4-4-11

Consolidation as of the Date of Acquisition 4

Baker / Lembke / KingBaker / Lembke / King

4-4-22Consolidation WorkpaperConsolidation Workpaper

Trial Balance Data Elimination Entries Account Titles Parent Subsidiary Debits Credits Consolidated

Work flow

4-4-33Nature of Eliminating EntriesNature of Eliminating Entries

Eliminating entries are used in the consolidation workpaper to adjust the totals of the individual account

balances of the separate companies...

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.

…to reflect the amounts that would appear if all the legally

separate companies were actually a single company.

4-4-44Full Ownership Purchased at Book ValueFull Ownership Purchased at Book Value

Peerless purchases all of Special Foods’ outstanding common stock for $300,000.

Peerless purchases all of Special Foods’ outstanding common stock for $300,000.

Let’s take a look at the balance sheets of Peerless and

Special Foods immediately before combination.

Let’s take a look at the balance sheets of Peerless and

Special Foods immediately before combination.

4-4-55

AssetsCash $ 350,000 $ 50,000 Accounts Receivable 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Buildings and Equipment 800,000 600,000 Accumulated Depreciation (400,000) (300,000)

Total Assets $1,100,000 $500,000 Liabilities and Stockholders’ Equity

Accounts Payable $ 100,000 $100,000 Bonds Payable 200,000 100,000 Common Stock 500,000 200,000 Retained Earnings 300,000 100,000

Total Liabilities and Stock Equity $1,100,000 $500,000

Balance Sheets Before CombinationBalance Sheets Before Combination Peerless Special Foods

) )

4-4-66

Investment cost $300,000

Book value:

Common stock--S Foods $200,000

Retained earnings--S Foods 100,000

$300,000

Peerless’s share x 1.00 (300,000

Differential $ -0-

Investment cost $300,000

Book value:

Common stock--S Foods $200,000

Retained earnings--S Foods 100,000

$300,000

Peerless’s share x 1.00 (300,000

Differential $ -0-

January 1, 20X1 entry:E(1) Investment in S Foods Stock 300,000

Cash 300,000 Record purchase of Special Foods stock.

P

S

100%

Full Ownership Purchased at Book ValueFull Ownership Purchased at Book Value

)

4-4-77Balance Sheets After CombinationBalance Sheets After CombinationAssets

Cash $ 50,000 $ 50,000 Accounts Receivable 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Buildings and Equipment 800,000 600,000 Accumulated Depreciation (400,000 (300,000Investment in Special Foods Stock 300,000

Total Assets $1,100,000 $500,000 Liabilities and Stockholders’ Equity

Accounts Payable $ 100,000 $100,000 Bonds Payable 200,000 100,000 Common Stock 500,000 200,000 Retained Earnings 300,000 100,000

Total Liabilities and Stock Equity $1,100,000 $500,000

Peerless Special Foods

) )

4-4-88

Cash 50,000 50,000 100,000Accounts Rec. 75,000 50,000 125,000Inventory 100,000 60,000 160,000Land 175,000 40,000 215,000Bldg. and Equip. 800,000 600,000 1,400,000Inv. in Sp. Foods 300,000Total Debits 1,500,000 800,000 2,000,000

Accum. Depr. 400,000 300,000 700,000Accounts Payable 100,000 100,000 200,000Bonds Payable 200,000 100,000 300,000Common Stock 500,000 200,000 500,000Retained Earn. 300,000 100,000 300,000Total Credits 1,500,000 800,000 2,000,000

100% Purchase at Book Value100% Purchase at Book Value

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated

4-4-99

Cash 50,000 50,000 100,000Accounts Rec. 75,000 50,000 125,000Inventory 100,000 60,000 160,000Land 175,000 40,000 215,000Bldg. and Equip. 800,000 600,000 1,400,000Inv. in Sp. Foods 300,000 (2) 300,000Total Debits 1,500,000 800,000 2,000,000

Accum. Depr. 400,000 300,000 700,000Accounts Payable 100,000 100,000 200,000Bonds Payable 200,000 100,000 300,000Common Stock 500,000 200,000 (2)200,000 500,000Retained Earn. 300,000 100,000 (2)100,000 300,000Total Credits 1,500,000 800,000 300,000 300,000 2,000,000

100% Purchase at Book Value100% Purchase at Book Value

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated

4-4-1010

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated

Cash 50,000 50,000 100,000Accounts Rec. 75,000 50,000 125,000Inventory 100,000 60,000 160,000Land 175,000 40,000 215,000Bldg. and Equip. 800,000 600,000 1,400,000Inv. in Sp. Foods 300,000 300,000Total Debits 1,500,000 800,000 2,000,000

Accum. Depr. 400,000 300,000 700,000Accounts Payable 100,000 100,000 200,000Bonds Payable 200,000 100,000 300,000Common Stock 500,000 200,000 200,000 500,000Retained Earn. 300,000 100,000 100,000 300,000Total Credits 1,500,000 800,000 300,000 300,000 2,000,000

100% Purchase at Book Value100% Purchase at Book Value

4-4-1111

Common Stock--S Foods 200,000Retained Earnings 100,000

Investment in S Foods 300,000 Eliminate investment balance.

