THE CONSOLIDATED BALANCE SHEET AND PROFIT AND LOSS SUMMARY
Purpose and Function
The consolidated balance sheet is a form of statement distinctively
American. As indicated in previous chapters, its use has arisen as
a result of the corporation laws of some of the states which allow
the formation of the holding company. This, if strictly a financing
company, has a very simple operating organization. Its chief assets
are usually the securities, capital stock and bonds, of the subsidiary
companies which it owns in part or in full. Accordingly, its balance
sheet is comparatively simple; in fact this very simplicity results in
giving little information as to its real financial condition or that
of the subsidiaries which it owns. If, however, the holding company is
at the same time both an operating and a financing corporation, all
the complexities encountered in the balance sheet of a manufacturing
company will be found on that of the holding company. However, the
financial statement of an operating holding company is not any more
intelligible because of its complexity than that of a purely financing
corporation.
The items on the balance sheet of either type of corporation which are
evidence of the activities peculiar to a holding company are, as stated
above, the securities of the subsidiary concerns held by the holding
company and whatever advances have been made on open account to the
various subsidiaries in order to provide funds for making extensions
or for recouping losses incurred by the subsidiaries. The principles
governing the valuation of the securities of the holding company have
already been stated and explained in Chapter XV. In that chapter were
stated the different applications of the principles of valuation to
the three conditions met; namely, (1) the condition in which the
holding company owns the entire capital stock of the subsidiary; (2)
the condition in which a controlling but partial interest only is
held; and (3) the condition in which the holding company is a minority
stockholder of the subsidiary. In making up the balance sheet of the
holding company the application of these principles to the valuation
of the holdings of the corporation must be carefully handled. Aside
from this problem of valuation, the balance sheet of the holding
company presents no new problems. Such a balance sheet, however, gives
very little information as to the actual financial condition of the
corporation because its finances are tied up so completely with the
financial condition of the various subsidiaries. In order, therefore,
to present a statement which will intelligently show the real condition
of the holding company, it becomes necessary to combine or consolidate
the statements of financial condition of all its subsidiaries.
Problem of Partial Ownership
Where the ownership of the subsidiaries is complete, the consolidated
balance sheet in which are brought together all the various assets and
liabilities of the subsidiaries, presents a true, full, and intelligent
statement of the financial condition of the holding company. Where,
however, ownership is not complete, in which case there may be majority
or minority holdings, the problem of drawing up a statement which
will present the actual condition of the holding company is more
difficult and much more complex. Manifestly, a consolidated balance
sheet under either of these latter conditions as to partial ownership
cannot be applicable alone to the holding company, inasmuch as in such
a statement there must be included interests over which the holding
company has no direct control or authority.
Because of this difficulty, three different ways of attempting to show
the holding company’s condition are met with. One method makes no
attempt to overcome the difficulty but limits itself to showing simply
the balance sheet of the holding company as explained in the early
part of this chapter. A second method consists in showing the balance
sheet of the holding company supported by the separate balance sheets
of all of the subsidiary companies. The third method is the method of
the consolidated balance sheet which has just been briefly explained.
This last is, perhaps, the most satisfactory method of the three. The
insufficiency of the first method and the objection to it have been
referred to already. The second method gives all essential information
but presents it in such form that it is practically impossible for
anyone but a trained student of finance and accounting to correlate
the various parts and arrive at an intelligent understanding of actual
conditions. The stockholder or the outsider is usually completely at a
loss to know the meaning of all the figures and statements presented.
Under the third method the data as to the condition of the various
companies are brought together and presented in logical form on the
consolidated balance sheet so that the combined statement shows as
clearly as is possible the condition of the holding company.
Conditions under which Used
It should be clearly understood that the consolidated balance sheet
is not a balance sheet of the holding company except and only when the
holding company owns the entire capital stock of all the subsidiaries.
A consolidated balance sheet, therefore, is a statement which presents
the condition of all of the subsidiary companies. If it reflects the
condition of the holding company better than the latter’s balance
sheet, then, and then only, should a consolidated balance sheet be
used. A fine distinction must sometimes be drawn to determine when
it is more desirable, in the interests of an accurate showing of
condition, to present a consolidated balance sheet rather than the
balance sheet of the holding company, and a delicate appreciation is
needed of the various financial problems involved. When the holding
company is not the complete owner but nevertheless has a controlling
interest in all the subsidiaries, the method of the consolidated
balance sheet is usually the better way of showing its financial
condition. Where the holding company, however, holds only minority
interests, it is oftentimes open to question as to whether the
consolidated balance sheet gives a true presentation of the facts of
financial condition, especially in view of the fact that the holding
company cannot always control the policies of its subsidiaries.
