THE LIBRARY
OF
THE UNIVERSITY
OF CALIFORNIA
LOS ANGELES
RN
OF CALIFORNIA.
RARY
v
I I
n * rary
Graduate School of Business Administration
University of California
Los Angeles 24, California
CONSOLIDATED
STATEMENTS
FOR HOLDING COMPANY
AND SUBSIDIARIES
BY
H. A. FINNEY, PH. B., C. P. A.
PROFESSOR OF ACCOUNTING, NORTHWESTERN UNIVERSITY, CHICAGO
NEW YORK
PRENTICE-HALL, INC.
1923
COPYRIGHT, 1922, HI
PRENTICE-HALL, INC.
1st Printing June, 1922
2nd Printing September, 1922
3rd Printing March, 1923
PRINTED IN TBX UNITED STATES OF AUERTCA
Bus. Admin-
Library
HF
5686
C7F4
TO
MY WIFE AND MY MOTHER
PREFACE
This book is intended to embrace the principles and pro-
cedure involved in the preparation of the consolidated state-
ment of cost of goods sold, the consolidated profit and loss
statement, the consolidated surplus statement and the con-
solidated balance sheet.
Students of accounting who are preparing for the examina-
tions of the various C. P. A. boards or the American Institute
of Accountants must be familiar with the subject of con-
solidated statements for holding companies and their sub-
sidiaries, for the examinations frequently contain more or less
complicated problems requiring the preparation of such state-
ments. The income tax law, which requires consolidated
returns supported by consolidated income statements and
balance sheets, makes a knowledge of the method of preparing
these statements imperative for the corporation auditor, the
public accountant and the tax counsellor.
It is surprising that the literature which deals with con-
solidated statements is so meager when one considers that so
many accountants and students of accounting are interested
in the subject and that the statements themselves may be
involved by an almost infinite variety of complications. These
complexities arise from the fact that the holding company
may or may not account properly for the investments in sub-
sidiary stock; that minority interests may exist; that sub-
sidiary earnings since acquisition may exceed dividends re-
ceived during the same period, or vice versa; that the holding
company may take up as profit the earnings of the subsidiary
or the dividends received; that the stock may have been ac-
quired by purchase from former stockholders, by subscription
or as a stock dividend; that book value at acquisition may have
exceeded cost, or vice versa; that the stockholdings may have
been acquired by a .single purchase or by several purchases;
that the holdings may be in common or preferred stock or
both; that inter-company profits may remain unrealized in
inventories and in fixed assets; etc., etc.
vi PREFACE
The book contains a discussion of underlying principles,
illustrations showing the procedure of preparing consolidated
working papers and statements, and supplementary exercises
and problems to be solved by the reader.
On several phases of consolidated statements there is some
conflict of opinion as to the proper procedure and considerable
variation in practice. This is particularly true in the matters
of minority interest in a subsidiary with a deficit, negative
goodwill, and reserves for unrealized profit when there are
minority interests. Where practice has not been standardized
the fact is commented upon, the different methods of procedure
are discussed, and the method which seems to the author to be
correct in principle is indicated.
It scarcely seems necessary to remind the reader that ac-
counting principles and income tax regulations do not always
coincide. Taxable net income and invested capital do not
always agree with the figures shown in the revenue statement
and the balance sheet, yet these statements are the basis of a
corporation's tax return, and the consolidated profit and loss
statement and balance sheet are the basis of a consolidated
return. This book is not an interpretation of the regulations
pertaining to consolidated returns, but is an explanation of
the accounting principles underlying the consolidated state-
ments which must be submitted in support of the return.
The author wishes to acknowledge his obligation to his
friend Roy Hall, C.P.A., who read the manuscript and offered
helpful criticisms and suggestions.
H. A. FINNEY
Chicago, Illinois
May 15, 1922
CONTENTS
CHAPTER PAGE
I. CONSOLIDATIONS, MERGERS, HOLDING COMPANIES 1
II. THE BALANCE SHEET OF A HOLDING COMPANY 9
III. SUBSIDIARY SURPLUS OR DEFICIT AT ACQUISITION 16
IV. MINORITY INTEREST 20
V. GOODWILL 25
VI. DEDUCTION FROM GOODWILL 34
VII. SUBSIDIARY'S PROFITS, LOSSES AND DIVIDENDS ON THE HOLDING COM-
PANY'S BOOKS 42
VIII. CONSOLIDATED BALANCE SHEET AFTER DATE OF ACQUISITION; SUB-
SIDIARY PROFITS AND LOSSES TAKEN UP 47
IX. CONSOLIDATED BALANCE SHEET AFTER DATE OF ACQUISITION; INVEST-
MENT ACCOUNT CARRIED AT COST 54
REVIEW EXERCISES 62
X. INTER-COMPANY RECEIVABLES AND PAYABLES ....... 65
XI. MISCELLANEOUS TOPICS:
Book Value at Acquisition in Excess of Cost . 74
Minority Interest in a Subsidiary with a Deficit 75
Stock Acquired by Subscription from Subsidiary 78
Subscription Rights 79
No Par Value Stock 81
Holdings of Both Common and Preferred Stock 81
Stock Dividends 85
Arbitrary Entries in Investment Account 87
XII. MAJOR HOLDING COMPANY CONTROL THROUGH A MINOR HOLDING
COMPANY 89
XIII. UNREALIZED INTER-COMPANY PROFITS 103
XIV. CONSOLIDATED PROFIT AND Loss AND SURPLUS STATEMENTS; SEPARATE
WORKING PAPERS 110
XV. CONSOLIDATED PROFIT AND Loss STATEMENT, SURPLUS STATEMENT AND
BALANCE SHEET; COMBINED WORKING PAPERS 128
PROBLEMS 151
vii
CHAPTER I
CONSOLIDATIONS, MERGERS, HOLDING
COMPANIES
Methods of effecting combinations. When it is desired to
combine two or more corporations into a single company or
into a co-ordinated organization with a centralized control,
the result may be accomplished by several means, the most
common of which are a consolidation, a merger, and a holding
company.
As a simple illustration of these three methods of effecting
combinations, it will be assumed that the two companies whose
balance sheets appear below are to be combined.
BALANCE SHEET COMPANY A
Machinery $25,000 Accounts Payable $10,000
Merchandise Inventory 15,000 Capital Stock 35,000
Cash 5,000
$45,000 $45,000
BALANCE SHEET-COMPANY B
Machinery $35,000 Accounts Payable $15,000
Merchandise Inventory 25,000 Capital Stock 50,000
Cash 5,000
$65,000 $65,000
Consolidation. A consolidation is effected by organizing a
new corporation which buys the assets and assumes the
liabilities of the old companies. The new company may sell
its stock for cash and pay the old companies in cash for their
net assets, or it may issue its stock to the old companies in
payment for their net assets. In either case the old companies
go out of existence, distributing among their stockholders the
cash or stock received from the new company.
1
2 CONSOLIDATED STATEMENTS
To illustrate, it will be assumed that Company C is organ-
ized with a capital stock of $85,000; and contracts are entered
into with Company A and Company B whereby it is agreed
that Company C shall take over the assets of the two companies
at their book value, assume their liabilities, and pay for the
net assets in stock of Company C.
Entries of the consolidating company. Company C will
make the following entries to record the consolidation:
Subscriptions $85,000
Capital Stock ' $85,000
To record the subscriptions to our entire authorized
stock issue, as follows:
Company A $35,000
Company B 50,000
Total $85,000
Machinery $25,000
Merchandise Inventory 15,000
Cash 5 000
Accounts Payable $10,000
Company A, Vendor 35,000
To record the purchase of the assets of Company A
and the assumption of their liabilities, in ac-
cordance with the contract dated . Pay-
ment to be made in the stock of this company.
Company A, Vendor 35,000
Subscriptions 35,000
To record the offset of our liability to Company A for
their net assets against their liability to us on
account of subscriptions to our stock.
Machinery $35,000
Merchandise Inventory , 25,000
Cash 5,000
Accounts Payable 15,000
Company B, Vendor 50,000
To record the purchase of the assets of Company B
and the assumption of their liabilities, in accord-
ance with the contract dated . Payment
to be made in the stock of this company.
Company B, Vendor $50,000
Subscriptions $50,000
To record the offset of our liability to Company B
for their net assets against their liability to us
on account of subscriptions to our stock.
CON SOLI DA TIONS MERGERS 3
Balance sheet of the consolidation. After the consolidation
has been effected, the balance sheet of the new company will
show all of the assets and liabilities formerly owned by the
old companies, and now owned by the new or consolidated
company.
BALANCE SHEET COMPANY C
Machinery $60,000 Accounts Payable $25,000
Merchandise Inventory 40,000 Capital Stock 85,000
Cash 10,000
$110,000 $110,000
Entries of the absorbed companies. The entries of Com-
pany A and Company B will be similar to each other and will
show the sale of their assets to Company C, the assumption
of their liabilities by Company C, the receipt of stock in pay-
ment for their net assets, and the distribution of this stock
among their stockholders. These entries will be illustrated by
showing those which will appear on the books of Company A.
Company C, Vendee $35,000
Accounts Payable 10,000
Machinery $25,000
Merchandise Inventory 15,000
Cash 5,000
To record the sale of our assets to Company C and the assump-
tion by them of our liabilities; payment for net assets to be
made in stock of Company C, in accordance with the con-
tract of sale dated . See Minutes, page .
Stock of Company C $35 000
Company C, Vendee $35,000
To record the receipt of stock of Company C in payment for net
assets transferred to them.
Captal Stock $35,000
Stock of Company C $35,000
To record the distribution of the stock of Company C among
our stockholders in final liquidation of this company.
Thus it will be seen that Company A and Company B go
out of existence. They have no assets nor liabilities, and all
of the assets and liabilities of the consolidation are shown on
the balance sheet of Company C.
Merger. If a merger is decided upon, a new corporation
will not be organized. One of the old companies will purchase
4 CONSOLIDATED STATEMENTS
the assets and assume the liabilities of the other company,
paying for the net assets either in cash or in stock. As the
company which has been bought out will go out of existence,
the merger as well as the consolidation results in a complete
combination of the two old companies into a single company.
To illustrate, it will be assumed that Company A contracts
with Company B to purchase its assets at book value, assume
its liabilities, and pay for the net assets in stock of Company
A. In order to provide the necessary stock for this purpose,
Company A increases its authorized capitalization from
$35,000 to $85,000.
Entries of the purchasing company. Company A will
make the following entries to record the merger:
Subscriptions $50,000
Capital Stock $50,000
To record an addition of $50,000 to our authorized stock, all of
which has been subscribed for by Company B, to be paid
for by a transfer of their net assets.
Machinery $35,000
Merchandise Inventory 25,000
Cash 5,000
Accounts Payable $15,000
Company B, Vendor 50,000
To record the purchase of the assets of Company B and the
assumption of their liabilities, in accordance with the con-
tract dated . Payment for the net assets to be
made in the stock of this company.
Company B, Vendor $50,000
Subscriptions $50,000
To record the offset of our liability to Company B for their net
assets against their liability to us on account of subscrip-
tions to our stock.
Balance sheet of the merger. After the merger has been
effected, the balance sheet of Company A will show all of the
assets and liabilities formerly shown by the balance sheets of
the two companies.
BALANCE SHEET COMPANY A
Machinery $60,000 Accounts Payable $25,000
Merchandise Inventory 40,000 Capital Stock 85,000
Cash 10,000
$110,000 $110,000
CON SOLI DA TIONS MERGERS 5
Entries of the absorbed company. Company B will make
entries to record the transfer of its assets and liabilities to
Company A, the receipt of the stock in settlement, and the
distribution of this stock among its own stockholders.
Company A, Vendee $50,000
Accounts Payable 15,000
Machinery $35,000
Merchandise Inventory 25,000
Cash 5,000
To record the sale of our assets to Company A and the assump-
tion by Company A of our liabilities; payment for net as-
sets to be made in stock of Company A, in accordance with
the contract of sale dated . See Minutes, page .
Stock of Company A $50,000
Company A, Vendee $50,000
To record the receipt of stock of Company A in payment for
the net assets transferred to them.
Capital Stock $50,000
Stock of Company A $50,000
To record the distribution of the stock of Company A among
our stockholders in final liquidation of this company.
Thus it will be seen that Company B goes out of existence;
it has no assets nor liabilities, and all of the assets and lia-
bilities of the merged companies are shown in the balance sheet
of Company A.
Holding company. If the holding company procedure is
adopted, one of the old companies may act as the holding
company, or a new corporation may be organized to act in
that capacity. The holding company does not deal directly
with the other companies, and does not buy their assets nor
assume their liabilities. It deals with the stockholders of the
old companies, buying all of, or a controlling interest in, their
stock. The company acquiring the stock is called a holding
company or parent company, and the companies whose stock
is acquired by the holding company are called subsidiaries.
The holding company may pay for the subsidiary stock in
cash, and if this is done the former stockholders of the sub-
sidiaries do not become stockholders of the holding company.
On the other hand, the holding company may issue its own
stock in payment for the acquired stock, and if this is done the
former stockholders of the subsidiaries become stockholders
of the holding company.
6 CONSOLIDATED STATEMENTS
Outline of illustrations. Three illustrations of the holding
company procedure will be given in this chapter, which may
be divided into two groups as follows:
Group I. New corporation organized to act as holding
company.
First illustration: Stockholders of old companies re-
ceive stock in payment.
Second illustration: Stockholders of old companies re-
ceive cash in payment.
Group II. One of the old companies acts as holding company.
Third illustration: Stockholders of subsidiary receive
stock in payment.
First illustration. It will be assumed in this illustration
that a new corporation called Company C is organized to act
as a holding company. Its charter authorizes it to issue stock
totalling $85,000. All of the stockholders of Company A and
Company B agree to sell their holdings in these companies to
Company C, taking in payment therefor an equal number
of shares of the stock of Company C.
The entries on the books of Company C, the holding com-
pany, are:
Subscriptions $85,000
Capital Stock $85,000
To record subscriptions to our stock as follows:
Stockholders of Company A $35,000
Stockholders of Company B 50,000
Total. $85,000
Investment in Stock of Company A $35,000
Investment in Stock of Company B 50,000
Subscriptions $85,000
To record the payment of subscriptions by transfer to us of
stock of Company A and Company B.
The balance sheet of the holding company will appear as
follows :
BALANCE SHEET COMPANY C
Investment in Stock of Co. A $35,000 Capital Stock $85,000
Investment in Stock of Co. B 50,000
$85,000 $85,000
CON SO LI DA TIONS MERGERS 7
The only entries on the books of Companies A and B will
be made in their stock ledgers, recording the transfer of stock
from the sundry stockholders to Company C. These com-
panies are not parties to the transaction, they retain the same
assets and liabilities as before, and their balance sheets are
not affected by the change in the ownership of their stock.
Second illustration. It will be assumed, in this illustration,
that the new Company C sells its stock for cash to various
individuals not formerly stockholders of either Company A
or Company B, and with the proceeds of the stock issue it
buys at par all of the stock of the two original companies.
The entries on Company C's books are as follows:
Subscriptions $85,000
Capital Stock $85,000
To record the subscriptions to our authorized issue
Cash $85,000
Subscriptions $85,000
To record the collection of subscriptions
Investment in Stock of Company A $35,000
Investment in Stock of Company B 50,000
Cash $85,000
To record the purchase of all of the outstanding stock of Com-
panies A and B at par value
The balance sheet of the holding company will be exactly
like the one shown in the first illustration, and the balance
sheets of the subsidiary companies will be in no way affected
by the transaction, since they still retain their assets and
liabilities.
Third illustration. It will be assumed in this illustration
that Company A is to act as the holding company. It in-
creases its authorized stock issue from $35,000 to $85,000; the
additional stock is subscribed for by the stockholders of Com-
pany B, who pay their subscriptions by turning over their
holdings of the stock of Company B. The entries on Com-
pany A's books are:
Subscriptions $50,000
Capital Stock $50,000
To record the subscriptions to our additional authorized capital
stock
Investment in Stock of Company B $50,000
Subscriptions $50,000
To record the payment of subscriptions in stock of Company B
8 CONSOLIDATED STATEMENTS
The balance sheet of the holding company after recording
these transactions, will be:
COMPANY A BALANCE SHEET
Investment in Stock of Co. B $50,000 Accounts Payable $10,000
Machinery 25,000 Capital Stock 85,000
Merchandise Inventory 15,000
Cash 5,000
$95,000 $95,000
The balance sheet of Company B will not be affected by
the transaction.
CHAPTER II
THE BALANCE SHEET OF A HOLDING COMPANY
Balance sheet after consolidation. In the illustration on
page 3 it was shown that if a combination is effected by
means of a consolidation, one company will exist where several
existed before, and the balance sheet of the new or consoli-
dated company will show all of the assets and liabilities of
the combined companies. The balance sheet of the consolida-
tion shown on page 3 was:
BALANCE SHEET COMPANY C
Machinery $60,000 Accounts Payable $25,000
Merchandise Inventory 40,000 Capital Stock 85,000
Cash 10,000
$110,000
Company A and Company B went out of business and have
no balance sheets.
Balance sheet after merger. In the illustration on page
4 it was shown that if the combination was effected by
means of a merger, one of the old companies would continue in
existence and its balance sheet would show all of the assets and
liabilities of the combined companies. The balance sheet
after the merger, as shown on page 4, was exactly like
the one of the consolidation, except that the assets and liabil-
ities had passed to Company A instead of to Company C.
BALANCE SHEET COMPANY A
Machinery $60,000 Accounts Payable $25,000
Merchandise Inventory 40,000 Capital Stock 85,000
Cash 1C.OOO
$110,000 $110,000
Balance sheets of parent and subsidiaries. In the first
holding company illustration, on page 6, the balance sheets
9
10 CONSOLIDATED STATEMENTS
of the several companies after effecting the combination,
were:
BALANCE SHEET-COMPANY C
Investment in Stock of Co. A . $35,000 Capital Stock ........... $85,000
f Investment in Stock of Co. B. 50,000
$85,000 $85,000
BALANCE SHEET COMPANY A
^Machinery $25,000 Accounts Payable $10,000
>/ Merchandise Inventory 15,000 Capital Stock 35,000
Cash 5,000
$45,000 $45,000
BALANCE SHEET-COMPANY B
Machinery $35,000 Accounts Payable $15,000
Merchandise Inventory 25,000 Capital Stock 50,000
Cash 5,000
$65,000 $65,000
The balance sheets in the second holding company illustra-
tion, on page 7, would be exactly like those in the first
illustration.
In the third illustration, on page 7, it was assumed that
Company A acted as the holding company, and the resulting
balance sheets were:
BALANCE SHEET COMPANY A
^ In vestment in Stock of Co. B. $50,000 Accounts Payable $10,000
V Machinery 25,000 Capital Stock 85,000
Merchandise Inventory 15,000
V Cash 5,000
$95,000 $95,000
BALANCE SHEET COMPANY B
Machinery $35,000 Accounts Payable $15,000
Merchandise Inventory 25,000 Capital Stock 50,000
Cash 5,000
$65,000 $65,000
BALANCE SHEET OF A HOLDING COMPANY 11
v
Object of the consolidated balance sheet. When a combi-
nation is effected by means of a consolidation or a merger, a
single balance sheet contains all of the assets and liabilities of
the combined companies. But when the combination is
effected by means of a holding company, each corporation
maintains its separate legal entity and prepares its own balance
sheet. These separate balance sheets are not a satisfactory
means of displaying the financial condition of the several
related companies for two reasons.
In the first place, if we view the several companies as separate
corporations, the balance sheet of each company should clearly
present the facts of its financial condition. The balance sheets
of the subsidiary companies do so, since they show the assets
and liabilities of these companies. The balance sheet of the
holding company, however, fails to do so. The reason for this
failure can be seen by referring to the balance sheet of Company
C on page 10. This balance sheet contains two investment
accounts, but there is nothing in the balance sheet to indicate
exactly what these investments in stock represent. They
represent the assets and liabilities of the subsidiary companies,
and the balance sheet of the holding company would be a much
clearer presentation of its financial condition if these invest-
ment accounts were dropped out of the balance sheet and re-
placed by the assets and liabilities of the subsidiaries. For
while it is true from a legal standpoint that the holding com-
pany owns merely the stock, it is also true from a business
standpoint that the holding company virtually owns and
actually controls the subsidiary's net assets which the stock
represents.
In the second place, if we look past the legal fiction of
separate corporate entities and view the related companies
as a single organization, we find that no single balance
sheet shows the total assets and liabilities of the organiza-
tion, and the total stock of the organization in the hands
of the public.
The consolidated balance sheet is a device for avoiding these
two disadvantages of separate balance sheets. The assets and
liabilities of the several companies are all combined, with the
exception of those accounts which represent merely inter-
company relations. The investment accounts are not in-
cluded among the assets on the consolidated balance sheet
because these accounts do not represent assets in and of them-
12 CONSOLIDATED STATEMENTS
selves but merely represent the holding company's right to the
subsidiary's net assets. The capital stock accounts on the
subsidiary's books represent the same inter-company relation
if the stock is all owned by the holding company; and when
this is the case no portion of the subsidiaries' capital stock is
included in the consolidated balance sheet.
The consolidated balance sheet thus has its advantages
whether we view the affiliated companies as separate entities or
as a single organization. If we view them as separate cor-
porations, the consolidated balance sheet is a more adequate
presentation of the holding company's financial condition than
is a balance sheet showing the investment accounts, for the
consolidated balance sheet shows the total assets under the
control of the holding company, the total liabilities to be
paid out of these assets, and the capital of the holding
company.
On the other hand, if we view the several companies as a
single organization, the consolidated balance sheet shows the
financial condition of this organization in relation to the outside
world, for it combines all of the assets and liabilities of the
related companies, it shows the total stock outstanding in the
hands of the public, and it does not show mere inter-company
relations as assets or liabilities of the organization.
Consolidated working papers. From the discussion in the
preceding section, it will be apparent that in preparing a con-
solidated balance sheet it is necessary to combine all similar
assets and liabilities and eliminate all accounts showing mere
inter-company relations. This work is facilitated by drawing
up consolidated balance sheet working papers. These working
papers contain columns for the several balance sheets to be
consolidated, columns for accounts to be eliminated, and
columns to contain the figures which are to appear in the
consolidated balance sheet.
Outline of illustrations. Two illustrations will be given
in this chapter to show the method of preparing consolidated
balance sheet working papers.
First illustration: Holding company is not an operating
company, and has no assets other than its investments in
subsidiaries.
Second illustration: Holding company is an operating
company, and has assets other than its investment in a
subsidiary.
BALANCE SHEET OF A HOLDING COMPANY 13
First illustration. This illustration is based on the balance
sheets at the top of page 10 which show the financial con-
dition of the related companies when a new corporation was
organized to act as the holding company.
COMPANY C AND SUBSIDIARIES A AND B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
(Date)
Inter-Co. Consolidated
Assets Co. C
Investment in Stock of Co. A $35,000
Investment in Stock of Co. B 50,000
Co. A
$25,000
15,000
5,000
Co. B
$35,000
25,000
5,000
Eliminations B. S.
1 $35,000
/ so,ooa
$60,000
40,000
10,000
Merchandise Inventory
Cash
$85,000 $45,000 $65,000 $85,000 $110,000
Liabilities
Accounts Payable.
$10,000 $15,000
Capital Stock:
Co. C ................ $85,000
Co. A ................
Co. B..
35,000
50,000
35,000
50J
$25,000
85,000
$85,000 $45,000 ' $65,000 $85,000 $110,000
The following is the consolidated balance sheet prepared
from these working papers.
COMPANY C AND SUBSIDIARIES A AND B
CONSOLIDATED BALANCE SHEET
(Date)
Machinery $60,000
Merchandise Inventory 40,000
Cash 10,000
$110,000
Accounts Payable $25,000
Capital Stock 85,000
$110,000
Second illustration. This illustration is based on the balance
sheets at the bottom of page 10, which show the financial
condition of the related companies when one of the old com-
panies acts as the holding company.
14
CONSOLIDATED STATEMENTS
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
(Date)
Assets Co. A
Investment in Stock of Company B $50,000
Machinery 25,000
Merchandise Inventory 15,000
Cash .' . . . . 5,000
Co.B
$35,000
25,000
5,000
Elim.
$50,000
C. B. S.
$60,000
40,000
10,000
$95,000 $65,000 $50,000 $110,000
Liabilities
Accounts Payable $10,000
Capital Stock:
Co. A 85,000
Co.B..
$15,000
50,000
$50,000
$25,000
85,000
$95,000 $65,000 $50,000 $110,000
The consolidated balance sheet prepared from these working
papers is as follows:
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Accounts Payable $25,000
Machinery $60,000
Merchandise Inventory 40,000
Cash 10,000
Capital Stock 85,000
$110,000
$110,000
Inter-company eliminations. Reasons have already been
given for the elimination of certain items in preparing the
consolidated balance sheet, but these eliminations are so im-
portant that it may be well to re-state these reasons even though
the re-statement be merely a reiteration.
It is to be borne in mind that the consolidated balance sheet
is not the balance sheet of any one company, but is the balance
sheet of a group of very closely affiliated companies showing
the financial condition of the group of companies as if they
were a single organization. The essential facts to be shown
are: the total assets of the organization without omission or
duplication, the total liabilitie_s to the world outside the or-
ganization, and the total capital in the hands of the public.
When the group of companies is thus dealt with as a single
company or organization, any inter-company relations become
BALANCE SHEET OF A HOLDING COMPANY 15
virtually inter-departmental relations and have no place in a
statement which is intended to show merely the relations of the
organization to outsiders.
The investment accounts carried as assets on the holding
company's books are therefore eliminated. These accounts
merely represent the interest of the holding company in the
subsidiary. They do not represent, in and of themselves, an
asset which could be used to pay the liabilities of the organiza-
tion. To include the assets of the subsidiary in the con-
solidated balance sheet and also the investment account would
be a duplication and would result in an overstatement of the
assets of the organization.
When all of the capital stock of the subsidiary is owned by
the holding company, the capital stock account on the sub-
sidiary's books does not represent a capital liability to the
outside world. The only outstanding stock is that issued by
the holding company. Therefore the subsidiary capital stock
is dropped out in the Elimination column.
CHAPTER III
SUBSIDIARY SURPLUS OR DEFICIT AT
ACQUISITION
Conditions common to preceding illustrations. All of the
holding company illustrations in the preceding chapters were
made as simple as possible; in each of them the following con-
ditions prevailed:
1. The consolidated balance sheet was prepared imme-
diately after the holding company acquired its holdings
in the subsidiary stock.
2. The holding company acquired all of the subsidiary stock.
3. The price paid was the exact book value of the acquired
stock as shown by the subsidiary's books.
4. The subsidiary had no surplus or deficit at the date of
acquisition; therefore the book value of its stock was
represented by its capital stock account only.
All of these conditions may be changed, and each change
will affect the procedure in preparing the consolidated balance
sheet.
Outline of illustrations. In the illustrations in this chapter,
condition (1) will remain unchanged; the consolidated balance
sheet will be prepared at the date of acquisition. Condition
(2) will also remain unchanged; the holding company will own
all of the subsidiary stock. Condition (3) will also remain
unchanged; the purchase price will be exactly book value at
the date of acquisition as shown by the subsidiary's books.
Condition (4) will be changed as follows: First illustration:
the book value at the date of acquisition will be the sum of
the capital stock and surplus accounts of the subsidiary;
Second illustration: the book value at the date of acquisition
will be the capital stock of the subsidiary minus its deficit
account.
Subsidiary surplus at acquisition. The reader is now fa-
miliar with the principle that accounts which merely represent
inter-company relations are eliminated in the consolidated
16
SUBSIDIARY SURPLUS OR DEFICIT 17
working papers. In each preceding illustration the invest-
ment account in the holding company's balance sheet was
eliminated because it represented the holding company's claim
to the subsidiary's net assets; and the subsidiary's capital
stock account was eliminated because it represented a capital
liability of the subsidiary to the holding company.
If the subsidiary has a surplus at the date of acquisition,
this account must be added to the capital stock account to
determine the total capital; and if all of the stock is owned
by the parent company, the surplus, as well as the capital stock,
represents a capital liability to the holding company, and is
subject to the principle which requires the elimination of inter-
company accounts.
First illustration. Company A has just purchasecTall of the
stock of Company B, paying book value therefor. This book
value is represented by the sum of the capital stock and sur-
plus accounts on the books of Company B. The balance
sheets of the two companies immediately following the stock
purchase are as follows:
BALANCE SHEET COMPANY A
In vestment in Stock of Co. B. $65,000 Accounts Payable $10,000
Cash 20,000 Capital Stock 75,000
$85,000 $85,000
BALANCE SHEET COMPANY B
Cash $70,000 Accounts Payable $5,000
Capital Stock 50,000
Surplus 15,000
$70,000 $70,000
The investment account of $65,000 represents the holding
company's right to the net assets of the subsidiary; and the
capital stock and surplus accounts on the subsidiary's books
represent the offsetting capital liability of the subsidiary to the
holding company. All are eliminated as showing mere inter-
company relations.
The reason for the elimination of the subsidiary surplus can
be further explained by reminding the reader that the con-
solidated balance sheet is virtually a balance sheet of the
holding company, in which the investment account is dropped
18
CONSOLIDATED STATEMENTS
out and replaced by the subsidiary assets and liabilities which
it represents. It would clearly be wrong to carry out any of
the subsidiary surplus to the consolidated balance sheet and
thus imply that it was holding company surplus. The sub-
sidiary surplus was built up from earnings prior to the date
when the holding company acquired the stock.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A
Investment in Stock of Company B $65,000
Cash 20,000
Co. B
$70,000
Elim.
$65,000
C. B. S.
$90,000
$85,000 $70,000 $65,000 $90,000
Liabilities
Accounts Payable $10,000
Capital Stock:
Co. A 75,000
Co.B
Surplus:
Co.B..
$5,000
50,000
15,000
$50,000
15,000
$15,000
75,000
$85,000 $70,000 $65,000 $90,000
Cash.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
$90,000 Accounts Payable $15,000
Capital Stock 75,000
$90,000
$90,000
Subsidiary deficit at acquisition. If the subsidiary has a
deficit at the date of acquisition, this account must be deducted
from the subsidiary's capital stock to determine its net capital.
If the holding company acquires all of the subsidiary's stock,
both the deficit and the capital stock must be considered in '
determining the capital liability of the subsidiary to the hold-
ing company, and both accounts are subject to the principle
which requires the elimination of inter-company accounts.
Second illustration. Company A has just purchased all of
the stock of Company B, paying book value therefor. This
book value is shown by the capital stock and deficit accounts
on the subsidiary's books. The balance sheets of the two
SUBSIDIARY SURPLUS OR DEFICIT 19
companies need not be set out separately as all of the figures
are shown in the first two columns of the working papers.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B .... $45,000 $45,000
Cash 35,000 $55,000 $90,000
Deficit Co. B 15,000 15,000
$80,000 $70,000 $60,000 $90,000
Liabilities
Accounts Payable $20,000 $10,000 $30,000
Capital Stock:
Co. A 50,000 50,000
Co. B 60,000 60,000
Surplus Co.A 10,000 10,000
$80,000 $70,000 $60,000 $90,000
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash $90,000 Accounts Payable $30,000
Capital Stock 50,000
Surplus 10,000
$90,000
$90,000
CHAPTER IV
MINORITY INTEREST
Minority interest an outside liability. When the holding
company acquires less than 100 per cent of the stock of the
subsidiary, it shares the ownership of the subsidiary with
outsiders whose stock it fails to purchase. These outsiders
have an interest equal to their stock proportion of the net
worth of the subsidiary, and this capital liability to outsiders
must be shown in the consolidated balance sheet.
When the holding company owns all of the subsidiary stock,
the working papers prepared at the date of acquisition elim-
inate the entire capital stock, surplus and deficit accounts
of the subsidiary. If there is a minority interest, it would be
wrong to eliminate the capital stock and surplus or deficit
accounts of the subsidiary entirely, because they represent
two things: (1) The capital liability to the holding company,
which is an inter-company relation and is therefore eliminated;
and (2) the capital liability to the minority stockholders,
which is an outside relation and must therefore be shown in
the consolidated balance sheet.
Outline of illustrations. Three illustrations will be given
in this chapter. In all of them it will be assumed that the
balance sheet is prepared at the date of acquisition, that the
holding company paid book value for the shares acquired,
and that it purchased 90 per cent of the stock of the sub-
sidiary leaving a minority interest outstanding of 10 per cent.
First illustration: subsidiary has no surplus or deficit at the
date of acquisition.
Second illustration: subsidiary has a surplus at the date of
acquisition.
Third illustration: subsidiary has a deficit at the date of
acquisition.
First illustration Minority interest in capital stock. In
this illustration it is assumed that the subsidiary had a capital
stock of $50,000 and no surplus or deficit at the date when the
holding company acquired 90 per cent of its stock, paying
20
MINORITY INTEREST
21
exactly book value therefor, or $45,000. The balance sheets
of holding company A and subsidiary B are indicated in the-
first two columns of the working papers, and are therefore not
set out as separate statements.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A Co. B Elim. C. B. S.
Cash $65,000 $60,000 $125,000
Investment in Stock of Co. B (90%) . 45,000 45,000
$110,000 $60,000 $45,000 $125,000
Liabilities
Accounts Payable $20,OCO $10,000 $30,000
Capital Stock:
Co. A 75,000 75,000
Co. B 50,000
Eliminate holding company's 90% $45,000
Minority interest 10% 5,OOOM
Surplus Co.A 15,000 15,000
$110,000 $60,000 $45,000 $125,000
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash $125,000 Accounts Payable $30,000
Minority Interest Co. B(10%). 5,000
Capital Stock 75,000
Surplus 15,000
$125,000
$125,000
Second illustration Minority interest in capital stock plus
surplus. In this illustration it is assumed that the subsidiary
had a capital stock of $50,000 and a surplus of $10,000, making
a total book value of $60,000 at the date when the holding
company acquired 90 per cent of the stock, paying book value
therefor, or $54,000. The subsidiary capital stock and sur-
plus accounts represent capital liabilities to the holding com-
pany and the minority, as follows:
Total Inter-Co. Minority
(00%) (10%)
Capital Stock $50,000 $45,000 $5,000
Plus Surplus 10,000 9,000 1,000
Total $60,000 $54,000
$6,000
CONSOLIDATED STATEMENTS
In the following working papers, 90 per cent of the stock
and surplus are eliminated as an inter-company liability, and
the 10 per cent minority interest is extended to the consoli-
dated balance sheet columns as an outside capital liability.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $54,000 $54,000
Cash 46,000 $75,000
Co. B.
