Advance accounting II

CHAPTER-ONE

BUSINESS COMBINATIONS
Nature of Business Combinations.
Business combinations are events or transactions in which two or more
business enterprises or their net assets are brought under common control in a
single accounting entity. Other terms frequently applied to business
combinations are Mergers and Acquisitions.:
A) Combined Enterprise- The accounting entity that results from a business
combination.
B) Combinor- A constituent company entering into a purchase type business
combination whose owners as a group end up with control of the
ownership interests in the combined enterprise.
C) Combinee- A constituent company other than the combinor in a
businesses combination.
A target combinee in a hostile takeover typically resists the proposed business
combination by resorting to one or more defensive tactics with the following
colorful designations:
1) Pac- man defense. A threat to undertake a hostile takeover of the prospective
combinor.
2) White Knight- A search for a candidate to be the combinor in a friendly
takeover.
3) Scorched Each- The disposal by sale or by a spin off to stockholders of one
or more profitable business segments.
4) Shark Repellent- An acquisition of substantial amounts of outstanding
common stock for the treasury or for retirement, or the incurring of substantial
long-term debts in exchange for outstanding common stock.
5) Green Mail- An acquisition of common stock presently owned by the
prospective combinor at a price substantially in excess of the prospective
combinor’s cost, with the stock thus acquired placed in the treasury or retired.

Reasons for Business Combinations

Business enterprises have major operating objectives other than growth, but that
goal increasingly has motivated combinor managements to undertake business
combinations. Growth through external method point out that it is much more
rapid than growth through internal means. There is no question that expansion and
diversification of product lines or enlarging the market share for current products
is achieved readily through a business combination with another enterprise.
However, the disappointing experiences of many combinors engaging in business

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 combinations suggest that much may be said in favor of more gradual and
reasoned growth through internal means, using available management and
financial resources.

Methods for Managing Business Combinations

There are four common methods for carrying out a business combination namely,
Statutory Merger, Statutory consolidation, acquisition of common stock and
acquisition of assets.

Statutory Merger- As its name implies a statutory merger is executed under

previous of applicable state laws. In a statutory merger, the boards of the
constituent companies approve a plan for the exchange of voting common stock
and perhaps some preferred stock, cash or long term debts of one of the
corporations (the survivor) for all the outstanding voting common stock of the
other corporations.

Statutory Consolidation- A statutory consolidation is consummated in

accordance with applicable to state laws. However, in a consolidation a new
corporation/company is formed to issue its common stock for outstanding stocks
of two or more existing companies, which have been dissolved.

Acquisition of Common Stock - One corporation (the Investor) may issue

preferred or common stock, cash, debt or a combination thereof to acquire from
present stockholders a controlling interest in the voting common stock of another
corporation (the investee).

Acquisition of Assets- A business company/enterprise may acquire from another

enterprises all or most of the gross assets or net assets of the other enterprises for
cash, debts, stock or by a combination of them.

1.3 Accounting Methods for Business Combinations

The two major accounting methods for business combination are Purchase
accounting method and Pooling of Interest accounting method.
Purchase Accounting
Assets acquired in a business combination for cash would be recognized at the
amount of cash paid and assets acquired in the business combination involving
either the issuance of debt or stock would be recognized at the current fair value
of the assets or debts/stocks, which ever is more clearly evident. The approach is
kwon as Purchase Accounting
a) The amount of consideration is the total of cash paid, the current fair value of other
assets distributed, the present value of debt securities issued and the current fair
(market) value of equity securities issued by the combinor.
b) Direct out-of –pocket costs. These included in some legal fees, some accounting fees
and finders fees. Finder ’s fees is the amount paid to the investment banking firm or

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 other organizations or individuals that investigated the combinee, assisted in
determining the price of the business combination & otherwise rendered services to
bring about the combination.
c) Contingent consideration is additional cash or other assets that may be issuable in
the future. Contingent on future events such as a specified level of earnings or
designated market price for a security that had been issued to complete the business
combination..
Illustration of Purchase type business combination for statutory merger with
Goodwill Assume that on Dec. 31, 2003 XYZ Company (the combinee) was merged into
ABC Corporation (the combinor or survivor). Both companies used the same accounting
principles and procedures for assets, liabilities, revenues and expenses and both
companies had a December 31, closing fiscal year. Further assumed that, ABC
Corporation issued 150,000 shares of its birr 10 par common stock current market value
of the shares is birr 25 a share to XYZ company stockholders for all 100,000 issued and
outstanding shares of XYZ’s company no par but stated value birr 10 a share common
stock. In addition, ABC Corporation paid the following out-of-pocket costs associated
with the business combination: Combinor’s out of pocket costs of purchase-type business
combination in ABC books of accounts includes:

Accounting fees: - for investigation of XYZ Co. as prospective combinee 5,000

-for registration statement for ABC common stock 60,000
Legal Fees: - for business combination ----------------------------------------- 10,000
- for registration statement for ABC common stock ---------------- 50,000
- finder’s fees ------------------------------------------------------------ 51,250
- printer’s charge for printing registration statement --------------- 23,750
Total out-of-pocket costs of business combination 200, 000
There was no contingent consideration in the merger contract; assumed that
condensed balance sheet of XYZ Company before the merger was as follows:

XYZ Company (Combinee)

Balance Sheet (Before Business Combination)
December 31, 2003
Assets
Current assets 1,000,000
Net Plant assets --- 3,000,000
Other assets 600,000
Total assets 4,600,000
Liabilities and Stockholders Equity
Current liabilities 500,000
Long term debts 1,000,000
: Total liabilities 1500,000
Stockholders’ Equity:
Common Stock 1,000,000
Additional paid in capital- 700,000
Retained earnings 1,400,000 3,100,000
Total liabilities & stockholders’ Equities 4,600,000

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Using the guidelines in APB Opinion No 16, “Business Combination”, the board
of directors of ABC Corporation determined the current fair value of XYZ
company’s identifiable assets and liabilities (identifiable net assets) as follows:
Current assets 1,150,000
Plant assets 3,400,000
Other assets 600,000
Current liabilities (500,000)
Long-term debts (950,000)
Identifiable net assets of XYZ Co. (Combinee) 3,700,000
Based on the above information, the condensed journal entries that follow are
require for the ABC Corporation (Combinor) to record the merger with XYZ
company on Dec.31, 2003 as a purchase-type business combination are:-
a) Investment in XYZ Co. common Stock (150,000xbirr25) 3,750,000.00
Common stock at par (150,000x birr10) 1,500,000
Paid-in capital in excess of par (3,750,000-1,500,000) 2,250,000
To record merger ABC Corporation with XYZ company by purchase-type.
b) Investment in XYZ co. common stock (5000+10000+51250) 66,250.00
Paid-in capital in excess of par (60,000+50,000+23,750) 133,750.00
Cash 200,000.00
To record payments of out-of-pocket costs incurred in the merger with XYZ Co.
Accounting to legal & finder’s fees in connection with the merger are recognized
as an investment cost other than out of pocket costs are recorded as a reduction in
the proceeds received from issuance of common stock. Example, On December
31, 2003 the journal entries on ABC Corporation (Combinor) shows below:-
Current Assets 1,150,000.00
Plant Assets 3,400,000.00
Other Assets 600,000.00
Discount on long-term debt 50,000.00
Goodwill 116,250.00
Current Liabilities 500,000.00
Long-term Debts 1,000,000.00
Investment on XYZ Co. common stock 3,816,250.00
(3,750,000+66,250)
The above mentioned Goodwill is computed as follows:-
Total cost of XYZ Co. (3,750,000+66,250) 3,816,250.00
Less; carrying amount of XYZ’s identifiable
net assets (4,600,000-1,500,000) =3,100,000
Excess of current values of identifiable
Net assets over carrying amounts
Current assets = 150,000
Plant assets =400,000
Long-term debts = 50,000 3,700,000.00
Amount of total Goodwill recognized 116,250.00

Note: There are no adjustments for the journal entries of ABC Corporation to
reflect the current fair values because ABC is the combinor in the business

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combination. XYZ Company (the combinee) prepares condensed journal entries
to record the dissolution and liquidation of the company as of Dec. 31, 2003 as
follows:
Current liabilities 500,000.00
Long-term debts 1, 0000,000.00
Common stock, birr10 stated values 1, 000, 0000.00
Paid-in capital in excess of stated value 700,000.00
Retained earnings 1,400,000.00
Current assets 1,000,000.00
Plant assets 3,000,000.00
Other assets 600,000.00
To record the liquidation of XYZ Co. in conjunction with merger with
ABC corporation.

