0. Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 3: Consolidated Financial Statements - Date of Acquisition
Slides Authored by Hannah Wong, Ph.D.
Rutgers University

1. Definition of Subsidiary
Parent Company
controls
Subsidiary

2. What is Control?
the ability to direct the policies and management of another entity
decision making ability that is not shared with others
means of control:
ownership of voting shares (often over 50%)
by contract

3. Who Should be Consolidated?
Companies under common control
Generally all majority-owned subsidiaries
Exceptions:
ownership is temporary
control does not rest with the majority owner
e.g., legal reorganization or bankruptcy
foreign subsidiary subject to government restrictions

4. Consolidated Financial Statements
Intended readers
stockholders and creditors of the parent company
Purpose
to present the financial position and operating results of a parent company and its subsidiaries as if the group were a single company
Reason
substance over form
i.e. economic entity VS legal entity

5. Parent’s JE at Acquisition Date
Case A: P Company acquires all 10,000 shares of the common stock of S Company for $25 per share and pays acquisition fee of $10,000.
Investment in S Company ,000
Cash ,000

6. Parent’s JE at Acquisition Date
Case B: P Company issues 20,000 of its $10 par value common shares with a fair value of $13 per share for the shares of S Company. P Company paid registration costs of $5,000 and a finder’s fee of $10,000.
Investment in S Company (20,000x$13) 260,000
Common stock (20,000x$10) 200,000
Other contributed capital(20,000x$3) 60,000
Other contributed capital 5,000
Cash 5,000
Investment in S Company 10,000
Cash 10,000
Direct costs are part of purchase price
and increase the investment account
Registration costs reduce the
other contributed capital

7. Intercompany Accounts to be Eliminated

8. Computation and Allocation of Difference between Cost and Book Value
Cost of Investment (Purchase Price)
- Book Value of Equity Acquired
(Sum of Equity Accounts of S Company
x percentage acquired)
= Difference between Cost and Book Value

9. Case 1(a) Cost = BV, 100% 0wnership
Journal Entry
Investment in S Company ,000
Cash ,000
Eliminating Entry
Common Stock - S Company 50,000
Other Contributed Capital - S Company 10,000
Retained Earnings - S Company 20,000
Investment in S Company ,000
The shareholders’ equity accounts
in the subsidiary’s books represent
the parent’s investment in the
net assets of the subsidiary
The investment account in the
parent’s books record
the parent’s investment in the net
assets of the subsidiary

10. Case 1(a) Cost = BV, 100% 0wnership Illustration 3-2
About the consolidated balances:
Investment in S Company = 0
Subsidiary’s net assets are substituted for the investment account.
Consolidated assets and liabilities = parent’s + subsidiary’s
Consolidated S/E = parent’s S/E

11. Case 1(b) Cost = BV, Partial 0wnership
Journal Entry
Investment in S Company ,000
Cash ,000
Computation and Allocation of Difference
between Cost and Book Value
Cost of Investment ,000
- Book Value of Equity Acquired (80,000 x90%) 72,000
= Difference between Cost and Book Value

12. Case 1(b) Cost = BV, Partial 0wnership
The Investment Eliminating Entry
Common Stock - S Company 45,000
Other Contributed Capital - S Company 9,000
Retained Earnings - S Company 20,000
Investment in S Company ,000
90% of the subsidiary’s
shareholders’ equity accounts,
representing the parent’s
investment in the net assets
of the subsidiary, is eliminated.
The investment account in the
parent’s books record
the parent’s investment in the net
assets of the subsidiary

13. Case 1(b) Cost = BV, Partial 0wnership Illustration 3-3
About the consolidated balances:
100% of subsidiary’s assets and liabilities are included.
Only 90% of subsidiary’s S/E accounts are eliminated.
The other 10% is non-controlling shareholders’ interest in the net assets.

14. Non-controlling Interests
Definition
the stock of the subsidiary which is not controlled by the parent
Presentation
Non-controlling interests in net assets can be presented in the consolidated balance sheet as:
a liability;
part of shareholders’ equity; or
a separate section

15. Case 2(b) Cost > BV, Partial 0wnership
Journal Entry
Investment in S Company ,000
Cash ,000
Computation and Allocation of Difference
between Cost and Book Value
Cost of Investment 74,000
- Book Value of Equity Acquired (80,000x80%) 64,000
= Difference between Cost and Book Value 10,000
Adjust land upward (mark toward market) (10,000)
Balance 0

16. Case 2(b) Cost > BV, Partial 0wnership
The Investment Eliminating Entry
Common Stock - S Company 40,000
Other Contributed Capital - S Company 8,000
Retained Earnings - S Company 16,000
Difference between Cost and Book Value 10,000
Investment in S Company ,000
The Allocation Eliminating Entry
Land ,000
Difference between Cost and Book Value 10,000
The difference between cost
and book value is recorded
and allocated to the
appropriate account (Land)
The investment account is eliminated
against 80% of the equity accounts
of the subsidiary

17. Why Would an Acquiring Company Pay More than Book Value
Appreciation of assets
expense of costs that contains future benefits
accelerated depreciation methods
LIFO inventory method
unrealized gains that are unrecognized
Goodwill
Overvaluation of long term liabilities
Other market factors, e.g. competitor acquirer

18. Case 3(b) Cost < BV, Partial 0wnership
Journal Entry
Investment in S Company ,000
Cash ,000
Computation and Allocation of Difference
between Cost and Book Value
Cost of Investment ,000
- Book Value of Equity Acquired (80,000x80%) 64,000
= Difference between Cost and Book Value (4,000)
Adjust land downward (mark toward market) 4,000
Balance

19. Case 3(b) Cost < BV, Partial 0wnership
The Investment Eliminating Entry
Common Stock - S Company 40,000
Other Contributed Capital - S Company 8,000
Retained Earnings - S Company 16,000
Difference between Cost and Book Value 10,000
Investment in S Company 60,000
The Allocation Eliminating Entry
Difference between Cost and Book Value 4,000
Land ,000
The difference between cost
and book value is recorded
and allocated to the
appropriate account (Land)
The investment account is eliminated
against 80% of the equity accounts
of the subsidiary

20. Why Would an Acquiring Company Pay Less than Book Value
Overvaluation of assets
Undervaluation of long term liabilities
Bargain purchase

21. Subsidiary Treasury Stock Holdings
The Investment Eliminating Entry
Common Stock - S Company 187,500
Other Contributed Capital - S Company 37,500
Retained Earnings - S Company ,750
Difference between Cost and Book Value 16, 250
Investment in S Company ,000
Treasury Stock ,000
The remainder of the treasury stock
is carried over as a reduction in
non-controlling interests
in net assets
The parent’s share of treasury
stock is eliminated

22. Other Eliminations Cash Advance Receivable/Payable
Advance from P Company 25,000
Advance to S Company ,000
Receivable/Payable
Accounts Payable (to S) 100,000
Accounts Receivable (from P) ,000

23. Limitations of Consolidated Statements
Limited information for non-controlling stockholders, subsidiary creditors, and regulatory agencies
Combining financial information of firms in different industries make the statements difficult to analyze

24. Advanced Accounting by Debra Jeter and Paul Chaney
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.
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