Consolidation

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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?
 

Triest123

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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?
=> You are paying the money to the shareholders of the acquired company for the
exchange of shareholdings in the acquired company rather than putting the money
into the acquired company.
 
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=> You are paying the money to the shareholders of the acquired company for the
exchange of shareholdings in the acquired company rather than putting the money
into the acquired company.
I don't think that answers my question. The company pays cash to the shareholders of the acquired company for the shares of the acquired company. So, when you journalize this transaction, you debit Equity Investment and credit cash. So, the Equity Investment account is created in the amount of cash given up, and the cash account is reduced by the same amount. So, how does Stockholders' Equity of the parent company equal the total consolidated Stockholders' Equity if it never changes? Looking at it from an alternative perspective, the Stockholders' Equity of the parent company increases by the Equity Investment amount (which makes sense, since Equity Investment equals the Stockholders' Equity of the acquired company), however, no other accounts change (in terms of values); this leaves the balance sheet out of balance.
 

Triest123

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I don't think that answers my question. The company pays cash to the shareholders of the acquired company for the shares of the acquired company. So, when you journalize this transaction, you debit Equity Investment and credit cash. So, the Equity Investment account is created in the amount of cash given up, and the cash account is reduced by the same amount. So, how does Stockholders' Equity of the parent company equal the total consolidated Stockholders' Equity if it never changes? Looking at it from an alternative perspective, the Stockholders' Equity of the parent company increases by the Equity Investment amount (which makes sense, since Equity Investment equals the Stockholders' Equity of the acquired company), however, no other accounts change (in terms of values); this leaves the balance sheet out of balance.
=> When preparing the consolidation accounts, the equity investment held in the parent
company shall be set off against the share of "capital and the reserves" (i.e. the net asset
value) in the acquired company at the date of acquisition.

Parent Co
Cash $10,000

Capital $10,000

the Parent Co acquire a company by cash $1,000, the balance sheet now is :

Cash $9,000
Equity Investment $1,000

Capital $10,000


The balance sheet of the Acquired Co on the date of acquisition is
Assets $1,000

Capital $500
Reserves $500

Consolidated entries :
Dr Capital (Acquired Co) $500
Dr Reserves (Acquired Co) $500
Cr Equity Investment (Parent Co) $1,000


Parent Co - Consolidated Balance Sheet


Cash $9,000
Assets $1,000

Capital $10,000
 
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