Chapter 2: Business Combination

and Consolidations
2.1. Accounting for Business Combinations
and Consolidation Process (IFRS 3 and IFRS
10)
2.2. Consolidated Financial Statements
2.3. Consolidation as of the Date of Acquisitions
2.4. Consolidated Financial Statements –
Subsequent to Date of Acquisition

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 Chapter Two
Business
Combinations

2.1. Accounting for Business

Combinations and Consolidation
Process (IFRS 3 and IFRS 10)

• Introduction: Business combinations

• Forms of Business Combinations
• Accounting for business Combinations:
Acquisition
Method (IFRS 3)
• Illustration of acquisition method.
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 Learning Objectives
• After completing this Session, students should be able to:

1. Define a business combination and explain its key

features.
2. Distinguish between different types of business
Combinations.
3. Understand the acquisition method and its steps.
4. Account for goodwill or bargain purchase gains.
5. Recognize subsequent measurement and
disclosure requirements under IFRS 3.

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 2.1. Accounting for Business
Combinations and Consolidation
Process (IFRS 3 and IFRS 10)
1. INTRODUCTION: BUSINESS COMBINATIONS

• International Accounting Standards Board defines

business combinations as: Business combination occurs
when an entity acquires net asset that constitute a
business or Acquires
Equity interests of one or more other entities and obtains
control over that entity or entities.
• According to IFRS 3, a business combination is a transaction
or other event in which an acquirer obtains control of one or
more businesses.
• In common parlance, business combinations are often
referred
to as mergers and acquisitions.

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 2. Types of Business
Combinations

(1) Statutory Merger

▪ Refers to a business combination in which only
one of the combining companies survives
and the other loses its separate identity.
▪ Here the acquired company’s assets and
liabilities are transferred to the acquiring
company and the acquired company is
dissolved or liquidated.
▪ The operations of the previously separate
companies are carried on in a single legal
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 identity following the merger.

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 …Cont’d

(2) A Statutory Consolidation

• Refers to a business combination in which both

the combining companies dissolve and the
assets and liabilities of both companies are
transferred to a newly created corporation.

• The operations of the previously separate

companies are carried on in a single legal entity,
and neither of the combining companies remains
in existence after a statutory consolidation.

• In many situations, however, the resulting corporation

is new in form only, and in substance it is actually one
of the combining companies reincorporated with a
new name.
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 …Cont’d

(3) A Stock Acquisition

• Occurs when one company acquires the voting
shares of another company and the two
companies continue to operate as separate,
but related, legal entities.

• Here neither of the combining companies is

liquidated,

• The acquiring company accounts for its

ownership interest in the other company as
an investment.
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 … Cont’d
• The relationship that is created in a stock
acquisition is referred to as a parent-
subsidiary relationship. A parent company
is one that controls another company
referred to as a subsidiary, usually through
majority ownership of common stock.

• For general-purpose financial reporting,

a parent company and its subsidiaries
present consolidated financial
statements that appear largely as if
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 companies had actually merged into one.

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0
10/24/2025 1
1
 3. Accounting for Business
Combinations
• All business combinations must be accounted for using the
acquisition method. Acquisition Method (IFRS 3)
• The acquisition method is a process of accounting for a
business combination in which the acquirer recognizes the
identifiable assets acquired, the liabilities assumed, and
any non-controlling interest in the acquiree at their
acquisition- date fair values, and records goodwill or gain
from a bargain purchase.
• As defined by IFRS 13, fair value is ‘the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date.
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Acquirer: - The entity that obtains control of the acquiree.

Acquiree: The business or businesses that the acquirer obtains control of in a business
combination.

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 Accounting for Acquisition method

Direct costs:
• We expense the direct costs of a business combination
(such as accounting, legal, consulting, and finders’ fees)
other than those for the registration or issuance of equity
securities.
Registration and issuance costs:
•We charge registration and issuance costs of equity
securities issued in a combination against the fair value
of securities issued, usually as a reduction of additional
paid-in capital.
Indirect costs
• We expense indirect costs such as management
salaries, depreciation, and rent under the acquisition
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 method. We also expense indirect costs incurred to
close duplicate facilities.

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 Steps in the acquisition
method
• The general approach for business combinations, whether a direct
Purchase of net assets or a purchase of control, contains the
following
Steps:
1. Identify the Combinor (acquirer)
2. Determine the acquisition date.
3. Consideration Transferred for cash, shares, contingent
consideration or
liabilities incurred measured at Fair value at the
acquisition date
4. Recognize and Measure Identifiable Assets acquired
and Liabilities assumed at Fair Value on the acquisition
date.
5. Recognize and Measure Goodwill or Bargain Purchase
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Goodwill = Consideration Transferred + Non-controlling
Interest (NCI) + Fair Value of Contingent Consideration– Net
Identifiable Assets Acquired.
6. Recording individual assets and liabilities acquired
and amount paid to the acquired company Recording
security related costs
7. Recording dissolution of the acquired company

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1. Determining the acquirer:
a. If cash or other assets are distributed or
liabilities are incurred: In a business combination
effected solely through the distribution of cash or
other assets or by incurring liabilities, the entity
that distributes cash or other assets or incurs
liabilities is generally the acquiring entity.
b. If stock is exchanged: In a business combination
effected through an exchange of equity interests,
the entity that issues the equity interests or
receive larger share of voting rights in the
combined enterprise is generally the acquiring
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 entity.

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• The acquirer is the entity that obtains
control of the acquiree.
• Control is defined by IFRS 10 as:
– Power over the investee,
– Exposure or rights to variable returns,
and
– The ability to use power to affect those
returns.

• Indicators of control:
– Majority voting rights,
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 – Power to appoint or remove key management,
– Dominant influence through contracts or
ownership

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2. Determine the Acquisition Date
The date when the acquirer obtains control over
the acquiree.
Typically, it is when the acquirer legally transfers
consideration, acquires assets, and assumes
liabilities.
Important because all fair values are measured
at this date

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4. Recognize and Measure Identifiable
Assets,
liabilities and Non-Controlling Interest
(NCI)
At the acquisition date, the acquirer must
recognize:
All identifiable assets acquired,
All liabilities assumed, and
Any NCI in the acquiree.
Measurement Principle:
All identifiable items are measured at
fair value on the acquisition date,
regardless of how the acquiree had
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 measured them before.

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 5. Recognize and Measure Goodwill or Gain from a Bargain Purchase
Goodwill
• Arises when the total consideration paid (plus NCI
and any previously held interest) exceeds the fair
value of the net identifiable assets acquired.
• Formula:
• Goodwill=(Consideration Transferred + NCI + FV of
Contingent
consideration) − Fair Value of Net Identifiable Assets
• Goodwill represents:
Synergies (walta’insa) from combining operations,
Brand reputation, customer relationships, and
future economic benefits not individually
identifiable.
• Bargain Purchase (Negative Goodwill)
• Occurs when the fair value of identifiable net assets
exceeds the total
consideration.
• The acquirer reassesses the measurements, and if
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 confirmed, recognizes the
excess as a gain in profit or loss on the acquisition
date.