Eliminate holding company's 90%
Minority interest 10%
Surplus:
Co. A
Co. B
Eliminate holding company's 90%
Minority interest 10%
15,000
$121,000
$100,000 $75,000 $54,000 $121,000
Liabilities
Accounts Payable $10,000 $15,000
Capital Stock:
Co. A 75,000
50,000
10,000
$45,000
9,000
$25,000
75,000
5,OOOM
15,OOOS
1,OOOM
$100,000 $75,000 $54,000 $121,000
Cash.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
$121,000 Accounts Payable
$121,000
Minority Interest in Co. B(10%)
Capital Stock $5,000
Surplus 1,000
Capital:
Capital Stock $75,000
Surplus 15,000
$25,000
6,000
90,000
$121,000
The minority interest may be shown in detail as to capital
stock and surplus, as in the foregoing balance sheet, or shown
in one amount as in the following balance sheet.
MINORITY INTEREST
23
Cash.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
$121,000 Accounts Payable $25,000
Minority Interest in Co. B (10%) 6,000
Capital:
Capital Stock $75,000
Surplus 15,000 90,000
$121,000
$121,000
Third illustration Minority interest in capital stock less
deficit. In this illustration it is assumed that the subsidiary
had a capital stock of $50,000 and a deficit of $10,000, making
a net worth of $40,000 at the time when the holding company
acquired 90 per cent of its stock, paying book value therefor,
or $36,000. The subsidiary's capital stock and deficit accounts
represent capital liabilities to the holding company and the
minority as follows:
Total
Capital Stock $50,000
Less Deficit 10,000
Net.. "$40,000
Inter-Co.
(90%)
$45,000
9,000
$36,000
Minority
(10%)
$5,000
1,000
$4,000
In the following working papers, 90 per cent of the sub-
sidiary's stock and deficit are eliminated as an inter-company
liability, and 10 per cent of these accounts are extended to the
consolidated balance sheet columns as an outside capital lia-
bility.
COMPANY A AND SUBSIDIARY B .
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A Co. B
Investment in Stock of Co. B (90%) . . . $36,000
Cash 64,000
Deficit Co. B
Eliminate holding company's 90%.
Minority interest 10% .
$55,000
10,000
$100,000
Liabilities
Accounts Payable $10,000
Capital Stock:
Co. A 75,000
Co. B
Eliminate holding company's 90%
Minority interest 10%
Surplus Co. A 15,000
$100,000
Elim.
$36,000
9,000
$65,000 $45,000
$15,000
C. B. S.
$119,000
1,OOOM
50,000
$25,000
75,000
$45,000
5,OOOM
15,0005
$65,000 $45,000 $120,000
24 CONSOLIDATED STATEMENTS
In the following consolidated balance sheet, the minority
interest is shown as $4,000, which is their 10 per cent of the
capital stock minus their 10 per cent of the deficit.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash $119,000 Accounts Payable $25,000
Minority Interest in Co. B (10%) 4,000
Capital:
Capital Stock $75,000
Surplus 15,000 90,000
$119,000 $119,000
CHAPTER V
GOODWILL
Purchase price in excess of book value. In all preceding
illustrations the holding company has paid exactly book
value for the subsidiary stock. In this chapter we shall con-
sider the effect on the consolidated balance sheet in case the
holding company pays more than book value.
When the holding company pays more than book value for
the subsidiary stock, the balance of the investment account
no longer represents merely the holding company's interest in
the subsidiary's net assets. The purchase price is now com-
posed of two elements; a payment equal to the book value of
the interest acquired in the subsidiary's net assets, and a
premium paid to obtain the interest. The treatment to be
given to this premium may be made clearer by considering how a
similar premium would be dealt with in the case of a merger.
Treatment in a merger. Let us assume that Company B
has the following balance sheet:
BALANCE SHEET COMPANY B
Machinery $25,000 Accounts Payable $15,000
Inventory 30,000 Capital Stock 50,000
Cash 10,000
$65,000 $65,000
Company A has the following balance sheet:
BALANCE SHEET COMPANY A
Cash.. . $75,000 Capital Stock $75,000
Company A wishes to obtain control of Company B. To
do so it may adopt either the merger procedure, purchasing
the assets and assuming the liabilities, or the holding company
procedure, purchasing the stock. The price agreed upon is
$55,000, which is $5,000 in excess of the book value of Com-
pany B.
25
26 CONSOLIDATED STATEMENTS
If the merger procedure is adopted, Company A's entries
will be:
Machinery $25,000
Inventory 30,000
Cash 10,000
Goodwill 5,000
Accounts Payable $15,000
Company B, Vendor 55,000
To record the purchase of the assets and the assumption
of the liabilities of Company B.
Purchase price $55,000
Assets per Co. B's books $65,000
Less liabilities assumed 15,000
Net assets per Co. B's books 50,000
Excess payment charged to goodwill. . $ 5,000
Company B, Vendor $55,000
Cash $55,000
To record the payment of cash for the net assets and good-
will of Company B.
Company A's balance sheet after the purchase will be as
follows :
BALANCE SHEET-COMPANY A
Machinery... $25,000 Accounts Payable $15,000
Inventory 30,000 Capital Stock 75,000
Cash 30,000
Goodwill 5,000
$90,000 $90,000
Treatment in a holding company. If the holding company
procedure is adopted, Company A will make the following
entry:
Investment in Stock of Company B $55,000
Cash $55,000
To record the purchase of the entire outstanding stock
of Company B.
Purchase price $55,000
Book value of stock acquired 50,000
Payment in excess of book- value $5,000
In preparing the consolidated balance sheet, the investment
account is replaced by the things which it represents. When
GOODWILL 27
the holding company pays exactly book value, the invest-
ment account represents the net assets on the subsidiary's
books; when the holding company pays more than book value,
the investment account represents two things: (1) the book
value of the subsidiary's net assets, and (2) the excess payment,
which is goodwill.
Therefore, in the consolidated working papers that portion
of the investment account which represents subsidiary net
assets is eliminated; and the portion which represents excess
payment is carried out to the consolidated balance sheet
column, and appears in the consolidated balance sheet as
goodwill.
Outline of illustrations. Six illustrations will be given in
this chapter, divided into two groups. In all of the illustra-
tions the purchase price will be in excess of the book value of
the subsidiary stock at the date of acquisition; and in all of
the illustrations the consolidated balance sheet will be prepared
at the date of acquisition.
Group I. Holding company acquires 100 per cent interest.
First illustration: Subsidiary has no surplus or deficit.
Second illustration: Subsidiary has a surplus.
Third illustration: Subsidiary has a deficit.
Group II. Holding company acquires a 90 per cent interest.
Fourth illustration: Subsidiary has no surplus or deficit.
Fifth illustration: Subsidiary has a surplus.
Sixth illustration: Subsidiary has a deficit.
In all of these illustrations the following principles, already
explained, will govern the eliminations:
Investment account: Eliminate the book value of the stock
acquired, carrying out any excess as goodwill.
Subsidiary capital stock, surplus and deficit accounts:
Eliminate the holding company's proportion as an inter-com-
pany relation, carrying out the minority's interest.
First illustration. In this illustration it will be assumed that
at the date of acquisition the subsidiary has a capital stock
of $50,000 and no surplus or deficit. The holding company
acquires all of the stock, paying $57,000 therefor.
28
CONSOLIDATED STATEMENTS
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A Co. B Elim. C. B, S.
Investment in Stock of Co. B (100%) . . $57,000
Eliminate book value:
Capital stock $50,000
Goodwill $ 7,000 G
Cash 43,000 $60,000 103,000
$100,000 $60,000 $50,000 $110,000
Liabilities
Accounts Payable $10,000 $10,000 $20,OCO
Capital Stock:
Co. A 75,000 75,000
Co. B 50,000
Eliminate holding company's 100% $50,000
Surplus Co. A 15,000 15,000
$100,000 $60,000 $50,000 $110,000
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash $103,000 Accounts Payable $ 20,000
Goodwill 7,000 Capital Stock 75,000
Surplus 15,000
$110,000
$110,000
Second illustration. In this illustration it will be assumed
that at the date of acquisition, the subsidiary has a capital
stock of $50,000 and a surplus of $10,000, making a total book
value of $60,000. The holding company acquires all of the
stock, paying $63,000 therefor.
Assets Co. A
Investment in Stock of Co. B (100%). . $ 63,000
Eliminate book value:
Capital Stock
Surplus
Goodwill
Cash 37,000
Co. B
Elim.
$50,000
10,000
$65,000
C. B. S.
$ 3,000 G
102,000
$100,000 $65,000 $60,000 $105,000
GOODWILL
29
Liabilities Co. A
Accounts Payable $10,000
Capital Stock:
Co. A 75,000
Co.B
Eliminate holding company's 100%
Surplus:
Co. A 15,000
Co.B
Eliminate holding company's 100%
Co.B
$5,000
50,000
10,000
Elim.
$50,000
10,000
C. B. S.
$15,000
75,000
15,000
$100,000 $65,000 $60,000 $105,000
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash * $102,000 Accounts Payable $15,000
Goodwill 3,000 Capital Stock 75,000
Surplus 15,000
$105,000
$105,000
Third illustration. In this illustration it will be assumed that
at the date of acquisition the subsidiary has a capital stock of
$50,000 and a deficit of $10,000, making the net book value of
the stock $40,000. The holding company acquires all of the
stock, paying $42,000 therefor.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A Co. B Elim.
Investment in Stock of Co. B (100%) . . $42,000
Eliminate book value:
Capital Stock
Less Deficit
Goodwill
Cash 58,000
Deficit Co. B
Eliminate holding company's 100%
$50,000
10,000*
$45,000
10,000
C. B. S.
$ 2,ooaq
103,000
10,000
$100,000 $55,000 $50,000 $105,000
$5,000
Liabilities
Accounts Payable $15,000
Capital Stock:
Co. A 75,000
Co.B 50,000
Eliminate holding company's 100% $50,000
Surplus Co. A 10,000
$20,000
75,000
10,000
$100,000 $55,000 $50,000 $105,000
Indicates a deduction.
30
CONSOLIDATED STATEMENTS
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash $103,000 Accounts Payable $20,000
2,000 Capital Stock 75,000
Surplus 10,000
Goodwill.
$105,000
$105,000
Fourth illustration. In this illustration it will be assumed
that at the date of acquisition the subsidiary has a capital stock
of $50,000 and no surplus. The holding company acquires a
90 per cent interest, the book value of which is $45,000 and the
purchase price $48,000.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $48,000
Eliminate book value:
Capital stock: 90% of $50,000. . . $45,000
Goodwill $ 3,000"G
Cash 52,000 $65,000 117,000
$100,000 $65,000 $45,000 $120,000
Liabilities
Accounts Payable $10,000 $15,000 $25,000
Capital Stock:
Co. A 75,000 75,000
Co. B 50,000
Eliminate holding company's 90% $45,000
Minority interest 10% 5,00&M
Surplus Co. A 15,000 15,000
$100,000 $65,000 $45,000 $120,000
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash $117,000 Accounts Payable $25,000
Goodwill 3,000 Minority Interest in Co. B (10%) 5,000
Capital Stock 75,000
Surplus 15,000
$120,000
$120,000
GOODWILL
31
Fifth illustration. In this illustration it will be assumed that
at the date of acquisition the subsidiary has a capital stock
of $50,000 and a surplus of $10,000, making a total book
value of $60,000. The holding company acquires a 90 per
cent interest, the book value of which is $54,000 and the pur-
chase price $57,000.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A
Investment in Stock of Co. B (90%) . . . $57,000
Eliminate book value:
Capital stock: 90% of $50,000...
Surplus :90%of 10,000...
Goodwill
Cash 43,000
Co. B
Elim. C. B. S.
$45,000
9,000
75,000
$ 3.000G
118,000
$100,000 $75,000 $54,000 $121,000
Liabilities
Accounts Payable $10,000 $15,000
Capital Stock:
Co. A 75,000
Co. B 50,000
Eliminate holding company's 90%
Minority interest 10%
Surplus:
Co. A 15,000
Co. B.. 10,000
Eliminate holding company's 90%
Minority interest 10%
$45,000
9,000
$25,000
75,000
5,OOOM
15,000
1,OOOM
$100,000 $75,000 $54,000 $121,000
Cash....
Goodwill.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Accounts Payable $25,000
$118,000
3,000
$121,000
Minority Interest Co. B (10%) 6,000
Capital Stock 75,000
Surplus 15,000
$121,000
Sixth illustration. In this illustration it will be assumed that
at the date of acquisition the subsidiary has a capital stock of
32
CONSOLIDATED STATEMENTS
$50,000 and a deficit of $10,000, making a net book value
of $40,000. The holding company acquires a 90 per cent
interest, the book value of which is $36,000, and the purchase
price $38,000.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Co. B Elim, C. B. S.
Assets Co. A
Investment in Stock of Co. B (90%) . . . $38,000
Eliminate book value:
Capital Stock: 90% of $50,000...
Less Deficit: 90% of 10,000...
Goodwill
Cash 62,000
Deficit Co. B
Eliminate holding company's 90%.
Minority interest 10% .
$45,000
9,000*
$55,000
10,000
9,000
$ 2,000 G
117,000
1,OOOM
$100,000 $65,000 $45,000 $120,000
Liabilities
Accounts Payable $10,000
Capital Stock:
Co. A 75,000
Co. B..
Eliminate holding company's 90%
Minority interest 10%
Surplus Co. A 15,000
$15,000
50,000
$45,000-
$25,000
75,000
5.000M
15,000
$100,000 $65,000 $45,000 $120,000
* Indicates a deduction.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash $117,000 Accounts Payable $25,000
Goodwill.
2,000
Minority Interest Co. B (10%) 4,000
Capital Stock 75,000
Surplus 15,000
$119,000
$119,000
Summary. It will be noted that in all of these illustrations:
1. The excess of the purchase price over the book value of
the acquired stock at the date of acquisition appears on
the consolidated balance sheet as goodwill.
GOODWILL 33
2. The minority interest is its stock proportion of the subsi-
diary's capital stock plus its proportion of the subsidiary's
surplus or minus its proportion of the subsidiary's deficit.
3. The holding company's surplus at the date of acquisition
is not affected by the fact that the subsidiary's books
show either a surplus or a deficit.
On the consolidated balance sheet the excess of purchase
price over book value at acquisition will not appear as a sep-
arate item of goodwill, but will be added to any goodwill
accounts on the books of the related companies, the total
being shown as one item.
CHAPTER VI
DEDUCTION FROM GOODWILL
Book value in excess of purchase price. If the subsidiary
has a goodwill account at the date when the holding company
acquires its stock interest, and if the holding company pays
less than book value for the stock, the presumption is that the
holding company does not recognize the goodwill as con-
servatively valued and is therefore unwilling to pay book value
for the stock. Therefore, when the purchase price is less than
the book value of the stock as shown on the subsidiary's books,
the deficiency should be deducted from any goodwill appearing
on the subsidiary's books. Only the net amount of goodwill
thus ascertained will appear on the consolidated balance sheet.
Cases may arise when the holding company pays less than
book value and there is no goodwill on the subsidiary's books;
the consideration of these cases will be deferred until a subse-
quent chapter.
Outline of illustrations. Six illustrations will be given in
this chapter, divided into two groups. In all of the illustra-
tions the purchase price will be less than book value, there will
be a goodwill account on the subsidiary's books, and the con-
solidated balance sheet will be prepared at the date of ac-
quisition.
Group I. Holding company acquires a 100 per cent interest.
First illustration: subsidiary has no surplus or deficit.
Second illustration: subsidiary has a surplus.
Third illustration: subsidiary has a deficit.
Group II. Holding company acquires a 90 per cent interest.
Fourth illustration: subsidiary has no surplus or deficit.
Fifth illustration: subsidiary has a surplus.
Sixth illustration: subsidiary has a deficit.
In all of these illustrations, the principles already discussed
will govern the eliminations:
Investment account: eliminate the book value of the stock
acquired, the excess of the book value eliminated over the
34
DEDUCTION FROM GOODWILL
35
cost of the stock being carried to the consolidated balance sheet
column as a negative figure to be deducted from the sub-
sidiary's goodwill.
Subsidiary's capital stock, surplus and deficit accounts:
eliminate the holding company's proportion as an inter-com-
pany relation, carrying out the minority's interest.
First illustration. In this illustration it is assumed that at
the date of acquisition the subsidiary has a capital stock of
$50,000 and no surplus or deficit. The holding company
acquires all of the stock, paying $49,000 therefor, or $1,000
less than the book value.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Co. B Elim.
Assets Co. A
Investment In Stock of Co. B (100%) . $49,000
Eliminate book value:
Capital Stock
Deduction from goodwill
Goodwill
Cash 51,000
$50,000
3,000
57,000
C. B. S.
$ 1,000* G
3,000 G
108,000
$100,000 $60,000 $50,000 $110,000
Liabilities
Accounts Payable $15,000 $10,000
Capital Stock:
Co. A 75,000
Co. B 50,000
Eliminate holding company's 100%
Surplus Co. A 10,000
$25,000
75,000
10,000
$100,000 $60,000 $50,000 $110,000
50,000
Indicate* deduction.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash $108,000 Accounts Payable $25,000
Goodwill.
2,000 Capital Stock 75,000
Surplus 10,000
$110,000
$110,000
36
Second illustration. In this illustration it is assumed that
at the date of acquisition the subsidiary has a capital stock
of $50,000 and a surplus of $10,000, making a total book value
of $60,000. The holding company acquires all of the stock,
paying $59,000 therefor, or $1,000 less than book value.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A
Investment in Stock of Co. B (100%) . $59,000
Eliminate book value:
Capital Stock
Surplus
Deduction from goodwill
Cash 41,000
Goodwill . .
Co. B
Elim. C. B. S.
$50,000
10,000
$61,000
4,000
$1,000* G
102,000
4,000 G
$100,000 $65,000 $60,000 $105,000
Liabilities
Accounts Payable $10,000
Capital Stock:
Co.A 75,000
Co. B..
Eliminate holding company's 100%
Surplus:
Co.A 15,000
Co. B
Eliminate holding company's 100%
$5,000
50,000
10,000
$50,000
10,000
$15,000
75,000
15,000
$100,000 $65,000 $60,000 $105,000
* Indicates a deduction.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash $102,000 Accounts Payable.
Goodwill 3,000 Capital Stock. ...
Surplus
$105,000
$15,000
75,000
15,000
$105,000
Third illustration. In this illustration it is assumed that at
the date of acquisition the subsidiary has a capital stock of
$50,000 and a deficit of $10,000, making a net book value of
DEDUCTION FROM GOODWILL
37
$40,000. The holding company acquires all of the stock,
paying $39,000 therefor, which is $1,000 less than book value.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (100%) . $39,000
Eliminate book value:
Capital Stock $50,000
Deficit 10,000*
Deduction from goodwill $ 1,000*G
Cash 61,000 $42,000 103,000
Goodwill 3,000 3.000G
Deficit Co. B 10,000
Eliminate holding company's 100% 10,000
$100,000 $55,000 $50,000 $105,000
Liabilities
Accounts Payable $15,000 $5,000 $20,000
Capital Stock:
Co. A 75,000 75,000
Co. B 50,000
Eliminate holding company's 100% $50,000
Surplus Co. A 10,000 10,000
$100,000 $55,000 $50,000 $105,000
* Indicates a deduction.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash $103,000 Accounts Payable $20,000
Goodwill 2,000 Capital Stock 75,000
Surplus 10,000
$105,000
$105,000
Fourth illustration. In this illustration it is assumed that
at the date of acquisition the subsidiary has a capital stock of
$50,000 and no surplus. Its book value is therefore $50,000.
The holding company acquires a 90 per cent interest, the book
value of which is $45,000. The purchase price was $44,000,
or $1,000 less than book value.
38
CONSOLIDATED STATEMENTS
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A Co. B Elim.
Investment in Stock of Co. B (90%) . . $44,000
Eliminate book value:
Capital stock: 90% of $50,000. .
Deduction from goodwill
Cash 56,000 62,000
Goodwill 3,000
$45,000
C. B. S.
$1,000* G
118,000
3,000 G
$100,000 $65,000 $45,000 $120,000
Liabilities
Accounts Payable $10,000
Capital Stock: \
Co. A 75,000
Co.B..
Eliminate holding company's 90%
Minority interest 10%
Surplus Co. A 15,000
$15,000
50,000
$45,000
$25,000
75,000
5,000 M
15,000
$100,000 $65,000 $45,000 $120,000
* Indicates a deduction.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash....
Goodwill
$118,000 Accounts Payable $25,000
2,000 Minority Interest Co. B (10%) 5,000
Capital Stock 75,000
Surplus 15,000
$120,000
$120,000
Fifth illustration. In this illustration it is assumed that at
the date of acquisition the subsidiary has a capital stock of
$50,000 and a surplus of $10,000, making a total book value of
$60,000. The holding company acquires a 90 per cent in-
terest, the book value of which is $54,000 and the purchase
price $53,000.
DEDUCTION FROM GOODWILL
39
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A Co. B Elim.
Investment in Stock of Co. B (90%) . . $53,000
Eliminate book value:
Capital stock: 90% of $50,000. .
Surplus: 90% of 10,000..
Deduction from goodwill
Cash 47,000
Goodwill. .
$45,000
9,000
72,000
3,000
C. B. S.
$ 1,000* G
119,000
3,000 G
$100,000 $75,000 $54,000 $121,000
Liabilities
Accounts Payable $10,000 $15,000
Capital Stock:
Co. A 75,000
Co. B.. 50,000
Eliminate holding'company's 90%
Minority interest 10%
Surplus:
Co. A 15,000
Co. B..
Eliminate holding company's 90%
Minority interest 10%
10,000
$45,000
9,000
$25,000
75,000
5,000 M
15,000
1,000 M
$100,000 $75,000 $54,000 $121,000
* Indicates a deduction.
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash $119,000 Accounts Payable $25,000
Goodwill 2,000 Minority Interest Co. B (10%) 6,000
Capital Stock 75,000
Surplus. . ~ 15,000
$121,000
$121,000
Sixth illustration. In this illustration it is assumed that at
the date of acquisition the subsidiary has a capital stock of
$50,000 and a deficit of $10,000, making a net book value of
$40,000. The holding company acquires a 90 per cent in-
terest, the book value of which is $36,000 and the purchase
price $35,000.
40
CONSOLIDATED STATEMENTS
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Assets Co. A
Investment in Stock of Co. B (90%) . . . $35,000
Eliminate book value:..
Capital Stock: 90% of $50,000..
Deficit: 90% of 10,000..
Deduction from goodwill
Cash 65,000
Goodwill
Deficit Co. B....
Eliminate holding company's 90%
Minority interest 10%
Co. B
Elim. C. B. S.
$52,000
3,000
10,000
$45,000
9,000*
9,000
$ 1,000* G
117,000
3,000 G
1,000 M
$100,000 $65,000 $45,000 $120,000
Liabilities
Accounts Payable $10,000 $15,000 $25,000
Capital Stock:
Co. A 75,000 75,000
Co. B 50,000
Eliminate holding company's 90% $45,000
Minority interest 10% 5,000 M
Surplus Co. A 15,000 15,000
$100,000 $65,000 $45,000 $120,000
* Indicates a deduction.
|
COMPANY A AND SUBSIDIARY B
CONSOLIDATED BALANCE SHEET
(Date)
Cash $117,000 Accounts Payable $25,000
Goodwill 2,000 Minority Interest Co. B (10%) 4,000
Capital Stock 75,000
Surplus 15,000
$119,000
$119,000
Summary of the first six chapters. In all of the illustra-
tions thus far presented the consolidated balance sheet has
been prepared at the date of acquisition, and the following
principles and procedure have been found to apply:
1. All similar assets and liabilities are combined.
2. The investment account is not shown in the consolidated
balance sheet; the book value of the subsidiary stock is
DEDUCTION FROM GOODWILL 41
eliminated; any excess of purchase price over book value
is carried to the consolidated balance sheet as goodwill;
any excess of the book value over the purchase price is
deducted from the goodwill on the subsidiary's books.
3. The subsidiary's capital stock, surplus and deficit ac-
counts are entirely eliminated if the holding company
owns all of the subsidiary stock; if it owns only a con-
trolling interest each of these accounts is divided into two
parts: (a) the holding company's proportion, which is
eliminated; and (b) the minority's interest, which is
shown on the consolidated balance sheet.
In later chapters we shall consider the procedure of making
eliminations when the consolidated balance sheet is prepared
at a date subsequent to the date of acquisition, after the sub-
sidiary has made profits or losses and paid dividends. Be-
fore considering these cases, however, it is necessary to de-
scribe the approved method for the holding company to record
its share of subsidiary profits, losses and dividends. This will
be done in the next chapter.
CHAPTER VII
SUBSIDIARY'S PROFITS, LOSSES AND DIVIDENDS
ON THE HOLDING COMPANY'S BOOKS
Subsidiary profits. If the subsidiary makes a profit after
the holding company acquires its stock, this profit increases
the net assets of the subsidiary and correspondingly increases
the value of the stock owned by the holding company. Hence,
after the subsidiary has closed its books and ascertained its
profits, the holding company should take up its share of these
profits by debiting the investment account and crediting an
account with some title such as Income from Subsidiary.
This account is closed into Profit and Loss or Surplus. It
will be noted that the holding company takes up its share of
the profits and increases its investment account as soon as the
subsidiary ascertains its profits; this practice is justified be-
cause the two companies are so closely related that the profits
of the subsidiary are virtually profits of the holding company
which owns the subsidiary.
Subsidiary losses. If the subsidiary suffers a loss, the hold-
ing company should debit Loss from Subsidiary to take up
its share of the loss, and credit the investment account to show
the reduction in the value of the stockholdings in the sub-
sidiary.
Subsidiary dividends. When the subsidiary declares a
dividend, the holding company should debit Dividends Re-
ceivable and credit the investment account. Since the hold-
ing company took up the profits of the subsidiary as income,
the dividends do not constitute additional income but are
a conversion of the asset of stock investment into a current
asset of dividends receivable.
In other words, profits earned by the subsidiary increase the
value of the subsidiary stock, and hence are added to the in-
vestment account by a debit entry; dividends decrease the
net assets of the subsidiary and hence are deducted from the
investment account by a credit entry.
42
PROFITS, LOSSES AND DIVIDENDS 43
When the subsidiary pays the dividend, the holding com-
pany should debit Cash and credit Dividends Receivable.
If at the time of the acquisition of the stock, a dividend has
been declared by the subsidiary but has not been paid, and if
the right to receive the dividend passes to the holding com-
pany, the holding company should record the transaction by
a debit to Dividends Receivable for the amount of the divi-
dend, and a debit to Investment in Stock for the remainder
of the purchase price.
Illustrative journal entries. The proper method of taking
up subsidiary profits, losses and dividends may be illustrated
by the following example. Company A acquired the entire
issue of the stock of Company B. At the date of acquisition
Company B had a capital stock of $100,000 and a surplus of
$50,000. The holding company paid $150,000 for the stock.
Investment in Stock of Company B $150,000
Cash $150,000
To record the purchase of the entire issue of Company
B's stock.
Immediately after the holding company acquired the stock,
the subsidiary declared a 10 per cent dividend. This dividend
was not income to the holding company; the holding company
virtually purchased the net assets of the subsidiary when it
acquired the stock, and the dividend merely transfers a portion
of these assets to the holding company. The dividend was a
conversion of a portion of the permanent investment into a
current asset.
Dividends Receivable $10,000
Investment in Stock of Company B $10,000
To record the declaration of a dividend by Company
B, payable on (date).
At a later date the subsidiary paid the dividend, and the
holding company's asset of dividends receivable was converted
into cash.
Cash $10,000
Dividends Receivable $10,000
To record the collection of the dividend from Company B.
During the first year following the acquisition of the stock,
the subsidiary made a profit of $25,000. This was virtually an
44 CONSOLIDATED STATEMENTS
earning for the holding company, and it resulted in a $25,000
increase in the value of the subsidiary stock.
Investment in Stock of Company B $25,000
Income from Company B $25,000
To take up our profits arising from the operations of
subsidiary Company B.
The subsidiary then declared and immediately paid a divi-
dend of $5,000. Although this dividend may have been paid
from profits earned since the holding company acquired control
of the stock, the dividend should not be treated as income be-
cause the holding company has already taken up the income
for the year. Since the dividend was paid immediately upon
declaration, it need not be passed through a Dividends Re-
ceivable account but may be recorded as follows:
Cash $5,OCO
Investment in Stock of Company B $5,000
To record collection of a dividend from Company B.
During the second year the subsidiary lost $20,000, thus
decreasing its net assets and the value of the stock owned by
the parent company. The parent company should take up
the loss by the following entry:
Loss of Subsidiary B $20,000
Investment in Stock of Company B $20,000
To take up the loss resulting from the year's operations
of subsidiary Company B.
Balance of the investment account. When the holding
company records its share of subsidiary profits, losses and
dividends in the manner just described, the balance of the
investment account will show at the close of each successive
fiscal period:
1. The book value of the subsidiary stockholdings at that
date,
2. Plus any goodwill involved in the purchase, due to the
fact that the purchase price was in excess of the book
value of the acquired stock at the date of acquisition,
3. Or minus any negative goodwill involved in the purchase,
due to the fact that the purchase price was less than the
book value of the acquired stock at the date of acquisition.
This fact will be demonstrated by a number of illustrations.
PROFITS, LOSSES AND DIVIDENDS 45
First illustration. This illustration is based on the journal
entries shown in the preceding sections of this chapter. The
account with the investment on Company A's books will ap-
pear as follows:
INVESTMENT IN STOCK OF COMPANY B
Cost $150,000 Dividends $10,000
Profits First year 25,000 Dividends 5,000
Loss Second year 20,000
The balance of the account is $140,000.
The subsidiary's surplus at this date is:
Opening balance $50,000
Minus first dividend 10,000
$40,000
Plus first year's profits 25,000
$65,000
Minus second dividend 5,000
$60,000
Minus second year's loss 20,000
Present surplus $40,000
Hence the present book value of the subsidiary is $140,000.
Thus the balance of the investment account at this date is
equal to the book value of the stock held; there is no goodwill
nor negative goodwill, for the holding company paid exactly
book value.
Second illustration. The subsidiary Company B has a
capital stock of $100,000 and at the date when the holding
company acquired its stock the subsidiary had a surplus of
$50,000. The holding company purchased a 90 per cent in-
terest, which had a book value of 90 per cent of $150,000, or
$135,000. The price paid was $138,000; hence there was a
$3,000 goodwill element in the stock purchase. During the
first two years after the holding company acquired the stock
the subsidiary's surplus account exhibited the following
changes:
Debits Credits
Balance at date of holding company's acquisition $50,000"
Profits first year 10,000
Dividend first year $ 6,000
Loss second year 3,000
Balance at the present date 51,000
$60,000 $60,000
46 CONSOLIDATED STATEMENTS
r
The subsidiary's book value is now $151,000, and 90 per cent
thereof is $135,900.
The investment account on the holding company's books will
appear as follows:
INVESTMENT IN STOCK OF COMPANY B
Cost $138,000 Dividend first year $ 5,400
Profits first year 9,000 Loss second year 2,700
Balance at present date. . 138,900
$147,000 $147,000
This balance of '.' '. $138,900 ""
Represents:
The present book value of 90% of the subsidiary stock 135,900
and the goodwill (as computed above) $3,000
Third illustration. The subsidiary Company B has a capital
stock of $100,000, and at the date when the holding company
acquired its stock it had a deficit of $15,000. The holding
company purchased a 90 per cent interest, which had a book
value of 90 per cent of $85,000, or $76,500. The price paid
was $73,000; hence there was a negative goodwill of $3,500
in the stock purchase. During the first two years after the
holding company acquired its stock, the subsidiary's surplus
account exhibited changes as follows:
Debits Credits
Balance at date of holding company's acquisition $15,000
Profits first year $35,000
Dividends first year 5,000
Loss second year 3,000
Balance at the present date 12,000
[ $35,000 $35.000
The subsidiary's book value is now $112,000, and 90 per cent
thereof is $100,800. The investment account on the holding
company's books will appear as follows:
INVESTMENT IN STOCK OF COMPANY B
Cost , $73,000 Dividends first year $ 4,500
Profits first year 31,500 Loss second year 2,700
Balance at the present date 97,300
$104,500 $104,500
This balance of $97,300
Represents:
The present book value of 90% of the subsidiary stock . $100,800
Minus the negative goodwill (as computed above) . . 3,500
$97,300
CHAPTER VIII
BALANCE SHEETS AFTER DATE OF ACQUISITION
Function of working papers. Consolidated balance sheet
working papers are prepared in order to accomplish the fol-
lowing objects:
1. Combine the assets and liabilities of a similar nature.
2. Determine any goodwill or negative goodwill involved in
the stock purchase.
3. Ascertain the minority interest in the stock and surplus
of the subsidiary.
4. Show the capital stock and surplus of the holding com-
pany.
The preceding chapters have shown how these objects are
accomplished when the consolidated balance sheet is prepared
at the date of acquisition. It is the purpose of this chapter to
show how the necessary facts are ascertained when the balance
sheet is prepared at a date subsequent to acquisition, and when
the holding company carries its investment account in the
manner described in the preceding chapter.
The assets and liabilities of a similar nature are combined
in the manner already described, regardless of the date of the
balance sheet, and this subject requires no further discussion.