The Setting Up of the Consolidated Balance Sheet
With this explanation of purpose and function of the consolidated
balance sheet, it is purposed now to draw attention to some of the
problems met in drawing up such a statement. The first essential
condition to facilitate the consolidation of the balance sheets
of the various subsidiaries with that of the holding company is
that standardized methods of accounting resulting in a similar
classification of accounts and presentation of results be used by
all the subsidiaries. The consolidated statement is then merely a
combination of the values of similar items in all the balance sheets to
determine the valuation at which the consolidated items shall appear.
On the balance sheets of the various companies certain accounts will
appear which represent intercompany relationships. Thus, on that of
the holding company appear the securities which are represented on the
statements of the subsidiaries by their net assets. In other words,
the securities of the holding company are assets represented by the
proprietorship items of the various subsidiaries. Sometimes on the
consolidated balance sheet both items are shown. This results, of
course, in an almost exact duplication of items inasmuch as the holding
company’s securities are a statement of the net asset values of the
subsidiaries. The better method of presentation, however, seems to be
the elimination of the securities of the holding company against the
proprietorship items of the subsidiaries. It may frequently happen
that the values of these two items to be eliminated are not the
same. This will always be the case if the holding company values its
securities either above or below the par of the capital stocks of the
subsidiaries, plus any surplus belonging to the subsidiary at date of
purchase by the holding company.
It is to be presumed that the values at which the securities are held
on the books of the holding company represent the latter’s estimate of
the value of its interests in the various subsidiaries. If this value
is more than the net worth of the subsidiary as shown by its capital
stock outstanding and surplus at the time of purchase by the holding
company, the difference between the value at which the securities are
carried by the holding company and the net worth of the subsidiary must
represent the value placed by the holding company on the good-will of
the subsidiary. This good-will does not appear, of course, on the books
of the subsidiary. Hence, in consolidating the balance sheet of the
subsidiary with that of the holding company, it is necessary to set up
the asset good-will and thus increase the net worth of the subsidiary
to the point where it can be exactly canceled against the value of the
securities on the balance sheet of the holding company. If, however,
the value of the securities on the holding company’s books is less than
the net worth of the subsidiary, that condition indicates that in the
opinion of the holding company the assets of the subsidiary as carried
on the subsidiary’s books are overvalued. In this case it becomes
necessary, upon consolidation, to set up a depreciation reserve under
suitable title.
The effect of this, so far as the eliminations on the consolidated
balance sheet are concerned, is merely to set up under the title
Depreciation Reserve the portion of the subsidiary’s capital stock—or
capital stock and surplus—not canceled by the amount at which the
holding company carries on its books the value of its interest in
the subsidiary. Instead of carrying this difference in values under
the title Depreciation Reserve, it is sometimes shown as Capital
Surplus. This is merely another way of saying that the portion of
the subsidiary’s capital stock not canceled by the holding company’s
investment in the subsidiary is simply carried on the consolidated
balance sheet under another name. Another method of handling this
uncanceled amount is to carry it into the consolidated balance sheet
as a credit to Good-Will account, and so secure a reduction in the
value at which this intangible asset is shown in the balance sheet
of the allied companies. This may sometimes result in reducing the
value of good-will to a negligible figure, or in writing it off the
books entirely, or even in showing it with a credit balance. There is
little to choose between the methods; the author prefers the use of the
depreciation reserve. The balance sheets of all of the subsidiaries are
in this way consolidated with the balance sheet of the holding company.
On the consolidated balance sheet as at the date of the purchase of
the various subsidiaries, there will not therefore be shown any item of
surplus, inasmuch as the items of surplus on the balance sheets of the
various subsidiaries have been eliminated together with their capital
stock items against the securities on the balance sheet of the holding
company. This is as it should be. Surplus account properly used should
represent only profits reserved from operation. The holding company
cannot, therefore, previous to its operation, show any item of surplus
even though the subsidiary companies have accumulated profits which
they, of course, are entirely right in showing under the title Surplus.
