Chapter Six

Consolidation of Financial Statements under Purchase

Accounting
6.1) Basic Concepts of Consolidated Financial Statements
The Parent prepares Parent Financial Statements while the Subsidiary prepares Subsidiary Financial
Statements. However, Consolidated Financial Statements is prepared by the Parent by combining separate
financial statements of the parent and the subsidiary as the Parent Company is the Reporting Entity
The Parent and Subsidiary Relationships

If the Parent Company owns more than 50% voting stock of another company, that company is an
Affiliate

The combinor’s acquisition of common stock of a combinee corporation resorts to investor-investee
(parent-subsidiary) relationship.

If the investor acquires a controlling interest, a parent-subsidiary relationship is established. The
investee becomes a subsidiary of the acquiring parent company (investor) but remains a separate legal
entity.

A parent company and its subsidiary are a single economic entity.

Hence, consolidated financial statement are issued to report the financial position and operating results
of a parent company and its subsidiaries as thought they comprised a single accounting entity.
Nature of consolidated financial statements
They are similar to the combined financial statements for a Home Office and its branches. Assets, liabilities,
revenue, and expenses of the parent company and its subsidiaries are totaled; inter-company transactions
and balances are eliminated; and the final consolidated amounts are reported in the balance sheet, income
statements, statement of stockholders’ equity, and statement of cash flows. However, the separate legal
entity status of the parent and subsidiary corporations necessitates eliminations that are generally more
complex.
The Meaning of Controlling Interest
Traditionally, an investor’s direct or indirect ownership of more than 50% of an investee’s outstanding
common stock has been required to evidence the controlling interest underlying a parent-subsidiary
relationship. However, even though such a common stock ownership exists, other circumstances may negate
the parent company’s actual control of the subsidiary.
For Example:
1. Subsidiary in liquidation
2. A foreign subsidiary
3. If minority shareholders of a subsidiary have the right to participate effectively in the financial and
operating activities of the subsidiary in the ordinary course of business, the subsidiary’s financial statements
should not be consolidated with those of the parent company.

Example of Controlling Interest

Direct Controlling Interest = Father – Son Relationship

Indirect Controlling Interest = Father – Son – Grandson Relationship
Father and Son together control Grandson
Father controls Son; Son controls Grandson

Parent Company’s control of a subsidiary might be achieved indirectly as follows:

Example: If ABC Company owns 80% of outstanding common stock of XYZ Company and 40% of KLM
Company’s common stock and also XYZ Company owns 40% of KLM Company’s common stock, ABC
Company controls both XYZ and KLM Company. ABC Company owns 72% of KLM Company (40%
directly and 32% indirectly).
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Criticism of Traditional concept of control

Many accountants criticize the traditional definition of control described above which emphasizes legal
form.

They argue that an investor owning less than 50% of an investee’s voting common stock in substance
may control the affiliate, especially if the remaining stock is scattered among a large number of
shareholders who do not attend shareholder’s meetings or give proxies

Effective control of an investee is also possible if individuals comprising management of the investor
corporation own a substantial number of shares of the investee or successfully solicit proxies from the
investee’s other shareholders.
Steps for Consolidation
1. Update the balances of accounts affected by business combination transaction
2. Record the financial information for both Parent and Subsidiary on the worksheet
3. Remove the Investment in Subsidiary balance
4. Remove the Subsidiary’s equity account balances
5. Remove Intercompany transactions (e.g. payables and receivables)
6. Adjust the Subsidiary’s net assets to CFV
7. Allocate any excess of cost over CFV to identifiable intangible assets or goodwill
8. Combine all account balances
6.2) Consolidation of Wholly Owned Subsidiary on the Date of Business Combination
under Purchase Accounting
Example 6.1: There is no question of control of a wholly owned subsidiary. Thus, as an illustration
assume that on December 31, 2002, PALM Corporation issued 10,000 shares of its 10 par common stock
(current fair value Br 45 a share) to shareholder of STARR Company for all the outstanding Br 5 par
common stock of Starr. There was no contingent consideration. Out of pocket costs of the business
combination paid by Palm Corp on December 31, 2002 consisted of the following;
Finder’s fees and legal fees of the combination ................................ Br 50,000
Costs of issuing common stock................................................... 35,000
Total costs ................................................................................... Br 95,000
Assume also that the combination qualified for purchase accounting. Starr Company was to continue its
corporate existence as a wholly owned subsidiary of Palm Corporation. Both companies had a December
31 fiscal year and use the same accounting policies. Income tax rate for both companies was 40%. Financial
statements of the two companies as of December 31, 2002 prior to combination are presented below follow:
Palm Corporation Starr Company
Income statement
Net sales........................................................... Br 990,000 Br 600,000
Interest revenue ............................................... 10,000 - 0-
Total Revenues ................................................ 1,000,000 600,000
Cost & expenses:
Cost of goods sold ........................................... 635,000 410,000
Operating expense ........................................... 158,333 73,333
Interest expense ............................................... 50,000 30,000
Income tax Expense ......................................... 62,667 34,667
Total Costs and expenses................................ (906,000) (548,000)
Net income....................................................... 94,000 52,000
Statement of RES
Retained Earnings beginning of year............... 65,000 100,000
Add: Net income.............................................. 94,000 52,000
Less: dividends ................................................ (25,000) (20,000)
Retained Earnings ending of year.................... 134,000 132,000

