1. An Introduction to Consolidated Financial Statements
Chapter 3

2. Recognize the benefits and limitations of consolidated
Learning Objective 1
Recognize the benefits and
limitations of consolidated
financial statements.

3. Business Combinations Consummated Through Stock Acquisitions
One or more companies
become subsidiaries of a
common parent corporation.

4. The Reporting Entity Parent Financial Statements _____ _____
_____ _____
Subsidiary
Financial
Statements
_____ _____
Consolidated
Financial
Statements
_____ _____

5. The Reporting Entity A parent company may acquire a
subsidiary in a very different industry
from its own as a means of diversifying
its overall business risk.
There are also legal reasons for
maintaining separate identities.

6. The Parent-Subsidiary Relationship
Parent Company
Owns more than 50%
of another company
Affiliate

7. The Parent-Subsidiary Relationship
Parent Company
Subsidiary A
90%
ownership
Subsidiary B
80%
ownership

8. Understand the requirements for inclusion of a subsidiary in
Learning Objective 2
Understand the requirements for
inclusion of a subsidiary in
consolidated financial statements.

9. Consolidation Policy Consolidated financial statements provide
information that is not included in the separate
statements of the parent corporation.

10. Consolidation Policy A subsidiary can be excluded from
consolidation in only two situations: 1
Control is likely to be temporary. 2
Control does not rest with the
majority owner.

11. Consolidation Policy Consolidation policy is usually presented
under the following headings:
Principles of
consolidation
Basis of
consolidation

12. Parent and Subsidiary with Different Fiscal Periods
Consolidated statements are prepared for and
as of the end of the parent’s fiscal period.
If the difference does not exceed three months…
it is acceptable to use the subsidiary’s
statements with disclosure.

13. Apply the consolidations concepts to parent company recording of
Learning Objective 3
Apply the consolidations concepts
to parent company recording of
the investment in a subsidiary
company at the date of acquisition.

14. Consolidated Balance Sheet at Date of Acquisition (100% at Book Value)
Assets Penn Skelly Consolidated
Current assets
Cash $ 20,000 $10,000 $ 30,000
Other current assets , , ,000
Total current assets $ 65,000 $25,000 $ 90,000
Plant assets $ 75,000 $45,000 $120,000
Less: Accum. depr , , ,000
Total plant assets $ 60,000 $40,000 $100,000
Investment in Skelly ,
Total assets $165,000 $65,000 $190,000

15. Consolidated Balance Sheet at Date of Acquisition (100% at Book Value)
Liabilities Penn Skelly Consolidated
Current liabilities
Accounts payable $ 20,000 $15,000 $ 35,000
Other current liabilities , , ,000
Total current liabilities $ 45,000 $25,000 $ 70,000
Stockholders’ equity
Capital stock $100,000 $30,000 $100,000
Retained earnings , , ,000
Total stockholders’ equity $120,000 $40,000 $120,000
Total liabilities and
stockholders’ equity $165,000 $65,000 $190,000

16. Allocate the excess of the investment cost over the
Learning Objective 4
Allocate the excess of the
investment cost over the
book value of the subsidiary
at the date of acquisition.

17. Parent Acquires 100% of Subsidiary with Goodwill
Penn purchased all the stock of Skelly for $50,000.
Skelly stockholder’s equity is $40,000.
What is the consolidating (eliminating) entry?

18. Parent Acquires 100% of Subsidiary with Goodwill
Capital Stock ,000
Retained Earnings 10,000
Goodwill ,000
Investment in Skelly ,000
To eliminate reciprocal investment and equity
accounts and to assign the excess of investment
cost over book value acquired to goodwill

19. Prepare a consolidated balance sheet at the date of acquisition,
Learning Objective 5
Prepare a consolidated balance
sheet at the date of acquisition,
including preparation
of eliminating entries.

20. Consolidated Balance Sheet at Date of Acquisition (100% at Book Value)
Assets Penn Skelly Consolidated
Current assets
Cash $ 10,000 $10,000 $ 20,000
Other current assets , , ,000
Total current assets $ 55,000 $25,000 $ 80,000
Plant assets $ 75,000 $45,000 $120,000
Less: Accum. depr , , ,000
Total plant assets $ 60,000 $40,000 $100,000
Investment in Skelly ,000
Goodwill ,000
Total assets $165,000 $65,000 $190,000

21. Consolidated Balance Sheet at Date of Acquisition (100% at Book Value)
Liabilities Penn Skelly Consolidated
Current liabilities
Accounts payable $ 20,000 $15,000 $ 35,000
Other current liabilities , , ,000
Total current liabilities $ 45,000 $25,000 $ 70,000
Stockholders’ equity
Capital stock $100,000 $30,000 $100,000
Retained earnings , , ,000
Total stockholders’ equity $120,000 $40,000 $120,000
Total liabilities and
stockholders’ equity $165,000 $65,000 $190,000

22. Learn the concept of minority interest when the parent
Learning Objective 6
Learn the concept of minority
interest when the parent
company acquires less than
100% of the subsidiary’s
outstanding common stock.

