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Chap012S 111.doc
Chap012S_111.doc
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Chap012S 111.doc-Chapter 12 - Supplement A Chapter
Chap012S_111.doc-Chapter 12 - Supplement A Chapter
Chap012S 111.doc-Chapter 12 - Suppl...
Chap012S_111.doc-Chapter 12 - Supplement A Chapter
Page 4
Chapter 12 - Supplement A:
EXHIBIT 12.4
Consolidated Balance Sheet on the Date of Acquisition
WASHINGTON POST AND SUBSIDIARIES
Consolidated Balance Sheet
January 1, 2010 (dollars in millions)
Assets
Cash and other current assets
$
835
Plant and equipment (net)
1,253
Other assets
3,289
Goodwill
15
Total assets
$5,392
Liabilities and Stockholders’ Equity
Current liabilities
$
813
Noncurrent liabilities
1,407
Stockholders’ equity
3,172
Total liabilities and stockholders’ equity
$5,392
The Income Statement
When we prepared the consolidated balance sheet, we combined the separate balance sheets to make
it appear as if a single company exists. Consolidating the income statements requires a similar
process. The revenues and expenses generated by the parent company’s own operations, excluding
any investment income from the subsidiary, must now be combined with the subsidiary’s revenues
and expenses.
The revaluation of assets to fair value, if any, also has implications for the
consolidated income statement. The increase in the assets must be depreciated or amortized in the
consolidation process.
In this example, preparing the consolidated income statement requires three steps (ignoring taxes):
1. Add Washington Post’s revenues from its own operations of $3,989 and INews’s revenues
of $120.
2. Add Washington Post’s expenses related to its own operations of $3,665 and INews’s
expenses of $106.
3. Add to the expenses the $1 additional depreciation expense, assuming a five-year useful life
($5 additional plant and equipment over book value ÷ 5 years = $1 per year).
Due to the simplicity of this example, you can directly prepare the simplified consolidated income
statement in Exhibit 12.5. Complex adjustments and eliminations would normally be entered into a
spreadsheet program.
12S-4
Page 5
Chapter 12 - Supplement A:
Exhibit 12.5
Consolidated Income Statement
WASHINGTON POST AND SUBSIDIARIES
Consolidated Income Statement
Year Ended December 31, 2010
(dollars in millions)
Revenues ($3,989 + $120)
$4,109
Expenses ($3,665 + $106 + $1)
3,772
Net income
$
337
DEMONSTRATION
CASE D
-- Consolidation
On January 1, 2010, Connaught Company purchased 100 percent of the outstanding voting shares of London
Company on the open market for $85,000 cash. On the date of acquisition, the fair value of London Company’s
operational assets was $79,000.
Required:
1.
Give the journal entry that Connaught Company should make on the date of acquisition. If none is required,
explain why.
2.
Give the journal entry that London Company should make on the date of acquisition. If none is required,
explain why.
3.
Analyze the acquisition to determine the amount of goodwill that was purchased.
4.
Should London Company’s assets be included on the consolidated balance sheet at book value or fair value?
Explain.
SUGGESTED SOLUTION FOR CASE D
1.
Jan. 1, 2010
Investment in Subsidiary (+A)
. . . . . . . . . . . . . . . . . . . . . . . .
85,000
Cash (-A)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85,000
2.
London Company does not record a journal entry related to the purchase of its stock by Connaught Company.
The transaction was between Connaught and the stockholders of London Company; it did not directly involve
London Company.
3.
Purchase price for London Company
$85,000
Fair value of net assets purchased
79,000
Goodwill
$ 6,000
4.
London Company’s assets should be included on the consolidated balance sheet at their fair values
as of the
date of acquisition
. The cost principle applies as it does with all asset acquisitions.
KEY
TERMS
Consolidated Financial Statements
p. 1
Parent Company
p. 1
Subsidiary Company
p. 1
QUESTIONS
1.
What is a parent–subsidiary relationship?
2.
Explain the basic concept underlying consolidated statements.
3.
What are intercompany eliminations?
12S-5
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