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McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-1 Consolidation as of the Date of Acquisition 4 Electronic.

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Presentation on theme: "McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-1 Consolidation as of the Date of Acquisition 4 Electronic."— Presentation transcript:

1 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-1 Consolidation as of the Date of Acquisition 4 Electronic Presentation by Douglas Cloud Pepperdine University Baker / Lembke / King

2 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-2 Consolidation Workpaper Trial Balance Data Elimination Entries Account Titles Parent Subsidiary Debits Credits Consolidated Work flow

3 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-3 Nature of Eliminating Entries Eliminating entries are used in the consolidation workpaper to adjust the totals of the individual account balances of the separate companies... …to reflect the amounts that would appear if all the legally separate companies were actually a single company.

4 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-4 Full Ownership Purchased at Book Value Peerless purchases all of Special Foods outstanding common stock for $300,000. Lets take a look at the balance sheets of Peerless and Special Foods immediately before combination.

5 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-5 Assets Cash$ 350,000 $ 50,000 Accounts Receivable75,000 50,000 Inventory100,000 60,000 Land175,000 40,000 Buildings and Equipment800, ,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 Payable200, ,000 Common Stock500, ,000 Retained Earnings 300, ,000 Total Liabilities and Stockholders Equity$1,100,000 $500,000 Balance Sheets Before Combination Peerless Special Foods ) )

6 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-6 Investment cost$300,000 Book value: Common stock--Special Foods$200,000 Retained earnings--Special Foods100,000 $300,000 Peerlesss sharex 1.00 (300,000 Differential$ -0- Investment cost$300,000 Book value: Common stock--Special Foods$200,000 Retained earnings--Special Foods100,000 $300,000 Peerlesss sharex 1.00 (300,000 Differential$ -0- January 1, 20X1 entry: E(1) Investment in Special Foods Stock300,000 Cash300,000 Record purchase of Special Foods stock. P S 100% Full Ownership Purchased at Book Value )

7 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-7 Balance Sheets After Combination Assets Cash$ 50,000 $ 50,000 Accounts Receivable75,000 50,000 Inventory100,000 60,000 Land175,000 40,000 Buildings and Equipment800, ,000 Accumulated Depreciation(400,000(300,000 Investment in Special Foods Stock 300,000 Total Assets$1,100,000 $500,000 Liabilities and Stockholders Equity Accounts Payable$ 100,000 $100,000 Bonds Payable200, ,000 Common Stock500, ,000 Retained Earnings 300, ,000 Total Liabilities and Stockholders Equity$1,100,000 $500,000 Peerless Special Foods ) )

8 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-8 Cash50,00050,000100,000 Accounts Rec.75,00050,000125,000 Inventory100,00060,000160,000 Land175,00040,000215,000 Bldg. and Equip.800,000600,0001,400,000 Inv. in Sp. Foods 300,000 Total Debits1,500,000800,0002,000,000 Accum. Depr.400,000300,000700,000 Accounts Payable100,000100,000200,000 Bonds Payable200,000100,000300,000 Common Stock500,000200,000500,000 Retained Earn. 300,000100,000300,000 Total Credits1,500,000800,0002,000, % Purchase at Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated

9 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-9 Cash50,00050,000100,000 Accounts Rec.75,00050,000125,000 Inventory100,00060,000160,000 Land175,00040,000215,000 Bldg. and Equip.800,000600,0001,400,000 Inv. in Sp. Foods 300,000(2) 300,000 Total Debits1,500,000800,0002,000,000 Accum. Depr.400,000300,000700,000 Accounts Payable100,000100,000200,000 Bonds Payable200,000100,000300,000 Common Stock500,000200,000(2)200,000500,000 Retained Earn. 300,000100,000(2)100,000300,000 Total Credits1,500,000800,000300,000300,0002,000, % Purchase at Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated

10 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash50,00050,000100,000 Accounts Rec.75,00050,000125,000 Inventory100,00060,000160,000 Land175,00040,000215,000 Bldg. and Equip.800,000600,0001,400,000 Inv. in Sp. Foods 300,000300,000 Total Debits1,500,000800,0002,000,000 Accum. Depr.400,000300,000700,000 Accounts Payable100,000100,000200,000 Bonds Payable200,000100,000300,000 Common Stock500,000200,000200,000500,000 Retained Earn. 300,000100,000100,000300,000 Total Credits1,500,000800,000300,000300,0002,000, % Purchase at Book Value

