Page 566 - Accounting Principles (A Business Perspective)

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Z Company, the subsidiary, records the following entry on its books:
Cash (+A) 100,000
Common stock (+SE) 100,000
To record issuance of all the common stock to
Y Company.
An elimination entry can offset the parent company's subsidiary investment account against the stockholders'
equity accounts of the subsidiary. On the consolidated statements work sheet, the required elimination is:
Common stock (Z company) (- 100,000
SE)
Investment in Z Company (-A) 100,000
This elimination is required because the parent company's investment in the stock of the subsidiary actually

represents an equity interest in the net assets of the subsidiary. Unless the investment is eliminated, the same
resources appear twice on the consolidated balance sheet—first as the investment account of the parent and second
as the assets of the subsidiary. By eliminating Z Company's common stock, the parent avoids double counting
stockholders' equity. Viewing the two companies as if they were one, the Z Company common stock is really not
outstanding; it is held within the consolidated group.
Consolidated financial statements present financial data as though the companies were a single entity. Since no
entity can owe an amount to itself or be due an amount from itself, Z Company must eliminate intercompany

receivables and payables (amounts owed to and due from companies within the consolidated group) during the
preparation of consolidated financial statements. For example, assume the parent company purchased USD 5,000
of bonds issued by its subsidiary company. Because no debt is owed to or due from any entity outside the
consolidated enterprise, Y Company would eliminate those balances by an entry like the following that offsets the
Investment in Bonds against the Bonds Payable:
Bonds payable (subsidiary company) (-L) 5,000
Investment in bonds (parent company) (-A) 5,000
To eliminate intercompany bonds and bond
investment.
P Company and Subsidiary S Company
Work Sheet for Consolidated balance sheet
2010 January 1 (date of acquisition)
P S Eliminations Consolidated
Assets Company Company Debit Credit Amounts
Cash 26,000 12,000 38,000
Notes receivable 5,000 (2) 5,000
Accounts receivable, 24,000 15,000 39,000
net
Merchandise 35,000 30,000 65,000
inventory
Investment in S 106,000 (1)
Company 106,000
Equipment, net 41,000 15,000 56,000
Building, net 65,000 35,000 100,000
Land 20,000 10,000 30,000
322,000 117,000 328,000
Liabilities and
stockholders' equity
Accounts payable 18,000 6,000 24,000
Notes payable 5,000 (2) 5,000
Common stock 250,000 100,000 (1) 100,000
Paid-in capital excess
of par
value - common 4,000 (1) 4,000
Retained earnings 54,000 2,000 (1) 2,000
322,000 117,000 111,000 111,000 328,000
Exhibit 108: Consolidated balance sheet work sheet (stock acquired at book value)

Accounting Principles: A Business Perspective 567 A Global Text