Page 567 - Accounting Principles (A Business Perspective)

14. Stock investments

When preparing consolidated statements, the parent would similarly eliminate other intercompany balances.

Consolidated balance sheet at time of acquisition
A parent company may acquire a subsidiary at its book value or at a cost above or below book value. Also, the
parent may acquire 100 per cent of the outstanding voting common stock of the subsidiary or some lesser

percentage exceeding 50 per cent.
To consolidate its assets and liabilities with those of its subsidiaries, a parent company prepares a consolidated
statement work sheet similar to the one in Exhibit 108. A consolidated statement work sheet is an informal
record on which elimination entries are made for the purpose of showing account balances as if the parent and its
subsidiaries were a single economic enterprise. The first two columns of the work sheet show assets, liabilities, and
stockholders' equity of the parent and subsidiary as they appear on each corporation's balance sheet. The pair of
columns labeled Eliminations allows intercompany items to be offset and consequently eliminated from the
consolidated statement. The final column shows the amounts that will appear on the consolidated balance sheet.
The work sheet in Exhibit 108 consolidates the accounts of P Company and its subsidiary, S Company, on 2010

January 1. P Company acquired S Company on 2010 January 1, by purchasing all of its outstanding voting common
stock for USD 106,000 cash, which was the book value of the stock. Book value is equal to stockholders' equity, or
net assets (assets minus liabilities). Thus, common stock (USD 100,000), paid-in capital in excess of par value—
common (USD 4,000), and retained earnings (USD 2,000) equal USD 106,000. When P Company acquired the S
Company stock, P Company made the following entry in its books:
Investment in S company 106,000
Cash 106,000
To record investment in S
Company.
The Investment in S Company account appears as an asset on P Company's balance sheet. By buying the
subsidiary's stock, the parent acquired a 100 per cent equity, or ownership, interest in the subsidiary's net assets.
Thus, if both the investment account and the subsidiary's assets appear on the consolidated balance sheet, the same
resources would be counted twice. The Common Stock and Retained Earnings accounts of the subsidiary also
represent an equity interest in the subsidiary's assets. Therefore, P's investment in S Company must be offset
against S Company's stockholders' equity accounts so that the subsidiary's assets and the ownership interest in

these assets appear only once on the consolidated balance sheet. P Company accomplishes this elimination by entry
1 under Eliminations on the work sheet. The entry debits S Company's Common Stock for USD 100,000, Paid-In
Capital in Excess of Par Value—Common for USD 4,000, and Retained Earnings for USD 2,000 and credits
Investment in S Company for USD 106,000. In journal entry form, the elimination entry made only on the
consolidated work sheet is:
Common stock (-SE) 100,000
Paid-in capital in excess of par value – Common (-SE) 4,000
Retained earnings (-SE) 2,000
Investment in S Company (-A) 106,000
To eliminate investment account and subsidiary
stockholder's equity.
Entry 2 eliminates the effect of an intercompany debt. On the date it acquired S Company, P Company loaned S
Company USD 5,000. The loan is a USD 5,000 note receivable on P's books and a USD 5,000 note payable on S's
books. If the elimination entry is not made on the work sheet, the consolidated balance sheet would show USD
5,000 owed to the consolidated enterprise by itself. From the viewpoint of the consolidated equity, neither an asset

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