Illustration of Purchase accounting for the acquisition of net assets with bargain
purchase excess. Assume that on December 31, 2003 XY company acquired the
net assets of AB Company directly for birr 400,000.00 cash, in a purchase-type
business combination. XY Company paid legal fees of birr 40,000.00 in
connections with the business combination.
The condensed balance sheet of AB Company prior to the business combination,
with related current fair value data is presented below:

XY Company (Combinor)
Balance Sheet (prior to Combination)
December 31, 2003

Carrying Current
Amounts Fair values
Assets
Current assets 190,000 200,000
Investment in marketable securities 50,000 50,000
Plant assets (net) 870,000 900,000
Intangible assets (net) 90,000 100,000
Total assets 1,200,000 1,200,000
Liabilities and stockholders’ Equities
Liabilities:
Current liabilities 240,000 240,000
Long term debt 500,000 520,000
Total liabilities 740,000 760,000
Stockholders’ Equities:
Common stock birr 1 par 600,000
Deficit (140,000)
Total net stockholders Equities 460,000
Total liabilities and Owners’ equity 1,200,000

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Thus, XY Company acquired identifiable net assets with a current market (fair)
value of birr 500,000.00(1260000-760000=500,000) for a total of birr
440,000(400,000+40,000).
The excess of current fair value of the net assets over their costs to XY Company
(Birr 500,000-440,000=60,000) is prorated to the plant assets and intangible
assets in the ratio of their respective current fair values as shown below:
Plant assets: birr 60,000 x 900,000 =54, 000.
(900000+100000)
Intangible assets: birr 60,000 x 100,000 =6,000
1 000,000
Total excess of current market value of identifiable net assets over XY company
(combinor) is birr 60,000.00.
Note: No part of the birr 60,000 bargain purchase excess is allocated to current
assets or to the investment in marketable securities. Based on the given data the
journal entries to record XY Company’s acquisition of the net assets of AB
Company and payment of legal fees in connection with the business combination
as of Dec.31, 2003 are shown in the XY company accounts:
1) Investment in net assets of AB company --------------400,000
Cash ------------------- 400,000
To record the acquisition of net assets of AB Company

2) Investment in Net assets of AB Company --------------- 40,000

Cash ---------------------------40,000
To record payment of legal fees incurred in the acquisition of net assets of
company AB.
3) Current assets 200,000
Investment in marketable securities 60,000
Plant assets (900000-54000) 846,000
Intangible assets (100000-6000) 94,000
Current liabilities 240,000
Long-term debts 500,000
Premium on long term debts (520000-500000) 20,000
Investment in net assets of company AB (400000+40000) 440,000
To allocate total cost of assets acquired to identifiable net assets, with excess of
current fair vale of the net assets over their costs prorated to non current assets
other than marketable securities.

1.3.2 POOLING OF INTERESTS ACCOUNTING

The original premise of pooling of interests method was that certain business
combinations involving the exchange of common stock between an issuer and
the stockholders of a combinee were more in the nature of a combining of
existing stockholders interests than an acquisition of assets or raising of capital.
The pooling of interest method of accounting is provided for carrying forward to
the accounting records of the combined enterprise

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 Illustration of Pooling-of –Interest Accounting for Statutory Merger- Assume
that the ABC Corporation (combinor) and XYZ company (combinee) merger
business combination described in the previous illustration would be accounted
for a Pooling of interests. The journal entries to be taken in the ABC
Corporation’s (the survivor’s) accounting records on Dec. 31, 2003 the merger
date as a pooling of interest are as follows:
Current assets 1,000,000
Plant assets (net) 3,000,000
Other assets 600,000
Current liabilities 500,000
Long-term Debts 1,000,000
Common stock, birr 10 par 1,500,000
Paid in capital in excess of par 200,000
Retained earnings 1,400,000
To record merger records with XYZ company as a pooling of interest.
Expenses of Business Combination 200,000
Cash 200,000
To record payments of out of pocket costs incurred in merger with XYZ
Company.
Note: A pooling-type business combination is a combining of existing
stockholder interests rather than an acquisition of assets.
-An investment in XYZ Company common stock ledger account, as applied in
purchase accounting illustration earlier is not used in the foregoing pooling-of
interests journal entries.
-Paid in capital in excess of par to the survivor’s credit amount is computed as follows:
Total paid-in capital of XYZ Co. prior to merger (1000000+700000) 1,700,000
Less: Par value of ABC Corporation common stock issued in merger 1, 500,000
Amount credited to ABC Corporation’s paid-in capital in excess of par 200,000
If the par value of common stock issued by ABC Corporation had exceeded the
total paid in capital of XYZ Company, ABC’s paid in capital in excess of par
ledger account would have been debited in the illustrated journal entry. If the
balance of ABC” paid in capital in excess of par amounts were insufficient to
absorb the debit ABC’s Retained Earnings account would have been reduced.
In the pooling –type business combination all out-of-pocket costs of the
combination are recognized/considered as expenses because it is neither an
acquisition of assets nor a raising of capital. However, such expenses are not
deductible for income tax purposes; thus ABC Corporation doesn’t make any
adjustment to its income tax expenses.

Differences between Purchase Accounting &Pooling Accounting

Methods

The differences between the two methods are mainly reflected in the net assets
and total paid-in capital of a company (corporation). Further to clarify the
differences let’s take data from previous illustration and elaborate as follows:

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a) Difference in Net assets- The foregoing journal entries in the net assets
recorded under the purchase method (birr 3,616,250.00) exceeds the net assets in
the pooling of interest (birr 2,900,000.00) by birr 716,250.00. The composition of
this difference is summarized Below: Excess of purchase asset values over
pooling asset values
Current assets (1,150,000- 1000, 000) birr 150, 000
Plant assets (3,400,000-3 000,000) 400,000
Goodwill 116,250

Excess of pooling liability values over purchase liability values

Long term debts (1,000,000-(100000-50,000)) = 50,000
Excess of purchase net asset values over pooling net asset values 716,250
Assuming that the birr 400,000.00 difference in plant assets is attributable to
depreciable assets, total expenses of ABC corporation for the subsequent to
Dec.31, 2003 will be birr 716,250.00 larger under the purchase method than
under the pooling of interest accounting. The birr 150,000 difference in current
assets is assumed attributable to inventories that will be allocated to costs of
goods sold on the FIFO basis; the average economic life of the depreciable plant
assets is 10 year; the Goodwill is to be amortized over a 40 years period and the
long term debt has a remaining five year to maturity. ABC Corporation’s pre-tax
income for the year ending Dec.31, 2004 (the year following the merger period)
would be nearly birr 203,000.00 less under the purchase accounting method than
under the pooling of interest accounting method, attributable to the following
post merger expenses under the purchase accounting method. The computations
are as follows:
Cost of goods sold 150,000
Depreciation expenses (400,000x10%) 40,000
Amortization expenses (116,250x2.5%) 2,906
Interest expenses (50,000x20%) 10,000
Excess of 2004 pre-tax income under pooling accounting is 202,906
It is true that pre-tax income for the year ended Dec. 31, 2003 is reduced by birr
200,000 in pooling accounting, because the pooling method included the
immediate expensing of the out of pocket costs of the business combination.
However, this situation tends to be obscured by the fact that the income
statement of ABC Corporation and XYZ Company would be combined in
pooling of interest accounting for the entire year ended Dec. 31, 2003 (the
merger period). In summary, the favorable effect of pooling accounting method
on post combination earnings has been the main reason for the conditions of
pooling method for business combinations.
b) Difference in total paid in capital: the increase in ABC corporation’s total
paid in capital is birr 1,916,250 less under pooling method than under purchase
method (3,616,250-1,700,000=1,916,250).The birr 1,200,000(1,400,000-
200,000=1,200,000) difference is attributable to a net increase in ABC
Corporation’s Retained Earnings under the pooling accounting method. If state
laws make this birr 1,200,000.00 available as the basis for dividends to be

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declared by the board of directors of ABC Corporation is another advantages of
the pooling of interest method over the purchase method.

Conditions Requiring Pooling of Interest Accounting

The Accounting Principles Board (APB) provided 12 conditions for business
combinations that were to be accounted for the pooling accounting method. The
conditions were to be satisfied for pooling to be appropriated method for
business combination and these can be categorized in to three groups as follows:
1) Attributes of the combining companies. This group designed to assure that
the pooling –type business combination was truly a combining of two or
more enterprises whose common stockholder interests were previously
independent of each other.
2) Manner of combining ownership interests. This group supported the
requirement for pooling accounting that an exchange of stock to combine the
existing voting common stock interests actually took place, in substance as
well as in form.
3) Absence of planned transactions. The planned transactions prohibited by
this group of conditions were those that would be inconsistent with the
combining of entire existing interests of common stockholders.

The income statement of combined enterprise for the accounting period under
the purchase –type business combination occurred includes the operating results
of the Combinee after the date of the combination only. For example, under the
purchase accounting, ABC Corporation’s post merger income statement for the
year ended Dec. 31, 2003 would b identical to ABC Corporation’s pre merger
income statement shown below:

ABC Corporation & XYZ Company (constituent Co.)

Separate Income Statements
For the Year ended Dec.31, 2003
Description ABC Corp. XYZ Co.
_________________________________________________________________
_____
Sales & other Revenues 10,000,000 5,000,000
Costs of Goods sold 7,000,000 3,000,000
Gross profit 3,000,000 2,000,000
Operating expenses (1,883,333) (1,274,500)
Interest expenses (150,000) (100,500)
Income taxes expenses (466,667) (250,000)
Net Income 500,000 375,000

Except that (a) net income would be birr 700,000 (b) operating expenses would
be birr 1,683,333 (the birr 200,000.00 out of pocket costs of business
combination are not recognized as expenses in the purchase accounting method)
(c) birr 66,250 is part of the total cost to ABC Corporation of XYZ Company’s

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 net assets, and (d) birr 133,750 is a reduction in ABC Corporation’s paid in
capital in excess of par.

1.5.2 Financial Statements using Pooling Accountings Method.

The income statement of the combined enterprise for the accounting period in
which a Pooling-type business combination took place includes the results of
operations of the constituent companies as though the combination had been
completed at the beginning of the period.
According to APB Opinion No 20 “Accounting Changes”, a business
combination accounted for by the pooling method results in a change in the
Reporting Entity. The presentation of income statement that a business
combination accounted for as a pooling is a combining of existing stockholder
interests rather than an acquisition of assets because stockholder interests are
combined, previous financial statements showing changes in those
interests also are combined.
To illustrate, assume that the income statements of ABC Corporation and
XYZ Company for the year ended Dec. 31, 2003(prior to completion of their
pooling-type merger described earlier are shown below:-

ABC Corporation
Working paper for combined Income Statement (Pooling of Interests)
For the Year ended Dec. 31, 2003
Description ABC Corp. XYZ Co. Eliminations Combined
Sales& other revenues 10,000,000 5,000,000 (a)(25,000) 14 ,975,000
Cost & Expenses:
Costs of goods sold 7,000,000 3,000,000 -- 10,000,000
Operating expenses 1,883,333 1,274,500 --- 3,157,883
Interest expenses 150,000 100,500 (a) (25,000) 225,500
Income tax expenses 466,667 250,000 - 716,667
Total Costs & expenses 9,500,000 4,625,000 (25,000) 14,100,000
Net Income 500,000 375,000 - 875,000
In the above assumption XYZ Company’s interest expenses includes birr 25,000
paid to ABC Corporation on loan that was repaid prior to Dec.31 ,2003 and that
ABC corporation sales and other revenue include birr 25,000 interest revenue
received from XYZ company.
The Complex nature of business combinations and their effect on the financial
position and operating results of the combined enterprise required extensive
disclosure for the period in which they occur.
According to APB, disclosures required for purchase-type business combination
in a note to the financial statements for the period in which the business
combination took place are the following:-
(1) The period for which combinee’s operating results are included in the
income statement of the combined enterprise.
(2) The name and brief description of the combinee.