A distinction must be made here between what is termed “contributed”
surplus and “operating” surplus. Any corporation, the holding company
included, may at the time of its organization have some portion of its
capital represented by contributed or capital surplus. It has been
pointed out that this may arise either through subscription to its
stock at a premium, or by a later donation of stock by its stockholders
which, when sold, may be recorded as working capital surplus or
contributed surplus. It is not possible, however, for any corporation,
previous to its operation, to show as a balance sheet item an operating
surplus from which it might be possible to declare dividends.
Showing of Intercompany Accounts
At the time of consolidation, intercompany accounts of various sorts
will also appear. The holding company may have made advances of cash
to some of the subsidiaries. These will be shown on the books of the
holding company as open account claims against the subsidiaries, while
on the books of the subsidiaries they appear as increases among the
assets—usually cash or other current items—offset by open liability
claims in favor of the holding company. The account receivable on
the holding company’s books should be eliminated against the account
payable on the books of the subsidiary. Similarly, there may be
numerous inter-subsidiary accounts which may be eliminated, the ones
against the others. The need for a very careful classification of
accounts receivable in order to separate the claims against trade
debtors from those against allied companies should be emphasized when
it is desirable to consolidate balance sheets on which these various
classes of accounts receivable appear.
Showing of Notes Discounted
One kind of intercompany item needs further consideration. A
corporation may, as the holder of the notes of an allied company, have
had those notes discounted. On the maker’s books the notes appear as
a liability. On the holder’s books, after discount, the notes will
be shown as a contingent asset offset by a contingent liability of
equal amount. Upon consolidation of all the balance sheets, neither
the contingent asset nor liability will appear, being canceled against
each other, but the full liability as maker of the notes must be shown;
for now that the notes have passed into possession of an outsider, the
bank, the liability is no longer an intercompany liability but one for
which the consolidated interests are fully liable.
Reconcilement of Current Accounts
Previous to the consolidation of the balance sheets, it is possible
that some of the intercompany accounts may need reconciliation just as
any other current accounts. For instance, Company A may have shipped
goods to Company B and have charged B’s account, but A’s account on
B’s records may not yet have been credited because the goods have not
yet been received. All items in transit will require reconciliation.
These are all intercompany transactions which will be eliminated
upon consolidation; but to make exact cancellation possible, the
intercompany current accounts on the books of the various companies
must be reconciled.
Valuation of Inventory
The problem of the valuation of the stock-in-trade inventory on
the consolidated balance sheet is perhaps the most troublesome. The
situation with regard to inventories of stock-in-trade is often
complicated by the fact that the same raw material or partly finished
material may pass through the hands of several companies each doing
certain processes upon it. The process of manufacture may not be
completed until the goods are turned over ultimately to the holding
company for sale and final distribution to the consumer. This—or other
possible variations of the procedure—is usually the situation so far as
stock-in-trade is concerned. Inasmuch as the various subsidiaries are
independent corporate organizations, the price at which they transfer
their product to the allied subsidiaries is not cost price but a sale
price determined, perhaps not by market conditions, but rather by some
fixed policy set by the holding company; although it frequently happens
that market price is the price at which the partially completed product
is turned over to allied subsidiaries. However determined, the price
includes an element of profit which from the standpoint of the holding
company is not a realized profit until the goods are finally disposed
of to the outside consumer. Were the manufacture carried out by a
single corporate organization, the product, as it passed through its
various stages of manufacture, would be charged into each succeeding
stage at the costs accumulated during preceding stages, and the element
of profit would not need to be considered until the product was
ultimately sold by the holding company.
Thus, the valuation at which the inventory of stock-in-trade is
carried on the books of the various subsidiaries is often inflated
by the profit in each case, so that by the time the product reaches
the holding company it may carry a very large element of unrealized
profit. While from the standpoint of each subsidiary company the act of
transfer has been legally a sale and therefore the seller is entitled
to a profit on the sale, without which there would be no element of
profit appearing in the operations of each subsidiary company at any
time, from the standpoint of the holding company such transactions are
in no sense sales, but are simple transfers from one process or stage
of manufacture to another.
In order to show the true condition as to the value of the inventory of
stock-in-trade on the consolidated balance sheet, it becomes necessary
to eliminate these intercompany items of profit loaded onto the goods
at the time of transfer between companies. The figure at which the
value of the consolidated inventories will appear in the consolidated
balance sheet should represent the actual cost figure, as if the
entire process of manufacture were carried on under one corporate
organization. The corresponding offset to this reduction in value of
the consolidated inventories will appear as a reduction in the surplus
as shown on the consolidated balance sheet.