23. Consolidated Balance Sheet at Date of Acquisition (100% at Book Value)
Assets Penn Skelly Consolidated
Current assets
Cash $ 10,000 $10,000 $ 20,000
Other current assets , , ,000
Total current assets $ 55,000 $25,000 $ 80,000
Plant assets $ 75,000 $45,000 $120,000
Less: Accum. depr , , ,000
Total plant assets $ 60,000 $40,000 $100,000
Investment in Skelly ,000
Goodwill ,000
Total assets $165,000 $65,000 $194,000

24. Consolidated Balance Sheet at Date of Acquisition (100% at Book Value)
Liabilities Penn Skelly Consolidated
Current liabilities
Accounts payable $ 20,000 $15,000 $ 35,000
Other current liabilities , , ,000
Total current liabilities $ 45,000 $25,000 $ 70,000
Minority interest $ 4,000
Stockholders’ equity
Capital stock $100,000 $30,000 $100,000
Retained earnings , , ,000
Total stockholders’ equity $120,000 $40,000 $120,000
Total liabilities and
stockholders’ equity $165,000 $65,000 $194,000

25. Minority Interest Minority interest in subsidiaries is generally
shown in a single amount in the liability section
of the consolidated balance sheet.
The alternatives are to include the minority interest
in consolidated stockholders’ equity or to place it
in a separate minority interest section.

26. Minority Interest The interest of minority stockholders represents
equity investments in the
consolidated net assets by
stockholders of the company
affiliated with the parent.

27. Prepare consolidated balance sheets subsequent to the date
Learning Objective 7
Prepare consolidated balance
sheets subsequent to the date
of acquisition, including
preparation of eliminating entries.

28. Consolidated Balance Sheet After Acquisition
Assumptions
1. Penn acquired a 90% interest in Skelly on
January 1 for $50,000 when Skelly’s
stockholders’ equity was $40,000.
2. The accounts payable of Skelly includes
$5,000 owed to Penn.
3. During the year, Skelly had income of
$20,000 and declared $10,000 dividends.

29. Consolidated Balance Sheet After Acquisition
What is the balance in the investment in
Skelly’s account at December 31?
Original investment January 1 $50,000
+ 90% of Skelly’s net income 18,000
– 90% of Skelly’s dividends – 9,000
Investment account balance $59,000

30. Consolidated Balance Sheet After Acquisition
Capital Stock 30,000
Retained Earnings 20,000
Goodwill ,000
Investment in Skelly 59,000
Minority Interest ,000
To eliminate reciprocal investment and
equity balances, record goodwill, and
enter the minority interest

31. Consolidated Balance Sheet After Acquisition
Dividends Payable 9,000
Dividends Receivable 9,000
To eliminate reciprocal dividends
receivable and payable
Accounts Payable 5,000
Accounts Receivable 5,000
To eliminate intercompany receivable
and accounts payable

32. Effect of Allocation on Consolidated Balance Sheet at Acquisition
The separate books of the affiliated
companies do not record cost/book
value differentials in acquisitions that
create parent-subsidiary relationships.
Working paper procedures are used
to adjust subsidiary book values to
reflect the cost/book differentials.

33. Effect of Allocation on Consolidated Balance Sheet at Acquisition
The adjusted amounts appear in the
consolidated balance sheet.
The amount of the adjustment to
individual assets and liabilities is
determined using an investment
cost-allocation schedule.

34. Effect of Allocation on Consolidated Balance Sheet at Acquisition
On Dec. 3, 2003, Pilot purchases 90% of Sand
Corporation’s outstanding common stock for
$5,000,000 cash plus 100,000 shares of $10
stock with a market value of $5,000,000.
Additional costs are $300,000.
$200,000 is recorded as cost of the investment.