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 (3) The cost of the combinee, including number of shares and value per share
of common stock issued and nature of accounting treatment for the contingent
consideration
(4) The amortization policy for Goodwill recorded if any in the combination
accounts.
(5) The proforma operating results for the combined enterprise for the current
and preceding accounting periods as though the combination had occurred
at the beginning of the preceding period.
In contrast to the purchase-type the disclosures required for a pooling-type
business combination in a note to the financial statements of the combined
enterprises are stated below: (a) name and brief description of the combinee (b)
number of shares issued in the combination (c) separate operating results of the
constituent companies for the period prior to the combination that were included
in the operating results of the combined enterprise for the year in which the
business combination occurred.
CHAPTER TWO: CONSOLIDATIONS
Consolidated Financial Statements are the financial Statement of a group
presented as those of a single economic entity” whereby that bring the holding
(parent) company's subsidiaries into its aggregated accounting figure.
Above definition, explicitly stresses about a group relationship which involves
parent and its subsidiaries.
Consolidated financial statements provide a comprehensive overview of all the
business operations that a parent company is involved in and has control over
The Rationale for Consolidating the Financial Statement of Different Legal
Entities
• Consolidated financial statements are presented primarily for the benefit of the
shareholders, creditors, and other resource providers of the parent.
• Consolidated financial statements represent the means of obtaining clear
picture of the total resources of the combined entity that are under the control
of the parent company.
• It would be difficult or not practicable for an investor or financial analyst to
gather together all the accounting reports of a parent company and its many
subsidiaries in order to get an idea of the financial health of the total
enterprise.
• So as to eliminate this confusion consolidated financial statement came to
prominence.
Investor Controls over Investee
Simply, Control is the power to govern the financial and operating policies of an
economic activity so as to obtain benefits from it. The control is presumed to exist
when parent company owns more than half of the voting power of entities either
directly or indirectly through subsidiaries. Thus control can be either direct or
indirect or combination.
Direct Control

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The Direct control is presumed to exist when parent company owns more than
half of the voting power of entities directly.
Indirect Control
The Indirect control is presumed to exist when parent company owns more than
half of the voting power of entities through its subsidiaries

Joint Control
Joint control is the contractually agreed sharing of control over an economic
activity, and exists only when the strategic financial and operating decisions
relating to the activity require the unanimous consent of the parties sharing
control.
This concept is applicable to the circumstances where there is a joint venture
which is a contractual arrangement whereby two or more parties undertake an
economic activity that is subject to joint control.
Preparation and Presentation of Consolidated Financial
Statements under control
Consolidation difference
Consolidation difference’ refers to the difference that arises on consolidation
because the amount paid by the investor company is greater or less than its
proportionate share of the tangible and identifiable intangible net assets of the
investee. Under IFRS and US GAAP, it is standard practice to make this
calculation at the date of acquisition, to take in the net assets at their ‘fair value’ at
that date, and to refer to the resulting balancing figure as ‘goodwill on
consolidation’.
Alternative methods of preparing consolidated accounts
1. The purchase method
The fair value of the parent company’s investment in a subsidiary is set against its
share of the fair value of the identifiable net assets in the subsidiary at the date of
acquisition.
If the investment is greater than the share of net assets, then the difference is
regarded as the purchase of goodwill
Example: EXAMPLE THE ROSE GROUP CONSOLIDATED USING THE
PURCHASE METHOD
On 1 January 20 Rose plc acquired 100% of the 10,000 £1 common shares in
Tulip plc for £1.50 per share in cash and gained control. The fair value of the net
assets of Tulip plc at that date was the same as the book value. The individual
balance sheets immediately after the acquisition and the group accounts at that
date were as follows

Rose plc Tulip plc Group

£££

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ASSETS
Non-current assets 20,000 11,000 31,000
Goodwill — — 1,000
Investment in Tulip 15,000 — —
Net current assets 8,000 3,000 11,000
Net assets 43,000 14,000 43,000
Common share capital 16,000 10,000 16,000
Retained earnings 27,000 4,000 27,000
43,000 14,000 43,000

Calculate the goodwill for inclusion in the group accounts:

£ £
The parent company’s investment 15,000
Less: The parent’s share of the subsidiary’s
share capital (100% × 10,000) 10,000
The parent’s share of
accumulated profits (100% × 4,000) 4,000 14,000
The difference is goodwill
for inclusion in the consolidated balance sheet 1,000
the assets and liabilities of the two companies for the group accounts:

Fixed assets other than goodwill (20,000 + 11,000) 31,000

 Goodwill (as calculated in Note 1) 1,000
 Net current assets (8,000 + 3,000) 11,000
43,000
Calculate the consolidated share capital and reserves for the group accounts:
 Common share capital (The parent company only) 16,000
 Retained earnings (The parent company only) 27,000
43,000
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidation of Wholly Owned Subsidiary on Date of Purchase-
type Business Combination
There is no question of control a wholly owned subsidiary. Thus, to illustrate
consolidated financial statements for a Parent’s company and a wholly owned
purchased subsidiary, assume that on Dec. 31, 2003 Wegagen Bank Share
company issued 10,000 shares of its birr 10 par common stock (current fair

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value is birr 45 a share) to stockholders of Star Company for all the
outstanding birr 5 par common stock of Star company. There was no
contingent consideration. Out of pocket costs of the business combination
paid by Wegagen Bak on Dec. 31, 2003 were the following:
Finder’s& legal fees relating to business combination 50,000
Cost of associated with registration statement for Wegagen common stock .35 000
Total out of pocket costs 85,000
Assume also that the business combination qualified for purchase accounting
because required conditions for pooling accounting were not met. Star
Company was to continue its corporate existence as a wholly owned
subsidiary of Wegagen Bank. Both constituent companies had a Dec. 31 fiscal
year and used the same accounting principles, procedures and regulations;
thus, no adjusting entries were required for either company prior to the
business combination. The rate of income tax for each company was 40%.
The financial statements of the two companies for the year ended Dec.31 2003
prior to as Purchase-type Business Combination were as follows:

Wegagen Bank Share Company

Separate Financial Statements (prior to business combination)
For the year ended December 31, 2003
Wegagen Bank S.Co. Star Company
Income Statements
Revenues:
Net Sales 790,000 600,000
Interest 210,000 ----
Total revenues 1,000,000 600,000
Costs & Expenses:
Cost of goods sold 535,000 410,000
Operating expenses 158,333 73,333
Interest expenses 150,000 30,000
Income tax expenses 61,667 34,667
Total Costs & Expenses 906,000 548,000
Net income 94,000 52,000
Statement of Retained Earnings
Retained earnings (beginning) 65,000 100,000
Add: Net income 94,000 52,000
Sub-totals 159,000 152,000
Less: Dividends declared 25,000 20,000
Retained earnings (ending) 134,000 132,000
Balance Sheet
Cash 100,000 40,000
Inventories 150,000 110,000
Other current assets 110,000 70,000
Receivables from Star Co. 25,000 --
Plant Assets (net) 450,000 300,000
Patents (net) -- 20,000

14
 Total Assets 835,000 540,000
Liabilities & Owners’ Equities
Payable to Wegagen bank -- 25,000
Income tax payable 26,000 10,000
Other liabilities 325,000 115,000
Common stock, birr 10 par 300,000 --
Common stock, birr 5 par -- 200,000
Additional paid in capital 50,000 58,000
Retained earnings 134, 000 132,000
Total liabilities & equity 835,000 540,000
The Dec. 31, 2003 current fair values of Star company identifiable assets and
liabilities were the same as their historical costs (carrying amounts), except
the three assets listed below:
Description Carrying costs current fair values
Inventories 110,000 135,000
Plant assets (net) 300,000 365,000
Patents (net) 20,000 25,000

Star company did not prepare journal entries for the business combination,
because it was decided to continue as a separate corporation and generally
accepted accounting principles do not sanction write ups of assets a going
concern. However, Wegagen Bank Share Company recorded the combination
as a purchase on Dec. 31, 2003 with the following journal entries:
1. Investment in Star Company common stock (10,000x 45) 450,000
Common stock (10 000 x 10) 100,000
Paid in capital in excess of par 350,000
To record issuance of 10,000 shares of common stock for all the outstanding
common stock of Star company in a purchase-type business combination
2. Investment in Star Co. common stock 50,000
Paid in capital in excess of par 35,000
Cash 85,000
To record payment of cash out of pocket costs of business combination with
Star Co. Finder’s and legal fees relating to the combination were recorded as
additional cost of investment but costs associated with the SEC registration
statement were recorded as an offset to the previously recorded proceeds from
the issuance of common stock. The foregoing journal entries do not include
any debits or credits to record individual assets and liabilities of Star
Company in the accounting records of Wegagen Bank share company. The
reason is that Star Co. was not liquidated as in the merger; it remains a
separate legal entity.
After the journal entries have been posted, the affected ledger accounts of
Wegagen Bank Share Co. (the combinor) are cash birr 15,000, Investment in
Star company common stock birr 500,000, Common stock, birr 10par birr
400,000, and paid in capital in excess of par birr 365,000 respectively.

