4-1 Consolidation as of the Date of Acquisition 4 Baker / Lembke / King

4-2 Consolidation Workpaper Trial Balance Data Elimination Entries Account Titles Parent Subsidiary Debits Credits Consolidated Work flow

4-3 Nature of Eliminating Entries Eliminating entries are used in the consolidation workpaper to adjust the totals of the individual account balances of the separate companies... …to reflect the amounts that would appear if all the legally separate companies were actually a single company.

4-4 Full Ownership Purchased at Book Value Peerless purchases all of Special Foods’ outstanding common stock for $300,000. Let’s take a look at the balance sheets of Peerless and Special Foods immediately before combination.

4-5 Assets Cash$ 350,000 $ 50,000 Accounts Receivable75,000 50,000 Inventory100,000 60,000 Land175,000 40,000 Buildings and Equipment800, ,000 Accumulated Depreciation(400,000)(300,000) Total Assets$1,100,000 $500,000 Liabilities and Stockholders’ Equity Accounts Payable$ 100,000 $100,000 Bonds Payable200, ,000 Common Stock500, ,000 Retained Earnings 300, ,000 Total Liabilities and Stock Equity$1,100,000 $500,000 Balance Sheets Before Combination Peerless Special Foods ) )

4-6 Investment cost$300,000 Book value: Common stock--S Foods $200,000 Retained earnings--S Foods100,000 $300,000 Peerless’s sharex 1.00 (300,000 Differential$ -0- Investment cost$300,000 Book value: Common stock--S Foods $200,000 Retained earnings--S Foods100,000 $300,000 Peerless’s sharex 1.00 (300,000 Differential$ -0- January 1, 20X1 entry: E(1) Investment in S Foods Stock300,000 Cash300,000 Record purchase of Special Foods stock. P S 100% Full Ownership Purchased at Book Value )

4-7 Balance Sheets After Combination Assets Cash$ 50,000 $ 50,000 Accounts Receivable75,000 50,000 Inventory100,000 60,000 Land175,000 40,000 Buildings and Equipment800, ,000 Accumulated Depreciation(400,000(300,000 Investment in Special Foods Stock 300,000 Total Assets$1,100,000 $500,000 Liabilities and Stockholders’ Equity Accounts Payable$ 100,000 $100,000 Bonds Payable200, ,000 Common Stock500, ,000 Retained Earnings 300, ,000 Total Liabilities and Stock Equity$1,100,000 $500,000 Peerless Special Foods ) )

4-8 Cash50,00050,000100,000 Accounts Rec.75,00050,000125,000 Inventory100,00060,000160,000 Land175,00040,000215,000 Bldg. and Equip.800,000600,0001,400,000 Inv. in Sp. Foods 300,000 Total Debits1,500,000800,0002,000,000 Accum. Depr.400,000300,000700,000 Accounts Payable100,000100,000200,000 Bonds Payable200,000100,000300,000 Common Stock500,000200,000500,000 Retained Earn. 300,000100,000300,000 Total Credits1,500,000800,0002,000, % Purchase at Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated

4-9 Cash50,00050,000100,000 Accounts Rec.75,00050,000125,000 Inventory100,00060,000160,000 Land175,00040,000215,000 Bldg. and Equip.800,000600,0001,400,000 Inv. in Sp. Foods 300,000(2) 300,000 Total Debits1,500,000800,0002,000,000 Accum. Depr.400,000300,000700,000 Accounts Payable100,000100,000200,000 Bonds Payable200,000100,000300,000 Common Stock500,000200,000(2)200,000500,000 Retained Earn. 300,000100,000(2)100,000300,000 Total Credits1,500,000800,000300,000300,0002,000, % Purchase at Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated

4-10 Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash50,00050,000100,000 Accounts Rec.75,00050,000125,000 Inventory100,00060,000160,000 Land175,00040,000215,000 Bldg. and Equip.800,000600,0001,400,000 Inv. in Sp. Foods 300,000300,000 Total Debits1,500,000800,0002,000,000 Accum. Depr.400,000300,000700,000 Accounts Payable100,000100,000200,000 Bonds Payable200,000100,000300,000 Common Stock500,000200,000200,000500,000 Retained Earn. 300,000100,000100,000300,000 Total Credits1,500,000800,000300,000300,0002,000, % Purchase at Book Value

4-11 Common Stock--S Foods 200,000 Retained Earnings 100,000 Investment in S Foods 300,000 Eliminate investment balance. Elimination Entry E(2) Entry E(2)

