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McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-1 Consolidation of Wholly- Owned Subsidiary Electronic Presentation.

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

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

2 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 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 or a subsidiary or in the consolidation workpaper. 4-2

3 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Consolidation Procedures The term subsidiary has been defined as “an entity... in which another entity known as its parent holds a controlling financial interest.” 4-3

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

5 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-5 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.

6 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-6 Full Ownership Purchased at Book Value PT Induk purchases all of PT Anak’ outstanding common stock for Rp300,000,000. Let’s take a look at the balance sheets of PT Induk and PT Anak immediately before combination.

7 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-7 Assets CashRp 350,000 Rp 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 AssetsRp1,100,000 Rp500,000 Liabilities and Stockholders’ Equity Accounts PayableRp 100,000 Rp100,000 Bonds Payable200, ,000 Common Stock500, ,000 Retained Earnings 300, ,000 Total Liabilities and Stockholders’ EquityRp1,100,000 Rp500,000 Balance Sheets Before Combination (in ‘000) PT Induk PT Anak ) )

8 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-8 Investment costRp300,000,000 Book value: Common stock--PT AnakRp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00 (300,000,000 DifferentialRp -0- Investment costRp300,000,000 Book value: Common stock--PT AnakRp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00 (300,000,000 DifferentialRp -0- January 1, 20X1 entry: E(1) Investment in PT Anak Stock300,000,000 Cash 300,000,000 Record purchase of PT Anak stock. P S 100% Full Ownership Purchased at Book Value )

9 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 4-9 Balance Sheets After Combination (in ‘000) Assets CashRp 50,000 Rp 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 PT Anak Stock 300,000 Total AssetsRp1,100,000 Rp500,000 Liabilities and Stockholders’ Equity Accounts PayableRp 100,000 Rp100,000 Bonds Payable200, ,000 Common Stock500, ,000 Retained Earnings 300, ,000 Total Liabilities and Stockholders’ EquityRp1,100,000 Rp500,000 PT Induk PT Anak ) )

10 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved 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 PT Anak 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 (in ‘000) Trial Balance Data Elimination Entries Account Titles PT Induk PT Anak Debits Credits Consolidated

11 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved 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 PT Anak 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 (in ‘000) Trial Balance Data Elimination Entries Account Titles PT Induk PT Anak Debits Credits Consolidated

12 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Trial Balance Data Elimination Entries Account Titles PT Induk PT Anak 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 PT Anak 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 (in ‘000)

13 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Common Stock--PT Anak200,000,000 Retained Earnings100,000,000 Investment in PT Anak Stock 300,000,000 Eliminate investment balance. Elimination Entry E(2) Entry E(2)

14 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 subsidiary’s net identifiable assets  Existence of goodwill Purchase At More Than Book Value Reasons the purchase price of a company’s stock might exceed the stock’s book value :

15 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 PT Anak Stock340,000,000 Cash 340,000,000 Record purchase of PT Anak stock. P S 100% Investment cost Rp340,000,000 Book value: Common stock--PT AnakRp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00 (300,000,000 DifferentialRp40,000,000 Investment cost Rp340,000,000 Book value: Common stock--PT AnakRp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00 (300,000,000 DifferentialRp40,000,000 )

16 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--PT Anak200,000,000 Retained Earnings100,000,000 Differential40,000,000 Investment in PT Anak Stock 340,000,000 P S 100% Investment cost Rp340,000,000 Book value: Common stock--PT AnakRp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00 (300,000,000 DifferentialRp40,000,000 Investment cost Rp340,000,000 Book value: Common stock--PT AnakRp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00 (300,000,000 DifferentialRp40,000,000 )

17 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 PT Anak 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 (in ‘000) Trial Balance Data Elimination Entries Account Titles PT Induk PT Anak Debits Credits Consolidated (4) 40,000 (4)200,000 (4)100,000 (4) 340,000

18 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Purchase At More Than Book Value (in ‘000) Trial Balance Data Elimination Entries Account Titles PT Induk PT Anak 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 PT Anak 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

19 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Purchase At More Than Book Value (in ‘000) Trial Balance Data Elimination Entries Account Titles PT Induk PT Anak 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 PT Anak 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

20 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Elimination Entry E(5) Land40,000,000 Differential 40,000,000 Entry E(5)

21 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 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.

