PROFESSOR: Now, let's talk about the consolidation. And this is the first part, first step of the consolidation. So personally, let's try to understand the situation. The situation is that the parent company acquires 100% of the ownership of the subsidiary at book value-- at book value. So 100%.

So this is the stock acquisition. Personally, this is the stock acquisition. And 100% means that there is no noncontrolling interest. And this book value means that there is no fair value, book value, no differential. OK? So this is no differential. And no good deal-- no good deal.

So this is a really simple case. OK? No NCI, no Noncontrolling Interest, no differential, no goodwill. In the future, in the later lessons, especially lesson 5, we're going to see that when acquiring company, parent company acquires less than 100% at greater than the book value.

And if that is the case, there should be noncontrolling interest. We've got to consider noncontrolling interest. And also, we've got to consider the fact from the differential. And also, we've got to calculate the goodwill that should be reported as well.

For this consolidation, there are some timing issues. The first one is what would it be the consolidation at the time of acquisition-- at the time of acquisition-- whether it be the consolidation. And also, as time goes by, usually, year 1, at the end of the year, what would the consolidation look like?

And what about the consolidated financial statement at the end of the year? What about the following year-- the second year of after the acquisition? So we've got to make sure that the timing of the consolidation-- the thing is, then, so this is the stock acquisition, as you learned, as you know.

In this case, the parent in the case of stock acquisition-- both companies survive, OK? So at the stock acquisition, both companies remain independently. OK? So they have their own financial statement.

But as you know, in the case that acquisition parent company is required to prepare consolidated financial statement as if this is one entity-- so therefore, although the parent subsidiary independence survives and each company has their own financial statement, still, the parent company needs to prepare for consolidated financial statement as if this is one merged entity.

So therefore there should be consolidation and entry-- consolidation entry. This should be made on worksheet, not the real financial statement of the each company. So their individual financial statement will not be affected from this consolidation. Only on the worksheet, we do the consolidation entry. And we combine.

The reason of using the worksheet is just to prepare a consolidated financial statement. OK? So you've got to make sure that this concept-- although it is a very challenging concept, just be aware, then, because each company survives independently. So therefore, the journal entry, which is the consolidated entry, should be made only on the worksheet, not affecting each company's financial statement.

OK, so let's talk more specifically about the time of acquisition. At the time of acquisition, you'll remember that previously, we talked about the combined balance sheet. When a parent company acquires a subsidiary, 100% net asset, at the time, the parent company book value is combined with the fair value of the subsidiary. This is the same.

So we just add these two numbers together, OK? Together, the parent book, parent number, and the subsidiary number, we just add together. And one thing we've got to be careful of is that at the time, we just combine their asset and liability, but not their equity. So therefore, their equity should be eliminated. Their equity should be eliminated. OK?

And also, what happens is then the parent record investment-- the parent record investment-- in its balance sheet. So we've got, basically, the consolidated entry is canceling out each other. They are active with our investment. That's because we are going to add their asset and liability 100%.

So investment is a double counting. So we just eliminate their equity with our investment. OK? So that's the main entry-- consolidate entry, which is the basic consolidation entry. So notice that journal entry-- debit their equity, credit our investment.

And also, at the time of acquisition, the only available financial statement is consolidated balance sheet. So that's the only available financial statement. There is no income statement because there is no operation started yet affecting the parent's book. So therefore, only consolidated financial-- the balance sheet is available at the time of acquisition.

So you can see some examples here. So for example, parent acquires subsidiary's stock for $300,000. It's actually the same as the book value. OK? That's the same as the book value of the subsidiary's equity-- $300,000. And that's the same as subsidiary's equity, which is a net asset of the book-- net asset of the subsidiary.

So therefore, because the consideration, $300,000, is the same as the book value, there is no differential. And there is no noncontrolled interest. So the parent's journal entry-- because this is that action-- they record investment in subsidiary and credit cash-- $300. That's the parent entry.

At the time of acquisition, the thing is the consolidated balance sheet-- we combine their asset and liability, 100%. So therefore, we've got to eliminate our investment. So these investments should be eliminated by crediting investment. And we've got to eliminate the subsidiary's equity.

We cancel each other. And we just combine their asset and liability. If you do that-- and also, one thing that you've got to be aware of is that we've got to eliminate the pre-acquisition accumulative position from subsidiary. So if you look at this balance sheet, before acquisition, if you see the subsidiaries, building and equipment is $600,000, and accumulated depreciation, $300,000.

And the book value there is $300,000, which is the difference between these two numbers. For consolidation, we usually consider, then, the depreciable asset is acquired as a new asset. So instead of combining 600 and accumulate 300, we just combine just the $300,000 of the net amount as if this is acquired as a new asset from the subsidiary.

So in order to achieve that objective, what we need to do is that we do this entry. We credit accumulated depreciation-- $300,000. At the same time, we decrease the building and equipment-- $300,000. Notice that is the accumulated percent before acquisition-- before acquisition.