Elimination Entry E(2)Elimination Entry E(2)

Entry E(2)

4-4-1212

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 Other reasons

Purchase At More Than Book ValuePurchase At More Than Book Value

Reasons the purchase price of a company’s stock might exceed the stock’s book value:

Reasons the purchase price of a company’s stock might exceed the stock’s book value:

4-4-1313Purchase At More Than Book ValuePurchase At More Than Book Value

January 1, 20X1 entry:E(3) Investment in S Foods Stock 340,000

Cash 340,000 Record purchase of Special Foods stock.

P

S

100%

Investment cost $340,000

Book value:

Common stock--S Foods $200,000

Retained earnings--S Foods 100,000

$300,000

Peerless’s share x 1.00 (300,000Differential $ 40,000

Investment cost $340,000

Book value:

Common stock--S Foods $200,000

Retained earnings--S Foods 100,000

$300,000

Peerless’s share x 1.00 (300,000Differential $ 40,000

)

4-4-1414Purchase At More Than Book ValuePurchase At More Than Book Value

The elimination entry on the workpaper would be:E(4)Common Stock--S Foods 200,000

Retained Earnings 100,000Differential 40,000

Investment in S Foods Stock 340,000

P

S

100%

Investment cost $340,000

Book value:

Common stock--S Foods $200,000

Retained earnings--S Foods 100,000

$300,000

Peerless’s share x 1.00 (300,000

Differential $ 40,000

Investment cost $340,000

Book value:

Common stock--S Foods $200,000

Retained earnings--S Foods 100,000

$300,000

Peerless’s share x 1.00 (300,000

Differential $ 40,000

)

4-4-1515

Cash 10,000 50,000Accounts Rec. 75,000 50,000Inventory 100,000 60,000Land 175,000 40,000Bldg. and Equip. 800,000 600,000Inv. in Sp. Foods 340,000DifferentialTotal Debits 1,500,000 800,000

Accum. Depr. 400,000 300,000Accounts Payable 100,000 100,000Bonds Payable 200,000 100,000Common Stock 500,000 200,000Retained Earn. 300,000 100,000Total Credits 1,500,000 800,000

Purchase At More Than Book ValuePurchase 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

4-4-1616Purchase At More Than Book ValuePurchase At More Than Book Value

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated

Cash 10,000 50,000Accounts Rec. 75,000 50,000Inventory 100,000 60,000Land 175,000 40,000Bldg. and Equip. 800,000 600,000Inv. in Sp. Foods 340,000DifferentialTotal Debits 1,500,000 800,000

Accum. Depr. 400,000 300,000Accounts Payable 100,000 100,000Bonds Payable 200,000 100,000Common Stock 500,000 200,000Retained Earn. 300,000 100,000Total Credits 1,500,000 800,000

(4) 40,000

(4)200,000(4)100,000

(4) 340,000

(5) 40,000

(5) 40,000

380,000 380,000

4-4-1717Purchase At More Than Book ValuePurchase At More Than Book Value

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated

Cash 10,000 50,000Accounts Rec. 75,000 50,000Inventory 100,000 60,000Land 175,000 40,000Bldg. and Equip. 800,000 600,000Inv. in Sp. Foods 340,000DifferentialTotal Debits 1,500,000 800,000

Accum. Depr. 400,000 300,000Accounts Payable 100,000 100,000Bonds Payable 200,000 100,000Common Stock 500,000 200,000Retained Earn. 300,000 100,000Total Credits 1,500,000 800,000

(4) 40,000

(4)200,000(4)100,000

(4) 340,000

(5) 40,000

(5) 40,000

380,000 380,000

60,000125,000160,000255,000

1,400,000

2,000,000

700,000200,000300,000500,000300,000

2,000,000

4-4-1818Elimination Entry E(5)Elimination Entry E(5)

Land 40,000

Differential 40,000

Entry E(5)

4-4-1919Existence of GoodwillExistence 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.

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.

4-4-2020Existence of GoodwillExistence 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:

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) Goodwill 40,000Differential 40,000

Assign differential to goodwill.

4-4-2121Illustration of Debit DifferentialIllustration 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.

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.

4-4-2222

Investment cost $400,000

Book value:

Common stock--S Foods $200,000

Retained earnings--S Foods 100,000

$300,000

Peerless’s share x 1.00 (300,000Differential $100,000

Investment cost $400,000

Book value:

Common stock--S Foods $200,000

Retained earnings--S Foods 100,000

$300,000

Peerless’s share x 1.00 (300,000Differential $100,000

P

January 1, 20X1 entry:E(7) Investment in S Foods Stock 400,000

Bonds Payable 100,000 Cash 300,000

Record purchase of Special Foods stock.

