4-1

Baker / Lembke / King

Consolidation of
Wholly Owned
Subsidiaries
Aquired at
More than Book
4
Value
 4-2
Purchase At More Than Book Value

Reasons
Reasons the
the purchase
purchase price
price of
of aa company’s
company’s
stock
stock might
might exceed
exceed the
the stock’s
stock’s book value::
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
 Other reasons
 4-3
Purchase At More Than Book Value

P Investment
Investmentcost
cost $340,000
$340,000
Book
Bookvalue:
value:
Common
Commonstock--S
stock--SFoods
Foods $200,000
$200,000
100%
Retained
Retainedearnings--S
earnings--SFoods
Foods 100,000
100,000
$300,000
$300,000
Peerless’s share x 1.00 (300,000 )
Peerless’s share x 1.00 (300,000
S Differential $$ 40,000
Differential 40,000

January 1, 20X1 entry:

E(3) Investment in S Foods Stock 340,000
Cash 340,000
Record purchase of Special Foods stock.
 4-4
Purchase At More Than Book Value

P Investment
Investmentcost
cost $340,000
$340,000
Book
Bookvalue:
value:
Common
Commonstock--S
stock--SFoods
Foods $200,000
$200,000
100%
Retained
Retainedearnings--S
earnings--SFoods
Foods 100,000
100,000
$300,000
$300,000
Peerless’s share x 1.00 (300,000 )
Peerless’s share x 1.00 (300,000
S Differential $$ 40,000
Differential 40,000
Basic elimination entry:
E(4) Common Stock--S Foods 200,000
Retained Earnings 100,000
Differential 40,000
Investment in S Foods Stock 340,000
 4-5
Purchase At More Than Book Value
Trial Balance Data Elimination Entries
Account Titles Peerless Spec. Foods 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 Sp. Foods 340,000 (4) 340,000
Differential (4) 40,000
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 (4)200,000
Retained Earn. 300,000 100,000 (4)100,000
Total Credits 1,500,000 800,000
 4-6
Purchase At More Than Book Value
Trial Balance Data Elimination Entries
Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 10,000 50,000
Accounts Rec. 75,000 50,000
Inventory 100,000 60,000
Land 175,000 40,000 (5) 40,000
Bldg. and Equip. 800,000 600,000
Inv. in Sp. Foods 340,000 (4) 340,000
Differential (4) 40,000 (5) 40,000
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 (4)200,000
Retained Earn. 300,000 100,000 (4)100,000
Total Credits 1,500,000 800,000 380,000 380,000
 4-7
Purchase At More Than Book Value
Trial Balance Data Elimination Entries
Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 10,000 50,000 60,000
Accounts Rec. 75,000 50,000 125,000
Inventory 100,000 60,000 160,000
Land 175,000 40,000 (5) 40,000 255,000
Bldg. and Equip. 800,000 600,000 1,400,000
Inv. in Sp. Foods 340,000 (4) 340,000
Differential (4) 40,000 (5) 40,000
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 (4)200,000 500,000
Retained Earn. 300,000 100,000 (4)100,000 300,000
Total Credits 1,500,000 800,000 380,000 380,000 2,000,000
 4-8
Elimination Entry E(5)

Entry E(5)
Land 40,000
Differential 40,000
 4-9
Existence of Goodwill

IfIf aa company
company purchases
purchases aa subsidiary
subsidiary at at aa
price
price in
in excess
excess ofof the
the total
total of
of the
the fair
fair
value
value of of the
the subsidiary’s
subsidiary’s net net identifiable
identifiable
assets,
assets, the
the additional
additional amount
amount generally
generally isis
considered
considered to to be
be aa payment
payment forfor the
the excess
excess
earning
earning power
power of of the
the acquired
acquired company,
company,
referred
referred toto as
as goodwill.
goodwill.
 4-10
Existence of Goodwill

