How to Make a Consolidated Balance Sheet

This video shows how to make a consolidated balance sheet when one company acquires 100% of another company. The consolidated balance sheet presents the assets and liabilities of the combined entity, but it is not as simple as adding the figures from the 2 separate balance sheets together (this would result in double-counting). To create the consolidated balance sheet, one must make a series of adjusting and eliminating entries that do the following:
1. Eliminate the purchaser's investment in the target
2. Eliminate the target's stockholders' equity accounts
3. Step up the target's assets to their fair value
4. Recognize any goodwill-
Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world.
-
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
• A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING
• A 44-PAGE GUIDE TO U.S. TAXATION
• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
• MANY MORE FREE PDF GUIDES AND SPREADSHEETS
* eepurl.com/dIaa5z
-
SUPPORT EDSPIRA ON PATREON
* / prof_mclaughlin
-
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT
* edspira.thinkific.com
-
LISTEN TO THE SCHEME PODCAST
* Apple Podcasts: podcasts.apple.com/us/podcast...
* Spotify: open.spotify.com/show/4WaNTqV...
* Website: www.edspira.com/podcast-2/
-
GET TAX TIPS ON TIKTOK
* / prof_mclaughlin
-
ACCESS INDEX OF VIDEOS
* www.edspira.com/index
-
CONNECT WITH EDSPIRA
* Facebook: / edspira
* Instagram: / edspiradotcom
* LinkedIn: / edspira
-
CONNECT WITH MICHAEL
* Twitter: / prof_mclaughlin
* LinkedIn: / prof-michael-mclaughlin
-
ABOUT EDSPIRA AND ITS CREATOR
* www.edspira.com/about/
* michaelmclaughlin.com

[@Frank-ci5hl]

Not the hero we deserved but the hero we needed.

[@AbdulRehman-yp2jk]

I have my exam in 3 days and I was watching other lectures but yours are outstanding and the best thing about your videos are that they are accurate and precise, everything makes sense after seeing them, thanks for them and keep it up !

[@mingao9018]

I've been confused about consolidation for quite sometime. Thank you for making it so easy to understand!

[@Edspira]

No problem. I'm glad the video helped you!

[@hankarber7280]

The entire chapter in the textbook makes me dizzy. Your 12' video delivers the principal and significant foundation that allows students to build a deeper knowledge from there. Please keep helping students by posting your videos. I don't know how I could survive without your links.

[@Edspira]

I'm so happy you're finding the videos helpful!

[@meera2038]

Your videos are simple and easy to understand. Thank you so much!

[@Winnie-zy1co]

Amazing! The most impressive and simplest illustration to my study!!

[@fekrabusinesssolutions]

Whenever I need help with learning any accounting, I look for you because I know that you are certainly the best, another great job. thanks for sharing

[@Edspira]

I appreciate that!

[@theanimeaccountant1472]

Would you be able to make a video on inter-company transactions as Ex. a company selling inventory to a sub and having to do the elimination entries?

[@abhishekvelani4399]

Brilliant video, very clear and precise. Thanks!

[@meenachhantyal38]

Thank you so much!!! This just made the things crystal clear

[@chelseaz.3584]

Thank you so much for this video! Consolidation and Intercompany Eliminations are kicking my butt as I study for FAR and this is the most straightforward explanation I can find. Does the Fair Value adjustment we make for consolidations stay on the Subsidiary's books, or does it just have to be readjusted every year when we consolidate?

[@cszhang8201]

thanks! Great example amd explaination!

[@yinyin7614]

Great teacher.

[@vjcxmq]

Great video! Thank you 🙏

[@gz6773]

I love u bro, u saved my life

[@josh_imagination]

Thanks , all your videos are helpful. I am preparing for CPA and taking help of your videos. Can you make videos on Government accounting.

[@mrmhjr7]

Great vids! Btw in which playlist is this video listed? I did all Accounting basics this Consolidating part i don't find the attached playlist to be able to follow chronology Thx!! Great Work again!

[@Meenakshi1003]

Awesome teaching 👍

[@mpmandeep9]

Thank you so much for your efforts !

[@noshadhz3891]

Thanks for useful video

[@raneenbadr8102]

Hello, why do we subtract the liabilities when finding the net identifiable assets?

[@exonexoo3184]

how do you make a consolidated fs when the balance sheet given is AFTER the acquisition?

[@amk93]

Thank you for making consolidation quite clear. My only problem is that I haven't understood yet where the consolidation reserve appears. And actually what exactly it is.

[@bbqking10]

U make things look easy! Thx again

[@Edspira]

No problem!

[@blackezi3]

Hello. Which software in your opinion is the best for Consolidation Balance Accounting?

[@natc9589]

Thank you so much.

[@mzgemini0006]

Got it THANKS!

[@llaw3016]

thank you so much!:) can u do a video about auditing topics?:)

[@mrmhjr7]

To compute the Step-up, liabilities here are written in this example as is. Just to be sure, in another scenario, wouldn't we need Fair value Liabilities?

[@martijnz5768]

Hello! First of all, thank you so much for all of these great videos. I also have some questions: Why do you use the fair value of net assets? I wonder how this works in practice, because there is not always a valuation of all fixed assets (possible) when doing a takeover. Does the step up imply you debit the net assets with 1 milion? Secondly, How does this step up affect future depreciation of the consolidated business? Would it also be possible to consolidate just using book values? Hope you, or somebody else can help me gain some additional insight :-)

[@meera2038]

Do you have inter company transactions consolidation? Thanks

[@sandesh-lna9635]

For example, there are two companies, and I am forming a third company above these two companies so will then the above calculations be the same?

[@randomperson5275]

Incredible!I wished you were my teacher ty!