Goodwill or negative goodwill. In the preceding chapter
it was shown that when the holding company follows the ap-
proved method of accounting, the investment account at any
date has a balance equal to the book value of the stock held,
plus any goodwill or minus any negative goodwill arising from
the stock purchase. Therefore the goodwill element can be
ascertained by eliminating the book value of the subsidiary
holdings at the date of the balance sheet; a positive remainder
is an addition to the goodwill, and a negative remainder is a
deduction from the goodwill.
Minority interest. The minority interest is its stock pro-
portion of the subsidiary's capital stock and surplus at the date
of the balance sheet. This interest is ascertained by elimi-
nating the holding company's proportion of these accounts, and
47
48 CONSOLIDATED STATEMENTS
carrying out the minority's interest. The reader is already
familiar with this procedure.
Holding company's capital stock and surplus. The entire
outstanding capital stock of the holding company as well as
its surplus is carried to the consolidated balance sheet. This
surplus account contains not only the gains and losses arising
from the holding company's own operations, but also the pro-
portion of the subsidiary's gains and losses accruing to the hold-
ing company. If the investment account has been carried in
the approved manner, these gains and losses have been taken
up on the holding company's books.
Summary of eliminations. From the preceding paragraphs
it will be noted that the following eliminations are made:
On the asset side: From the investment account: eliminate
the present book value of the stock held, represented by the
par of the stock and the proportion of subsidiary surplus ap-
plicable thereto. A positive remainder is goodwill; a negative
remainder is a deduction from goodwill.
On the liability side: From the subsidiary capital stock:
eliminate the par of the stock held by the parent company,
carrying out the remainder as minority interest.
From the subsidiary surplus: eliminate the surplus applicable
to the stock owned by the parent company, carrying out the
remainder as minority interest.
Outline of illustrations. Nine illustrations will be given in
this chapter, designed to show the method of preparing con-
solidated balance sheet working papers under a variety of
conditions. They will be divided into three groups, as follows:
First group: 100 per cent interest; no goodwill; no subsidiary
surplus at date of acquisition.
First illustration: at date of acquisition; no subsidiary
surplus.
Second illustration: at end of first year; subsidiary surplus.
Third illustration: at end of two years; subsidiary deficit.
Second Group: 90 per cent interest; goodwill; subsidiary
surplus at acquisition.
Fourth illustration: at date of acquisition; subsidiary
surplus.
Fifth illustration : at end of one year; subsidiary surplus
increased.
Sixth illustration: at end of two years; subsidiary deficit.
BALANCE SHEETS AFTER ACQUISITION 49
Third Group: 90 per cent interest; negative goodwill; sub-
sidiary deficit at acquisition.
Seventh illustration: at date of acquisition; subsidiary
deficit.
Eighth illustration: at end of one year; subsidiary deficit
increased.
Ninth illustration: at end of two years; subsidiary surplus.
The sundry assets and liabilities will be omitted, as they are
not essential to show the method of making eliminations of
inter-company accounts.
In all of the illustrations it will be assumed that the holding
company made no profits or losses other than those accruing
from its ownership of the subsidiary stock.
First illustration. Working papers prepared at the date of
acquisition.
Assets Co. A Co. B Elim. C. B, S.
Investment in Stock of Co. B (100%) . . $50,000
Eliminate present book value:
Capital stock $50,000
Liabilities
Capital Stock:
Co. A $75,000
Co. B
Eliminate holding company's 100%
Surplus: Co. A 15,000
$50,000
$50,000
$75,000
15,000
Second illustration. During the year the subsidiary has
made a profit of $12,000, and hence it has a surplus of that
amount. The holding company has taken up this profit,
thus raising its investment account to $62,000 and its surplus
to $27,000.
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (100%) . . $62,000
Eliminate present book value:
Capital Stock $50,000
Surplus 12,000
Liabilities
Capital Stock:
Co. A $75,000 $75,000
Co. B $50,000
Eliminate holding company's 100% $50,000
Surplus:
Co. A 27,000 27,000
Co. B 12,000
Eliminate holding company's 100% 12,000
50
CONSOLIDATED STATEMENTS
Third illustration. During the second year the subsidiary
lost $18,000, thus wiping out its surplus and leaving it with
a deficit of $6,000. The holding company took up the loss,
reducing its investment account to $44,000, and its surplus to
$9,000.
Co. A Co. B Elim. C. B. S.
$44,000
Assets
Investment in Stock of Co. B (100%) . .
Eliminate present book value:
Capital Stock
Deficit
Deficit Co. B
Eliminate holding company's 100%
$6,000
$50,000
6,000*
6,000
Liabilities
Capital Stock:
Co. A $75,000
Co. B
Eliminate holding company's 100%
Surplus Co. A 9,000
$50,000
$50,000
$75,000
9,000
Fourth illustration. The subsidiary had a capital stock of
$50,000 and a surplus of $10,000 at the date when the holding
company acquired its stock. The holding company purchased
90 per cent of the stock, the book value of which was $54,000,
and the purchase price $56,000. The working papers are pre-
pared at the date of acquisition.
Assets
Investment in Stock of Co. B (90%) .
Eliminate present book value:
Capital stock: 90% of 50,000. ,
Surplus: 90% of 10,000.,
Goodwill..,
Co. A
$56,000
Co. B Elim. C. B. S.
$45,000
9,000
$2,000 G
Liabilities
Capital Stock:
Co. A $75,000 $75,000
Co. B $50,000
Eliminate holding company's 90% $45,000
Minority interest 10% 5,OOOM
Surplus:
Co. A 15,000 15,000
Co. B 10,000
Elimin ate holding company's 90% 9,000
Minority interest 10% 1,OOOM
Fifth illustration. During the first year the subsidiary
made a profit of $4,000, thus increasing its surplus to $14,000.
The holding company took up its 90 per cent of this profit,
BALANCE SHEETS AFTER ACQUISITION 51
or $3,600, thus increasing its investment account to $59,600
and its surplus to $18,600.
Assets
Investment in Stock of Co. B (90%) .
Eliminate present book value:
Capital stock: 90% of 50,000. .
Surplus: 90% of 14,000 ..
Goodwill. .
Co. A
$59,600
Co. B
Elim. C. B. S.
$45,000
12,600
$2,000 G
Liabilities
Capital Stock:
Co. A $75,000 $75,000
Co. B $50,000
Eliminate holding company's 90% $45,000
Minority interest 10% 5,OOOM
Surplus:
Co. A 18,600 18,600
Co. B 14,000
Eliminate holding company's 90% 12,600
Minority interest 10% 1,400M
Sixth illustration. During the second year the subsidiary lost
$16,000, wiping out its surplus account and leaving it with a
deficit of $2,000. The holding company took up 90 per cent
of this loss, or $14,400, thus reducing its investment account
to $45,200 and its surplus to $4,200.
Assets
Investment in Stock of Co. B (90%). . .
Eliminate present book value:
Capital stock: 90% of 50,000. . . .
Deficit: 90% of 2,000....
Goodwill
Deficit Co. B
Eliminate holding company's 90%
Minority interest 10%
Co. A
$45,200
Co. B
Elim. C. B. S.
$2,000
$45,000
1,800*
1,800
$2,000 G
2(X)M
Liabilities
Capital Stock:
Co. A $75,000
Co. B
Eliminate holding company's 90%
Minority interest 10%
Surplus Co. A 4,200
$50,000
$45,000
$75,000
5.000M
4,200
Seventh illustration. The subsidiary had a capital stock of
$50,000 and a deficit of $10,000 at the date when the holding
company acquired its stock. The holding company pur-
52
CONSOLIDATED STATEMENTS
chafed 90 per cent of the stock, the book value of which was
$36,000 and the purchase price $34,000. The working papers
are prepared at the date of acquisition.
Assets
Investment in Stock of Co. B (90%) . . .
Eliminate present book value:
Capital stock: 90% of 50,000. . . .
Deficit: 90% of 10,000... .
Deduction from goodwill
Deficit Co. B
Eliminate holding company's 90%
Minority interest 10%
Co. A
$34,000
Co. B
Elim. C. S. S.
$10,000
$45,000
9,000*
9,000
$2,000*G
1,000 M
Liabilities
Capital Stock:
Co. A $75,000
Co. B
Eliminate holding company's 90%
Minority interest 10%
Surplus Co. A 2,000
$50,000
$45,000
$75,000
5,000 M
2,000
Eighth illustration. During the first year the subsidiary lost
$5,000, thus increasing its deficit to $15,000. The holding
company took up 90 per cent of this loss, or $4,500, thereby
reducing its investment account to $29,500, and changing its
surplus of $2,000 into a deficit of $2,500.
Assets
Investment in Stock of Co. B (90%) . . .
Eliminate present book value:
Capital stock: 90% of $50,000. . .
Deficit: 90% of 15,000...
Deduction from goodwill
Deficit:
Co. A
Co. B
Eliminate holding company's 90%
Minority interest 10%
Co. A
$29,500
Co. B
2,500
$15,000
Elim.
$45,000
13,500*
13,500
C. B. S.
$2,000*G
2,500
1,500M
Liabilities
Capital Stock
Co. A $75,000
Co. B..
Eliminate holding company's 90%
Minority interest 10%
$50,000
$45,000
$75,000
5,OOOM
Ninth illustration. During the second year the subsidiary
made a profit of $30,000 and paid a dividend of $5,000, thereby
causing a net increase of $25,000 in its surplus, changing its
$15,000 deficit into a $10,000 surplus. The holding company
took up its 90 per cent of the profits and its 90 per cent of the
dividends, with the following results:
Investment
Account Surplus
Balances at end of first year (as above) $29,500 $ 2,500*
Add profits 90% of $30,000 27,000 27,000
Balances after adding profits 56,500 24,500
Deduct dividend 90% of $5,000 4,500
Balances at end of year 52,000 24,500
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%). . $52,000
Eliminate present book value:
Capital Stock 90% of 50,000. . 45,000
Surplus 90% of 10,000.. 9,000
Deduction from goodwill $2,000* G
Liabilities
Capital Stock:
Co. A $75,000 $75,000
Co. B $50,000
Eliminate holding company's 90% $45,000
Minority interest 10% 5,000 M
Surplus:
Co. A 24,500 24,500
Co. B 10,000
Eliminate holding company's 90% 9,000
Minority interest 10% 1,000 M
Summary of illustrations. In the next chapter the illustra-
tions will be based on the same assumed facts as those in this
chapter, and the reader will have occasion to refer to the
results obtained in this chapter. These results are therefore
summarized here to facilitate reference.
Goodwill
First Group:
First illustration
Second illustration
Third illustration
Second Group:
Fourth illustration $2,000
Fifth illustration 2,000
Sixth illustration 2,000
Third Group:
Seventh illustration 2,000*
Eighth illustration 2,000*
Ninth illustration 2,000*
Holding
Company
Surplus
$15,000
27,000
9,000
15,000
18,600
4,200
2,000
2,500*
24,500
Minority Interest
Capital
Stock
Surplus
or Deficit*
Total
or Net
$5,000 $1,000 $6,000
5,000 1,400 6,400
5,000 200* 4,800
5,000
5,000
5,000
1,000* 4,000
1,500* 3,500
1,000 6,000
CHAPTER IX
BALANCE SHEETS AFTER DATE OF ACQUISITION
Continued
INVESTMENT ACCOUNT CARRIED AT COST
Determining the goodwill. The reader is already familiar
with the principle that the goodwill element is the difference
between the book value of the stock at the date of acquisition
and the purchase price. When the investment account is
carried continuously at cost, without entries for subsidiary
profits, losses and dividends, the balance of the account
represents:
1. The book value at the date of acquisition,
2. Plus any goodwill due to the fact that the purchase price
was in excess of book value,
3. Or minus any negative goodwill due to the fact that the
purchase price was less than book value.
Therefore, when the investment account is carried at cost,
the goodwill element is ascertained by eliminating the book
value of the stock at the date of acquisition; a positive re-
mainder is an addition to goodwill, and a negative remainder
is a deduction from goodwill.
Minority interest. The minority interest is always the
minority's stock proportion of the capital stock and surplus
of the subsidiary at the date of the balance sheet. The
method used by the holding company in carrying its invest-
ment account has no bearing whatever on the computation of
the minority interest.
Holding company surplus. When the holding company
takes up the profits and losses of the subsidiary in the manner
described in Chapter VII, the holding company's surplus ac-
count reflects its portion of the subsidiary's net gain or loss
after the date of acquisition. If the holding company does
54
BALANCE SHEETS AFTER ACQUISITION 55
not take up gains and losses in this manner, its surplus account
does not reflect its portion of the net increase or decrease in
subsidiary surplus after the date of acquisition. .Therefore
the holding company's surplus appearing on the consolidated
balance sheet must be computed as follows:
1. The holding company's own surplus account,
2. Plus its proportion of the net increase in the subsidiary's
surplus since the date of acquisition,
3. Or minus its proportion of the net decrease in the sub-
sidiary's surplus since the date of acquisition.
Summary of eliminations. From the foregoing discussion it
will be apparent that when the holding company carries the
investment account at cost, the book value of the subsidiary
stock at the date of acquisition is eliminated, instead of the
book value at the date of the consolidated balance sheet, as
was done in the preceding chapter. The eliminations may be
summarized as follows:
On the asset side: From the investment account: eliminate
the book value of the subsidiary stock at the date of acquisition,
represented by the par of the stock held and the proportion
of the subsidiary's surplus or deficit at that date applicable to
the holding company. A positive remainder is an addition
to goodwill; a negative remainder is a deduction from goodwill.
On the liability side: From the subsidiary capital stock:
eliminate the par of the stock held by the parent company,
carrying out the remainder as minority interest.
From the subsidiary surplus or deficit: eliminate the holding
company's proportion thereof at the date of acquisition;
carry out the minority's proportion of the present surplus or
deficit; and carry out the holding company's proportion of the
net increase or decrease in the account since the date of ac-
quisition, this latter item being combined with the holding
company's surplus account to obtain the total or net surplus
on the consolidated balance sheet.
Outline of illustrations. The nine illustrations in the pre-
ceding chapter will be repeated in this chapter, the only change
being the fact that the holding company carries the investment
account at cost. After each illustration is completed, the
reader should refer to the summary at the close of Chapter
VIII and note that the same results are obtained in each cor-
responding pair of cases.
56
CONSOLIDATED STATEMENTS
First illustration. Working papers prepared at the date of
acquisition; the holding company purchased all of the stock
of the subsidiary, paying book value therefor. Book value
was par, for the subsidiary had no surplus or deficit.
Assets Co. A
Investment in Stock of Co. B (100%) Cost $50,000
Eliminate book value at acquisition:
Capital stock
Co. B Elim. C. B. S.
$50,000
Liabilities
Capital Stock:
Co. A $75,000
Co. B
Eliminate holding company's 100%
Surplus Co. A 15,000
$50,000
$50,000
$75,000
15,000 S
There is no goodwill, the holding company's surplus is
$15,000, and there is no minority interest.
Second illustration. During the year the subsidiary made
a profit of $12,000, and hence it has a surplus of that amount.
The holding company has not taken up this profit; hence its
investment account and its surplus remain unchanged.
Assets Co. A
Investment in Stock of Co. B(100%)Cost $50,000
Eliminate book value at acquisition:
Capital stock
Co. B Elim. C. B. S.
$50,000
Liabilities
Capital Stock:
Co. A $75,000
Co. B $50,000
Eliminate holding company's 100%
Surplus:
Co. A 15,000
Co. B 12,000
$50,000
$75,000
15,000 S
12,000 S
There is no goodwill.
The surplus shown on the consolidated balance sheet will
be $27,000, being the sum of the holding company's own
surplus account and 100 per cent of the earnings of the sub-
sidiary since the date of acquisition.
There is no minority interest.
Third illustration. During the second year the subsidiary
lost $18,000, thus wiping out its surplus and leaving it with a
deficit of $6,000. The holding company made no record of
BALANCE SHEETS AFTER ACQUISITION 57
this loss and hence its investment account and its surplus re-
main unchanged.
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B(100%)Cost $50,000
Eliminate book value at acquisition:
Capital stock $50,000
Deficit Co. B $6,000
Holding company's 100% of de-
crease in surplus since the date
of acquisition $6,000 S
Liabilities
Capital Stock:
Co. A $75,000 $75,000
Co. B $50,000
Eliminate holding company's 100% $50,000
Surplus Co. A 15,000 15,000 S
There is no goodwill.
The holding company's surplus on the consolidated balance
sheet will be shown as $9,000, being the holding company's
own surplus balance of $15,000 minus its $6,000 proportion of
the net loss of the subsidiary since the date of acquisition.
There is no minority interest.
Fourth illustration. The subsidiary had a capital stock of
$50,000 and a surplus of $10,000 at the date when the holding
company acquired its stock. The holding company purchased
90 per cent of the stock, the book value of which was $54,000,
and the purchase price $56,000. The balance sheet is made at
the date of acquisition.
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) Cost $56,000
Eliminate book value at acquisition:
Capital stock: 90% of $50,000. . . $45,000
Surplus: 90% of 10,000... 9,000
Goodwill $2,000 G
Liabilities
Capital Stock:
Co. A $75,000 $75,000
Co. B $50,000
Eliminate holding company's 90% $45,000
Minority interest 10% 5,OOOM
Surplus:
Co. A 15,000 15,000 S
Co. B 10,000
Minority: 10% of present surplus 1,OOOM
Eliminate holding company's 90% 9,000
58
CONSOLIDATED STATEMENTS
There is a $2,000 addition to goodwill. The holding com-
pany's surplus is $15,000. The minority interest is $5,000
capital stock plus $1,000 surplus, or $6,000.
Fifth illustration. During the first year the subsidiary
made a profit of $4,000, thus increasing its surplus to $14,000.
The holding company made no entries for this profit; hence its
investment account and its surplus remain unchanged.
Assets Co. A
Investment in Stock of Co. B (90%) Cost $56,000
Eliminate book value at acquisition:
Capital stock: 90% of $50,000. . .
Surplus: 90% of 10,000...
Goodwill. .
Co. B
Elim. C. B. S.
$45,000
9,000
$2,000 G
Liabilities
Capital Stock:
Co. A $75,000
Co. B..
Eliminate holding company's 90%
Minority interest 10%
Surplus:
Co. A 15,000
Co. B
Minority: 10% of 14,000
piesent surplus
Elim. H. C.: 90% of 10,000
surplus at acquis
H. C. Surplus: 90% of 4,000
increase . .
$50,000
14,000
$45,000
9,000
$75,000
5,OOOM
15,000 S
1.400M
3,600 S
There is a $2,000 addition to goodwill.
The holding company's surplus will appear on the con-
solidated balance sheet at $18,600, being the holding com-
pany's surplus account of $15,000 plus $3,600, which is its 90
per cent of the increase in the subsidiary's surplus since ac-
quisition.
The minority interest is $5,000 stock plus $1,400 surplus,
or $6,400.
Sixth illustration. During the second year the subsidiary
lost $16,000, wiping out its $14,000 surplus and leaving it
with a deficit of $2,000. The holding company made no
entry for this loss, and hence its investment account and its
surplus remain unchanged.
BALANCE SHEETS AFTER ACQUISITION 59
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) Cost $56,000
Eliminate book value at acquisition:
Capital stock: 90% of $50,000. . . $45,000
Surplus: 90% of 10,000... 9,000
Goodwill $2,OOOG
Deficit Co. B $2,000
Minority: 10% of $2,000
present deficit 200M
Elim. H. C. 90% of 10,000
surplus at acquisition. .. 9,000*
Surplus: 90% of $12,000
decrease in surplus 10,800 S
Liabilities
Capital Stock:
Co. A $ 75,000 $75,000
Co. B $50,000
Eliminate holding company's 90% $45,000
Minority interest 10% 5.000M
Surplus Co. A 15,000 15,000 S
There is a $2,000 addition to goodwill.
The holding company's surplus will appear on the consoli-
dated balance sheet at $4,200, being the holding company's
surplus account of $15,000 minus $10,800 which is its 90 per
cent of the net decrease in the subsidiary's surplus since the
date of acquisition.
The minority interest is $5,000 stock minus $200 deficit, or
$4,800.
It will be observed that an asterisk appears after the second
$9,000 surplus elimination, indicating that this item is to be
deducted in obtaining the total of the elimination column.
This is because a surplus item is being deducted from a de-
ficit. The asterisk would be used also if a deficit at acquisi-
tion were being deducted from a surplus at the date of the
balance sheet
Seventh illustration. The subsidiary had a capital stock of
$50,000 and a deficit of $10,000 at the date when the holding
company acquired its stock. The holding company purchased
90 per cent of the stock, the book value of which was $36,000
and the purchase price $34,000. The working papers are
prepared at the date of acquisition.
60
CONSOLIDATED STATEMENTS
Assets Co. A Co. B
Investment in Stock of Co. B (90%) Cost $34,000
Eliminate book value at acquisition:
Capital stock: 90% of $50,000. . .
Deficit: 90% of 10,000...
Deduction from goodwill
Deficit Co. B
Minority: 10% of $10,000
present deficit
Elim.H.C: 90% of 10,000
deficit at acquisition
Liabilities
Capital Stock:
Co. A $75,COO
Co. B.. $50,000
Eliminate holding company's 90%
Minority interest 10%
Surplus Co. A 2,000
Elim. C. B. S.
$45,000
9,000*
$10,000
$2,000*G
1,000 M
9,000
$45,000
$75,000
5,000 M
2,000 S
There is a $2,000 deduction from goodwill.
The holding company's surplus is $2,000, the balance of its
surplus account. The subsidiary has made no gains or losses
since the date of acquisition.
The minority interest is $5,000 stock minus $1,000 deficit,
or $4,000.
Eighth illustration. During the first year the subsidiary
lost $5,000, thus increasing its deficit to $15,000. The hold-
ing company made no entries for this loss; hence its invest-
ment account and its surplus remain unchanged.
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) Cost $34,000
Eliminate book value at acquisition:
Capital stock : 90% of $50,000 ... $45,000
Deficit: 90% of 10,000... 9,000*
Deduction from goodwill $2,000*G
Deficit Co. B $15,000
Minority: 10% of $15,000
present deficit 1,500 M
Elim. H. C. : 90% of 10,000
deficit at acquisition 9,0000
Surplus: 90% of $5,000
decrease since 4,500* S
Liabilities
Capital Stock:
Co. A $75,000
Co. B
Eliminate holding company's 90%
Minority interest 10%
Surplus Co. A 2,000
$50,000
$45,000
$75,000
5,000 M
2,000 S
BALANCE SHEETS AFTER ACQUISITION 61
There is a $2,000 deduction from goodwill.
The deficit appearing on the consolidated balance sheet will
be $2,500, being the holding company's surplus of $2,000
minus $4,500 which is its 90 per cent of the $5,000 decrease in
subsidiary surplus since the date of acquisition.
The minority interest is $5,000 stock minus $1,500 deficit,
or $3,500.
Ninth illustration. During the second year the subsidiary
made a profit of $30,000 and paid a dividend of $5,000, causing
a net increase of $25,000 in its surplus, thereby changing its
$15,000 deficit into a surplus of $10,000.
The holding company made no entry for its share of the
$30,000 profits, but it recorded the collection of its share of the
$5,000 dividend by debiting Cash and crediting Surplus wkh
$4,500. This entry causes no change in the investment ac-
count, but the holding company's surplus is increased from
$2,000 to $6,500.
Assets Co. A
Investment in Stock of Co. B (90%) Cost $34,000
Eliminate book value at acquisition:
Capital stock: 90% of $50,000. . .
Deficit: 90% of 10,000...
Deduction from goodwill .........
Co. B Elim. C. B. S.
$45,000
9,000*
$2,000*G
Liabilities
Capital Stock:
Co. A $75,000 $75,000
Co. B $50,000
Eliminate holding company's 90% $45,000
Minority interest 10% . 5,000 M
Surplus:
Co. A 6,500 6,500 S
Co. B 10,000
Minority: 10% of $10,000
present surplus 1,000 M
Elim. H. C. : 90% of 10.000
deficit at acquisition . . 9,000*
Surplus: 90% of $20,000
increase since 18,000 S
There is a $2,000 deduction from goodwill.
The surplus appearing on the consolidated balance sheet
will be $24,500, being the sum of the holding company's
$6,500 surplus account and the $18,000, which is its 90 per cent
of the increase in the subsidiary's surplus since the date of
acquisition.
62
CONSOLIDATED STATEMENTS
REVIEW EXERCISES
When the holding company takes up its share of subsidiary
profits, losses and dividends through the investment account,
eliminations are based on the book value of the subsidiary
stock at the date of the consolidated balance sheet. When
the holding company carries the investment account at cost,
eliminations are based on the book value at the date of
acquisition.
As a means of reviewing these principles, it is suggested that
the reader prepare consolidated balance sheet working papers
for the following cases.
In all cases it is assumed that the holding company owns 90
per cent of the subsidiary stock. In each group of eight
cases, the first four are based on the assumption that the
holding company has taken up its 90 per cent of the subsidiary
gains and losses through its investment account; the second
four are based on the same subsidiary profits and losses, but
the investment account is carried at cost. Neither company
has paid any dividends.
To simplify the cases, the various assets and liabilities are
shown in a single amount, as sundry net assets. The holding
company has no source of income other than its investment
in the subsidiary stock.
The solution to the first case is given to illustrate the form:
Case A:
Co. A Co. B Elim. C. B. S.
$110,000
Assets
Investment in Stock of Co. B (90)%. .
Eliminate present book value:
Capital stock: 90% of $100,000.
Surplus: 90% of 20,000.
Goodwill
Sundry Net Assets 105,000
$215,000
$90,000
18,000
$120,000
$120,000 $108,000
$ 2,000 G
225,000
$227,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus:
Co. A 15,000 15,OOOS
Co. B 20,000
Eliminate holding company's 90% 18,000
Minority interest 10% 2,OOOM
'$215,000 $120,000 $108,000 $227,000
REVIEW EXERCISES
63
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CHAPTER X
INTER-COMPANY RECEIVABLES AND PAYABLES
Current accounts. It has already been stated that the object
of the consolidated balance sheet is to show the financial con-
dition of a group of related companies in relation to the outside
world. In doing so, all inter-company accounts are eliminated.
Related companies frequently buy from and sell to each other
on credit, with the result that the accounts receivable of one
company will include a balance due from a related company;
and the same inter-company relation will be recorded among
the accounts payable of the other company. In preparing
the consolidated balance sheet working papers, the inter-
company accounts receivable and accounts payable must be
eliminated, only the net amounts being carried to the balance
sheet columns. These net amounts will represent the accounts
receivable due from the outside world and the accounts pay-
able due to the outside world.
Advances. When the capital of one company is inadequate
to its needs, one of the other related companies may advance
funds to it. The company receiving the advance will credit
it to Advances from Company, and the company mak-
ing the advance will charge it to Advances to Company.
These two accounts represent an inter-company relation, to
be offset in the elimination columns.
Notes receivable. If the inter-company indebtedness takes
the form of a note, one company will have an account Notes
Receivable Company - , and the other company will
have an account Notes Payable Company - . These
two accounts should also be offset in the elimination columns.
Notes receivable discounted. The situation is a little more
complex when one company has discounted notes receivable
taken from another company. To illustrate, let it be assumed
that Company A has given a $5,000 note to Company B.
Company B has discounted this note with its bankers. At
the date of the consolidated balance sheet, the note has not
65
66 CONSOLIDATED STATEMENTS
matured; therefore the following accounts will appear in the
trial balances of the two companies:
COMPANY A
Notes Payable Company B $5,000
COMPANY B
Notes Receivable Company A $5,000
Notes Receivable Company A Discounted 5,000
Since the note is in the hands of the bankers, the liability is
no longer an inter-company one, and hence it must be shown
as a liability on the consolidated balance sheet. The Notes
Payable account on Company A's books should be offset
against the Notes Receivable account on Company B's books,
and the Notes Receivable Company A Discounted account
should be carried to the consolidated balance sheet column,
thus:
Assets Co. A Co. B Elim. C. B. S.
Notes Receivable Co. A $5,000 $5,000
Liabilities
Notes Payable Co. B $5,000 $5,000
Notes Rec. Co. A Discounted .... 5,000 $5,000
There is a difference of opinion among accountants as to
whether the $5,000 liability to the outside world should be
shown in the consolidated balance sheet as Notes Receivable
Company A Discounted, or as Notes Payable. Those who
favor the former title contend that the note is a direct liabil-
ity of one of the related companies and a secondary liability
of the other company and hence is an obligation different in
nature from a note signed by one company only. Showing
the liability as a note payable would not indicate the liability
of both companies.
The author's opinion is that the Notes Payable title is
preferable. In the first place, the consolidated balance sheet
is based on the assumption that the related companies are a
single organization, the legal fact of separate corporate entities
being ignored. From the viewpoint of the consolidated balance
sheet, therefore, a note signed by one company is as much a
liability of the organization as a note signed by one company
and endorsed by another related company. In the second place,
the term Notes Receivable Discounted at once suggests a
contingent liability, and since an inter-company note dis-
counted with an outsider is a positive liability, the term is
likely to be misleading.
INTER-COMPANY ACCOUNTS 67
Inter-company bond holdings. When one company holds
bonds of another company, the bonds held as an asset by one
company may be offset against the bond liability of the other
company, and only the net amount outstanding in the hands
of the public be shown as a liability. It is preferable, however,
to carry out the asset account and the liability account to the
balance sheet columns of the working papers, and deduct the
inter-company holdings from the total liability on the face of
the consolidated balance sheet.
If a corporation has an authorized bond issue of $500,000,
of which only $400,000 has been issued, the facts should be
shown on its balance sheet thus:
Bonds Payable Authorized $500,000
Less Treasury Bonds 100,000
Bonds Outstanding $400,000
This procedure is followed because the mortgage is security
for the full issue of $500,000, and the company has $100,000
of bonds available for issue or for use as collateral for short
term loans on notes payable.
The situation is analogous in the case of inter-company
bond holdings, as the bonds are virtually treasury bonds of
the organization, available for issue or for use as collateral.
Premium or discount on inter-company bond holdings.
If the company which purchased the bonds paid more than par
for them, it may have written off the premium against its sur-
plus immediately. It is better accounting, however, to amor-
tize the premium by periodical charges to interest. When this
is done the balance of the bond investment account at all times
prior to maturity will be in excess of the par of the bonds.
In preparing the consolidated working papers, the bond
account should be divided into two parts, par and premium.
The portion representing par should be handled in the manner
described in the preceding section, and the portion representing
premium should be carried to the consolidated balance sheet
as unamortized premium on the purchase of treasury bonds
under the caption of deferred charges. Thus:
Assets Co. A Co. B Elim. C. B. S.
Investment in Bonds of Co. B $27,500
Par (Shown on the C. B. S. as
treasury bonds) $27,000
Unamorti/ed premium (Shown as a
deferred charge) 500
68 CONSOLIDATED STATEMENTS
If the company bought the bonds at a discount, the working
papers should be prepared as follows:
Assets Co. A Co. B Elim. C. B. S.
Investment in Bonds of Co. B $26,700
Par $27,000
Unamortized discount 300*
The unamortized discount should be shown on the con-
solidated balance sheet under the caption of deferred credits.
Accrued interest. If there are inter-company bonds or
notes, the balance sheet of the company issuing the paper
may show a liability for accrued interest. The company hold-
ing the paper should then show an asset of accrued interest
receivable. The accrued interest receivable should be offset
against the accrued interest payable, only the net amount due
to the outside creditors being shown on the consolidated bal-
ance sheet.
Declared dividends unpaid. If the subsidiary has declared
dividends which are unpaid at the date of the balance sheet,
its books will show a liability of dividends payable. The hold-
ing company's books should show an asset of dividends
receivable, which should be offset against the dividends
payable. The consolidated balance sheet will then show only
the dividends declared and payable to the outside or minority
stockholders.
Adjusting inter-company accounts. All inter-company rela-
tions should be shown on the books of both related companies,
so that the same amount may be eliminated from the assets
and the liabilities. If any inter-company transactions have
been recorded on the books of one company only, they should
be taken up on the books of the other company before the
consolidated balance sheet is prepared.
Goods may have been sold by one company to another just
prior to the close of the year and recorded in the current
account of the selling company, but not taken up in the books
of the purchasing company. Before preparing the consolidated
balance sheet these goods should be added to the purchasing
company's inventory and credited to the purchasing company's
current account with the selling company.
If services have been rendered by one company and recorded
by a charge to the current account and a credit to income, and
if the balance sheet of the other company is drawn up before
recording the transaction, an adjustment should be made
INTER-COMPANY ACCOUNTS 69
debiting Surplus and crediting the current account of the
company rendering the service.
If a company holding bonds of a related company has not
taken up its share of the accrued interest on these bonds, an
adjustment should be made debiting Bond Interest Receivable
and crediting Surplus.
If the subsidiary has declared a dividend which is unpaid at
the date of the balance sheet and which is shown on its books as
Dividends Payable, the holding company should take up its
share by a debit to Dividends Receivable. The offsetting credit
will depend upon the method adopted by the holding company
for carrying its investment in the subsidiary stock. If it has
taken up its share of subsidiary profits and losses by the method
explained in Chapter VII, the offsetting credit for the dividend
will be made in the investment account. If the investment
account is carried at cost, the offsetting credit will be made
to Surplus.
All of these adjustments may be indicated by the use of
Adjustment columns in the consolidated working papers.
Illustration. Company A owns 90 per cent of the stock of
Company B and 95 per cent of the stock of Company C. It
carries its investment account with Company C at cost, but
has taken up its share of the profits and losses of Company B.
