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Accounting for Consolidated Financial Statements

(Acquisition Method)
A. Date of Acquisition. To prepare Consolidated Financial Statements, the Investment in
Subsidiary should be eliminated in the consolidated statements.
B. Subsequent to Date of Acquisition. In subsequent to date of acquisition, the newly affiliated
companies continue to maintain their separate accounting records. Furthermore, the
eliminations and adjustments made as part of the consolidation procedures are not entered into
the books of any of the companies; these adjustments are simply worksheet entries which are
never formally journalized. As a result, consolidation procedures must be performed every
period in which financial statements are presented. Generally, the parent company carries its
interest in a subsidiary as Investment in Subsidiary. This account is generally carried under
one of the two methods: the cost method and the equity method. Either method will result to
the same consolidated statements.
C. Transactions Between Affiliated Companies
a. Intercompany Sale of Inventory. This creates three problems that must be addressed
in the consolidation:
1. The Sales and Cost of Goods Sold are recorded twice: first, the seller records a
sale and the related cost of goods sold as the merchandise is transferred to the
affiliated buyer; secondly, the buyer resells the goods to outsiders, also
recording a sale and cost of goods sold. For consolidation purposes, however, it
should be treated as only one sale that occurred.
2. When one company sells merchandise to its affiliate at a price above cost, the
ending inventory of the buyer contains an element of unrealized gross profit.
The gross profit is not realized to the entity until it is sold to outsiders. The
preparation of consolidated financial statements requires that unrealized gross
profit must be eliminated.
3. Non-controlling interest in the subsidiary must be based on the sales and cost of
goods sold originally reported by the subsidiary. As it was the case in inter-
affiliate interest income and expense, the non-controlling interest should reflect
the expense incurred or revenues obtained in intercompany transactions. The
sale, however, may not be recognized until after the goods have been sold to an
outside buyer.
b. Intercompany Sale of Fixed Assets. Sales of fixed assets between members of an
affiliated group may result in the recognition of gain or loss if the selling price differs
from the carrying amount of the asset. No actual gain or loss has taken place for the
consolidated entity; assets have merely been transferred from one set of books to
another. Additional complications result from the fact that the buyer of the asset will
record it in its books at the agreed upon purchase price; subsequent depreciation
charges will be based upon this purchase price, thus requiring adjustment. An inter-
affiliate sale of fixed assets involves the following:
1. In the year of sale, restore the carrying amount of the asset to its original book
value and eliminate the gain (loss) recorded by the seller.
2. For each period, adjust depreciation expense and accumulated depreciation to
reflect the original book value of the asset.
3. For periods subsequent to the year of sale, Investment in Subsidiary must be
adjusted to eliminate the gain (loss) contained therein.
i. If the parent is the seller, Investment in Subsidiary absorbs the entire
ii. If a less than 100% owned subsidiary is the seller, the adjustment should
be allocated to the Investment in Subsidiary and the Non-controlling
Interest, on the basis of their ownership ratio.