Preparation of Consolidated Balance Sheet without a Working Paper

15
 Purchase accounting for the business combination of Wegagen Bank and Star
Co. requires a fresh start for the consolidated entity. This reflects the theory
that a business combination that is an acquisition of the combinee’s net assets
(assets less liabilities) by the combinor. The operating results of Wegagen
Bank and Star Co. Prior to the date of their business combination are those of
two separate economic as well as legal entities. Accordingly, a consolidated
balance sheet is the only consolidated financial statement issued by Wegagen
Bank on Dec. 31 2003, the date of the purchase-type business combination of
Wegagen Bank & Star Companies.
The preparation of a consolidated balance sheet for a parent company and its
wholly owned subsidiary may be accomplished without the use of a
supporting working paper. The parent company’s investment account and the
subsidiary’s stockholder’s equity accounts do not appear in the consolidated
balance sheet because they are essentially reciprocal (intercompany) accounts.
Under the purchase accounting theory, the parent company (combinor) assets
& liabilities (other than intercompany ones) are reflected at carrying
amounts, and the subsidiary (combine) assets & liabilities (other than
intercompany ones) are reflected at Current Fair Values in the consolidated
balance sheet.
Goodwill is recognized to the extent when cost of the parent’s investment is
100% of the subsidiary’s outstanding common stock exceeds the current fair
value of the subsidiary’s identifiable net assets.
Applying the foregoing principles to the Wegagen Bank Share Company and
its subsidiary (Star Co.) parent- subsidiary relationship, the following
consolidated balance sheet is produced:

WEGAGEN BANK SHARE CO. & SUBSIDIARY

Consolidated Balance Sheet
December 31, 2003
Assets
Current Assets:
Cash (15,000+40,000) 55,000
Inventories (150,000+135,000) 285,000
Other assets (110,000+70,000) 180,000
Total Current assets 520,000
Plant assets (net) (450,000+365,000) 815,000
Intangible assets:
Patents (net) 25,000
Goodwill 15,000 40,000
Total Assets 1,375,000
Liabilities and Stockholders’ equity
Liabilities:
Income tax payable (26,000+10,000) 36,000
Other liabilities (325,000+115,000) 440,000
Total liabilities 476,000

16
 Stockholders’ equity:
Common stock, birr 10 par 400,000
Additional paid in capital 365,000
Retained earnings 134,000 899,000
Total liabilities & stockholders’ equity 1,375,000

Note: The following are significant aspects of the foregoing consolidated

balance sheet:
1. The first amounts in the computations of consolidated assets & liabilities
except Goodwill are the parent Co.’s carrying amounts; the 2nd amounts
are the subsidiary’s current fair values.
2. Intercompany receivables/payables are excluded from the consolidated
balance sheet.
3. Goodwill in the consolidated balance sheet is the cost of the parent
company’s investment (birr 500,000) less the current values of the
subsidiary’s identifiable net assets (birr485, 000) i.e. birr 15,000. The
above mentioned current value is (40,000+135,000+70,000+365,000+25,000-
10,000+110,000+115,000) =485,000
Preparation of Consolidated Balance Sheet with a Working Paper
on the date of a Purchase-type Business Combination

The preparation of a consolidated balance sheet on the date of a purchase-type

business combination usually required the use of a working paper for
consolidated purpose, even for a parent company and wholly owned
subsidiary it is important the format of working paper for consolidated
balance sheet with the individual balance sheet amounts included both in
Wegagen bank & Star companies is shown below:
WEGAGEN BANKSHARE CO. & SUBSIDIARY
Working paper for consolidated Balance Sheet
Dec. 31, 2003
_______________________________________________________________
_____
Description Wegagen Bank Star Co. Eliminations Consolidated
Increase/Decrease
Assets
Cash 15,000 40,000 -- 55,000
Inventories 150,000 110,000 -- 260,000
Other assets 110,000 70,000 -- 180,000
Intercompany Rec. /Pay 25,000 (25,000) -- ---
Investment in Star Co.
Common stock 500,000 -- --- 500,000
Plant Assets (net) 450,000 300,000 --- 750,000
Patent (net) -- 20,000 --- 20,000
Goodwill -- ----- ---- ---
Total Assets 1,250,000 515,000 --- 1,765,000

17
Liabilities & Stockholder’s equity
Income tax payable 26,000 10,000 -- 36,000
Other liabilities 325,000 115,000 -- 440,000
Common stock, birr 1 par 400,000 --- --- 400,000
Common stock, birr 5 par ---- 200,000 --- 200,000
Additional paid in capital 365,000 58,000 - 423,000
Retained Earnings 134,000 132,000 -- 266,000
Total Liabilities& Equities 1, 250,000 515,000 - 1,765,000
As indicated in the Wegagen Bank Co.’s investment in Star Co. common stock
ledger account in the working paper for consolidated Balance sheet is similar to a
home office’s investment in branch account. However, Star Co. is a separate
corporation, not a branch; therefore, Star has the three conventional stockholder’s
equity accounts rather than the single Home office reciprocal account used by a
branch. Accordingly, the elimination for intercompany accounts of Wegagen
Bank & Star company must decrease to Zero the investment in Star company
common stock account of Wegagen Bank & the three stockholder’s equity
accounts of Star decreases in assets are affected by credits and decreases in
stockholders’ equity accounts are affected by debits; therefore, the elimination for
Wegagen bank share Co. and subsidiary on Dec.31, 2003 i.e the date of the
purchase-type business combination is began as follows: (a journal entry
format is used to facilitate the elimination process)
Common stock –Star 200,000
Additional paid in capital-Star 58,000
Retained Earnings –Star 132,000
390,000
Investment in Star Co. common stock –Wegagen Bank 500,000
The footing of birr 390,000 of the debit items of the foregoing partial elimination
represents the carrying amounts of the net assets of Star Co. that is less than the
credit items by birr 110,000 which represents the cost of Wegagen Bank’s
investment in Star Co. As indicated earlier, part of the birr 110,000 differences is
attributable to the excess of current fair values over carrying amounts of certain
identifiable assets of Star Co. This excess is summarized as follows (the current
fair values of all other assets & liabilities are equal to their carrying amounts):

Description Current Carrying Excess of current

Fair value amounts fair values over carrying
Inventories 135,000 110,000 25,000
Plant assets (net) 365,000 300,000 65,000
Patents (net) 25,000 20,000 5,000
Total assets 525,000 430,000 95,000
According to the Generally Accepted Accounting Principles (GAAP), it is not
possible to write up of a going concern’s assets to their current fair values. Thus,
to conform the requirements of purchase accounting for business combination, the
foregoing excess of current fair values over carrying amounts must be
incorporated in the consolidated balance sheet of the Wegagen Bank Share
Company & subsidiary by means of the elimination. Increase in assets is recorded

18
by debits; thus the elimination for Wegagen bank and subsidiary began above is
continued as follows:-
Common stock –Star 200,000
Additional paid in capital- Star 58,000
Retained earnings-Star 132,000
Inventories- Star (135,000-110,000) 25,000
Plant assets (net)-Star (365,000-300,000) 65,000
Patents (Net) - Star (25,000-20,000) 5,000
Total 485,000
Investment in Star company common stock- Wegagen 500,000
The revised footing of birr 485,000 of the debit items of the foregoing partial
elimination is equal to the current fair value of the identifiable tangible and
intangible net assets of Star Co. Thus, the birr 15,000 (500,000-485,000= 15,000)
is the difference b/n the cost of Wegagen bank’s investment in Star Co. and the
current fair values of Star’s identifiable net assets which represents Goodwill of
Star company in accordance with purchase accounting theory for business
combination. Consequently, the Dec.31, 2003 elimination for Wegagen bank and
Subsidiary is completed with the birr 15,000 Goodwill debit –Star Co. as shown
below:-
WEGAGEN BANK & SUBSIDIARY
Working Paper Elimination
December 31 2003
Common stock –Star 200,000
Additional paid in capital-Star 58,000
Retained Earnings –Star 25,000
Plant Assets (net)-Star (365,000-300,000) 65,000
Patents (net)-Star (25,000-20,000) 5,000
Goodwill (net)-Star (500,000-485,000) 15,000
Investment in Star Co. common stock-Wegagen bank
500,000

Completed Working Paper Elimination for Wholly Owned

Purchase Subsidiary on date of Business Combination
To eliminate intercompany investment and equity accounts of subsidiary on date
of combination and to allocate excess of costs over carrying amounts of
identifiable assets acquired with the remainder to Goodwill.