The balance sheets of the three companies at December 31,
1921, were as follows:
BALANCE SHEET-COMPANY A
Investment in Stock of Co. B $64,000 Accounts Payable $ 25,000
Investment in Stock of Co. C 68,000 Capital Stock 100,000
Cash 5,000 Surplus 69,000
Co. B Current 6,000
Advances to Co. C 10,000
Investment in Bonds of Co. B . 41,000
$194,000 JS1M,<K.<~)
BALANCE SHEET COMPANY B
Cash $20,000 Bonds Payable $50,000
Merchandise Inventory 40,000 Bond Interest Accrued 1,500
Notes Receivable Co. C. ... 15,000 Accounts Payable 15,000
Plant 75,000 Company A Current 8,000
Notes Receivable Co. C
Discounted 6,000
Dividends Payable 3,000
Capital Stock 50,000
Surplus 16,500
$150,000' $150,000
70 CONSOLIDATED STATEMENTS
BALANCE SHEET COMPANY C
Cash $3,000 Accounts Payable $5,000
Merchandise Inventory 62,000 Advances from Co. A 10,000
Notes Receivable 11,000 Notes Payable Co. B 15,000
Plant 14,000 Dividends Payable 2,000
Capital Stock 40,000
Surplus 18,000
$90,000 $90,000
Company A holds bonds of Company B of a par value of
$40,000; the additional $1,000 in the bond investment account
represents unamortized premium. At the date when Company
A acquired its interest in the stock of Company C, the latter
company had a surplus of $30,000. The Company B Current
account in the holding company's balance sheet has a balance
of $6,000, while the offsetting current account on Company
B's balance sheet has a balance of $8,000. This difference is
accounted for as follows: Company A acts as a selling agent
for Company B on a commission basis, and at December 31
Company A charged Company B $1,000 as commission on
sales made during December, and these commissions have not
been taken up on the books of Company B. On December 30
Company B drew a draft on Company A for $3,000, depositing
the proceeds; this transaction has not been taken up on the
books of Company A. The holding company has not taken
up its proportion of accrued bond interest and declared div-
idends.
Explanation of adjustments. Capital letters are used to
indicate offsetting adjustments and small letters to indicate
offsetting eliminations. Adjustments are made as follows:
(A) To take up the holding company's 90 per cent of the divi-
dends declared by Company B. Ninety per cent of $3,000 =
$2,700. Since the holding company has reflected its share of
the profits and losses of Company B in its investment account,
the dividends declared should be treated as a reduction of the
investment account. Hence the entry: debit Dividends
Receivable and credit Investment in Stock of Company B.
(B) To take up on the holding company's records the draft
drawn by Company B, by a debit to Company B Current and a
credit to Cash, $3,000.
(C) To take up the interest accrued on bonds of Company B
held by Company A; debit Bond Interest Receivable and
INTER-COMPANY ACCOUNTS 71
credit Surplus $1,200, being 80 per cent of the $1,500 accrued
bond interest shown in Company B's balance sheet.
(D) To take up the holding company's 95 per cent of the
dividends declared by Company C. Ninety-five per cent of
$2,000 = $1,900. Since the holding company is carrying its
investment in Company C stock at cost, the dividends are
treated as income. Hence the entry: debit Dividends Re-
ceivable and credit Surplus.
(E) To take up on Company B's records the commission
charged by Company A on sales, $1,000. Debit Surplus and
credit Company A Current. This entry affects the surplus of
Company B and hence the amount eliminated from the Com-
pany B investment account on Company A's balance sheet.
COMPANY A AND SUBSIDIARY COMPANIES B AND C
CONSOLIDATED BALANCE SHEET
December 31, 1921
Assets
Current Assets:
Cash $25,000
Notes Receivable 11,000
Merchandise Inventory 102,000 $138,000
Fixed Assets:
Plant 89,000
Goodwill 3,850 92,850
Deferred Charges:
Unamortized Premium on Purchase of Treasury Bonds. . . 1,000
$231,850
T . .... . Liabilities
Current Liabilities:
Accounts Payable $45,000
Notes Payable 6,000
Accrued Bond Interest 300
Dividends Payable 400 $51,700
Fixed Liabilities:
Bonds Payable 50,000
Less Treasury Bonds 40,000 10,000
Minority Interests:
Company B 10% 6,550
Company C- 5% 2,900 9,450
Capital:
Capital Stock 100,000
Surplus 60,700 160,700
$231,850
72
CONSOLIDATED STATEMENTS
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INTER-COMPANY ACCOUNTS
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CHAPTER XI
MISCELLANEOUS TOPICS
Book value at acquisition in excess of cost. Chapter VI
contained a discussion of the treatment of the excess of book
value at acquisition over the cost of the stock purchased by the
holding company. The discussion in that chapter was limited
to the condition where a goodwill account appeared on the
books of the subsidiary whose stock was purchased at less
than book value. It is now necessary to discuss the proper
treatment when the subsidiary has no goodwill account.
It is the custom in such cases to treat the excess of book
value over cost as a deduction from goodwill wherever found
in the consolidated working papers. That is to say, it may be
deducted from goodwill appearing on the books of the holding
company, on the books of any other subsidiary, or arising from
the purchase of the stock of some other subsidiary at more than
book value. While this is customary, it does not seem to be
theoretically correct.
Assuming that the subsidiary has no goodwill account at
the date of acquisition, the fact that the holding company
acquired its stock at less than book value would seem to
indicate one of two things: either some asset on the subsidiary's
books was over-valued or the holding company made a fortu-
nate purchase, acquiring the right to more net assets than it
parted with. If some asset was over-valued, the excess of the
book value over purchase price should be deducted on the
consolidated balance sheet from the over-valued asset. If
no subsidiary asset was over-valued, and if the holding com-
pany acquired the subsidiary stock by an issue of its own
stock, it would seem that the excess value received over the
par of the stock issued in payment is paid-in surplus, to be
shown on the consolidated balance sheet as surplus, set apart
as capital surplus if the distinction is desired. If the holding
company acquired the subsidiary stock by a cash payment,
the excess would still appear to be a proper addition to cap-
ital surplus.
74
MISCELLANEOUS TOPICS 75
It is difficult to see the logic of offsetting "negative goodwill"
against goodwill appearing on the holding company's books.
If the holding company's goodwill account is a legitimate one,
the purchase of a subsidiary's stock at less than book value
would not seem to cause a decrease in the value of the holding
company's goodwill, unless the subsidiary's earnings were so
small that the investment would not pay a reasonable rate of
income. In this case the excess earnings of the holding com-
pany may be reduced and the capitalized value of the holding
company's excess earnings, or goodwill, may be reduced. The
same reasoning would apply to offsetting "negative goodwill"
against goodwill appearing on the books of one of the other
subsidiaries, or against goodwill arising from the purchase of
the stock of another subsidiary.
Of course it must be admitted that it is more conservative to
deduct such items from goodwill wherever found than to add
them to surplus. But it may be said that while it is con-
servative to write off any goodwill account it is not obligatory
to do so. Each case must be decided in the light of all related
facts with the guidance of the following principles :
If the subsidiary whose stock is acquired at less than book
value has a goodwill account, the negative goodwill should be
offset against the subsidiary's goodwill.
If there are over-valued assets on the subsidiary's books, the
excess of book value of the stock acquired over cost should be
deducted from the assets known to be over-valued. If no
specific over-valuation is known, but such over-valuation is
believed to exist, the excess cannot be deducted from specific
assets but may be shown on the liability side of the consolidated
balance sheet as a' reserve. Any descriptive title is satisfactory,
such as Reserve for Revaluation of Subsidiary Assets.
If no subsidiary assets are over-valued, the excess is a proper
addition to the consolidated surplus, preferably shown as
Capital Surplus to indicate that it did not arise from operations.
If it is desired to be conservative and write off goodwill
accounts, the excess may be deducted from goodwill wherever
found.
Minority interest subsidiary deficit. In all working papers
thus far prepared, the minority interest has been shown at an
amount equal to the minority's share of the subsidiary's stock
plus its share of the subsidiary's surplus or minus its share of
the subsidiary's deficit at the date of the consolidated balance
76
CONSOLIDATED STATEMENTS
sheet. In case the subsidiary has a deficit some accountants
show the minority interest at the par of the stock without
deduction of their pro-rata share of the deficit. The result of
this treatment is that the minority's share of the subsidiary's
deficit is deducted from the holding company's surplus. The
difference in treatment may be shown by the following illustra-
tion, in which it is assumed that the holding company has
taken up its share of subsidiary gains and losses. In the follow-
ing working papers the minority interest is reduced by its share
of the subsidiary's deficit.
Assets
Investment in Stock of Co. B (90%)
Eliminate book value:
Capital stock: 90% of $50,000. . .
Deficit: 90% of 10,000...
Goodwill
Cash
Merchandise
Deficit Co. B
Minority: 10% of $10,000
Elim. H. C: 90% of 10,000
Co. A
38,000
Co. B
Elim. C. B. S.
22,000 $20,000
80,000 , 45,000
10,000
$45,000
9,000*
9,000
$ 2,000 G
42,000
125,000
1.000M
$140,000 $75,000 $45,000 $170,000
Liabilities
Accounts Payable $ 15,000
Capital Stock:
Co. A 100,000
Co. B
Minority: 10%
Elim. B.C.: 90%
Surplus Co. A 25,000
$25,000
50,000
$45,000
$ 40,000
100,000
5,OOOM
25,000 S
$140,000 $75,000 $45,000 $170,000
The minority interest would be shown on the consolidated
balance sheet at $4,000, and the holding company's surplus at
$25,000.
If the minority's interest is not to be diminished by its share
of the subsidiary's deficit, the working papers would be pre-
pared in exactly the same manner, except that the $1,000
portion of the subsidiary's deficit carried out above as a deduc-
tion from the minority's interest, would be carried out as a
deduction from the holding company's surplus, with the result
that the minority interest would be shown at $5,000, the par
MISCELLANEOUS TOPICS 77
of the stock held by the minority, and the holding company's
surplus would be shown at $24,000.
Accountants who follow this latter method do so on the
theory that while the minority will share in profits, the holding
company will be obliged to "absorb the losses" of the sub-
sidiary in order to hold the organization together.
While it is true that the subsidiary may be such an essential
part of the organization that the holding company will consider
it expedient to retain its ownership of the stock in spite of
these losses, it does not seem necessary for the holding com-
pany to assume the magnanimous position of allowing the
minority to share in subsidiary profits while relieving them
from any reduction in the book value of their stock caused by
losses. As long as the subsidiary is able to pay its debts the
losses merely reduce the value of all shares proportionately.
If it comes to a point where the subsidiary is unable to pay its
debts it may be necessary for the holding company to advance
the funds necessary to pay the debts and prevent the creditors
from forcing the subsidiary into liquidation.
1 As an extreme illustration, let us assume that the subsidiary
losses have resulted in a deficit equal to the capital stock, and
that the holding company has not seen fit to make advances
to keep the business out of the hands of the creditors. The
creditors therefore take possession, and the holding company
loses its stock and the minority stockholders lose theirs. But
the holding company does not bear the minority's loss.
On the other hand, assume that the holding company has
made advances, so that the condition is as follows:
SUBSIDIARY BALANCE SHEET
Net Assets $ 50,000 Advances from Holding Company. . $ 50,000
Deficit 100,000 Capital Stock 100,000
The holding company may now take over the assets of the sub-
sidiary in settlement of the advances; again the holding com-
pany will lose its share of the stock and the minority will lose
their share.
The purpose of a balance sheet is to show the present financial
condition of a business organization. It would seem that a
consolidated balance sheet fulfils this purpose if it shows all of
the assets and liabilities of the combined companies, and the
actual present interests of the holding company and the
minority's stockholders in these net assets. Regardless of
78 CONSOLIDATED STATEMENTS
what the holding company may have to do in the future (and
it is difficult to see how it will have to bear more than its share
of the loss), it cannot be denied that the present book value
of the minority's interest in the net assets of the organization
is measured by the minority's share of the subsidiary's capital
stock and surplus or deficit.
Stock acquired from the subsidiary. In all illustrations
heretofore presented, it has been assumed that the holding
company acquired its stock by purchase from former stock-
holders of the subsidiary. The stock may be acquired by direct
subscription to the subsidiary. The difference in the method
of acquiring the stock would have no effect, however, on the
method of making eliminations from the investment account.
If the investment account has been charged with subsidiary
profits and credited with subsidiary losses and dividends, the
book value of the stock at the date of the balance sheet should
be eliminated; if the investment is carried at cost, the book
value at the date of acquisition should be eliminated.
Of course, the book value at the date of acquisition is the
book value after the holding company has paid for the stock.
To illustrate, a company has an issue of $30,000 of stock, all
outstanding in the hands of individual owners. The surplus is
$10,000. An additional issue of $70,000 is authorized and sold
to a holding company at 150, or $105,000. Eliminations would
be made as follows in the working papers prepared at the date
of acquisition :
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (70%) . . . $105,000
Eliminate book value:
Capital stock $70,000
Surplus: 70% of $45,000 .'. . 31,500
Goodwill $3,500 G
The $45,000 surplus is the sum of the $10,000 surplus on the
books of the subsidiary before the holding company acquired
its stock, and the $35,000 premium paid for the stock.
Liabilities Co. A Co. B Elim. C. B. S.
Capital Stock Co. B $100,000
Eliminate holding company's 70%. $70,000
Minority 30%. $30,OOOM
Surplus Co. B 45,000
Eliminate holding company's 70%. 31,500
Minority 30%. 13.500M
MISCELLANEOUS TOPICS
79
Before the issue of additional stock, the old stockholders had
a capital interest of $40,000. After the additional issue these
stockholders become the minority and have an interest of
$43,500. In other words, the holding company paid $3,500 as
goodwill to obtain control of this business, and this payment
inures to the benefit of the minority stockholders.
Subscription rights. Corporations frequently allow their
stockholders to subscribe for additional stock at par or at some
other figure less than book value. Regardless of the price paid
for the new stock the transaction has no effect on the goodwill
appearing in the consolidated balance sheet, provided all stock-
holders, including the minority, take new stock at the same
price and in amounts proportionate to their former holdings.
To illustrate, assume that immediately after the holding com-
pany (in the preceding illustration) acquired its stock, the di-
rectors of the subsidiary authorized the issue of an additional
$50,000 of stock to be subscribed and paid for at par by the
present stockholders in proportion to their present holdings.
All stock is issued on this basis, the holding company taking
$35,000 and the minority $15,000. The working papers follow:
Assets
Investment in Stock of Co. B (70%) . . .
Eliminate book value:
Capital stock: 70% of $150,000.
Surplus: 70% of 45,000.
Goodwill
Co. A
$140,000
Co. B
Elim. C. B. S.
Liabilities
Capital Stock Co. B
Eliminate holding company's 70%.
Minority 30%.
Surplus Co. B
Eliminate holding company's 70%.
Minority 30%.
$150,000
45,000
$105,000
31,500
$105,000
31,500
$3,500 G
$45,OOOM
13,500M
This illustration shows that when all stockholders pay for
new stock at the same price and take it in proportion to their
original holdings, their payments to the corporation increase
the book value of their holdings an amount exactly equal to
their payments and hence there is no effect on the goodwill
arising from the original purchase.
If the holding company or the minority should fail to take
new stock in amounts exactly proportionate to their former
holdings, the computation of the goodwill would be affected
80
CONSOLIDATED STATEMENTS
because of the change in the proportion of stock ownership
and the consequent change in the interests of the holding com-
pany and the minority in the surplus of the subsidiary. This
fact may be illustrated by assuming that, in the preceding illus-
tration, the holding company took all of the stock to which it
was entitled while the minority stockholders took only $5,000
of new shares. The total issue would be:
Par
Stock owned by holding company:
Original purchase $70,000
Additional 35,000 $105,000
Stock owned by minority:
Original holding 30,000
Additional 5,000
75%
35,000 25%
$140,000 100%
CONSOLIDATED WORKING PAPERS
Co. B Elim.
Assets Co. A
Investment in Stock of Co. B (75%) . . . $140,000
Eliminate book value:
Capital stock: 75% of $140,000. .
Surplus: 75% of 45,000..
Goodwill
Liabilities
Capital Stock Co. B
Eliminate holding company's 75% .
Minority 25%.
Surplus Co. B
Eliminate holding company's 75%.
Minority 25%.
$140,000
45,000
$105,000
33,750
$105,000
33,750
C. B. S.
$1,250 G
$35,OOOM
11.250M
It will be noted that the minority's interest in the surplus
is reduced $2,250 and the holding company's interest therein
increased an equal amount. The elimination of this excess
amount reduces the goodwill $2,250. It might be contended
with very good reason that the original stock purchase and the
subsequent subscription are entirely distinct transactions;
that the original purchase involved a payment of $3,500 for
goodwill, and that the subsequent transaction transferred
$2,250 of the subsidiary surplus from the minority to the
holding company without cost to the holding company; and
MISCELLANEOUS TOPICS 81
that therefore the goodwill should be shown as $3,500 since
this amount was paid for, and that the $2,250 should be added
to the holding company's surplus. While this position can be
defended, the treatment shown in the working papers is more
conservative.
Holdings of no par value stock. The method of making
eliminations is not affected by the fact that the subsidiary's
stock has no par value. The book value of the holding com-
pany's ownings is determined by ascertaining the per cent of
subsidiary stock owned and by eliminating this percentage of the
subsidiary's stock and surplus accounts. To illustrate, assume
that the subsidiary has an issue of 3,000 shares of no par value
stock for which $250,000 has been paid in and credited to Capi-
tal Stock. The subsidiary also has a surplus of $60,000. The
holding company acquired 2,400 shares for which it pays
$260,000.
CONSOLIDATED WORKING PAPERS
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (80%) . . .
2,400 shares of a total issue of 3,000 $260,000
Eliminate book value:
Capital stock : 80% of $250,000 . . $200,000
Surplus: 80% of 60,000.. 48,000
GoodwiU 12,000 G
Liabilities
Capital Stock Co. B $250,000
Eliminate holding company's 80%. $200,000
Minority 20%. $50,OOOM
Surplus Co. B 60,000
Eliminate holding company's 80%. 48,000
Minority 20%. 12,OOOM
Holdings of both common and preferred stock. When the
holding company owns both common and preferred stock, it
may be necessary to make a division of the subsidiary surplus
into the portions applicable to the two classes of stock, in order
to determine their book value and make proper eliminations.
If the holding company owns the same proportion of each
class, it will not be necessary to make a division of the sub-
sidiary surplus, since the two investments may be treated as
one, and a single elimination made to determine the goodwill.
The following working papers are illustrative.
82
CONSOLIDATED STATEMENTS
Assets Co. A
Investment in Preferred Stock of Co. B
(90%) $60,000
Investment in Common Stock of Co. B
(90%) 125,000
Eliminate book value:
90% of Preferred stock
90% of Common stock
90% of Surplus
Goodwill. .
Co. B
Elim. C. B. S.
Liabilities
Capital Stock Preferred Co. B
Eliminate holding company's 90%.
Minority 10%.
Capital Stock Common Co. B
Eliminate holding company's 90%.
Minority 10%.
Surplus Co. B
Eliminate holding company's 90% .
Minority 10%.
$50,000
100,000
40,000
$45,000
90,000
36,000
$45,000
90,000
36,000
$14,COOG
$5,OOOM
10,OOOM
4.000M
If the holding company owns different proportions of the
common and preferred stock, it is necessary to make a division
of the subsidiary surplus, and in making this division it is
necessary to consider whether the subsidiary's preferred stock
is cumulative or non-cumulative, participating or non-par-
ticipating, and whether there are any cumulative dividends in
arrears. In the following illustrations, it will be assumed that
the holding company bought 80 per cent of the preferred stock
for $48,000 (par value $40,000) and 90 per cent of the common
stock for $106,000 (par value $90,000). The subsidiary had
no surplus at the date of acquisition. The total paid for good-
will was therefore $8,000 + $16,000, or $24,000. At the end of
one year the subsidiary has made a profit of $18,000.
In the first place it will be assumed that the preferred stock
is non-cumulative and non-participating, and that the year's
dividend of $3,000 has been paid on the preferred stock. The
preferred therefore has no further claim on the surplus of the
subsidiary, which is reduced to $15,000 by the payment of the
preferred dividend, and the entire $15,000 would be applicable
to the common stock. Ninety per cent of this amount is $13,500
and this amount should have been taken up by the holding
company as well as their $2,400 dividend on the preferred
stock.
MISCELLANEOUS TOPICS
83
CONSOLIDATED WORKING PAPERS
Assets Co. A Co. B Elim. C. B. S.
Investment in Preferred Stock of Co. B
(80%) $48,000
Eliminate book value:
Capital stock: 80% of $50,000... $40,000
Goodwill $8,000 G
Investment in Common Stock of Co. B
(90%) 119,500
Eliminate book value:
Capital stock: 90% of $100,000. . 90,000
Surplus: 90% of 15,000.. 13,500
Goodwill 16,000 G
Liabilities
Capital Stock Preferred Co. B $50,000
Eliminate holding company's 80%. $40,000
Minority 20%. $10,OOOM
Capital Stock Common Co. B 100,000
Eliminate holding company's 90%. 90,000
Minority 10% 10.000M
Surplus Co. B Applicable to common
stock 15,000
Eliminate holding company's 90%. 13,500
Minority 10%. 1,500M
Surplus Co. A 15,900 15,900 S
In the second place it will be assumed that the preferred
stock is cumulative and non-participating, and that there are
no dividends in arrears. The rights of the preferred stock-
holders in the subsidiary surplus have therefore been satisfied
by the payment of the dividend, and the entire surplus is ap-
plicable to the common stock. Therefore the working papers
would be identical with those just shown.
In the third place it will be assumed that the preferred stock
is cumulative but non-participating, and that one year's div-
idend of 6 per cent is in arrears. The surplus is therefore
$18,000. As the profits have been earned, the preferred stock-
holders have a lien against them to the extent of $3,000, and
the holding company would be justified in taking up their
80 per cent thereof by a debit to the investment account and a
credit to earnings. The subsidiary surplus is divided into two
parts: $3,000 applicable to preferred stock, and $15,000
applicable to common stock.
84
CONSOLIDATED STATEMENTS
CONSOLIDATED WORKING PAPERS
Assets Co. A Co. B Elim. C. B. S.
Investment in Preferred Stock of Co. B
(80%) $50,400
Eliminate book value:
Capital stock : 80% of $50,000 . . . $40,000
Surplus: 80% of 3,000... 2,400
Goodwill $8,000 G
Investment in Common Stock of Co. B
(90%) 119,500
Eliminate book value:
Capital stock : 90% of $100,000 . . 90,000
Surplus: 90% of 15,000.. 13,500
Goodwill 16,000 G
Liabilities
Capital Stock Preferred Co. B $50,000
Eliminate holding company's 80%. $40,000
Minority 20%. $10,OOOM
Capital Stock Common Co. B 100,000
Eliminate holding company's 90% . 90,000
Minority 10%. 10.000M
Surplus Co. B (Applicable to preferred
stock) 3,000
Eliminate holding company's 80%. 2,400
Minority 20%. 600M
Surplus Co. B (Applicable to common
stock) 15,000
Eliminate holding company's 90%. 13,500
Minority 10%. 1.500M
Surplus Co. A (2,400 + 13,500) 15,900 $15,900 S
In the fourth place it will be assumed that the preferred stock
is cumulative and participating and that no dividends have been
paid on either preferred or common stock. Since the pre-
ferred stock is participating, it shares pro-rata with the com-
mon stock in the surplus. Therefore $6,000 of the earnings are
applicable to preferred and $12,000 are applicable to common.
The holding company would be justified in making the follow-
ing entry:
Investment in Preferred Stock of Co. B (80% of $6,000). . . $ 4,800
Investment in Common Stock of Co. B (90% of $12,000) . . 10,800
Surplus $15,600
To take up our share of the earnings of Co. B.
85
CONSOLIDATED WORKING PAPERS
Assets Co. A Co. B Elim. C. B. S.
Investment in Preferred Stock of Co. B
(80%) $52,800
Eliminate book value:
Capital stock: 80% of $50,000. . . $40,000
Surplus: 80% of 6,000... 4,800
Goodwill 8,OOOG
Investment in Common Stock of Co. B
(90%) 116,800
Eliminate book value:
Capital stock: 90% of $100,000. . 90,000
Surplus: 90% of 12,000.. 10,800
Goodwill 16,000 G
Liabilities
Capital Stock Preferred Co. B $50,000
Eliminate holding company's 80%. $40,000
Minority 20%. $10,OOOM
Capital Stock Common Co. B 100,000
Eliminate holding company's 90% . 90,000
Minority 10%. 10,OOOM
Surplus Co. B 18,000
Applicable to Preferred $6,000 . . .
Eliminate holding company's 80% 4,800
Minority 20% 1,200M
Applicable to Common $12,000. . .
Eliminate holding company's 90% 10,800
Minority 10% 1,200M
Surplus Co. A $15,600 15,600 S
Stock dividends. If the holding company carries its invest-
ment at cost, stock dividends should be taken up by a debit
to the investment account and a credit to surplus, as illustrated
in the following example:
Company A purchased 90 per cent of the stock of Company
B at January 1, 1920, paying $140,000 therefor. At that date
Company B had a capital stock of $100,000 and a surplus of
$50,000. During the year Company B made a profit of $25,000,
and at the end of the year declared and issued a stock dividend
of $40,000, of which Company A received $36,000. Assuming
that Company A had no surplus at the beginning of the year
and made no profits from its own operations, the working
papers at the end of the year would be:
86
CONSOLIDATED STATEMENTS
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B $176,000
Eliminate book value at acquisition:
Capital stock: Original purchase. $90,000
Stock dividend... 36,000
Surplus : 90% of $50,000 45,000
Goodwill $5,000 G
Liabilities
Capital Stock $140,000
Eliminate Co. A's 90% $126,000
Minority 10% $14,OOOM
Surplus:
Co. A $36,000 36,000 S
Co. B 35,000
Minority: 10% of $35,000 pres.
surplus 3,500M
Elim.H.C.:90%of 50,000 at
acquis 45,000
Surplus: 90% of 15,000 de-
crease 13,500*S
The surplus on the consolidated balance sheet will be
$22,500, which is 90 per cent of the year's profits of Company B.
If the stock dividend were not taken up by the holding
company, a portion of the capital stock of the subsidiary would
have to be carried out to the balance sheet columns as surplus
to appear in the consolidated balance sheet because the sub-
sidiary earnings since the date of acquisition have been merged
with the profits prior to acquisition and a portion of this
surplus has been transferred to the capital stock account of the
subsidiary.
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B $140,000
Eliminate book value at acquisition:
Capital stock $90,000
Surplus: 90% of $50,000 45,000
Goodwill. .
Liabilities
Capital Stock Co. B
Minority 10% of present stock
Elim. Co. A's 90% of stock at ac-
quisition
Surplus
Surplus Co. B
Minority 10% of $35,000 pres-
ent surplus
Elim. Co. A's 90% of 50,000 surp.
at acquisition ....
Surplus: 90% of 15,000 de-
crease. .
$140,000
35,000
$90,000
45,000
5,000 G
$14,OOOM
36,000 S
3,500M
13,500*S
MISCELLANEOUS TOPICS 87
If the holding company takes up its share of subsidiary
profits and losses, no entry should be made on the holding com-
pany's books for the stock dividend, as it represents merely
a transfer of a portion of the net worth from the subsidiary's
surplus to its capital stock account. If Company A has taken
up its $22,500 profits from Company B during the year, the
working papers will appear as follows:
Assets Co. A Co. B Elim. C. S. S.
Investment in Stock of Co. B $162,500
Eliminate present book value:
Capital stock: 90% of $140,000. . $126,000
Surplus: 90% of 35,000.. 31,500
Goodwill $5,000 G
Liabilities
Capital Stock Co. B '. $140,000
Eliminate Co. A's 90% $126,000
Minority 10% $14,OOOM
Surplus:
Co. A $22,500 22,500 S
Co. B 35,000
Eliminate Co. A's 90% 31,500
Minority 10% 3,500M
Arbitrary entries in investment account. In some instances
a holding company will not take up the profits and losses of its
subsidiary but will at intervals make entries of an arbitrary
amount to raise or lower the investment account to an esti-
mated present value. If the entry adjusts the investment to
its present book value as measured by the capital stock and
surplus accounts of the subsidiary, and if eliminations are made
in the working papers on the basis of present book value, the
effect will be to eliminate from the consolidated balance sheet
any goodwill or negative goodwill in the stock purchase. To
illustrate, Company A purchased 90 per cent of the stock of
Company B, paying $115,000 therefor. At the date of acquisi-
tion Company B had a capital stock of $100,000 and a surplus
of $20,000, so that its book value was $120,000. Ninety per
cent was $108,000, and there was therefore a goodwill ele-
ment of $7,000 in the purchase. The investment account was
carried at cost until the end of the year at which time the
subsidiary had a surplus of $50,000, making its book value
$150,000, and 90 per cent thereof, $135,000. Company A
thereupon made an entry debiting the investment account and
88
CONSOLIDATED STATEMENTS
crediting surplus with $20,000 to raise the investment account
from $115,000 to $135,000. If eliminations are made on the
basis of present book values, the working papers will appear
as follows:
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $135,000
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Surplus: 90% of 50,000.. 45,000
Liabilities
Capital Stock Co. B ................ $100,000
Eliminate holding company's 90% . $90,000
Minority interest 10% . $10,OOOM
Surplus:
Co. A .......................... $20,000 20,000 S
Co. B .......................... 50,000
Eliminate holding company's 90% 45,000
Minority interest 10% 5,OOOM
These working papers show that the goodwill of $7,000 is
eliminated, and that the holding company's surplus is only
$20,000, whereas the holding company should have taken up
its 90 per cent of the $30,000 profits for the year, or $27,000.
Because of the erroneous results produced if such arbitrary
entries are ignored, it is advisable to reverse them by adjust-
ing entries in the consolidated working papers.
CHAPTER XII
MAJOR HOLDING COMPANY CONTROL THROUGH
A MINOR HOLDING COMPANY
Outline of chapter. This chapter will contain four sections
devoted to the following subjects :
1. An explanation of the method by which a major holding
company may control a group of corporations through
the ownership of the stock of a minor holding company.
2. A discussion of the reasons why it is desirable for the
holding companies, and particularly the minor holding
company, to take up the subsidiary profits, losses and
dividends through the investment accounts rather than
to carry the investment accounts at cost.
3. An illustration of the preparation of consolidated working
papers when the investment accounts have been charged
with subsidiary profits and credited with subsidiary
losses and dividends.
4. An illustration of the preparation of consolidated working
papers when the investment accounts are carried at cost.
Major and minor holding company. In the process of com-
bining a group of corporations it frequently happens that one
company will buy a controlling interest in the stock of another
company which is itself a holding company owning stock in a
subsidiary. The minor holding company controls only its own
subsidiary, but the major holding company controls the minor
holding company and thus controls the entire organization.
Advantage of taking up subsidiary profits, losses and div-
idends. In discussing this subject we shall first consider the
minor holding company and discuss the reasons why it is de-
sirable for it to take up the profits, losses and dividends of its
subsidiary; second, we shall consider the advantages resulting
from having the major holding company also take up profits,
losses and dividends.
If the minor holding company takes up the profits, losses
and dividends of its subsidiary, the preparation of the con-
89
90 CONSOLIDATED STATEMENTS
solidated balance sheet will be facilitated in three particulars:
namely, the computation of the goodwill, the minority interest
and the surplus.
The goodwill involved in the purchase of the minor holding
company's stock by the major holding company is the excess
of the purchase price over the book value of the minor holding
company's stock at the date of acquisition. If the minor hold-
ing company has not taken up the profits of its subsidiary, its
surplus will be under-stated because it will not include the
profits which it has earned through the operations of its sub-
sidiary. The under-statement of surplus means an under-
statement of book value, and this in turn means an over-
statement of goodwill. To illustrate, assume that Company B
has a capital stock of $100,000 and a surplus of $50,000 arising
from its own operations. It owns all of the stock of Company
C but has not taken up the $25,000 profit earned by Company
C since it acquired C's stock. Company A now purchases all
of Company B's stock, paying $190,000 therefor. According to
Company B's books which show a capital stock of $100,000
and a surplus of $50,000, the book value of B's stock appears to
be $150,000, and the purchase of this stock by Company A at
a price of $190,000 appears to involve a goodwill element of
$40,000. But as a matter of fact Company B should have a
surplus of $75,000 and a total book value of $175,000, so that
the goodwill element is only $15,000.
In the second place, the computation of the minority interest
will be facilitated if the minor holding company takes up the
profits of its subsidiary. Returning to the illustration in the
preceding paragraph, let us assume that Company A bought
only 90 per cent of the stock of Company B. There is, therefore,
a 10 per cent minority interest in Company B. These minority
stockholders are entitled not only to 10 per cent of the profits
from the minor holding company's own operations but also to
10 per cent of the profits accruing from the ownership of the
subsidiary C stock. The minority interest in the surplus of
Company B is therefore 10 per cent of $75,000, but it will be
difficult to show this fact in the working papers if Company
B's surplus appears at only $50,000.
In the third place, the computation of the surplus appearing
on the consolidated balance sheet will be facilitated if the minor
holding company has taken up the profit of its subsidiary. To
illustrate, assume that Company A owns 90 per cent of the
MAJOR HOLDING COMPANY CONTROL 91
stock of Company B, and that Company B owns 80 per cent
of the stock of Company C. The surplus on the consolidated
balance sheet will include: (1) Company A's earnings from its
own operations, (2) plus 90 per cent of the earnings of Company
B since the date when Company A acquired its stock. These
earnings of Company B should include 80 per cent of the earn-
ings of Company C.
Now if Company B has taken up its earnings from Company
C, the surplus on the consolidated balance sheet will be cor-
rectly stated by merely taking up 90 per cent of the total earn-
ings of Company B since the date of acquisition. But if Com-
pany B has not taken up its earnings from Company C, a cor-
rect statement of the surplus of Company A will require
taking up (1) 90 per cent of the profits from the operations of
Company B since the date when A acquired the stock of B; and
(2) 90 per cent of 80 per cent of the profits from the operations
of Company C since the date when A acquired the stock of B.
Turning now to the advantages to be obtained if the major
holding company also takes up the profits and losses of its
subsidiary, it should be readily seen that the major holding
company's surplus will in that case include all of the profits
from its own operations and from the ownership of the stock
of its subsidiaries. For in taking up 90 per cent of the earnings
of Company B, which include B's share of the profits of C, the
major holding company has automatically taken up the proper
proportion of the profits of Company C. The surplus on the
consolidated balance sheet will therefore be the surplus of the
major holding company only, and it will not be necessary to
make involved adjustments on the working papers to take up
the proper proportions of the profits of the minor holding com-
pany and its subsidiary.
