1. Electronic Presentation by Douglas Cloud Pepperdine University
Baker / Lembke / King
Consolidation of Wholly Owned Subsidiaries 4
Electronic Presentation by Douglas Cloud Pepperdine University
Edited by Taufik Hidayat

2. Edited by Taufik Hidayat
Consolidation Procedures
The starting point for preparing consolidated financial statements is the books of the separate consolidating companies.
Because the consolidated entity has no books, all amounts in the consolidated financial statements originate on the books of the parent and subsidiary.
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Consolidation Workpaper
Trial Balance Data Elimination Entries
Account Titles Parent Subsidiary Debits Credits Consolidated
Work flow
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Nature of Eliminating Entries
…to reflect the amounts that would appear if all the legally separate companies were actually a single company.
Eliminating entries are used in the consolidation workpaper to adjust the totals of the individual account balances of the separate companies...
Eliminating entries appear only in the consolidating workpapers and do not affect the books of the separate companies.
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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.
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Balance Sheets Before Combination
Peerless Special Foods
Assets
Cash $ 350,000 $ 50,000
Accounts Receivable 75, ,000 Inventory 100, ,000 Land 175, ,000
Buildings and Equipment 800, ,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 Payable 200, ,000
Common Stock 500, ,000
Retained Earnings 300, ,000
Total Liabilities & Stockholders’ Equity $1,100,000 $500,000 ) )
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Full Ownership Purchased at Book Value
Investment cost $300,000
Book value:
Common stock-Special Foods $200,000
Retained earnings-Special Foods 100,000
$300,000
Peerless’s share x (300,000
Differential $ P S
100% )
January 1, 20X1 entry:
Investment in Special Foods Stock 300,000
Cash 300,000
Record purchase of Special Foods stock.
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Balance Sheets After Combination
Peerless Special Foods
Assets
Cash $ ,000 $ 50,000
Accounts Receivable 75, ,000 Inventory 100, ,000 Land 175, ,000
Buildings and Equipment 800, ,000
Accumulated Depreciation (400,000 (300,000
Investment in Special Foods Stock ,000
Total Assets $1,100,000 $500,000
Liabilities and Stockholders’ Equity
Accounts Payable $ 100,000 $100,000
Bonds Payable 200, ,000
Common Stock 500, ,000
Retained Earnings 300, ,000
Total Liabilities & Stockholders’ Equity $1,100,000 $500,000 3 ) )
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100% Purchase at Book Value
Trial Balance Data Elimination Entries
Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 50,000 50, ,000
Accounts Rec. 75,000 50, ,000
Inventory 100,000 60, ,000
Land 175,000 40, ,000
Bldg. and Equip. 800, , ,400,000
Inv. in Sp. Foods ,000
Total Debits 1,500, , ,000,000
Accum. Depr. 400, , ,000
Accounts Payable 100, , ,000
Bonds Payable 200, , ,000
Common Stock 500, , ,000
Retained Earn , , ,000
Total Credits 1,500, , ,000,000
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100% Purchase at Book Value
Trial Balance Data Elimination Entries
Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 50,000 50, ,000
Accounts Rec. 75,000 50, ,000
Inventory 100,000 60, ,000
Land 175,000 40, ,000
Bldg. and Equip. 800, , ,400,000
Inv. in Sp. Foods ,000 (1) 300,000
Total Debits 1,500, , ,000,000
Accum. Depr. 400, , ,000
Accounts Payable 100, , ,000
Bonds Payable 200, , ,000
Common Stock 500, ,000 (1)200, ,000
Retained Earn , ,000 (1)100, ,000
Total Credits 1,500, , ,000,000
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100% Purchase at Book Value
Trial Balance Data Elimination Entries
Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 50,000 50, ,000
Accounts Rec. 75,000 50, ,000
Inventory 100,000 60, ,000
Land 175,000 40, ,000
Bldg. and Equip. 800, , ,400,000
Inv. in Sp. Foods ,000 (1) 300,000
Total Debits 1,500, , ,000,000
Accum. Depr. 400, , ,000
Accounts Payable 100, , ,000
Bonds Payable 200, , ,000
Common Stock 500, ,000 (1)200, ,000
Retained Earn , ,000 (1)100, ,000
Total Credits 1,500, , ,000,000
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Elimination Entry E(1)
Entry E(1)
Common Stock--Special Foods 200,000
Retained Earnings 100,000
Investment in Special Foods Stock ,000
Eliminate investment balance.
