An Introduction to

Consolidated
Financial Statements
1: Benefits &
Limitations
AN INTRODUCTION TO CONSOLIDATED FINANCIAL
STATEMENTS
Business Acquisitions
Business combinations occur
◦ Acquire controlling interest in voting stock
◦ More than 50%
◦ May have control through indirect ownership

Consolidated financial statements

◦ Primarily for owners & creditors of parent
◦ Not for noncontrolling owners or subsidiary creditors
2: Subsidiaries
AN INTRODUCTION TO CONSOLIDATED FINANCIAL
STATEMENTS
Who is a Subsidiary?
Subsidiaries, or affiliates, continue as separate legal entities and
reporting to their controlling and noncontrolling interests.
Consolidated Statements
Prepared by the parent company
Parent discloses
◦ Consolidation policy, Reg. S-X
◦ Exceptions to consolidation, temporary control and inability to obtain control

Fiscal year end

◦ Use parent's FYE, but
◦ May include subsidiary statements with FYE within 3 months of parent's FYE.
◦ Disclose intervening material events
3: Parent
Company
Recording
AN INTRODUCTION TO CONSOLIDATED FINANCIAL
STATEMENTS
 Penn Example: Acquisition Cost =
Fair Value = Book Value
Skelly BV=FV
Cash $10 Penn acquires 100% of Skelly for $40,
which equals the book value and fair
Other current assets 15
values of the net assets acquired.
Net plant assets 40
Total $65
Accounts payable $15
Cost of acquisition $40
Other liabilities 10
Less 100% book value 40
Capital stock 30
Excess of cost over book value $0
Retained earnings 10
To consolidate, eliminate Penn's
Total $65 Investment account and Skelly's
capital stock and retained
earnings.
 Balance sheets Separate Consolidated
Penn Skelly Penn & Sub.
Cash $20 $10 $30
Other curr. assets 45 15 60
Net plant 60 40 100
Investment in Skelly 40 0 0
Total $165 $65 $190
Accounts payable $20 $15 $35
Other curr. liabilities 25 10 35
Capital stock 100 30 100
Retained earnings 20 10 20
Total $165 $65 $190
© Pearson Education, Inc.
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publishing as Prentice Hall
4: Allocations at
Acquisition Date
AN INTRODUCTION TO CONSOLIDATED FINANCIAL
STATEMENTS
Cost, Fair Value and Book
Value
Acquisition cost, fair values of identifiable net assets and book values
may differ.
◦ Allocate excess or deficiency of cost over book value and determine
goodwill, if any.
◦ When BV = FV, excess is goodwill.

Cost less BV = Excess to allocate

◦ Allocate first to FV-BV differences
◦ Remainder is goodwill (or bargain purchase)
Example: BV ≠ FV but Cost =
FV
Piper acquires 100% of Sandy for $310.
BV = 100 + 145 = $245
Sandy BV FV
FV = 385 – 75 = $310
Cash $40 $40
Receivables 30 30
Cost – FV = $0 goodwill
Inventory 50 75
Plant, net 200 240
Total $320 $385
Liabilities $75 $75
Cost $310
Capital stock 100
100% BV 245
Retained earnings 145 Excess of cost over BV $65
Total $320
Piper and Sandy (cont.)
Allocate to: Amt Amort.
Inventory 100%(+25) 25 1st yr
Plant 100%(+40) 40 10 yrs
Total $65

Piper's elimination worksheet entry:

Capital stock 100
Retained earnings 145
Inventory 25
Plant 40
Investment in Sandy 310
Example: BV ≠ FV and Cost ≠
FV
Panda acquires 100% of Salty for $530.
BV = 250 + 190 = $440

Salty BV FV FV = 580 – 85 = $495

Cash $100 $100

Cost – FV = $35 goodwill
Receivables 40 40
Inventory 250 250
Plant, net 130 190
Total $520 $580
Liabilities $80 $85 Cost $530
Capital stock 250
100% BV (250+190) 440
Retained earnings 190
Excess of cost over BV $90
Total $520
Panda and Salty (cont.)
Allocate to: Amt Amort.
Plant 60 4 yrs
Liabilities -5 5 yrs
Goodwill 35 -
Total $90
Panda's elimination worksheet entry:
Capital stock 250
Retained earnings 190
Plant 60
Goodwill 35
Liabilities 5
Investment in Salty 530
EXCERCISE
Surya Corp. acquires Sunny for $465. Sunny’s
book values are 150 in cash. 85 in
receivables, 175 in inventory, 200 in plant,
180 in liabilities, 230 in capital stock, and
200 in retained earnings. Sunny’s fair values
are 150 in cash. 85 in receivables, 200 in
inventory, 230 in plant, and 200 in liabilities
. Count book value, fair value, goodwill, and
the excess of cost over book value!
EXCERCISE
Surya Corp. acquires Sunny for $500. Sunny’s
book values are 150 in cash. 85 in
receivables, 175 in inventory, 200 in plant,
180 in liabilities, 230 in capital stock, and
200 in retained earnings. Sunny’s fair values
are 150 in cash. 85 in receivables, 175 in
inventory, 250 in plant, and 200 in liabilities
. Count book value, fair value, goodwill, and
the excess of cost over book value!
© Pearson Education, Inc.
3-18 18
publishing as Prentice Hall
© Pearson Education, Inc.
3-19 19
publishing as Prentice Hall