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 Balance sheet
Assets:
Cash ................................................................ Br100, 000 Br 40,000
Inventories ....................................................... 150,000 110,000
Other current assets ......................................... 110,000 70,000
Receivable from Starr Co ................................ 25,000
Plant asset (net)................................................ 450,000 300,000
Patent (net)....................................................... -0- 20,000
Total ................................................................ 835,000 540,000
Liability and SHE:
Payable to Palm Corp ...................................... 25,000
Income taxes payable ...................................... 26,000 10, 000
Other liabilities ................................................ 325,000 115,000
Common stock Br 10 par ................................ 300,000
Common stock for Br 5 par ............................. 200,000
Additional Paid in capital ............................... 50,000 58,000
Retained Earnings ............................................ 134,000 132,000
Total liabilities and SHE ................................ 835,000 540,000
On Dec, 31, 2002 current fair values of Starr Company’s identifiable assets and liabilities were the same as
their carrying amount, except for the following 3 assets:
Fair Values:
Inventories ......................................... Br 135,000
Plant assets (net).............................. Br 365,000
Patent (net) ...................................... Br 25,000
Because Starr was to continue as a separate corporation and generally accepted principles do not sanction
write-ups of assets of a going concern, Starr didn’t prepare journal entries for the combination. Palm
Corporation recorded the combination as a purchase on December 31, 2002 with the following journal
entries.
1. Issuance of 10,000 common stocks to stockholders of Starr Company
Investment in Starr Company..................................................... 450,000
Common Stock .................................................... 100,000
Additional PIC – Common Stock ....................... 350, 000
2. Out of pocket costs
Investment in Starr Company..................................................... 50,000
Additional PIC - CS ................................................................... 35,000
Cash ...................................................................... 85,000
The above entries are the same as the entries for a statutory merger accounted for using Purchase Method
but they do not include any debit or credit, to record individual assets and liabilities of Starr Company in the
records of Palm Corporation. This is because the investee was notliquidated as in a merger; it remains a
separate legal entity.
Preparation of Consolidated Balance Sheet
Purchase accounting for the business combination of Palm Corporation and Starr Company requires a
fresh start for the consolidated entity. This reflects the theory that a business combination that meets the
requirement of purchase accounting is an acquisition of the combines’ net assets (assets less liabilities) by
the combinor.
1. The operating results of the two companies prior to combination are those of two separate economic- as
well as legal – entities. Accordingly, a consolidated balance sheet is the only consolidated financial
statement issued by the investor (Palm Corporation) on the date of the business combination. This can
be done with the use of a working paper.
2. The parent company’s investment account and the subsidiary’s stockholder’s equity accounts do not
appear in the consolidated Balance sheet because they are reciprocal or intercompany accounts.
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3. Under purchase accounting theory, the parent company (combinor) assets and liabilities are reflected at
carrying amount and that of the subsidiary (the combinee’s) at current fair values except inter
company accounts, in the consolidated balance sheet.
4. Goodwill is recognized to the extent the cost of the parent company’s investment in 100% of the
subsidiary’s outstanding common stock exceeds the current fair value of the subsidiary’s identifiable net
assets.

Based on the foregoing data, the following consolidated Balance sheet is prepared
Palm Corporation and Subsidiary
Consolidated Balance Sheet
December 31, 2002
Assets:
Cash (15,000 + 40,000) .............................................................................. 55,000
Inventories (150,000 + 135,000) ................................................................ 285,000
Others (110,000 + 70,000) ......................................................................... 180,000
Plant assets (net) (450,000 + 365,000) ....................................................... 815,000
Patent (net) (0+25,000) .............................................................................. 25,000
Good will.................................................................................................... 25,000
Total assets ................................................................................................. 1,375,000
Liabilities and Shareholders’ Equity:
Liabilities:
Income taxes payable (26,000 + 10,000) ................................................... 36,000
Others (325,000 + 115,000) ....................................................................... 440,000
Stock holder’s equity:
Common stock, Br 10 par .......................................................................... 400,000
Additional Paid in capital ........................................................................... 365,000
Retained Earnings ...................................................................................... 134,000
Total liabilities & shareholder’s equity ...................................................... 1,375,000

Goodwill = Investment in Starr Company - Values of Starr Company’s net assets at CFV
Goodwill =500,000 – (Br 635,000 – 150,000) = Br500,000 – 485,000 = 15,000
Working Paper for Consolidated Balance Sheet

Preparation of consolidated balance sheet on the date of purchase type business combination usually
requires the use of a working paper for consolidated balance sheet, even for a parent company and a
wholly owned subsidiary.

