Consolidating financial statements eliminations
But, the assets and liabilities are not necessarily the simple sum of the amounts reported by the parent and subsidiary.For example, the $135,000 Land account reflects the parent’s land plus the fair value of the subsidiary’s land ($25,000 $110,000).
This excess is often called “purchase differential” (the excess of the fair value over the net book value).For example, the cost of land held by Sledge may differ from its current value.Assume Sledge’s land is worth $110,000, or $35,000 more than its carrying value of $75,000.Therefore, accounting rules require that parent companies “consolidate” their financial reports and include all the assets, liabilities, and operating results of all controlled subsidiaries.For example, the financial statements of a conglomerate like General Electric are actually a consolidated picture of many separate companies controlled by GE.That would explain part of the purchase differential.
Assume that all other identifiable assets and liabilities are carried at fair value.
Control is ordinarily established once ownership jumps over 50%, but management contracts and other similar arrangements may allow control to occur at other levels.
Notice: Undefined variable: animation_class in /services/webpages/p/r/principlesofaccounting.com/public/wp-content/plugins/u-shortcodes/shortcodes/on line 18 " href=" data-delay="0" A controlled company may continue to operate and maintain its own legal existence.
This asset reflects ownership of all of the stock of Sledge and that Premier paid $400,000 for this investment.
Importantly, the $400,000 flowed from Premier to the former owners of Sledge (not directly to Sledge).
A casual review of business news won’t take long to reveal a story about one business buying another.