0:01 in this video we're going to talk about
0:04 how to create a Consolidated balance
0:08 sheet when one company acquires 100% of
0:10 another company so basically what we're
0:12 going to do is we're going to create one
0:15 balance sheet for the entire combined
0:17 entity right so if we have two companies
0:19 if we have a acquires B then we're going
0:22 to have this one entity AB we're going
0:24 to have this Consolidated entity and
0:27 we're going to prepare a balance sheet
0:29 for that Consolidated entity however
0:32 here's the catch we do not simply just
0:35 add together all the balance sheet item
0:37 totals from A's previous balance sheet
0:39 and from B's previous balance sheet we
0:41 don't just add them together it's not
0:44 that simple because that would result in
0:45 double counting and and I'm going to
0:47 explain why so basically I just want to
0:49 give you four-step process to kind of
0:50 outline and then I'm going to show you
0:53 with an actual example we call these
0:55 adjusting and eliminating entries that
0:58 we have to make so first when the parent
1:00 let's say it's company a they're the one
1:02 that is the purchaser they acquire B
1:04 okay so if they're the purchaser when
1:07 they buy B when they buy 100% of B
1:08 they're going to make they're going to
1:10 debit an investment account in that
1:13 subsidiary okay so when we go to make
1:15 the Consolidated balance sheet we have
1:17 to eliminate we have to eliminate the
1:19 purchasers investment in the Target
1:21 company right because if we're going to
1:24 treat them as one entire entity then it
1:26 doesn't make sense that one would be
1:27 invested in the other right because it's
1:29 just one entity so we're going to do
1:30 that and we're also going to eliminate
1:32 the stockholders Equity accounts like
1:35 common stock and retained earnings of
1:37 the target company of that subsidiary in
1:39 this case b we're going to get rid of
1:40 their Equity accounts we're going to
1:44 leave the the purchasers Equity accounts
1:45 but we're going to get rid of the ones
1:48 for the Target and then for the Target
1:50 company or subsidiary we're going to
1:52 take all their assets and we're going to
1:55 step them up to the fair value okay so
1:57 if they have Machinery that was on the
1:59 books at a book value of $100 but
2:01 actually the fair value of 75 we're
2:03 going to recognize that additional
2:06 $75 to account for the fact that it's at
2:08 its fair value okay now that's just a
2:11 fair value of the Target or subsidiaries
2:14 assets and then if we have let's say any
2:16 Goodwill and and if you haven't watched
2:17 the video on Goodwill it's basically
2:20 when we think of the the acquisition
2:22 price of the of the target if that
2:24 exceeds the fair value of the net
2:27 identifiable assets which I will explain
2:29 uh briefly if you didn't quite get that
2:31 then we will have this plug entry which
2:33 is called Goodwill which which is an
2:36 asset I know it's a lot to take in so
2:38 I'm going to show you this process as we
2:40 work through an actual example and then
2:42 it'll be a little bit easier for you to
2:44 understand so let's say in our example
2:46 that we have a company let's just call
2:49 it purchaser right so purchaser is going
2:51 to pay
2:56 $3,400 th000 to acquire 100% of Target
2:59 Okay so we've got purchaser buying Target
3:00 Target
3:03 now here are the balance sheets here are
3:04 the balance sheets for these two
3:08 companies prior to the acquisition so
3:09 these balance sheets when we look at
3:11 purchaser their current assets here are 3
3:12 3
3:15 3,750 th000 they have not yet paid the
3:17 cash right they have not yet paid the
3:19 cash and by the way they don't have to
3:20 pay cash to acquire the target they
3:22 could give stock but in this case we're
3:25 going to say that it's 3.4 million cash
3:28 okay so they this 3, 750,000 is going to
3:30 have to come down later because we have
3:32 to acknowledge the fact that we paid out
3:34 this cash okay so this is prior to the
3:36 acquisition these are the balance sheets
3:39 for the purchaser and the target okay so
3:41 you see we've got current assets we've
3:43 got fixed assets and those are all the
