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How to Make a Consolidated Balance Sheet
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in this video we're going to talk about
how to create a Consolidated balance
sheet when one company acquires 100% of
another company so basically what we're
going to do is we're going to create one
balance sheet for the entire combined
entity right so if we have two companies
if we have a acquires B then we're going
to have this one entity AB we're going
to have this Consolidated entity and
we're going to prepare a balance sheet
for that Consolidated entity however
here's the catch we do not simply just
add together all the balance sheet item
totals from A's previous balance sheet
and from B's previous balance sheet we
don't just add them together it's not
that simple because that would result in
double counting and and I'm going to
explain why so basically I just want to
give you four-step process to kind of
outline and then I'm going to show you
with an actual example we call these
adjusting and eliminating entries that
we have to make so first when the parent
let's say it's company a they're the one
that is the purchaser they acquire B
okay so if they're the purchaser when
they buy B when they buy 100% of B
they're going to make they're going to
debit an investment account in that
subsidiary okay so when we go to make
the Consolidated balance sheet we have
to eliminate we have to eliminate the
purchasers investment in the Target
company right because if we're going to
treat them as one entire entity then it
doesn't make sense that one would be
invested in the other right because it's
just one entity so we're going to do
that and we're also going to eliminate
the stockholders Equity accounts like
common stock and retained earnings of
the target company of that subsidiary in
this case b we're going to get rid of
their Equity accounts we're going to
leave the the purchasers Equity accounts
but we're going to get rid of the ones
for the Target and then for the Target
company or subsidiary we're going to
take all their assets and we're going to
step them up to the fair value okay so
if they have Machinery that was on the
books at a book value of $100 but
actually the fair value of 75 we're
going to recognize that additional
$75 to account for the fact that it's at
its fair value okay now that's just a
fair value of the Target or subsidiaries
assets and then if we have let's say any
Goodwill and and if you haven't watched
the video on Goodwill it's basically
when we think of the the acquisition
price of the of the target if that
exceeds the fair value of the net
identifiable assets which I will explain
uh briefly if you didn't quite get that
then we will have this plug entry which
is called Goodwill which which is an
asset I know it's a lot to take in so
I'm going to show you this process as we
work through an actual example and then
it'll be a little bit easier for you to
understand so let's say in our example
that we have a company let's just call
it purchaser right so purchaser is going
to pay
$3,400 th000 to acquire 100% of Target
Okay so we've got purchaser buying Target
Target
now here are the balance sheets here are
the balance sheets for these two
companies prior to the acquisition so
these balance sheets when we look at
purchaser their current assets here are 3
3
3,750 th000 they have not yet paid the
cash right they have not yet paid the
cash and by the way they don't have to
pay cash to acquire the target they
could give stock but in this case we're
going to say that it's 3.4 million cash
okay so they this 3, 750,000 is going to
have to come down later because we have
to acknowledge the fact that we paid out
this cash okay so this is prior to the
acquisition these are the balance sheets
for the purchaser and the target okay so
you see we've got current assets we've
got fixed assets and those are all the
assets and then we've got liabilities
common stock paid in capital and
retained earnings okay so pretty simple
balance sheets now you need to know some
extra information in order to put all
this together and that is that the fair
value of targets net fixed assets that's
this account right here so the fair
value of the the net fixed assets is not
so we see it it's on the books at
1,625 but the fair value is actually
2,625 right 2, 625,000 which means
there's going to be 1 million of step up
so we're going to have some step up we
have to step up the the targets fixed
assets now that the target's being
acquired when we put together a
Consolidated balance sheet we have to
say hey these fixed assets are really worth
worth
2,625 not
1,625 then we also know need to know to
calculate the Goodwill if there is any
Goodwill we're going to see uh we need
to know the fair value of the target's
net identifiable assets okay net
identifiable assets well we take a look
and we say okay here's an identifiable
asset 500,000 here's another one 1
million6 well actually we've got to use
the fair value so let me actually not
point to that but we know that the the
current asset the fair value is 500,000
because I I haven't told you anything
otherwise right so 500,000 for the
current assets and then the fixed assets
we will be careful to use that fair value
2,625 and then we're going to subtract
out the liabilities Okay so we've got
some liabilities there of
$125,000 125,000 and that's the
liabilities so the net
assets when we think about the fair
value of the net assets we've got here $3
$3
million $3 million okay so that's the fair
fair
value of the target's net identifiable
assets why do we care about that well we
paid if we're purchaser we paid 3.4
million for something that we just went
