Consolidation Journal Entry at the Date of Acquisition
When a parent company acquires a subsidiary, consolidation journal entries are necessary to eliminate intercompany transactions and reflect the combined financial position. Below are the journal entries for the consolidation at the date of acquisition.
Scenario: Parent Company Acquires 100% of Subsidiary
Assume Parent Company (ParentCo) acquires 100% of Subsidiary Company (SubsidiaryCo) for ₹1,000,000. The book values of SubsidiaryCo's assets and liabilities are as follows:
- Assets: ₹800,000
- Liabilities: ₹200,000
- Equity: ₹600,000
Journal Entries
1. Eliminate the Investment in Subsidiary
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Equity of SubsidiaryCo | 600,000 | |
| Liabilities of SubsidiaryCo | 200,000 | |
| To Assets of SubsidiaryCo | 800,000 | |
| To Investment in SubsidiaryCo | 1,000,000 | |
| (Being elimination of the investment in SubsidiaryCo and the recognition of the subsidiary's net assets) |
2. Recognize Goodwill (if applicable)
If the purchase price exceeds the fair value of net assets acquired, goodwill is recognized. In this case, assume fair value of assets and liabilities equals book value.
Purchase Price = ₹1,000,000
Fair Value of Net Assets = ₹800,000 (Assets) - ₹200,000 (Liabilities) = ₹600,000
Goodwill = Purchase Price - Fair Value of Net Assets
Goodwill = ₹1,000,000 - ₹600,000 = ₹400,000
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Goodwill A/c | 400,000 | |
| To Investment in SubsidiaryCo | 400,000 | |
| (Being recognition of goodwill on acquisition) |
3. Adjustments for Fair Value of Assets and Liabilities
If there are fair value adjustments for assets and liabilities, they should be recorded. Assume equipment has a fair value increase of ₹100,000.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Equipment A/c | 100,000 | |
| To Revaluation Reserve A/c | 100,000 | |
| (Being recognition of fair value adjustment for equipment) |
Summary of Entries
Elimination of Investment:
- Debit Equity of SubsidiaryCo
- Debit Liabilities of SubsidiaryCo
- Credit Assets of SubsidiaryCo
- Credit Investment in SubsidiaryCo
Recognition of Goodwill:
- Debit Goodwill A/c
- Credit Investment in SubsidiaryCo
Fair Value Adjustments (if applicable):
- Debit Equipment A/c (or other assets)
- Credit Revaluation Reserve A/c
Example of Full Entry:
Elimination of Investment:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Equity of SubsidiaryCo | 600,000 | |
| Liabilities of SubsidiaryCo | 200,000 | |
| To Assets of SubsidiaryCo | 800,000 | |
| To Investment in SubsidiaryCo | 1,000,000 | |
| (Being elimination of the investment in SubsidiaryCo and the recognition of the subsidiary's net assets) |
Recognition of Goodwill:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Goodwill A/c | 400,000 | |
| To Investment in SubsidiaryCo | 400,000 | |
| (Being recognition of goodwill on acquisition) |
Fair Value Adjustments (if applicable):
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Equipment A/c | 100,000 | |
| To Revaluation Reserve A/c | 100,000 | |
| (Being recognition of fair value adjustment for equipment) |