35. Effect of Allocation on Consolidated Balance Sheet at Acquisition
Sand Corporation (000) Book Value Fair Value
Assets
Cash $ $ 200
Net receivables
Inventories
Other current assets
Land
Building, net , ,000
Equipment, net , ,700
Total assets $8,000 $9,000

36. Effect of Allocation on Consolidated Balance Sheet at Acquisition
Sand Corporation (000) Book Value Fair Value
Liabilities
Accounts payable $ $ 700
Notes payable , ,300
Common stock ,000
Paid-in capital ,000
Retained earnings
Total liabilities and
stockholders’ equity $8,000

37. Assignment of Excess Cost over Underlying Equity
Investment in Sand 10,000
Common Stock ,000
Additional Paid-in Capital 4,000
Cash ,000
To record 90% acquisition of Sand Corporation

38. Assignment of Excess Cost over Underlying Equity
Investment in Sand
Additional Paid-in Capital 100
Cash
To record additional costs of combining with
Sand

39. Allocation of Excess Cost over Underlying Equity
Investment in Sand $10,200,000
Book value of interest acquired
$5,900,000 × 90% = (5,310,000)
Excess of cost over BV $ 4,890,000

40. Allocation of Excess Cost over Underlying Equity
Fair
Value –
Book
Value
× 90% =
Excess
Allocated
Inventories
Land
Building net 5,000 4,
Equipment, net 1,700 2, (270)
Notes payable 1,300 1,
Total allocated
Remainder to goodwill ,900
Total ,890

41. Consolidated Working Papers December 31, 2003
Adjustments and Consolidated
Eliminations Balance
Account Title Pilot Sand Dr Cr Sheet
Cash
Receivables, net
Inventories
Other current assets
Land
Building, net
Equipment, net
Investment in Sand
Goodwill
Unamortized excess
Total assets
1,300
700
900
600
1,200
8,000
7,000
10,200
29,900
200
300
500
400
600
4,000
2,000
8,000 b b b
b 3,900
a 4,890 b
a 10,200
b 4,890
1,500
1,000
1,490
1,980
12,900
8,730
3,900
32,500

42. Consolidated Working Papers December 31, 2003
Adjustments and Consolidated
Eliminations Balance
Account Title Pilot Sand Dr Cr Sheet
Accounts payable
Notes payable
Common stock
Other paid-in capital
Retained earnings
Minority interest
Total liabilities and
stockholders’ equity
2,000
3,700
11,000
8,900
4,300
29,900
700
1,400
4,000
1,000
900
8,000 b
a 4,000
a 1,000 a a
2,700
5,010
11,000
8,900
4,300
590
32,500

43. Apply the concepts underlying preparation of a consolidated
Learning Objective 8
Apply the concepts underlying
preparation of a consolidated
income statement.

44. Consolidated Income Statement
The difference between a consolidated and
an unconsolidated income statement of the
parent company lies in the detail presented
rather than the net income amount.

45. Amortize the excess of the investment cost over the book
Learning Objective 9
Amortize the excess of the
investment cost over the book
value in periods subsequent
to the acquisition.

46. Effect of Amortization on Consolidated Balance Sheet after Acquisition
Income for 2004:
Sand’s net income $ 800,000
Pilot’s income
(excluding income from Sand) $2,523,500

47. Effect of Amortization on Consolidated Balance Sheet after Acquisition
Dividends Paid:
Sand $ 300,000
Pilot $1,500,000

48. Effect of Amortization on Consolidated Balance Sheet after Acquisition
Amortization of excess:
Undervalued inventories sold in 2004
Undervalued land still held
Undervalued building (45 years useful life)
Overvalued equipment (5 years useful life)
Overvalued notes payable retired in 2004
Goodwill (no amortization)

49. Consolidated Working Papers December 31, 2004
Adjustments and Consolidated
Eliminations Balance
Account Title Pilot Sand Dr Cr Sheet
Cash
Receivables, net
Inventories
Other current assets
Land
Building, net
Equipment, net
Investment in Sand
Goodwill
Unamortized excess
Total assets
253.5
540
1,300
800
1,200
9,500
8,000
10,504
32,097.5
100
200
600
500
3,800
1,800
7,600 b b
b 3,900
a 4,744 b
a 10,504
b 4,744
353.5
740
1,900
1,300
1,980
12,900
8,730
3,900
33,937.5

50. Consolidated Working Papers December 31, 2004
Adjustments and Consolidated
Eliminations Balance
Account Title Pilot Sand Dr Cr Sheet
Accounts payable
Notes payable
Common stock
Other paid-in capital
Retained earnings
Minority interest
Total liabilities and
stockholders’ equity
2,300
4,000
11,000
8,900
5,897.5
32,097.5
1,200
4,000
1,000
1,400
7,600
a 4,000
a 1,000
a 1,400 a
3,500
4,000
11,000
8,900
5,897.5
640
33,937.5

51. End of Chapter 3