and counted all the we just went and
said hey what's the fair value of all
these assets minus the liabilities it's
only3 million right so we actually paid
$400,000 more so we're going to call
that Goodwill we're going to call that
Goodwill just represents that hey we
think that these assets uh when they're
working together as part of this company
they're they're they have more value
than if we were to just part them out
and and so forth right so we'll call that
that
$400,000 of Goodwill now we can go and
we can start making our adjusting
entries first off I want to show you the
the very first entry so when we actually
when the purchaser pays that 3.4 million
they would have debited investment in
Target and then they would credited cash
for 3.4 million okay so that's the very
first entry but then when we go to make
the Consolidated balance sheet we got to
get rid of that investment in Target
account because we're going to treat
them now as one entity so it's kind of
weird like we do this but then we have
to undo it to put together a
Consolidated balance sheet so first and
and you don't have to do this in two
steps but it's it's maybe easier first
remember we said we have to get rid of
the equity accounts for the Target so
that would be the common stock the paid
in capital and then also this retained
earnings okay so there's they don't have
any paid in capital so it's 1.5 million
uh for the common stock we're going to
debit it because it increases with a
credit so we debit it to get rid of it
we debit it for 1.5 million and then we
debit retained earnings for 500,000 and
then we credit investment in Target okay
so now we' reduced the investment Target
but look investment Target was 3.4
million right so it was 3.4 million but
we've only credited it now for 2 million
okay we've only credited for 2 million
so we still have 1.4 million uh that we
have to account for because we have to
zero that out remember we have to get
rid of that investment account that was
one of our steps so what do we do well
we're going to credit it we're going to
credit that investment and Target again
for 1.4 million so we're going to get
rid of that and then now we no longer
have that investment and Target account
it's done with what is going to be the
corresponding debits well we're going to
have the step up for the fixed assets
right so we've got we've got our step up
to fair value and that's just that two
2, 625,000 minus the 1, 625,000 so we
take the fair value minus the book value
and that's 1 million and then the plug
here if so if you didn't know how to
calculate Goodwill before with this now
you can figure it out is that hey we've
got an empty entry there we need to make
is balance it would be
$400,000 is Goodwill now that we've made
these adjusting and eliminating entries
we can go ahead and we can go from these
pre-acquisition balance sheets now we
can go and we can actually put together
uh a a post consolidation a Consolidated
balance sheet that is for the single
entity of the purchaser and the target
together okay now here's what we're
going to do so we're let's take current
assets I'm just going to go line by line
current assets we have 500,000 for the
Target and we still have 500,000 for
Target now purchaser is 350,000 whereas
before it was 3,
750,000 why is that it went down 3.4
million because we had to pay cash to
the Target shareholders to make them go
away so we could own this company right
so purchaser has a lot less current
assets because it paid out cash for the
acquisition if we add these two together
we get $850,000 of current assets on uh
the consolidated balance sheet right
here's our Consolidated balance sheet
everything here these are adjusting
entries and you don't have to do the
worksheet this way but it's just how I
do it so we've got debits we've got
credits okay and then we have the Target
and then the purchaser separately okay
but the Consolidated balance sheet this
is this is the key this is what we're
building now fixed assets we had 1,
625,000 and 5 million that stays the
same but we make a debit remember we
made that entry we made that entry right
here we made that entry okay so we did
that for the step up and so now we have
7,625 th000 on a Consolidated balance
sheet that's these three things added
together the investment in Target it
went on at 3.4 million then we credit it
for 3.4 million to get it to zero right
that was these entries that we did here
okay and then the Goodwill we debited
for $400,000 we didn't have any Goodwill
before so now we're at $400,000 if you
add all the assets up together so this
is this is our total assets 8 million $875,000
$875,000
okay then liability stays the same we
had 125 and 250 that just taken that
from before from our pre-acquisition
balance sheet so we're at 375 and then
common stock remember we got rid of the
targets common stock so now all we have
is the purchasers $7 million right so
we've got this debit to common stock
that we made before right remember this
entry and we also got rid of their
retained earnings as well we got rid of
that in the same entry so that's why
I've got those debit there okay so we
have 7 million common stock it's just
the purchasers we have the paid in
capital from the purchaser and then we
have the 1 million of retained earnings
for the purchaser now if we add up all
the liabilities and Equity accounts we get
get
8,875 th000 which you can see equals our
total assets so we see that our assets
equal our liabilities plus our
stockholders equity and this
Consolidated balance sheet is the
balance sheet that we would have to
prepare at year end for the single
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