4-12  Errors or omissions on the books of the subsidiary  Excess of fair value over the book value of the subsidiary’s net identifiable assets  Existence of goodwill  Other reasons Purchase At More Than Book Value Reasons the purchase price of a company’s stock might exceed the stock’s book value :

4-13 Purchase At More Than Book Value January 1, 20X1 entry: E(3) Investment in S Foods Stock340,000 Cash340,000 Record purchase of Special Foods stock. P S 100% Investment cost$340,000 Book value: Common stock--S Foods$200,000 Retained earnings--S Foods 100,000 $300,000 Peerless’s sharex 1.00 (300,000 Differential$ 40,000 Investment cost$340,000 Book value: Common stock--S Foods$200,000 Retained earnings--S Foods 100,000 $300,000 Peerless’s sharex 1.00 (300,000 Differential$ 40,000 )

4-14 Purchase At More Than Book Value The elimination entry on the workpaper would be: E(4) Common Stock--S Foods200,000 Retained Earnings100,000 Differential40,000 Investment in S Foods Stock340,000 P S 100% Investment cost$340,000 Book value: Common stock--S Foods$200,000 Retained earnings--S Foods 100,000 $300,000 Peerless’s sharex 1.00 (300,000 Differential$ 40,000 Investment cost$340,000 Book value: Common stock--S Foods$200,000 Retained earnings--S Foods 100,000 $300,000 Peerless’s sharex 1.00 (300,000 Differential$ 40,000 )

4-15 Cash10,00050,000 Accounts Rec.75,00050,000 Inventory100,00060,000 Land175,00040,000 Bldg. and Equip.800,000600,000 Inv. in Sp. Foods 340,000 Differential Total Debits1,500,000800,000 Accum. Depr.400,000300,000 Accounts Payable100,000100,000 Bonds Payable200,000100,000 Common Stock500,000200,000 Retained Earn. 300,000100,000 Total Credits1,500,000800,000 Purchase At More Than Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated (4) 40,000 (4)200,000 (4)100,000 (4) 340,000

4-16 Purchase At More Than Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash10,00050,000 Accounts Rec.75,00050,000 Inventory100,00060,000 Land175,00040,000 Bldg. and Equip.800,000600,000 Inv. in Sp. Foods 340,000 Differential Total Debits1,500,000800,000 Accum. Depr.400,000300,000 Accounts Payable100,000100,000 Bonds Payable200,000100,000 Common Stock500,000200,000 Retained Earn. 300,000100,000 Total Credits1,500,000800,000 (4) 40,000 (4)200,000 (4)100,000 (4) 340,000 (5) 40, ,000

4-17 Purchase At More Than Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash10,00050,000 Accounts Rec.75,00050,000 Inventory100,00060,000 Land175,00040,000 Bldg. and Equip.800,000600,000 Inv. in Sp. Foods 340,000 Differential Total Debits1,500,000800,000 Accum. Depr.400,000300,000 Accounts Payable100,000100,000 Bonds Payable200,000100,000 Common Stock500,000200,000 Retained Earn. 300,000100,000 Total Credits1,500,000800,000 (4) 40,000 (4)200,000 (4)100,000 (4) 340,000 (5) 40, ,000 60, , , ,000 1,400,000 2,000, , , , , ,000 2,000,000

4-18 Elimination Entry E(5) Land40,000 Differential40,000 Entry E(5)

4-19 Existence of Goodwill If a company purchases a subsidiary at a price in excess of the total of the fair value of the subsidiary’s net identifiable assets, the additional amount generally is considered to be a payment for the excess earning power of the acquired company, referred to as goodwill.

4-20 Existence of Goodwill If the fair values of Special Foods’ assets and liabilities are equal to their book values, and the $40,000 differential is considered a payment for goodwill, the following elimination entry is needed: E(6) Goodwill40,000 Differential40,000 Assign differential to goodwill.

4-21 Illustration of Debit Differential Peerless Products acquires all Special Foods’ capital stock for $400,000 on January 1, 20X1, by issuing $100,000 of 9 percent first mortgage bonds and paying cash of $300,000.