22 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Existence of Goodwill If the fair values of PT Anak’ assets and liabilities are equal to their book values, and the Rp40,000,000 differential is considered a payment for goodwill, the following elimination entry is needed: E(6) Goodwill40,000,000 Differential40,000,000 Assign differential to goodwill.

23 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Illustration of Debit Differential: relates to a number of different assets and liabilities PT Induk acquires all PT Anak’ capital stock for Rp400, on January 1, 20X1, by issuing Rp100, of 9 percent first mortgage bonds and paying cash of Rp300,

24 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Investment cost Rp400,000,000 Book value: Common stock--PT AnakRp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00 (300,000,000 Differential Rp100,000,000 Investment cost Rp400,000,000 Book value: Common stock--PT AnakRp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00 (300,000,000 Differential Rp100,000,000 P January 1, 20X1 entry: E(7) Investment in PT Anak Stock400,000,000 Bonds Payable 100,000,000 Cash 300,000,000 Record purchase of PT Anak stock. S 100% Debit Differential )

25 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Debit Differential Fair value of net identifiable assets Rp330,000,000 Total differential Rp100,000,000 Excess of cost over fair value of net identifiable assets Rp70,000,000 Excess of fair value over book value of net identifiable assets Rp30,000,000 (See Fig. 4-7) Book value of net identifiable assets Rp300,000,000 Cost of investment Rp400,000,000

26 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--PT Anak200,000,000 Retained Earnings100,000,000 Differential100,000,000 Investment in PT Anak Stock 400,000,000 Eliminate investment balance. E(9) Inventory15,000,000 Land60,000,000 Goodwill70,000,000 Buildings and Equipment10,000,000 Premium on Bonds Payable35,000,000 Differential 100,000,000 Assign differential.

27 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Full Ownership Purchased at Less than Book Value Differential may include: 1. Errors or omissions on the books of the subsidiary. 2. Excess of book value over the fair value of the subsidiary’s net identifiable assets. 3. Diminution of previously recorded goodwill. 4. Bargain purchase. The existence of “negative goodwill,” indicating that the subsidiary’s net assets are worth less as a going concern than if they were sold individually.

28 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Illustration of Treatment of Credit Differential PT Induk purchases all of PT Anak’ stock for Rp260,000,000. The resulting ownership situation is as follows: Investment cost Rp260,000,000 Book value 1/1/X1: Common stock —PT Anak Rp200,000,000 Retained earnings—PT Anak 100,000,000 Rp300,000,000 PT Induk’ s share x 1.00 (300,000,000) Difference (credit) (Rp40,000,000)

29 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidation Subsequent to Acquisition More than a consolidated balance sheet, however, is needed to provide a comprehensive picture of the consolidated entity’s activities following acquisition. As with a single company, the set of basic financial statements for a consolidated entity consists of a balance sheet, an income statement, a statement of changes in retained earnings, and a statement of cash flows.

30 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidated Net Income All revenues and expenses of the individual consolidating companies arising from transactions with nonaffiliated companies are included in the consolidated income statement. The amount reported as consolidated net income is that part of the total enterprise’s income that is assigned to the parent company’s shareholders.

31 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Computing Consolidated Net Income Consolidated net income is computed by adding the parent’s proportionate share of the income of all subsidiaries, adjusted for any differential write-off, to the parent’s income from its own separate operations (parent’s net income less investment income from the subsidiaries under either the cost or equity method).

32 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidated Retained Earnings Consolidated retained earnings must be measured on a basis consistent with that used in determining consolidated net income. Consolidated retained earnings is that portion of the consolidated enterprise’s undistributed earnings accruing to the parent company shareholders.