S

100%

Debit DifferentialDebit Differential

)

4-4-2323Debit DifferentialDebit 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

4-4-2424Debit DifferentialDebit Differential

The eliminations entered in the consolidation workpaper in immediately after the combination are:

E(8) Common Stock--Special Foods 200,000 Retained Earnings 100,000 Differential 100,000

Investment in Special Foods Stock 400,000 Eliminate investment balance.

E(9) Inventory 15,000 Land 60,000 Goodwill 70,000

Buildings and Equipment 10,000Premium on Bonds Payable 35,000Differential 100,000

Assign differential.

4-4-252580 Percent Purchase at Book Value80 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.

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.

4-4-2626

Investment cost $240,000

Book value:

Common stock--S Foods $200,000

Retained earnings--S Foods 100,000

$300,000

Peerless’s share x .8 (240,000

Differential $ -0-

Investment cost $240,000

Book value:

Common stock--S Foods $200,000

Retained earnings--S Foods 100,000

$300,000

Peerless’s share x .8 (240,000

Differential $ -0-

80 Percent Purchase at Book Value80 Percent Purchase at Book Value

P

S

100%

NCI

20%

January 1, 20X1 entry:

E(14) Investment in S Foods Stock 240,000 Cash 240,000

Record purchase of Special Foods stock.

)

4-4-2727

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Fd. Debits Credits Consolidated

80 Percent Purchase at Book Value

Cash 110,000 50,000Accounts Rec. 75,000 50,000Inventory 100,000 60,000Land 175,000 40,000Bldg. and Equip. 800,000 600,000Inv. in Sp. Foods 240,000Total Debits 1,500,000 800,000Accum. Depr. 400,000 300,000Accounts Payable 100,000 100,000Bonds Payable 200,000 100,000Common Stock 500,000 200,000Retained Earn. 300,000 100,000

Total Credits 1,500,000 800,000

240,000

200,000100,000

Nonctrl. Interest 60,000

4-4-2828

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Fd. Debits Credits Consolidated

80 Percent Purchase at Book Value80 Percent Purchase at Book Value

Cash 110,000 50,000Accounts Rec. 75,000 50,000Inventory 100,000 60,000Land 175,000 40,000Bldg. and Equip. 800,000 600,000Inv. in Sp. Foods 240,000Total Debits 1,500,000 800,000Accum. Depr. 400,000 300,000Accounts Payable 100,000 100,000Bonds Payable 200,000 100,000Common Stock 500,000 200,000Retained Earn. 300,000 100,000

Total Credits 1,500,000 800,000

240,000

200,000100,000

300,000 300,000

Nonctrl. Interest 60,000

4-4-2929

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Fd. Debits Credits Consolidated

80 Percent Purchase at Book Value80 Percent Purchase at Book Value

240,000

200,000100,000

300,000 300,000

160,000125,000160,000215,000

1,400,000

2,060,000700,000200,000300,000500,000300,000

60,0002,060,000

Cash 110,000 50,000Accounts Rec. 75,000 50,000Inventory 100,000 60,000Land 175,000 40,000Bldg. and Equip. 800,000 600,000Inv. in Sp. Foods 240,000Total Debits 1,500,000 800,000Accum. Depr. 400,000 300,000Accounts Payable 100,000 100,000Bonds Payable 200,000 100,000Common Stock 500,000 200,000Retained Earn. 300,000 100,000

Total Credits 1,500,000 800,000Nonctrl. Interest 60,000

4-4-3030

Common Stock--S Foods 200,000Retained Earnings 100,000

Investment in S Foods Stock 240,000Noncontrolling Interest 60,000

Elimination Entry E(15)Elimination Entry E(15)

Entry E(15)

4-4-3131Consolidated Balance Sheet--80 PercentConsolidated Balance Sheet--80 Percent

Peerless Products Corporation and SubsidiaryConsolidated Balance Sheet

January 1, 20X1Assets:

Cash $ 160,000Accounts Receivable 125,000Inventory 160,000Land 215,000Building and Equipment $1,400,000Accumulated Depreciation (700,000 700,000

Total Assets $1,360,000

ContinuedContinued

)

4-4-3232Consolidated Balance Sheet--80 PercentConsolidated Balance Sheet--80 Percent

Liabilities:Accounts Payable $ 200,000Bonds Payable 300,000

Noncontrolling Interest 60,000

Stockholders’ Equity:Common Stock 500,000Retained Earnings 300,000

Total Liabilities and Equity $1,360,000

4-4-3333Chapter FourChapter Four

The The EndEnd

4-4-3434