CONSOLIDATED

FINANCIAL STATEMENTS
(DATE OF ACQUISITION)
Jade S. Casayas, CPA
 DEFINITION
The financial statements of a group in which the assets, liabilities, equity, income,
expenses and cash flows of the parent and its subsidiaries are presented as those of
a single economic entity

WHY DO WE PREPARE CONSOLIDATED FINANCIAL STATEMENTS?

The Standard [IFRS 10:1] requires a parent entity (an entity that controls one or
more other entities) to present consolidated financial statements
 RECORDING INVESTMENT ACCOUNT

Investment account should be recorded at cost.

• Stock investment is recorded at cost as measured by fair value of the
consideration given or consideration received, whichever is clearly evident.
• Consideration given may include cash, other assets, debt securities, stock of
the acquiring company.
 ILLUSTRATIVE PROBLEM
On January 1, 2018, Montecorp Company purchased 100% of the common stock of
Dos Desinyos Company by issuing 40,000 shares of its (Montecorp’s) P10 par value
common stock with a market price of P17.50 per share. Montecorpincurred cash
expenses of P20,000 for registering and issuing the common stock. The
stockholder’s equity section of the two companies balance sheet on December
31,2017, were:
Montercorp Dos Desinyos
Common Stock, P10 par value P350,000 P320,000
Additional Paid In Capital 590,000 175,000
Retained Earnings 380,000 205,000
 Journay Entry on the Books of Montecorp

1. To record the investment.

Investment in Dos Desinyos 700,000
Common Stock 400,000
Additional Paid In Capital 300,000

2. To record stock issuance cost.

Additional Paid In Capital 20,000
Cash 20,000
 Consolidated Balance Sheet: Use of
Workpapers
Assets and liabilities are summed, regardless of whether the parent owns 100 or
a smaller controlling interest.
• Noncontrolling interest (NCI) are reflected as a component of owner’s equity.
• Elimination must be made to cancel the effects of transactions among the
parent and its subsidiaries.
• A workpaper is frequently used to summarize the effects of various additions
and eliminations.
Consolidated Balance Sheet: Use of Workpapers
Intercompany Accounts to be Eliminated

Parent’s Accounts Subsidiary’s Accounts

Investment in Subsidiary against

Equity Accounts

Intercompany receivable (payable) against

Intercompany payable (receivable)

Advances to subsidiary (from Advances from parent

subsidiary) against (to parent)
Interest revenue (expense) Interest expense (revenue)
against

Dividend revenue (dividends Dividends declared (dividend

declared) against revenue)
Management free received from Management free paid to parent
subsidiary
against
Sales to subsidiary (purchases of Purchases of inventory from parent
inventory from subsidiary (sales to parent)
against
 Consolidated Balance Sheet: Use of
Workpapers
Investment Elimination

It is necessary to eliminate the investment account of the parent company against the
related stockholders’ equity of the subsidiary to avoid double count of these net assets.

When parent’s share of subsidiary’s equity is eliminated against the investment account,
subsidiary’s net assets are substituted for the investment account in the consolidated
balance sheet.
Computation of Allocation of Difference between Implied Value and Book
Value
Step 1: Determine percentage of stock acquired.
Step 2: Divide purchase price by the percentage acquired to calculate the
implied value of the subsidiary.
Step 3: Difference between step 2 and book value of subsidiary’s equity must
be allocated to adjust the underlying assets and liabilities of the acquired
company.
 Possible cases
Case 1. The implied value (IV) of the subsidiary is equal to the book value of the
subsidiary’s equity (IV=BV), and
a. The parent company acquired 100% of the subsidiary’s stock or
b. The parent company acquired less than 100% of the subsidiary’s stock.
Case 2. The implied value of the subsidiary exceeds the book value of the subsidiary’s
equity (IV>BV), and
c. The parent company acquired 100% of the subsidiary’s stock or
d. The parent company acquired less than 100% of the subsidiary’s stock.
Case 3. The implied value of the subsidiary is less than the book value of the subsidiary’s
equity (IV<BV), and
e. The parent company acquired 100% of the subsidiary’s stock or
Case 1(a): Implied Value of Subsidiary is Equal to Book Value of Subsidiary
Company’s Equity (IV=BV) – 100% of Stock Aquired.