A consolidated balance sheet is prepared using a working paper for Palm Corporation a shown below.

The working paper for consolidated balance sheet on the date of purchase-type business combination has the
following features:
1. The elimination is not entered in either the parent company’s or the subsidiary’s accounting records; it is only a
part of the working paper for preparation of the consolidated balance sheet.
2. The elimination is used to reflect differences between current fair values and carrying amounts of the subsidiary’s
identifiable net assets because the subsidiary did not write up its assets to current fair values on the date of the
business combination.
3. The Elimination column in the working paper for consolidated balance sheet reflects increases and decreases,
rather than debits and credits. Debits and credits are not appropriate in a working paper dealing with financial
statements.
4. Intercompany receivables and payables are placed on the same line of the working paper for consolidated balance
sheet and are combined to produce a consolidated amount of zero.
5. The respective corporations are identified in the working paper elimination. The reason for precise identification
is to deal with the eliminations of intercompany profits (or gains).
6. The consolidated paid-in capital amounts are those of the parent company only. Subsidiary’s Paid-in capital
amounts always are eliminated in the process of consolidation.
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7. Consolidated retained earnings on the date of purchase-type business combination include only the retained
earnings of the parent company. This treatment is consistent with the theory that purchase accounting reflects a
fresh start in an acquisition of net assets (assets less liabilities), not a combining of existing stockholder interest.
8. The amounts in the consolidated column of the working paper for consolidated balance sheet reflects the financial
position of a single economic entity comprising two legal entities, with all intercompany balances of the two
entities eliminated

Palm Corporation and Subsidiary

Working Paper for Consolidated Balance Sheet
December 31, 2002
Palm Starr Elimination Consolidated
Corporation Company
Assets: ↑ (↓)
Cash................................................................
15,000 40,000 55,000
Inventories................................................................
150,000 110,000 25,000 285,000
Other current assets ................................110,000 70,000 180,000
Intercompany receivables 25,000 (25,000)
(payables)
Investment in Starr Co ................................ 500,000 (500,000)
Plan asset (net) ................................ 450,000 300,000 65,000 815,000
Patent (net) ................................................................
-0- 20,000 5,000 25,000
Goodwill (net) ................................ -0- __-0- 15,000 15,000
Total asset ................................................................
1,250,000 515,000 (390,000) 1,375,000
Liabilities & SHE:
Income taxes Payables ................................ 26,000 10,000 – 36,000
Other Liabilities ................................ 325,000 115,000 – 440,000
Common stock Br 10 par ................................ 400,000 – – 400,000
Common stock Br 5 par ................................ – 200,000 (200,000) –
Additional Paid in capital ................................365,000 58,000 ( 58,000 ) 365,000
Retained Earnings ................................ 134,000 132,000 (132,000) 134,000
Total Liab. & SHE ................................ 1,250,000 515,000 (390,000) 1,375,000
Working Paper Elimination Journal Entries shown below:
Debit Credit
Common stocks Br 5 par-Starr ......................200,000
Additional paid in capital-Starr ...................... 58,000 Reciprocal Ledger Accounts (390,000)
Retained Earnings-Starr ................................. 132,000
Inventories (135,000-110,000)....................... 25,000
Plant assets (net) (365,000-300,000) .............65,000 Increase in Assets (95,000)
Patent (net) (25,000-20,000) ..........................5,000
Goodwill (net) (500,000-485,000) .................15,000 Excess Cost
Investment in Starr Company ..............………………………...500,000
Br 390,000 represents the carrying amounts of the net assets of Star Company. Br 110,000 (500,000 –
390,000) is attributable to the excess of current fair values over carrying amounts of certain identifiable
assets of Starr and Goodwill.
Example 6.2:
XYZ Corporation issued 20,000 shares of its Br 10 par Common Stock (CFV of Br 45 a share) to the
stockholders of ABC Company for all the outstanding Br 5 Common Stock of ABC Company. The out-of-
pocket cost of the business combination paid by XYZ Company on December 31, 2002, consisted of the
following:
1. Finder’s fees and legal fees ............................................................ 100,000
2. Registration expenses..................................................................... 70,000
Total ................................................................................................... 170,000
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The Business Combination qualified for purchase accounting. ABC Company is to continue its corporate
existence as a wholly owned subsidiary of XYZ Corporation. The Balance Sheet of XYZ Corporation and
ABC Company for the year ended December 31, 2002 prior to Consummation of the business combination
are below:
XYZ Corporation and ABC Company
Balance Sheet
December 31, 2002
Assets: Liabilities and Shareholders’ Equity:
XYZ ABC XYZ ABC
Company Company Company Company
Cash ................................................................
200,000 80,000 Payable to XYZ Co ................................ 50,000
Inventories ................................
300,000 220,000 Income tax payable ................................
52,000 20,000
Other Current Assets ................................
220,000 140,000 Other liabilities ................................
650,000 230,000
Receivable from ABC ................................
50,000 Common Stock (10 Par) ................................
600,000 ─
Plant Assets (net) ................................
900,000 600,000 Common Stock(5 par)................................
─ 400,000
Patent (net) ................................–– 40,000 Additional PIC ................................
100,000 116,000
Retained Earning ................................
268,000 264,000
Total Assets ................................
1,670,000 1,080,000 Total Liab. & SHEs ................................
1,670,000 1,080,000
The December 31, 2002 CFVs of ABC Company identifiable assets and liabilities were the same as carrying
amount except for the three assets listed below:
1. Inventories...................................................................................... 270,000
2. Plant assets (net) ............................................................................ 730,000
3. Patent (net) ..................................................................................... 50,000
Pass necessary journal entries in the books of XYZ Corporation and prepare the Consolidated Balance sheet
of XYZ Corporation and its subsidiary ABC Company on December 31, 2002
1. Issuance of 20,000 shares of common stocks
Investment in ABC Company (20,000@45) ............................ 900,000
Common Stock (20,000 shares @ Br 10) ....................... 200,000
Additional PIC (20,000 shares @ 35) ...................... 700,000
2. Out-of-Pocket Costs
Investment in ABC Company .................................................. 100,000
Additional PIC (Indirect Expenses) ............................................ 70,000
Cash .......................................................................... 170,000
Calculation of Goodwill:
Total acquisition cost (investment cost)................................ 1,000,000
Net Assets of ABC Company
Cash ........................................................................... 80,000
Inventories ................................................................. 270,000
Other Current Assets ................................................. 140,000
Plant (net) .................................................................. 730,000
Patent (net) ................................................................ 50,000
Total .......................................................................... 1,270,000
Less: Liabilities
Payable to XYZ Corporation .................... 50,000
Income Tax Payable ................................... 20,000
Other Liabilities ...................................... 230,000
Total liabilities .......................................................... (300,000)
Net Assets ................................................................. 970,000
Goodwill.................................................................... 30,000