WEGAGEN BANK & SUBSIDIARY

Working Paper for Consolidated Balance Sheet
Dec. 31, 2003
Description Wegagen Star Elimination Consolidated
Bank Co. Increase/Decrease
Assets
Cash 15,000 40,000 -- 55,000
Inventories 150,000 110,000 25,000 285,000

19
Other current assets 110,000 70,000 -- 180,000
Intercompany Rec. /Pay. 25,000 (25,000) -- --
Investment in Star common stock 500,000 --- (500,000) --
Plant assets (net) 450,000 300,000 65,000 815,000
Patent (net) -- 20,000 5,000 25,000
Goodwill --- -- 15,000 15,000
Total Assets 1,250,000 515,000 (390,000) 1,375,000
Liabilities &Equities
Income tax payable 26,000 10,000 -- 36,000
Other liabilities 325,000 115,000 -- 440,000
Common stock, birr 10 par 400,000 -- -- 400,000
Common stock, birr 5 par ---- 200,000 (200,000) --
Additional paid in capital 365,000 58,000 (58,000) 365,000
Retained earnings 134,000 132,000 (132,000) 134,000
Total Liab. & Owners’ equity 1,250,000 515,000 (390,000) 1,375,000

Features of the working paper for consolidated balance sheet on the date of
purchase-type business combination need emphasizes are:-
1. The elimination is not entered in either the parent company’s or the
subsidiary’s accounting records; it is only part of the working paper for the
preparation of the consolidated balance sheet
2. The elimination is used to reflect difference between current fair values
and carrying amounts of the subsidiary’s identifiable net assets because
the subsidiary did not write up its assets to current fair values on the date
of business combination.
3. The elimination column in the working paper for consolidated balance
sheet reflects increases and decreases, rather than debits and credits.
Debits and credits are not appropriate in a working paper dealing with
financial statements rather than trial balance.
4. Intercompany receivables and payables are placed on the same line of the
working paper for consolidated balance sheet and are combined to produce
a consolidated amount to Zero (0).
5. The respective corporations are identified in the working paper
elimination.
6. The consolidated paid in capital amounts are those of capital amounts
always are eliminated in the process of consolidation.
7. Consolidated retained earnings on the date of a purchase-type business
combination include only the retained earnings of the parent company.
This treatment is consistent with the theory that purchase accounting
reflects a fresh start in an acquisition of net assets (assets less liabilities).
Not a combining of existing stockholders’ interests.
8. The amounts in the consolidated column of the working paper for
consolidated balance sheet reflect the financial position of a single
economic entity comprising two legal entities with all intercompany
balances of the two entities eliminated.

CONSOLIDATED BALANCE SHEET AFTER

20
 THE WORKING PAPER ELIMINATIONS
The amounts in the consolidated column of the working paper for
consolidated balance sheet are presented in the customary fashion in the
consolidated balance sheet of Wegagen Bank & subsidiary that followed.

WEWGAGEN BANK &SUBSIDIARY

Consolidated Balance Sheet
December 31, 2003
Assets
Current Assets:
Cash 55,000
Inventories 285,000
Other Current assets 180,000
Total Current assets 520,000
Plant assets (net) 815,000
Intangible Assets:
Patents 25,000
Goodwill 15,000 40,000
Total Assets 1,375,000
Liabilities & Stockholder’s Equity

Liabilities:
Income tax payable 36,000
Other liabilities 440,000
Total liabilities 476,000
Stockholders’ equity:
Common Stock, birr 10 par 400,000
Additional paid in capital 365,000
Retained Earnings 134,000 899,000
Total liabilities & Stockholders’ equity 1,375,000

2.2.2 Consolidation of Partially Owned Subsidiary on date of

Purchase-type Business Combination

The consolidation of a parent company and its partially owned subsidiary differs
from the consolidation of a wholly owned subsidiary in one major respect- the
recognition of Minority interest. Minority interest, or non controlling interest, is
the claims of stockholders’ other than the parent company (the controlling
interest) to the net income or net losses and net assets of the subsidiary. The
minority interest in the subsidiary’s net income or loss is displayed in the
consolidated income statement and the minority interest in the subsidiary’s net
assets is displayed in the consolidated balance sheet.

21
 To illustrate the consolidation techniques for a purchase-type business
combination involving a partially owned subsidiary, assume that, on December
31, 2003 Palm corporation issued 57,000 shares of its birr 1 par common stock
(current value is birr 20 a share) to stockholders of Segen company in exchanges
for birr 38,000 of the birr 40,000 outstanding shares of Segen’s birr 10 par
common stock in a purchase-type business combination. Thus, Palm Corporation
acquired a 95% interest
(38,000/40,000 = 0.95) in Segen, which became Palm’s subsidiary. There was no
contingent consideration. Out of pocket costs of the combination paid in cash by
Palm Corporation on December 31, 2003, were as follows:-
Finder’s & legal fees relating to the business combination 52,250
Costs associated with registration statements 72,750
Total out of pocket costs in connection to business combination 125,000
The Financial Statements of Palm Corporation & Segen Company for
their fiscal year ended Dec. 31, 2003, prior to the business
combination, was as follows:
Palm Corporation & Segen Company
Separate Financial Statements (prior to Business Combination)
December 31, 2003
Palm Corp. Segen Co.
Income Statement
Net Sales 5,500,000 1,000,000
Costs & Expenses:
Cost of goods sold 3,850,000 650,000
Operating expenses 925,000 170,000
Interest expenses 75,000 40,000
Income tax expenses 260,000 56,000
Total costs & expenses 5,110,000 916,000
Net Income 390,000 84,000
Retained Earnings Statement
Beginning Retained Earnings 810,000 290,000
Add: Net income 390,000 84,000
Sub-total 1,200,000 374,000
Less: Dividends 150,000 40,000
Ending Retained Earnings 1,050,000 334,000
Balance Sheet
Assets
Cash 200,000 100,000
Inventories 800,000 500,000
Other assets 550,000 215,000
Plant assets (net) 3,500,000 1,100,000
Goodwill (net) 100,000 -----
Total Assets 5,150,000 1,915,000
Liabilities & Stockholders’ Equity
Income tax payable ` 100,000 16,000
Other liabilities 2,450,000 930,000

22
Common stock, birr 1 par 1,000,000 --
Common stock, birr 10 par -- 400,000
Additional paid in capital 550,000 235,000
Retained Earnings 1,050,000 334,000
Total liab. & stockholders’ equity 5,150,000 1,915,000
Note: - There were no intercompany transactions prior to the business
combination and the Dec. 31, 2003 current fair values of Segen Co.’s identifiable
assets & Liabilities were the same as their carrying amounts, except for the
following assets:
Description Carrying amounts Current fair values
Inventories 500,000 526,000
Plant assets (net) 1,100,000 1,290,000
Leasehold -- 30,000
Segen Company did not prepare journal entries related to the business
combination because Segen is continuing as a separate corporation and generally
accepted accounting principles do not permit the write up of assets of a going
concern to current fair values. Palm Corporation recorded the combination with
Segen Co. as purchase-type by means of the following journal entries as of
December 31, 2003.
1. Investment in Segen common stock (57,000 x 20) 1,140,000
Common stock (57,000 x 1) 57,000
Additional paid in capital in excess of par 1,083,000
To record issuance of 57,000 shares of common stock for 38,000 of the 40,000
outstanding shares of Segen company common stock in a purchase-type business
combination.
2. Investment in Segen Co. common stock 52,250
Paid in capital in excess of par 72,750
Cash 125,000
To record payments of out of pocket costs of business combination with
Segen Co. finders & legal fees relating to the combination are recorded as
additional costs of the investment; costs associated with the registration statement
are recorded as an offset to the previously recorded proceeds from the issuance of
common stock.

Working paper for Consolidated Balance Sheet to Partially

Owned Subsidiary
Because of the complexities of cased by the minority interest in the net assets of a
partially owned subsidiary and the measurement of Goodwill acquired on date of
business combination, it is advisable to use a working paper for the preparation of
a consolidated balance sheet for a parent company and its partially owned
subsidiary on the date of the purchase-type combination. Developing the
elimination of Intercompany accounts for the preparation of elimination for a
parent Co. and a partially owned purchase subsidiary parallel for a wholly
owned purchase subsidiary described earlier in this chapter. First, the

23
intercompany accounts are reduced to zero, as shown below in the journal entry
format:-
Common stock-Segen 400,000
Additional paid in capital-Segen 235,000
Retained earnings -Segen 334,000
969,000
Investment in Segen common stock -Palm 1,192,250
The footing of birr 969,000 debit items of the partial elimination above represents
the carrying amounts of the net assets of Segen Co. and it is less by birr 223,250
than the credit items of birr 1,192,250. Part of the 223,250 differences is the
excess of the total of the costs of Palm Corporation’s investment in Segen Co. and
the minority interest in Segen company’s net assets over the carrying amounts of
the Segen’s identifiable net assets. This excess may be computed as shown below,
from the data stated earlier:
Assets carrying amounts Current fair value excess amounts
Inventories 500,000 526,000 26,000
Plant assets (net) 1,100,000 1,290,000 190,000
Leasehold -- 30,000 30,000
Totals 1,600,000 1,846,000 246,000

Under the generally accepted accounting principles (GAAP), the foregoing

differences are not entered in Segen Company’s accounting records. Thus, to
conform with the requirements of purchase accounting, the differences must be
reflected in the consolidated Balance Sheet of Palm Corporation and subsidiary
by means of the elimination which is continued below:-
Common stock _ Segen 400,000
Additional paid in capital –Segaen 235,000
Retained earnings –Segen 334,000
Inventories –Segen(526,000-500,000) 26,000
Plant assets (net) Segen (1290000-1100000) 190,000
Leasehold -Segen 30,000
1,215,000
Investment in Segen Co. common stock – Palm 1,192,250
The revised footing of birr 1,215,000 of the debit items of the above partial
elimination represents the current fair value of Segen Co.’s identifiable tangible
and intangible net assets on Dec.31, 2003.
Two items now must be recorded to complete the elimination for Palm
Corporation and subsidiary.
First, the minority interest in the identifiable net assets (at current fair values) of
Segen Co. is recorded by a credit. This minority interest is computed as follows:-
Current fair value of Segen Co. identifiable net assets 1,215,000
Minority interest ownership in Segen Co.’s identifiable
Net assets (100% minus Palm Corp.’s 95% interest) x 0.05
Minority interest in Segen Co.’s identifiable net assets
(1215, 000x 0.05) 60,750

24
Second, the Goodwill acquired by Palm Corporation in the business combination
with Segen Co. is recorded by a Debit. This was computed as follows:-
Cost of Palm Corporation’s 95% interest in Segen Co. 1,192,250
Less: Current fair value of Segen Co.’s identifiable net
Assets acquired by Palm (1,215,000 x 0.95) 1,154,250
Goodwill acquired by Palm corporation 38,000

