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1、 2009 The McGraw-Hill Companies, Inc. All rights reserved.,McGraw-Hill/Irwin,Consolidation of Wholly Owned Subsidiaries,4,Consolidation Procedures,The starting point for preparing consolidated financial statements is the books of the separate consolidating companies The consolidated entity has no bo
2、oks Amounts in the consolidated financial statements originate on the books of the parent or a subsidiary or in the consolidation workpaper,Consolidation Workpapers,The consolidation workpaper a mechanism for: Combining the accounts of the separate companies involved in the consolidation Adjusting t
3、he combined balances to the amounts that would be reported if all consolidating companies were actually a single company When consolidated statements are prepared, the account balances are taken from the separate books of the parent and each subsidiary and placed in the consolidation workpaper The c
4、onsolidated statements are prepared, after adjustments and eliminations, from the amounts in the workpaper,Consolidation Workpapers,Eliminating entries Used to adjust the totals of the individual account balances of the separate consolidating companies to reflect the amounts that would appear if all
5、 the legally separate companies were actually a single company Appear only in the consolidating workpapers and do not affect the books of the separate companies Used to increase or decrease the combined totals for individual accounts so that only transactions with external parties are reflected in t
6、he consolidated amounts They do not carry over from period to period,Consolidated Balance Sheet with Wholly Owned Subsidiary - Illustration,Back,100 percent ownership acquired at book value,Peerless acquires all of Special Foods common stock for $300,000, an amount equal to the fair value of Special
7、 Foods as a whole On the date of combination, the fair values of Special Foods individual assets and liabilities are equal to their book values Peerless records the stock acquisition on its books:,100 percent ownership acquired at book value,Workpaper for Consolidated Balance Sheet, January 1, 20X1,
8、 Date of Combination; 100 Percent Acquisition at Book Value,100 percent ownership acquired at book value,The consolidated balance sheet is prepared directly from the last column of the consolidation workpaper,100 Percent Ownership Acquired at More than Book Value,Peerless records the stock acquisiti
9、on:,Peerless acquires all of Special Foods outstanding stock on January 1, 20X1, by paying $340,000 cash, an amount equal to Special Foods fair value as a whole. The consideration given by Peerless is $40,000 in excess of Special Foods book value of $300,000.,100 Percent Ownership Acquired at More t
10、han Book Value,The workpaper entry to eliminate Peerlesss investment account and the stockholders equity accounts of Special Foods is:The fair value, and hence acquisition price, of a subsidiary might exceed the book value for several reasons: Errors or omissions on the books of the subsidiary Exces
11、s of fair value over the book value of the subsidiarys net identifiable assets Existence of goodwill,100 Percent Ownership Acquired at More than Book Value,Errors or omissions on the books of the subsidiary Corrections should be made directly on the subsidiarys books as of the date of acquisition Ex
12、cess of fair value over book value of subsidiarys net identifiable assets The assets and liabilities of the subsidiary may be revalued directly on the books of the subsidiary The accounting basis of the subsidiary may be maintained and the revaluations made each period in the consolidation workpaper
13、,100 Percent Ownership Acquired at More than Book Value,If the fair value of Special Foods land is determined to be $40,000 more than its book value, and all other assets and liabilities have fair values equal to their book values, the entire amount of the differential is allocated to the subsidiary
14、s land,Workpaper for Consolidated Balance Sheet, January 1, 20X1, Date of Combination; 100 Percent Acquisition at More than Book Value,100 Percent Ownership Acquired at More than Book Value,Existence of goodwill Related to the future economic benefits associated with other assets of the subsidiary t
15、hat are not separately identified and recognized,Assuming that the acquisition-date fair values of Special Foods assets and liabilities are equal to their book values, then the $40,000 difference between the $340,000 consideration exchanged and the $300,000 fair value of the subsidiarys net identifi
16、able assets is attributed to goodwill.,Illustration of Treatment of Debit Differential,Assume that the acquisition-date book values and fair values of Special Foods assets and liabilities are as shown.,Illustration of Treatment of Debit Differential,Assume that Peerless Products acquires all of Special Foods capital stock for $400,000 on January 1, 20X1, by issuing $100,000 of 9 percent bonds, with a fair value of $100,000, and paying cash of $300,000. The resulting ownership situation can be pictured as follows:,