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Consolidated Balance sheet
XYZ Corporation and ABC Company
Consolidated Balance sheet
December 31, 2002
Assets:
Cash (200,000 – 170,000 + 80,000) ............................................ 110,000
Inventories (300,000 + 270,000) ................................................. 570,000
Others Current Assets (220,000 + 140,000) ............................... 360,000
Plant assets (net) (900,000 + 730,000) ........................................ 1,630,000
Patent (net) (0+50,000) ............................................................... 50,000
Good will..................................................................................... 30,000
Total assets .................................................................................. 2,750,000
Liabilities and SHE:
Liabilities:
Income taxes payable (52,000 + 20,000) .................................... 72,000
Others (650,000 + 230,000) ........................................................ 880,000
Common stock, Br 10 Par ........................................................... 800,000
Additional Paid in capital ............................................................ 730,000
Retained Earnings ....................................................................... 268,000
Total liabilities & shareholder’s equity ....................................... 2,750,000
Working Paper Elimination in the form of Journal Entries:
Debit Credit
Common stocks Br 5 par................................400,000
Additional paid in capital ..............................116,000 Reciprocal Ledger Accounts (780,000)
Retained Earnings ..........................................264,000
Inventories (270,000 – 220,000) .................... 50,000
Plant assets (net) (730,000 – 600,000) ........... 130,000 Increase in Assets (190,000)
Patent (net) (50,000 – 40,000) ....................... 10,000
Goodwill (net) (1,000,000 – 970,000) ...........30,000 Excess Cost
Investment in Starr Company .....1,000,000
Exercise 6.1 On July 1, 2000 LEE Company exchanged 18,000 of its Br 30 market value shares (Br 10
par) for all the outstanding shares of BLACK Company. LEE paid direct acquisition costs of Br 20,000 and
paid Br 5,000 in stock issuance costs. The two companies had the following Balance sheet on July 1, 2002
LEE and BLACK Company
Balance Sheet (Prior to Business Combination)
July 1, 2002
Assets: Liabilities and Shareholders’ Equity:
LEE BLACK LEE BLACK
Corporation Company Corporation Company
Cash ........................... 50,000 70,000 Current Liabilities ................. 180,000 60,000
Inventories ................. 120,000 60,000 Common Stock (10 Par) ....... 400,000
Land ........................... 100,000 40,000 Common Stock(5 par)........... 200,000
Building (net)............. 300,000 120,000 Retained Earnings ................. 420,000 140,000
Equipment (net .......... 430,000 110,000
Total Assets ............... 1,000,000 400,000 Total Liab. & SHEs .............. 1,000,000 400,000