IfIf the
the fair
fair values
values ofof Special
Special Foods’
Foods’ assets
assets
and
and liabilities
liabilities are
are equal
equal to
to their
their book
book
values,
values, andand the
the $40,000
$40,000 differential
differential isis
considered
considered aa payment
payment for
for goodwill,
goodwill, thethe
following
following elimination
elimination entry
entry isis needed:
needed:
E(6) Goodwill 40,000
Differential 40,000
Assign differential to goodwill.
 4-11
Illustration of Debit Differential

Peerless
Peerless Products
Products acquires
acquires all
all Special
Special Foods’
Foods’
capital
capital stock
stock for
for $400,000
$400,000 on on January
January 1,1, 20X1,
20X1,
by
by issuing
issuing $100,000
$100,000 ofof 99 percent
percent first
first mortgage
mortgage
bonds
bonds and
and paying
paying cash
cash of
of $300,000.
$300,000.
Illustration of Debit Differential 4-12

BV FV Differential
Cash 50,000 50,000
A/R 50,000 50,000
Land 60,000 75,000 15,000
Building & Eq 600,000
Acc Dep (300,000) 300,000 290,000 ( 10,000 )
500,000 565,000
A/P 100,000 100,000
B/P 100,000 135,000 ( 35,000 )
C/S 200,000
R/E 100,000
500,000 235,000 30,000
 4-13
Debit Differential
P Investment
Investmentcost
cost $400,000
$400,000
Book
Bookvalue:
value:
Common
Commonstock--S
stock--SFoods
Foods $200,000
$200,000
100%
Retained
Retainedearnings--S
earnings--SFoods
Foods 100,000
100,000
$300,000
$300,000
Peerless’s
Peerless’sshare
share xx 1.00
1.00 (300,000
(300,000 )
S
Differential
Differential $100,000
$100,000
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.
 4-14
Debit Differential
Cost of investment
$400,000
Excess of cost
over fair value of
net identifiable
assets
Total $70,000
differential
Fair value of net
$100,000
identifiable assets
Excess of fair
$330,000
value over book
Book value of net value of net
identifiable assets identifiable assets
$300,000 $30,000
 4-15
Debit 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
Investment in Special Foods Stock 300,000
Basic elimination entry.

E(9) Inventory 15,000

Land 60,000
Goodwill 70,000
Buildings and Equipment 10,000
Premium on Bonds Payable 35,000
Investment in Special Foods Stock 100,000
Excess value ( differential ) reclasification entry.
 4-16
Illustration Bargain – Purchase Differential

Peerless
Peerless Products
Products acquires
acquires all
all Special
Special Foods’
Foods’
capital
capital stock
stock for
for $310,000
$310,000 on
on January
January 1,
1, 20X1,
20X1,
FV
FV Land
Land 40,000
40,000 greater
greater than
than BV
BV
 4-17
Illustration Bargain – Purchase Differential
P Investment
Investmentcost
cost $310,000
$310,000
Book
Bookvalue:
value:
Common
Commonstock--S
stock--SFoods
Foods $200,000
$200,000
100% Retained
Retainedearnings--S
earnings--SFoods
Foods 100,000
100,000
$300,000
$300,000
)
Peerless’s share
Peerless’s share x 1.00 (300,000
x 1.00 (300,000
S Differential
Differential $10,000
$10,000
January 1, 20X1 entry:
E(7) Investment in S Foods Stock 310,000
Cash 310,000
Record purchase of Special Foods stock.
 4-18
Illustration Bargain – Purchase 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
Investment in Special Foods Stock 300,000
Basic Investment account elimination entry.
E(9) Land 40,000
Gain on Bargain Purchase 30,000
Investment in Special Foods Stock 10,000
Excess value ( differential ) reclasification entry.
Excess value (Differential) Calculation :
Net Differential = Land – Gain
10,000 = 40,000 - 30,000
 4-19
Consolidated FS 100% Ownership More than BV

Peerless
Peerless Products
Products acquires
acquires all
all Special
Special Foods’
Foods’
capital
capital stock
stock for
for $387,500
$387,500 onon January
January 1,
1, 20X1,
20X1, $$
87,500
87,500 excess
excess ofof BV,
BV, by
by issuing
issuing N/P
N/P (( 60
60
days)
days) $$ 87,500
87,500 ofof and
and paying
paying cash
cash of
of $300,000.
$300,000.

