In this chapter we will illustrate the prepa ration

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statement, and the accompanying notes. In this chapter, we will illustrate the prepa- ration of the consolidated balance sheet on the date that control is obtained by the parent company. Consolidation of other financial statements will be illustrated in later chapters. In Chapter 3, we introduced the preparation of a consolidated balance sheet immediately after a business combination, using the acquisition method. Summarized financial statements were used to focus on the basic concepts involved. In this chapter, we elaborate on these concepts and use more detailed financial state- ments. The following example will form the basis of many of the illustrations that will be used in this chapter. We will call the two companies to be consolidated P Ltd. and S Ltd. Both com- panies have a June 30 fiscal year-end. The balance sheets of the two companies on June 29, Year 1, are shown in Exhibit 4.1. On June 30, Year 1, P Ltd. obtains control over S Ltd. by paying cash for a portion of that company’s outstanding common shares to the shareholders of S Ltd. No additional transactions take place on this date. Immediately after the share acquisi- tion, P Ltd. prepares a consolidated balance sheet. 100-Percent Ownership Illustration 1 Assume that on June 30, Year 1, S Ltd. had 10,000 shares outstand- ing and P Ltd. purchases 100 percent of S Ltd. for a total cost of $90,000. Given that P Ltd. paid $90,000 for 100 percent of the shares of S Ltd., we will assume The acquisition method is required by GAAP and will be used throughout the rest of this book. Exhibit 4.1 BALANCE SHEET At June 29, Year 1 P Ltd. S Ltd. Book value Book value Fair value Cash $100,000 $ 12,000 $ 12,000 Accounts receivable 90,000 7,000 7,000 Inventory 130,000 20,000 22,000 Plant 280,000 50,000 59,000 Patent 11,000 10,000 $600,000 $100,000 $110,000 Current liabilities $ 60,000 $ 8,000 $ 8,000 Long-term debt 180,000 22,000 25,000 Total liabilities 240,000 30,000 $ 33,000 Common shares 200,000 40,000 Retained earnings 160,000 30,000 $600,000 $100,000 These balance sheets present the financial position just prior to the business combination.
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122 CHAPTER 4 CONSOLIDATED STATEMENTS ON DATE OF ACQUISITION (and it is logical to assume) that the fair value of S Ltd. as a whole was $90,000 on the date of acquisition. P Ltd.’s journal entry to record the acquisition is as follows: Investment in S Ltd. 90,000 Cash 90,000 P Ltd.’s year-end is June 30, and the only consolidated statement prepared at this time would be the balance sheet. The income statement, statement of changes in equity, and cash flow statement present only the parent’s income, changes in equity, and cash flows since the two entities were not operating as a combined entity prior to June 30. The calculation and allocation of the acquisition differential is a useful first step in the preparation of the consolidated balance sheet. The information provided in this calculation forms the basis of the elimination and adjusting entries required. This calculation is shown in Exhibit 4.2.
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  • Fall '12
  • Smith
  • Balance Sheet, consolidated balance sheet, S Ltd, acquisition differential, hiL01537_ch04_120-169.indd Page

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