Question

How are consolidated balances calculated for a combined entity immediately after consolidation? In your opinion, what are some of the account balances that are challenging to calculate? Explain.

Answer 1

Hey there !

After Consolidation, Firstly cost of invstment is calculated. The value at which the susidiary is obtained less the fair value of assets obtained, give us the Cost of Investment.

After calculating cost of investment, we will find out Goodwill or Capital reserve over consolidation.

Then, we allocate the pre acquisition and post acquisition profits and account for the same.

After which we consolidate various assets and liabilities line by line item wise after making appropriate adjustments in those accounts.

Account balances challenging to calculate:

1. Calculation of Goodwill and Capital Reserves.

2. Inter company adjustments.

Here, the parent company will report the “investment in subsidiary” as an asset, with the subsidiary reporting the equivalent equity owned by the parent as equity on its own accounts. At the consolidated level, an elimination adjustment must be added so that the consolidated statement is not overstated by the amount of equity held by the parent. The elimination adjustment is made with the intent of offsetting the intercompany transaction, such that the values are not double counted at the consolidated level.