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Purchase At More Than Book Value
Reasons the purchase price of a company’s stock might exceed the stock’s book value:
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
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Purchase At More Than Book Value
Investment cost $340,000
Book value:
Common stock-Special Foods $200,000
Retained earnings-Special Foods 100,000
$300,000
Peerless’s share x (300,000
Differential $ 40,000 ) P S
100%
January 1, 20X1 entry:
Investment in Special Foods Stock 340,000
Cash 340,000
Record purchase of Special Foods stock.
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Purchase At More Than Book Value
Investment cost $340,000
Book value:
Common stock-Special Foods $200,000
Retained earnings-Special Foods 100,000
$300,000
Peerless’s share x (300,000
Differential $ 40,000 ) P S
100%
The elimination entry on the workpaper would be:
E(1) Common Stock--Special Foods 200,000
Retained Earnings 100,000
Differential 40,000
Investment in Special Foods Stock 340,000
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Purchase At More Than Book Value
Trial Balance Data Elimination Entries
Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 10,000 50,000
Accounts Rec. 75,000 50,000
Inventory 100,000 60,000
Land 175,000 40,000
Bldg. and Equip. 800, ,000
Inv. in Sp. Foods ,000
Differential
Total Debits 1,500, ,000
Accum. Depr. 400, ,000
Accounts Payable 100, ,000
Bonds Payable 200, ,000
Common Stock 500, ,000
Retained Earn , ,000
Total Credits 1,500, ,000
(1) 340,000
(1) 40,000
(1)200,000
(1)100,000
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Purchase At More Than Book Value
Trial Balance Data Elimination Entries
Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 10,000 50,000
Accounts Rec. 75,000 50,000
Inventory 100,000 60,000
Land 175,000 40,000
Bldg. and Equip. 800, ,000
Inv. in Sp. Foods ,000
Differential
Total Debits 1,500, ,000
Accum. Depr. 400, ,000
Accounts Payable 100, ,000
Bonds Payable 200, ,000
Common Stock 500, ,000
Retained Earn , ,000
Total Credits 1,500, ,000
(2) 40,000
(1) 340,000
(1) 40,000
(2) 40,000
(1)200,000
(1)100,000
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Purchase At More Than Book Value
Trial Balance Data Elimination Entries
Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 10,000 50,000
Accounts Rec. 75,000 50,000
Inventory 100,000 60,000
Land 175,000 40,000
Bldg. and Equip. 800, ,000
Inv. in Sp. Foods ,000
Differential
Total Debits 1,500, ,000
Accum. Depr. 400, ,000
Accounts Payable 100, ,000
Bonds Payable 200, ,000
Common Stock 500, ,000
Retained Earn , ,000
Total Credits 1,500, ,000
60,000
125,000
160,000
255,000
1,400,000
2,000,000
(2) 40,000
(1) 340,000
(1) 40,000
(2) 40,000
700,000
200,000
300,000
500,000
2,000,000
(1)200,000
(1)100,000
380,000
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Elimination Entry E(5)
Land 40,000
Differential 40,000
Entry E(2)
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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.
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PSAK No. 22
Selisih lebih antara biaya perolehan dan bagian (interest) perusahaan pengakuisisi atas nilai wajar aktiva dan kewajiban yang dapat diidentifikasi pada tanggal transaksi pertukaran diakui sebagai goodwill dan disajikan sebagai aktiva.
Goodwill harus diamortisasi sebagai beban selama masa manfaatnya. Dalam mengamortisasi goodwill digunakan metode garis lurus.
Periode amortisasi goodwill tidak boleh lebih dari 5 tahun, kecuali periode yang lebih panjang tetapi tidak lebih dari 20 tahun.
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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(2) Goodwill 40,000
Differential 40,000
Assign differential to goodwill.
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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.
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Balance Sheets – Special Food
Assets
Cash $ 50,000 $ 50,000
Accounts Receivable 50, ,000 Inventory 60, ,000 Land 40, ,000
Buildings and Equipment 600,000
Accumulated Depreciation (300, ,000
Total Assets $500,000 $565,000
Liabilities and Stockholders’ Equity
Accounts Payable $ 100,000 $100,000
Bonds Payable 100, ,000
Common Stock 200,000
Retained Earnings 100,000
Total Liabilities & Stockholders’ Equity $500,000
Fair Value of Net Asset $330,000
Book Value Fair Value )
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Debit Differential
Investment cost $400,000
Book value:
Common stock--Special Foods $200,000
Retained earnings--Special Foods 100,000
$300,000
Peerless’s share x (300,000
Differential $100,000 P S
100% )
January 1, 20X1 entry:
Investment in Special Foods Stock 400,000
Bonds Payable 100, Cash 300,000
Record purchase of Special Foods stock.