3:46 assets and then we've got liabilities
3:48 common stock paid in capital and
3:51 retained earnings okay so pretty simple
3:53 balance sheets now you need to know some
3:55 extra information in order to put all
3:57 this together and that is that the fair
4:02 value of targets net fixed assets that's
4:04 this account right here so the fair
4:07 value of the the net fixed assets is not
4:10 so we see it it's on the books at
4:13 1,625 but the fair value is actually
4:17 2,625 right 2, 625,000 which means
4:20 there's going to be 1 million of step up
4:22 so we're going to have some step up we
4:24 have to step up the the targets fixed
4:26 assets now that the target's being
4:27 acquired when we put together a
4:29 Consolidated balance sheet we have to
4:31 say hey these fixed assets are really worth
4:32 worth
4:34 2,625 not
4:37 1,625 then we also know need to know to
4:39 calculate the Goodwill if there is any
4:41 Goodwill we're going to see uh we need
4:43 to know the fair value of the target's
4:46 net identifiable assets okay net
4:48 identifiable assets well we take a look
4:50 and we say okay here's an identifiable
4:53 asset 500,000 here's another one 1
4:56 million6 well actually we've got to use
4:58 the fair value so let me actually not
5:01 point to that but we know that the the
5:03 current asset the fair value is 500,000
5:06 because I I haven't told you anything
5:08 otherwise right so 500,000 for the
5:10 current assets and then the fixed assets
5:12 we will be careful to use that fair value
5:18 2,625 and then we're going to subtract
5:20 out the liabilities Okay so we've got
5:24 some liabilities there of
5:27 $125,000 125,000 and that's the
5:30 liabilities so the net
5:32 assets when we think about the fair
5:34 value of the net assets we've got here $3
5:35 $3
5:39 million $3 million okay so that's the fair
5:40 fair
5:43 value of the target's net identifiable
5:45 assets why do we care about that well we
5:49 paid if we're purchaser we paid 3.4
5:51 million for something that we just went
5:53 and counted all the we just went and
5:54 said hey what's the fair value of all
5:56 these assets minus the liabilities it's
5:58 only3 million right so we actually paid
6:01 $400,000 more so we're going to call
6:03 that Goodwill we're going to call that
6:05 Goodwill just represents that hey we
6:07 think that these assets uh when they're
6:10 working together as part of this company
6:11 they're they're they have more value
6:13 than if we were to just part them out
6:14 and and so forth right so we'll call that
6:15 that
6:19 $400,000 of Goodwill now we can go and
6:21 we can start making our adjusting
6:24 entries first off I want to show you the
6:26 the very first entry so when we actually
6:29 when the purchaser pays that 3.4 million
6:31 they would have debited investment in
6:34 Target and then they would credited cash
6:36 for 3.4 million okay so that's the very
6:38 first entry but then when we go to make
6:40 the Consolidated balance sheet we got to
6:42 get rid of that investment in Target
6:44 account because we're going to treat
6:46 them now as one entity so it's kind of
6:48 weird like we do this but then we have
6:49 to undo it to put together a
6:52 Consolidated balance sheet so first and
6:53 and you don't have to do this in two
6:55 steps but it's it's maybe easier first
6:57 remember we said we have to get rid of
6:59 the equity accounts for the Target so
7:02 that would be the common stock the paid
7:05 in capital and then also this retained
7:07 earnings okay so there's they don't have
7:10 any paid in capital so it's 1.5 million
7:12 uh for the common stock we're going to
7:14 debit it because it increases with a
7:16 credit so we debit it to get rid of it
7:18 we debit it for 1.5 million and then we
7:20 debit retained earnings for 500,000 and
7:23 then we credit investment in Target okay
7:25 so now we' reduced the investment Target
7:28 but look investment Target was 3.4
7:31 million right so it was 3.4 million but
7:35 we've only credited it now for 2 million
7:37 okay we've only credited for 2 million
7:40 so we still have 1.4 million uh that we
7:42 have to account for because we have to
7:44 zero that out remember we have to get
