Chapter 4 Consolidated financial statements—date of acquisition

Terminology  Asset acquisition  Stock acquisition  Parent  Subsidiary  Non-controlling (minority )interest  Affiliation  Affiliated company  Consolidated financial statements

Definition of subsidiary and control  Own a controlling interest in the voting shares,often more than 50%, directly or indirectly or both  Control the operation policies and management rather than asset  Have effective control despite a smaller percentage ownership

The range of companies consolidated  Essentially all controlled corporations should be consolidated  Under below circumstances,majority-owned subsidiaries should be excluded: ownership is temporary; control does not rest with majority owner ; exposed to foreign exchange restriction etc.

Consolidated financial statements  Necessity: unconsolidated financial statements of parent company are insufficient to present the financial position and results of operations of the economic unit controlled by the parent company.  Consolidated financial statements include the full complement of statements normally prepared for a separate entity and represent essentially the sum of the assets, liabilities, revenues and expenses of the affiliates after eliminating the effect of any transactions among the affiliated companies( intercompany transactions )

 The purpose of consolidated statements is to present,primarily for the benefit of the stockholders and creditors of the parent company,the results of operations and the financial position of a parent company and its subsidiaries essentially as if the group were a single company with one or more branches or divisions.  Focus on substance rather than form  They are not substitutes for the statements of separate subsidiary

Investment at the date of acquisition Business combination Asset acquisition Stock acquisition Purchase method Pooling method Purchase method Pooling method

Recording investments at cost (p company )  Investment in s company 260,000 cash 260,000 (250,000+10,000)  investment in s company 133,000 cash 133,000 (125,000+8,000)  investment in s company 260,000 common stock 200,000 other contributed capital 60,000  investment in s company (finder’s fee) 10,000 cash 10,000

Intercompany accounts to be eliminated Parent’s account Subsidiary’ s account Investment in subsidiaryagainstEquity accounts Intercompany receivable (payable)againstIntercompany payable (receivable) Advances to subsidiary (from it)againstAdvances to parent (from it) Interest revenue (interest expense)againstInterest expense (interest revenue) Dividend revenue (Dividends declared) againstDividend declared (Dividends revenue) Management fees received from subsidiary againstManagement fee paid to parent Sales to subsidiary (purchase of inventory from subsidiary ) againstpurchase of inventory from parent (Sales to parent)

Difference between cost and book value CAD schedule  Determine the percentage of acqisition:100% acquisition or a smaller percetage  Compare the purchase price (cost )to the book value of the equity acquired  Allocate the difference to adjust the underlying assets and /or liabilities

CAD leads to the following possible cases Case 1. cost =the book value (of equity acquired) (a)100% acquisition (b) a smaller percentage acquisition Case 2. cost >the book value (of equity acquired) (a)100% acquisition (b) a smaller percentage acquisition Case 3. cost <the book value (of equity acquired) (a)100% acquisition (b) a smaller percentage acquisition

consolidated balance sheet Jan1,2010 P company S compan y eliminationsConsolidate d balance Dr.Cr. Cash Other current assets Plant and equipment Land Investment in S company Total assets 20, , ,000 40,000 80,000 $400,000 20,000 50,000 40,000 20,000 $130,000 (1)80,000 40, , ,000 60,000 $450,000 Liabilities Common stock P company S company Other contributed capital P company S company Retained earning P company S company Total liabilities and equity 60, ,000 40, ,000 $400,000 50,000 10,000 20,000 $130,000 (1)50,000 (1)10,000 (1)20,000 $ 80, , ,000 40, ,000 $450,000