This principle of inventory valuation should always be applied to the
full in the case where the holding company is the complete owner of
all its subsidiaries. It cannot, however, be too rigorously lived up
to under conditions where the holding company may not have absolute
control over the policies of the subsidiary companies. It may sometimes
even be modified by the fact that the product as turned over by one
company to another is in such stage of completion that there is a ready
market for it outside that of the allied subsidiaries. The accountant
is, however, treading on somewhat uncertain ground when he attempts
to incorporate any element of profit in the consolidated inventory.
Conservative management as adopted by some of our largest corporations
eliminates all elements of profit, and that should be the standard
practice. Only under unusual circumstances and after a very careful
consideration of all the conditions should the consolidated inventory
be carried at any other valuation than that of full manufacturing cost.
Reserve for Intercompany Profits
In eliminating intercompany profits from the valuation of the
inventory, use is sometimes made of a Reserve for Intercompany Profits
account. The reserve is created by a charge against Surplus. The
inflated valuation of the inventory is allowed to stand but it is
offset by this reserve in sufficient amount to reduce its value to a
cost basis.
Valuation of Inventory—Minority Interests
An interesting problem arises in handling the consolidated inventories
and other similar items when there are minority interests to be
taken into account. To write down the inventory to a cost basis for
the consolidated companies involves a valuation below cost for the
subsidiary companies which purchased the commodities from their allied
companies. This is hardly equitable to the minority interests in those
companies, for they are concerned not with what is the proper basis
for valuation on the consolidated balance sheet but rather on their
own balance sheet. Their company as a distinct legal organization has
the right to show all the profits arising out of a valuation of its
inventory on its own purchase-cost basis. Recognizing this right, some
accountants advocate carrying the portion of the inventory represented
by the ratio of the minority interests to the whole interests, at the
cost price to the subsidiary and writing down the rest of it to a true
cost basis for the consolidated companies. The effect of this is to
leave undisturbed the portion of the subsidiary’s surplus belonging to,
or, more strictly, representing the minority interests. Such a method
results in the valuation of the inventory on two different bases for
the consolidated balance sheet—a practice which is objectionable. The
more conservative policy is to write down the whole inventory to a
consolidated cost basis, charging the amount written off against the
consolidated company’s surplus. This will leave the minority interest
surplus unaffected by the changed basis of valuation—a desirable thing
from the standpoint of equity to the minority.
Valuation of Liabilities
So far as the liabilities of the corporation are concerned, the values
at which these will be carried on the consolidated balance sheet will
be the combined values of all the liabilities of the subsidiaries,
aside from the intercompany accounts payable and other similar items
which have been canceled against the accounts receivable of the
subsidiaries and holding company.
Showing of Capital Stock
The showing of the capital stock item on the consolidated balance sheet
will depend somewhat on the degree of ownership of the holding company.
If the ownership is partial, in addition to the capital stock of the
holding company a statement must appear of the consolidated minority
interests of the various subsidiaries. This should, of course, be shown
separately from the capital stock of the holding company. This becomes
necessary because of the fact that items which do not belong in full
to the holding company have been incorporated with the assets on the
consolidated balance sheet. It is seldom if ever feasible to attempt
a separation of the various asset items on the basis of the degree
of ownership of the holding company; hence, the only offset to the
inclusion of asset values not belonging to the holding company is by
showing the outside interest in those assets by means of the minority
holdings of capital stock.
Showing of Surplus
The other element of net worth, i.e., the surplus, will also have
to be adjusted in order to give the best showing of the interest
of the various parties therein. This is, of course, the operating
surplus referred to above. The portion of the surplus belonging to the
holding company as indicated by its proportion of ownership in the
allied companies will be shown separately from the portion of surplus
belonging to the minority interests. Sometimes when this is relatively
insignificant it is shown as a liability rather than as an item of net
worth, on the ground that the minority has a claim on that surplus and
will very probably, in the near future, receive it by way of dividends.
It would seem to be, however, a truer index of the exact status of
affairs at the time of the consolidation, to show the item separately
as a portion of surplus in the net worth section of the balance sheet.
