The basic consolidation entry on the date of acquisition would be the same as the one illustrated in Chapter 2 except that the $300,000 book value of net assets is now jointly owned by Peerless (80 percent) and the NCI shareholders (20 percent). Thus, the origi- nal $300,000 credit to the Investment in Special Foods account from the wholly owned example in Chapter 2 is now “shared” with the NCI shareholders as shown in the break- down of the book value of Special Foods:
Book Value Calculations:
NCI 20% +Peerless 80%=Common Stock +Retained Earnings Beginning Book Value 60,000 240,000 200,000 100,000
Because the fair value of Special Foods’ net assets on the acquisition date is equal to their book value, there is no differential. Thus, the only required consolidation entry (the basic consolidation entry) in the worksheet removes the Investment in Special Foods Stock account and Special Foods’ stockholders’ equity accounts and records the $60,000 NCI interest in the net assets of Special Foods.
Basic Consolidation Entry:
Common Stock 200,000 Common stock balance
Retained Earnings 100,000 Beginning balance in RE
Investment in Special Foods 240,000 Peerless’ share of “book value”
NCI in NA of Special Foods 60,000 NCI’s share of “book value”
In this example, Peerless’ investment is exactly equal to its 80 percent share of the book value of Special Foods’ net assets. Therefore, goodwill is not recorded and all assets and liabilities are simply combined from Special Foods’ financial statements at their current book values. Again, in Chapters 4 and 5, we will explore situations in which the acquiring company pays more than the book value of the acquired company’s net assets. However, in Chapters 2 and 3, the excess value of identifiable net assets and goodwill will always be equal to zero. To maintain a consistent approach through all four chapters, we always illustrate the components of the acquiring company’s investment, even though the acquir- ing company’s investment will always be exactly equal to its share of the book value of net assets in this chapter. Thus, the relationship between the fair value of the consider- ation given to acquire Special Foods, the fair value of Special Foods’ net assets, and the book value of Special Foods’ net assets can be illustrated as follows:
Goodwill = 0 1/1/ X1
Peerless’
$240,000 initial investment
in Special Foods Identifiable
excess = 0
80%
Book value = 240,000
The consolidation entry simply credits the Investment in Special Foods Stock account (for the original acquisition price, $240,000), eliminating this account from Peerless’ balance sheet.
Investment in Special Foods Acquisition Price 240,000
240,000 Basic consolidation entry 0
Remember that this entry is made in the consolidation worksheet, not on the books of either the parent or the subsidiary, and is presented here in T-account form for instruc- tional purposes only. The investment account must be eliminated in the consolidation process because, as explained in Chapter 2, from a single-entity viewpoint, a company cannot hold an investment in itself. Stated differently, since the Investment in Special Foods account already summarizes Special Foods’ entire balance sheet, adding the individual line items on Special Foods’ balance sheet together with Peerless’ balance sheet items would be equivalent to double counting Special Foods’ balance sheet.
As explained in Chapter 2, we first examine situations where a subsidiary is created (hence the parent’s book values of transferred assets carry over) or where the acquisi- tion price is exactly equal to the book value of the target company’s net assets. When a parent company acquires a subsidiary, the consolidated financial statements should appear as if all of the subsidiary’s assets and liabilities were acquired and recorded at their acquisition prices (equal to their former book values). If Peerless had purchased Special Foods’ assets instead of its stock with an acquisition price equal to the book value of net assets, the assets would have been recorded in Peerless’ books at their acquisition prices (as if they were new assets with zero accumulated depreciation). Fol- lowing this logic, because Peerless did acquire Special Foods’ stock, the consolidated financial statements should present all of Special Foods’ assets and liabilities as if they had been recorded at their acquisition prices and then depreciated from that date forward. Thus, eliminating the old accumulated depreciation of the subsidiary as of the acquisition date and netting it out against the historical cost gives the appearance that the depreciable assets have been newly recorded at their acquisition prices (which happen to be equal to Special Foods’ book values). In this example, Special Foods had accumulated depreciation on the acquisition date of $300,000. Thus, as explained in Chapter 2, the following consolidation entry nets this accumulated depreciation out against the cost of the building and equipment.
Optional Accumulated Depreciation Consolidation Entry:
Accumulated Depreciation 300,000 Accumulated depreciation at the time of the acquisition netted against cost
Building & Equipment 300,000
Also as explained in Chapter 2, this worksheet consolidation entry does not change the net buildings and equipment balance. Netting the preacquisition accumulated depreciation
out against the cost basis of the corresponding assets merely causes the buildings and equipment to appear in the consolidated financial statements as if they had been recorded as new assets (which coincidentally happen to be equal to their former book values) on the acquisition date. In this chapter and in Chapter 2, we assume that the fair values of all assets and liabilities are equal to their book values on the acquisition date. This same entry would be included in each succeeding consolidation as long as the assets remain on Special Foods’
books (always based on the accumulated depreciation balance as of the acquisition date).
Consolidation Worksheet
Figure 3–1 presents the consolidation worksheet. As explained previously in Chapter 2, the investment account on the parent’s books can be thought of as a single account rep- resenting the parent’s investment in the net assets of the subsidiary, a one-line consolida- tion. In a full consolidation, the subsidiary’s individual assets and liabilities are combined with those of the parent. Including both the net assets of the subsidiary, as represented by the balance in the investment account, and the subsidiary’s individual assets and lia- bilities would double-count the same set of assets. Therefore, the investment account is eliminated, not carried to the consolidated balance sheet.
Figure 3–2 presents the consolidated balance sheet, prepared from the consolidation worksheet, as of the acquisition date. Because no operations occurred between the date of combination and the preparation of the consolidated balance sheet, there is no income statement or statement of retained earnings.
Peerless Products
Special Foods
Consolidation Entries
Consolidated
DR CR
Balance Sheet
Cash 110,000 50,000 160,000
Accounts Receivable 75,000 50,000 125,000
Inventory 100,000 60,000 160,000
Investment in Special Foods 240,000 240,000 0
Land 175,000 40,000 215,000
Buildings & Equipment 800,000 600,000 300,000 1,100,000
Less: Accumulated Depreciation (400,000) (300,000) 300,000 (400,000)
Total Assets 1,100,000 500,000 $300,000 $540,000 1,360,000
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 Earnings 300,000 100,000 100,000 300,000
NCI in NA of Special Foods 60,000 60,000 Total Liabilities & Equity 1,100,000 500,000 300,000 60,000 1,360,000 FIGURE 3–1 January 1, 20X1, Worksheet for Consolidated Balance Sheet, Date of Combination; 80 Percent Acquisition at Book Value
FIGURE 3–2 Consolidated Balance Sheet, January 1, 20X1, Date of Combination;
80 Percent Acquisition at Book Value
PEERLESS PRODUCTS CORPORATION AND SUBSIDIARY Consolidated Balance Sheet
January 1, 20X1
Assets Liabilities
Cash 160,000 Accounts Payable 200,000
Accounts Receivable 125,000 Bonds Payable 300,000
Inventory 160,000 Stockholders’ Equity
Land 215,000 Common Stock 500,000
Buildings & Equipment 1,100,000 Retained Earnings 300,000 Accumulated Depreciation (400,000) 700,000 NCI in NA of Special Foods 60,000 Total Assets 1,360,000 Total Liabilities & Equity 1,360,000