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Consolidation of Wholly-Owned Subsidiary

Baker / Lembke / King. Consolidation of Wholly-Owned Subsidiary. 4. Electronic Presentation by Douglas Cloud Pepperdine University. Consolidation Procedures. The starting point for preparing consolidated financial statements is the books of the separate consolidating companies.

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Consolidation of Wholly-Owned Subsidiary

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  1. Baker / Lembke / King Consolidation of Wholly-Owned Subsidiary 4 Electronic Presentation by Douglas Cloud Pepperdine University

  2. 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.

  3. 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. Consolidation Workpaper Trial Balance Data Elimination Entries Account Titles Parent Subsidiary Debits Credits Consolidated Work flow

  5. Nature of Eliminating Entries …to reflect the amounts that would appear if all the legally separate companies were actually a single company. Eliminating entries are used in the consolidation workpaper to adjust the totals of the individual account balances of the separate companies...

  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. Balance Sheets Before Combination (in ‘000) PT Induk PT Anak Assets Cash Rp 350,000 Rp 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 Rp1,100,000 Rp500,000 Liabilities and Stockholders’ Equity Accounts Payable Rp 100,000 Rp100,000 Bonds Payable 200,000 100,000 Common Stock 500,000 200,000 Retained Earnings 300,000100,000 Total Liabilities and Stockholders’ Equity Rp1,100,000 Rp500,000 ) )

  8. Full Ownership Purchased at Book Value P 100% S Investment cost Rp300,000,000 Book value: Common stock--PT Anak Rp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00 (300,000,000 Differential Rp -0- ) January 1, 20X1 entry: E(1) Investment in PT Anak Stock 300,000,000 Cash 300,000,000 Record purchase of PT Anak stock.

  9. Balance Sheets After Combination (in ‘000) PT Induk PT Anak Assets Cash Rp 50,000 Rp 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 Investment in PT Anak Stock 300,000 Total Assets Rp1,100,000 Rp500,000 Liabilities and Stockholders’ Equity Accounts Payable Rp 100,000 Rp100,000 Bonds Payable 200,000 100,000 Common Stock 500,000 200,000 Retained Earnings 300,000100,000 Total Liabilities and Stockholders’ Equity Rp1,100,000 Rp500,000 ) )

  10. 100% Purchase at Book Value (in ‘000) Trial Balance Data Elimination Entries Account Titles PT Induk PT Anak Debits Credits Consolidated Cash 50,000 50,000 100,000 Accounts Rec. 75,000 50,000 125,000 Inventory 100,000 60,000 160,000 Land 175,000 40,000 215,000 Bldg. and Equip. 800,000 600,000 1,400,000 Inv. in PT Anak 300,000 Total Debits 1,500,000 800,000 2,000,000 Accum. Depr. 400,000 300,000 700,000 Accounts Payable 100,000 100,000 200,000 Bonds Payable 200,000 100,000 300,000 Common Stock 500,000 200,000 500,000 Retained Earn. 300,000100,000 300,000 Total Credits 1,500,000 800,000 2,000,000

  11. 100% Purchase at Book Value (in ‘000) Trial Balance Data Elimination Entries Account Titles PT Induk PT Anak Debits Credits Consolidated Cash 50,000 50,000 100,000 Accounts Rec. 75,000 50,000 125,000 Inventory 100,000 60,000 160,000 Land 175,000 40,000 215,000 Bldg. and Equip. 800,000 600,000 1,400,000 Inv. in PT Anak 300,000(2)300,000 Total Debits 1,500,000 800,000 2,000,000 Accum. Depr. 400,000 300,000 700,000 Accounts Payable 100,000 100,000 200,000 Bonds Payable 200,000 100,000 300,000 Common Stock 500,000 200,000 (2)200,000 500,000 Retained Earn. 300,000100,000 (2)100,000 300,000 Total Credits 1,500,000 800,000 300,000 300,000 2,000,000

  12. 100% Purchase at Book Value (in ‘000) Trial Balance Data Elimination Entries Account Titles PT Induk PT Anak Debits Credits Consolidated Cash 50,000 50,000 100,000 Accounts Rec. 75,000 50,000 125,000 Inventory 100,000 60,000 160,000 Land 175,000 40,000 215,000 Bldg. and Equip. 800,000 600,000 1,400,000 Inv. in PT Anak 300,000 300,000 Total Debits 1,500,000 800,000 2,000,000 Accum. Depr. 400,000 300,000 700,000 Accounts Payable 100,000 100,000 200,000 Bonds Payable 200,000 100,000 300,000 Common Stock 500,000 200,000 200,000 500,000 Retained Earn. 300,000100,000 100,000 300,000 Total Credits 1,500,000 800,000 300,000 300,000 2,000,000

  13. Elimination Entry E(2) Entry E(2) Common Stock--PT Anak 200,000,000 Retained Earnings 100,000,000 Investment in PT Anak Stock300,000,000 Eliminate investment balance.

