Homework Answers
While preparing the consolidated statement, the Investments in the books of Parent Ltd. will be replaced by (or expanded to reflect) the net assets of S Inc and any goodwill or capital reserve on the acquisition of investments vis-a-vis the value of net assets of S Inc, will also be reflected in the books. Simply stated, the consolidation process can be understood through the following journal entry in the books of Parent Ltd.:
Assets of S Inc debit 144000
Goodwill A/c debit 30000 (Balancing Figure)
To Liabilities of S Inc (credit) 24000
To Investments in S Inc (credit) 150000
As a result,
i. Assets of S Inc (i.e. $144000) will be added to the Assets of Parent Ltd.
ii. Liabilities of S Inc (i.e. $24000) will be added to the liabilities of Parent Ltd
iii. Goodwill to be reflected in the consolidated financial statements, in the Assets of Parent Ltd.
iv. Investments will not be shown under the assets of Parent Ltd in the consolidated financial statement.
Therefore, the consolidated assets of Parent Ltd will stand at $474000, as calculated hereunder:
Assets of Parent Ltd (standalone) $450000
Add: Assets of S Inc $144000
Less: Investments in S Inc by Parent Ltd $150000
Add: Goodwill arising as above $30000
Total $474000
Further, basis the above, there will not be any change in the shareholders' equity of Parent Ltd. Hence, the consolidated shareholders' equity will remain at $300000.
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