PROFESSOR: OK, now, let's talk about the consolidation after the acquisition, especially the first year and the second year after the acquisition. Let's start with discussing the first year of the acquisition by looking at this example. So in this particular example, I can see that, again, the situation is that the parent acquires 100% of the stock, common stocks of the acquiring subsidiary, at book value.

So there is no differential. There is no non-controlling interest. So, now, the action happened January 1st, 20X1. Now, the time is December 31st, this 20X1. So over the year, subsidiary recorded income of $50,000 and paid dividend, $30,000, OK? So because the subsidiary now starts to contribute to the parents through the act method and the consolidation, so the consolidation should include not only the balance sheet, also.

But the financial statement includes consolidated income statement and consolidated balance sheet, the retained earnings statement, et cetera. And so, those are the main financial statements of the consolidation, the income statement, retained earnings, and the balance sheet. OK, so, now, the parent needs to, and we assume, that the parent uses the equity method to account for the investment in the subsidiary.

So what's the journal entry for the parents? The parents record the purchase initially, firstly, the purchase of this subsidiary stock, which is $300,000 debit and cash $300,000. And based on equity method, the parent company needs to report investment income, income from subsidiary, based on the share of income. But in this case, because the share ownership is 100%, the entire income is recorded as income from subsidiary and debit account. And also, debit account is the increasing investment-- so debit investment, $50,000, and credit income from subsidiary.

And third, the dividend paid by the subsidiary decreases investment. So the journal entry, again, because their share ownership is 100%, the entire $30,000 is actually decreased the investment. And the journal entry is the debit cash, $30,000, credit investment, $30,000. As a result, the investment amount at the end of the year will be-- how much is the investment?

The investment amount, initially, the purchase, $300,000, and the share of income at $50,000 increase investment. And dividend paid by the investee, subsidiary, or decreased investment as a reserve, the ending balance of the investment at the end of the year will be $320,000. And also, how about income from subsidiary? Income from special subsidiary, so that is the what? That is the $50,000, OK? That is the $50,000.

So this equity method is actually trying to approximate the effect of consolidation, the effect from the subsidiary, by using these two counts, the investment in special, investment in subsidiary, and income from subsidiary. So the purpose of consolidation is basically, as we discussed earlier, the basic consolidation, basically, we have to cancel our investment amount with the equity, OK? So that's the starting point.

Our investment at the end of the year is the $320,000. And we will cancel this investment amount with the subsidiary's equity amount at the end of the year. And also, income from the subsidiary, $50,000, will be also eliminated because, through the consolidation, the parents will combine the subsidiary's revenues and expenses entirely, as reserve income from subsidiary will be eliminated.

So, basic consolidation entry, so we have to do some basic consolidation entries. So to make it easy, this basic consolidation entry, this book value calculation is very useful. On the right-hand side, we record the equity, the subsidiary's equity, common the retained earnings. The first line is the beginning value of the equity. And the second line is the net income, that increased retained earnings. And third line is the dividend from the subsidiary.

As a result, the last line is actually the ending balance. The common stock of the subsidiary is just $200,000. And ending balance, retained earnings, is $120,000. On the left-hand side is actually our investment. The investment at the end of the year is $320,000, OK? So, therefore, this $320,000 is exactly the same as the ending balance of the subsidiary's equity. And the thing is, then, through the consolidation and through the elimination, we will cancel these two amount, OK? We will cancel the equity. And we will cancel our investment at the end of the year.

So, please be aware of this. Be familiar with this consolidation entry. So our purpose is that there are equity. So we will cancel their equity with our investment at the end of the year. So we buy debiting equity and crediting investment. So you can see, the debit common stock. And this is the beginning balance, OK? The common stock, $200,000, the subsidiary's common retained earnings, $100,000 with debit. And also, we debit income from subsidiary, which is $50,000-- $50,000.

We credit dividends declared. So this is from the subsidiary, dividend from subsidiary. And through the consolidation, that should be eliminated. So dividends paid from the subsidiaries should be eliminated. And if you do the calculation, the net amount is the same as $320,000. Essentially, this is the same as the ending balance of the subsidiary's equity amount. And we cancel with our investment at the end of the year, which is $320,000.

So that's the basic consolidation entry to eliminate their investment. And secondly, we got to eliminate the pre-acquisition accumulated depreciation. That was $300,000, OK? Before acquisition, the subsidiary had the accumulated amount of the $300,000. So we eliminate the amount by debiting accumulated depreciation, $300,000, and crediting building and equipment, $300,000.

