Steps to Prepare Consolidated Financial Statements

PURCHASE METHOD

Assume the Parent Co. is following the cost method to account for it’s Investment in the sub.

At the date of acquisition: On the WORKING PAPERS ONLY

1. Eliminate the reciprocal accts. (Inv. in stock and the stockholder’s equity accts.) If partially owned sub. adjust minority interest for it’s share.

2. Adjust the assets of the sub to their fair market values if necessary.

At the end of the first year of acquisition: On the WORKING PAPERS ONLY

1. Eliminate the reciprocal accts. (Inv. in stock and the stockholder’s equity accts. 1/1 balance.) If partially owned sub. adjust minority interest for it’s share.

2. Adjust the assets of the sub to their fair market values if necessary.

3. Amortize the excess of cost over book values if necessary.

4. Eliminate Dividends of the sub. against Dividend Income recorded on the Parent’s Inc. Stmt.

5. If partially owned sub. complete the minority interest column.

Subsequent Years after acquisition: On the WORKING PAPERS ONLY

1. Reconcile the reciprocal accts. (establishing reciprocity) by doing a retroactive catch up from cost to equity.

2. Eliminate the reciprocal accts. (Inv. in stock and the stockholder’s equity accts. 1/1 balance.) If partially owned sub. adjust minority interest for it’s share.

3. Adjust the assets of the sub to their fair market values if necessary.

4. Amortize the excess of cost over book values if necessary. Do a catch up of the amortized amts. of the previous years by adjusting the 1/1 balance of the R/E of the Parent Co.

5. Eliminate Dividends of the sub. against Dividend Income recorded on the Parent’s Inc. Stmt.

6. If partially owned sub. complete the minority interest column.