First illustration: All inter-company profits taken up. If
all subsidiary profits have been taken up by the major and min-
or holding companies, the preparation of the consolidated
working papers is a very simple matter, for all eliminations
are based on the present book values of the stock holdings. As
an illustration assume the following facts:
1. Company A owns 90 per cent of the stock of Company B
2. Company A owns 20 per cent of the stock of Company C
3. Company B owns 60 per cent of the stock of Company C
4. Company C owns 85 per cent of the stock of Company D
92 CONSOLIDATED STATEMENTS
Company A is therefore the major holding company, for it
controls the entire organization. Company B is a minor hold-
ing company, for it owns a majority of the stock of Company C.
Company C is also a minor holding company, for it owns a
majority of the stock of Company D.
All companies have taken up the profits, losses and dividends
of their subsidiaries; consequently the investment accounts
represent the present book value of the stock holdings plus
any goodwill or minus any negative goodwill involved in the
stock purchases. Therefore eliminations will be based on pres-
ent book values. Following are the balance sheets at De-
cember 31, 1920.
Assets Co. A Co. B Co. C Co. D
Investment in Stock of Co. B (90%) $92,493
Investment in Stock of Co. C (20%) 14,090
Investment in Stock of Co. C (60%) $ 41,070
Investment in Stock of Co. D (85%) $34,175
Cash 37,850 60,100 31,275 $38,500
^ $144,433 $101,170 $65,450 $38,500
Liabilities
Capital Stock $100,000 $75,000 $50,000 $30,000
Surplus 44,433 26,170 15,450 8,500
$144,433 $101,170 $65,450 $38,500
The following consolidated balance sheet is prepared from
the working papers on pages 93 and 94.
COMPANY A AND SUBSIDIARIES B, C AND D
CONSOLIDATED BALANCE SHEET
December 31, 1920
Assets
Goodwill $ 5,690
Cash 167,725
$173,415'
Liabilities
Minority Interests:
Company B (10%) $10,117
Company C (20%) 13,090
Company D (15%) 5.775 $28,982
Capital:
Capital Stock 100,000
Surplus _44,433 .144,433
"$173,415
MAJOR HOLDING COMPANY CONTROL 93
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CONSOLIDATED STATEMENTS
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MAJOR HOLDING COMPANY CONTROL 95
This illustration shows that when all of the holding com-
panies have taken up their proportions of subsidiary profits,
losses and dividends, the preparation of the working papers
is not in any way complicated by the fact that the major hold-
ing company holds its control of the organization by ownership
through a minor holding company.
The goodwill is the excess of the various investment accounts
over the present book value of the stock holdings.
The minority interests are their proportions of the capital
stock and surplus accounts of the companies in which they
own stock.
The surplus appearing on the consolidated balance sheet is
the major holding company's surplus only, for it includes the
subsidiary profits taken up.
Second illustration: Inter-company profits not taken up.
To illustrate the simplest method of preparing consolidated
balance sheet working papers when the major and minor hold-
ing companies have carried their investment accounts at cost,
the same group of companies will be used as in the first illustra-
tion. It will now be assumed, however, that no subsidiary profits
have been taken up; the investment accounts are all carried
at cost; and dividends received from subsidiaries have been
credited to surplus. All essential facts will be restated so that
reference to the preceding illustration will not be necessary.
The various stock purchases were made at dates and prices
as follows:
1. At January 1, 1918, Company A purchased 80 per cent of
the stock of Company B, paying $85,000.
2. At January 1, 1919, Company B purchased 60 per cent of
the stock of Company C, paying $45,000.
3. At January 1, 1920, Company A purchased 10 per cent of
the stock of Company B, paying $10,000.
4. At January 1, 1920, Company A purchased 20 per cent of
the stock of Company C, paying $14,000.
5. At January 1, 1920, Company C purchased 85 per cent of
the stock of Company D, paying $38,000.
Following are the balance sheets of the four companies at
December 31, 1920. These are the same balance sheets as
before, except that the investment accounts are carried at
cost, and the surplus accounts are different because the holding
companies have taken up subsidiary dividends as profits instead
96
CONSOLIDATED STATEMENTS
of crediting surplus with subsidiary profits and charging it
with subsidiary losses.
Assets Co. A
Investment in Stock of Co. B (90%) Cost $95,000
Investment in Stock of Co. C (20%) Cost 14,000
Investment in Stock of Co. C (60%) Cost
Investment in Stock of Co. D(85%) Cost
Cash 37,850
Co. B
$45,000
60,100
Co.C
$38,000
31,275
Co.D
$38,500
$146,850 $105,100 $69,275 $38,500
Lidbilties
Capital Stock $100,000
Surplus 46,850
$75,000
30,100
$50,000
19,275
$30,000
8,500
$146,850 $105,100 $69,275 $38,500
The fact that the investment accounts are carried at cost
makes the preparation of the consolidated working papers
far more difficult than in the preceding illustration. In the
first place, Companies B, C and D all have minority interests;
these minority stockholders are entitled to their proportions of
the true surplus of the respective companies. But in the case
of Companies B and C, the surplus accounts do not represent
the true surplus because these minor holding companies have
credited surplus with dividends received from their subsidiaries
rather than with the profits earned by the subsidiaries since
the dates of acquisition. If the dividends have exceeded the
profits earned during the period of ownership, the surplus
accounts are over-stated; if the profits earned by the sub-
sidiaries have exceeded the dividends paid by them, the surplus
accounts of the holding companies are under-stated.
In the second place, the consolidated balance sheet must
show the true surplus of Company A, but the surplus account
in Company A's balance sheet does not represent the true
surplus of Company A for the same reason that the surplus
accounts of Companies B and C do not represent their true
surplus; Company A has taken up dividends instead of taking
up the profits and losses of its subsidiaries.
The first step in the preparation of consolidated working
papers will therefore be the ascertaining of the true surplus,
accounts of the several companies^ This will be accomplished
by building up a statement showing what the several surplus
accounts would be if each company had taken up subsidiary
97
profits and losses instead of subsidiary dividends. Having
ascertained these true surplus balances, adjustments will be
made on the working papers to raise or lower the surplus ac-
counts to the true balances. That is, if subsidiary profits
have exceeded dividends, surplus will be credited; the off-
setting debit will be made against the investment accounts to
adjust them to the balances which they would have if the
holding companies had followed the correct accounting pro-
cedure. On the other hand, if subsidiary dividends have ex-
ceeded subsidiary profits, the holding companies' surplus ac-
counts will be debited for the excess of the dividends over the
profits; and the offsetting credits will be made in the invest-
ment accounts to reduce them; this reduction is necessitated by
the fact that dividends in excess of profits reduce the value of
the subsidiary net assets and hence reduce the value of the
investments.
Having made the adjustments indicated above, the invest-
ment accounts and surplus accounts will have been adjusted
to the same basis as in the preceding illustration, and elimina-
tions can be made on the basis of present book values, as in the
preceding illustration.
The following statement shows the operating profits and
losses of the four companies from January 1, 1918, to December
31, 1920, as well as the credits to surplus for subsidiary div-
idends taken up, and the debits to surplus for dividends paid.
The final balances agree with the surplus balances shown in the
balance sheet on page 96.
98 CONSOLIDATED STATEMENTS
STATEMENT OF SURPLUS ACCOUNTS PER BOOKS
(Subsidiary Profits and Losses Not Taken Up, but Subsidiary Dividends
Received Treated as Income)
Co. A Co. B Co. C Co. D
Surplus, January 1, 1918 $25,000 $30,000 $20,000 $5,000
Profits of 1918:
Dividends received.
3,600
Total
.... $38,600
$27,000
$25,000
$11,000
Less Dividends paid
6,000
4,500
3,000
1,500
Surplus, December 31, 1918
.... $32,600
$22,500
$22,000
$9,500
Profits of 1919:
From operations
8,000
5,000
4,000*
5,000
Dividends received
3,600
1,800
Total
.... $44,200
$29,300
$18,000
$14,500
6,000
4,500
3,000
1,500
Surplus, December 31, 1919
$38,200
$24,800
$15,000
$13,000
Profits of 1920:
From operations
. . . . 10,000
8,000
6,000
3,000*
Dividends received:
From Co. B
4,050
600
1,800
From Co. D
1,275
Total
. ... $52,850
$34,600
$22,275
$10,000
Less Dividends paid
6,000
4,500
3,000
1,500
Surplus, December 31, 1920 $46,850 $30,100 $19,275 $8,500
The following Statement of Adjusted Surplus and Invest-
ment Accounts shows the method of arriving at the necessary
adjustments. This statement is built up from the foregoing
statement of surplus accounts, and shows the entries in surplus
and investment accounts which should have been made by the
several companies to record profits, losses and dividends in
the proper manner. At the end of the statement there are
shown the surplus and investment account balances which
result from a proper accounting method; by comparing these
balances with the balances per the companies' books the neces-
sary adjustments are ascertained.
MAJOR HOLDING COMPANY CONTROL 99
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CHAPTER XIII
UNREALIZED INTER-COMPANY PROFITS
Profits in inventories. When one constituent company sells
goods at a profit to another constituent company, the minority
stockholders of the selling company have a right to consider
that the profit has been realized since the goods have been sold
to a company in which they have no interest. The holding
company which controls the organization and which looks
upon the various subsidiaries virtually as departments of the
organization, should not consider the profit as realized until
the goods have been resold to a purchaser outside of the
organization.
Therefore, if, at the date of the consolidated balance sheet,
the inventories of any of the related companies contain goods
which have been purchased from another related company
after the combination was effected, the inventories should be
analyzed to determine how much of their present cost or carry-
ing value is composed of profits added by the selling com-
panies. After this unrealized profit has been ascertained a
reserve should be created out of the holding company's surplus
for the holding company's portion of such unrealized profit.
To illustrate, it will be assumed that Company A owns 90
per cent of the stock of Company B. Company B has sold goods
to Company A during the year at a profit, and the inventory of
Company A at the end of the year includes goods purchased
from Company B on which the latter company made a profit
of $1,000. Since Company A, in taking up its share of the
profits of Company B, has taken up $900 of this profit, a reserve
should be created by deducting $900 from the holding com-
pany's surplus and transferring it to a reserve.
Position of reserve on the balance sheet. There are two
possible methods of showing the reserve for unrealized profits
on the consolidated balance sheet. The first is as a deduction
from inventories, and the second is on the liability side under
the caption of reserves. The former method is usually em-
103
104 CONSOLIDATED STATEMENTS
ployed and is theoretically correct, for inventories should be
priced at cost (unless market is lower) and cost should not
include the organization's share of unrealized profits resulting
from transfers from one related company to another.
Conflicting opinions as to amount of reserve. Some ac-
countants set up a reserve for the entire amount of the unreal-
ized profit instead of for the holding company's proportion
thereof. This is permissible for tax purposes, for the tax law
views the related companies as a unit without consideration of
minority interests. But the commercial purpose of a consol-
idated balance sheet is to show the interests of the holding
company's stockholders and the minority stockholders in the
total assets of the consolidation. From the commercial view-
point, the minority stockholders are outsiders and their share
of the profit is earned as soon as the goods are sold to another
corporation in which they have no interest.
Complications in computation of reserve. When the organ-
ization is composed of a number of companies, the computation
of the reserve for unrealized profits in inventories may be com-
plicated by the fact that:
1. The profits are made by a subsidiary of a minor holding
company;
2. The profits are cumulative.
The essential principle to bear in mind is that, so far as the
minority interest of the company making the profit by sale or
service is concerned, the profit is earned, but the holding com-
pany taking up the profit should set up a reserve for its pro-rata
share of the portion which has not been realized by sales out-
side the organization.
Profits of subsidiary of minor holding company. Three
illustrations will be given to show the method of determining
the amount of the reserve.
First illustration: A owns all of B; B owns 90 per cent of C.
B's inventory contains unrealized profits of $1,000 on goods
purchased from C. Since B has taken up 90 per cent of the
unrealized profit, and A has taken up the same amount by
taking up all of B's profit, a reserve of 90 per cent of $1,000, or
$900, should be set up.
Second illustration: A owns 80 per cent of B; B owns 90
per cent of C. A's inventory contains unrealized profits of
$1,000 on goods purchased from C. Since B has taken up 90
UNREALIZED INTER-COMPANY PROFITS 105
per cent of the unrealized profit made by C, and A has taken up
80 per cent of B's 90 per cent in taking up its share of B's profit,
the reserve should be 80 per cent of 90 per cent of $1,000, or
$720.
Third illustration: A owns 80 per cent of B and 10 per cent of
C; B owns 90 per cent of C. A's inventory contains unrealized
profits of $1,000 on goods purchased from C. B has taken up
90 per cent of the unrealized profit, and A has taken up 80 per
cent of this 90 per cent in taking up its share of B's profit. A
has also taken up 10 per cent of the unrealized profit by taking
up its share of C's profit. Since A has taken up 72 per cent plus
10 percent of the unrealized profit, it should set up a reserve for
82 per cent or $820. The remaining $180 is properly included
in the minority interest of Company B; these stockholders own
20 per cent of Company B which has taken up 90 per cent of the
profit, and this profit is realized to the minority of Company B
since they are outsiders so far as concerns the organization con-
trolled by Company A.
Cumulative profits. As an illustration of cumulative un-
realized profits in inventories, it will be assumed that Company
A owns 90 per cent of the stock of Company B, while Company
B owns 80 per cent of the stock of Company C. The inventory
of Company A contains goods which were put through one
process by Company C and sold to Company B at a profit of
$800; Company B put them through another process and sold
them to Company A at a profit of $1,200. The reserve is com-
puted as follows:
Company C's profits:
90% of 80% of $800 $ 576
Company B's profits:
90%of$l,200 1,080
Total reserve $1,656
Profits from sales before combination. If the inventories
contain goods which were sold by one company to another
before the holding company acquired control of the selling
company, no reserve should be created because the holding
company did not take up a share of such profits and should not
be required to reduce its surplus by an amount which has not
been included therein. The companies were not related when
106 CONSOLIDATED STATEMENTS
the sale took place, and hence the profit is not inter-company
profit.
Inter-company profits in construction. When one related
company produces fixed assets for another company and makes
a profit on the construction, a reserve should be created to
eliminate the holding company's proportion of such profit and
reduce the fixed assets to cost. As already shown in connection
with inventories, the cost may properly include the profit made
by the minority stockholders of the selling company. The hold-
ing company can not equitably ask the minority stockholders
of its subsidiary to forego their share of the profit on work done
for a company in which they have no interest.
To illustrate, assume that Company A owns 90 per cent of
the stock of Company B. After the combination is effected,
the latter company sells fixed assets to Company A at a profit
of $1,000. At the end of the year, Company A will take up
$900 of the profit which Company B made on the sale, and it
should therefore create a reserve of $900 for unrealized profit
in fixed assets.
The question of inter-company profits on construction of
fixed assets is a much more complex one than that of inter-
company profits in inventories. Inter-company profits in
inventories will become realized profits when the goods are sold
to outsiders and the reserve will disappear when the goods are
disposed of. In the case of fixed assets, however, the property
is not ordinarily disposed of through sale, and it might seem
therefore that the reserve should be kept intact and appear as a
deduction on the balance sheet at the original amount so long
as the fixed assets are owned. But it should be remembered
that the fixed assets are virtually disposed of gradually through
use and depreciation, and it would therefore seem logical to
reduce the depreciation charges to a basis of inter-company
cost. This view is strengthened when it is remembered that
depreciation should be based on cost, and that cost cannot be
two different things for two different purposes. If cost for
balance sheet purposes is purchase price less inter-company
profit, then cost for depreciation purposes should be the same
amount. If manufacturing expense is charged with deprecia-
tion on the purchase price, the costs of manufacture will be
over-stated since depreciation will have been computed on a
value in excess of the cost to the organization.
It is not difficult to put this theory into practice if the hold-
UNREALIZED INTER-COMPANY PROFITS 107
ing company owns the asset on which the inter-company profit
was made. Two methods are available:
1. The holding company may write down the asset to inter-
company cost by debiting surplus and crediting the asset
account instead of crediting a reserve for inter-company profit.
Depreciation will then be computed on the carrying value of
the property as shown by the asset account.
2. The holding company may carry the reserve and compute
depreciation on the carrying value of the property as measured
by the debit balance in the asset account minus the credit
balance in the reserve for inter-company profit.
To illustrate, assume that Company A owns 90 per cent of
the stock of Company B, and that during the year Company
B manufactured for Company A machinery which it delivered
to them at the end of the year, billing them at $25,000. The
profit made by Company B was $5,000. Company A took up
90 per cent of this amount, or $4,500, in taking up its share of
the profits of Company B. If Company A follows the first
method suggested above, it will debit its surplus and credit
the machinery account $4,500, thus reducing the asset to
$20,500 which is inter-company cost after allowing the minority
stockholders of Company B their 10 per cent of the profit.
Depreciation will then be computed on $20,500. If Company
A follows the second method suggested above, it will debit
surplus and credit a reserve for unrealized profit in fixed assets
$4,500; it will then compute depreciation on the $25,000 balance
of the asset account minus the $4,500 balance of the reserve for
inter-company profit.
The theory is not so easily put into practice if the company
making the profit sold the assets to another affiliated company
instead of to the holding company. To illustrate, assume that
Company A owns 90 per cent of the stock of Company B and
80 per cent of the stock of Company C. Company C has sold
machinery to Company B for $50,000 which cost $40,000.
When Company A takes up its 80 per cent of the profits of
Company C, it takes up $8,000 of this unrealized inter-company
profit and should therefore create a reserve of $8,000. The
first method suggested above is not practicable in this case; the
asset is on Company B's books while the unrealized profit must
be taken out of Company A's surplus. It is impossible to write
down the asset on Company B's books, because that would
involve a debit to Company B's surplus which would be
108 CONSOLIDATED STATEMENTS
improper, because the inter-company profit went into A's
surplus and not into B's. The asset will therefore go on B's
books at $50,000, and the reserve will be set up at $8,000 on
A's books.
For consolidated balance sheet purposes the cost of the asset
was $42,000, but Company B will compute depreciation on a
basis of $50,000, which was the cost to Company B as a sepa-
rate corporation. If the rate of depreciation is 10 per cent, the
depreciation on a straight line basis will be $5,000 annually.
But from the standpoint of the organization as a unit Com-
pany B has over-stated its manufacturing costs by 10 per cent
of $8,000 or $800, and if all of the goods manufactured by
Company B during the year have been sold outside the organ-
ization the profits of the organization have been under-stated
$800. In other words, according to the theory which makes
depreciation a manufacturing expense, 10 per cent of the ma-
chinery has now been converted into finished goods and sold.
Ten per cent of the unrealized profit on fixed assets is thereby
realized by converting the fixed assets into finished goods and
selling them. The holding company A would therefore be
justified, in the author's opinion, in transferring 10 per cent of
the $8,000 reserve or $800 to its surplus account, thus reducing
the reserve on the holding company's books to $7,200. The
asset would then appear on the consolidated balance sheet as
follows :
Machinery $50,000
Less Reserve for inter-company profit on construction. . . $7,200
Reserve for depreciation 5,000 12,200
$37,800
This treatment seems theoretically correct since it produces
the same result which would be produced by either the first or
second method if the holding company had itself purchased
the asset from Company C. In that case Company A would
carry the asset on its own books at $42,000. The depreciation
at 10 per cent would be $4,200, and the carrying value at the
end of the first year would be:
Machinery (at cost less inter-company profit) $42,000
Less Depreciation 4,200
$37,800
UNREALIZED INTER-COMPANY PROFITS 109
There is a still further complication if the finished goods have
not been sold or have been sold to another company within the
organization. In that case the inter-company profit on con-
struction has merely been converted into inter-company profit
in inventories, and, as this inter-company profit has not been
realized by sales outside the organization, it should appear in
the reserve for inter-company profits in inventories on the
consolidated balance sheet.
Illustration of working papers. The method of obtaining
the reserves for the consolidated balance sheet will depend
upon whether or not they have been set up on the books of the
holding company. If they have been set up, they will appear
in the balance sheet of the holding company and will be merely
carried out to the consolidated balance sheet columns. If they
have not been set up on the holding company's books, they will
be deducted from the holding company's surplus on the work-
ing papers, as indicated below:
CONSOLIDATED BALANCE SHEET WORKING PAPERS
Co. A Co. B Elim. C. B. S.
Surplus Co. A $40,000
Reserve for int.-co. profit in inventories $ 900 R
Reserve for int.-co. profit in construction 4,500 R
Surplus 34,600 S
CHAPTER XIV
CONSOLIDATED PROFIT AND LOSS AND SURPLUS
STATEMENTS
SEPARATE WORKING PAPERS
Working papers based on statements or trial balances. At
the close of each accounting period it is customary to prepare
a consolidated profit and loss statement, a consolidated surplus
statement and a consolidated balance sheet. There are two
methods available for making the working papers for these
statements.
First, they may be prepared from the statements of the hold-
ing company and its subsidiaries after their books are closed.
If this method is adopted there will be a separate set of work-
ing papers for the revenue statement, the surplus statement
and the balance sheet.
Second, they may be prepared from the trial balances of the
holding company and its subsidiaries before the books are
closed. If this method is adopted there will be a single set of
working papers from which all of the consolidated statements
will be prepared.
The first method will be illustrated in this chapter; the second
method will be illustrated in Chapter XV.
Consolidated revenue statement Working papers. When
the consolidated revenue statement is prepared from the rev-
enue statements of the holding company and the subsidiaries,
the statement may be divided into a cost of goods sold state-
ment and a profit and loss statement, or both sections may be
combined in a single statement. In either event, the working
papers should contain columns for each company, two columns
for adjustments if necessary, a column for inter-company
eliminations, and one for the consolidated figures. The pro-
cedure may be summarized as follows:
1. Combine all similar items of income and expense.
2. Eliminate all inter-company nominal accounts.
All inter-company transactions should have been taken
110
PROFIT AND LOSS; SURPLUS 111
up on the books of both companies which were
parties to the transaction. If they have not been
taken up, adjustments will be required in the working
papers.
3. Make adjustments for inter-company profits as follows:
a. Profits in inventories at the beginning of the period.
(1) If the beginning of the period was also the
date of acquisition, make no adjustment as the
profits were not inter-company profits. (2) If the
beginning of the period was subsequent to the date
of acquisition, make adjustment by reducing the in-
ventories; this adjustment is equivalent to a credit
to cost of sales (since the opening inventories are
debited to cost of sales) and a debit to the holding
company's surplus as of the beginning of the period.
Only the credit will be shown in the revenue state-
ment working papers; the debit will appear in the
surplus statement working papers.
b. Profits in inventories at the end of the period.
Make adjustment by reducing the inventories; this
adjustment is equivalent to a debit to cost of sales
since the closing inventories are credited to cost of
sales, and a credit to reserve for inter-company profit
in inventories. Only the debit will be shown in the
revenue statement working papers.
c. Profit on construction during the period. Adjust
by a reduction of the nominal account showing the
profit; this adjustment is equivalent to a debit to
the income account and a credit to the reserve.
4. From the total consolidated net profit:
Deduct the minority interests in the profits of the sub-
sidiaries, to obtain the net increase or decrease in
the profits of the holding company.
Consolidated surplus statement Working papers. When
the consolidated surplus statement is prepared from the sur-
plus statements of the holding company and the subsidiaries,
the working papers should contain columns for each company,
two columns for adjustments if necessary, a column for in-
ter-company eliminations, a column for the minority interest in
the surplus accounts of the subsidiaries, and a column for the
consolidated surplus figures. The procedure may be sum-
marized as follows:
1. Enter the holding company's surplus as of the beginning
of the period; make adjustment for any inter-company
112 CONSOLIDATED STATEMENTS
profits in inventories at the beginning of the period
which were not provided for on the books of the holding
company. Carry the adjusted surplus to the consoli-
dated surplus column.
2. Enter the surplus of each subsidiary as of the beginning
of the period.
a. Carry the minority interests thereof to the minority
column.
b. If the holding company has followed the procedure
of taking up its share of subsidiary profits and losses,
eliminate the holding company's percentage of the
subsidiary's surplus at the beginning of the period.
c. If the holding company has carried the investment
account at cost, eliminate the holding company's
percentage of the surplus at the date of acquisition,
and carry to the consolidated surplus column the
holding company's percentage of the increase or
decrease in subsidiary surplus since the date of
acquisition.
3. Foot the consolidated surplus column; the total should
be the consolidated surplus of the organization at the
beginning of the period, and should tie up with the
surplus appearing on the consolidated balance sheet
prepared at that date.
4. Enter the earnings of each company, the earnings of the
minority and the consolidated earnings for the year,
as shown by the consolidated profit and loss statement
working papers.
5. Enter the dividends of each company, eliminate inter-
company dividends, deduct dividends paid to minority
holders in the minority column, and deduct dividends
paid by the holding company in the consolidated
column.
The balance of the minority column should be the minority's
interest in the surplus of the subsidiaries, and the balance of
the consolidated column should be the consolidated surplus at
the end of the period and should tie up with the surplus shown
in the consolidated balance sheet.
Outline of illustrations of separate working papers. The
procedure of preparing working papers depends as indicated
in paragraph 2 of the preceding section, upon whether the
holding company carries its investment account at cost or takes
up its share of subsidiary profits and losses. It also depends
upon whether the subsidiaries have paid any dividends during
PROFIT AND LOSS; SURPLUS
113
the period. The following illustrations will indicate the pro-
cedure under various combinations of these conditions.
Group I. Subsidiary profits and losses up to beginning of
period taken up by holding company:
First illustration: No dividends paid by subsidiaries.
Second illustration: Dividends paid by subsidiaries taken
up by holding company as credit to Investment account.
Group II. Investment carried at cost:
Third illustration: No dividends paid by subsidiaries.
Fourth illustration: Dividends paid by subsidiaries taken
up by the holding company as a credit to Profit and Loss.
First illustration: Consolidated profit and loss statement.
At December 31, 1921, Company A owns 90 per cent of the stock
of Company B, which it purchased five years prior, and 80 per
cent of the stock of Company C, which it purchased at January
1, 1921. Following are the revenue statements of the three
companies for the year 1921:
COMPANY A AND SUBSIDIARIES B AND C
PROFIT AND Loss STATEMENTS (Exhibit A)
For the Year Ending December 31, 1921
Co. A Co. B Co. C
Gross Sales $300,000 $225,000 $120,000
Less Returned Sales and Allowances 3,000 2,000 1,000
Net Sales 297,000 223,000 119,000
Less Cost of Goods Sold (Exhibit B) 215,000 175,000 80,000
Gross Profit on Sales 82,000 48,000 39,000
Less Selling Expenses 23,000 22,000 15,000
Net Profit on Sales 59,000 26,000 24,000
Less General and Administrative Expenses 22,000 11,000 3,000
Net Profit on Operations 37,000 15,000 21,000
Add Miscellaneous Income:
Rent of Equipment to Company B 3,000
Bond Interest Received from Company C. . . 2,000
Total 40,000 17,000 21,000
Less Bond Interest Paid 6,000 2,500
Net Profit for the Year... ... $34,000 $17,000 [$18,500
114
CONSOLIDATED STATEMENTS
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PROFIT AND LOSS; SURPLUS 115
Company C does no manufacturing, but deals only in raw
materials, selling to outsiders and to Companies A and B.
Both Company B and Company A manufacture; Company B
sells to Company A and to outsiders; Company A sells to out-
siders only.
Company A has taken up its share of the profits of Com-
pany B in prior years, but has taken up no subsidiary profits
for 1921. Therefore Company A's profit and loss statement
contains no figures for subsidiary profits or dividends.
The inventories at January 1, 1921, contained inter-company
profits made by sales between companies as follows:
Profit Made Profit Made
Company A's Inventories: by Co. B by Co. C
Raw Materials $2,000 $1,000
Goods in Process 1,500 800
Company B's Inventories:
Raw Material 500
Goods in Process 800
Finished Goods 250
The inventories at December 31, 1921, contained profits
made by sales between companies as follows:
Profit Made Profit Made
Company A's Inventories: by Co. B by Co. C
Raw Materials $2,500 $1,200
Goods in Process 800 200
Finished Goods 1,800 1,500
Company B's Inventories:
Raw Materials 500
Goods in Process 1,000
Finished Goods 1,300
Company C sold $60,000 worth of goods to Company B
during the year and $35,000 worth to Company A. Com-
pany B sold $75,000 worth to Company A. Following are the
working papers and the consolidated statements.
The first step is to ascertain the adjustments to be made in
the working papers for inter-company profits in inventories.
Since Company C was not a part of the organization prior to
January 1, 1921, the profits which it made on sales to Company
A and Company B prior to that date were not inter-company
profits, and hence are ignored. The profit made by Company
B on the goods in Company A's inventories at January 1, 1921,
116 CONSOLIDATED STATEMENTS
must be considered. Company A's inventory at January 1
contained goods on which Company B had made a profit of
$3,500. Since Company A owns 90 per cent of the stock of
Company B the reserve at January 1, 1921, will be $3,150.
Of this total, $1,800 will be deducted from the inventory
of raw materials, and $1,350 from the inventory of goods
in process.
The reserves for inventories at December 31, 1921, are com-
puted as follows:
Company A:
Raw Materials:
90% of $2,500 profit made by Co. B $2,250
80% of 1,200 profit made by Co. C 960 $3,210
Goods in Process:
90% of $800 profit made by Co. B 720
80% of 200 profit made by Co. C 160 880
Finished Goods:
90% of $1,800 profit made by Co. B 1,620
80% of 1,500 profit made by Co. C 1,200 2,820
Company B:
Raw Materials:
80% of $500 profit made by Co. C 400
Goods in Process:
80% of $1,000 profit made by Co. C 800
Finished Goods:
80% of $1,300 profit made by Co. C 1,040
$9,150
The unrealized profit is summarized by inventories as follows
Co. A's Co. B's
Inventory Inventory Total
Raw Materials $3,210 $ 400 $3,610
Goods in Process 880 800 1,680
Finished Goods 2,820 1,040 3,860
Total reserve at December 31, 1921 $9,150
After computing these adjustments for inter-company profits
in inventories, the consolidated working papers may be drawn
up. The working papers for cost of sales are prepared in the
following form:
PROFIT AND LOSS; SURPLUS
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CONSOLIDATED STATEMENTS
COMPANY A AND SUBSIDIARIES B AND C
CONSOLIDATED PROFIT AND Loss STATEMENT WORKING PAPERS
For the Year Ending December 31, 1921
Co. A Co. B Co. C Elim. Consolidated
P.VL.
Gross Sales $300,000 $225,000 $120,000 $170,000(A) $475,000
Less Returned Sales and Allow-
ances 3,000 2,000 1,000 6,000
Net Sales 297,000 223,000 119,000 469,000
Less Cost of Goods Sold 215,000 175.000 80,000 303,000
Gross Profit on Sales 82,000 48,000 39,000 166,000
Less Selling Expenses 23,000 22,000 15,000 60,000
Net Profit on Sales 59,000 26,000 24,000 106,000
Less General and Administrative
Expenses 22,000 11,000 3,000 36.000
Net Profit on Operations 37,000 15,000 21,000 70,000
Add Miscellaneous Income:
Rent of Equipment to Co. B. 3,000 3,000(B)
Bond Interest from Co. C.... 2,000 2,000(C)
Total 40,000 17,000 21,000 70,000
Less Bond Interest Paid 6,000 2.500 2,000(C) 6,500
Net Profit for the Year $34,000 $17,000 $18,500 $63,500
Minority Interests:
Company B (10%) 1,700
Company C (20%) 3,700
Total 5,400
Holding Company's Earnings. . ^ $58,100
COMPANY A AND SUBSIDIARIES B AND C
CONSOLIDATED STATEMENT OF COST OF GOODS SOLD
For the Year Ending December 31, 1921 (Exhibit A)
Goods in Process, January 1, 1921 $ 53,650
Materials:
Inventory, January 1, 1921 $ 68,200
Add Purchases 146,000
Total 214,200
Deduct Inventory, December 31, 1921 82.390
Materials Used 131,810
Direct Labor 150,000
Manufacturing Expense 107,000 388,810
Total " ' 442,460
Deduct Goods in Process, December 31, 1921 78.320
Cost of Goods Manufactured 364,140
Add Inventory of Finished Goods, January 1, 1921 30,000
Total 394,140
Deduct Finished Goods Inventory, December 31, 1921 91,140
Cost of Goods Sold 303,000
PROFIT AND LOSS; SURPLUS 119
COMPANY A AND SUBSIDIARIES B AND C
CONSOLIDATED PROFIT AND Loss STATEMENT (Exhibit B)
For the Year Ending December 31, 1921
Gross Sales $475,000
Less Returned Sales and Allowances 6,000
Net Sales. 469,000
Less Cost of Goods Sold (Exhibit A) 303,000
Gross Profit on Sales 166,000
Less Selling Expenses 60,000
Net Profit on Sales 106,000
Less General and Administrative Expenses 36,000
Net Profit on Operations 70,000
Deduct Bond Interest Paid 6,500
Net Profit for the Year $63,500
Distributed as follows:
Minority interest of Company B $ 1,700
Minority interest of Company C 3,700
Holding Company A 58,100
$63,500
First illustration continued: Consolidated surplus statement.
Following is a summary of the surplus accounts of the three
companies:
Co. A Co. B Co. C
Surplus, January 1, 1921 $35,000 $25,000 $20,000
Add Profits of 1921 34,000 17,000 18,500
Surplus, December 31, 1921 $69,000 $42,000 $38,500
In studying the consolidated surplus statement working
papers which follow, it should be remembered that Company
A has taken up its 90 per cent of the profits of Company B of
former years, these profits being included in its $35,000 surplus
at January 1, 1921.
