Consolidating partnerships with corporations
Upon consolidation, the original organizations cease to exist and are supplanted by a new entity.
A parent company can acquire another company by purchasing its net assets or by purchasing a majority share of its common stock.
Regular dividends are recorded as dividend income whenever they are declared.
Impairment loss : An impairment loss occurs when there is a decline in the value of the investment other than temporary.
The company does not need any entries to adjust this account balance unless the investment is considered impaired or there are liquidating dividends, both of which reduce the investment account.
Liquidating dividends : Liquidating dividends occur when there is an excess of dividends declared over earnings of the acquired company since the date of acquisition.
If the acquired company is liquidated then the company needs an additional entry to distribute the remaining assets to its shareholders.
Treatment to the purchasing company: When the purchasing company acquires the subsidiary through the purchase of its common stock, it records in its books the investment in the acquired company and the disbursement of the payment for the stock acquired.
This balance increases with income and decreases for dividends from the subsidiary that accrue to the purchaser.In business, consolidation or amalgamation is the merger and acquisition of many smaller companies into a few much larger ones.In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group company as consolidated financial statements.Treatment of Purchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.Purchase differentials have two components: Purchase differentials need to be amortized over their useful life; however, new accounting guidance states that goodwill is not amortized or reduced until it is permanently impaired, or the underlying asset is sold.In this type of relationship the controlling company is the parent and the controlled company is the subsidiary.The parent company needs to issue consolidated financial statements at the end of the year to reflect this relationship.Regardless of the method of acquisition; direct costs, costs of issuing securities and indirect costs are treated as follows: Treatment to the acquiring company: When purchasing the net assets the acquiring company records in its books the receipt of the net assets and the disbursement of cash, the creation of a liability or the issuance of stock as a form of payment for the transfer.Treatment to the acquired company: The acquired company records in its books the elimination of its net assets and the receipt of cash, receivables or investment in the acquiring company (if what was received from the transfer included common stock from the purchasing company).The result is one set of financial statements that reflect the financial results of the consolidated entity. horizontal integration:is the combination of firms in the same business lines and markets. vertical integration: is the combination of firms with operations in different but successive stages of production or distribution or both. Conglomeration: is the combination of firms with unrelated and diverse products or services functions, or both.A standard issued by FASB on Wednesday is designed to improve targeted areas of consolidation guidance for certain legal entities and make financial statements more relevant for users.