33 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved 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 Earnings INCOME STATEMENT SECTION RETAINED EARNINGS SECTION to Balance Sheet section

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

35 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved X1 Consolidation--100 Percent Ownership Investment costRp300,000,000 Book value: Common stock--PT AnakRp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s sharex 1.00 (300,000,000) DifferentialRp -0- Investment costRp300,000,000 Book value: Common stock--PT AnakRp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s sharex 1.00 (300,000,000) DifferentialRp -0- P S 100% January 1, 20X1 (14) Investment in PT Anak Stock300, Cash300,000,000 Record purchase of PT Anak stock.

36 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved X1 Consolidation--100 Percent Ownership PT Induk PT Anak Common Stock, January 1, 20X1Rp500,000,000Rp200,000,000 Retained Earnings, January 1, 20X1300,000,000100,000,000 20X1: Separate Operating Income, PT Induk140,000,000 Net Income, PT Anak50,000,000 Dividends60,000,00030,000,000 20X2: Separate Operating Income, PT Induk160,000,000 Net Income, PT Anak75,000,000 Dividends60,000,00040,000,000

37 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved X1 Consolidation--100 Percent Ownership PT Induk records its 20X1 income and dividends from PT Anak under the equity method with the following entries: (16) Investment in PT Anak Stock50,000,000 Income from Subsidiary50,000,000 Record equity-method income. Rp50,000,000 x 1.00 (15) Cash30,000,000 Investment in PT Anak Stock30,000,000 Record dividends from PT Anak. Rp30,000,000 x 1.00

38 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 50,000 Dividends Declared(60,000(30,000) Investment in PT Anak Stock320,000 20X1 Consolidation--100 Percent Ownership (in ‘000) (17) 50,000 (17) 30,000(60,000) (17) 20,000 Remove both the investment income reflected in the parent’s income statement and the parent’s portion of any dividends declared by the subsidiary. Remove both the investment income reflected in the parent’s income statement and the parent’s portion of any dividends declared by the subsidiary. )

39 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 50,000 (17) 50,000 Retained Earnings, January 1300, ,000 Dividends Declared(60,000(30,000 (17) 30,000(60,000) Investment in PT Anak Stock320,000 (17) 20,000 Common Stock500, ,000 20X1 Consolidation--100 Percent Ownership (in ‘000) Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary as of the beginning of the period. Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary as of the beginning of the period. (18) 100,000300,000 (18) 300,000 (18) 200,000500,000 ) )

40 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved X2 Consolidation--100 Percent Ownership PT Induk records its 20X2 income and dividends from PT Anak under the equity method with the following entries: (20) Investment in PT Anak Stock75,000,000 Income from Subsidiary75,000,000 Record equity-method income. Rp75,000,000 x 1.00 (19) Cash40,000,000 Investment in PT Anak Stock40,000,000 Record dividends from PT Anak. Rp40,000,000 x 1.00

41 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 75,000 Retained Earnings, January 1430, ,000 Dividends Declared(60,000(40,000 Investment in PT Anak Stock355,000 20X2 Consolidation--100 Percent Ownership (in ‘000) Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary recorded during the period. Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary recorded during the period. (21) 75,000 (21) 40,000(60,000) (21) 35,000 ) )

42 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 75,000 (21) 75,000 Retained Earnings, January 1430, ,000 Dividends Declared(60,000(40,000 (21) 40,000(60,000 Investment in PT Anak Stock355,000 (21) 35,000 Common Stock500, ,000 20X2 Consolidation--100 Percent Ownership Eliminate the beginning balance in the investment account and the stockholders’ equity accounts of the subsidiary at the beginning of 20X2. ))) (22) 120,000430,000 (22) 320,000 (22) 200,000500,000

43 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved PERCENT OWNERSHIP PURCHASED AT MORE THAN BOOK VALUE The excess of the purchase price over the book value of the net identifiable assets purchased must be allocated to those assets and liabilities acquired, including any purchased goodwill.

44 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved In consolidation, the purchase differential is assigned to the appropriate asset and liability balances, and consolidated income is adjusted for the amounts expiring during the period by assigning them to the related expense items (e.g., depreciation expense). 100 PERCENT OWNERSHIP PURCHASED AT MORE THAN BOOK VALUE

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


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