Note:  The investment account of P and equity of S have been eliminated and the S’ net assets substituted for the investment account  Consolidated assets and liabilities consist of the sum of P and S assets and liabilities in each classification  Consolidated equity is the same as the P’ equity

consolidated balance sheet Jan1,2010 P companyS company eliminationsConsolidated balance Dr.Cr. Cash Other current assets Plant and equipment Land Investment in S company Total assets 28, , ,000 40,000 80,000 $400,000 20,000 50,000 40,000 20,000 $130,000 (1)72,000 40, , ,000 60,000 $458,000 Liabilities Common stock P company S company Other contributed capital P company S company Retained earning P company S company Non-controlling interest Total liabilities and equity 60, ,000 40, ,000 $400,000 50,000 10,000 20,000 $130,000 (1)50,000 (1)10,000 (1)20,000 $ 80,000 (1)8,000 $80, , ,000 40, ,000 8,000 $458,000

Note:  The investment account of P and equity of S have been eliminated and the S’ net assets substituted for the investment account  Consolidated assets are greater since P took 8,000 less cash to acquire the investment  An 8,000 non-controlling interest exists

consolidated balance sheet Jan1,2010 P companyS company eliminationsConsolidated balance Dr.Cr. Cash Other current assets Plant and equipment Land Investment in S company Consolidation difference Total assets 26, , ,000 40,000 74,000 $400,000 20,000 50,000 40,000 20,000 $130,000 (2)10,000 (1)10,000 (1)74,000 (2)10,000 46, , ,000 70,000 $466,000 Liabilities Common stock P company S company Other contributed capital P company S company Retained earning P company S company Non-controlling interest Total liabilities and equity 60, ,000 40, ,000 $400,000 50,000 10,000 20,000 $130,000 (1)50,000 (1)10,000 (1)20,000 $100,000 (1)16,000 $100, , ,000 40, ,000 16,000 $466,000

consolidated balance sheet Jan1,2010 P company S company eliminationsConsolidated balance Dr.Cr. Cash Other current assets Plant and equipment Land Investment in S company Consolidation difference Total assets 40, , ,000 40,000 60,000 $400,000 20,000 50,000 40,000 20,000 $130,000 (2)4,000 (1)60,000 (1)4,000 60, , ,000 56,000 $466,000 Liabilities Common stock P company S company Other contributed capital P company S company Retained earning P company S company Non-controlling interest 60, ,000 40, ,000 $400,000 50,000 10,000 20,000 $130,000 (1)50,000 (1)10,000 (1)20,000 $84,000 (1)16,000 $84, , ,000 40, ,000 16,000 $466,000

Other intercompany balance sheet eliminations  Advance from P company 25,000 Advance to S company 25,000  Accounts payable (to S) 100,000 Accounts receivable (from P) 100,000

A comprehensive illustration :more than one subsidiary company (1)common stock –S company 200,000 retained earnings 70,000 consolidation difference 7,000 investment in S company 250,000 non-controlling interest 27,000

(2) common stock –T company 100,000 retained earnings 40,000 consolidation difference 3,000 investment in T company 115,000 non-controlling interest 28,000 (3) plant and equipment 10,000 consolidation difference 10,000

(4) Cash 20,000 Advance to T company 20,000 (5) Accounts payable (to S) 6,000 Accounts receivable (from P) 6,000 (6) Accounts payable (to T) 5,000 Accounts receivable (from S) 5,000

P companyS companyT company eliminationsConsolidated balance Dr.Cr. Cash Accounts receivable Inventories Advance to T company Investment in S company Investment in T company Plant and equipment Land Consolidation difference Total assets 82,000 68,000 76,000 20, , , ,000 24, ,000 36,000 59,000 64, ,000 10, ,000 4,000 10,000 15, ,000 6, ,000 4)20,000 3)10,000 1)2)10,000 5)6)11,000 4)20,000 1)250,000 2)115,000 (3)10, , , , ,000 40,000 1,044,000 Accounts payable Notes payable Common stock P company S company T company Retained earning P company S company T company Advance from P company Non-controlling interest Total liabilities and equity 85, , , ,000 40, , ,000 70, ,000 25, ,000 40,000 5)6)11,000 (1)200,000 (2)100,000 (1)70,000 (2)40, ,000 1)2)55, , , , , ,000 55,000 1,044,000