The following market values differ from book values for BLACK Company’s Assets:
Inventories ...................................................................... 65,000
Land................................................................................ 100,000
Building (net) ................................................................. 150,000
Equipment (net).............................................................. 75,000
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Instructions:
1. Record the investment in BLACK Company and any other entry necessitated by the purchase method
2. Prepare a consolidated Balance Sheet as of July 1, 2006, on the date of purchase
Checking Figures:
Total Acquisition Cost (18,000@30 + 20,000) ................................ 560,000
Net Assets (460,000 – 60,000) ........................................................... 400,000
Goodwill .............................................................................................
160,000
Consolidated cash ...............................................................................
95,000
Consolidated inventories ................................................................ 185,000
Consolidated Current liabilities .......................................................... 240,000
Exercise 6.2:
Balance Sheet of PELLMANCorporation and SHIRECompany on May 31, 2004, together with current
fair values of SHIRE identifiable Net Assets are shown below:

PELLMAN and SHIRE Company

Balance Sheet (Prior to Combination)
May 31, 2004
Assets: Liabilities and Shareholders’ Equity:
PELLMAN SHIREC PELLMAN SHIRE
Company ompany Company Company
Cash ................................ 500,000 10,000 Current Liabilities ................................
500,000 80,000
Trade A/Receivable ................................
700,000 60,000 Long-term Debt ................................
1,000,000 400,000
Inventories ................................
1,450,000 120,000 Common Stock (10 Par) ................................
1,500,000 100,000
Plant Assets (net) ................................
2,850,000 610,000 Additional PIC ................................
1,200,000 40,000
Retained Earnings ................................
1,300,000 180,000
Total Assets ................................
5,500,000 800,000 Total Liab. & SHEs ................................
5,500,000 800000

The following current fair values differ from book values for SHIRE Company’s Assets and Liabilities:
Inventories ................................................................ 140,000
Plant Assets (net) ..................................................... 690,000
Long-term Debt ........................................................ 440,000
On May 31, 2004, PELLMAN acquiring all 10,000 shares of SHIRE’s outstanding common stock by paying
Br 300,000 cash to SHIRE’s shareholders and Br 50,000 cash for finders and legal fees related to the
business combinations. There was no contingent consideration and SHIRE became a subsidiary of
PELLMAN Corporation
Instruction:
1. Prepare journal entries for PELLMAN Corporation to record business combination with SHIRE
Company on May 31, 2004 as a purchase
2. Prepare a consolidated balance sheet on May 31, 2004 showing the workings

Checking Figures:
Total Acquisition Cost ................................................... 350,000
Net Assets (900,000 – 520,000) ..................................... 380,000
Goodwill (negative) ....................................................... 30,000
Consolidated cash........................................................... 160,000
Consolidated total assets ................................................6,020,000
Consolidated Long-term debt .........................................1,440,000

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6.3) Consolidation of Partially Owned Subsidiary on the Data of Business
Combination Under Purchase Accounting
Consolidation of a parent company and its partially owned subsidiary differs from the consolidation of a
wholly owned subsidiary in one major respect - the recognition of minority interest (non-controlling
interest).
• Minority interest or no controlling interest is a term applied to the claims of stockholders other than
the parent company (controlling interest) to the net income or losses and net assets of the subsidiary. The
minority interest in the subsidiary’s net income or losses is displayed in the consolidated income
statement, and the minority interest in the subsidiary’s net assets is displayed in the consolidated balance
sheet.
Example 6.3: To illustrate the consolidation techniques for a purchase type business combination
involving a partially owned subsidiary, assume the following facts:
On December 31,2003 Post Corporation issued 57,000 shares of its Br 1 par common stock (Current fair
value Br 20 a share ) to stockholders of Sage Company in exchange for 38,000 of the 40,000 outstanding
shares of Sage’s Br 10 par common stock Thus Post acquired 95% of the interest in Sage (38/40). There
was no contingent consideration. Out-of-pocket costs of the combination paid in cash by Post on December
31, 2003 were as follows:
• Finder’s and legal fees of Combination ....................................Br 52, 250
• Cost of issuing shares................................................................72,750
• Total ..........................................................................................125,000
Financial statements of the two companies before the combination are as follows:
Income statement Post Sage
Corporation Company
Net sales ................................................................
Br 5,500,000 Br 1,000,000
Costs & Expenses:
Cost of goods sold .....................................................
3,850,000 650,000
Operating expense .....................................................
925,000 170,000
Interest expense .........................................................
75,000 40,000
Income tax Expense ................................ 260,000 56,000
Total Costs and expenses ................................ (5,110,000) (916,000)
Net income ................................................................
390,000 84,000
Statement of RES
Retained Earnings, beginning of year ....................... 810,000 290,000
Add: Net income .......................................................
390,000 84,000
Sub-totals ................................................................
1,200,000 374,000
Less: Dividends .........................................................
(150,000) (40,000)
Retained Earnings End of the year ............................ 1,050,000 334,000
Balance Sheet
BALANCE SHEET
Post Sage
Corporation Company
Assets:
Cash .........................................................Br 200,000 Br 100,000
Inventories ................................................ 800,000 500,000
Other current assets ................................ 550,000 215,000
Plant asset, (net) ................................ 3,500,000 1,100,000
Goodwill (net) .......................................... 100,000 __-0-
Total ........................................................5,150, 000 1,915,000