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26. Excess of cost over fair value of net identifiable assets
Debit Differential
Cost of investment $400,000
Total differential
$100,000
Excess of cost over fair value of net identifiable assets
$70,000
Goodwill
Fair value of net identifiable assets $330,000
Excess of fair value over book value of net identifiable assets
$30,000
Book value of net identifiable assets $300,000
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Debit Differential
The eliminations entered in the consolidation workpaper in preparing the consolidated balance sheet immediately after the combination are:
E(1) Common Stock--Special Foods 200,000
Retained Earnings 100,000
Differential 100,000
Investment in Special Foods Stock 400,000
Eliminate investment balance.
E(2) Inventory 15,000
Land 60,000
Goodwill 70,000
Buildings and Equipment 10,000
Premium on Bonds Payable 35,000
Differential 100,000
Assign differential.
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Illustration of Credit Differential
Peerless Products acquires all Special Foods’ capital stock for $260,000 on January 1, 20X1, by paying cash.
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Balance Sheets – Special Food
Assets
Cash $ 50,000 $ 50,000
Accounts Receivable 50, ,000 Inventory 60, ,000 Land 40, ,000
Buildings and Equipment 600,000
Accumulated Depreciation (300, ,000
Total Assets $500,000 $485,000
Liabilities and Stockholders’ Equity
Accounts Payable $ 100,000 $100,000
Bonds Payable 100, ,000
Common Stock 200,000
Retained Earnings 100,000
Total Liabilities & Stockholders’ Equity $500,000
Fair Value of Net Asset $285,000
Book Value Fair Value )
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Credit Differential
Investment cost $260,000
Book value:
Common stock--Special Foods $200,000
Retained earnings--Special Foods 100,000
$300,000
Peerless’s share x (300,000
Differential $(40,000 P S
100% ) )
January 1, 20X1 entry:
Investment in Special Foods Stock 260,000
Cash 260,000
Record purchase of Special Foods stock.
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31. Book value of net identifiable assets $300,000
Credit Differential
Book value of net identifiable assets $300,000
Total differential
$(40,000)
Excess of book value over fair value of net identifiable assets
$15,000
Fair value of net identifiable assets $285,000
Excess of fair value of net identifiable assets over cost
$25,000
Negative Goodwill
Cost of investment $260,000
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Credit Differential
The eliminations entered in the consolidation workpaper in preparing the consolidated balance sheet immediately after the combination are:
E(1) Common Stock--Special Foods 200,000
Retained Earnings 100,000
Investment in Special Foods Stock 260,000
Differential 40,000
Eliminate investment balance.
E(2) Land 5,000
Differential 15,000
Buildings and Equipment 20,000
Assign differential to Fair Value.
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Allocation of Credit Differential
Fair Value Allocation
Ratio
Unallocated Allocated
Differential Reduction
E(3) Differential 25,000
Land 3,462
Buildings and Equipment 21,538
Assign remaining credit differential.
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Consolidation Subsequent to Acquisition
Push Corporation owns 80 percent of the stock of Shove Company, which was purchased at book value. During 20X1, Shove reports net income of $25,000, while Push reports earnings of $100,000, plus equity-method investment income of $20,000.
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Computation of Consolidated Net Income
Additive Computation
Separate operating income of Push $100,000
Net income of Shove $25,000
Push’s proportionate share x ,000
Consolidated net income $120,000
Residual Computation
Net income of Push $120,000
Less: Income from subsidiary - 20,000 $100,000
Net income of Shove 25,000
$125,000
Less: Income to noncontrolling interest $25,000
x ,000
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Consolidated Retained Earnings
On January 1, 20X1, Push has a retained earnings balance of $400,000, and Shove has a retained earnings balance of $250,000. During 20X1, Push reports net income of $100,000 and equity-method income from Shove of $20,000; Push declares dividends of $30,000. Shove reports net income of $25,000 and declares dividends of $10,000.
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Consolidated Retained Earnings
Push Shove
Balance, January 1, 20X1 $400,000 $250,000
Net income, 20X1 120, ,000
Dividends declared in 20X , ,000
Balance, December 31, 20X1 $490,000 $265,000
Consolidated retained earnings equals the parent’s retained earnings when the parent uses the equity method
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Consolidated Retained Earnings
When the parent does not account for its subsidiary investment using the equity method, consolidated retained earnings is determined by adding the parent’s retained earnings from its own operations and the parent’s share of the subsidiary’s net income from the date of acquisition.
