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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 1
Chapter 12 - Supplement A
Chapter 12
Supplement A
P
REPARING
C
ONSOLIDATED
S
TATEMENTS
What Are Consolidated Statements?
Any corporate acquisition involves two companies. The
parent company
is the company that gains
control over the other company. The
subsidiary company
is the company that the parent acquires.
When a company acquires another and both companies continue their separate legal existence,
consolidated financial statements
must be presented. These statements combine the operations of
two or more companies into a single set of statements. Basically,
consolidated statements can be
thought of as the adding together of the separate financial statements for two or more
companies to make it appear as if a single company exists
.
Thus, the cash accounts for each
company are added as are the inventory accounts, land accounts, and others.
The notes to Washington Post’s 2008 annual report provide the following information:
Notes to Consolidated Financial Statements
B. Summary Of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
— The accompanying consolidated financial
statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the
United States and include the assets, liabilities, results of operations and cash flows of the Company and its
majority-owned and controlled subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Remember that consolidated statements make it appear as though a
single company exists when in fact there are two or more separate
legal entities.
Intercompany items do not exist for a single corporation. For
example, a debt owed by Washington Post (the parent) to its newsprint
subsidiary is not reported on a consolidated statement because a company
cannot owe itself money.
12S-1
The
PARENT COMPANY
is the entity that gains
control over another
company.
The
SUBSIDIARY
COMPANY
is the entity that
is acquired by the parent.
CONSOLIDATED
FINANCIAL STATEMENTS
combine the operations of
two or more companies into
a single set of statements.
REAL WORLD EXCERPT
Washington Post
ANNUAL REPORT
Page 2
Chapter 12 - Supplement A:
Recording Acquisition of a Controlling Interest
By offering cash or shares of its stock or a combination of the two to a target company’s shareholders,
one company can acquire control of another. When the target company’s shareholders accept the offer
and the exchange is made, the parent company records the investment in its accounts at the
acquisition cost using the purchase method. When both companies maintain their separate legal
identities after the acquisition, we say that a
parent-subsidiary relationship
exists. Since both
companies continue to exist, both companies’ accounting systems continue to record their respective
transactions.
Let’s assume that, on January 1, 2010, Washington Post (the parent) paid $100 (dollars in millions)
cash to buy all of the stock of INews Company (the hypothetical subsidiary).
1
Washington Post would
record the acquisition as follows:
Debit
Credit
Investments in Subsidiaries (+A)
. . . . . . . . . . . . .
100
Cash (-A)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100
Assets
=
Liabilities
+
Stockholders’ Equity
Investments in Subsidiaries
+100
Cash
- 100
Because the acquisition of INews is simply an exchange of shares among owners,
no entry is made on INews’s books. The spreadsheet in Exhibit 12.3 presents
Washington Post’s and INews’s balance sheets immediately
after
the acquisition
is recorded by Washington Post.
The Investment in Subsidiaries account is
included in Washington Post’s balance sheet.
Exhibit 12.3
Spreadsheet for Consolidated Balance Sheet on the Date of Acquisition
1
Purchasing 100 percent of the outstanding stock results in a wholly owned subsidiary. Purchasing less than 100 percent of the
stock results in
minority interest
in the subsidiary.
12S-2
Immediately After
Acquisition
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