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 Illustration:

• Assume that on January 1, Archer, Inc.,

acquired Baker Company in exchange for
10,000 shares of its $1.00 par common stock
having a fair value of $1,200,000 in a transaction
structured as a merger. In connection with the
acquisition, Archer paid $25,000 in legal and
accounting fees. Also, Archer agreed to pay the
former owners additional cash consideration
contingent upon the completion of Baker’s

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 existing contracts at specified profit margins.
The current fair value of the contingent obligation
was estimated to be $150,000.

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 January 1 Book Values
Fair Values
Current assets $ 30,000 $ 30,000
Internet domain name 160,000 300,000
Licensing agreements 0 500,000
In-process research and development 0
25,000) (25,000)
$165,000
200,000 Notes payable $1,005,000
Total net assets

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 ▪Note the following characteristics of the
acquisition method.
▪The valuation basis is fair value of
consideration transferred and includes the
contingent consideration, but excludes direct
combination costs.
▪The assets acquired and liabilities
assumed are recorded

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 at their individual fair values.
▪Goodwill is the excess of the consideration
transferred
over the fair values of the net assets
acquired.

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 ▪ Acquired in-process research and

development is recognized as an asset.

▪ Professional service fees to help accomplish

the acquisition are expensed.

▪ Stock issue cost reduces Additional Paid-In

Capital.

▪ Thedirect combination costs (accounting and

legal fees) are

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 expensed when incurred.

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Steps
Identify the Combinor (acquirer: - the entity that obtain
control of acquiree.)
1. Determine the acquisition date.
2. Consideration Transferred for cash, shares,
contingent consideration
or liabilities incurred measured at Fair value at the
acquisition date
3. Recognize and Measure Identifiable Assets
acquired and Liabilities assumed at Fair Value
on the acquisition date.
4. Recognize and Measure Goodwill or Bargain
Purchase
Goodwill = Consideration Transferred + Non-controlling
Interest (NCI) + Fair Value of Contingent Consideration–
Net Identifiable Assets Acquired.
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 6. Recording individual assets and liabilities acquired
and amount paid to
the acquired company Recording security related
costs
7. Recording dissolution of the acquired company

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 According to the acquisition method, Archer’s
valuation basis for
its acquisition of Baker is computed as follows:
Fair value of shares issued ------------------------------- $1,200,000
Fair value of contingent performance obligation ----------- 150,000
Total consideration transferred for the Baker acquisition
1,350,000 (1) Cost allocation:
Current assets . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . $ 30,000
Internet domain name . . . . . . . . . . . . . . .. . . . . . . . . . . . 300,000
Licensing agreements . . . . . . . . . . . . . . . .. . . . . . . . . . .
500,000 Research and development asset . . . . . .. . . . . . .
. . . . . 200,000 Notes payable . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . (25,000)
Total net fair value of items acquired . . . . . . . . . . . . . . . . 1,005,000
(2) Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
345,000 (3)

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4. Recording individual assets and liabilities acquired and
amount paid to the acquired company
Current assets 30,000
Internet domain name 300,00
Licensing agreements 0500,00
In-process research and 0
200,00
development
Good Will 0345,00
Notes payable 0 25,0
Common 00
10,0
Stock(10,000*1)
Paid in Capital in 00
1,190,0
Excess of Par
Contingent Performance Obligation 00 . . . . ... .
. 150,000

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5. Professional service fee 25,000
Cash 25,000

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6. Recording dissolution of the acquired
company

Investment in CS of com. 1, 200,

Archerpayable
Notes 0000
25,000

Current assets 30,000

Internet domain name 160,000
Gain on business 1,035,
combination 000
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 Closing of Stockholders equity accounts, gain
on sale and investment account and
distribution of common stock investment will be
made.
Stockholders equity 165,000
Gain on sale of net assets to Archer com 1,035,000
Investment in the common stock of Archer Corporation
1,200,000

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 Illustration 2 Following are the account balances of
Miller Company and Richmond Company as of
December [Link] fair values of Richmond
Company’s assets and liabilities are also listed.
Miller Richmond Richmond
Company Company Company
Book Values Book Values Fair Values
12/31 12/31 12/31
Cash. . . . . . . . . . . . . . . . . . . . . …….. . . $ 600,000 $ 200,000 $ 200,000
Receivables. . . . . . . . . . . . . . . ………. . . . 900,000 300,000 290,000
Inventory . . . . . . . . . . . . . . . . . . ……. . 1,100,000 600,000 820,000
Buildings and equipment (net) . . …. . 9,000,000 800,000 900,000
Unpatented technology . . . . . . . . . –0– –0– 500,000
In-process research
and development . . . . . . . . . . . . –0– –0– 100,000
Accounts payable . . . . . . . . . . . . ….. . (400,000) (200,000) (200,000)
Notes payable. . . . . . . . . . . . . . …. . . (3,400,000) (1,100,000) (1,100,000)
Totals . . . . . . . . . . . . . . . . . . . …….. . $ 7,800,000 $ 600,000 $ 1,510,000

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 Miller Co. Richmond

• Common stock—$20 par value . . . $

• (2,000,000)
Common stock—$5 par value . . . . $
• Additional paid-in capital . . . . . . . . (220,00
(100,0
• (900,000)
Retained earnings, 1/1 . . . . . . . . . . 00)
(130,000)
(2,300,000)
• Revenues . . . . . . . . . . . . . . . . . . . . (900,000)
(6,000,000)
• Expenses . . . . . . . . . . . . . . . . . . . .. 750,000
3,400,000

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 Additional Information (not reflected
in the
preceding figures)

• On December 31, Miller issues 50,000 shares

of its $20 par value common stock for all of
the outstanding shares of Richmond
Company.

• As part of the acquisition agreement, Miller

agrees to pay the former owners of Richmond
$250,000 if certain profit projections are
realized over the next three years. Miller
calculates the acquisition date fair value of this
contingency at $100,000.
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• In creating this combination, Miller pays $10,000
in stock issue costs
and $20,000 in accounting and legal fees.

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Required
[Link]’s stock has a fair value of
$32.00 per share. Using the
acquisition method: Prepare the
necessary journal entries if Miller
dissolves Richmond so it is no
longer a separate legal entity.
b. If Miller’s stock has a fair value
of $26.00 per share, Prepare the
necessary journal entries if Miller
10/24/2025 31
 dissolves Richmond so it is no
longer a separate legal entity.

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• a1. In a business combination, the accountant first
determines the total fair value of the consideration
transferred. Because Miller’s stock is valued at $32 per
share, the 50,000 issued shares are worth $1,600,000 in
total. Included in the consideration transferred is the
$100,000 acquisition-date fair value of the contingent
performance obligation.
• This $1,700,000 (1,600,000+100,000) total fair value is
compared to the
$1,510,000 fair value of Richmond’s assets and liabilities
(including the value of
IPR&D).
• The $190,000 excess fair value ($1,700,000 less
$1,510,000) is recognized as
goodwill.
• Because dissolution will occur, Richmond’s asset and
liability accounts are
transferred to Miller and entered at fair value with the
excess recorded as goodwill.
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• The $10,000 stock issue cost reduces Additional Paid-In
[Link] $20,000 direct
combination costs (accounting and legal fees) are expensed
when incurred.