The $31,850.00 balance of the holding company's surplus,
after eliminating the $3,150.00 unrealized profit at the be-
ginning of the year, should agree with the surplus shown in
the consolidated balance sheet of January 1, 1921. The sub-
sidiary surplus accounts are dealt with in accordance with
paragraph 2 c on page 112.
120
CONSOLIDATED STATEMENTS
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PROFIT AND LOSS; SURPLUS 121
COMPANY A AND SUBSIDIARIES B AND C
CONSOLIDATED SURPLUS STATEMENT (Exhibit C)
For the Year Ending December 31, 1921
Surplus, January 1, 1921 $31,850
Add Holding Company's share of 1921 Profits (Exhibit B) 58,100
Surplus, December 31, 1921 (Per Consolidated Balance Sheet) $89,950
Second illustration: Consolidated profit and loss and surplus
statements. This illustration will be based on the same facts
as the first illustration. In addition it is assumed that both
subsidiaries have paid dividends, which have been credited by
Company A to the respective investment accounts. The hold-
ing company has also paid dividends. None of these dividends
will appear in the profit and loss statements of the several com-
panies, and hence the consolidated profit and loss statement
will be the same as in the first illustration.
Following is a statement of the surplus accounts :
Co. A Co. B Co. C
Surplus, January 1, 1921 $35,000 $25,000 $20,000
Profits, 1921 34,000 17,000 18,500
Total 69,000 42,000 38,500
Less Dividends Paid 6,000 4,500 3,000
Surplus, December 31, 1921 $63,000 $37,500 $35,500
The following consolidated surplus statement is prepared
from the working papers on page 122.
COMPANY A AND SUBSIDIARIES B AND C
CONSOLIDATED SURPLUS STATEMENT
Year Ending December 31, 1921
Surplus, January 1, 1921 $31,850
Add Profits of 1921 Per Consolidated P. & L. Statement 58,100
Total 89,950
Less Dividends Paid 6,000
Surplus, December 31, 1921 $83,950
122
CONSOLIDATED STATEMENTS
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Third illustration: Consolidated profit and loss and surplus
statements. This illustration is based on the same facts as the
first illustration, with the further assumption that the holding
company is carrying its investment accounts at cost, and is
taking up subsidiary dividends as a credit to Profit and Loss.
But since no dividends were paid during 1921, there will be no
dividend figures in the profit and loss statements, and hence
the consolidated profit and loss working papers will be the same
as in the first two illustrations.
The consolidated surplus statement working papers will
differ from the two preceding ones in this particular: the holding
company has not taken up the profits of the subsidiaries and
hence its surplus will not include these profits but will include
the subsidiary dividends. Therefore the surplus accounts of
the subsidiaries at the beginning of the period will be disposed
of as follows:
a. Carry minority interest in present surplus to the minority
column.
b. Eliminate holding company's proportion of subsidiary
surplus at date of acquisition.
c. Carry to the consolidated surplus column the holding
company's proportion of the increase or decrease in sub-
sidiary surplus since acquisition.
In this illustration it will be assumed that Company B had a
surplus of $20,000 at the date of acquisition. Since that date
its profits have been $15,000 and its dividends have been
$10,000. Company A has not taken up its share of the profits
but has taken up its share of the dividends of prior years by
credits to profit and loss.
In the preceding illustrations Company A's surplus was
shown as $35,000 at January 1, and this balance included
$13,500 (90 per cent of $15,000) profits of Company B taken up.
In this illustration, under the assumption that Company A has
taken up only $9,000 (90 per cent of $10,000) dividends, Com-
pany A's surplus will be $30,500 instead of $35,000. The
surplus accounts of the other companies will be unchanged.
The consolidated surplus statement prepared from the fol-
lowing working papers will be exactly like the one in the first
illustration, on page 121.
124
CONSOLIDATED STATEMENTS
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Fourth illustration: Consolidated profit and loss statement.
This illustration will be based on the same facts as the third
illustration, with the additional assumption that the three
companies paid dividends during 1921 as follows:
Company A $6,000
Company B 4,500
Company C 3,000
Company A has taken up its proportion of the subsidiary
dividends by credits to profit and loss; it is carrying the invest-
ment accounts at cost.
The consolidated profit and loss statement working papers
will be the same as in the first illustration, on page 118, down
to Net Profit on Operations. The dividends are shown under
Miscellaneous Income in the working papers on page 126.
126
CONSOLIDATED STATEMENTS
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CHAPTER XV
CONSOLIDATED PROFIT AND LOSS STATEMENT,
SURPLUS STATEMENT AND BALANCE SHEET
COMBINED WORKING PAPERS FROM TRIAL BALANCES
Form of working papers. When a single set of working pa-
pers is prepared from the trial balances of the holding company
and the subsidiaries to obtain the consolidated figures for the
cost of goods sold statement, the profit and loss statement, the
surplus statement, and the balance sheet, the working papers
should contain columns for the trial balance of each company,
for adjustments, inter-company eliminations, manufacturing
account, selling account (or the two latter may be combined
in a single Cost of Sales column to save space), profit and loss,
and balance sheet.
Outline of illustrations. This chapter will contain three
illustrations, divided into two groups, as follows:
Group I. Subsidiary profits and losses taken up on the hold-
ing company's books; dividends recorded as a credit to the
Investment account.
First illustration: All dividends credited to investment
account; hence balance at end of year represents book
value at the beginning of year minus dividends received
during the year, and plus goodwill.
Group II. Investment account carried at cost.
Second illustration: 100 per cent ownership. All stock
acquired at beginning of period.
Third illustration: Less than 100 per cent ownership.
Stock acquired prior to beginning of period.
First illustration. This illustration is based on the same
conditions as the second illustration in the preceding chapter.
Ninety per cent of the stock of Company B was acquired prior
to the beginning of the period, and 80 per cent of the stock of
Company C was acquired at the beginning of the period. All
subsidiary earnings and dividends have been recorded through
the investment account; therefore at the beginning of the period
the investment accounts represented book value plus goodwill.
128
COMBINED WORKING PAPERS
129
During the year the holding company has taken up dividends
by credits to the investment accounts but has not taken up the
subsidiary profits for the year.
Following are the trial balances of the holding company and
subsidiaries at December 31, 1921.
COMPANY A AND SUBSIDIARIES
TRIAL BALANCES DECEMBER 31, 1921
Debits Co. A Co. B Co. C
Cash $16,450 $7,500 $22,500
Accounts Receivable 30,000 35,000 50,000
Inventories, January 1, 1921:
Raw Materials 40,000 15,000 15,000
Goods in Process 25,000 30,000
Finished Goods 30,000
Co. B Current Account 10,000
Co. C. Current Account 5,000
Plant and Machinery 125,000 70,000
Investment in Stock of Co. B (90%) 90,450
Investment in Stock of Co. C (80%) 57,600
Bonds of Co. C 40,000
Purchases, Raw Materials 145,000 95,000 76,000
Direct Labor 85,000 65,000
Manufacturing Expense 70,000 40,000
Returned Sales and Allowances 3,000 2,000 1,000
Selling Expenses 23,000 22,000 15,000
General and Administrative Expenses 22,000 11,000 3,000
Bond Interest Paid 6,000 2,500
Dividends Paid 6,000 4,500 3,000
$754,500 $402,000 $258,000
Credits
Capital Stock $200,000 $75,000 $50,000
Surplus, January 1, 1921 35,000 25,000 20,000
Bonds Payable 100,000 50,000
Reserve for Depreciation 11,500 3,000
Accounts Payable 55,000 20,000 10,000
Notes Payable 50,000 45,000
Company A Current 10,000
Company B Current 5,000
Sales 300,000 225,000 120,000
Rent of Equipment to Co. B 3,000
Bond Interest Received from Co. C 2,000
$754,500 $402,000 $258,000
In the following consolidated working papers the adjustments
and inter-company eliminations are cross-referenced by letters
to facilitate tracing offsetting items.
130
CONSOLIDATED STATEMENTS
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Explanation of working papers. These working papers
were prepared in the following manner: The trial balance
figures were entered, leaving room for eliminations after the
investment accounts and after the capital stock and surplus
accounts. The trial balance columns were then added to detect
any possible errors in copying figures from the trial balances
to the working papers.
The inventories at December 31, 1921, were entered by
adjustment (a) by a debit to Inventories on the debit sheet and
a credit to Cost of Sales on the credit sheet. The inventories
were listed in detail on the credit side in the columns of the
several companies, so that they could be readily included in the
total credits to the nominal accounts of each company in de-
termining its profit. The debit to Inventories was carried to
the consolidated balance sheet column. In drawing up the
consolidated balance sheet the detail of the inventories can be
obtained from the credit sheet.
An adjustment was made for inter-company profits in inven-
tories at January 1, 1921, by adjustment (b) debiting Com-
pany A's surplus and crediting the inventories, thus reducing
the charge to cost of sales for the opening inventories.
I The dividends paid by Company B and Company C were
transferred to the respective surplus accounts by adjustments
(c) and (d). These entries are made because the holding com-
pany has taken up these dividends by credits to the invest-
ment accounts. Since it is following this method of accounting,
eliminations will be made on the basis of present book values;
i.e., surplus at January 1, 1921, less dividends paid in 1921.
The investment accounts represent book values at January 1,
1921, less dividends received; therefore the surplus elimination
should be on the basis of January 1, 1921 surplus less dividends
paid.
A reserve for inter-company profits in inventories at Decem-
ber 31, 1921, was created by adjustment (e) charging cost of
sales (as a reduction of the inventories to be credited to cost
of sales) and crediting the reserve, which was carried to the
consolidated balance sheet column.
All inter-company accounts were eliminated. These elim-
inations may be traced by the letters.
All items affecting cost of sales were carried to the cost of
sales column after making deductions as indicated by the ad-
justments and eliminations. Items affecting profit and loss
COMBINED WORKING PAPERS 135
and items to appear in the consolidated balance sheet were
carried to their respective columns.
Trial balance nominal account debits were added and de-
ducted from trial balance nominal account credits (including
inventories) to determine the profit of each company and the
minority interests in profits.
The adjustment and elimination columns were footed to see
that they balanced.
On the debit sheet the total of the consolidated cost of sales
column was determined; the total of the credits to cost of sales
was determined and carried over to the debit sheet where it
was deducted from the total debits to obtain the net cost of
sales of $303,000. This amount was carried to the debit profit
and loss column.
On the credit sheet the total of the profit and loss column was
determined; the total of the debits to profit and loss was de-
termined and carried over to the credit sheet where it was
deducted from the total credits to ascertain the net profit for
the year. The two minority interests were deducted and car-
ried to the consolidated balance sheet column, and the remain-
ing net profit, applicable to the holding company, was carried
to the consolidated balance sheet column.
The two consolidated balance sheet columns were footed.
Consolidated statements. The consolidated cost of goods
sold statement prepared from these working papers will be
exactly like the one on page 118 of Chapter XIV, and will
show $303,000 as the cost of goods sold during the year. The
consolidated profit and loss statement will be identical with the
one on page 119 of- Chapter XIV, and will show $58,100 as
the consolidated net profit. The consolidated surplus state-
ment will be a duplicate of the one on page 121 and will show
$83,950 as the consolidated surplus. This is the same surplus
which appears in the following consolidated balance sheet.
The following data are summarized from the working
papers for use in the consolidated balance sheet:
Minority Minority Consolidated
in B inC Surplus
Surplus, January 1, 1921 less dividends $2,050 $3,400 $25,850
Profitsofl921 1,700 3,700 58.100
Surplus, December 31, 1921 3,750 7,100 $83,950
Minority Interests in Capital Stock 7,500 10,000
Total Minority Interests $11,250 $17,100
136 CONSOLIDATED STATEMENTS
COMPANY A AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1921
Assets
Fixed Assets:
Plant and Machinery $195,000
Less Reserve for Depreciation 14,500 $180,500
Goodwill 8,500 $189,000
Current Assets:
Inventories:
Raw Materials $86,000
Goods in Process 80,000
Finished Goods 95,000 261,000
Less Reserve for Inter-Company
Profit 9,150 251,850
Accounts Receivable 115,000
Cash 46,450 413,300
$602,300
Liabilities
Fixed Liabilities:
Bonds Payable $150,000
Less Treasury Bonds 40,000 $1 10,000
Current Liabilities:
Accounts Payable 85,000
Notes Payable 95,000 180,000
Minority Interests:
In Company B (10%) 11,250
In Company C (20%) 17,100 28,350
Capital:
Capital Stock 200,000
Surplus 83.950 283.950
$602,300
Second illustration. In this illustration, which is taken from
a recent Ohio C. P. A. examination, the holding company
acquired all of the stock of the subsidiaries at the beginning of
the period. No profits have been taken up; dividends have been
credited to Dividends Received to be transferred to Surplus
at the end of the period. A consolidated profit and loss state-
ment, surplus statement and balance sheet are to be prepared
from the following trial balances at the end of 1919.
COMBINED WORKING PAPERS
137
Cleveland Cincinnati Columbus
Debits Mfg. Co. Mfg. Co. Mfg. Co.
Cash $150,000 $50,000 $110,000
Accounts Receivable 650,000 210,000 400,000
Notes Receivable 300,000 50,000 50,000
Raw Materials Purchased 600,000 380,000 490,000
Labor 430,000 350,000 350,000
Manufacturing Expenses 220,000 170,000 160,000
Selling Expenses 100,000 60,000 100,000
Administrative Expenses 50,000 30,000 40,000
Plant and Machinery 1,000,000 600,000 800,000
Dividends Paid 450,000 100,000 200,000
Capital Stock Owned:
Cincinnati Mfg. Co 1,000,000
Columbus Mfg. Co 1,500,000
Inventory, January 1, 1919 150,000 100,000 150,000
$6,600,000 $2,100,000 $2,850,000
Credits
Accounts Payable $150,000 $105,000 $360,000
Notes Payable 50,000 95,000 90,000
Sales 1,500,000 1,100,000 1,200,000
Dividends Received 300,000
Capital Stock 4,500,000 500,000 800,000
Surplus, January 1, 1919 100,000 300,000 400,000
$6,600,000 $2,100,000 $2,850,000
The inventories at December 31, 1919, were as follows:
Qeveland Company $300,000
Cincinnati Company 150,000
Columbus Company 200,000
Provide 10 per cent depreciation on total plant and ma-
chinery.
Notes payable of the Cincinnati Manufacturing Co. amount-
ing to $95,000 and of the Columbus Manufacturing Co.
amounting to $90,000 are for money advanced by the Cleveland
Manufacturing Co. and are included in notes receivable of
the Cleveland Manufacturing Co.
The inventory of the Columbus Manufacturing Co. includes
goods purchased from the Cleveland Manufacturing Co. on
which the latter company made a profit of $25,000.
The accounts receivable of the Cleveland Manufacturing
Co. include $200,000 due from the Columbus Manufacturing
Co. for goods shipped during the year.
The entire capital stocks of the Cincinnati and Columbus
companies were acquired on January 1, 1919, at the cost as
shown by the books of the Cleveland Manufacturing Co.
138
CONSOLIDATED STATEMENTS
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The inter-company sales and purchases may have been more
than $200,000 but the only information as to these transactions
is contained in the statement that there were $200,000 of inter-
company receivables at the end of the year for goods sold during
the year.
THE CLEVELAND MANUFACTURING COMPANY
AND SUBSIDIARIES (Exhibit A)
CONSOLIDATED PROFIT AND Loss STATEMENT
For the Year Ending December 31, 1919
Sales $3,600,000
Less Cost of Goods Sold :
Inventory, January 1, 1919 $ 400,000
Purchases 1,270,000
Labor 1,130,000
Manufacturing Expense 550,000
Depreciation Plant and Machinery 240,000
Total $3,590,000
Less Inventory, December 31, 1919 625,000 2,965,000
Gross Profit on Sales $635,000
Less Selling Expenses 260,000
Net Profit on Sales $375,000
Less Administrative Expenses i 120,000
Net Profit for the Year $255,000
THE CLEVELAND MANUFACTURING COMPANY
AND SUBSIDIARIES (Exhibit B)
CONSOLIDATED SURPLUS STATEMENT
For the Year Ending December 31, 1919
Surplus January 1, 1919 $100,000
Add Profits 1919 255,000
Total $355,000
Deduct Dividends paid in 1919 450,000
Deficit December 31, 1919 $95,000
COMBINED WORKING PAPERS
143
THE CLEVELAND MANUFACTURING COMPANY
AND SUBSIDIARIES (Exhibit O
CONSOLIDATED BALANCE SHEET
December 31, 1919
Assets
Fixed Assets:
Plant and Machinery $2,400,000
Less Reserve for Depreciation 240,000 $2,160,000
Goodwill 500,000 $2,660,000
Current Assets:
Inventories $650,000
Less Reserve for Inter-Company
Profit 25,000 $625,000
Accounts Receivable 1,060,000
Notes Receivable 215,000
Cash 310,000 2,210,000
$4,870,000
Liabilities
Capital:
Capital Stock $4,500,000
Less Deficit (Exhibit B) 95,000 $4,405,000
Current Liabilities:
Accounts Payable 415,000
Notes Payable 50,000 465,000
$4,870,000
Third illustration. This illustration is based on the same
data as the second illustration, with the following changes:
1. The holding company owns only 90 per cent of the stock
of each company. This change will introduce the feature of
minority interests.
2. The holding company acquired its stock interests at
January 1, 1918. This change will introduce two features:
a. Adjustments will have to be made for inter-company
profit in inventories at January 1, 1919, which were:
(1). In Cincinnati inventories, $20,000 added on sales
by Columbus.
(2). In Cleveland inventories, $15,000 added on sales by
Cincinnati. (See page 148).
144
CONSOLIDATED STATEMENTS
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148 CONSOLIDATED STATEMENTS
b. The eliminations from the investment accounts and the
subsidiary surplus accounts will be based on book values at a
date prior to the beginning of the period, and hence on surplus
amounts different from those shown in the trial balances, which
are the surplus balances at the first of the year.
Since the holding company has not taken up profits, losses
and dividends by entries in the investment accounts, the
balances represent the cost at January 1, 1918. At that date
the Cincinnati Manufacturing Company had a surplus of $160,-
000 and the Columbus Manufacturing Company had a surplus
of $500,000.
Since'the holding company did not own all of the stock of the
subsidiaries during the year, the dividends received were only
90 per cent of the amounts paid by the subsidiaries, and hence
in the following working papers the dividends received from the
Cincinnati Company appear in the trial balance at $90,000
instead of $100,000, and the dividends received from the
Columbus Company appear at $180,000 instead of $200,000, a
total reduction of $30,000. The holding company's cash is
correspondingly reduced from $150,000 to $120,000.
THE CLEVELAND MANUFACTURING COMPANY
AND SUBSIDIARIES (Exhibit A)
CONSOLIDATED PROFIT AND Loss STATEMENT
For the Year Ending December 31, 1919
Sales $3,600,000
Deduct Cost of Goods Sold:
Inventory, January 1, 1919 $ 368,500
Purchases 1,270,000
Labor 1,130,000
Manufacturing Expense 550,000
Depreciation Plant and Machinery 240,000
Total 3,558,500
Less Inventory, December 31, 1919 627,500 2,931,000
Gross Profit on Sales 669,000
Less Selling Expenses 260,000
Net Profit on Sales 409,000
Less Administrative Expenses 120,000
Net Profit for the Year $ 289.000
For Minority Stockholders of Cincinnati Mfg. Co. . $ 10,000
For Minority Stockholders of Columbus Mfg. Co. . 3,000
For Cleveland Mfg. Co 276,000
$289,000
COMBINED WORKING PAPERS 149
Before preparing the consolidated surplus statement, it is
necessary to assemble the various elements of the consolidated
surplus at January 1, 1919.
Cleveland Mfg. Co. surplus after adjustment for inter-company profit
in inventories at January 1, 1919 $68,500
Add holding company's 90% of increase in Cincinnati Mfg. Co.'s
surplus since acquisition 126,000
Total 194,500
Deduct holding company's 90% of decrease in Columbus Mfg. Co.'s
surplus since acquisition 90,000
Adjusted surplus as at January 1, 1919 $104,500
THE CLEVELAND MANUFACTURING COMPANY
AND SUBSIDIARIES (Exhibit E)
CONSOLIDATED SURPLUS STATEMENT
For the Year Ending December 31, 1919
Surplus, January 1, 1919 $104,500
Add Profits for 1919 (Exhibit A) 276,000
Total 380,500
Deduct Dividends Paid 450,000
Deficit, December 31, 1919 $69,500
Before preparing the consolidated balance sheet it is desirable
to assemble the elements of the minority interests:
Cincinnati Columbus
Capital stock $50,000 $80,000
Surplus, January 1, 1919 30,000 40,000
Profits, 1919 10,000 3,000
Total 90,000 123,000
Less Dividends paid in 1919 10,000 20,000
Minority Interests, at December 31, 1919 $80,000 $103,000
150
CONSOLIDATED STATEMENTS
THE CLEVELAND MANUFACTURING COMPANY
AND SUBSIDIARIES (Exhibit O
CONSOLIDATED BALANCE SHEET
December 31, 1919
Assets
Fixed Assets:
Goodwill $736,000
Plant and Machinery $2,400,000
Less Reserve for Depreciation 240,000 2,160,000 $2,896,000
Current Assets:
Inventories 650,000
Less Reserve for Inter-Company Profit 22,500 627,500
Accounts Receivable 1,060,000
Notes Receivable 215,000
Cash 280,000 2,182,500
$5,078,500
Liabilities
Current Liabilities:
Accounts Payable $ 415,000
NotesPayable 50,000 $465,000
Minority Interests:
Cincinnati Mfg. Co. (10%) 80,000
Columbus Mfg. Co. (10%) 103,000 183,000
Capital:
Capital Stock 4,500,000
Less Deficit (Exhibit B) " 69,500 4,430,500
$5,078,500
APPENDIX A
PROBLEMS
Problem i. Three-fourths of the capital stock of Company
A and two-thirds of the capital stock of Company B is owned
by the holding company C. Company C purchased the above
stock of Company A at 150 in February, 1905, on the basis of
the balance sheet given below, dated January 1, 1905.
Assets Liabilities
Real Estate, Plant, etc $100,000 Capital Stock $150,000
Inventory, Merchandise 100,000 Surplus 75,000
Accounts Receivable 75,000 Bills Payable 75,000
Cash 25,000
$300,000 $300,000
During the year 1905 Company A made a net profit after
providing for depreciation, bad debts, etc., of $5,000, and the
directors of Company A declare and pay a dividend of 10
per cent as of February 15, 1906.
The stock of Company B owned by Company C was pur-
chased in March, 1905, at 125, on the basis of the balance sheet
below, dated January 1, 1905.
Assets Liabilities
Real Estate, Plant, etc $450,000 Capital Stock $500,000
Patents 50,000 Bonded Indebtedness 200,000
Inventory, Merchandise 200,000 Accounts Payable 62,500
Accounts Receivable 150,000 Surplus 125,000
Cash 37,500
$887,500 $887,500
During the year 1905 Company B made a net profit of $50,-
000 after making all necessary provision for bad debts and for
depreciation on plant, machinery and patents. The directors
of Company B declare and pay a dividend of 8 per cent as of
February 14, 1906.
Draw up all the necessary entries in respect to the purchase
of the stock of the two companies, their earnings and dividends,
as they should appear on the books of Company C, the holding
company.
151
152
CONSOLIDATED STATEMENTS
Problem 2. On January 1, 1910, X Y Z Company acquired
the entire capital stock of the P Q Company, consisting of 1,000
shares of par value of $100 each, for which was paid the sum of
$150,000. After the transaction was recorded on the books of
the X Y Z Company, the balance sheets of the two companies
were as follows:
X Y Z Company P Q Company
Real Estate $ 50,000 $25,000
Buildings, Plant and Equipment. . . 75,000 45,000
Goodwill 25,000
Investment in P Q Company 150,000
Inventories 80,000 20,000
Accounts Receivable 70,000* 85,000
Accounts Payable $50,000 $50,000*
Loans 50,000
Capital Stock 250,000 100,000
Surplus 100,000 25,000
$450,000 $450,000 $175,000 $175,000
* Includes account of $15,000 due by P Q Company to X Y Z Company.
Prepare a consolidated balance sheet.
Problem 3. Company A purchased on January 1, 1917, the
entire capital stock of Company B at $175 per share, and the
entire stock of Company C at $80 per share. There are no
inter-company accounts or inventories.
You are handed the balance sheets as understated, at June
30, 1917, and are requested to prepare a consolidated balance
sheet of the A Company and its subsidiaries at that date.
BALANCE SHEET-COMPANY A
Property and goodwill $850,000
Stock of subsidiary companies 1,500,000
Current assets 700,000
Capital stock $2,250,000
Current liabilities 150,000
Surplus, January 1 525,000
Undivided profits for half
year 125,000
$3,050,000
$3,050,000
BALANCE SHEET COMPANY B
Property and goodwill $650,000
Current assets 60,000
Capital stock $400,000
Current liabilities 10,000
Surplus, January 1 200,000
Undivided profits for half
year 100,000
$710,000
$710,000
APPENDIX A 153
BALANCE SHEET COMPANY C
Property (as appraised Janu-
ary 1, 1917) $1,130,000 Capital stock $1,000,000
Current assets 180,000 Current liabilities 240,000
Surplus, January 1 30,000
Undivided profits for half
year 40,000
$1,310,000 $1,310,000
Problem 4. In the process of consolidating several compet-
ing establishments, Corporation A, the holding company,
acquires $98,000 out of a total of $100,000 of the capital stock
of Company B. At the time of the purchase the balance sheet
of Company B showed surplus and undivided profits of $50,000.
Company A bought the stock of B at 200 per cent. Almost
immediately after the purchase Company B declared and paid
a cash dividend of 25 per cent.
In what ways would the payment of this dividend affect (a)
the balance sheet of B; (b) the balance sheet of A; (c) the
consolidated balance sheet of A and its subsidiary companies?
Give reasons for your answer.
Problem 5. Prepare a consolidated balance sheet with the
use of the data contained below:
COMPANY A (Holding Company)
BALANCE SHEET
December 31, 1913
Assets Liabilities
Investment in other com-
panies at cost: Capital Stock $2,000,000
B (75% interest) $1,000,000 Collateral Trust 5% Notes. . 1,000,000
C (70% interest) 750,000 Surplus 1,000,000
D (80% interest) 850,000 $2,600,000
Other Sundry Assets 1,400,000
$4,000,000 $4,000,000
NOTE: As indicated above, the Holding Company has not
recognized in its books the increase or decrease in the value
(represented in profits and losses) of the investments in sub-
154
CONSOLIDATED STATEMENTS
sidiaries, except that dividends received from time to time have
been carried to surplus account.
The dates as of which the interests in the various companies
were acquired are as follows:
B January 1, 1910
C July 1, 1908
D June 30, 1912
COMPANY B
BALANCE SHEET
December 31, 1913
Fixed Assets.
Current Assets . . .
Deferred Charges.
Assets
$500,000
500,000
100,000
Liabilities
Capital Stock $600,000
Current Liabilities 100,000
Surplus:
Balance 1/1/10 $100,000
Profits Since. ... 500,000
Dividends .
$1,100,000
600,000
200,000 400,000
$1,100,000
COMPANY C
BALANCE SHEET
December 31, 1913
Assets
Fixed Assets $700,000
Current Assets 250,000
Deferred Charges 50,000
Deficiency Account:
Balance 1/1/1906. $250,000
Dividends, Dec. 1,
1913 500,000
750,000
'Profits from l/l/
1906 650,000
100,000
$1,100,000
Liabilities
Capital Stock $800,000
Current Liabilities 300,000
$1,100,000
* It con be assumed that there was no fluctuation of profits as between months.
APPENDIX A
155
COMPANY D
BALANCE SHEET
December 31, 1913
Assets
Fixed Assets $500,000
Current Assets 500,000
Deferred Charges 100,000
$1,100,000
Liabilities
Capital Stock $800,000
Current Liabilities 100,000
Surplus:
Balance 1/1/1911 $300,000
*Profits Since 800,000
1,100,000
Dividends declared
in 1911 900,000 200,000
$1,100,000
* The amount of $800,000 is made up thus:
Profits IQII $600,000
'Loss 1912 100,000
Profits 1913 300,000
1 For the purpose of solving the problem assume that $50,000 of this loss was incurred in the six months
ending June 30, 1912.
Prepare: (A) Consolidated working papers.
(B) Consolidated balance sheet.
Problem 6. The following is a balance sheet of the Brown
Company as at December 31, 1917:
Real Estate, Buildings and Machinery $200,000
Patents and Goodwill 350,000
Investment in Black Company 1,800 Shares of $100
each, purchased March 31, 1917, for 270,000
Inventory $410,000
Bills and Accounts Receivable 320,000
Cash 70,000
Advances to Black Company 130,000 930,000
Total $1,750,000
Capital Stock $500,000
Bills Payable 405,000
Accounts Payable 375,000 780,000
Surplus January 1, 1917 275,000
Profits for Year 320,000
595,000
Less Dividends Paid 125,000 470,000
Total $1,750,000
156 CONSOLIDATED STATEMENTS
The Balance Sheet of the Black Company as at December
31, 1917, shows the following condition:
Machinery and Equipment $460,000
Inventory $130,000
Accounts and Bills Receivable 80,000
Cash 2,000 212,000
Total $672,000
Capital Stock 2,000 Shares $200,000
Bills Payable $205,000
Advances from Brown Company 130,000
Accounts Payable 62,000 397,000
Surplus January 1, 1917 15,000
Profits (earned proportionately throughout the year) . . . 60,000 75,000
Total $672,000
Prepare a consolidated balance sheet as at December 31,
1917.
What position would you take should the client request a
certified balance sheet of the Brown Company by itself as at
December 31, 1917 ? Submit your answer in the form of a letter
addressed to the client, giving reasons for your conclusions.
Problem 7. On January 1, 1913, the A B Company acquired
90 per cent of the stock of the X Y Company and 80 per cent of
the stock of the P Q Company, two subsidiary companies which
it thus controlled and whose policy and general administration
it directed, the minority holdings in each case being in the hands
of the officers and employees of the subsidiary companies or of
other interests friendly to the A B Company. On June 30, 1913,
the holdings in the X Y Company were reduced to 80 per cent
by the sale of 100 shares at $200 per share to certain employees
not heretofore stockholders; while in the case of the P Q Com-
pany, owing to the resignation of an officer, his holdings, con-
sisting of 100 shares, were purchased at par, the holdings by
the A B Company being thus increased to 90 per cent, so that
on December 31, 1913, the proportion of holdings in the two
companies was just reversed.
The following are the trial balances of all three companies
(after closing) at December 31, 1913:
APPENDIX A
157
TRIAL BALANCES at December 31, 1913
Particulars A B Company X Y Company P Q Company
Properties $85,000 $75,000
Goodwill $100,000
Stockholdings:
In XY Co., 800 shares.
(book value) 115,000*
In P Q Co., 900 shares
(at cost) 82,000
Current Assets 132,000 135,000 90,000
Capital Stock:
A B Co., 3,000 shares. $300,000
X Y Co., 1,000 shares. $100,000
P Q Co., 1,000 shares. $100,000
Accounts Payable 125,000 30,000 10,000
Surplus at January 1 50,000 60,000 10,000
1913 Profits 44,000** 45,000 35,000
Dividends paid in Decem-
ber, 1913 30,000 40,000 25,000
Current Accounts 60,000 25,000 35,000
$519,000 $519,000 $260,000 $260,000 $190,000 $190,000
* After crediting the proceeds of the 100 shares sold, prior to which the investment had been valued at
cost.
** Dividends received from subsidiary companies, less expenses of parent company.
Prepare a consolidated balance sheet. Assume that the
profits earned by the X Y Company and the P Q Company,
respectively, to June 30, 1913, were exactly 50 per cent of the
profits for the complete year.
Problem 8. From the following trial balances, after closing,
prepare a consolidated balance sheet as at January 31, 1915.
This consolidated balance sheet must be prepared in form
suitable for submission to a firm of commercial paper brokers
and to bankers.
It is assumed that you audited all these balance sheets and
had every opportunity of inquiring and satisfying yourself
relative to their accuracy. This being so, append to the
balance sheet such a certificate as you would feel warranted
in signing.
158
CONSOLIDATED STATEMENTS
ABC MANUFACTURING COMPANY
TRIAL BALANCE after closing as at January 31, 1915
Dr. Cr.
Real Estate, Buildings, Machinery, etc $1,000,000
Goodwill 1,000,000
Investment in and advances to Paris Manufacturing Company:
Capital Stock at cost $250,000
Advances 150,000 400,000
Accounts Receivable, less Reserve $10,000. 150,000
Inventories of Raw Material, Work in Pro-
cess, Finished Material, etc 300,000
Cash 50,000
Notes Payable $250,000
Accounts Payable 50,000
Investment in and advances to Brown-Smith Company:
Capital Stock par value 100,000
Advances 100,000 200,000
First Mortgage 6% Gold Bonds 500,000
Preferred Stock 7% Cumulative 10,000
shares , 1,000,000
Common Stock 10,000 shares 1,000,000
Surplus 300,000
$3,100,000 $3,100,000
PARIS MANUFACTURING COMPANY
TRIAL BALANCE after closing as at January 31, 1915
Dr.
Real Estate, Buildings, Machinery, etc $250,000
Goodwill 200,000
Accounts Receivable 60,000
Inventories of Raw Material, Work in Process, Fin-
ished Material, etc 175,000
Cash 25,000
Reserve for Bad Debts
Notes Payable
Accounts Payable
ABC Manufacturing Company
Capital Stock 1,500 Shares
Surplus
Cr.
$10,000
90,000
10,000
150,000
150,000
300,000
$710,000 $710,000
APPENDIX A
BROWN-SMITH COMPANY
TRIAL BALANCE after closing as at January 31, 1915
Dr.
Real Estate, Buildings, Machinery, etc $50,000
Accounts Receivable 25,000
Finished Goods on Consignment at Selling Price 100,000
Inventories of Raw Material, Work in Process, Fin-
ished Materials, etc 125,000
Cash 25,000
Notes Payable
Accounts Payable
ABC Manufacturing Company
Capital Stock 1,000 shares
Deficit 50,000
Cr.