BV FV FV INC.
Inventory 60,000 65,000 5,000
Land 40,000 50,000 10,000
Building & Equip. 300,000 360,000 60,000
400,000 475,000 75,000
Inventory terjual semua th 20X1, Building disusut 10th
dan Impairment loss GW seb 3,000
 4-20
Illustration Bargain – Purchase Differential
P Investment
Investmentcost
cost $387,500
$387,500
Book
Bookvalue:
value:
Common
Commonstock--S
stock--SFoods
Foods $200,000
$200,000
100% Retained
Retainedearnings--S
earnings--SFoods
Foods 100,000
100,000
$300,000
$300,000
)
Peerless’s share
Peerless’s share x 1.00 (300,000
x 1.00 (300,000
S Differential
Differential $87,500
$87,500
January 1, 20X1 entry:
E(7) Investment in S Foods Stock 387,500
Cash 300,000
N/P 87,500
Record purchase of Special Foods stock.
 5-21
20X1 Consolidation--100 Percent Ownership
Peerless records its 20X1 income and dividends from Special
Foods under the equity method with the following entries:
(2) Investment in S Foods Stock 50,000
Income from Subsidiary 50,000
Record equity-method income.
$50,000 x 1.00
(3) Cash 30,000
Investment in S Foods Stock 30,000
Record dividends from S Foods.
$30,000 x 1.00

(4) Income From SF 14,000

Investment in SF 14,000
Record Amortization
5,000 +6,000+ 3,000
 2-22
Elimination Entry ( 20X1)
Basic Investment account Elimination entry :
Common Stock 200,000
Retained Earning 100,000
Income from SF 50,000
Dividend Declared 30,000
Investment in SF 320,000

Perhitungan :
Investasi : 300,000 + 50,000 – 30,000 = 320,000
Net Income : 50,000
 2-23
Elimination Entry (20X1)
Amortized excess value reclassification entry :
Cost of Goods Sold 5,000
Depreciation Expense 6,000
Goodwill Impairment Loss 3,000
Income From SF 14,000

Excess value (differential) reclassification entry :

Land 10,000
Building 60.000
Goodwill 9,500
Accumulated Depre. 6,000
Investment in SF Stock 73,500
 4-24
Excess value ( differential ) Calculations
TOTAL INVEN LAND BUILD AC DP GW
Beg. Balance 87,500 5,000 10,000 60,000 0 12,500
Changes (14,000) (5,000) (6,000) (3,000)
End. Balance 73,500 0 10,000 60,000 (6,000) 9,500

Optional Accumulated Depreciation elimination entry :

Accumulated Depreciation 300,000

Building & Equipment 300,000
 5-25
20X1 Consolidation--100 Percent Ownership

Trial Balance Data Elimination Entries Consoli-

Item Parent Subsidiary Debits Credits dated
Income from
Subsidiary 36,000 50,000

Retained Earnings,
January 1 300,000 100,000 100,000 300,000
30,000 (60,000)
Dividends Declared (60,000) (30,000)

Investment in S 320,000
Foods Stock 393,500
Common Stock 500,000 200,000 200,000 500,000
 5-26
20X1 Consolidation--100 Percent Ownership

Peerless Special Eliminations

Item Products Foods Debits Credits Consolidated
Cost of Goods
Sold 170,000 115,000 5,000 290,000
Depre. Expense 50.000 20,000 6,000 76,000
GW Imp. Loss 3,000 3,000
Income from SF 36,000 50,000 14,000 0
Land 175,000 40,000 10,000 225,000
Buildings and
Equipment 800,000 600,000 60,000 300,000 1,160,000
Goodwill 9,500 9,500
Acc. Depre 450,000 320,000 300,000 6,000 476,000
Investment in SF 393,500 320,000
73,500 0
4-27
 Consolidated NI & R/E 20X1, 100% 4-28