Showing of Deficit
When it becomes necessary to incorporate a deficit rather than a
surplus, conservative practice usually demands that the entire deficit
be shown as belonging to the holding company rather than merely its
proportionate share as indicated by its share of ownership in the
subsidiary. This is advisable because an initial deficit is often an
indication of the inability of the company to be operated profitably,
in which case the holding company may have to stand practically the
entire deficit.
Showing of Profit and Loss Summary
The consolidated balance sheet should be supported by a consolidated
profit and loss summary. Just as with the balance sheet, a distinction
is made between the profit and loss statement of the holding company
and the consolidated profit and loss statement in which are brought
together the summaries of all of the allied companies. If the holding
company is primarily a financing company, its chief source of earnings
will be from dividends on the stocks of the subsidiary companies
held by it. The profit and loss summary of the holding company may
be a true reflection of its earning condition for the current year
if proper provision has been made for the losses of the subsidiary
companies which have been operated unprofitably. The information which
the holding company’s profit and loss summary gives, however, is not
adequate or sufficient on which to base an intelligent judgment as to
whether it is a correct statement of current operations. Much the same
difficulties are met in connection with it as in connection with the
balance sheet of the holding company referred to above. For instance,
if, during a given period, some of the subsidiary companies were
operated at a loss or on a narrow margin of profit but dividends were
declared out of surplus earnings accumulated from other periods, there
would be no indication on the profit and loss summary of the holding
company as to the actual conditions under which the earnings of the
holding company had been secured. In other words, there would appear on
the profit and loss summary of the holding company as earnings for the
current period items representing accumulated earnings from previous
periods.
Thus, the profit and loss summary of the holding company would not
give a true reflection of the earnings for the current period, and
furthermore would give no information whereby it would be possible for
an interested party to form any judgment as to the current operations
of the holding company and its subsidiaries. Inasmuch as the holding
company usually owns a majority interest in all the subsidiaries and
therefore can dictate their policies, the management of the holding
company is always in possession of the true status of affairs, but the
stockholder or other interested party can form no judgment whatever
as to the actual condition. On the profit and loss statement of the
holding company there will be no data as to gross earnings, operating
expenses, fixed charges, or miscellaneous income and expense items
reflecting the operating conditions of the various subsidiaries.
Furthermore, if a subsidiary company has been operating at a loss and
has declared no dividend, the absence of that item of earnings from the
profit and loss summary of the holding company would not be necessarily
a proper reflection of the condition of the subsidiary on the holding
company’s summary. It might be necessary, in order properly to show the
true condition of affairs, to make provision by way of a reserve for
the loss of the subsidiary.
Again, it becomes very easy, if control of the holding company is in
the hands of an unscrupulous clique, to understate the profits of the
holding company by refusal to declare such a dividend on the part of
each subsidiary as will reflect the true earnings of the subsidiary
for the current period. Such a policy may be used for the purpose of
manipulating the stocks of the various companies.
The Consolidated Profit and Loss Summary
For these reasons and others of the same kind as those mentioned
in connection with the balance sheet of the holding company, it is
best, in order to give an intelligent showing of condition, to set
up a consolidated profit and loss account. The comment made on the
consolidated balance sheet is here pertinent also. It is not a profit
and loss account of the holding company for it includes also items
representing other interests. In some respects it is an unwieldy
instrument, but it seems to be the best way in which to show the actual
condition of the holding company’s operations. On the consolidated
profit and loss summary the earnings from dividends which appear as the
chief source of the holding company’s earnings on its profit and loss
summary will be eliminated and in their stead will appear the combined
earnings of the allied companies. This might seem to be an inflation of
earnings inasmuch as the goods which were sold by one company and are
recorded by it as earnings will be resold by another company on whose
books they will appear also as earnings. The sale of the same goods
may thus appear as earnings in many of the subsidiaries. However, such
a showing of combined results does provide a true basis on which to
judge earnings in comparison with the values invested by the various
companies from the use of which values the earnings have been derived.
Similarly, on the consolidated profit and loss statement will appear
all the operating expenses and other items belonging to the individual
profit and loss summaries of the subsidiaries. As it is necessary on
the consolidated balance sheet to make some adjustments in the surplus
on account of the unrealized elements of profits in the values at which
the combined inventories were taken over, so this same adjustment will
perhaps be best handled as an appropriation of profits in the last
section of the consolidated profit and loss summary.
