I have a question regarding consolidation that has been bugging me lately. I will keep the example simple. A parent acquires 100% of the net assets (stockholders' equity) for $1,000 at book value via a cash payment. Now, the parent's balance sheet at the acquisition date includes an asset called "Equity Investment", valued at $1,000. The stockholders' equity reported on the parent's acquisition date balance sheet will equal the total consolidated stockholders' equity. I understand this if the payment was made via an issuance of common stock, but not cash. The reason is if I pay cash of $1,000 to the subsidiary and add an Equity Investment asset of $1,000, my stockholders' equity hasn't changed. So, how can the stockholders' equity on the parent's acquisition-date balance sheet equal the consolidated stockholders' equity? Do parent companies not reduce the "cash" asset on their balance sheet when it is used for a purchase of a subsidiary since the $1,000 of cash paid to the subsidiary will show up in the consolidation balance sheet? That can't be right...
Of course, adding the parent's acquisition-date balance sheet stockholders' equity would equal the consolidation stockholders' equity if you think of it this way: the $1,000 leaving your company to the subsidiary means now that the subsidiary's stockholders' equity is equal to $2,000, meaning the parent's Equity Investment account is equal to $2,000. The increase in assets of $1,000 for the parent ($2,000 equity investment - $1,000 cash) means the stockholders' equity increases by $1,000, which would equal the consolidation total. So, how do companies solve this issue?
Of course, adding the parent's acquisition-date balance sheet stockholders' equity would equal the consolidation stockholders' equity if you think of it this way: the $1,000 leaving your company to the subsidiary means now that the subsidiary's stockholders' equity is equal to $2,000, meaning the parent's Equity Investment account is equal to $2,000. The increase in assets of $1,000 for the parent ($2,000 equity investment - $1,000 cash) means the stockholders' equity increases by $1,000, which would equal the consolidation total. So, how do companies solve this issue?