Page 568 - Accounting Principles (A Business Perspective)

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nor a liability exists. Therefore, entry 2 on the work sheet eliminates both the asset and liability. The entry debits
Notes Payable and credits Notes Receivable for USD 5,000. In general journal form, entry 2 is:
Notes payable (-L) 5,000
Notes receivable (-A) 5,000
To eliminate intercompany payable and
receivable.
Note that P Company makes elimination entries only on the consolidated statement work sheet; no elimination
entries appear in the accounting records of either P Company or S Company. P Company uses the final work sheet
column to prepare the consolidated balance sheet.

An accounting perspective:

Uses of technology

Computer applications have greatly simplified the preparation of consolidated work sheets.

Spreadsheet programs in particular expedite the process of constructing consolidated financial
statements.

In the previous example, P Company acquired 100 per cent of S Company at a cost equal to book value. In some
cases, firms acquire subsidiaries at a cost greater than or less than book value. For example, assume P Company
purchased 100 per cent of S Company's outstanding voting common stock for USD 125,000 (instead of USD
106,000). The book value of this stock is USD 106,000. Cost exceeds book value by USD 19,000. P Company's
management may have paid more than book value because (1) the subsidiary's earnings prospects justify paying a
price greater than book value or (2) the total fair market value of the subsidiary's assets exceeds their total book

value.
Where cost exceeds book value because of expected above-average earnings, the investor labels the excess
goodwill on the consolidated balance sheet. Goodwill is an intangible value attached to a business primarily due to
above-average earnings prospects (as discussed in Chapter 11). On the other hand, if the excess is attributable to the
belief that assets of the subsidiary are undervalued, then the investor increases the asset values on the consolidated
balance sheet to the extent of the excess. In Exhibit 109, USD 4,000 is due to the undervaluation of land owned by
the company, and the remaining USD 15,000 of the excess of cost over book value is due to expected above-average

earnings. As a result, P Company adds USD 4,000 of the USD 19,000 excess to Land, and identifies the other USD
15,000 as Goodwill on the work sheet (Exhibit 109) and on the balance sheet (Exhibit 110).
P Company establishes Goodwill as part of the first elimination entry. Elimination entry 1 in Exhibit 109
involves debits to the subsidiary's Common Stock for USD 100,000, Paid-In Capital in Excess of Par Value—
Common for USD 4,000, Retained Earnings for USD 2,000, Land for USD 4,000, and Goodwill for USD 15,000,
and a credit to Investment in S Company for USD 125,000. In journal form, entry 1 is:
Common stock (-SE) 100,000
Paid-in capital in excess of par value – 4,000
common (-SE)
Retained earnings (-SE) 2,000
Land (+A) 4,000
Goodwill (+A) 15,000
Investment in S Company (-A) 125,000
To eliminate investment and subsidiary

Accounting Principles: A Business Perspective 569 A Global Text