4-22 Investment cost$400,000 Book value: Common stock--S Foods$200,000 Retained earnings--S Foods 100,000 $300,000 Peerless’s sharex 1.00(300,000 Differential$100,000 Investment cost$400,000 Book value: Common stock--S Foods$200,000 Retained earnings--S Foods 100,000 $300,000 Peerless’s sharex 1.00(300,000 Differential$100,000 P January 1, 20X1 entry: E(7) Investment in S Foods Stock400,000 Bonds Payable100,000 Cash300,000 Record purchase of Special Foods stock. S 100% Debit Differential )

4-23 Debit Differential Fair value of net identifiable assets $330,000 Total differential $100,000 Excess of cost over fair value of net identifiable assets $70,000 Excess of fair value over book value of net identifiable assets $30,000 Book value of net identifiable assets $300,000 Cost of investment $400,000

4-24 Debit Differential The eliminations entered in the consolidation workpaper in immediately after the combination are: E(8) Common Stock--Special Foods200,000 Retained Earnings100,000 Differential100,000 Investment in Special Foods Stock400,000 Eliminate investment balance. E(9) Inventory15,000 Land60,000 Goodwill70,000 Buildings and Equipment10,000 Premium on Bonds Payable35,000 Differential100,000 Assign differential.

Percent Purchase at Book Value On January 1, 20X1, Peerless Products purchases 80 percent of the outstanding common stock of Special Foods for $240,000 cash. The purchase price represents 80 percent of the book value of Special Foods’ stock on the date of combination.

4-26 Investment cost$240,000 Book value: Common stock--S Foods$200,000 Retained earnings--S Foods 100,000 $300,000 Peerless’s sharex.8 (240,000 Differential$ -0- Investment cost$240,000 Book value: Common stock--S Foods$200,000 Retained earnings--S Foods 100,000 $300,000 Peerless’s sharex.8 (240,000 Differential$ Percent Purchase at Book Value P S 100% NCI 20% January 1, 20X1 entry: E(14) Investment in S Foods Stock 240,000 Cash 240,000 Record purchase of Special Foods stock. )

4-27 Trial Balance Data Elimination Entries Account Titles Peerless Spec. Fd. Debits Credits Consolidated 80 Percent Purchase at Book Value Cash110,00050,000 Accounts Rec.75,00050,000 Inventory100,00060,000 Land175,00040,000 Bldg. and Equip.800,000600,000 Inv. in Sp. Foods 240,000 Total Debits1,500,000800,000 Accum. Depr.400,000300,000 Accounts Payable100,000100,000 Bonds Payable200,000100,000 Common Stock500,000200,000 Retained Earn.300,000100,000 Total Credits1,500,000800, , , ,000 Nonctrl. Interest 60,000

4-28 Trial Balance Data Elimination Entries Account Titles Peerless Spec. Fd. Debits Credits Consolidated 80 Percent Purchase at Book Value Cash110,00050,000 Accounts Rec.75,00050,000 Inventory100,00060,000 Land175,00040,000 Bldg. and Equip.800,000600,000 Inv. in Sp. Foods 240,000 Total Debits1,500,000800,000 Accum. Depr.400,000300,000 Accounts Payable100,000100,000 Bonds Payable200,000100,000 Common Stock500,000200,000 Retained Earn.300,000100,000 Total Credits1,500,000800, , , , ,000 Nonctrl. Interest 60,000

4-29 Trial Balance Data Elimination Entries Account Titles Peerless Spec. Fd. Debits Credits Consolidated 80 Percent Purchase at Book Value 240, , , , , , , ,000 1,400,000 2,060, , , , , ,000 60,000 2,060,000 Cash110,00050,000 Accounts Rec.75,00050,000 Inventory100,00060,000 Land175,00040,000 Bldg. and Equip.800,000600,000 Inv. in Sp. Foods 240,000 Total Debits1,500,000800,000 Accum. Depr.400,000300,000 Accounts Payable100,000100,000 Bonds Payable200,000100,000 Common Stock500,000200,000 Retained Earn.300,000100,000 Total Credits1,500,000800,000 Nonctrl. Interest 60,000

4-30 Common Stock--S Foods200,000 Retained Earnings100,000 Investment in S Foods Stock240,000 Noncontrolling Interest60,000 Elimination Entry E(15) Entry E(15)

4-31 Consolidated Balance Sheet--80 Percent Peerless Products Corporation and Subsidiary Consolidated Balance Sheet January 1, 20X1 Assets: Cash$ 160,000 Accounts Receivable125,000 Inventory160,000 Land215,000 Building and Equipment$1,400,000 Accumulated Depreciation (700, ,000 Total Assets$1,360,000 Continued )

4-32 Consolidated Balance Sheet--80 Percent Liabilities: Accounts Payable$ 200,000 Bonds Payable300,000 Noncontrolling Interest60,000 Stockholders’ Equity: Common Stock500,000 Retained Earnings 300,000 Total Liabilities and Equity$1,360,000

4-33 Chapter Four The End

4-34