If you do that, then we are now ready to prepare for consolidated financial statement, OK? So the first starting point is income statement. So, basically, we combine the parent and subsidiary's income statement. So, again, the consolidation is nothing but the addition of the parent number and subsidy number and some adjustment. So that's the consolidated number. So we can see that, in the income statement, everything is actually-- it's just good enough to just add the parent number and subsidiary number.

But notice that there is income from subsidiary, $50,000. And where does it come from? Because the parent uses ACT method. So parent has, in their book, they have income from subsidiary through this active method entry. And through the consolidation entry, this income from the subsidiary should be eliminated. So how to eliminate the number is that, in the worksheet, we debit $50,000. And as a result, the ending balance becomes zero.

And why? Again, why we eliminate this amount is because we combine their subsidiary's revenue, sales, and expenses, 100% So, therefore, we got to eliminate our income from subsidiary because that's a double counting. So we eliminate this amount, this income from subsidiary, to avoid the double counting and making the balance zero. As a reserve, the consolidated income is $190,000. Notice that this $190,000 of consolidated income is the same as the parent's income, $190,000.

And this is not a coincidence. But why is the case? Because parent uses equity method. The parent uses equity method. The purpose of equity method is to approximate the effect of a consolidation. And we call

that equity method as one-line consolidation, one-line consolidation, because this approximate effect of consolidation. And why this is the same? Because, through this income from subsidiary, the parent already includes this income, $50,000.

That's exactly the same as the subsidiary's income, $50,000. So, basically, we eliminate the $50,000 through this entry. But we add their net income, $50,000. The same amount is eliminated. But we add the same amount through the consolidation process. As a result, these two number should be the same. Consolidated income and parent income should be the same, as long as the parent uses the equity method.

Then, secondly, we got to prepare for the statement, retained earnings. And starting from the beginning balance, so 300 100, we have to eliminate the beginning balance of the subsidiary. We do this by debiting. So as a result, the beginning balance in the consolidated retained earnings is the same as the parent retained earnings. And net income, this is actually, just copy and paste down from this net income, this line. And just copy and paste to this part.

And as a result, $190,000 should be added to the consolidated retained earnings. And, finally, dividend declared, the subsidiary dividend should be eliminated. And this is $60,000. As a result, consolidated retained earnings is $430,000. Again, this is the same as the parent's retained earnings. And the reason is because the parent uses equity method. So that completes the statement retained earnings.

Now, we got to prepare for consolidated balance sheet. So, again, most of the time, it's good enough just by adding the parent number and subsidiary number. But there are some things that we got to make adjustments, especially investment in subsidiary, which is ending balance between $20,000, based on equity method entry that should be eliminated.

So we credit $320,000, making the balance zero in the consolidated number. And the buildings and equipment and accumulated depreciation, why we do that? Because this is the pre-acquisition of accumulated depreciation. The reason is because we want to show the building and equipment as a new asset after this acquisition.

So, therefore, the accumulated depreciation before acquisition should be eliminated. So if we do that, we obtain the total consolidated asset as $1,430,000. And, lastly, in the equity part, we got to eliminate the common stock, which is the subsidiary's common should be eliminated. And this retained earnings line, you just copy and paste from the statement of retained earnings. Statement of retained earnings, the ending balance should be copied and pasted down.

And then, if you do that, the total consolidated liability and equity should be the same as this total asset. And that verifies the accuracy of this consolidation process. So, now, let's take a look at another example of the initial year consolidation by looking at the Excel worksheet. So this is the initial year example.

We have trial balances from a parent company and a subsidiary company. And this is after one year after the acquisition. At the beginning of the year, the parent company acquires a subsidiary stock 100%, $300,000 consolidation, which is the same as the book value-- so, book value. So, therefore, there is no differential. There is no non-controlling interest. And the parent uses the equity method to account for the investment. And this is the timeline.

So you've got to make sure, what's the timeline? The timeline here is the December 31st, 20X8, which is one year after the acquisition. Now, the parent company needs to prepare for consolidated financial statement. And if you see that, if you look close, a little closer about this trial balance number in the parent number, so there is an income from subsidiary, which is $75,000-- $75,000.

And the subsidiary, during the year, they'll pay the dividend of $20,000. And if you see that, there's the sales from the subsidiary. And there is income. And there's expenses reported by the subsidiary. So there's cost of goods sold, depreciation expense, and asset expense. So if we subtract those numbers, those three numbers from the sales, that is the same as the $75,000.

So $250,000 minus expenses, cost of goods sold, depreciation expense, and asset expense, the difference is just the same as $75,000. Why is this the same? That's obvious. It's kind of obvious because the parent uses equity method. So, the subsidiary income is $75,000. And the dividend is the $20,000. So what's the journal entry? What's the journal entry?