The working paper elimination for Palm Corporation & subsidiary may now be,
computed as follows:-
PALM CORPORATION AND SUBSIDIARY
Working Paper Elimination
December 31, 2003
Common stock –Segen 400,000
Additional paid in capital- Segen 235,000
Retained Earnings- Segen 334,000
Inventories –Segen (526,000-500,000) 26,000
Plant Assets –Segen(1290000-1100000) 190,000
Leashold –Segen 30,000
Goodwill (net)-Palm (1192250-1154250) 38,000
Investment in Segen common stock –Palm 1,192,250
Minority interest in net assets of subsidiary 60,750
To eliminate intercompany investment & equity accounts of subsidiary on the
date of business combination and to allocate excess of costs over carrying
amounts of identifiable assets acquired, with the remainder to Goodwill and to
establish minority interest in identifiable net assets of the subsidiary on the date of
business combination (1,215,000 x 0.05 = 60,750) is shown below and next page.
Income tax effects are omitted.
Working Paper for Consolidated Balance Sheet
The working paper for consolidated balance sheet on Dec.31, 2003, for Palm
Corporation and Subsidiary is as follows:-

PALM CORPORATION & SUBSIDIARY

Working Paper for consolidated Balance Sheet
December 31, 2003.
Palm Corp. Segen Co. Elimination Consolidated
Increase/decease
Assets
Cash 75,000 100,000 -- 175,000
Inventories 800,000 500,000 26,000 1,326,000
Other current assets 550,000 215,000 -- 765,000
Investment in Segen Co, comm. Stock1, 192,250 --- (1,192,250) --
Plant assets (net) 3,500,000 1,100,000 190,000 4,790,000
Leasehold -- ----- 30,000 30,000
Goodwill (net) 100,000 --- 38,000 138,000
Total Assets 6,217,250 1,915,000 (908,250) 7,224,000
Liabilities & Equities
Income tax payable 100,000 16,000 -- 116,000

25
Other liabilities 2,450,000 930,000 -- 3,380,000
Minority Interest in net asset
Of subsidiary -- --- 60,750 60,750
Common stock, birr 1 par 1,057,000 ---- ---- 1,057,000
Common stock, bib 10 par -- 400,000 (400,000) --
Additional paid in capital 1,560,250 235,000 (235,000) 1,560,250
Retained Earnings 1,050,000 334,000 (334,000) 1,050,000
Total Liab. & Owner’s equities 6,217,250 1,915,000 (908,250) 7,224,000

2.2.3 Nature of Minority Interest

The appropriate classification and presentation of minority interest in a
consolidated financial statement has been a perplexing problem for accountants,
especially because it is recognized only in the consolidation process and doesnot
result from a business transaction or event of either the parent company or the
subsidiary. There are two concepts for consolidated financial statements to
account for Minority Interest namely, (a) the parent company concept (b) the
economic unit concept.

The FASB has described these two concepts as follows: - The parent company
concept emphasizes the interests of the parent’s stockholders. As a result, the
consolidated financial statements reflect those stockholders’ interests in the parent
itself, plus their undivided interests in the net assets of the parent’s subsidiaries.
The consolidated balance sheet is essentially a modification of the parent’s
balance sheet with the assets & liabilities of all subsidiaries substituted for the
parent’s investment in subsidiaries. The stockholders’ equity of the parent Co. is
also the stockholders’ equity of the consolidated entity. Similarly, the
consolidated income statement is essentially a modification of the parent’s income
statement with the revenues, expenses, gains and losses of subsidiaries substituted
for the parent’s income from investment in the subsidiaries.
The economic unit concept emphasizes control of the wholly by a single
management. As a result, under this concept consolidated financial statements are
intended to provide information about a group of legal entities- a parent company
and its subsidiaries.-operating as a single unit. The assets, liabilities, revenues,
expenses, gains & losses of the various component entities are the assets,
liabilities, revenues expenses gains and losses of the consolidated entity. Unless
all subsidiaries are wholly owned, the business enterprises proprietary interest (its
residual owners’ equity- assets less liabilities) is divided into the controlling
interest (stockholders or owners of the parent company) and one or more non
controlling interests in subsidiaries. Both the controlling and the non controlling
interests are part of the proprietary group of the consolidated entity, even though
the non controlling stockholders’, ownership interests relate only to the affiliates
whose shares they own.
In accordance with the foregoing quotations, the parent company concept of
consolidated financial statements apparently treats the minority interest in net
assets of a subsidiary as a Liability. This liability is increased each accounting
period subsequent to the date of a purchase- type business combination by an

26
expense representing the minority’s share of the subsidiary’s net income (or
decreases by the minority’s share of the subsidiary’s net losses). Dividends
declared by the subsidiary to minority stockholders decrease the liability to them.
Consolidated net income is net of the minority’s share of the subsidiary’s net
income.
In the economic unit concept, the minority interest in the subsidiary’s net assets is
displayed in the stockholders’ equity section of the consolidated balance sheet.
The consolidated income statement displays the minority interest in the
subsidiary’s net income as a subdivision of the total consolidated net income,
similar to the distribution of the net income of a partnership described in
Advanced Accounting part I course. Minority interest in net assets of consolidated
subsidiaries doesn’t represent obligations of the enterprise to pay cash or
distribute other assets to minority stockholders. Rather, those stockholders have
owners or residual interests in components of a consolidated enterprise. Consolidated
balance sheet for partially owned subsidiary
The consolidated balance sheet of palm Corporation and its partially owned,
Segen Company is shown below: - the consolidated amounts are taken from the
working paper exercised in the preceding pages of this chapter.

PALM CORPORATION & SUBSIDIARY

Consolidated Balance Sheet
December 31, 2003
Assets
Current Assets:
Cash 175,000
Inventories 1,326,000
Other current assets 765,000
Total current assets 2,266,000
Plant assets (net) 4,790,000
Intangible assets:
Leasehold 30,000
Goodwill (net) 138,000 168,000
Total Assets 7,224,000
Liabilities & Stockholders’ equity
Liabilities:
Income tax payable 116,000
Other liabilities 3,380,000
Minority interest in net assets of subsidiary 60,750
Total liabilities 3,556,750
Stockholders’ equity:
Common stock, birr 1 par 1,057,000
Additional paid in capital 1,560,250
Retained earnings 1,050,000 3,667,250
Total liabilities & stockholders’ equity 7,224,000

27
The display of minority interest in net assets of subsidiary in the liability section
of the consolidated balance sheet of Palm Corporation and subsidiary is
constituent with the parent company concept of the consolidated financial
statements. It should be noted that there is no ledger account for minority
interest in net assets of subsidiary, in either the parent company’s or the
subsidiary accounting records.

Alternative Methods for valuing Minority Interest and Goodwill

Minority interest and Goodwill can be computed based on two premises. First,
the identifiable net assets of a partially owned purchase subsidiary should be
valued on a single basis-current fair value in accordance with purchase accounting
theory for business combinations. Second, only the subsidiary Goodwill
acquired by the parent company should be recognized, in accordance with the
cost method for valuing assets. There are two alternative procedures to the above
described premises and these are: the first alternative would assign current fair
values to a partially owned purchase subsidiary’s identifiable net assets only to
the extent of the parent company’s ownership interest therein- under this
alternative, birr 233,700 (246,000 x 0.95= 233,700) of the total difference b/n
current fair values and carrying amounts of Segen company’s identifiable net
assets would be reflected in the aggregate debits to inventories, plant assets and
leasehold in the working paper elimination for Palm corporation and subsidiary
on December 31, 2003. The minority interest in net assets of subsidiary would be
based on the carrying amounts of Segen Co.’s identifiable net assets, rather than
on their current fair values, and would in computed as follows: birr 969,000 x
0.05=48,450. Goodwill would be birr 38,000, as computed earlier. The balance of
the combinee’s net assets and the related minority interest in the net assets should
be reflected in consolidated financial statements at the carrying amounts on the
subsidiary’s accounting records. Thus, identifiable net assets of the subsidiary
would be valued on a hybrid basis, rather than at full current fair values as
required by purchase accounting theory.
The other alternative for valuing minority interest in net assets of the
subsidiary and Goodwill is to obtain a current fair value for 100% of a partially
owned purchased subsidiary’s total net assets, either through independent
measurement of the minority interest or by inference from the cost of the
parent company’s investment in the subsidiary. Independent measurement of the
minority interest might be accomplished by reference to quoted market price of
publicly traded common stock owned by minority stockholders of the subsidiary.
The computation of minority interest and Goodwill of Segen Company by
inference from the cost of the Palm corporation investment in Segen Co. is as
follows:
Total cost of Palm Corporation’s investment in Segen common stock 1,192,250
Palm’s percentage ownership of Segen 95%
Implied current fair value of 100% of Segen’s total assets
(1,192,250/0.95) =1,255,000
Minority interest (1,255,000 x 0.05) 62,750

28
 Goodwill (1,255,000-1,215,000) the current value
of Segen’s identifiable assets 40,000
A summary of the three methods for valuing minority interest and Goodwill of a
partially owned purchased subsidiary (derived from the Dec.31, 2003 business
combination of Palm and Segen) is shown below:-
__________________________________________________________________
Total Identifiable Minority Interest Goodwill
Net assets in Net assets of sub. ---
1. Identifiable net assets recorded at
Current value; minority interest
In net assets of subsidiary based on
Identifiable net assets. 1,215,000 60,750 38,000
2. Identifiable net assets recorded
at current fair value only to the
extent of parent Co.’s interest
Balance of net assets minority

Interest in net assets of subsidiary

Reflected at carrying amounts 1,202,700 48,450 38,000
3. Current fair value, through
independent measurement of
Inference, assigned to total net
Assets of subsidiary including
Goodwill 1,215,000 62,750 40,000