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Miller Company’s Financial Records—December 31

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200,000
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
290,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
820,000
Buildings and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
900,000
Unpatented Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500,000
In-Process Research and Development Asset . . . . . . . . . . . . . . . . . . . . .
100,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
190,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
....... . . 200,000
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
...... 1,100,000
Contingent Performance Obligation . . . . . . . . . . . . . . ....... . . . . .
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 . . . 100,000
Common Stock (Miller) (par value) . . . . . . . . . . . . . . . . . . .
.... . . . . . 1,000,000 Additional Paid-In Capital (fair value in
excess of par value) . ......... . . . . 600,000 To record
acquisition of Richmond Company.

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Professional service expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
20,000
Cash (paid for combination costs) . .. . . . . . . . .
. . . . . . . 20,000 To record legal and accounting fees
related to the combination.
Additional Paid-In Capital . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,000
Cash (stock issuance costs) . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 10,000 To record payment of stock
issuance costs.

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 b. If the fair value of Miller’s stock is
$26.00 per share, then the
fair value of the consideration
transferred
in the Richmond acquisition is recomputed
as follows:
Fair value of shares issued ($26 * 50,000 shares) . . . . . . .
. . . . . . . $1,300,000 Fair value of contingent
consideration . . . . . . . . . . . . . . . . . . . . . . . 100,000 Total
consideration transferred at fair value . . . . . . . . . .
.. . . $1,400,000 Because the consideration transferred

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 is $110,000 less than the $1,510,000 fair
value of the net assets received in the acquisition, a
bargain purchase has
occurred.

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 In this situation, Miller continues to recognize
each of the separately identified assets
acquired and liabilities assumed at their fair
values. Resulting differences in the
consolidated balances relative to the
Requirement (a) solution are as follows:

• The $110,000 excess fair value recognized over

the consideration
transferred is recognized as a “gain on
bargain purchase.”

• No goodwill is recognized.
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 • Miller’s additional paid-in capital decreases by
$300,000 to
$1,190,000.

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Miller Company’s Financial Records—December 31

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200,000
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
290,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
820,000
Buildings and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
900,000
Unpatented Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500,000
In-Process Research and Development Asset . . . . . . . . . . . . . . . . . . . . .
100,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
....... . . 200,000
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
...... 1,100,000
Contingent Performance Obligation . . . . . . . . . . . . . . ....... .
. . . . . . . 100,000 Gain on bargain purchase

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 ………………………………………….110,000 Common Stock
(Miller) (par value) . . . . . . . . . . . . . . . . . . . .... . . . . .
1,000,000 Additional Paid-In Capital (fair value in excess of
par value) . ......... . . . . 300,000 To record acquisition of
Richmond Company.

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Professional service expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Cash (paid for combination costs) . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
To record legal and accounting fees related to the combination.

Additional Paid-In Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000

Cash (stock issuance costs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
To record payment of stock issuance costs.

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 READINGS

▪ IFRS 3-Business combinations

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2.2. Consolidated Financial Statements
Overview
• Consolidated financial statements
• Key definitions
• Exemptions
• Control
• Benefits of Consolidated Financial Statements
• Limitations of Consolidated Financial Statements
• Subsidiary Financial Statements
• Non- controlling Interest

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 Meaning of Consolidated
Financial Statements

• IFRS10 defines consolidated financial

statements as "the financial
Statements of a group … presented as those of
a single economic entity".
• Consolidated financial statements are often
referred to as group
financial statements, or simply group accounts.
• A group consists of a parent company together
with one or more subsidiary companies which
are controlled by the parent company.
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• The shareholders of a parent company have
an indirect interest in the net assets and in
the profits or losses of the company's
subsidiaries.
• Accordingly, parent companies are required to
prepare and present a set of accounts for the
group as a whole.

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 Key definitions
IFRS10 includes the following key definitions:
• A group is "a parent and its subsidiaries".
• A parent is "an entity that controls one or more
entities".
• A subsidiary is "an entity that is controlled
by another entity".
• Control exists "when the investor is exposed … to
variable returns from its involvement with the
investee and has the ability to affect those
returns through its power over the investee".

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 Exemption from requirement to
prepare group accounts
A parent company need not prepare group
accounts if:
• the parent company is itself a wholly-owned
subsidiary or a partially-owned subsidiary (and its
other owners do not object to the company not
preparing group accounts), and
• the parent's shares are not publicly traded, and
• The parent's ultimate parent company
presents group accounts that comply with
international standards.
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 A parent that has been consolidating a subsidiary in
its financial statements should exclude that company
from future consolidation if the parent can no longer
exercise control over it. Control might be lost for a
number of reasons, such as
(1) the parent sells some or all of its interest in the
subsidiary,
(2) the subsidiary issues additional common stock,
(3) the parent enters into an agreement to relinquish
( dhiisuu) control, or
(4) the subsidiary comes under the control of the
10/24/2025 government or other regulator. 44
 Control
• An investor company has control over an investee
if it has the power to direct the investee's
activities. Rights which may give this power
include:
– voting rights
– the right to appoint or remove members of the
investee's key management personnel
– the right to direct the investee to enter into transactions
for the investor's benefit
– contractual rights.
• In straightforward cases, power is achieved by owning more than 50% of
the investee's ordinary shares.

10/24/2025 45
How do we report the results of subsidiaries/Associate/Investee?
Parent
ompan
C y

80% 51% 21% 14%

Sub A Sub B Associate c Investee D

Consolidation Equity Method Fair value

(plus the Equity Method)

10/24/2025 46
 Benefits of Consolidated Financial Statements

• Presented primarily for those parties having a long-

run interest in the parent company:
▪ shareholders,
▪ long-term creditors, or
▪ other resource providers.
• Provide a means of obtaining a clear picture of the
total resources of the combined entity that are
under the parent's control.
10/24/2025 47
 Limitations of Consolidated Financial Statements

▪ Results of individual companies not disclosed (hides

poor performance).
▪ Little information of value in consolidated statements because
they contain insufficient detail about the individual subsidiaries.
▪ Financial ratios are not necessarily representative of any
single company in the consolidation.
▪ Similar accounts of different companies may not be entirely
comparable.
▪ Highly diversified companies operating across several industries,
often the result of mergers and acquisitions, are difficult to
analyze or compare.
▪ Information is lost any time data sets are aggregated.

10/24/2025 48
 Subsidiary Financial Statements
• Creditors, preferred stockholders, and
noncontrolling common stockholders of subsidiaries
are most interested in the separate financial
statements of the subsidiaries in which they have an
interest.
• Because subsidiaries are legally separate from their
parents,
– the creditors and stockholders of a subsidiary
generally have no claim on the parent, and
– the stockholders of the subsidiary do not share in
the profits of the parent.
10/24/2025 49
 Noncontrolling Interest
• Only a controlling interest is needed for the parent to
consolidate the subsidiary—not 100% interest.
• Shareholders of the subsidiary other than the parent
are referred to as “noncontrolling” shareholders.
• Noncontrolling interest refers to the claim of
these shareholders on the income and net assets
of the subsidiary.