$150,000
25,000
100,000
100,000
$375,000 $375,000
In preparing the balance sheet required, bear the following
facts in mind:
1. The dividends on the preferred stock of the ABC Man-
ufacturing Company were paid to March 31, 1914.
2. The finished goods on consignment (Brown-Smith
Balance Sheet) cost to manufacture $60,000.
it is estimated a profit of $10,000 will be made.
freight expense.
3. All inventories are priced on proper basis.
4. All accounts receivable are considered collectible after
allowing for reserves.
On realization
Disregard any
Problem 9. From the following three trial balances prepare
a consolidated balance sheet as at December 31, 1912, in the
form you would draw it up for presentation to the stockholders
of the parent company (The Safety Razor Company) showing
as separate items therein (a) the total goodwill of the com-
bined companies; and (b) the net profits accruing to the Safety
Razor Company.
160
CONSOLIDATED STATEMENTS
SAFETY RAZOR COMPANY
TRIAL BALANCE
December 31, 1912
Preferred Stock.
Common Stock.
Investments in Subsidiary Companies:
4,000 shares of stock of L W Co., and
4,000 shares of stock of Steel Blade Co., both of
$100 each at cost $2,500,000
Accounts Payable
Dividends from Subsidiary Companies
Administration Expenses 25,000
L W Co., Current Account 100,000
Steel Blade Company Advances 150,000
Cash 270,000
Organization Expenses 75,000
$1,500,000
1,500,000
20,000
100,000
$3,120,000 $3,120,000
L W COMPANY
TRIAL BALANCE
December 31, 1912
Properties and Plant $325,000
Goodwill 250,000
Investment in Steel Blade Co.:
2,000 shares of a par value of $100 each cost $300,000 400,000
Inventories 250,000
Receivables 195,000
Cash 90,000
Capital Stock 4,000 shares
Accounts Payable
Steel Blade Company
Surplus (Includes $100,000 added to book value of In-
vestment in Steel Blade Co.)
Safety Razor Company
$400,000
125,000
175,000
710,000
100,000
$1,510,000 $1,510,000
APPENDIX A 161
STEEL BLADE COMPANY
TRIAL BALANCE
December 31, 1912
Goodwill $50,000
Property and Plant 325,000
Inventories 190,000
Receivables General 105,000
L W Company 195,000
Cash 10,000
Capital Stock (6,000 shares) $600,000
Accounts Payable 90,000
Safety Razor Company 150,000
Surplus 35,000
$875,000 $875,000
In the preparation of your consolidated balance sheet, be
guided by the following assumed facts:
1. That the Safety Razor Company was formed on March
28, 1912, and acquired its stock ownership in the two sub-
sidiary companies, as shown in its trial balance on April 1, 1912.
2. That at January 1, 1912, the L W Company had a surplus
of $605,000 and the Steel Blade Company a deficit of $50,000.
3. That no inventory was taken of either the L W Company
or the Steel Blade between January 1 and December 31, 1912,
the business of the companies being continued without interrup-
tion notwithstanding the change in ownership of the capital
stocks as indicated above. It is estimated on reliable authority,
which may be accepted as final, that from January 1 to March
31, 1912, the net profits of the L W Company amounted to
$30,000, while during the same period the Steel Blade Company
lost $15,000.
4. That prior to December 31, 1912, the L W Company
declared a dividend of $100,000 payable to the parent company
which was duly taken up on the books of both companies,
being passed through the current accounts and charged against
the surplus of the L W Company prior to December 31, 1912.
5. That the difference in the current accounts between the
Steel Blade Company and the L W Company represents, as to
$10,000 merchandise in transit and as to the remaining $10,000,
a charge for rental of warehouse for the last six months of 1912,
which has been credited to the rent account on the books of
the Steel Blade Company.
162
CONSOLIDATED STATEMENTS
B Co. C Co.
Problem 10. The Jones Investment Company on June 30,
1915, obtained a controlling interest in three operating com-
panies, viz., A Company, B Company and C Company.
The balance sheets of the four companies as at June 30, 1916,
are as follows:
Jones Invest-
Debits ment Co. A Co.
Investments in other companies:
A Co. 60% interest (Cost $900,000) $1,000,000
B Co. 75% interest at cost 600,000
C Co. 80% interest at cost 400,000
Advances to A Co 100,000
Advances to C Co 50,000
Cash 50,000 $100,000
Accounts Receivable
Inventories
Plant
Deficit..
100,000
200,000
1,000,000
$10,000 $50,000
50,000 100,000
100,000 50,000
600,000 400,000
40,000
$2,200,000 $1,400,000 $800,000 $600,000
Credits
Capital Stock $2,000,000 $1,000,000 $800,000 $400,000
Jones Investment Co 100,000 50,000
Surplus 200,000 300,000 150,000
$2,200,000 $1,400,000 $800,000 $600,000
The Surplus and Deficit accounts as
shown above may be analyzed as
follows :
Balance to June 30, 1915 $100,000 $200,000 $4,000 $100,000
Surplus income:
6 months to Dec. 31, 1915 180,000 46,000 25,000
6 months to June 30, 1916 217,500 220,000 40,000* 25,000
Increase in value of A Co. stock 100,000
Dividends paid Jan., 1916 217,500* 300,000* 50,000*
Balance June 30, 1916 $200,000 $300,000 $40,000* $150,000
* Indicates debit.
Prepare a consolidated balance sheet of the four companies
as at June 30, 1916.
A statement of the consolidated earnings and surplus account
for the year to June 30, 1916, is not required, but may be sub-
mitted if desired.
In preparing the balance sheet the following additional facts
should be considered:
1. The holding company has no other source of income than
APPENDIX A
163
the dividends from the subsidiaries, which have been taken on
to its books when received.
2. In accordance with a resolution of the Board of Directors
of the Jones Investment Company, the following entry was
made on the holding company books at June 30, 1916.
Dr. Investment in A Co $100,000
Cr. Surplus 100,000
3. The inventories of the A Company include $100,000 of
stock purchased from B Company in 1916. The cost of these
goods to the B Company was $90,000.
4. Part of the plant of the C Company was built by the A
Company in September and October, 1915, at a cost of $80,000.
For this work the A Company charged the C Company $95,000.
5. In February, 1916, part of the equipment of the B Com-
pany, which was carried on the books at the cost price of
$50,000, was destroyed by fire. The only entry that has been
made in respect to this loss was to credit the plant account
with the salvage of $5,000.
Problem n. Following are the trial balances of Company
A and its subsidiaries at December 31, 1920:
Debits Co. A Co. B Co. C
Cash $ 75,000 $ 50,000 $ 60,000
Accounts Receivable 350,000 190,000 420,000
Notes Receivable 200,000 60,000 40,000
Inventory, Raw Material, Jan. 1, 1920... 150,000 105,000 160,000
Purchases, Raw Materials 650,000 400,000 510,000
Labor 450,000 320,000 370,000
Manufacturing Expenses 190,000 190,000 205,000
Selling Expenses 85,000 40,000 75,000
Administrative Expenses 45,000 25,000 35,000
Inventory, Goods in Process, Jan. 1, 1920. 80,000 70,000 75,000
Inventory, Finished Goods, Jan. 1,1920.. 90,000 65,000 80,000
Plant and Equipment 900,000 400,000 750,000
Investment in Stock of Company B 875,000
Investment in Stock of Company C 1,200,000
$5,340.000 $1.915.000 ^2.780.000
Credits
Capital Stock $3,000,000 $500,000 $800,000
Notes Payable 110,000 80,000 60,000
Accounts Payable 100,000 65,000 250,000
Bonds Payable 500,000
Premium on Bonds 5,000
Reserve for Depreciation 100,000 60,000 112,500
Sales 1,400,000 1,050,000 1,250,000
Surplus 125,000 160,000 307,500
$5,340,000 $1,915,000 $2,780,000
164 CONSOLIDATED STATEMENTS
The inventories at December 31, 1920, were:
Co. A Co. B Co. C
Raw Material $280,000 $175,000 $210,000
Goods in Process 95,000 80,000 85,000
Finished Goods 135,000 145,000 105,000
Company A purchased the entire stock issues of Companies
B and C at January 1, 1920, at the prices shown in the trial
balance. During the year each of the three companies declared
and paid a five per cent dividend. Company A took up its
dividends from Companies B and C by credits to surplus.
The various entries for the dividends were the only entries
affecting the surplus accounts during the year.
At December 31, 1919, Company A's inventory of raw mate-
rial included goods purchased from Company B at a price of
$60,000, the cost thereof to Company B being $40,000.
At the same date Company B's inventory of raw material
included goods purchased from Company C for $75,000, on
which Company C made a profit of $25,000.
During 1920, Company C sold goods to Company B at a
price of $200,000. These goods cost Company C $160,000.
Company B still owes $30,000 on these purchases, the indebt-
edness being included in the accounts payable.
During 1920, Company B sold goods to Company A at a cost
of $300,000, and at a selling price of $375,000. Company A
made cash advances totaling $400,000 to Company B during
the year. The sales just mentioned were charged against the
advances account, the $25,000 balance of which is included in
Company B's accounts payable.
The inventories at December 31, 1920, include inter-company
profits as follows:
Raw Goods Finished
Material in Process Goods
Company A $20,000 $5,000 $4,000
Company B 30,000 6,000 5,000
Company A's bonds were issued July 1, 1920. They bear
5 per cent interest, payable semi-annually, and mature in five
years. No interest has been paid.
Allow depreciation at five per cent per annum on the cost of
the fixed assetsi
Prepare the following consolidated statements: cost of goods
manufactured and sold; profit and loss; surplus; balance
sheet.
APPENDIX B
SOLUTIONS TO REVIEW EXERCISES FOLLOWING CHAPTER IX
(* Indicates deduction)
Case A
Assets Co. A Co. B EUm. C. B. S.
Investment in Stock of Co. B (90%) . . .$110,000
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Surplus: 90% of 20,000.. 18,000
Goodwill $2,OOOG
Sundry Net Assets 105,000 $120.000 225,000
$215.000 $120,000 $108.000 $227.000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus:
Co. A 15,000 15,OOOS
Co. B 20,000
Eliminate holding company's 90% 18,000
Minority interest 10% 2,OOOM
$215,000 $120,000 $108,000 $227.000
Goodwill $2,000; minority interest $12,000; surplus $15,000.
CaseB
Assets Co. A Co. B EUm. C. B. S.
Investment in Stock of Co. B (90%) . . .$119,000
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Surplus: 90% of 30,000.. 27,000
Goodwill $2,OOOG
Sundry Net Assets 105,000 $130,000 235,000
$224,000 $130.000 $117.000 $237,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus:
Co. A 24,000 24.000S
Co. B 30,000
Eliminate holding company's 90% 27,000
Minority interest 10% 3.000M
$224,000 $130.000 $117,000 $237.000
Goodwill $2,000; minority interest $13,000; surplus $24,000.
165
166
CaseC
CONSOLIDATED STATEMENTS
Assets Co. A Co. B Elim. C. B.
Investment in Stock of Co. B (90%) . . . $105,500
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Surplus: 90% of 15,000.. 13,500
Goodwill $2,OOOG
Sundry Net Assets 105,000 $115,000 220,000
$210,500 $115,000 $103,500 $222,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10.000M
Surplus:
Co. A 10,500 10,500S
Co. B 15,000
Elimin ate holding company's 90% 13,500
Minority interest 10% 1.500M
$210,500 $115,000 $103,500 $222,000
Goodwill $2,000; minority interest $11,500; surplus $10,500.
CaseD
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $83,000
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Deficit: 90% of 10,000*. 9,000*
Goodwill $2,OOOG
Deficit:
Co. A 12,000 12,OOOS
Co. B $10,000
Eliminate holding company's 90% 9,000
Minority interest 10% l.OOOM
Sundry Net Assets 105,000 90,000 195,000
$200,000 $100,000 $90,000 $210,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
$200,000 $100,000 $90,000 $210,000
Goodwill $2,000; minority interest $9,000; deficit $12,000.
APPENDIX B
Case AA
Assets
Co. A
Co.B
167
Elim. C. B. S.
Investment in Stock of Co. B(90%) Cost $110,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. . $90,000
Surplus: 90% of 20,000.. 18,000
Goodwill $2,OOOG
Sundry Net Assets 105,000 $120,000 225,000
$215,000 $120,000 $108.000 $227,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co.B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus:
Co. A 15,000 15,OOOS
Co.B 20,000
Minority: 10% of $20,000 pres-
ent surplus 2,OOOM
Elim. H.C.:90%of 20,000 sur-
plus at acquis 18,000
$215.000 $120.000 $108,000 $227,000
Goodwill $2,000; minority interest $12,000; surplus $15,000.
CaseBB
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) Cost $110,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. . $90,000
Surplus: 90% of 20,000.. 18,000
Goodwill $2,OOOG
Sundry Net Assets 105,000 $130,000 235,000
$215,000 $130,000 $108,000 $237.000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10.000M
Surplus:
Co. A 15,000 15,0005
Co. B 30,000
Minority: 10% of $30,000 pres-
ent surplus 3,OOOM
Elim. H. C.: 90% of 20,000 sur-
plus at acquis. 18,000
Surplus: 90% of 10,000 in-
crease 9,OOOS
$215,000 $130,000 .$108,000 $237,000
Goodwill $2,000; minority interest $13,000; surplus $24,000.
168
Case CC
CONSOLIDATED STATEMENTS
Co.B
Assets Co. A
Investment in Stock of Co. B (90%) Cost $110,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. .
Surplus: 90% of 20,000..
Goodwill
Sundry Net Assets 105,000 $115,000
Elim.
$90,000
18,000
C. B. S.
$2,OOOG
220,000
$215,000 $115,000 $108,000 $222,000
Liabilities
Capital Stock:
Co. A $200,000
Co.B
Eliminate holding company's 90%
Minority interest 10%
Surplus:
Co. A 15,000
Co. B
Minority: 10% of $15,000 pres-
ent surplus
Elim. H. C.: 90% of 20,000 sur-
plus at acquis
Surplus: 90% of 5,000 de-
crease
$100,000
15,000
$200,000
$90,000
18,000
1.500M
4,500*S
$215,000 $115,000 $108,000 $222,000
Goodwill $2,000; minority interest $11,500; surplus $10,500.
Case DD
Assets Co. A Co. B
Investment in Stock of Co. B (90%) Cost $110,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. .
Surplus: 90% of 20,000..
Goodwill
Sundry Net Assets 105,000 $90,000
Deficit Co. B 10,000
Minority: 10% of $10,000*
present deficit
Elim. H. C.: 90% of 20,000 sur-
plus at acquis.
Surplus: 90% of 30,000 de-
crease...
Elim. C. B. S.
$90,000
18,000
18,000*
$2,OOOG
195,000
1,OOOM
27,OOOS
$215,000 $100,000 $90,000 $225,000
Liabilities
Capital Stock:
Co. A $200,000
Co.B
Eliminate holding company's 90%
Minority interest 10%
Surplus Co. A 15,000
$100,000
$90,000
$200,000
10,OOOM
15,OOOS
$215,000 $100,000 $90,000 $225,000
Goodwill $2,000; minority interest $10,000 - $1,000 = $9,000; surplus $15,000
$27,000 = $12,000 deficit.
APPENDIX B 169
Case E
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%). . . $115,000
Eliminate present book value:
Capital stock : 90% of $100,000 . . $90,000
Surplus: 90% of 20,000.. 18,000
Goodwill $7,OOOG
Sundry Net Assets 100,000 $120,000 220,000
$215,000 $120,000 $108,000 $227,000
Liabilities .
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10.000M
Surplus:
Co. A 15,000 15,OOOS
Co. B 20,000
Eliminate holding company's 90% 18,000
Minority interest 10% 2,OOOM
$215,000 $120,000 $108,000 $227,000
Goodwill $7,000; minority interest $12,000; surplus $15,000.
Case F
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%). . . $133,000
Eliminate present book value:
Capital stock : 90% of $100,000 . . $90,000
Surplus: 90% of 40,000.. 36,000
Goodwill $7,OOOG
Sundry-Net Assets 100,000 $140,000 240,000
$233,000 $140,000 $126,000 $247,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10.000M
Surplus:
Co. A 33,000 33,OOOS
Co. B 40,000
Eliminate holding company's 90% 36,000
Minority interest 10% 4,OOOM
$233,000 $140,000 $126,000 $247,000
Goodwill $7,000; minority interest $14,000; surplus $33,000.
CONSOLIDATED STATEMENTS
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $107,800
Eliminate present book value:
Capital stock : 90% of $100,000 . . $90,000
Surplus: 90% of 12,000.. 10,800
Goodwill $7,OOOG
Sundry Net Assets 100,000 $112,000 212,000
$207,800 $112,000 $100,800 $219,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% lO.OOOM
Surplus:
Co. A 7,800 7,800S
Co. B 12,000
Eliminate holding company's 90% 10,800
Minority interest 10% 1,200M
$207,800 $112,000 $100,800 $219,000
Goodwill $7,000; minority interest $11,200; surplus $7,800.
Case H
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $89,800
Eliminate present book value:
Capital stock : 90% of $100,000 . . $90,000
Deficit: 90% of 8,000.. 7,200*
Goodwill $7,OOOG
Sundry Net Assets 100,000 $92,000 192,000
Deficit:
Co. A 10,200 10,200S
Co. B 8,000
Eliminate holding company's 90% 7,200
Minority interest 10% 800M
$200,000 $100,000 $90,000 $210,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
$200,000 $100,000 $90,000 $210,000
Goodwill $7,000; minority interest $9,200; deficit $10,200.
APPENDIX B 171
Case EE
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) Cost $115,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. . $90,000
Surplus: 90% of 20,000.. 18,000
Goodwill $7,OOOG
Sundry Net Assets 100,000 $120,000 220,000
$215,000 $120,000 $108,000 $227,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus:
Co. A 15,000 15,0008
Co. B . 20,000
Minority : 10% of $20,000 pres-
ent surplus ' 2,OOOM
Elim. H.C.:90%of 20,000 sur-
plus at acquis 18,000
$215,000 $120,000 $108.000 $227,000
Goodwill $7,000; minority interest $12,000; surplus $15,000.
Case FF
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) Cost $115,000
Eliminate book value at acquisition:
Capital stock : 90% of $100,000 . . $90,000
Surplus: 90% of 20,000.. 18,000
Goodwill $7,000 G
Sundry Net Assets 100,000 $140,000 240,000
$215,000 $140,000 $108,000 $247,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus:
Co. A 15,000 15,0005
Co. B 40,000
Minority: 10% of $40,000 pres-
ent surplus 4,OOOM
Elim. H.C.:90%of 20,000 sur-
plus at acquis. 18,000
Surplus: 90% of 20,000 in-
crease 18,0005
$215,000 $140.000 $108,000 $247,000
Goodwill $7,000; minority interest $14,000; surplus $15,000 + $18,000 = $33,000.
172
Case GG
CONSOLIDATED STATEMENTS
Elim. C. B. S.
Assets Co. A Co. B
Investment in Stock of Co. B (90%) Cost $1 15,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. .
Surplus: 90% of 20,000..
Goodwill
Sundry Net Assets 100,000 $112,000
$90,000
18,000
$7,OOOG
212,000
$215,000 $112,000 $108,000 $219,000
Liabilities
Capital Stock:
Co. A $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10%
Surplus:
Co. A 15,000
Co. B 12,000
Minority: 10% of $12,000 pres-
ent surplus
Elim.H.C.:90%of 20,000 sur-
plus at acquis.
Surplus: 90% of 8,000 de-
crease
18,000
$200,000
lO.OOOM
15,OOOS
1,200M
7,200*S
$215,000 $112,000 $108,000 $219,000
Goodwill $7,000; minority interest $11,200; surplus $15,000 - $7,200 - $7,800.
Case HH
Co. B
Elim. C. B. S.
$90,000
18,000
8,000
18,000*
Assets Co. A
Investment in Stock of Co. B (90%) Cost $115,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. .
Surplus: 90% of 20,000. .
Goodwill
Sundry Net Assets 100,000 $92,000
Deficit Co. B
Minority: 10% of $8,000 pres-
ent deficit
Elim. H. C.: 90% of 20,000 sur-
plus at acquis.
Surplus: 90% of 28,000 de-
crease
$215.000 $100,000 $90,000 $225,000
Liabilities
Capital Stock:
Co. A $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus Co.A 15,000 15,0005
$215,000 $100,000 $90,000 $225,000
Goodwill $7,000; minority interest $9,200; surplus $15,000 $25,200 = $10,200
deficit.
$7,OOOG
192,000
800M
25,200S
$200,000
APPENDIX B 173
Case I
Assets Co. A Co. B Elim. C. S. S.
Investment in Stock of Co. B (90%) . . . $105,000
Eliminate present book value:
Capital stock : 90% of $100,000 . . $90,000
Surplus: 90% of 20,000.. 18,000
Deduction from goodwill $3,000*G
Sundry Net Assets.... 80,000 $120,000 200,000
Deficit Co. A 15,000 15,0005
$200,000 $120,000 $108,000 $212,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus Co. B 20,000
Eliminate holding company's 90% 18,000
Minority interest 10% 2.000M
$200,000 $120,000 $108,000 $212,000
Deduction from goodwill $3,000; minority interest $12,000; deficit $15,000.
Case J
Assets Co. A Co.B Elim. C.B.S.
Investment in Stock of Co. B (90%) . . . $123,000
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Surplus: 90% of 40,000.. 36,000
Deduction from goodwill $3,000*G
Sundry Net Assets 80,000 $140,000 220,000
$203,000 $140,000 $126,000 $217,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus:
Co. A 3,000 3,0005
Co. B 40,000
Eliminate holding company's 90% 36,000
Minority interest 10% 4,OOOM
$203,000 $140,000 $126,000 $217,000
Deduction from goodwill $3,000; minority interest $14,000; surplus $3,000.
174 CONSOLIDATED STATEMENTS
CaseK
Assets Co. A Co. B Elim. C.B.S
Investment in Stock of Co. B (90%). . . $97,800
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Surplus: 90% of 12,000.. 10,800
Deduction from goodwill $3,000*G
Sundry Net Assets 80,000 $112,000 192,000
Deficit Co. A 22,200 22,200S
$200,000 $112,000 $100,800 $211,200
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus Co. B 12,000
Eliminate holding company's 90% 10,800
Minority interest 10% 1,200M
$200,000 $112,000 $100,800 $211,200
Deduction from goodwill $3,000; minority interest $11,200; deficit $22,200.
CaseL
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $79,800
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Deficit: 90% of 8,000.. 7,200*
Deduction from goodwill $3,000*G
Sundry Net Assets 80,000 $92,000 172,000
Deficit:
Co. A 40,200 40,200 S
Co. B 8,000
Eliminate holding company's 90% 7,200
Minority interest 10% 800M
$200,000 $100,000 $90,000 $210,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
200,000 100,000 90,000 210,000
Deduction from goodwill $3,000; minority interest $9,200; deficit $40,200.
APPENDIX B 175
Casell
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) Cost $105,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. . $90,000
Surplus: 90% of 20,000.. 18,000
Deduction from goodwill $3,000*G
Sundry Net Assets 80,000 $120,000 200,000
Deficit Co. A 15,000 15,0008
$200,000 $120,000 $108,000 $212,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus Co. B 20,000
Minority: 10% of $20,000 pres-
ent surplus 2,OOOM
Elim.H.C.:90%of 20,000 sur-
plus at acquis. 18,000
$200,000 $120,000 $108,000 $212,000
Deduction from goodwill $3,000; minority interest $12,000; deficit $15,000.
CaseJJ
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) Cost $105,000
Eliminate book value at acquisition:
Capital stock : 90% of $100,000 . . $90,000
Surplus: 90% of 20,000.. 18,000
Deduction from goodwill $3,000*G
Sundry Net Assets 80,000 $140,000 220,000
Deficit Co. A 15,000 15,0005
$200,000 $140,000 $108,000 $232,000
Liabilities
Capital Stock:
Co. A $200,000
Co. B $100,000
Eliminate holding company's 90%
Minority interest 10% 10.000M
Surplus Co. B 40,000
Minority: 10% of $40,000 pres-
ent surplus 4,OOOM
Elim.H.C.:90%of 20,000 sur-
plus at acquis. 18,000
Surplus: 90% of 20,000 in-
crease 18,OOOS
$200,000 $140,000 $108,000 $232,000
Deduction from goodwill $3,000; minority interest $14,000; surplus $18,000-$15,000,
or $3,000.
176
CaseKK
CONSOLIDATED STATEMENTS
Co.B
Assets Co. A
Investment in Stock of Co. B (90%) Cost $105,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. .
Surplus: 90% of 20,000. .
Deduction from goodwill
Sundry Net Assets 80,000 $112,000
Deficit Co. A 15,000
Elim. C. B. S.
$90,000
18,000
$3,000*G
192,000
15,0008
$200,000 $112,000 $108,000 $204,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus Co. B 12,000
Minority: 10% of $12,000 pres-
ent surplus 1.200M
Elim.H.C.:90% of 20,000 sur-
plus at acquis. 18,000
Surplus: 90% of 8,000 de-
crease 7,200*5
$200,000 $112,000 $108,000 $204,000
Deduction from goodwill $3,000; minority interest $11,200; deficit $15,000 $7,200
- $22,200.
Case LL
Assets Co. A Co. B
Investment in Stock of Co. B (90%) Cost $105,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. .
Surplus: 90% of 20,000..
Deduction from goodwill
Sundry Net Assets 80,000 $92,000
Deficit:
Co. A 15,000
Co.B 8,000
Minority: 10% of $8,000 pres-
ent deficit
Elim. H. C.: 90% of 20,000 sur-
plus at acquis.
Surplus: 90% of 28,000 de-
crease
Elim. C. B. S.
$90,000
18,000
18,000*
$3,000*G
172,000
15.000S
800M
25,200 S
$200,000 $100,000 $90,000 $210,000
Liabilities
Capital Stock:
Co. A $200,000
Co. B $100,000
Eliminate holding company's 90%
Minority interest 10%
$200,000 $100,000 $90,000 $210,000
Deduction from goodwill $3,000; minority interest $9,200; deficit $40,200.
$90,000
$200,000
10.000M
APPENDIX B 177
Case M
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $85,000
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Deficit: 90% of 10,000.. 9,000*
Goodwill $4,OOOG
Sundry Net Assets.., 130,000 $90,000 220,000
Deficit Co. B 10,000
Eliminate holding company's 90% 9,000
Minority interest 10% 1,OOOM
$215,000 $100,000 $90,000 $225,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus Co. A 15,000 15,000 S
$215,000 $100,000 $90,000 $225,000
Goodwill $4,000; minority interest $9,000; surplus $15,000.
CaseN
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $92,200
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Deficit: 90% of 2,000.. 1,800*
Goodwill $4,OOOG
Sundry Net Assets 130,000 $98,000 228,000
Deficit Co. B 2,000
Eliminate holding company's 90% 1,800
Minority interest 10% 200M
$222,200 $100,000 $90,000 $232,200
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% lO.OOOM
Surplus Co. A 22,200 22,2008
$222,200 $100,000 $90,000 $232,200
Goodwill $4,000; minority interest $9,800; surplus $22,200.
178 CONSOLIDATED STATEMENTS
CaseO
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%). . . $104,800
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Surplus: 90% of 12,000.. 10,800
Goodwill $4,OOOG
Sundry Net Assets 130,000 $112,000 242,000
$234,800 $112,000 $100,800 $246,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus:
Co. A 34,800 34,8008
Co. B 12,000
Eliminate holding company's 90% 10,800
Minority interest 10% 1,200M
$234,800 $112,000 $100,800 $246,000
Goodwill $4,000; minority interest $11,200; surplus $34,800.
CaseP
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $77,800
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Deficit: 90% of 18,000.. 16,200*
Goodwill $4,OOOG
Sundry Net Assets 130,000 $82,000 212,000
Deficit Co. B 18,000
Eliminate holding company's 90% 16,200
Minority interest 10% 1,800M
$207,800 $100,000 $90,000 $217,800
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus Co. A 7,800 7,800
$207,800 $100,000 $90,000 $217,800
Goodwill $4,000; minority interest $8,200; surplus $7,800.
APPENDIX B 179
Case MM
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) Cost $85,000
Eliminate book value at acquisition:
Capital stock : 90% of $100,000 . . $90,000
Deficit: 90% of 10,000.. 9,000*
Goodwill $4,OOOG
Sundry Net Assets 130,000 $90,000 220,000
Deficit Co. B 10,000
Eliminate holding company's 90% 9,000
Minority interest 10% 1,OOOM
$215,000 $100,000 $90,000 $225,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Elimin ate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus Co. A 15,000 15,0005
$215,000 $100,000 $90,000 $225,000
Goodwill $4,000; minority interest $9,000; surplus $15,000.
Case NN
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) Cost $85,000
Eliminate book value at acquisition:
Capital stock : 90% of $100,000 . . $90,000
Deficit: 90% of 10,000.. 9,000*
Goodwill $4,OOOG
Sundry Net Assets 130,000 $98,000 228,000
Deficit Co. B 2,000
Minority: 10% of $2,000 present
deficit 200M
Elim. H. C. 90% of 10,000 deficit
at acquis. 9,000
Surplus: 90% of 8,000 gain
since acquis 7,200*S
$215,000 $100,000 $90,000 $225,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus Co.A 15,000 15,0008
$215,000 $100,000 $90,000 $225,000
Goodwill $4,000; minority interest $9,800; surplus $15,000 + $7,200 = $22,200.
180
Case OO
CONSOLIDATED STATEMENTS
Elim. C. B. S.
Assets Co. A Co. B
Investment in Stock of Co. B (90%) Cost $85,000 -
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. .
Deficit: 90% of 10,000..
Goodwill
Sundry Net Assets 130,000 $112,000
$90,000
9,000*
$4,OOOG
242,000
$215,000 $112,000 $81.000 $246,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus:
Co. A 15,000 15,OOOS
Co. B 12,000
Minority: 10% of $12,000 pres-
ent surplus 1,200M
Elim. H. C. 90% of 10,000 defi-
cit at acquis. 9,000*
Surplus 90% of 22,000 gain 19,8008
$215,000 $112,000 $81,000 $246,000
Goodwill $4,000; minority interest $11,200; surplus $15,000 + $19,800 = $34,800
Elim. C. B. S.
$90,000
9,000*
Case PP
Assets Co. A Co. B
Investment in Stock of Co. B (90%) Cost $85,000
Eliminate book value at acquisition:
/Qapital stock: 90% of $100,000. .
Deficit: 90% of 10,000..
Goodwill
Sundry Net Assets 130,000 $82,000
Deficit Co. B 18,000
Minority: 10% of $18,000 pres-
ent deficit
Elim. H. C. 90% of 10,000 defi-
cit at acquis.
Surplus 90% of 8,000 loss.
$215,000 $100,000 $90,000 $225,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus Co. A 15,000 15,0008
9,000
$4,OOOG
212,000
1.800M
7,2008
$215,000 $100,000 $90,000 $225,000
Goodwill $4,000; minority interest $8,200; surplus $15,000 $7,200 = $7,800.
APPENDIX B 181
Case Q t ,
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $80.000
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Deficit: 90% of 10,000.. 9,000*
Deduction from goodwill $1,000*G
Sundry Net Assets 105,000 $90,000 195,000
Deficit:
Co. A 15,000 15,OOOS
Co. B 10,000
Eliminate holding company's 90% 9,000
Minority interest 10% l.OOOM
$200,000 $100,000 $90,000 $210,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
$200,000 $100,000 $90,000 $210,000
Deduction from goodwill $1,000; minority interest $9,000; deficit $15,000.
Case R
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $87,200
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Deficit: 90% of 2,000.. 1,800*
Deduction from goodwill $1,000*G
Sundry Net Assets 105,000 $98,000 203,000
Deficit:
Co. A 7,800 7,800S
Co. B 2,000
Eliminate holding company's 90% 1,800
Minority interest 10% 200M
$200,000 $100,000 $90,000 $210,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10.000M
$200,000 $100,000 $90,000 $210,000
Deduction from goodwill $1,000; minority interest $9,800; deficit $7,800.
182 CONSOLIDATED STATEMENTS
Case S
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%). . . $99,800
Eliminate present book value:
Capital stock: 90% of $100,000. . $90,000
Surplus: 90% of 12,000.. 10,800
Deduction from goodwill $1,000*G
Sundry Net Assets 105,000 $112,000 217,000
$204,800 $112,000 $100,800 $216,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
Surplus:
Co. A 4,800 4,800S
Co. B 12,000
Eliminate holding company's 90% 10,800
Minority interest 10% 1.200M
$204,800 $112,000 $100,800 $216,000
Deduction from goodwill $1,000; minority interest $11,200; surplus $4,800.
Case T
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) . . . $72,800
Eliminate present book value:
Capital stock: 90% of 100,000 . . $90,000
Deficit:. 90% of 18,000.. 16,200*
Deduction from goodwill $1,000*G
Sundry Net Assets 105,000 $82,000 187,000
Deficit:
Co. A 22,200 22,2005
Co. B 18,000
Eliminate holding company's 90% 16,200
Minority interest 10% 1,800 M
$200,000 $100,000 $90,000 $210,000
Liabilities
Capital Stock:
Co. A $200,000 $200,000
Co. B $100,000
Eliminate holding company's 90% $90,000
Minority interest 10% 10,OOOM
$200,000 $100,000 $90,000 $210,000
Deduction from goodwill $1,000; minority interest $8,200; deficit $22,200.
APPENDIX B 183
Case QQ
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B (90%) Cost $80,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. . $90,000
Deficit: 90% of 10,000.. 9,000*
Deduction from goodwill $1,000*G
Sundry Net Assets 105,000 $90,000 195,000
Deficit:
Co. A 15,000 15,0005
Co. B 10,000
Minority 10% of $10,000 pres-
ent deficit 1,000 M
Elim. H. C. 90% of 10,000 defi-
cit at acquis 9,000
$200,000 $100,000 $90,000 $210,000
Liabilities
Capital Stock:
Co. A $200,000
Co. B $100,000
Eliminate holding company's 90%
Minority interest 10%
$90,000
$200,000
$10,OOOM
$200.000 $100,000 $90,000 $210,000
Deduction from goodwill $1,000; minority interest $9,000; deficit $i5,000.