Among the three stated above alternatives, the FASB choice method number one
for the valuing minority interest and Goodwill
A purchase-type business combination, that results in the parent company
subsidiary relationship may involve an excess of current fair values of the
subsidiary‘s identifiable net assets over the cost of the parent Co.’s investment in
the subsidiary’s common stock. If so, the excess of current fair values over cost is
applied prorate to reduce the amounts initially assigned non current assets rather
than long- term investments in marketable securities. Any remaining excess is
established as a deferred credit (“Negative Goodwill”) and is amortized over a 40
years period.
Illustration of bargain purchase excess – wholly owned subsidiary.
Assumed that, on December 31, 2003 XYZ corporation acquired all the
outstanding common stock of Seble Company for birr 850,000 cash, including
direct out of pocket cost of the business combines. Stockholders’ equity of Sebele
totaled birr 800,000., consisting of common stock birr 100,000, additional paid in
capital birr 300,000 and retained earnings birr 400,000. The current fair values of
Seble’s identifiable net assets were the same as their carrying amounts, except the
following assets:

Assets Current fair Carrying Difference

_________________________ Values Amounts ________
Inventories 339,000 320,000 19,000

29
Short-term investments in
marketable securities 61,000 50,000 11,000
Plant assets (net) 1,026,000 984,000 42,000
Intangible assets (net) 54,000 36,000 18,000
Thus, the current fair value of Seble’s identifiable net assets exceeded the amount
paid by XYZ corporation by birr 40,000
(800,000+19,000+11,000+42,000+18,000=890,000) less birr 850,000 equals birr
40,000.This difference/excess is offset against amounts originally assigned to
Seblle’s plant and intangible assets in the proportion to their current fair values
(1,026,000:54,000 = 95:5 or 19:1 ratio). The December 31, 2003 working paper
elimination for XYZ Corporation and subsidiary is as follows:

XYZ Corporation and Subsidiary

Working Paper Elimination
December 31, 2003
Common stock –Seble 100,000
Additional paid in capital-Seble 300,000
Retained earnings- Seble 400,000
Inventories- Seble(339,000-320,000) 19,000
Short-term investment in marketable securities-Seble 11,000
Plant assets (net) - Seble (1,026,000-984,000)-(40,000x0.95) 4,000
Intangible assets (net)-Seble (54,000-36,000)-(40,000x0.05) 16,000
Investment in Seble Co. Common stock-XYZ Corporation 850,000
To eliminate intercopany investment & equity accounts of subsidiary on date of
business combination and to allocate birr 40,000 excess of current values of
subsidiary’s identifiable net assets over cost to subsidiaries plant assets and
intangible assets in the ratio of 1,026,000:54,000 or 95% to 5%.

Illustration of bargain purchase-excess: Partially owned Subsidiary is

shown next section. Assume that the XYZ corporation- Seble company business
combination described in the foregoing section is now changed by that XYZ
corporation acquired only 98%, rather than 100% of Seble’s common stock for
birr 833,000 (850,000x98%) on December 31, 2003 with all other facts remaining
the same. The excess of current values of Seble’s identifiable net assets over XYZ
corporation’s costs is only birr 39,200[(890,000 x 0.98)-(833,000) = 39,200 )]
under this circumstances , the working paper for elimination of XYZ corporation
and subsidiary on December 31, 2003 is changed as shown below:

XYZ CORPORATION AND SUBSIDIARY

Working Paper Elimination
December 31, 2003
Common stock-Seble 100,000
Additional paid in capital-Seble 300,000
Retained Earnings –Seble 400,000
Inventories –Seble(339,000-320,000) 19,000
Short-term Investment in marketable securities-Seble 11,000

30
Plant assets (net)-Seble(42,000-(39,200 x 0.95) 4,760
Intangible assets (net) –Seble (18,000-(39,200x0.05) 16,040
Investment in Seble common stock –XYZ 833,000
Minority interest in net assets of subsidiary (890,000x0.02) 17,800
To eliminate intercompany investment and equity accounts of subsidiary on date
of business combination; to allocate parent company’s share of excess birr 39,200
of current values of subsidiary’s identifiable net assets over costs to subsidiary’s
plant assets and intangible assets in the ratio of 95% & 5% and to establish
minority interest in net assets of subsidiary on date of business combination.

Disclosure of Consolidation Policy

Currently, the “Summary of Significant Accounting Policies Note to Financial

Statements Required by APB Opinion No 22,” disclosure of accounting policies
generally includes a description of consideration policy reflected in consolidated
financial statements. The consolidated financial statements included the amounts
of all subsidiaries and the company’s share of earnings or losses of joint ventures
and affiliated companies, under the equity method of accounting. All significant
intercompany accounts and transactions have been eliminated.

Advantages &disadvantages of Consolidated Financial Statements

a) Consolidated financial statements are useful primarily to stockholders and

prospective investors of the parent company.
b) Creditors of each consolidated company and minority interest of
subsidiaries have only limited use for consolidated financial statements,
because such statements do not shown the financial position or operating
results of the individual companies comprising the consolidated groups.
These accountants believe that the business combination is an event that warrants
recognition of current fair values of the subsidiary’s net assets in its separate
statements. In absence of definitive guidelines from FASB, companies that have
applied push-down accounting apparent have used accounting techniques
analogues to Quasi –re-organization which are discussed in intermediate
accounting text book. Thus, the restatement of identifiable assets and liabilities of
the purchased subsidiary and the recognition of Goodwill are accompanied by a
write off of the subsidiary’s retained earnings account; the balancing amount is an
increase in additional paid in capital of the subsidiary.
To illustrate push-down accounting, let’s return back to the Palm
corporation- Segen Company business combination taken in earlier examples,
specifically to the working paper for consolidated balance sheet part to apply the
push-down techniques described above.
The following working paper adjustments to the Segen company balance sheet
amounts would be required.
Balance Sheet Items:
Inventories 26,000
Plant assets (net) 190,000

31
 Leasehold 30,000
Goodwill 38,000
Retained Earnings 334,000
Additional paid in capital 618,000
To adjust carrying amounts of identifiable net assets, to recognize Goodwill and
to write off retained earnings in connection with push-down accounting for separate
financial statements.
Segen Co.’s separate balance sheet reflecting Push-Down accounting is shown
below:

Segen Company
Balance sheet (Push-Down Accounting)
December 31, 2003
Assets
Current assets:
Cash 700,000
Inventories (500,000+26,000) 526,000
Other current assets 215,000
Total current assets 841,000
Plant assets (net) (1,100,000+190,000) 1,290,000
Leasehold 30,000
Goodwill 38,000
Total assets 2,199,000

Liabilities & stockholders’ equity

Liabilities:
Income tax payable 16,000
Other liabilities 930,000
Total liabilities 946,000
Stockholders’ equity:
Common stock, birr 10 par 400,000
Additional paid in capital (235000+618000) 853,000 1,253,000
Total liabilities & Stockholders equity 2,199,000

Note that the financial statement described for Segen Company’s business
combination with Palm Corporation & its adjustments to reflect push-down
accounting in its balance sheet, the birr 38,00 Goodwill in Segen company’s
separate balance sheet is attributed to Palm corporation in the working paper
elimination.

CONSOLIDATED FINANCIAL STATEMENTS: POOLING

OF INTEREST ON DATE OF BUSINESS COMBINATION

Consolidation of Wholly Owned Pooled Subsidiary on date of

Business Combination

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The Palm Corporation and Star company business combination described in
purchase-type business combination is continued for the consolidated financial
statements of a wholly owned pooled subsidiary on the date of a business
combination. Assuming that the business combination is qualified for pooling of
interest accounting rather than for purchase-type accounting on the date of
business combination Dec. 31, 2003 the end of the fiscal year Palm used 10,000
shares of its birr 10 par common stock for all the outstanding common stock of
Star company and paid out of pocket costs of birr 85,000 in connection with the
business combination. Separate financial statements of Palm Corporation and Star
Company prior to the business combination on Dec. 31, 2003 are as follows:
PALM CORPORATION & SUBSIDIARY
Separate Financial Statements (Prior to Pooling)
For the year ended Dec. 31, 2003
Palm Corporation Star Company.
Income Statement
Revenues:
Net Sales 990,000 600,000
Interest revenues 10,000 --____
Total revenues 1,000,000 600,000
Costs & expenses:
Cost of goods sold 635,000 410,000
Operating expenses 158,333 73,333
Interest expenses 50,000 30,000
Income tax expenses 62,667 34,667
Total costs and Expenses 906,000 548,000
Net income 94,000 52,000
Retained Earnings Statement
Beginning Retained Earnings 65,000 100,000
Add: Net income 94,000 52,000
Subtotals 159,000 152,000
Less: Dividends 25,000 20,000
Ending Retained Earnings 134,000 132,000
Balance Sheet
Assets
Cash 100,000 40,000
Inventories 150,000 110,000
Other Current assets 110,000 70,000
Receivables from Star Company 25,000 ---
Plant Assets (net) 450,000 300,000
Patents (net) --- 20,000
Total Assets 835,000 540,000
Liabilities & stockholders’ equity
Payable to Palm Corporation --- 25,000
Income tax payable 26,000 10,000
Other liabilities 325,000 115,000

33
Common stock, birr 10 par 300,000 ---
Common stock, birr 5 par --- 200,000
Additional paid in capital 50,000 58,000
Retained earnings 134,000 132,000
Total liab. & stockholders’ equity 835,000 540,000
The following entries are prepared by Palm Corporation on December 31, 2003 to
record the consolidation as a pooling –type business combination.

Investment in Star company common stock

(200,000+58,000+132,000 = 390,000) 390,000
Common stock (10,000 x 10) 100, 000
Paid in capital in excess of par (258,000-100,000) 158,000
Retained Earnings 132,000
To record issuance of 10,000 shares of common stock for all outstanding common
stock of Star company in a Pooling-type business combination.

Expenses of business combination 85,000

Cash 85,000
To record payment of out of pocket costs.