11 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Common Stock--Special Foods200,000 Retained Earnings100,000 Investment in Special Foods Stock300,000 Eliminate investment balance. Elimination Entry E(2) Entry E(2)

12 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Errors or omissions on the books of the subsidiary Excess of fair value over the book value of the subsidiarys net identifiable assets Existence of goodwill Other reasons Purchase At More Than Book Value Reasons the purchase price of a companys stock might exceed the stocks book value :

13 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Purchase At More Than Book Value January 1, 20X1 entry: E(3) Investment in Special Foods Stock340,000 Cash340,000 Record purchase of Special Foods stock. P S 100% Investment cost$340,000 Book value: Common stock--Special Foods$200,000 Retained earnings--Special Foods 100,000 $300,000 Peerlesss sharex 1.00 (300,000 Differential$ 40,000 Investment cost$340,000 Book value: Common stock--Special Foods$200,000 Retained earnings--Special Foods 100,000 $300,000 Peerlesss sharex 1.00 (300,000 Differential$ 40,000 )

14 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Purchase At More Than Book Value The elimination entry on the workpaper would be: E(4)Common Stock--Special Foods200,000 Retained Earnings100,000 Differential40,000 Investment in Special Foods Stock340,000 P S 100% Investment cost$340,000 Book value: Common stock--Special Foods$200,000 Retained earnings--Special Foods 100,000 $300,000 Peerlesss sharex 1.00 (300,000 Differential$ 40,000 Investment cost$340,000 Book value: Common stock--Special Foods$200,000 Retained earnings--Special Foods 100,000 $300,000 Peerlesss sharex 1.00 (300,000 Differential$ 40,000 )

15 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Cash10,00050,000 Accounts Rec.75,00050,000 Inventory100,00060,000 Land175,00040,000 Bldg. and Equip.800,000600,000 Inv. in Sp. Foods 340,000 Differential Total Debits1,500,000800,000 Accum. Depr.400,000300,000 Accounts Payable100,000100,000 Bonds Payable200,000100,000 Common Stock500,000200,000 Retained Earn. 300,000100,000 Total Credits1,500,000800,000 Purchase At More Than Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated (4) 40,000 (4)200,000 (4)100,000 (4) 340,000

16 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Purchase At More Than Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash10,00050,000 Accounts Rec.75,00050,000 Inventory100,00060,000 Land175,00040,000 Bldg. and Equip.800,000600,000 Inv. in Sp. Foods 340,000 Differential Total Debits1,500,000800,000 Accum. Depr.400,000300,000 Accounts Payable100,000100,000 Bonds Payable200,000100,000 Common Stock500,000200,000 Retained Earn. 300,000100,000 Total Credits1,500,000800,000 (4) 40,000 (4)200,000 (4)100,000 (4) 340,000 (5) 40, ,000

17 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Purchase At More Than Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash10,00050,000 Accounts Rec.75,00050,000 Inventory100,00060,000 Land175,00040,000 Bldg. and Equip.800,000600,000 Inv. in Sp. Foods 340,000 Differential Total Debits1,500,000800,000 Accum. Depr.400,000300,000 Accounts Payable100,000100,000 Bonds Payable200,000100,000 Common Stock500,000200,000 Retained Earn. 300,000100,000 Total Credits1,500,000800,000 (4) 40,000 (4)200,000 (4)100,000 (4) 340,000 (5) 40, ,000 60, , , ,000 1,400,000 2,000, , , , , ,000 2,000,000

18 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Elimination Entry E(5) Land40,000 Differential40,000 Entry E(5)

19 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Existence of Goodwill If a company purchases a subsidiary at a price in excess of the total of the fair value of the subsidiarys 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.

20 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved 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(6) Goodwill40,000 Differential40,000 Assign differential to goodwill.

21 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved 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.