Illustration: Assume that on January 1, 2018, P Company acquired all the

outstanding stock (10,000 shares) of S Company for cash of P160,000. What
journal entry would P Company make to record the shares of S Company
acquired?
 Consolidated Balance Sheet
Case 1(a): The balance sheets of both companies immediately after the
acquisition of shares is as follows:
Assets P Company S Company
Cash P40,000 P40,000
Other Current Assets 280,000 400,000
Plant and Equipment 240,000 80,000
Land 80,000 40,000
Investment in S Co. 160,000
TOTAL ASSETS 800,000 260,000
Liabilities 120,000 100,000
Common Stock 400,000 100,000
APIC 80,000 100,000
Retained Earnings 200,000 20,000
TOTAL LIAB. AND 800,000 40,000
EQ.
 Consolidation Workpaper
Case 1(a): The workpaper to consolidate the balance sheets for P and S on January 1,2018, date of
acquisition, is presented below:
Assets P Company S Company Debit Credit Consolidated
Balances
Cash P40,000 P40,000
Other Current 280,000 400,000
Assets
Plant and 240,000 80,000
Equipment
Land 80,000 40,000
Investment in S 160,000
Co.
TOTAL ASSETS 800,000 260,000
Liabilities 120,000 100,000
Common Stock 400,000 100,000
APIC 80,000 100,000
Retained 200,000 20,000
Earnings
TOTAL LIAB. 800,000 40,000
AND EQ.
 Workpaper Elimination Entry

Case 1(a): The workpaper entry to eliminate S Company’s stockholders’ equity against the
investment account is:

Common Stock (S) 100,000

APIC (S) 20,000
Retained Earnings (S) 40,000
Investment in S Company 160,000
Case 1(b): Parent’s Cost of Investment is Equal to Book Value of Subsidiary
Company’s Equity (IV=BV) – Partial Ownership.

Illustration: Assume that on January 1, 2018, P Company acquired 90% (9,000

shares) of the stock of S Company for cash of P144,000. What journal entry
would P Company make to record the shares of S Company acquired?
 Consolidated Balance Sheet
Case 1(b): The balance sheets of both companies immediately after the
acquisition of shares is as follows:
Assets P Company S Company
Cash P56,000 P40,000
Other Current Assets 280,000 400,000
Plant and Equipment 240,000 80,000
Land 80,000 40,000
Investment in S Co. 144,000
TOTAL ASSETS 800,000 260,000
Liabilities 120,000 100,000
Common Stock 400,000 100,000
APIC 80,000 20,000
Retained Earnings 200,000 40,000
Noncontrolling Interest
TOTAL LIAB. AND EQ. 800,000 260,000
Case 1(b): Computation and Allocation of Difference between Implied and
Book Values:
90% Parent 10% NCI Total Value
Share Share

Purchase Price and Implied Value 144,000 16,000 160,000

Less: Book Value of Equity acquired:

Common Stock 90,000 10,000 100,000

APIC 18,000 2,000 20,000

Retained Earnings 36,000 4,000 40,000

TOTAL BOOK VALUE 144,000 16,000 160,000

DIFFERENCE BETWEEN IV AND BV - - -

 Consolidation Workpaper
Case 1(b): The workpaper to consolidate the balance sheets for P and S on
January
Assets 1,2018, date of acquisition,
P Company is presented
S Company Debit below: Credit Consolidated
Balances
Cash P56,000 P40,000
Other Current 280,000 400,000
Assets
Plant and 240,000 80,000
Equipment
Land 80,000 40,000
Investment in S Co. 144,000
TOTAL ASSETS 800,000 260,000
Liabilities 120,000 100,000
Common Stock 400,000 100,000
APIC 80,000 20,000
Retained Earnings 200,000 40,000
Noncontrolling
Interest
TOTAL LIAB. 800,000 260,000
AND EQ.
 Workpaper Elimination Entry
Case 1(b): The workpaper entry to eliminate S Company’s stockholders’ equity
against the investment account is:

Common Stock (S) 100,000

APIC (S) 20,000
Retained Earnings (S) 40,000
Investment in S Company 144,000
Noncontrolling interest in equity 16,000
Case 2(b): Implied Value exceeds book value of Subsidiary
Company’s Equity (IV>BV) – Partial Ownership.

Illustration: Assume that on January 1, 2018, P Company acquired

80% (8,000 shares) of the stock of S Company for cash of P148,000.
What journal entry would P Company make to record the shares of S
Company acquired?
 Consolidated Balance Sheet
Case 2(b): The balance sheets of both companies immediately after the
acquisition
Assets of shares is as follows:
P Company S Company
Cash P52,000 P40,000
Other Current Assets 280,000 400,000
Plant and Equipment 240,000 80,000
Land 80,000 40,000
Investment in S Co. 148,000
TOTAL ASSETS 800,000 260,000
Liabilities 120,000 100,000
Common Stock 400,000 100,000
APIC 80,000 20,000
Retained Earnings 200,000 40,000
Noncontrolling Interest
TOTAL LIAB. AND EQ. 800,000 260,000
Case 2(b): Computation and Allocation of Difference between Implied and
Book Values:
80% Parent 20% NCI Total Value
Share Share
Purchase Price and Implied Value 148,000 37,000 185,000
Less: Book Value of Equity acquired:
Common Stock 80,000 20,000 100,000
APIC 16,000 4,000 20,000
Retained Earnings 32,000 8,000 40,000
TOTAL BOOK VALUE 128,000 32,000 160,000
DIFFERENCE BETWEEN IV AND BV 20,000 5,000 25,000