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 Liability and SHE:
Income taxes payable ............................... 100,000 16,000
Other liabilities ................................ 2,450,000 930,000
Common stock Br 1 par ...........................1,000,000
Common stock for Br 10 par.................... 400,000
Additional Paid in capital ......................... 550,000 235,000
Retained Earnings ................................ 1,050,000 334,000
Total liabilities and SHE ..........................5,150, 000 1,915,000
On Dec, 31, 2003 current fair values of Sage company’s identifiable assets and liabilities were the same as
their carrying amount, except for the following assets:
Market Values
Inventories ......................................... Br 526,000
Plant assets (net).............................. Br1,290,000
Leasehold ........................................ Br30,000
Post Corporation records the combination with Sage Company as a purchase and thus, the following
journal entries are made:
1. Issuance of 57,000 shares to Sage company
Investment in Sage Company (57,000 shares @ Br 20) ............... 1,140,000
Common Stock.......................................................... 57, 000
Paid in capital ........................................................... 1,083,000
2. To record out-of-pocket cost
Investment in Sage Company........................................................ 52,250
Paid in capital ................................................................................
72,750
Cash l ................................................................ 125,000
Investment in Subsidiary Account
Investment in Sage Company
1,140,000
52,250
1,192,250

Working Paper for Consolidated Balance Sheet

As minority interest in net assets of a partially owned subsidiary& measurement of goodwill acquired in the
combination complicates the process, it is advisable to use a working paper.
Developing the Elimination
• Common stock –Sage Company ....................................................... 400,000
• Additional paid in capital- Sage Company ........................................ 235,000
• RES, Sage Company .......................................................................... 334,000
• Intercompany accounts (net assets = A – L) ...................................... 969,000
The footing of Br 969,000 of the debit items of the partial elimination above represents the carrying
amounts of the net assets of Sage Company and is Br 223,250 less than the investment in Sage Company
of Br 1,192,250. Part of this Br 223,250 difference is the excess of the total cost of Post Corporation’s
investment in Sage Company plus the minorityinterest in Sage Company’s net assets over the carrying
amounts of Sage’s identifiable net assets. Difference between current fair vales and carrying amount of
combinee’s identifiable assets are presented below:
• Inventories (526,000 – 500,000) ......................................................... 26,000
• Plant assets (net) (1,290,000 – 1,100,000) ..........................................190,000
• Leasehold ............................................................................................ 30,000
• Total ................................................................................................ 246,000

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Working Paper Elimination Journal Entry:
Common Stock – Sage Company ........................................... 400,000
Additional paid in capital – Sage Company............................ 235,000
RES – Sage Company ............................................................ 334,000
Inventories (526,000 – 500,000) ............................................. 26,000
Plant assets, net (1,290,000 – 1,100,000)................................ 190,000
Leasehold ................................................................................ 30,000
Goodwill.................................................................................. 38,000
Investment in Sage Company .................................... 1,192,250
Minority Interest in Net Assets of Subsidiary ........... 60,750
Computation of Goodwill and Minority Interest:
The revised footing of Br 1,215,000 (969,000 + 246,000) of the debit items of the above partial elimination
represents the current fair values of Sage Company’s identifiable net assets on December 31, 2003. Two
items must be recorded to complete the elimination for Post Corporation and Subsidiary. Thus, Minority
Interest and Goodwill should be computed. First, computations of Minority interest in combinee’s
identifiable net assets
Minority interest:
CFV of net assets ................................................................ 1,215,000
Minority interest (100% – 95%) ........................................ 5%
Minority interest (5% @ 1,215,000) .................................. 60,750 – This is recorded by crediting Minority
Interest Account like liability
Alternative way of Calculating Net Assets at CFV:
Cash ....................................................................................... 100,000
Inventories ............................................................................. 526,000
Other Current Assets ............................................................. 15,000
Plant (net) .............................................................................. 1,290,000
Leasehold .............................................................................. 30,000
Total Assets at CFV .............................................................. 2,161,000
Less: Liabilities at CFV (16,000 + 930,000) ........................ 946,000)
Net Assets at CFV ................................................................. 1,215,000
Goodwill:
Second, the Goodwill acquired by Post Corporation in the business combination with Sage Company is
computed as follows and recorded:
Investment for 95% interest in Sage Company........................................... 1,192,250
Less: CFV of 95% of Investment in net assets (1,215,000 @ 0.95) ..........1,154,250
Goodwill acquired by Post Corporation ....................................................38,000
The working paper for consolidated balance sheet is presented below:
Post Corporation and Subsidiary
Working Paper for Consolidated Balance Sheet
December 31, 2003
Post Sage
Elimination Consolidated
Corporation Company
Assets: ↑ (↓)
Cash................................................................
75,000 100,000 175,000
Inventories................................................................
800,000 500,000 26,000 1,326,000
Other current assets 550,000 215,000 765,000
Investment in Sage Co ................................ 1,192,250 (1,192,250)
Plan asset (net) ................................ 3,500,000 1,100,000 190,000 4,790,000
Leasehold Assets (net) ................................ -0- -0- 30,000 30,000
Goodwill (net) ................................ 100,000 38,000 138,000
Total asset ................................................................
6,217,250 1,915,000 (908,250 7,224,000
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 Liabilities & SHE:
Income taxes Payables ................................
100,000 16,000 – 116,000
Other Liabilities ................................ 2,450,000 930,000 – 3,380,000
Minority Interest in NAs Sub 60,750 60,750
Common stock Br 1 par ................................
1,057,000 – 1,057,000
Common stock Br 10 par ................................
– 400,000 (400,000) –
Additional Paid in capital ................................
1,560,250 235,000 ( 235,000) 1,560,250
Retained Earnings ................................1,050,000 334,000 (334,000) 1,050,000
Total Liability & SHE ................................
6,217,250 1,915,000 (908,250) 7,224,000