Acquisition More than BV

Consolidated NI 20X1 :
Peerless Separate Op. Income 140,000
Special Foods NI 50,000
Write-off diff – inventory sold (5,000)
Amortization diff – build. 20X1 (6,000)
Goodwill impairment loss (3,000)
Consolidated Net Income 20X1 176,000
 Consolidated NI & R/E 20X1, 100% 4-29

Acquisition More than BV

Consolidated R/E December 20X1 :
Peerless R/E Jan 1 300,000
Peerless Separate Op. Income 140,000
Special Foods NI 50,000
Write-off diff – inventory sold (5,000)
Amortization diff – build. 20X1 (6,000)
Goodwill impairment loss (3,000)
Dividend declared 20X1 (60,000)
Consolidated R/E20X1 416,000
 5-30
20X2Consolidation--100 Percent Ownership
Peerless records its 20X2 income and dividends from Special
Foods under the equity method with the following entries:
(2) Investment in S Foods Stock 75,000
Income from Subsidiary 75,000
Record equity-method income.
$75,000 x 1.00
(3) Cash 40,000
Investment in S Foods Stock 40,000
Record dividends from S Foods.
$40,000 x 1.00

(4) Income From SF 6,000

Investment in SF 6,000
Record Amortization
0+6,000+ 0
 2-31
Elimination Entry (20X2)
Basic Investment account Elimination entry :
Common Stock 200,000
Retained Earning 120,000
Income from SF 75,000
Dividend Declared 40,000
Investment in SF 355,000

Perhitungan :
Investasi : 320,000 + 75,000 – 40,000 = 355,000
Net Income : 75,000
 2-32
Elimination Entry (20X2)
Amortized excess value reclassification entry :
Depreciation Expense 6,000
Income From SF 6,000

Excess value (differential) reclassification entry :

Land 10,000
Building 60.000
Goodwill 9,500
Accumulated Depre. 12,000
Investment in SF Stock 67,500
 4-33
Excess value ( differential ) Calculations
TOTAL INVEN LAND BUILD AC DP GW
Beg. Balance 73,500 0 10,000 60,000 (6,000) 9,500
Changes (6,000) 0 (6,000) 0
End. Balance 67,500 0 10,000 60,000 (12,000) 9,500

Optional Accumulated Depreciation elimination entry :

Accumulated Depreciation 300,000

Building & Equipment 300,000
 5-34
20X2 Consolidation--100 Percent Ownership

Trial Balance Data Elimination Entries Consoli-

Item Parent Subsidiary Debits Credits dated
Income from
Subsidiary 69,000 75,000

Retained Earnings,
January 1 416,000 120,000 120,000 300,000
40,000 (60,000)
Dividends Declared (60,000) (40,000)

Investment in S 355,000
Foods Stock 422,500
Common Stock 500,000 200,000 200,000 500,000
 5-35
20X1 Consolidation--100 Percent Ownership

Peerless Special Eliminations

Item Products Foods Debits Credits Consolidated
Cost of Goods
Sold 450,000 300,000 750,000
Depre. Expense 50.000 20,000 6,000 76,000
GW Imp. Loss
Income from SF 69,000 75,000 6,000 0
Land 175,000 40,000 10,000 225,000
Buildings and
Equipment 800,000 600,000 60,000 300,000 1,160,000
Goodwill 9,500 9,500
Acc. Depre 500,000 340,000 300,000 12,000 552,000
Investment in SF 422,500 355,000
67,500 0
4-36
 Consolidated NI & R/E 20X2, 100% 4-37

Acquisition More than BV

Consolidated NI 20X2 :
Peerless Separate Op. Income 160,000
Special Foods NI 75,000
Amortization diff – build. 20X2 (6,000)
Consolidated Net Income 20X2 176,000
 Consolidated NI & R/E 20X2, 100% 4-38

Acquisition More than BV

Consolidated R/E December 20X2 :
Peerless R/E Jan 1 416,000
Peerless Separate Op. Income 160,000
Special Foods NI 75,000
Amortization diff – build. 20X2 (6,000)
Dividend declared 20X2 (60,000)
Consolidated Net Income 20X2 585,000
 4-39
Chapter Four

The
End