22 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Investment cost$400,000 Book value: Common stock--Special Foods$200,000 Retained earnings--Special Foods 100,000 $300,000 Peerlesss sharex 1.00(300,000 Differential$100,000 Investment cost$400,000 Book value: Common stock--Special Foods$200,000 Retained earnings--Special Foods 100,000 $300,000 Peerlesss sharex 1.00(300,000 Differential$100,000 P January 1, 20X1 entry: E(7) Investment in Special Foods Stock400,000 Bonds Payable100,000 Cash300,000 Record purchase of Special Foods stock. S 100% Debit Differential )

23 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Debit Differential Fair value of net identifiable assets $330,000 Total differential $100,000 Excess of cost over fair value of net identifiable assets $70,000 Excess of fair value over book value of net identifiable assets $30,000 Book value of net identifiable assets $300,000 Cost of investment $400,000

24 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Debit Differential The eliminations entered in the consolidation workpaper in preparing the consolidated balance sheet immediately after the combination are: E(8) Common Stock--Special Foods200,000 Retained Earnings100,000 Differential100,000 Investment in Special Foods Stock400,000 Eliminate investment balance. E(9) Inventory15,000 Land60,000 Goodwill70,000 Buildings and Equipment10,000 Premium on Bonds Payable35,000 Differential100,000 Assign differential.

25 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Percent Purchase at Book Value On January 1, 20X1, Peerless Products purchases 80 percent of the outstanding common stock of Special Foods for $240,000 cash. The purchase price represents 80 percent of the book value of Special Foods stock on the date of combination.

26 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Investment cost$240,000 Book value: Common stock--Special Foods$200,000 Retained earnings--Special Foods 100,000 $300,000 Peerlesss sharex.8 (240,000 Differential$ -0- Investment cost$240,000 Book value: Common stock--Special Foods$200,000 Retained earnings--Special Foods 100,000 $300,000 Peerlesss sharex.8 (240,000 Differential$ Percent Purchase at Book Value P S 100% NCI 20% January 1, 20X1 entry: E(14) Investment in Special Foods Stock240,000 Cash240,000 Record purchase of Special Foods stock. )

27 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Trial Balance Data Elimination Entries Account Titles Peerless Spec. Fd. Debits Credits Consolidated 80 Percent Purchase at Book Value Cash110,00050,000 Accounts Rec.75,00050,000 Inventory100,00060,000 Land175,00040,000 Bldg. and Equip.800,000600,000 Inv. in Sp. Foods 240,000 Total Debits1,500,000800,000 Accum. Depr.400,000300,000 Accounts Payable100,000100,000 Bonds Payable200,000100,000 Common Stock500,000200,000 Retained Earn.300,000100,000 Total Credits1,500,000800, , , ,000 Nonctrl. Interest 60,000

28 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Trial Balance Data Elimination Entries Account Titles Peerless Spec. Fd. Debits Credits Consolidated 80 Percent Purchase at Book Value Cash110,00050,000 Accounts Rec.75,00050,000 Inventory100,00060,000 Land175,00040,000 Bldg. and Equip.800,000600,000 Inv. in Sp. Foods 240,000 Total Debits1,500,000800,000 Accum. Depr.400,000300,000 Accounts Payable100,000100,000 Bonds Payable200,000100,000 Common Stock500,000200,000 Retained Earn.300,000100,000 Total Credits1,500,000800, , , , ,000 Nonctrl. Interest 60,000

29 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Trial Balance Data Elimination Entries Account Titles Peerless Spec. Fd. Debits Credits Consolidated 80 Percent Purchase at Book Value 240, , , , , , , ,000 1,400,000 2,060, , , , , ,000 60,000 2,060,000 Cash110,00050,000 Accounts Rec.75,00050,000 Inventory100,00060,000 Land175,00040,000 Bldg. and Equip.800,000600,000 Inv. in Sp. Foods 240,000 Total Debits1,500,000800,000 Accum. Depr.400,000300,000 Accounts Payable100,000100,000 Bonds Payable200,000100,000 Common Stock500,000200,000 Retained Earn.300,000100,000 Total Credits1,500,000800,000 Nonctrl. Interest 60,000

30 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Common Stock--Special Foods200,000 Retained Earnings100,000 Investment in Special Foods Stock240,000 Noncontrolling Interest60,000 Elimination Entry E(15) Entry E(15)

31 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidated Balance Sheet--80 Percent Peerless Products Corporation and Subsidiary Consolidated Balance Sheet January 1, 20X1 Assets: Cash$ 160,000 Accounts Receivable125,000 Inventory160,000 Land215,000 Building and Equipment$1,400,000 Accumulated Depreciation (700, ,000 Total Assets$1,360,000 Continued )

32 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidated Balance Sheet--80 Percent Liabilities: Accounts Payable$ 200,000 Bonds Payable300,000 Noncontrolling Interest60,000 Stockholders Equity: Common Stock500,000 Retained Earnings 300,000 Total Liabilities and Equity$1,360,000

33 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Chapter Four The End


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