Case RR
Assets Co. A
Investment in Stock of Co. B (90%) Cost $80,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. .
Deficit: 90% of 10,000..
Deduction from goodwill
Co.B
Elim.
$90,000
9,000*
C. B. S.
$1,000*G
Sundry Net Assets 105,000
$98,000
203,000
Deficit:
Co. A 15,000
15,0008
Co. B
2,000
Minority: 10% of $2,000 pres-
ent deficit
Elim. H. C. 90% of 10,000 defi-
o nnn
200 M
Surplus 90% of 8,000 gain
7,200 *S
$200,000
$100,000
$90,000
$210,000
Liabilities
Capital Stock:
Co. A $200,000
$200,000
Co. B
$100,000
Eliminate holding company's 90%
Minority interest 10%
$90,000
10.000M
$200,000
$100,000
$90,000
$210,000
Deduction from goodwill $1,000; minority interest $9,800; deficit $15,000 - $7,200
$7,800.
184
Case SS
CONSOLIDATED STATEMENTS
Co. B Elim. C. B. S.
Assets Co. A
Investment in Stock of Co. B (90%) Cost $80,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. .
Deficit: 90% of 10,000..
Deduction from goodwill
Sundry Net Assets 105,000 $112,000
Deficit Co. A 15,000
$90,000
9,000*
$1,000*G
217,000
15,0005
$81,000 $231,000
$200,000
$200,000 $112,000
Liabilities
Capital Stock:
Co. A $200,000
Co. B $100,000
Eliminate holding company's 90%
Minority interest 10%
Surplus Co. B 12,000
Minority: 10% of $12,000 pres-
ent surplus
Elim. H. C. 90% of 10,000 defi-
cit at acquis.
Surplus 90% of 22,000 gain
$200,000 $112,000 $81,000 $231,000
Deduction from goodwill $1,000; minority interest $11,200; surplus $19,800 - $15,000
= $4,800.
$90,000
9,000*
10,OOOM
1,200M
19,800
Case TT
Assets Co. A Co. B
Investment in Stock of Co. B (90%) Cost $80,000
Eliminate book value at acquisition:
Capital stock: 90% of $100,000. .
Deficit: 90% of 10,000..
Deduction from goodwill
Sundry Net Assets 105,000 $82,000
Deficit:
Co. A ..;.:.... 15,000
Co. B ' 18,000
Minority: 10% of $18,000 pres-
ent deficit
Elim. H. C. 90% of 10,000 defi-
cit at acquis.
Surplus 90% of 8,000 loss^
Elim. C. B. S.
$90,000
9,000*
9,000
$1,000*G
187,000
15,OOOS
1,800M
7.200S
$200,000 $100,000 $90,000 $210,000
Liabilities
Capital Stock:
Co. A $200,000
Co. B $100,000
Eliminate holding company's 90%
Minority interest 10%
$200,000 $100,000" $90.000 $210,000
Deduction from goodwill $1,000; minority interest $8,200; deficit $15,000 + $7,200 =
$22,200.
$90,000
$200,000
10.000M
APPENDIX C
SOLUTIONS TO PROBLEMS IN APPENDIX A
Solution to problem 1.
JOURNAL ENTRIES ON THE BOOKS OF THE HOLDING COMPANY
February, 1905
Investment in Stock of Company A $168,750.00
Cash $168,750.00
To record the purchase of three-fourths of the stock of
Company A, at book value at December 31, 1904.
Capital Stock $150,000
Surplus 75,000
Total $225,000
Three-fourths thereof = $168,750.
March, 1905
Investment in Stock of Company B 416,666.67
Cash 416,666.67
To record the purchase of two-thirds of the stock of
Company B, at book value at December 31, 1904.
Capital Stock $500,000
Surplus 125,000
Total $625,000
Two-thirds thereof = $413,333.33
January, 1906
Investment in Stock of Company A 3,750.00
Income from Investment in Company A 3,750.00
To take up our three-fourths of the net profits of Com-
pany A as shown by their profit and loss statement for
the year 1905.
January, /pod
Investment in Stock of Company B 33,333.33
Income from Investment in Company B 33,333.33
To take up our two-thirds of the net profits of Company
B as shown by their profit and loss statement for the
year 1905.
185
186 CONSOLIDATED STATEMENTS
February /.f, 1906
Dividends Receivable Company A $11,250.00
Investment in Stock of Company A $11,250.00
To record declaration of dividend of 10% by Company A
Cash 11,250.00
Dividends Receivable Company A 11,250.00
To record receipt of dividend on stock of Company A
NOTE. The problem does not indicate any interval between
the declaration and payment of the dividend. The above
entries are given to indicate how the facts would be recorded if
there had been an interval. The following single entry in the
case of Company B shows how the facts may be recorded when
no time intervenes between the declaration and payment of
the dividend.
February 14, 1906
Cash $26,666.67
Investment in Stock of Company B $26,666.67
To record reduction of investment by reason of payment
by Company B of a dividend of 8%.
These entries indicate the proper method of recording earn-
ings of and dividends from subsidiaries, as explained in Chapter
VII. The holding company should take up as income its share
of the profits of the subsidiary, and not the dividends which it
receives. In the case of Company A, its share of the earnings
was only $3,750, although it received dividends of $11,250.
$7,500 of the cash received was therefore a conversion of the
investment into cash. If the entire dividend had been treated
as income the earnings for the year would have been over-
stated, as would also the carrying value of the investment. On
the other hand, Company B did not declare dividends equal to
its earnings. If the holding company had taken up only its
share of the dividends as income, its earnings for the year
would have been understated, and the carrying value of the
investment in Company B stock would also have been under-
stated.
It will be noted that the stock of Company A was purchased
in February and the stock of Company B was purchased in
March. The question arises as to whether any consideration
should be given to this fact in the entries for the stock pur-
chases and the profits for the year, as well as in the preparation
of the consolidated balance sheet.
APPENDIX C 187
The entries for the purchase would not be affected, even if it
were certain that profits had accrued at the dates of purchase,
for the investment accounts should be charged with the price
paid regardless of the book value at the date of acquisition.
As to the entries for income determined at the end of
the year, it must be remembered that the law does not
consider corporate profits as accruing from day to day. More-
over, seasonal fluctuations usually make it unsafe to assume
that profits are made in uniform amounts throughout the year.
These facts, together with the added fact that Company C
clearly paid nothing for accrued profits, justify the holding
company in considering as profits its share of the year's income
of the two companies.
In preparing the consolidated balance sheet, the book value
at the date of the balance sheet will be eliminated from the
investment account. Since the balance of the investment
account is exactly equal to the book value of the stock held,
there will be no goodwill element. It may be contended that
the book value of the stock of each company at the date of
purchase was actually in excess of the purchase price because of
profits earned since the first of the year, and that there was
therefore a negative goodwill item involved in the stock
purchase. There are three objections to accepting this theory.
In the first place, even if the theory were accepted as sound,
there is no sure way of determining just how much profit was
earned up to the date of purchase and hence no way of ascertain-
ing the amount of the negative goodwill.
In the second place, if a negative goodwill is to be arrived at
in the consolidated working papers, the balance of the invest-
ment account must be less than the book value at the date of
the balance sheet. To have the balance of the investment
account less than book value at the end of 1906, it would be
necessary to charge the investment account with only that
portion of the year's profit earned by the subsidiary after the
holding company acquired the stock. It has already been
shown that it is proper for the holding company to take up the
entire year's profit.
In the third place, assuming for the sake of argument that
it would be possible to prorate the year's profits, and that it
would be proper to take up only the profits earned after acquisi-
tion, the results in this case would be the same so far as the
consolidated balance sheet is concerned. There are no goodwill
188 CONSOLIDATED STATEMENTS
accounts on the books of the subsidiaries and hence the excess
of book value over purchase price arising from profits between
January 1 and the dates of acquisition could not be treated as
negative goodwill to be offset against goodwill accounts, but
would be added to the surplus on the consolidated balance
sheet.
APPENDIX C
189
Solution to problem 2.
X Y Z COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET WORKING PAPERS
January 1, 1910
Assets XYZCo. PQ Co. 1. Co. Elim. C. B. S.
Real Estate $50,000 $25,000 $75,000
Building, Plant and Equipment 75,000 45,000 120,000
Goodwill 25,000 25,OOOG
Investment in P Q Co. (100%) Cost. . . 150,000
Eliminate book value at acquisition:
Capital stock $100,000
Surplus 25,000
Goodwill 25,000 G
Inventories 80,000 20,000 100,000
Accounts Receivable 70,000 85,000 15,000 140,000
$450,000 $175,000 $140,000 $485,000
Liabilities
Accounts Payable $50,000 $50,000 $15,000 $85,000
Loans 50,000 50,000
Capital Stock:
XYZCompany 250,000 250,000
P Q Company 100,000
Eliminate holding company's
100% 100,000
Surplus:
X Y Z Company 100,000 lOO.OOOS
P Q Company 25,000
Eliminate holding company's
100% at acquisition 25,000
$450,000 $175,000 $140,000 $485,000
190
CONSOLIDATED STATEMENTS
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191
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CONSOLIDATED STATEMENTS
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Eliminate holding company's 100%. . .
January 1, 1917: (Date of acquisitio
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-liminate holding company's 100%. . .
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APPENDIX C 193
COMPANY A AND SUBSIDIARIES B AND C
CONSOLIDATED BALANCE SHEET
June 30, 1917
Assets Liabilities
Property and Goodwill $2,730,000 Capital Stock $2,250,000
Current Assets 940,000 Capital Surplus 230,000
Surplus 790,000
Current Liabilities 400,000
$3,670,000 $3,670,000
The $230,000 excess of book value of Company C's stock
over the purchase price is shown on the balance sheet as
capital surplus. Company C has no goodwill account, and
the value of its property at January 1, the date of acquisition,
was established by appraisal; moreover, C's profits for the half
year were four per cent of its capital stock, or on the basis of
eight per cent per annum. It is difficult to see how this advan-
tageous purchase lessens the value of the goodwill on the books
of A or B, or the goodwill arising from A's purchase of B's stock.
APPENDIX C
195
Solution to problem 4.
(A) Effect on Balance Sheet of Company B, the Subsidiary.
BALANCE SHEET OF COMPANY B (before paying dividend)
Cash* $ 25,000
Other Net Assets 125,000
Capital Stock $100,000
Surplus 50,000
$150,000
$150,000
Cash assumed to be on hand because used for dividend.
BALANCE SHEET OF COMPANY B (after paying dividend)
Other Net Assets $125,000
Capital Stock $100,000
Surplus 25,000
$125,000
$125,000
The dividend causes a reduction of $25,000 in the cash and the surplus.
(B) Effect on Balance Sheet of Company A, the Holding Company.
The dividend would increase Company A's cash $24,500. If Company A treated
the dividend as a reduction of the investment account, the balance would be
reduced from $196,000 to $171,500. If the dividend was treated as income, the
investment account would remain unchanged and the surplus would be increased
$24,500. This would be misleading because it would make the dividend appear
to be an earning of Company A, whereas in reality it was merely a conversion
of part of its investment in the subsidiary into cash.
BALANCE SHEET OF COMPANY A (before dividend)
(C) Effect on the Consolidated Balance Sheet.
CONSOLIDATED WORKING PAPERS (before dividend)
Assets Co. A
Investment in Stock of Co. B $196,000
Eliminate book value:
Capital stock: 98% of $100,000. .
Surplus: 98% of 50,000..
Goodwill
Cash
Other Net Assets . .
Liabilities
Capital Stock
Eliminate Co. A's 98%.
Minority 2%.
Surplus
Eliminate Co. A's 98%.
Minority 2%.
Co. B
$25,000
125,000
100,000
50,000
Elim.
$98,000
49,000
98,000
49,000
C. B. S.
$49,000 G
25,000
125,000
2,OOOM
1,OOOM
196
CONSOLIDATED STATEMENTS
CONSOLIDATED WORKING PAPERS (after dividend)
(On assumption that holding company credited dividend to investment)
Assets Co. A Co. B Elim. C. B. S.
Investment in Stock of Co. B $171,500
Eliminate present book value:
Capital stock: 98% of $100,000. . $98,000
Surplus: 98% of 25,000.. 24,500
Goodwill
Cash 24,500
Other Net Assets $125,000
Liabilities
Capital Stock 100,000
Surplus 25,000
Elim. Co. A's 98% of $25,000 pres-
ent surplus 24,500
Minority 2% of 25,000 pres-
ent surplus
$49,000
24,500
125,000
98,000 2,OOOM
500M
CONSOLIDATED WORKING PAPERS (after dividend)
(On assumption that holding company credited the dividends to surplus)
Assets Co. A
Investment in Stock of Co. B (98%) Cost $196,000
Eliminate book value at acquisition:
Capital stock: 98% of $100,000. .
Surplus: 98% of 50,000..
Goodwill
Cash 24,500
Other Net Assets
Liabilities
Capital Stock
Eliminate holding company's 98% .
Minority 2%.
Surplus:
Co. A $24,500
Co. B
Minority: 2% of $25,000 pres-
ent surplus
Elim.Co.A's 98% of 50,000 sur-
plus at acquis
Co. B
Elim. C. B. S.
$98,000
49,000
$125,000
100,000
25,000
98,000
49,000
Surplus
crease.
98% of 25,000 de-
$49,000
24,500
125,000
2.000M
24,500 S
500M
24,500*S
The consolidated balance sheet will be the same no matter
whether the holding company credits the dividend to the invest-
ment account or to the surplus account. It will differ from the
consolidated balance sheet prior to the dividend in two par-
ticulars: the cash and the minority interest will each be $500
smaller than before because of the cash paid to the outside
stockholders.
APPENDIX C 197
Solution to problem 5. Since the holding company is carry-
ing its investments at cost, the eliminations will be based on
the book value of the subsidiaries' stock at the dates of acquisi-
tion. Therefore it is necessary to determine the surplus of each
company at the date when the holding company acquired its
stock.
Company B. The date of acquisition was January 1, 1910,
and B's surplus at that date was $100,000, as shown in its
balance sheet.
Company C. (Date of acquisition July 1, 1908.)
Deficit, January 1, 1906 $250,000
Add Profits from January 1, 1906, to July 1, 1908:
Profits from January 1, 1906, to Dec. 31, 191? = $650,000
These profits are assumed to have been made in uniform amounts
monthly. Then if
$650,000 = Profits for 8 years
81,250 = Profits for 1 year
From January 1, 1906, to July 1, 1908, is 2 l /a years
Then $81,250 x 2# = 203,125
Deficit at July 1, 1908 $46,875
Company D. (Date of acquisition June 30, 1912.)
Surplus, January 1, 1911 $300,000
Add Profits for 1911 600,000
Total 900,000
Less Dividends declared in 1911 900,000
Balance at January 1, 1912
Loss, January 1, 1912, to June 30, 1912 50,000
Deficit, June 30, 1912 , $50,000
198
CONSOLIDATED STATEMENTS
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APPENDIX C
199
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200 CONSOLIDATED STATEMENTS
COMPANY A AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1913
Assets Liabilities
Goodwill $ 947,812.50 Capital Stock $2,000,000.00
Other Sundry Assets 1,400,000.00 Surplus 1,387,812.50
Fixed Assets 1 ,700,000 . 00 Minority Interest :
Current Assets 1,250,000 .00 Co. B (25%) $250,000
Deferred Charges 250,000.00 Co. C (30%) 210,000
Co. D (20%) 200,000 660,000.00
Collateral Trust 5% Notes 1,000,000.00
Current Liabilities 500,000.00
$5,547,812.50 $5,547,812.50
APPENDIX C
201
Solution to problem 6.
THE BROWN COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET WORKING PAPERS
December 31, 1917
Inter Co.
Assets Brown Co. Black Co. Eliminations C. B. S.
Real Estate, Buildings and Machinery $200,000 $460,000 $660,000
Patents and Goodwill 350,000 350,000
Investment in Black Co. (1,800 shares,
par 100) Cost 270,000
Eliminate book value at acquisition:
Capital stock $180,000
Surplus* : 90% of $30,000 27,000
Goodwill 63,000 G
Inventory 410,000 130,000 540,000
Bills and Accounts Receivable 320,000 80,000 400,000
Cash 70,000 2,000 72,000
Advances to Black Company 130,000 130,000
$1,750,000 $672,000 $337,000 $2,085,000
* The surplus of the Black Company at March 31, 1917, the date when the Brown Company acquired
the stock, was:
Surplus at January 1, 1917 $15,000
Earnings to March 31 ( 1 A of $60,000) 15,000
Surplus at date of acquisition 30,00.0
Liabilities
Capital Stock:
Brown Company $500,000 $500,000
Black Company $200,000
Eliminate holding company's
1,800 shares $180,000
Minority interest 20.000M
Bills Payable 405,000 205,000 610,000
Accounts Payable 375,000 62,000 437,000
Advances from Brown Company 130,000 130,000
Surplus:
Brown Company 470,000 470,000 S
Black Company 75,000
Minority: 10% of $75,000
present surplus 7,500M
Elim. H. C.'s 90% of 30,000
surplus at acquisition 27,000
Surplus 90% of 45,000
increase since acquisition . . .
40.500S
$1,750,000 $672,000 $337,000 $2,085,000
202
CONSOLIDATED STATEMENTS
THE BROWN COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1917
Assets
Fixed Assets:
Real Estate, Buildings and Machinery $660,000
Patents and Goodwill 413,000 $1,073,000
Current Assets:
Inventory , 540,000
Bills and Accounts Receivable 400,000
Cash 72,000 1,012,000
Liabilities
Capital:
Capital Stock , 500,000
Surplus 510,500
Minority Interest:
10% Interest in the Black Company
Current Liabilities:
Bills Payable 610,000
Accounts Payable 437,000
$2,085,000
$1,010,500
27,500
1.047,000
$2,085,000
President ,
The Brown Company.
DEAR SIR:
If you desire a certified balance sheet of the Brown Company alone at
December 31, 1917, I should be willing to certify to such a statement after
auditing your books. In fact, unless I audit the books of the BLACK COMPANY
also, the only balance sheet to which I could append an unqualified certificate
would be one of the BROWN COMPANY alone, showing your investment in the
BLACK COMPANY at cost.
Such a balance sheet is not as desirable, however, as a consolidated
balance sheet, for two reasons. In the first place, the cost of the stock,
$270,000, and the advances, $130,000, represent a total investment of $400,000
in the subsidiary. You virtually own the BLACK COMPANY, and a con-
solidated balance sheet showing the assets and liabilities which this investment
represents, with the interest of the minority stockholders therein, is a much
more comprehensive and satisfactory statement of your financial condition.
In the second place, your balance sheet alone does not do you justice.
Showing the investment account and the advances would raise a question
in the minds of the readers of your balance sheet as to whether the net assets
of the BLACK COMPANY are good enough in nature and sufficient in amount
to warrant so heavy an investment and such large advances. A consolidated
balance sheet taking up the BLACK COMPANY'S assets and liabilities would
show clearly that the financial condition of the organization is sound and
would allay any doubts. Moreover, if I were to certify to your balance
sheet alone, without an audit of the books of the subsidiary to verify their
profits, I could show only your own surplus of $470,000; but in a consolidated
balance sheet, if the profits of the BLACK COMPANY are correctly stated, I could
take up your 90% of the earnings since March 31, when you acquired the
stock. This addition of $40,500 would make your surplus in the consolidated
balance sheet $510,500.
Yours very truly,
APPENDIX C 203
Solution to problem 7. Since the holding company is taking
up its proportion of subsidiary dividends as income, it is
evidently their intention to carry the investment accounts at
cost, but they have confused their records so far as the X Y
stock is concerned by crediting the investment account with
the selling price of the 100 shares sold, so that the balance of
the account no longer represents the cost of the 800 shares still
held. Therefore the profit on the shares sold must be ascer-
tained and the investment account adjusted.
Balance of X Y Co. investment account 800 shares $115,000
Add back selling price of 100 " 20,000
Cost of 900 " 135,000
Cost per share 150
Cost of 800 shares still held 120,000
Cost of 100 shares sold 15,000
The investment account should be raised to $120,000, the
cost of the 800 shares retained, and Surplus should be credited
with the $5,000 profit realized by selling for $20,000 the 100
shares which cost $15,000. This is accomplished by the follow-
ing entry:
Investment in X Y Co. Stock $5,000
Surplus $5,000
To adjust the investment account to $120,000, the cost of
800 shares still owned, and to take up the $5,000 profit
on the sale at 200 of 100 shares which cost 150.
Since the P Q Company investment account contains the
cost of two purchases, it will be well to divide the balance of
the account into two amounts representing the cost of the
various purchases, so that the goodwill element may be meas-
ured by elimination of book values at the respective dates.
The cost of the two purchases is ascertained thus:
Balance of P Q Co. investment account cost of 900 shares $82,000
Cost of June 30th purchase at par 100 " 10,000
Cost of first purchase 800 " $72,000
204
CONSOLIDATED STATEMENTS
<&
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APPENDIX C
205
to
o
8 2
I
irplus
acquisition
irplus
acquisition
lolding company's 80%. . .
terest 20%....
iclding company's 90%
terest 10%...
20% of $65,000 present si
. 80% of 60,000 surplus at
s80%of $5,000 increase.
10% of $20,000 present si
10,750 surplus at
us
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6
206 CONSOLIDATED STATEMENTS
The various eliminations are based on surplus accounts at
dates of acquisition, as follows:
X Y stock purchase on January 1, 1913: Surplus of X Y Co. at that date $60,000
P Q stock purchase on January 1, 1913: Surplus of P Q Co. at that date 10,000
P Q stock purchase on June 30, 1913: Surplus of P Q Company at that date:
Surplus at January 1 10,000
Add one-half of 1913 profits . . 1 7,500
Surplus at June 30 $27,500
To simplify the working papers, the various elements affect-
ing the surplus at December 31, 1913, are combined as follows:
A B Co. XYCo. PQ Co.
Surplus, January 1, 1913 $50,000 $60,000 $10,000
Profits, 1913 44,000 45,000 35,000
Profit on sale of X Y Co. stock 5,000
Total 99,000 105,000 45,000
Less Dividends paid in 1913 30,000 40,000 25,000
Surplus, December 31, 1913 $69,000 $65,000 $20,000
THE A B COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1913
Assets
Goodwill $73,250
Properties 160,000
Current Assets 357,000
$590,250
Liabilities
Capital Stock $300,000
Surplus 80,250
Minority Interests:
X Y Co. 20% $33,000
PQCo. 10% 12,000 45,000
Accounts Payable 165,000
$590,250
All stock purchases were made at less than book value. The
excess of book value over cost is deducted from the holding
company's goodwill account as a more conservative treatment
than adding the excess to surplus.
APPENDIX C 207
Solution to problem 8. The investment accounts appear to
be carried at cost, and hence the book value of the stocks at the
date of acquisition should be eliminated. The problem, how-
ever, does not contain any information as to the dates of
acquisition nor the book value of the subsidiaries at the re-
spective dates. Therefore all that can be done is to eliminate
the entire cost of the stock from the investment accounts, and
an equal amount from the subsidiaries' capital stock and sur-
plus. If the holding company paid more than book value at
the date of acquisition the elimination will be greater than it
should be, with the result that the consolidated balance sheet
will understate the goodwill and the surplus; on the other hand,
if the holding company paid less than book value, the con-
solidated balance sheet will overstate the goodwill and the
surplus.
The finished goods on consignment are carried at $100,000
while their cost was $60,000. The $40,000 unrealized profit
will have to be eliminated, and no consideration should be given
to the $10,000 estimated profit on realization.
Since the note brokers and bankers will lend money to in-
dividual companies and not to the organization as a whole,
their security will depend upon the financial condition of the
company to which the loan is made. Therefore it would be
well to present these facts as well as the consolidated figures
in the balance sheet, in columnar form, as shown on pages
210-211.
208
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CONSOLIDATED STATEMENTS
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213
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Solution
~'~i, Q.
Assets
nvestments in Stock of L W and Steel Blade (100%)
4,000 shares of L W Co. and \
4,000 shares of Steel Blade Co. J
9 fmn cKarps nf Sfppl Rlarlp Co
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Eliminate book value at acquisition by S
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idministration Expense. .
, W Co. Current Account,
teel Blade Company Ad
?ash. .
Organization Expense. . ..
'roperties and Plant
loodwill. .
nventories
.eceivables. .
214
CONSOLIDATED STATEMENTS
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APPENDIX C
215
THE SAFETY RAZOR COMPANY
AND ITS SUBSIDIARIES, THE L W COMPANY AND THE STEEL BLADE
COMPANY
CONSOLIDATED BALANCE SHEET
December 31, 1912
Assets
Fixed Assets:
Goodwill $1,630,000
Properties and Plant 650,000 $2,280,000
Current Assets:
Inventories 450,000
Receivables 300,000
Cash 370,000 1,120,000
Deferred Charges:
Organization Expense 75,000
$3,475,000
Liabilities
Capital:
Preferred Stock 1,500,000
Common Stock 1,500,000
Surplus 240,000 3,240,000
Current Liabilities:
Accounts Payable 235,000
$3,475,000
Some portion of the organization expense should perhaps
be written off, but as this is a matter which lies within the dis-
cretion of the directors of the Safety Razor Company, and
as they have apparently taken no action in regard to it, the
entire $75,000 is carried as a deferred charge.
In solving this problem it is necessary to make an assumption
as to the date when the L W Company made its entry adding
$100,000 to the carrying value of its investment in the Steel
Blade Company stock and to its surplus. This is imperative
in order to determine the true book value of the L W Company
at the first of April when the Safety Razor Company acquired
the L W Company stock. The problem states that the L W
Company had a surplus of $605,000 at January 1, 1912. If the
$100,000 entry was made prior to that date, the true surplus
at January 1 was $505,000, to which would be added the $30,000
216 CONSOLIDATED STATEMENTS
profits of the first three months to determine the surplus at
April 1. The working papers are prepared on the assumption
that the write-up was made prior to January 1, 1912. On the
other hand, if the entry was made in 1912, the true surplus of
the L W Company at January 1 was $605,000 and the surplus
at April 1 was $635,000, making the goodwill under this assump-
tion $1,530,000, instead of $1,630,000.
This problem is complicated by the fact that the L W Com-
pany is a subsidiary so far as its relations with the Safety Razor
Company are concerned, and a holding company so far as its
relations with the Steel Blade Company are concerned. Con-
sequently there is an investment account to eliminate from the
Safety Razor Company's balance sheet and also an investment
account to eliminate from the L W Company's balance sheet.
After writing off the $100,000 arbitrary addition to the L W
Company's investment in Steel Blade stock, both of these
investment accounts are carried at cost. Hence eliminations
are made by deducting the book value, at the date of acquisi-
tion, of all stock held within the organization. Since the
consolidated balance sheet is prepared from the viewpoint of
the Safety Razor Company as the parent corporation, the date
of its stock purchase governs and not the date when the L W
Company acquired the Steel Blade stock. In other words,
on April 1 the Safety Razor Company obtained control of all
of the stock of both the L W Company and the Steel Blade
Company; the total inter-company stock-holdings are repre-
sented by two accounts of $2,500,000 and $300,000 (after writ-
ing off $100,000). Hence the goodwill is computed as follows:
Investment Accounts (at cost) :
On Safety Razor Company's books $2,500,000
On L W Company's books 300,000 $2,800,000
Eliminate book value at date of acquisition by Safety Razor Co.:
Capital Stock:
L W Company 400,000
Steel Blade Company 600,000
Surplus:
L W Company " 535,000
Steel Blade Company 65,000* 1,470,000
Goodwill... $1,330,000
APPENDIX C
217
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CONSOLIDATED STATEMENTS
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APPENDIX C
219
COMMENTS
Adjustment (A) is a debit to the Jones Investment Com-
pany's Surplus and a credit to its account of investment in
Stock of Company A, taking out of surplus the $100,000 write-
up of the investment, and reducing the investment account
to its cost to permit the determination of goodwill by eliminat-
ing book value at acquisition.
Adjustment (B) is a debit to Deficit and a credit to Plant
of Company B, to record the fire loss.
The reserve for inter-company profit in inventories is necessi-
tated by the fact that the B Company sold goods to the A Com-
pany during 1916, on which they made a profit of $10,000, and
these goods remain in the A Company's inventory. 75 per cent
of the $10,000 is an unrealized inter-company profit.
The reserve for inter-company profit on construction is
necessitated by the fact that Company A made a profit of
$15,000 by constructing a part of the plant of Company C.
As the holding company owns 60 per cent of the stock of Com-
pany A, 60 percent of the $15,000 is an unrealized inter-com-
pany profit.
THE JONES INVESTMENT COMPANY
AND SUBSIDIARY COMPANIES-CO. A, CO. B AND CO. C
CONSOLIDATED BALANCE SHEET
June 30, 1916
Assets
Fixed Assets:
Goodwill $177,000
Plant $1,955,000
Less Reserve for Inter-Co. Profit 9,000 1,946,000 $2,123,000
Current Assets:
Inventories 350,000
Less Reserve for Inter-Co. Profit 7,500 342,500
Accounts Receivable 250,000
Cash 210,000
Liabilities
Capital:
Capital Stock $2,000,000
Surplus 116,750
Minority Interests:
Company A 40% 520,000
Company B 25% 178,750
Company C 20% 110,000
802,500
$2,925,500
$2,116,750
808,750
$2,925,500"
220
CONSOLIDATED STATEMENTS
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APPENDIX C
221
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Loss: Six Months to June
Dividends:
Jones Investment Co. .
A Company
B Company
en
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duct Reserves for Inter-Coi
In Inventories 75% o
On Construction 60% o
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222 CONSOLIDATED STATEMENTS
THE JONES INVESTMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED SURPLUS STATEMENT
July 1, 1915 June 30, 1916
Surplus, July 1, 1915 $100,000
Add Profits for the Year:
For Six Months Ending December 31, 1915 $162,500
For Six Months Ending June 30, 1916 88,250
Total 250,750
Less Unrealized Inter-Company Profit:
In Inventories $7,500
On Construction 9,000 16,500 234,250
Total 334,250
Deduct Dividends Paid 217,500
Surplus, June 30, 1916 $116,750
APPENDIX C 223
Solution to problem u. Since there are no minority inter-
ests in the subsidiaries, it is not necessary to determine the
profits of the individual companies; therefore this feature of
the working papers is omitted. As the beginning of the period
is also the date of acquisition, the so-called inter-company
profit in the inventories at that date is not true inter-company
profit, and no adjustment is made for it.
224
CONSOLIDATED STATEMENTS
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)tes Receivable . . .
ventory, Raw Material, Ja
rchases, Raw Material. . .
bor. .
anufacturing Expense
ling Expense
ministrative Expenses
ventory, Goods in Process,
ventory, Finished Goods, .
int and Equipment
trestment in Stock of Co. ]
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Goodwill. . .
APPENDIX C
225
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CONSOLIDATED STATEMENTS
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228 CONSOLIDATED STATEMENTS
COMPANY A AND SUBSIDIARIES B AND C Exhibit A
CONSOLIDATED STATEMENT OF COST OF GOODS MANUFACTURED AND SOLD
For the Year Ending December 31, 1920
Goods in Process, January 1, 1920 $225,000
Materials:
Inventory, January 1, 1920 $415,000
Add Purchases 985,000
Total $1,400,000
Less Inventory, Dec. 31, 1920 615,000 $785,000
Labor 1,140,000
Manufacturing Expense:
Miscellaneous 585,000
Depreciation of Plant and Equipment 102,500 687,500 2,612,500
Total Manufacturing Cost 2,837,500
Deduct Inventory, Goods in Process, December 31, 1920 '. . . 249,000
Cost of Goods Manufactured 2,588,500
Add Inventory of Finished Goods, January 1, 1920 235,000
Total 2,823,500
Less Inventory of Finished Goods, December 31, 1920 376,000
Cost of Goods Sold $2,447,500
in in ii
COMPANY A AND SUBSIDIARIES B AND C Exhibits
CONSOLIDATED PROFIT AND Loss STATEMENT
For the Year Ending December 31, 1920
Sales $3,125,000
Less Cost of Goods Sold (Exhibit A) 2,447,500
Gross Profit on Sales 677,500
Less Selling Expenses 200,000
Net Profit on Sales 477,500
Less Administrative Expenses 105,000
Net Profit on Operations 372,500
Less Bond Interest:
Interest Accrued $12,500
Less Premium Amortized 500 12,000
Net Profit for the Year $360,500
COMPANY A AND SUBSIDIARIES B AND C Exhibit C
CONSOLIDATED SURPLUS STATEMENT
Year Ending December 31, 1920
Surplus, January 1, 1920 $210,000
Add Profits for 1920 (Exhibit B) 360,500
Total 570,500
Less Dividends Paid 150,000
Surplus, December 31, 1920 $420,500
229
COMPANY A AND SUBSIDIARIES B AND C Exhibit D
CONSOLIDATED BALANCE SHEET
December 31, 1920
Assets
Current Assets:
Cash $185,000
Accounts Receivable 905,000
Notes Receivable 300,000
Inventories:
Raw Material $665,000
Goods in Process 260,000
Finished Goods 385,000
Total 1,310,000
Less Inter-Company Profit 70,000 1,240,000 $2,630,000
Fixed Assets:
Plant and Equipment 2,050,000
Less Reserve for Depreciation 375,000
1,675,000
Goodwill 242,500 1,917,500
$4,547,500
Liabilities
Current Liabilities:
Notes Payable 250,000
Accounts Payable 360,000
Accrued Bond Interest 12,500 622,500
Fixed Liabilities:
Bonds Payable 500,000
Deferred Credits:
Premium on Bonds . 4,500
Capital:
Capital Stock 3,000,000
Surplus (Exhibit C)..i 420,500 3,420,500
$4,547,500
*v
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