If the holding company owns all of the stock of the subsidiaries, a
true profit and loss summary with no inflated values should be drawn
up. In this there will appear only the sales to outside consumers;
no intercompany sales should be shown. The cost of goods sold will
be determined on the same basis, viz., the basis of cost from the
standpoint of the consolidated companies as a unit organization,
all intercompany profits being eliminated. All the expenses of the
subsidiaries are loaded onto, and therefore absorbed in, the cost
of the goods sold by the holding company. Usually only the holding
company’s expenses—selling, general administrative, etc.—will appear
as such on the consolidated profit and loss summary. Where, however,
there are minority interests to be taken into account, the method of
combining all the elements is doubtless the most satisfactory.
Illustration of Consolidated Balance Sheet
_Problem._ Company X, the holding company, owns all of the capital
stock of Company Z and 60% of the stock of Company Y. Company X is
chiefly the financing company, Company Y is the selling company, while
Company Z manufactures the commodities and turns them over to Company Y
at a price slightly under the market. The following balance sheets of
the several companies show their condition at the close of the fiscal
period. Company Z records show that the cost of the merchandise carried
on the balance sheet of Company Y at $75,000 is $60,000. It is required
to draw up a consolidated balance sheet of the affiliated companies.
COMPANY X—BALANCE SHEET
===============================+====================================
Cash $ 50,000.00 | Notes Payable $ 100,000.00
Notes Receivable Y 100,000.00 | Bonds 500,000.00
Advances to Z 250,000.00 | Capital Stock 1,000,000.00
Stock Y 300,000.00 | Surplus 250,000.00
Stock Z 550,000.00 |
Patents 500,000.00 |
Other Property 100,000.00 |
------------- | -------------
$1,850,000.00 | $1,850,000.00
============= | =============
COMPANY Y—BALANCE SHEET
===============================+====================================
Cash $ 25,000.00 | Notes Payable X $100,000.00
Accounts Receivable 125,000.00 | Accounts Payable 25,000.00
Notes Receivable 100,000.00 | Bonds 75,000.00
Notes Receivable Z 50,000.00 | Capital Stock 500,000.00
Z (open account) 50,000.00 | Surplus 25,000.00
Merchandise 75,000.00 |
Plant 300,000.00 |
----------- | -----------
$725,000.00 | $725,000.00
=========== | ===========
COMPANY Z—BALANCE SHEET
===============================+====================================
Cash $ 40,000.00 | Company X
Accounts Receivable 180,000.00 | (open account) $250,000.00
Notes Receivable 230,000.00 | Notes Payable Y 50,000.00
Merchandise 150,000.00 | Company Y (open account) 50,000.00
Plant 350,000.00 |
Capital Stock 450,000.00 |
Surplus. 150,000.00 |
----------- | -----------
$950,000.00 | $950,000.00
=========== | ===========
_Solution_
WORKING SHEET
=====================+===============+=============+=============+
| Co. X | Co. Y | C o. Z |
_Assets_ +---------------+-------------+-------------+
| | | |
Cash | $ 50,000.00 | $ 25,000.00 | $ 40,000.00 |
Notes Receivable | | 100,000.00 | 230,000.00 |
Notes Receivable Y | 100,000.00 | | |
Notes Receivable Z | | 50,000.00 | |
Accounts Receivable | | 125,000.00 | 180,000.00 |
Advances to Z | 250,000.00 | | |
Co. Z (open account) | | 50,000.00 | |
Stock Y | 300,000.00 | | |
Stock Z | 550,000.00 | | 550,000.00 |
Merchandise | | 75,000.00 | 150,000.00 |
Patents | 500,000.00 | | |
Other Property | 100,000.00 | | |
Plant | | 300,000.00 | 350,000.00 |
Good-Will | | | |
+---------------+-------------+-------------+
| $1,850,000.00 | $725,000.00 | $950,000.00 |
+===============+=============+=============+
_Liabilities and_ | | | |
_Capital_ | | | |
Notes Payable | $ 100,000.00 | $ | $ |
Notes Payable X | | 100,000.00 | |
Notes Payable Y | | | 50,000.00 |
Accounts Payable | | 25,000.00 | |
Co. X (open account) | | | 250,000.00 |
Co. Y (open account) | | | 50,000.00 |
Bonds | 500,000.00 | 75,000.00 | |