10/24/2025 50
– NCI Aare voting shares not owned by the parent company
– NCI was formerly called the “Minority Interest”

NCI Parent

<50% >50%

Sub

10/24/2025 51
 Two Issues:
(1) Should 100% of the financial statements be
consolidated?
(2) Where & at what value to report NCI in the
financial statements? (Disclosure &
Valuation of NCI)
NCI Parent
<50% >50%

Sub
10/24/2025 52
2.3. Consolidation as of the Date of
Acquisitions
• Introduction
• Consolidated Balance Sheets: Use of Working
papers
• 3 Steps in Consolidation Procedures
• Illustration I: Consolidated balance sheet at
date of acquisition-
Wholly owned subsidiary (100%)
• Illustration 2: Consolidated balance sheet at
date of acquisition- Partially owned
subsidiary
2.4. Consolidated Financial Statements –
Subsequent to Date of
Acquisition
10/24/2025 53
Consolidation – The Effects of the Passage of
Time
• Consolidation of wholly owned subsidiary
Subsequent to Date of
Acquisition -equity method
• Consolidation of partially owned subsidiary
subsequent to the date of acquisition-
equity method

10/24/2025 54
 2.3. Consolidation as of the Date of
Acquisitions
 Acquisition date = the date when the
parent gains control, not necessarily the
purchase agreement date or payment
date.
• Accounting for Business Combination of Parent
corporation & Subsidiary
company requires a FRESH START for the consolidated
entity.
• This reflects the theory that a Business Combination
that involves a parent subsidiary Relationship is an
ACQUISITION OF THE COMBINEE’S NET ASSETS by
the combiner.
• The operating results of Parent and subsidiary prior
to the date of their Business Combination are those
of two separate ECONOMIC as well as LEGAL-
entities. Accordingly a consolidated balance sheet is
10/24/2025 55
 the only CONSOLIDATED Financial statement ISSUED
BY Parent company on the date of the Business
Combination of Parent and subsidiary.

10/24/2025 56
 Investments at the Date of
Acquisition

Recording Investments at Cost (Parent’s

Books)

• Stock investment is recorded at cost

as measured by fair value of the
consideration given or
consideration received, whichever
is more clearly evident.
10/24/2025 57
 • Consideration given may include
cash, other assets, debt securities,
stock of the acquiring company.

10/24/2025 58
 Consolidated Balance Sheets: Use of
Working papers

• Assets and liabilities are summed,

regardless of whether the parent owns
100% or a smaller controlling interest.

Noncontrolling interests (NCI) are reflected as a

component of
owners’ equity.
Eliminations must be made to cancel the
effects of transactions among the parent

10/24/2025 56
 and its subsidiaries.
A work paper is frequently used to summarize
the effects of
various additions and eliminations.

10/24/2025 57
 3 Steps in Consolidation
Procedures
1. Combine like items of assets, liabilities, equity,
income, expenses and cash flows of the parent with
those of its subsidiaries. (add up parent and subsidiary balance)

2. Offset (eliminate):- the carrying amount of the

parent’s investment in each subsidiary; and
the parent’s portion of equity of each
subsidiary.
3. Eliminate in full intragroup assets and liabilities,
equity, income, expenses and cash flows relating to
10/24/2025 58
 transactions between entities of the group.

10/24/2025 59
 Investment Elimination

• It is necessary to eliminate the

investment account of the parent
company against the related
stockholders’ equity of the subsidiary to
avoid double counting of these net
assets.

• When parent’s share of subsidiary’s

equity is eliminated against the
10/24/2025 60
 investment account, subsidiary’s net
assets are substituted for the investment
account in the consolidated balance
sheet.

10/24/2025 61
 Illustration 1: Consolidated balance
sheet at date of acquisition-
Wholly owned subsidiary (100%)

• On May 31, 2010 Amex Corporation acquired

all of 10,000 shares of Luck’s outstanding
common stock by paying Br 400,000 cash and
issuing 20,000 shares of Br 15 par common
stock having a market value of Br 40 per
share to Luck’s stockholders. In addition, Br
300,000 is contingent up on the achievement
of Br 1,000,000 profit margin in the next
annual period. The fair value of contingent
consideration was Br 100,000.
• Separate balance sheets of Amex Corporation
and Luck Company on May 31, 2010, together
10/24/2025 62
 with current fair values of Luck’s identifiable
net assets are as follows:

10/24/2025 63
 Amex corporation and Luck
Company Separate Balance
sheets (Prior to business
combination)
Luck Company
Amex Corporation Book values Fair Values

Assets
Cash Br 1,600,000 Br 20,000 Br 20,000
Accounts Receivable (net) 1,400,000 260,000 260,000
Inventories 2,800,000 220,000 280,000
Plant assets (net) 5,000,000 900,000 1,100,000
Patent _ _ 300,000
Customer contracts _ _ 200,000
Total assets 10,800,000 1,400,000 2,160,000
Liabilities & Stockholder’s Equity
Current liabilities Br 1,000,000 Br 120,000 Br 120,000
Long-term debt 2,000,000 600,000 800,000
Common Stock 3,000,000 290,000
Additional Paid-in Capital 2,400,000 90,000
Retained Earnings 2,400,000 300,000
10,800,000 1,400,000
10/24/2025 60
Total liability 920,000
Required:
a. Prepare journal entries for Amex Corporation
to record the business combination with Luck
Company on May 31, 2010.
b. Prepare consolidated balance sheet of Amex
Corporation and
subsidiary on May 31, 2010

10/24/2025 61
 Consolidation of financial statements ( Acquisition method)

Step 1: purchase
consideration
Cash Paid 400,000
Common stock issued 800,000
PresentValue of consideration 100,000
Step 2: CFV of net assets acquired (FVTA- FVTCL, 2160, 000-920,000)
1,240,000
Step 3: GW 60,000
Step 4: recording investment made to acquire the combinee
Step 5: Formal allocation of the acquisition date fair value[book
value, excess of CFV over book values, goodwill or gain on bargain
purchases].
Step 6: preparation of Eliminations in Journal Entry
(consolidating entry) Step 7: Working paper for
consolidated balance sheet

10/24/2025 62
 a.
Investment in Luck Company 1,300, 000
Common
Cash Stock 400,0
Contingent performance liability 00
100,0
Common stock (20,000*15) 00
300,0
Additional paid-in capital 00
500,0
(20,000*25)
(25= 40-15) 00
Book value of net asset Luck= CC+APIC+RE
Excess of Fair value over Book value= FVCT Amex-
BVNA Luck

10/24/2025 63
 Prior to constructing a worksheet, the
parent prepares a formal allocation of
the acquisition date fair
value.
• Acquisition-Date Fair Value Allocation Schedule
• Fair value of consideration transferred by Amex. . . . . . . . . .
Br 1,300,000
• Book value of net assets Luck (CS+APIC+RE) . . . . . . . . . .
……. 680,000
• Excess of fair value over book value . . . . . . . . . . . . . .. . . . .
. Br
620,000
• Allocations made to specific accounts based on acquisition-
date
• Fair and book value differences:
• Cash (20,000 - 20,000) . . . . . . . . . . . . . . . . . . . . . . . . . . -0-
• Accounts receivable (120,000 -120,000) . . . . . . . . . . . . -0-
10/24/2025 64
 • Inventories (280,000-220,000) . . . . . . . . . . . . . . . . . . . .
60,000
• Plant assets (1,100,000-900,000) . . . . . . . . . . . . . . . . . .
200,000
• Patent (300,000-0) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300,000
• Customer contract (200,000-0) . . . . . . . . . . . . . . . . . . . .
200,000
• Long term liability (800,000-600,000) . . . . . . . . . .. . . . .
(200,000) 560,000
• Excess fair value not identified with specific items Goodwill.
. Br 60,000
(Excess of fair value over book value-560,000) = Goodwill=
620,000-560,000

