Question: To illustrate the consolidation process, assume that Tiny has earned revenues of $800,000 and incurred
expenses of $500,000 during the year to date. In addition, the company reports a single asset, land costing
$400,000 but with a $720,000 fair value. The only liability is a $300,000 note payable. Thus, the company’s net
book value is $100,000 ($400,000 land less $300,000 note payable). Tiny also owns the rights to a well-known
trademark that has no book value because it was developed many years ago at little or no cost. However, it is now
estimated to be worth $210,000.
The assets and liabilities held by Tiny have a net fair value of $630,000 ($720,000 land plus $210,000 trademark
less $300,000 note payable). Because the company has been extremely popular and developed a large customer
base, Giant agrees to pay $900,000 to acquire all the outstanding stock. If consolidated financial statements are
created at the time of a corporate acquisition, what figures are reported by the business combination?
Answer: In consolidating Giant and its subsidiary Tiny at the date of this acquisition, neither the subsidiary
revenues of $800,000 nor its expenses of $500,000 are included. Their financial impact occurred prior to the
takeover by Giant; those profits benefitted the previous owners. Therefore, only the revenues and expenses
reported by Giant make up consolidated income statement totals determined on the day the parent acquires the
At the same time, consolidated balance sheet totals will not show any “investment in Tiny Company” as in the
other methods demonstrated above. Instead, Tiny’s land is added to Giant’s own totals at its $720,000 fair value.
The trademark is consolidated at $210,000 to reflect the amounts paid by Giant to acquire ownership of the
subsidiary. The note payable is added to the consolidated figures at $300,000, which was its fair value as well as
its book value. Subsidiary assets and liabilities are included in consolidated totals as if purchased by the parent.