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39. INCOME STATEMENT SECTION RETAINED EARNINGS SECTION
Comprehensive Three-Part Workpaper
Trial Balance Data Elimination Entries Consoli-
Item Parent Subsidiary Debits Credits dated
Credit Accounts:
Revenues
Gains
Debit Accounts:
Contra Revenues
Expenses
Losses
Net Income
Beginning Retained
Earnings
Add: Net Income
Deduct: Dividends
Ending Retained
INCOME STATEMENT SECTION
RETAINED EARNINGS SECTION
to Balance Sheet section
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Comprehensive Three-Part Workpaper
Trial Balance Data Elimination Entries Consoli-
Item Parent Subsidiary Debits Credits dated
Debit Accounts:
Assets
Contra Liabilities
Credit Accounts:
Contra Assets
Liabilities
Stockholders’
Equity:
Capital Stock
Paid-in Capital
Retained
Earnings
BALANCE SHEET SECTION
From Retained Earnings Statement section
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20X1 Consolidation--100 Percent Ownership
Peerless Special
Products Foods
Common Stock, January 1, 20X1 $500,000 $200,000
Retained Earnings, January 1, 20X1 300, ,000
20X1:
Separate Operating Income, Peerless 140,000
Net Income, Special Foods 50,000
Dividends 60,000 30,000
20X2:
Separate Operating Income, Peerless 160,000
Net Income, Special Foods 75,000
Dividends 60,000 40,000
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20X1 Consolidation--100 Percent Ownership
Investment cost $300,000
Book value:
Common stock--Special Foods $200,000
Retained earnings--Special Foods 100,000
$300,000
Peerless’s share x ,000
Differential $ P S
100%
January 1, 20X1
(1) Investment in Special Foods Stock 300,000
Cash 300,000
Record purchase of Special Foods stock.
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20X1 Consolidation--100 Percent Ownership
Peerless records its 20X1 income and dividends from Special Foods under the equity method with the following entries:
(2) Investment in Special Foods Stock 50,000
Income from Subsidiary 50,000
Record equity-method income.
$50,000 x 1.00
(3) Cash 30,000
Investment in Special Foods Stock 30,000
Record dividends from Special Foods.
$30,000 x 1.00
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44. 20X1 Consolidation--100 Percent Ownership
Trial Balance Data Elimination Entries Consoli-
Item Parent Subsidiary Debits Credits dated
(1) 50,000
(1) 30,000 (60,000)
(1) 20,000
Income from
Subsidiary 50,000
Dividends Declared (60,000 (30,000)
Investment in Special
Foods Stock 320,000 )
Remove both the investment income reflected in
the parent’s income statement and the parent’s
portion of any dividends declared by the subsidiary.
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45. 20X1 Consolidation--100 Percent Ownership
Trial Balance Data Elimination Entries Consoli-
Item Parent Subsidiary Debits Credits dated
(2)100, ,000
(2)300,000
(2)200, ,000
Income from
Subsidiary 50,000 (1) 50,000
Retained Earnings,
January 1 300, ,000
Dividends Declared (60,000 (30,000 (1) 30,000 (60,000)
Investment in Special
Foods Stock 320, (1) 20,000
Common Stock 500, ,000 ) )
Remove the intercorporate ownership claim and stockholders’
accounts of the subsidiary as of the beginning of the period.
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20X2 Consolidation--100 Percent Ownership
Peerless records its 20X2 income and dividends from Special Foods under the equity method with the following entries:
(1) Investment in Special Foods Stock 75,000
Income from Subsidiary 75,000
Record equity-method income.
$75,000 x 1.00
(2) Cash 40,000
Investment in Special Foods Stock 40,000
Record dividends from Special Foods.
$40,000 x 1.00
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47. 20X2 Consolidation--100 Percent Ownership
Trial Balance Data Elimination Entries Consoli-
Item Parent Subsidiary Debits Credits dated
Income from
Subsidiary 75,000
Retained Earnings,
January 1 430, ,000
Dividends Declared (60,000 (40,000
Investment in Special
Foods Stock 355,000
(1) 75,000
(1) 40,000 (60,000)
(1) 35,000 ) )
Remove the intercorporate ownership claim and stockholders’
accounts of the subsidiary recorded during the period.
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20X2 Consolidation--100 Percent Ownership
Trial Balance Data Elimination Entries Consoli-
Item Parent Subsidiary Debits Credits dated
(2)120, ,000
(2) 320,000
(2)200, ,000
Income from
Subsidiary 75,000 (1) 75,000
Retained Earnings,
January 1 430, ,000
Dividends Declared (60,000 (40,000 (1) 40,000 (60,000
Investment in Special
Foods Stock 355, (1) 35,000
Common Stock 500, ,000 ) ) )
Eliminate the beginning balance in the investment account and the stockholders’ equity accounts of the subsidiary at the beginning of 20X2.
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Chapter Four
The End
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