[@Edspira]

Wow, thank you!

[@Skybreaker29]

how did you get the fair market value?

[@alexraj2794]

Can u pls make a vedio of consoldation financial statement

[@rajaboopathi7332]

Hey you are really very talented.. lot of confusion.. you made it those are like dust.. 😂

[@grantcabbage2696]

you are awesome!

[@Edspira]

Thanks!

[@kokonvee]

Dudee tq

[@vascogamero530]

Legend

[@hamadaali3256]

please make video for capital lease i,m studying cpa and follow with your video ❤️❤️❤️❤️❤️❤️❤️❤️❤️❤️❤️❤️❤️❤️

[@Edspira]

I will definitely do that for you my friend, but it will take about 2 weeks before I get time to make the video. I hope that helps!

[@bbqking10]

Did u pass?

[@RadomName3457]

I dont get the idea behind debit the common stock and retained earnings yet, please can you explain it. Thanks

[@matthewtomasulo5714]

When you are consolidating a company via 100% purchase of stock, you as the parent company are purchasing 100% of the common voting stock. This is recorded as an investment, not a recording of a stock purchase. Hence: Dr. Investment in the subsidiary company Cr. Cash This investment recognizes the purchase of the common voting stock. Since the 100% purchase means your parent company now has control, the purchase of the stock can not be recognized as an investment. Companies cannot keep investments on the books for themselves. So you need to reduce the equity accounts from the subsidiary company. Therefore we need to reduce the investment account by the equity of the subsidiary. Dr. Common Stock Dr. Retained Earnings Cr. Investment Account So what did this do? We are saying that, yes, we purchased the common voting stock of this company, it is ours, but we don't want to keep the equity accounts on the books. The last entry is to recognize the difference between the price paid for the subsidiary company by the parent and the actual net identifiable assets. What does this mean? The parent company in this example paid $3.4 million for 100% of the company, but as we saw in the last entry the total value of the subsidiary (the total value of their equity) was only $2 million. Then we need to ask, "what is causing the difference?' For this, we look to differences in fair value first. If there are still differences when all fair value adjustments have been made then the rest of the purchase is goodwill. Which can represent the value of the company beyond what is tangible, such as reputation. When you really think about it, what is the purpose of a consolidation of a business? The parent company is only interested in absorbing the subsidiary company assets, and liabilities. When you look at the consolidation worksheet, what are you doing? You are combining the assets and liabilities, but only keeping the parent company equity accounts. That is why you eliminate common stock and retained earnings. Think of what happens on the side of the subsidiary company being purchased. They sell all of their common voting stock for cash. What do they do with all this cash? Well if the company is going out of business, they will distribute all the cash they received to their shareholders. Then the subsidiary company equity accounts will be gone with the parent having absorbed all the assets and liabilities from the purchase. I hope this helps.

[@matthewtomasulo5714]

One more thing. It is important to remember that consolidating entries are not made on the books of any company, so they do not carry over from period to period. They are a tool used to help accountants calculate the consolidation values.

[@RadomName3457]

Matthew Tomasulo it really helps i appreciate your response so much. I’m really interested in finance and just a sophomore in my university. You seems to have a solid knowledge in this field. I would love to get in contact with you in somehow, very pleased to have chance to learn from someone cuz i often have many question. Thanks

[@musicuniverse1356]

Could you do a Consolidated corporate tax return video? There are no videos on KZbin showing how this is done. You do an outstanding video on Consolidated Financial Statements, I’d like to see you do a consolidated tax return video and illustrate differences and similarities between a consolidated tax return and consolidated financial statements.

[@Edspira]

I'm planning on putting out more tax content this summer. Right now I'm teaching 5 classes and don't have the time to make more videos. Thanks for watching!

[@musicuniverse1356]

Edspira Well you are a great accounting professor. I wish my professor in college was as good as you. He just had us do problems out of the book and we reviewed them in class.

[@PaulKopyto]

I have a quick question... Since we noticed an increase in FV of Fixed Net Assets, shouldn't 400k if goodwill is attributed to the 1M in an increase in FV of those fixed assets? If that is true, at the end we should end up with 600k in an account called "Gain on bargained purchase", which is like an opposite of Goodwill. I might be wrong but there it is. Thank You

[@Edspira]

This is a good question. It all comes back to the rules that FASB has stated for publicly traded companies. You must first step-up the subsidiary's assets to fair value prior to recognizing any goodwill. Sorry that I don't have a more detailed explanation regarding the "why."

[@PaulKopyto]

Edspira where do you think I could get a detailed explanation on this? Thank you

[@kosr6624]

What happened to cash? In the consolidated BS you have shown Purchaser's current assets as 350 000 ( 3750 - 3400 ). Why have you not shown this cash on the side of the target? The entry for Target's standalone would be Dr. Cash 3400, Cr. Paid-in Capital 3400, right?

[@61percentodicarica]

if you mean the 3.400.000 cash paid, that's not shown in the target BS because it was kinda given in exchange for equity (total 2.000.000) + the increase in target assets (1.000.000 + 400.000) basically, that money is given to the previous shareholder to go away, so that isn't corporate money anymore. (Or the newly created group (I mean the two businesses together as a new entity) would still have all the money paid for the acquisition) I can't be more technical because I'm not very good at accounting, but that's how I understand it... hope the intuition helps you, otherwise just trash this comment

[@kosr6624]

Thanks for the comment. Related question - if we were making standalone financial statements of Target, what double entry would we make for this acquisition? Is it Dr. Unpaid share capital, Cr. Share capital, Dr. Cash, Cr. Unpaid share capital?

[@user-ri9bb6fr8f]

thank you from China hahahah

[@Edspira]

No problem, best wishes!