So, journal entry, so, again, the parent uses the equity method, so the purchase, $300,000, investment and cash. And what happens is that, according to equity method, the parent company needs to record the income from subsidiary. So the subsidiary reports income as $75,000, based on the sales and expenses. The difference is the income of the $75,000.

So, for that number, the parent company increases the investment, $75,000, and credit income from subsidiaries, $75,000-- $75,000. And the dividend is $20,000. Dividend is $20,000. That is considered the reduction of the investment, according to equity method. So that's $20,000 cash and credit investment.

OK, if you do that, you will find out the balance. Ending balance of the investment is-- and acquisition, net income, and dividend, that's $355,000. And income from subsidiary is $75,000, OK? So for consolidation, as we discussed, we got to eliminate our investment and income from subsidiary to avoid the double counting, because we will combine subsidiary's revenue expenses and their asset entirely. So we got to eliminate those numbers from parent's to for the consolidation to avoid double counting.

OK, so, now, let's try to do some consolidation entries. So, again, it's very convenient to compare, by using this table, by comparing subsidiary's equity and our investment account. So the first line is, again, that's the initial balance. The beginning balance, common stock is 200,000. Retain the 100. So that is related to our investment, $300,000. And the subsidiary reporting income, $75,000, that increases our investment. And dividend paid at $20,000, that decreases our investment.

So, therefore, our investment is the same as 355, which is the same as the ending balance of the subsidiary's equity. And they will cancel each other. So by using this information, we can easily complete this basic consolidation entry. So, basically, we got to eliminate the initial balance, the beginning balance, common stock, $200,000. And the beginning balance of retained earnings of subsidiary, $100,000, should be eliminated. And income from subsidiary should be eliminated, which is the $75,000.

So that completes the debit part. In the credit, we got to eliminate dividend declared, $20,000, from subsidiary. But basically, we cannot pay the dividend for the same company, OK? Consolidation, the idea is that we assume that this is the one entity. As a result, subsidiary dividend cannot be paid to the parents. That should be eliminated. And, again, this net amount should be the same as our investment. So, therefore, we eliminate our investment amount. So that is the consolidation worksheet. So that is the basic consolidation entry.

In addition to that, we got to eliminate the acquisition's accumulated depreciation. So if you see here, so this is actually continuation from the previous example. But this is one year after. So what happens is that the accumulated depreciation, at the end of the year, that is the actual number is $20,000. But if you see, the depreciation expense is $10,000, OK?

So one year after, accumulated depreciation is $20,000. And annual depreciation expense is $10,000. So what it means, then, the difference is the $10,000. That should be the acquisition of accumulated

depreciation. And that should be eliminated through the consolidation process. So that is the $10,000, accumulated depreciation, 10,000. And building and equipment is $10,000.

And now, after doing that, we are ready to prepare for consolidated financial statements, starting from the income statement. So everything, which is good enough, just combine the parent number and subsidiary number, just pure addition. But we got to eliminate income from subsidiary, $75,000, which is reported by the parent. It should be eliminated to avoid the double counting.

In the worksheet, we debit $75,000, making sure the balance should be zero in the consolidated number. If you do that, you will find out, the consolidated income is $400,000. That is the same as the parent's income, $400,000. And why is this the case? Because the parent uses equity method. So that's the reason why this is identical.

And secondly, after doing that, now, we are ready to prepare for retained earnings. Again, this $100,000 of the subsidiary's retained earnings should be eliminated by debiting in the worksheet. And then, the net income is copy and pasted from this net income from the consolidated income statement. So that's just leaving it as they are. And the dividends declared, the subsidiary's dividend should be eliminated by crediting $20,000 in the worksheet.

If you do that, you can verify this equality. The consolidated retained earnings, $25,000, should be the same as the parent's retained earnings. And again, the reason is just because the parent uses equity method. Now, let's go to the balance sheet. So, starting from the asset, most of them is actually just pure addition. So there are some accounts that we have to make adjustment, especially this investment, $355,000. Through the consolidated entry, this number should be eliminated by crediting in the worksheet, $355,000.

And as a result, the consolidated number is zero. And what else? We've got to eliminate the pre-acquisition accumulated depreciation for this building and equipment from the subsidiary. By reducing building and equipment by $10,000, which is pre-acquisition accumulated depreciation, at the same time, we got to eliminate and reduce the accumulated depreciation of the $10,000 from the subsidiary. If you do that, we have this consolidated asset, $1,445,000.

Now, let's move on to the liability and the equity. So liability is just good enough just pure addition. Common stock, and again, we got to eliminate subsidiary's common stock, $200,000, by debiting the worksheet. And the retained earnings, just copy and paste from the statement retained earnings. So therefore, as a consequence, we can verify the equality of the parents. This asset, consolidated asset, is the same as consolidated liabilities and equity.