Consolidated Balance sheet of the parent company and partially owned subsidiary
Post Corporation and Subsidiary
Consolidated Balance Sheet
December 31, 2003
Assets:
Cash .......................................................................................................... Br 175, 000
Inventories ................................................................................................ 1,326,000
Other Current assets ................................................................................. 765,000
Total current assets ................................................................................... 2, 266,000
Plant assets, net......................................................................................... 4,790,000
Leasehold.................................................................................................... 30,000
Goodwill ..................................................................................................... 138,000
Total assets ............................................................................................... 7,224,000
Liabilities and SHE:
Liabilities:
Income tax payable ................................................................................... 116,000
Other ......................................................................................................... 3,380,000
Minority Interest in net assets of subs ...................................................... 60,750
Total liabilities .......................................................................................... 3,556,750
Stockholders’ Equity:
Common stock Br 1par ............................................................................. 1,057,000
Additional PIC .......................................................................................... 1,560,250
Retained Earnings ..................................................................................... 1, 050,000
Total Shareholders’ Equity ....................................................................... 3,667,250
Total Liability and SHE............................................................................ 7,224,000

Example 6.4:
On 31 October 2003, SELALE Company acquires 83% of the common stock of BIRITY Company in
exchange for 50,000 Br 2 Stated Value (Br 10 Current Fair Value a share) shares of common stock. There
was no contingent consideration. Out-of-pocket costs of the business combination paid by SELALE
Company on 31 October 2003 were as follows:
Legal and Finder’s Fees ......................................................... 34,750
Stock Registration Costs ........................................................55,250
Total .......................................................................................90,000
There was inter-company transaction between the constituent companies prior to the business
combination. BIRITY was to be a subsidiary of SELALE Company. The separate balance sheet of the
constituent companies prior to the Business combination follows:

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 SELALE AND BIRITY Company
Separate Balance Sheet (Prior to Business Combination)
October 31, 2003
Assets: Liabilities and Shareholders’ Equity:
SELALE BIRITY SELALE BIRITY
Company Company Company Company
Cash 250,000 150,000 Income tax payable 40,000 60,000
Inventories 860,000 600,000 Current Liabilities 390,000 854,000
Other current asset 500,000 260,000 Long-term Debt 950,000 1,240,000
Plant Assets, net 3,400,000 1,500,000 CS, no-par (Br 2 Stated V) 1,5000,000 ––
Patent, net –– 80,000 Common Stock (10 Par) 100,000
Additional PIC 1,500,000 ––
Retained Earnings 630,000 336,000
Total Assets 5,010,000 2,540,000 Total Liab. & SHEs 5,010,000 2,540,000

The Current Fair Values of BIRITY’s identifiable net assets were the same as the carrying amounts on
October 31, 2003; except for the following:
Inventories ................................................................................
Br620,000
Patent, net .................................................................................
95,000
Plant Assets, net ................................................................
1,550,000
Long-term debt ................................................................ 1,225,000
Instructions:
1. Prepare journal entries in the books of SELALE Company on October 31, 2003 to record the
business combination as a purchase
2. Prepare a working paper elimination (in journal entry) on October 31, 2003 and Consolidated
Balance Sheet of SELALE Company and Subsidiary
Solution:
Calculation of total acquisition cost (investment):
Purchase consideration (50,000 Share @ Br 10) ....................................... 500,000
Direct out-of-pocket costs .......................................................................... 34,750
Total Investment ........................................................................................ 534,750
Calculation of Net Assets:
Cash ....................................................................................... 150,000
Inventories ............................................................................. 620,000
Other Current Assets ............................................................. 260,000
Plant Assets, net ................................................................ 1,550,000
Patent, net .............................................................................. 95,000
Total Assets ........................................................................... 2,675,000
Less: Liabilities
Income tax payable .......................................................... 60,000
Other current liabilities .................................................... 854,000
Long-term debt ................................................................. 1,225,000
Total liabilities ................................................................... (2,139,000)
Total Net Assets ................................................................ 536,000
Calculation of Goodwill:
• SELALE Company’s share of net Assets = 83% @ 536,000 = 444,880
• Goodwill = Total Investment – share of Net Assets
• Goodwill = 534,750 – 444,880 = Br 89,870
Calculation of Minority Interest in Net Assets:
• Minority Interest = 17% of Net Assets of BIRITY Co
• Minority Interest = 536,000 @ 17% = Br 91,120 Reported as liability
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1. Journal Entries:
Issuance of 50,000 shares to BIRITY Company
Investment in BIRITY Company (50,000 shares @ Br 10) .................. 500,000
Common Stock ................................................................ 100,000
Additional PIC ................................................................ 400,000
To record out-of-pocket cost
Investment in BIRITY Company ..........................................................34,750
Additional PIC - CS ..............................................................................55,250
Cash .................................................................................. 90,000