10/24/2025 65
 Note:
1. Cash…Br 1,200,000 = Br 1,600,000 – 400,000
2. Common stock….3, 300,000=3,000,000+300,000
3. Additional paid in capital….2, 900,000=2,400,000+500,000
(a) Eliminations in Journal Entry/consolidation entry:
Inventories(280,000-220,000) 60,000
Plant Assets 200,000
Patent 300,000
Customer contract 200,000
Common Stock 290,000
Additional Paid in Capital 90,000
Retained earnings 300,000
Goodwill 60,000
Investment in Luck company 1,300,000
Long-term debt 200,000

10/24/2025 66
 Amex Corporation and Subsidiary
Working paper for consolidated balance
sheet
Amex
Corporation
0 Luck
Company
Consolidation entries
Debit Credit
Consolidated
Totals
Assets
Cash Br 1,200,000 Br 20,000 Br.1,220,000

Investment in Luck company 1,300,000 1,300,000 -

Accounts Receivable (net) 1,400,000 260,000 1,660,000

Inventories 2,800,000 220,000 60,000 3,080,000
Plant assets (net) 5,000,000 900,000 200,000 6,100,000
Patent _ _ 300,000 300,000
Customer contracts _ _ 200,000 200,000
Goodwill 60,000 60,000
Total assets 11,700,000 1,400,000 12,620,000
Liabilities & Stockholder’s Equity
Current liabilities Br 1,000,000 Br 120,000 Br.1,120,000

Contingent performance liab. 100,000* 100,000

Long-term debt 2,000,000 600,000 200,000 2,800,000

Common Stock 3,300,0002 290,000 290,000 3,300,000
Additional Paid-in Capital 2,900,0003 90,000 90,000 2,900,000
Retained Earnings 2,400,000 300,000 300,000 2,400,000
 Amex Corporation and Subsidiary
Consolidated Balance sheet
May 31, 2010
Assets
Cash 1,220,000
Accounts Receivable (net) 1,660,000
Inventories 3,080,000
Goodwill 60,000
Patent 300,000
Customer contracts 200,000
Plant assets (net) 6,100,000
Total assets 12,620,000
Liabilities & Stockholder’s equity
Current liabilities 1,120,000
Contingent performance liability 100,000
Long-term debt 2,800,000
Common Stock Br 15 par 3,300,000
Additional Paid-in Capital 2,900,000
Retained Earnings 2,400,000
Total Liabilities & Stockholder’s equity 12,620,000 67
10/24/2025
 Consolidation of Partially owned subsidiaries

• When a business combination is completed by acquisition

of more than 50% of common stock (less than 100%), the
ownership interests in the subsidiary that are held by
owners other than the parent is termed as Non-controlling
interest/ minority interest.

• The non-controlling interest in a subsidiary is part of the

equity of the consolidated group

10/24/2025 68
• For business combinations involving less-than-100
percent ownership, the acquirer recognizes and
measures at the acquisition date;

1. Total acquired firm fair value (total

subsidiaries fair
value, i.e., FV of Controlling interest and
FV of NCI).
2. Non-controlling interest at fair value and
3. Goodwill or a gain from a bargain
10/24/2025 69
 purchase.

10/24/2025 70
• The total acquired firm fair value in the
presence of a partial acquisition is the sum of
the following two components at the
acquisition date:
1. The fair value of the controlling interest-that
can be estimated in comparison with
consideration transferred fair value.
2. The fair value of the non-controlling
interest-there are different bases to estimate
the fair value of non-controlling interest;
market value of the subsidiaries common
stock or based on parents consideration
10/24/2025 70
 transferred.

10/24/2025 70
 Illustration 2: Consolidated balance sheet at date of
acquisition-Partially owned subsidiary

Assume Amex Corporation acquired 9,000 (90%) shares of Luck

Company by paying Br 1,260,000 cash (Br 140 per share) to
lucks stock holders.
Separate balance sheets of Amex Corporation and Luck Company
on May 31, 2010, together with current fair values of Luck’s
identifiable net assets are as follows.

10/24/2025 71
 Amex corporation and Luck
Company Separate Balance
sheets (Prior to business
combination)
Luck Company
Amex Book values Fair Values
Corporation
Assets
Cash Br 1,600,000 Br 20,000 Br 20,000
Accounts Receivable (net) 1,400,000 260,000 260,000
Inventories 2,800,000 220,000 280,000
Plant assets (net) 5,000,000 900,000 1,100,000
Patent _ _ 300,000
Customer contracts _ _ 200,000
Total assets 10,800,000 1,400,000 2,160,000
Liabilities & Stockholder’s Equity
Current liabilities Br 1,000,000 Br 120,000 Br 120,000
Long-term debt 2,000,000 600,000 800,000
Common Stock 3,000,000 290,000
Additional Paid-in Capital 2,400,000 90,000
10/24/2025 72
Retained Earnings 2,400,000 300,000
Required:
a. Prepare journal entries for Amex Corporation to record the
business combination with Luck Company on May 31, 2010
b. Prepare consolidated balance sheet of Amex Corporation
and subsidiary on May 31, 2010

10/24/2025 73
 Consolidation of financial statements ( Acquisition
method)
Step 1: All Acquired Company fair value
Common stock issued / Cash paid 1,260,
Noncontrolling interest ( 1000*140) 000
140,000
1,400,0
Step 2: CFV of net assets acquired 00
1,240,000
Step 3: GW 160,000
Step 4: recording investment made to acquire the combinee
Step 5: preparation of Eliminations in Journal Entry
(consolidating entry): Formal allocation of the
acquisition date fair value[book value, excess of CFV
over book values, goodwill or gain on bargain
purchases].
Step 6:Working paper for consolidated
balance sheet Step 7: consolidated

10/24/2025 74
 balance sheet

10/24/2025 75
a. Prepare journal entries for Amex Corporation to record the
business combination with Luck Company on May 31,
2010.
Fair value of the firm
Fair value of controlling interest (9000*140) …. 1,260,000
Fair value of non controlling interest (1000*140).. 140,000
Total fair value…..……………………………………….…. 1,400,000

10/24/2025 76
2. Current Fair value of net assets of the subsidiary
Fair value allocation:
• The fair value allocation is similar with the above
(consolidation of wholly owned subsidiary). On the other
hand, goodwill is the difference between fair value of the
firm (controlling interest + non-controlling interest) and
fair value of net assets.
3. Goodwill or Gain on bargain purchase = Fair value of the firm-
fair value of net assets
= 1,400,000-1,240,000

Goodwill = 160,000

10/24/2025 77
4. recording investment made to acquire the
combinee

Investment in Luck company………1,260,000

Cash…………………………. 1,260,000

10/24/2025 78
(a) Eliminations in Journal Entry:
Inventories 60,000
Plant Assets 200,000
Patent 300,000
Customer contract 200,000
Common Stock 290,000
Additional Paid in Capital 90,000
Retained earnings 300,000
Goodwill 160,000
Investment in Luck company 1,260,000
Long-term debt 200,000
Non-controlling interest 140,000