  14. Purchase At More Than Book Value Reasons the purchase price of a company’s stock might exceed the stock’s book value: • 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

  15. Purchase At More Than Book Value Investment cost Rp340,000,000 Book value: Common stock--PT Anak Rp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00(300,000,000 Differential Rp40,000,000 P 100% ) S January 1, 20X1 entry: E(3) Investment in PT Anak Stock 340,000,000 Cash340,000,000 Record purchase of PT Anak stock.

  16. Purchase At More Than Book Value Investment cost Rp340,000,000 Book value: Common stock--PT Anak Rp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00(300,000,000 Differential Rp40,000,000 P 100% ) S The elimination entry on the workpaper would be: E(4) Common Stock--PT Anak 200,000,000 Retained Earnings 100,000,000 Differential 40,000,000 Investment in PT Anak Stock 340,000,000

  17. Purchase At More Than Book Value (in ‘000) (4) 340,000 (4) 40,000 (4)200,000 (4)100,000 Trial Balance Data Elimination Entries Account Titles PT Induk PT Anak Debits Credits Consolidated Cash 10,000 50,000 Accounts Rec. 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Bldg. and Equip. 800,000 600,000 Inv. in PT Anak 340,000 Differential Total Debits 1,500,000 800,000 Accum. Depr. 400,000 300,000 Accounts Payable 100,000 100,000 Bonds Payable 200,000 100,000 Common Stock 500,000 200,000 Retained Earn. 300,000100,000 Total Credits 1,500,000 800,000

  18. Purchase At More Than Book Value (in ‘000) 380,000 380,000 Trial Balance Data Elimination Entries Account Titles PT Induk PT Anak Debits Credits Consolidated Cash 10,000 50,000 Accounts Rec. 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Bldg. and Equip. 800,000 600,000 Inv. in PT Anak 340,000 Differential Total Debits 1,500,000 800,000 Accum. Depr. 400,000 300,000 Accounts Payable 100,000 100,000 Bonds Payable 200,000 100,000 Common Stock 500,000 200,000 Retained Earn. 300,000100,000 Total Credits 1,500,000 800,000 (5) 40,000 (4) 340,000 (5) 40,000 (4) 40,000 (4)200,000 (4)100,000

  19. Purchase At More Than Book Value (in ‘000) 60,000 125,000 160,000 255,000 1,400,000 2,000,000 700,000 200,000 300,000 500,000 300,000 2,000,000 380,000 380,000 Trial Balance Data Elimination Entries Account Titles PT Induk PT Anak Debits Credits Consolidated Cash 10,000 50,000 Accounts Rec. 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Bldg. and Equip. 800,000 600,000 Inv. in PT Anak 340,000 Differential Total Debits 1,500,000 800,000 Accum. Depr. 400,000 300,000 Accounts Payable 100,000 100,000 Bonds Payable 200,000 100,000 Common Stock 500,000 200,000 Retained Earn. 300,000100,000 Total Credits 1,500,000 800,000 (5) 40,000 (4) 340,000 (5) 40,000 (4) 40,000 (4)200,000 (4)100,000

  20. Elimination Entry E(5) Entry E(5) Land 40,000,000 Differential 40,000,000

  21. 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. 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) Goodwill 40,000,000 Differential 40,000,000 Assign differential to goodwill.

  23. Illustration of Debit Differential: relates to a number of different assets and liabilities PT Induk acquires all PT Anak’ capital stock for Rp400,000 000 on January 1, 20X1, by issuing Rp100,000000 of 9 percent first mortgage bonds and paying cash of Rp300,000000 .

  24. Investment cost Rp400,000,000 Book value: Common stock--PT Anak Rp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00(300,000,000 DifferentialRp100,000,000 100% S Debit Differential P ) January 1, 20X1 entry: E(7) Investment in PT Anak Stock 400,000,000 Bonds Payable100,000,000 Cash300,000,000 Record purchase of PT Anak stock.