This should be eliminated. OK? Again, these entries-- these are the consolidated entries. This only happens in the worksheet. So this concept is really important. So worksheet means that no effect on each company's financial statement.

So that means we've got to repeat. So there should be a repeat process. We do the same thing in the following period as well. So if we do that, we can prepare this. If you reflect this consolidation entry in the worksheet, so this is the parent's balance sheet. And this is the subsidiary's balance sheet.

And what do you need to consolidate is basically that parent plus S. So that's the basic step. And then we do something. We need something, adjustment. That is basically this adjustment. So eliminating equity and eliminating investment and eliminate pre-acquisition accumulated depreciation and corresponding building and equipment.

So as you can see, based on that investment, that is credited to making the balance 0. So we eliminate the investment, basically. And also, building equipment is decreased by 300. And accumulated depreciation-- pre-acquisition accumulated $300,000-- decreases.

In the credit, in the liability and equity, we just eliminate their equity. So we debit their equity-- 200, 100. And the remaining balance is just for the parent's equity. Common stock, 500, 300. And finally, we can make sure of the accuracy by comparing these numbers-- $1,300,000.

OK. Now, let's take a look at another example through the Excel worksheet. OK? So let's take a look at another example together. So this is the consolidation at acquisition. So let's take a look at an example together. OK? So let's try to understand the situation.

So a company acquired 100% of the F company. B company acquired 100% of F company's stock. So this is the acquisition for $150,000. OK? 150,000. So that's the consideration. And F company-- so who is the acquiring company? That's the B company.

And subsidiary or acquiring is based-- F company. The $150,000-- that is actually the same as their equity, the 90, 60, their common stock retained. The sum of these two numbers is exactly same as 150. So this is the case-- 100% acquisition. And the consideration, $150,000, is just the same as the book value of net asset of subsidiary. So there is no differential.

And as you can see, this also confirms the fact that the book value of F net asset liability is the same as the fair value. OK? So there is no differential. And also, there's an additional information. F company, which is the subsidiary-- accumulated depreciation on the action date was $30,000. OK?

So from here, $150,000 of this-- the number of building equipment, $150,000-- that includes the $30,000 of accumulated. But that should be eliminated. That should be eliminated. So let's try to do some entries. Let's try to do an entry and try to prepare this consolidated balance sheet.

Again, at the time of acquisition, only consolidated balance sheet is available. So the first entry that the parent company needs to do is that purchase. OK? The purchase investment in F company-- $150,000, cash, $150,000. Secondly, now, we've got to consolidate, which is basically elimination entry.

So make sure that we got it cancelled. We've got to eliminate their equity and cancel with our investment. So our investment-- $150,000. And also, we've got to cancel. We've got to cancel with their equity. And make sure that-- this book value calculation table actually helps you understand how our investment can be matched with and cancelled with their equity.

So their common stock at this time is that $60,000 and $90,000 retained earnings. OK? So that's $60,000 and $90,000. The sum of these two numbers is exactly the same as $150,000 of our investment. And based on that, base cost of entry is-- basically, we cancel that with our investment.

The common, we debit. We eliminate their equity common stock. We eliminate their retained earnings. And the sum is 150. That is actually the same as our investment-- $150,000. Again, why do we eliminate our investment? Because we're going to-- the parent company-- consolidate 100% asset and liability.

And the net amount is just the same as $150,000. So therefore, we've got to eliminate the investment to avoid the double counting. And also, this is the basic consolidation entry. In addition to that, we've got to eliminate the pre-acquisition accumulated depreciation-- $30,000.

The way to eliminate that one is that we eliminate accumulated depreciation-- $30,000. And at the same time, we eliminate building and equipment-- $30,000-- as if this is a new asset from the subsidiary at the time of acquisition. So based on that, if we do that, now, we can just prepare the consolidation balance sheet.

Basically, we got through the-- so this is each company's balance sheet. And we have a column for consolidated balance sheet. So it's basically parent, the subsidy, and some adjustment. OK?

So everything-- we just add them together. That's good enough. But we've got to be careful about something. For example, the building equipment is this part-- we've got to eliminate as $30,000 and $30,000 at the same time, which is to eliminate the pre-acquisition accumulated depreciation.

And investment is based on the $150,000. Should be, as you can see-- we eliminate. We credit. So we credit $150,000 in the worksheet, making sure that investment becomes 0 eventually. And also, what have we got to eliminate? We've got to eliminate their equity-- their equity.

So from here we eliminate their common stock, their retained earnings. So because this credit balance-- we debit to eliminate those accounts. So $60,000 should be eliminated. And $90,000 of the subsidiary retained earnings should be eliminated. OK?

If we do that, this is the only one. This is common stock retained earnings. It's just the same as the parent with common stock retainers because we eliminated subsidiaries in equity through the consolidation entry. And as a result, we can verify this equality-- the $747,000. And that completes that consolidated balance sheet at the time of acquisition.