Working Paper Elimination Journal Entries:

Common Stock – BIRITY Company ................................................... 100,000
Retained Earnings- BIRITY Company ................................................. 336,000
Inventories (620,000 – 600,000) ........................................................... 20,000
Plant assets (net) (1,550,000-1,500,000)............................................... 50,000
Patent, net ..............................................................................................
15,000
Long-term Debt ..................................................................................... 15,000
Goodwill................................................................................................
89,870
Investment in BIRITY Company ................................ 534,750
Minority Interest in Net Assets of Subsidiary .................. 91,120
2. Preparation of Consolidated Balance Sheet
SELALE Company And BIRITY Company
Consolidated Balance Sheet
October 31, 2003
Assets:
Cash (250,000 + 150,000 – 90,000) ..................................................... Br310,000
Inventories (860,000 + 600,000 + 20,000) ........................................... 1,480,000
Other Current assets (500,000 + 260,000)............................................ 760,000
Plant assets (net) (3,400,000 + 1,500,000 + 50,000) ............................ 4,950,000
Patents (net) (0 + 80,000 + 15,000) ...................................................... 95,000
Goodwill ............................................................................................... 89,870
Total Assets .......................................................................................... 7,684,870
Liabilities and SHE:
Liabilities:
Income tax payable (40,000 + 60,000) ................................................. 100,000
Other Current Liabilities (390,000 + 854,000) ..................................... 1,244,000
Long-term Debt (950,000 + 1,240,000 – 15,000) ................................ 2,175,000
Minority Interest in net assets of the Subsidiary .................................. 91,120
Stockholders’ Equity:
Common stock Br 2 Stated Value no-par stock................................... 1,600,000
Additional PIC ..................................................................................... 1,844,750
Retained Earnings ................................................................................ 630,000
Total Liability and SHE...................................................................... 7,684,870

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Problem 6.2:
Great Company has been looking to expand its operations and has decided to acquire the assets of TURE
Company and MURAD Company. Great Company will issue 25,000 shares of its Br 10 par common stock
to acquire the net assets of TURE Company and 8,000 shares to acquire 98% of the net asset of MURAD
Company. The Balance Sheet of the three companies on December 31, 2005, the scheduled date of business
combination, is given as follows:
GREAT TURE MURAD
Company Company Company
Assets In Birr In Birr In Birr
Cash ................................................................
300,000 80,000 30,000
Accounts Receivables ................................ 525,000 120,000 50,000
Inventory................................................................
340,000 150,000 135,000
Land ................................................................
420,000 150,000 150,000
Building ................................................................
800,000 500,000 150,000
Accumulated Depreciation ................................
(130,000) (150,000) (110,000)
Total Assets ................................ 2,255,000 850,000 405,000
Liabilities and SH Equity:
Current liabilities ................................75,000 160,000 55,000
Bonds payable ................................ 180,000 100,000 100,000
Common Stock (Br 10 par) ................................
1,000,000 270,000 100,000
Additional PIC ................................ 400,000 30,000 -0-
Retained earnings ................................ 600,000 290,000 150,000
Total liabilities and equity ................................
2,255,000 850,000 405,000
The following current fair values (CFV) are agreed upon by the BODs of the combinee companies and
Great Company while the others have the same book values and current fair values
TURE MURAD
Company Company
Inventory 160,000 150,000
Land 200,000 240,000
Building, net 400,000 60,000
Bonds payable 80,000 95,000
Great Company’sstock is currently traded at Br 40 per share. Great will incur Br 25,000 direct acquisition
cost in TURE Company and Br 14,000 of direct acquisition cost in MURAD Company. Great also incurred
Br 13,000 other indirect cost of acquisition and Br 15,000 stock registration and issue cost in the acquisition
of the two companies.
Required:
1. Prepare elimination journal entries assuming that purchased method is appropriate. Show the necessary
calculation that supports the recording and pass the journal entry of each combinee separately.
2. Prepare Consolidated balance sheet on the date of business combination consolidating all the combinees

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