Capital Stock | 1,000,000.00 | 500,000.00 | 450,000.00 |
| | | |
Surplus | 250,000.00 | 25,000,00 | 150,000.00 |
+---------------+-------------+-------------+
| $1,850,000.00 | $725,000.00 | $950,000.00 |
+===============+=============+=============+
=====================+==============+=================+=============
| Combined | Elimination |Consolidated
_Assets_ +--------------+-----------------+-------------
| | |
Cash |$ 115,000.00 |$ |$ 115,000.00
Notes Receivable | 330,000.00 | | 330,000.00
Notes Receivable Y | 100,000.00 |(a) 100,000.00|
Notes Receivable Z | 50,000.00 |(b) 50,000.00|
Accounts Receivable | 305,000.00 | | 305,000.00
Advances to Z | 250,000.00 |(c) 250,000.00|
Co. Z (open account) | 50,000.00 |(d) 50,000.00|
Stock Y | 300,000.00 |(e) 300,000.00|
Stock Z | |(f) 550,000.00|
Merchandise | 225,000.00 |(g)[73] 15,000.00| 210,000.00
Patents | 500,000.00 | | 500,000.00
Other Property | 100,000.00 | | 100,000.00
Plant | 650,000.00 | | 650,000.00
Good-Will | |(f)[74]100,000.00| 100,000.00
+--------------+-----------------+-------------
|$3,525,000.00 | $1,215,000.00|$2,310,000.00
+==============+=================+=============
_Liabilities and_ | | |
_Capital_ | | |
Notes Payable |$ 100,000.00 |$ |$ 100,000.00
Notes Payable X | 100,000.00 |(a) 100,000.00|
Notes Payable Y | 50,000.00 |(b) 50,000.00|
Accounts Payable | 25,000.00 | | 25,000.00
Co. X (open account) | 250,000.00 |(c) 250,000.00|
Co. Y (open account) | 50,000.00 |(d) 50,000.00|
Bonds | 575,000.00 | | 575,000.00
Capital Stock | 1,950,000.00 |(e) 300,000.00| 1,000,000.00
| |(f) 450,000.00| 200,000.00
Surplus | 425,000.00 |(g) 15,000.00| 410,000.00
+--------------+-----------------+-------------
|$3,525,000.00 | $1,215,000.00|$2,310,000.00
+==============+=================+=============
[73] Intercompany profit between Z and Y.
[74] Subtraction item, usually shown in red.
COMPANY X AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================+===================================
_Assets_ | _Liabilities and Capital_
|
Cash $ 115,000.00 | Notes Payable $ 100,000.00
Notes Receivable 330,000.00 | Accounts Payable 25,000.00
Accounts Receivable 305,000.00 | Bonds 575,000.00
Merchandise 210,000.00 | -------------
Other Property 100,000.00 | Total Liabilities. $700,000.00
Plant 650,000.00 | Capital Stock of Co. X 1,000,000.00
Patents 500,000.00 | Capital Stock of
Good-Will 100,000.00 | Subsidiaries not
| owned by Co. X 200,000.00
| Surplus of Affiliated
| Companies. 400,000.00
| Surplus of Minority
| Interests. 10,000.00
-------------- | -------------
$2,310,000.00 | $2,310,000.00
============== | =============
_Comments on Problem._ There is little in the solution to which
attention need be directed. In the handling of the capital stock items,
it will be noted that only $300,000 of Company Y’s stock is eliminated,
the remainder of $200,000 being shown on the consolidated balance sheet
as a minority interest. In eliminating Company Z’s capital stock,
it becomes necessary to bring a good-will item of $100,000 onto the
consolidated balance sheet. This is shown on the working sheet by means
of the three “f” items in the “Elimination” column. On the consolidated
balance sheet it will be noted that the minority interest in Surplus
(40% of $25,000, Y’s surplus) is not shown affected by the reduction
of Y’s inventory to a cost basis. The solution assumes that all the
surplus items on the balance sheets of the various companies represent
operating surplus accumulated since the purchase of the subsidiaries by
the holding company.
This problem calls attention to some of the questions encountered
in handling the consolidated balance sheet, although in practice much
more complicated situations arise. All that can be hoped for here is
to impress upon the student some fundamental principles to be observed
and to point out some of the methods used in order best to express the
relations of the various interests in the business. The idea of the
consolidated balance sheet is simple in concept but usually difficult
of full realization.