We assume the entire difference is attributable to land with a current value

higher than historical cost.
 Consolidation Workpaper
Case 2(b): The workpaper to consolidate the balance sheets for P and S on January
1,2018, date of acquisition, is presented below:
Assets P Company S Company Debit Credit Consolidated
Balances
Cash P52,000 P40,000
Other Current 280,000 400,000
Assets
Plant and 240,000 80,000
Equipment
Land 80,000 40,000
Investment in S Co. 148,000
Differencial (IV-BV)
TOTAL ASSETS 800,000 260,000
Liabilities 120,000 100,000
Common Stock 400,000 100,000
APIC 80,000 20,000
Retained Earnings 200,000 40,000
Noncontrolling
Interest
TOTAL LIAB. 800,000 260,000
AND EQ.
 Workpaper Eliminating Entries
Case 2(b): The workpaper (elimination) entries are as follows:

1. Common Stock (S) 100,000

APIC (S) 20,000
Retained Earnings (S) 40,000
Differencial (IV-BV) 25,000
Investment in S Company 148,000
Noncontrolling interest in equity 37,000

2. Land 25,000
Differencial (IV-BV) 25, 000
Case 2(b): Reasons on Acquiring Company may pay more than book value:

1. Fair value of specific assets of the subsidiary may exceed its recorded value
because of appreciation.
2. Excess payment may indicate existence of goodwill.
3. Liabilities, generally long-term, may be overvalued.
4. A variety of market factors may affect the price paid.
Case 3(b): Implied value of Subsidiary is less than book value (IV<BV) partial
ownership.

Illustration: Assume that on January 1, 2018, P Company acquired 80% (8,000

shares) of the stock of S Company for cash of P120,000. What journal entry
would P Company make to record the shares of S Company acquired?
 Consolidated Balance Sheet
Case 3(b): The balance sheets of both companies immediately after the acquisition
of shares is as follows:
Assets P Company S Company
Cash P80,000 P40,000
Other Current Assets 280,000 400,000
Plant and Equipment 240,000 80,000
Land 80,000 40,000
Investment in S Co. 120,000
Differencial (IV-BV)
TOTAL ASSETS 800,000 260,000
Liabilities 120,000 100,000
Common Stock 400,000 100,000
APIC 80,000 20,000
Retained Earnings 200,000 40,000
Noncontrolling Interest
TOTAL LIAB. AND EQ. 800,000 260,000
Case 3(b): Computation and Allocation of Difference between Implied and
Book Values:
80% Parent 20% NCI Total Value
Share Share
Purchase Price and Implied Value 120,000 30,000 150,000
Less: Book Value of Equity
acquired:
Common Stock 80,000 20,000 100,000
APIC 16,000 4,000 20,000
Retained Earnings 32,000 8,000 40,000
TOTAL BOOK VALUE 128,000 32,000 160,000
DIFFERENCE BETWEEN IV AND BV (8,000) (2,000) (10,000)

We assume the entire difference is attributable to plant and equipment, in this

case an overvaluation of 10,000
 Consolidation Workpaper
Case 3(b): The workpaper to consolidate the balance sheets for P and S on January 1,2018, date of
acquisition, is presented below:
Assets P Company S Company Debit Credit Consolidated
Balances
Cash P80,000 P40,000
Other Current 280,000 400,000
Assets
Plant and 240,000 80,000
Equipment
Land 80,000 40,000
Investment in S Co. 120,000
Differencial (IV-BV)
TOTAL ASSETS 800,000 260,000
Liabilities 120,000 100,000
Common Stock 400,000 100,000
APIC 80,000 20,000
Retained Earnings 200,000 40,000
Noncontrolling
Interest
TOTAL LIAB. 800,000 260,000
AND EQ.
 Workpaper eliminating entry

Case 3(b): The workpaper (elimination) entries are as follows:

1. Common Stock (S) 100,000

APIC (S) 20,000
Retained Earnings (S) 40,000
Differencial (IV-BV) 10,000
Investment in S Company 120,000
Noncontrolling interest in equity 30,000

2. Differencial (IV-BV) 10,000

Plant and Equipment 10, 000