  25. Excess of cost over fair value of net identifiable assets Rp70,000,000 Total differential Rp100,000,000 Excess of fair value over book value of net identifiable assets Rp30,000,000 (See Fig. 4-7) Debit Differential Cost of investment Rp400,000,000 Fair value of net identifiable assets Rp330,000,000 Book value of net identifiable assets Rp300,000,000

  26. 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 Anak 200,000,000 Retained Earnings 100,000,000 Differential 100,000,000 Investment in PT Anak Stock 400,000,000 Eliminate investment balance. E(9) Inventory 15,000,000 Land 60,000,000 Goodwill 70,000,000 Buildings and Equipment 10,000,000 Premium on Bonds Payable 35,000,000 Differential100,000,000 Assign differential.

  27. 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. 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 x1.00(300,000,000) Difference (credit) (Rp40,000,000)

  29. 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. 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. 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. 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. Comprehensive Three-Part Workpaper to Balance Sheet section 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

  34. Comprehensive Three-Part Workpaper From Retained Earnings Statement section 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

  35. 20X1 Consolidation--100 Percent Ownership P 100% S Investment cost Rp300,000,000 Book value: Common stock--PT Anak Rp200,000,000 Retained earnings--PT Anak100,000,000 Rp300,000,000 PT Induk’s share x 1.00(300,000,000) Differential Rp -0- January 1, 20X1 (14) Investment in PT Anak Stock 300,000000 Cash 300,000,000 Record purchase of PT Anak stock.

  36. 20X1 Consolidation--100 Percent Ownership PT Induk PT Anak Common Stock, January 1, 20X1 Rp500,000,000 Rp200,000,000 Retained Earnings, January 1, 20X1 300,000,000 100,000,000 20X1: Separate Operating Income, PT Induk 140,000,000 Net Income, PT Anak 50,000,000 Dividends 60,000,000 30,000,000 20X2: Separate Operating Income, PT Induk 160,000,000 Net Income, PT Anak 75,000,000 Dividends 60,000,000 40,000,000

  37. 20X1 Consolidation--100 Percent Ownership Rp50,000,000 x 1.00 Rp30,000,000 x 1.00 PT Induk records its 20X1 income and dividends from PT Anak under the equity method with the following entries: (15) Cash 30,000,000 Investment in PT Anak Stock 30,000,000 Record dividends from PT Anak. (16) Investment in PT Anak Stock 50,000,000 Income from Subsidiary 50,000,000 Record equity-method income.

  38. 20X1 Consolidation--100 Percent Ownership (in ‘000) 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 Stock 320,000 (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.

  39. 20X1 Consolidation--100 Percent Ownership (in ‘000) Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 50,000 (17) 50,000 Retained Earnings, January 1 300,000 100,000 Dividends Declared (60,000 (30,000 (17) 30,000 (60,000) Investment in PT Anak Stock 320,000 (17) 20,000 Common Stock 500,000 200,000 (18)100,000 300,000 (18) 300,000 (18) 200,000 500,000 ) ) Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary as of the beginning of the period.

  40. 20X2 Consolidation--100 Percent Ownership Rp75,000,000 x 1.00 Rp40,000,000 x 1.00 PT Induk records its 20X2 income and dividends from PT Anak under the equity method with the following entries: (19) Cash 40,000,000 Investment in PT Anak Stock 40,000,000 Record dividends from PT Anak. (20) Investment in PT Anak Stock 75,000,000 Income from Subsidiary 75,000,000 Record equity-method income.

  41. 20X2 Consolidation--100 Percent Ownership (in ‘000) Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 75,000 Retained Earnings, January 1 430,000 120,000 Dividends Declared (60,000 (40,000 Investment in PT Anak Stock 355,000 (21) 75,000 (21) 40,000 (60,000) (21) 35,000 ) ) Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary recorded during the period.

  42. 20X2 Consolidation--100 Percent Ownership Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 75,000 (21) 75,000 Retained Earnings, January 1 430,000 120,000 Dividends Declared (60,000 (40,000 (21) 40,000 (60,000 Investment in PT Anak Stock 355,000 (21) 35,000 Common Stock 500,000 200,000 (22)120,000 430,000 (22) 320,000 (22) 200,000 500,000 ) ) ) Eliminate the beginning balance in the investment account and the stockholders’ equity accounts of the subsidiary at the beginning of 20X2.

  43. 100 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. 100 PERCENT OWNERSHIP PURCHASED AT MORE THAN BOOK VALUE • 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).

  45. Chapter Four The End

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