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Advanced Financial Accounting Ch4 Lecture Notes

Advanced Financial Accounting Ch4 Lecture Notes - 4-1...

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1 4-1 CHAPTER FOUR Consolidation of Wholly Owned Subsidiaries ACCT400 Advanced Financial Accounting Fall Semester 2008 4-2 Eliminating Entries To adjust totals of individual account balances of separate companies to reflect amounts that would appear if all legally separate companies were actually a single company Only appear in consolidation workpaper Do NOT affect books of separate companies Some eliminating entries are required for just one period while some are required for subsequent periods
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2 4-3 Full Ownership Purchased at BV Simplest case: 100%; purchase price = BV of stock Textbook example: On January 1, 2001, P purchases ALL of S’s common stock for $300,000 S’s individual assets and liabilities have FV equal to BV on date of combination Purchase price = BV of NA = BV of stock NO differential P’s journal entry: Investment in S stock 300,000 Cash 300,000 Note: Cash is paid to former stockholders of S and no longer in consolidated entity 4-4 B/S of 2 companies before combination: $500,000 $1,100,000 Total 100,000 300,000 Retained earnings 200,000 500,000 Common stock 100,000 200,000 Bonds payable $100,000 $100,000 Accounts payable Liabilities & Equities: $500,000 $1,100,000 Total (300,000) (400,000) Accumulated depreciation 600,000 800,000 Buildings and equipment 40,000 175,000 Land 60,000 100,000 Inventory 50,000 75,000 Accounts receivable $50,000 $350,000 Cash Assets: S P
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3 4-5 B/S of 2 companies after combination: -- 300,000 Investment in S stock $500,000 $1,100,000 Total 100,000 300,000 Retained earnings 200,000 500,000 Common stock 100,000 200,000 Bonds payable $100,000 $100,000 Accounts payable Liabilities & Equities: $500,000 $1,100,000 Total (300,000) (400,000) Accumulated depreciation 600,000 800,000 Buildings and equipment 40,000 175,000 Land 60,000 100,000 Inventory 50,000 75,000 Accounts receivable $50,000 $50,000 Cash Assets: S P 4-6 Consolidation workpaper (Figure 4-4): Insert account titles and balances of P and S in consolidation workpaper Accounts with debit balance are in upper half and those with credit balance are in lower half Total debits = total credits for P, S and consolidated entity Eliminating entry (intercorporate stockholdings): Common Stock - S 200,000 Retained Earnings 100,000 Investment in S stock 300,000 Eliminating entry only appears in consolidation workpaper and is NOT recorded by either P or S Prepare consolidated balance sheet directly from last column of consolidation workpaper (Figure 4-5)
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4 4-7 Full Ownership Purchased at More than BV Purchase price is different from acquired stock’s BV due to changes in net asset values, enterprise earning power and general market conditions, etc. Slightly complicated: 100%; purchase price > BV of stock Positive/debit differential Reasons: 1. Errors/omissions on subsidiary’s book (correct books of subsidiary at date of acquisition through prior period adjustments and differential disappears) 2. FV > BV of subsidiary’s net identifiable assets 3. Goodwill Eliminating entries are required for (2) in the consolidated F/S as long as related assets are still held by subsidiary 4-8 Textbook example: Assume that P purchases all of S’s common stock for $400,000 by issuing $100,000, 9% bonds and paying cash $300,000 Positive/debit differential = $100,000 P’s journal entry: Investment in S stock 400,000 Bonds payable 100,000 Cash 300,000
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