10/24/2025 79
 Amex Luck Consolidation entries Consolidate
Corporation Company Debit Credit d Totals
Assets
Cash Br 340,000 Br 20,000 Br 360,000

Investment in Luck company 1,260,000 1,260,000 -

Accounts Receivable (net) 1,400,000 260,000 1,660,000

Inventories 2,800,000 220,000 60,000 3,080,000
Plant assets (net) 5,000,000 900,000 200,000 6,100,000
Patent _ _ 300,000 300,000
Customer contracts _ _ 200,000 200,000
Goodwill 160,000 160,000
Total assets 10,800,000 1,400,000 11,860,000

Liabilities & Stockholder’s Equity

Current liabilities Br1,000,000 Br 120,000 1,120,000
Long-term debt 2,000,000 600,000 200,000 2,800,000
Common Stock 3,000,000 290,000 290,000 3,000,000
Additional Paid-in Capital 2,400,000 90,000 90,000 2,400,000
Retained Earnings 2,400,000 300,000 300,000 2,400,000
Non-controlling interest 140,000 140,000
Total liabilities and equities 10,800,000 1,400,000 1,600,000 1,600,000 11,860,000
10/24/2025 79
Note: Cash 340,000=1,600,000-1,260,000
 Amex Corporation and Subsidiary
Consolidated Balance sheet
May 31, 2010
Assets
Cash 360,000
Accounts Receivable (net) 1,660,000
Inventories 3,080,000
Goodwill 160,000
Patent 300,000
Customer contracts 200,000
Plant assets (net) 6,100,000
Total assets 11,860,000
Liabilities & Stockholder’s equity
Current liabilities 1,120,000
Long-term debt 2,800,000
Common Stock Br 15 par 3,000,000
Additional Paid-in Capital 2,400,000
Retained Earnings 2,400,000
Non-controlling interest 140,000
Total Liabilities & Stockholder’s equity 11,860,000

10/24/2025 80
 Additional Considerations

• Subsidiary valuation accounts at acquisition

– All assets and liabilities acquired in a business
combination should be valued at their acquisition-
date fair values and no valuation accounts are to
be carried over

10/24/2025 81
 Additional Considerations

• Negative retained earnings of subsidiary at acquisition

– A parent company may acquire a subsidiary with a negative
in its retained earnings account
– The investment elimination entry appears as follows:

10/24/2025 82
 Additional Considerations

• Other stockholders’ equity accounts

– In general, all stockholders’ equity accounts
accruing to the common shareholders receive the
same treatment as common stock and are
eliminated at the time common stock is
eliminated

10/24/2025 83
2.4. Consolidated Financial Statements –
Subsequent to Date of Acquisition
Consolidation – The Effects of the Passage
of Time

▪ The passage of time creates complexities for internal record

keeping and the balance of the investment account varies
due to the accounting method used.
▪ The parent can use;
▪ Cost method
▪ Equity method of accounting
▪ A worksheet and consolidation entries are used to eliminate
the investment account and record the subsidiary’s assets
and liabilities to create a single set of financial statements
for the combined business entity.

10/24/2025 84
 Consolidation of wholly owned subsidiary Subsequent to Date
of Acquisition -equity method

Assume that ABC Company obtains all of the

outstanding common stock of XYZ Company on January
1, 2011. ABC acquires all of XYZ’s stock for Br 900,000
in cash. The following are assets and liabilities of the
subsidiary at book value and fair value on the date of
combination.

10/24/2025 85
 Book Fair Values
values

Assets

Cash Br 100,000 Br 100,000

Inventory 200,000 220,000

Trademarks (indefinite life) 100,000 180,000

Patented technology (10-year life) 200,000 300,000

Building (20- years life) 180,000 150,000

Liabilities (80,000) (90,000)

Net assets 700,000 860,000

Common Stock 400,000

Additional Paid-in Capital 100,000

Retained Earnings 200,000
10/24/2025 86
• Assume that XYZ earns income of Br 200,000 during the
year and pays Br 30,000 cash dividend on May 1. In addition
Assume ABC used equity method.
Required:
1. Record the necessary entries
2. Prepare consolidated financial statement at the end
of the year; December 31, 2011

10/24/2025 87
 ABC COMPANY
100 Percent Acquisition of XYZ
Company
Allocation of Acquisition-Date Subsidiary Fair Value
January 1, 2011
XYZ Company fair value (consideration transferred by ABC Company)…. .900,000
Book value of XYZ Company………………………………………………………………. (700,000)
Excess of fair value over book value . . . . . . . . . . . . . . . . . . . . . ……………. 200,000
Allocation to specific accounts based on fair values:
Inventory (220,000-200,000)……………………………………… 20,000
Trademarks (180,000-100,000)…………………………………… 80,000
Patented technology (300,000-200,000)………………………100,000
Building (150,000-180,000)……………………………………… (30,000)
Liabilities (90,000-80,000)……………………………………. …..(10,000) 160,000
Excess fair value not identified with specific accounts—goodwill . . . . …. 40,000

10/24/2025 88
 ABC COMPANY
100 Percent Acquisition of XYZ Company
Excess Amortization Schedule

Account Allocation Useful Annual Excess

Life Amortization
Trademarks 80,000 Indefinite –0–
Patented technology 100,000 10 years 10,000
Building (30,000) 20 years (1,500)
Goodwill 40,000 Indefinite –0–

10/24/2025 89
Total excess 8,500*
amortization

10/24/2025 89
 ABC’s Financial Records

1/1/11 Investment in XYZ Company . . . . . . . . . . . . . . . 900,000

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900,000
To record the acquisition of XYZ Company.
5/1/11 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Investment in XYZ Company . . . . . . . . . . . . 30,000
To record receipt of cash dividend from subsidiary
Under the equity method.
12/31/11 Investment in XYZ Company . . . . . . . . . . . . . . . . . 200,000
Equity in Subsidiary Earnings . . . . . . . . . . . . . 200,000

To accrue income earned by 100 percent owned subsidiary.

12/31/11 Equity in Subsidiary Earnings . . . . . . . . . . . . . . . . . 8,500

Investment in XYZ Company . . . . . . . . . . . 8,500
To recognize amortizations on allocations made in
acquisition of subsidiary
10/24/2025 90
• Assume the following are financial statements for
the parent and the subsidiary at the end of the
accounting period December 31, 2011.