7:45 rid of that investment account that was
7:48 one of our steps so what do we do well
7:50 we're going to credit it we're going to
7:52 credit that investment and Target again
7:54 for 1.4 million so we're going to get
7:57 rid of that and then now we no longer
8:00 have that investment and Target account
8:02 it's done with what is going to be the
8:05 corresponding debits well we're going to
8:07 have the step up for the fixed assets
8:10 right so we've got we've got our step up
8:13 to fair value and that's just that two
8:18 2, 625,000 minus the 1, 625,000 so we
8:19 take the fair value minus the book value
8:22 and that's 1 million and then the plug
8:24 here if so if you didn't know how to
8:26 calculate Goodwill before with this now
8:28 you can figure it out is that hey we've
8:29 got an empty entry there we need to make
8:31 is balance it would be
8:35 $400,000 is Goodwill now that we've made
8:37 these adjusting and eliminating entries
8:40 we can go ahead and we can go from these
8:42 pre-acquisition balance sheets now we
8:45 can go and we can actually put together
8:48 uh a a post consolidation a Consolidated
8:50 balance sheet that is for the single
8:52 entity of the purchaser and the target
8:55 together okay now here's what we're
8:57 going to do so we're let's take current
8:59 assets I'm just going to go line by line
9:01 current assets we have 500,000 for the
9:04 Target and we still have 500,000 for
9:07 Target now purchaser is 350,000 whereas
9:09 before it was 3,
9:12 750,000 why is that it went down 3.4
9:14 million because we had to pay cash to
9:16 the Target shareholders to make them go
9:18 away so we could own this company right
9:20 so purchaser has a lot less current
9:21 assets because it paid out cash for the
9:24 acquisition if we add these two together
9:28 we get $850,000 of current assets on uh
9:30 the consolidated balance sheet right
9:31 here's our Consolidated balance sheet
9:33 everything here these are adjusting
9:34 entries and you don't have to do the
9:36 worksheet this way but it's just how I
9:39 do it so we've got debits we've got
9:41 credits okay and then we have the Target
9:43 and then the purchaser separately okay
9:45 but the Consolidated balance sheet this
9:46 is this is the key this is what we're
9:50 building now fixed assets we had 1,
9:53 625,000 and 5 million that stays the
9:55 same but we make a debit remember we
9:57 made that entry we made that entry right
9:59 here we made that entry okay so we did
10:02 that for the step up and so now we have
10:05 7,625 th000 on a Consolidated balance
10:07 sheet that's these three things added
10:09 together the investment in Target it
10:11 went on at 3.4 million then we credit it
10:14 for 3.4 million to get it to zero right
10:16 that was these entries that we did here
10:18 okay and then the Goodwill we debited
10:21 for $400,000 we didn't have any Goodwill
10:23 before so now we're at $400,000 if you
10:26 add all the assets up together so this
10:29 is this is our total assets 8 million $875,000
10:31 $875,000
10:34 okay then liability stays the same we
10:37 had 125 and 250 that just taken that
10:39 from before from our pre-acquisition
10:42 balance sheet so we're at 375 and then
10:44 common stock remember we got rid of the
10:46 targets common stock so now all we have
10:50 is the purchasers $7 million right so
10:51 we've got this debit to common stock
10:53 that we made before right remember this
10:54 entry and we also got rid of their
10:56 retained earnings as well we got rid of
10:58 that in the same entry so that's why
11:00 I've got those debit there okay so we
11:02 have 7 million common stock it's just
11:03 the purchasers we have the paid in
11:05 capital from the purchaser and then we
11:07 have the 1 million of retained earnings
11:09 for the purchaser now if we add up all
11:11 the liabilities and Equity accounts we get
11:12 get
11:16 8,875 th000 which you can see equals our
11:19 total assets so we see that our assets
11:21 equal our liabilities plus our
11:23 stockholders equity and this
11:25 Consolidated balance sheet is the
11:26 balance sheet that we would have to
11:29 prepare at year end for the single
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