Chapter 17 - Business consolidations. This chapter presents the following content: Parent/subsidiary, consolidated financial statements, reciprocal accounts, consolidating, analyzing information. | Business Consolidations Parent/Subsidiary When investor owns more than 50% of voting stock of another company, assume ability to control Investor company is parent Investee company is subsidiary Consolidated Financial Statements Parent and subsidiary may be separate legal entities For reporting, view as single economic entity Consolidated financial statements show financial position and operating results of combined companies FASB No. 94 requires consolidation when parent has controlling interest Reciprocal Accounts Accounts in two separate sets of books that represent a common element and will cancel each other out Investment on parents books and owners’ equity on subsidiaries For intercompany transactions Accounts receivable and accounts payable Sales and cost of goods sold Consolidating Combine similar accounts from the separate financial statements of parent and subsidiary Eliminate reciprocal accounts Work Sheet for Consolidated Balance Sheet Par Sub Elimin Consol Cash 50 40 90 . | Business Consolidations Parent/Subsidiary When investor owns more than 50% of voting stock of another company, assume ability to control Investor company is parent Investee company is subsidiary Consolidated Financial Statements Parent and subsidiary may be separate legal entities For reporting, view as single economic entity Consolidated financial statements show financial position and operating results of combined companies FASB No. 94 requires consolidation when parent has controlling interest Reciprocal Accounts Accounts in two separate sets of books that represent a common element and will cancel each other out Investment on parents books and owners’ equity on subsidiaries For intercompany transactions Accounts receivable and accounts payable Sales and cost of goods sold Consolidating Combine similar accounts from the separate financial statements of parent and subsidiary Eliminate reciprocal accounts Work Sheet for Consolidated Balance Sheet Par Sub Elimin Consol Cash 50 40 90 Invest 100 100 0 PPE 150 65 215 Total 300 105 305 Liab 75 5 80 CS 175 80 80 175 RE 50 20 20 50 Total 300 105 100 100 305 Worksheet for Consolidated Income Statement Par Sub Elimin Consol Sales 500 200 60 640 CGS 300 120 60 360 Op. Exp. 100 40 140 Total exp 400 160 500 Net income 100 40 60 60 140 Acquisition of Less Than 100% of Subsidiary Eliminating parent investment against subsidiary owners’ equity leaves some subsidiary owners’ equity Minority interest Ownership interest of remaining owners in assets of subsidiary Acquisition of 100% at More Than Book Value Elimination of 100% of subsidiary’s owners’ equity against investment leaves a debit balance Excess paid for investment over value of assets is goodwill Goodwill amortized over useful life, not to exceed 40 years Analyzing Information For companies with goodwill, is amortization reasonable? If majority owned company is not consolidated, what is impact? For companies using equity method, how much cash dividends are actually being received?