10/24/2025 91
 ABC COMPANY AND XYZ COMPANY
Financial Statements
For Year Ending December 31, 2011

ABC XYZ
Company Company
Income Statement
Revenues 1,000,000 500,000
-Cost of goods sold 500,000 200,000
-Amortization expense 100,000 25,000
-Depreciation expense 80,000 75,000
+Equity in subsidiary earnings 191,500 –0–
Net income 511,500 200,000
Statement of Retained Earnings
Retained earnings, 1/1/11 800,000 200,000
+Net income (above) 511,500 200,000
-Dividends paid 100,000 30,000
10/24R/2e02t5ained earnings, 12/31/11 1,211,500 37902,00
 ABC XYZ
Balance Sheet Company Company

Cash 800,000 270,000

Inventory 236,000 200,000
Investment in XYZ Company (at equity) 1,061,500 –0–
Trademarks 600,000 100,000
Patented technology 300,000 200,000
Building 200,000 180,000

Total assets 3,197,500 950,000

Liabilities 86,000 80,000
Common stock 900,000 400,000
Additional paid-in capital 1,000,000) 100,000
Retained earnings, 12/31/11 (above) 1,211,500 370,000
To1t0a/l24l/i2a0b25ilities and equity 3,197,500 9509,300
 Determination of Consolidated Totals

• XYZ’s assets and liabilities are adjusted to reflect

the allocations originating
from their acquisition-date fair values.

• Because of the passage of time, the income

effects (e.g., amortizations) of these allocations
must also be recognized within the consolidation
process.

• Any reciprocal or intra-entity accounts must be offset.

10/24/2025 94
 Consolidation Entries
• Elimination of XYZ’s stockholders’ equity
beginning of the period.
• Allocation of XYZ’s acquisition-date excess fair
values over book values
• Elimination of parent’s equity in subsidiary
earnings accrual.
• Elimination of intra-entity dividend payment
• Recognition of current year excess fair-
value amortization and depreciation
expenses.

10/24/2025 95
Consolidation entries:
Elimination of XYZ’s stockholders’ equity January 1 balances and the book value
portion of the investment account.
Common Stock (XYZ Company). . . . . . . . . . . . . . . . .. . . . .400,000
Additional Paid-In Capital (XYZ Company) . . . . . . .. . . . . . 100,000
Retained Earnings, 1/1/11 (XYZ Company) . . . . . . . . . . . . 200,000
Investment in XYZ Company . . . . . . . . . . . . . . . .. .
700,000
Allocation of XYZ’s acquisition-date excess fair values over book values.
Inventory……………………………………………………………………… 20,000
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80,000
Patented technology . . . . . . .. . . . . . . . . . .. . . . . . . . . .. 100,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Liabilities……………………………………………..… ……10,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …………… 30,000
Investment in XYZ Company. . . . . . . . . . . . . . . .. . . . . …. 200,000
Elimination of parent’s equity in subsidiary earnings accrual.
Equity in Subsidiary Earnings . . . . . . . . . . . . . . . . . . . . 191,500
10/24/2025 96
Investment in XYZ Company . . . . . . . . . . . . . . . . . . . . . . . . . .191, 500
Elimination of intra-entity dividend payment.
Investment in XYZ Company . . . . . . . . . . . . . . . 30,000
Dividends Paid . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .
30,000
Recognition of current year excess fair-value amortization and depreciation expenses.
Amortization Expense . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Building . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . ……. …… 1,500
Patented Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500

10/24/2025 97
 ABC XYZ Consolidation Consolidated

Accounts Company Company entries Totals

Debit Credit

Income statement
1,500,000
Revenues 1,000,000 500,000

700,000
-Cost of goods sold 500,000 200,000

-Amortization expense 100,000 25,000 10,000 135,000

1,500 153,500
-Depreciation expense 80,000 75,000

+Equity in subsidiary earnings. 191,500 –0– 191,500 -0-

=Net income 511,500 200,000 511,500

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 Statement of retained earnings
Retained earnings, 1/1/11 800,000 200,000 200,000 800,000
+Net income (above)
-Dividends paid
511,500
100,000
0 200,000
30,000 30,000
511,500
100,000
=Retained earnings, 12/31/11 1,211,500 370,000 1,211,500
Balance sheet
Cash 800,000 270,000 1070,000
Inventory 236,000 200,000 20,000 456,000
30,000 700,000
Investment in XYZ Company 1,061,500 –0– 200,000
191,500
Trademarks 600,000 100,000 80,000 780,000
Patented technology. 300,000 200,000 100,000 10,000 590,000
Building 200,000 180,000 1,500 30,000 351,500
Goodwill 40,000 40,000
Total assets 3,197,500 950,000 3,287,500
Liabilities 86,000 80,000 10,000 176,000
Common stock 900,000 400,000 400,000 900,000
Additional paid-in capital 1,000,000 100,000 100,000 1,000,000
Retained earnings, 12/31/11 1,211,500 370,000 370,000 1,211,500
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 Consolidation of partially owned subsidiary
subsequent to the date of acquisition-equity
method

• The unamortized balance of the acquisition-date fair-value

allocation must still be computed and included within the
consolidated totals.
• Excess fair-value amortization expenses of these allocations
are recognized each year as appropriate.
• Reciprocal balances are eliminated.
• Beyond these basic steps, the valuation and recognition of for
non-controlling interest balances add a new dimension to the
process of consolidating financial information.

10/24/2025 100
 • The parent company must determine and then
enter each of these figures when constructing a
worksheet:
– Noncontrolling interest in the subsidiary as of the beginning of the
current year.
– Noncontrolling interest in the subsidiary’s current year income.
– Noncontrolling interest in the subsidiary’s dividend payments.
– Noncontrolling interest as of the end of the year (found by combining
the three balances above).

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 Illustration

Assume that ABC Company acquires 80 percent of XYZ

Company’s 120,000 outstanding voting shares on January 1,
2011, for Br 8 per share or a total of Br 768,000 cash
consideration. Further assume that the 20 percent non-
controlling interest shares traded both before and after the
acquisition date at an average of Br 8 per share. The following
are assets and liabilities of XYZ at book values and fair values;

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 Book values Fair Values
Assets
Cash Br 100,000 Br 100,000
Inventory 200,000 220,000
Trademarks (indefinite life) 100,000 180,000
Patented technology (10-year life) 200,000 300,000
Building (20- years life) 180,000 150,000
Liabilities (80,000) (90,000)
Net assets 700,000 860,000
Common Stock 400,000
Additional Paid-in Capital 100,000
Retained Earnings 200,000

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• Assume the subsidiary earned net income of Br 200,000 during
the period and paid cash dividend of Br 30,000. Assume ABC used
equity method.
Required:
1. Record the necessary entries
2. Prepare consolidated financial statement at the end of the
year; December 31, 2011

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• The starting point of accounting for business combinations
in the presence of noncontrolling interest is estimating the
fair value of the firm; which can be determined by adding
fair value of controlling interest and fair value of
noncontrolling interest.

Consideration transferred by ABC (96,000 shares*8) .. . .Br 768,000

Noncontrolling interest fair value (24,000 shares*8) . . . .. 192,000
XYZ’s total fair value at January 1, 2011 . . . . . . . …. . . . 960,000

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 ABC COMPANY AND 80% OWNED SUBSIDIARY XYZ
COMPANY
Fair-Value Allocation and Amortization
January 1, 2011
Estimated Annual Excess
Allocation Life (years) Amortizations Dec 31
XYZ’s acquisition-date fair value (100%) . … .. 960,000
XYZ’s acquisition date book value (100%) . (700,000)
Fair value in excess of book value . . . . ….. . . . 260,000
Adjustments (100%) to
Inventory (220,000-200,000)…………… 20,000
Trademarks (180,000-100,000)………… 80,000 Indefinite -0-
Patented technology (300,000-200,000) 100,000 10 10,000
Building (150,000-180,000)………… (30,000) 20 (1500)
Liabilities (90,000-80,000)……………… (10,000)
Goodwill (indefinite life) . . . . . . . . . . . .100,000 Indefinite -0-
Annual amortizations of excess fair value over book value 8,500

10/24/2025 106
 ABC’s Financial Records

1/1/11 Investment in XYZ Company . . . . . . . . . . . . . . . 768,000

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768,000
To record the acquisition of XYZ Company.