A retained earnings of subsidiary account established to record the amount of

Star’s retain earnings on December 31, 2003 separately and emphasizes that
Star’s retained earnings are not a source of dividends to Palm corporation’s
stockholders, as is often true in a statutory merger. The first entry thus reflects the
underlying theory of pooling accounting- the combination of existing
stockholders interests- while recognizing the separate corporate identity. The 2nd,
entry, all out of pocket costs of the business combination are recognized as
expenses, this procedure recognized for pooling-type business combination. After
the foregoing journal entries have been posted the affected financial statement
items for Palm Corporation have shown the following balances:
* Operating expenses (158,333+85,000) 243,333
Net income (94,000-85,000) 9,000
Cash (100,000-85,000) 15,000
Additional paid in capital (50,000+158,000) 208,000
Retained Earnings (134,000-85,000) 49,000
Retained Earnings of subsidiary 132,000
*Controlling account for expenses of business combination ledger account.

Prepare Consolidated Financial Statements without a Working

Paper for Pooling –type Business Combination.

If a business combination qualifies for pooling, all four financial statements are
consolidated for the accounting periods that includes the date of combination.

34
This is consistent with the assumption that a pooling is a combining of existing
stockholders interest rather than an acquisition of assets. In a pooling-type
business combination involving a wholly owned subsidiary, the Investment in
subsidiary common stock ledger account is similar to the investment in branch
account illustrated earlier for a Home office. However, the subsidiary’s three
stockholder’s equity accounts ( which totals birr 390,000) rather than a single
Home office or parent company account, offset Palm corporation’s Investment in
Star company common stock account, which has a balance of birr 390,000. In
view of the foregoing consolidated financial statements for a parent company and
a wholly owned subsidiary may be prepared without the use of working paper.
Assuming that Palm corporation ‘s interest revenue of birr 10,000 was attributable
to a loan by Palm to Star company prior to the pooling-type business combination,
the consolidated income statement, retained earnings statement and balance sheet
as shown in the following statements:

PALM CORPORATION & SUBSIDIARY

Consolidated Income Statement
For the year ended December 31, 2003
Net Sales (990,000+600,000) 1,590,000
Costs & Expenses:
Cost of Goods sold (635,000+410,000) = 1,045,000
Operating expenses (243,333+73,333) = 316,666
Interest expenses (50,000+30,000-10,000) = 70,000
Income tax expenses (62,667+34,667) =97,334 1,529,000
Net Income (9,000+52,000) 61,000
Basic Earnings per share of common stock
(40,000 shares outstanding) 61000/40000 = 1.53

PALM CORPORATION & SUBSIDIARY

Consolidated Retained Earnings Statement
For the year ended December 31, 2003

Beginning Retained Earnings balance 65,000

Add: Adjustments to reflect pooling of interest with Star Co. 100,000
Retained earnings beginning of the year adjusted 165,000
Add: Net income 61,000
Subtotals 226,000
Less: Dividends:
Palm Corporation (0.831/3 a share) 25,000
Star company prior to combination 20,000 45,000
Ending Retained Earnings balance 181,000

PALM CORPORATION & SUBSIDIARY

Consolidated Balance Sheet

35
 December 31, 2003
Assets
Current assets:
Cash (15,000+40,000) 55,000
Inventories (150,000+110,000) 260,000
Other current assets (110,000+70,000) 180,000 495,000
Plant assets (net) (450,000+300,000) 750,000
Patents (net) (0+20,000) 20,000
Total Assets 1,265,000
Liabilities & Stockholders equity
Liabilities:
Income tax payable 36,000
Other liabilities 440,000
Total liabilities 476,000
Stockholders’ equity:
Common stock, birr 10 par 400,000
Additional paid in capital in excess of par 208,000
Retained Earnings 181,000
Total Stockholders’ equity 789,000
Total Liabilities & stockholders’ equity 1,265,000

In reviewing the consolidated financial statements of Palm Corporation and

subsidiary, the following should be noted;
1. Intercompany items are excluded from the consolidated amounts as follows;
- Palm corporation’s intercompany interest income is birr 10,000
-- Star Company’s intercopany interest expense is birr 10 000
-- Palm Corporation’s receiving from Star is birr 25,000
-- Star Company’s payable to Palm Corporation is 25,000
-- Palm corporation’s investment in Star Co. common stock 390,000
-Star company’s total paid in capital in excess of par (200000+58000) 258,000
--Palm Corporation’s Retained Earnings of subsidiary 132,000
2. Other than the foregoing, amounts in the separated income statement and
balance sheets of the two constituent companies are totaled to arrive at the
consolidated amounts.
3. Because a pooling of interests business combination represents a change in
the reporting entity, the consolidated statements of retained earnings for Palm
corporation and subsidiary displays an “Adjustment to reflect Pooling of
interests with Star Company”. This adjustment represents the retroactive
application of the pooling accounting method to included Star’s beginning of
2003 retained earnings of birr 100,000 with Palm comparable amounts of birr
65,000.

Working Paper for Consolidated Financial Statements for

Wholly Owned Pooled Subsidiary
The preparation of a working paper for consolidated financial statements and
related working paper eliminations for a parent company and wholly owned

36
 pooled subsidiary is not complicated because of the absence of current fair
value excesses an Goodwill recognition in the subsidiary. The working paper
elimination for Palm Corporation & subsidiary under the pooling-type
business combination on December 31, 2003 is presented below:
PALM CORPORATION & SUBSIDIARY
Working paper Elimination
December 31, 2003
Common stock - Star 200,000
Additional paid in capital-in excess of par- Star 58,000
Retained Earnings of subsidiary- Star 132,000
Investment in Star Co. common stock-Palm 390,000
To eliminate intercopany investment and related accounts for stockholders’
equity of subsidiaries on the date of business combination.

PALM CORPORATION & SUBSIDIARY

Working Paper for Consolidated Financial Statements
For the Year ended Dec. 31, 2003
______________________________________________________
_____ Palm Corp. Star Co. Elimination consolidated
Income Statement
Revenues:
Net Sales 990,000 600,000 -- 1,590,000
Intercompany Rece. /payable 10,000 (10,000) --- --
Total revenues 1,000,000 590,000 1,590,000
Costs & Expenses:
Costs of goods sold 635,000 410,000 -- 1,045,000
Operating expenses 243,333 73,333 -- 316,666
Interest expenses 50,000 20,000 -- 70,000
Income tax expenses 62,667 34,667 -- 97,334
Total Costs & Expenses 991,000 538,000 -- 1,529,000
Net Income 9,000 52,000 -- 61,000
Statement of Retained Earnings
Beginning Retained Earnings 65,000 100,000 -- 165,000
Add: net income 9,000 52,000 -- 61,000
Subtotals 74,000 152,000 -- 226,000
Less: Dividends 25,000 20,000 -- 45,000
Ending Retained Earnings 49, 000 132,000 -- 181,000
Balance Sheet
Assets
Cash 15,000 49,000 --- 55,000
Inventories 150,000 110,000 -- 260,000
Other current assets 110,000 70,000 -- 180,000
Intercompany Rec./payable 25,000 (25,000) -- ---
Investment in Star Co. common stock 390,000 --- (390,000) ----
Plant assets (net) 450,000 300,000 -- 750,000

37
Patents (net) -- 20,000 -- 20,000
Total assets 1,140,000 515,000 (390,000) 1,265,000
Liabilities & stockholders’ equity
Liabilities:
Income tax payable 26,000 10,000 -- 36,000
Other liabilities 325,000 115,000 -- 440,000
Total liabilities 331,000 125,000 -- 476,000
Stockholders’ equity:
Common stock, birr 10 par 400,000 -- -- 400,000
Common stock, birr 5 par -- 200,000 (200,000) -----
Additional paid in capital 208,000 58,000 (58,000) 208,000
Retained earnings 49,000 132,000 -- 181,000
Retained earnings of subsidiary 132,000 -- (132,000) --
Total liabilities stockholders’ equity 1,140,000 515,000 (390,000) 1,265,000

Consolidated Financial Statements for Wholly Owned Pooled

Subsidiary
The following consolidated financial statements of Palm Corporation &
subsidiary are identical to those of the amounts in the consolidated column of the
working paper for consolidated financial statements wholly owned pooled
subsidiary, because all intercompay transactions and balances have been
eliminated in the computation of the consolidated amounts; the balances reflect
only the transactions of Palm Corporation & Star Co. with outside parties.

Palm Corporation & Subsidiary

Consolidated Income Statement
For the Year ended Dec. 31, 2003

Net Sales 1,590,000

Costs & Exegeses:
Cost of goods sold 1,045,000
Operating expenses 316,666
Interest expenses 70,000
Income tax expenses 97,334 1,529,000
Net Income 61,000
Basic Earnings per share of common stock (40,000 shares) 61,000/40000=1.53

Palm Corporation & Subsidiary

Consolidated Retained Earnings Statement
For the Year ended Dec. 31, 2003
Beginning Retained Earnings balance 65,000
Add: Adjustment to reflect Pooling of interest with Star Co. 100,000
Retained earnings beginning of the year restated 165,000
Add: Net income 61,000

38
 Subtotals 226,000

Less: Dividends:
Palm Corporation (0.831/3 a share) 25,000
Star Co. prior to business combination 20,000 45,000
Ending Retained Earnings balance 181,000

Palm Corporation & Subsidiary

Consolidated Balance Sheet
Dec. 31, 2003
Assets
Current assets:
Cash 55,000
Inventories 260,000
Other current assets 180,000
Total current assets 495,000
Plant assets (net) 750,000
Patents (net) 20,000
Total Assets 1,265,000

Liabilities & stockholders equity

Liabilities:
Income tax payable 36,000
Other liabilities 440,000
Total liabilities 476,000
Stockholders’ equity:
Common stock, birr 10 par 400,000
Additional paid in capital 208,000
Retained Earnings 181,000 789,000
Total liabilities & Stockholders’ equity 1,265,000

39