5/1/11 Cash (30,000*0.8) . . . . . . . . . . . . . . . . . . . . . . . .

24,000
Investment in XYZ Company . . . . . . . . . . . . 24,000
To record receipt of cash dividend from subsidiary
Under the equity method.
12/31/11 Investment in XYZ Company (200,000*0.8) . . . . . 160,000
Equity in Subsidiary Earnings . . . . . . . . . . . . . 160,000

To accrue income earned by 80 percent owned subsidiary.

12/31/11 Equity in Subsidiary Earnings (8500*0.8) . . . . . . . 6800

Investment in XYZ Company . . . . . . . . . . . 6800
To recognize amortizations on allocations made in
10/24/2025 107
acquisition of subsidiary
 Goodwill Allocation to the Controlling and Non-controlling Interests
Controlling Non-controlling
Interest Interest Total
Fair value at acquisition date . . Br. 768,000 Br 192,000 Br 960,000
Relative fair value of XYZ’s 688,000 172,000 860,000
identifiable net assets (80% and 20%)
Goodwill . . . . . . . . . . . . . . . . . . . . 80,000 20,000 100,000

• Investment at the end of the period can be determined by

adding the parent’s share of income to the beginning balance
of investment and deducting the dividend share

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Investment account on December 31, 2011
Acquisition price………………………………………………………..… 768,000
Add: Parents equity of subsidiary earning (200,000*0.8)………… 160,000
Less: Excess amortization expense (8500*0.8)…………..……………… .(6800)
= Equity in subsidiary earnings…………………………………………… 153,200
Controlling share from dividend payment (30,000*0.8)…………… (24,000) 129,200
Balance on December 31, 2011……………………………. 897,200

Noncontrolling interest on December 31, 2011

Non-controlling interest January 1, 20…….…………………… 192,000
Income allocation (200,000*0.2)………………………………… 40,000
Less: Amortization expense (8500*0.2)……………………………(1,700)
= Equity in subsidiary earnings………………………………… 38,300
Noncontrolling share from dividend (30,000*.2)…………… (6000) 32,300
Noncontrolling interest at December 31, 2011…………………… 224,300

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• Assume the following are separate financial
statements for the parent and the subsidiary
at the end of the accounting period

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 ABC COMPANY AND XYZ COMPANY
Financial Statements
For Year Ending December 31, 2011

ABC XYZ

Company Company

Income Statement
Revenues 1,000,000 500,000
-Cost of goods sold 500,000 200,000
-Amortization expense 100,000 25,000
-Depreciation expense 80,000 75,000
+Equity in subsidiary earnings 153,200 –0–
Net income 473,200 200,000

Statement of Retained Earnings

Retained earnings, 1/1/11 800,000 200,000
Net income (above) 473,200 200,000
Dividends paid 100,000 30,000
Retained earnings, 12/31/11 1,173,200 370,000

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10/24/2025 112
Balance Sheet

Cash 800,000 270,000

Inventory 262,000 200,000

Investment in XYZ Company (at equity) 897,200 –0–

Trademarks 700,000 100,000

Patented technology 300,000 200,000

Building 200,000 180,000

Total assets 3,159,200 950,000

Liabilities 86,000 80,000

Common stock 900,000 400,000

Additional paid-in capital 1,000,000 100,000

Retained earnings, 12/31/11 (above) 1,173,200 370,000
To1t0a/2l 4li/a20b2i5lities and equity 3,159,200 951102,0
Consolidation entries;
Eliminating equity accounts on the book of the subsidiary
Common stock 400,000
Additional paid-in capital 100,000
Retained earnings 200,000
Investment in Xyz company (700,000*0.8) 560,000
Noncontrolling interest (700,00*0.2) 140,000
Allocation of XYZ’s acquisition-date excess fair values over book values.
Inventory………………………………………………… …20,000
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Patented technology . . . . . . .. . . . . . . . . . .. . . . . . . . . .100,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100,000
Liabilities………………………………………………… ………………………………….. 10,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……………….. 30,000
Investment in XYZ Company (260,000*0.8). . . . . . . . . . . ………………. 208,000
Non-controlling interest (260,000*0.2)……………………………………….. 52,000
Elimination of parent’s equity in subsidiary earnings accrual.
Equity in Subsidiary Earnings . . . . . . . . . . . . . . . . . . . . . . .. . 153,200
Investment in XYZ Company . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .153,200
Elimination of intra-entity dividend payment.
Investment in XYZ Company . . . . . . . . . . . . . . . . . . 24,000
Dividends Paid . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 24,000
Recognition of current year excess fair-value amortization and depreciation expenses.
Amortization Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Building . . . . . . . . . . . . .. . . . . . . . . . . . …….. . . . . . . . . . . . . . 1,500
Patented Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Depreciation Expense . . . . . . . . . . . . . . . . . . . . . …. . . . . . . .
10/24/2025 1,500 113
 ABC XYZ Consolidation Non- Consolidat
Accounts Company Company Entries controlli ed
Credit ng Totals
Debit interest
Income statement

Revenues 1,000,000 500,000 1,500,000

-Cost of goods sold 500,000 200,000 700,000

-Amortization expense 100,000 25,000 10,000 135,000
-Depreciation expense 80,000 75,000 1,500 153,500

+Equity in subsidiary earnings. 153,200 –0– 153,200 -0-

Separate company net income 473,200 200,000

Consolidated net income 511,500
-Noncontrolling interest in Xyz NI 38,300 38,300
473,200
Net income to controlling interest
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 Statement of retained earnings

Non- Consolidat
controlling ed total
Dr. Cr. interest

Retained earnings, 1/1/11 800,000 200,000 200,000 800,000

+Net income (above) 473,200 200,000 473,200

-Dividends paid 100,000 30,000 24,000 (6000) 100,000

Retained earnings, 12/31/11 1,173,200 370,000

1,173,200

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 Balance sheet

Cash 800,000 270,000 1,070,000

Inventory 262,000 200,000 20,000 482,000

Investment in XYZ Company 897,200 –0– 24,000 921,200

Trademarks 700,000 100,000 80,000 880,000

Patented technology 300,000 200,000 100,000 10,000 590,000

Building 200,000 180,000 1,500 30,000 351,500

Goodwill 100,000 100,000

Total assets 3,159,200 950,000 3,473,500

Liabilities 86,000 80,000 10,000 176,000

Common stock 900,000 400,000 400,000 900,000

100,000 1,000,000
Additional paid-in capital 1,000,000 100,000

Noncontrolling interest Jan 1/11 140,000

52,000 192,000

Noncontrolling interest 12/31/11 224,300 224,300

Retained earnings, 12/31/11 (above) 1,173,200 370,000 1,173,200

Total liabilities and equity 3,159,200 950,000 1,188,700 1,188,700 3,473,500

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 End

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