Describing the Purchase Method Use Case

Objectives

After completing this lesson, you will be able to:

  • Explain the purchase method scenario
  • Describe the purpose of first consolidation
  • Layout the purpose of subsequent consolidation
  • Identify the accounting entries for the purchase method

Purchase Method Scenario

In December 2024, the BE00 (Belgium) consolidation unit purchased a 75% stake in the FR00 (France) consolidation unit for 150,000 Euros. Since the ownership exceeds 75%, the French subsidiary is consolidated using the purchase method.

Note
In this scenario, BE00 is the investor and FR00 is the investee.

You must include the individual financial statements of an investee unit in the consolidated financial statements when using the purchase method for consolidation.

First Consolidation

First Consolidation:

During consolidation of investments, you eliminate all investment relationships between companies in your corporate group. You achieve this by offsetting the value of the parent companies' investments against the group share of the subsidiary's equity. In addition, you calculate goodwill. Goodwill represents how much the investment exceeds the net equity of the subsidiary.

The elimination process depends on the defined consolidation methods, which you assign to each applicable consolidation unit within the group structure. In this case, you assign a consolidation method of 00-Parent to the BE00 consolidation unit and 10-Purchase to the FR00 consolidation unit.

An investee can belong to multiple consolidation groups, each with a different consolidation method. For instance, Company A could be a purchase subsidiary in one consolidation group and an equity subsidiary in another.

Subsequent Consolidation

There are two objectives of subsequent consolidation:

  1. Record the non-controlling interest (25% in this example) for net income earned by the subsidiary after the acquisition.
  2. Modify the net income of the consolidation group to include only its proportion of the subsidiary's net income.

Identifying the Accounting Entries for the Purchase Method

Introduction:

As a new intermediate consolidation consultant at ABC Corporation, Robert must learn how to identify the accounting entries for the purchase method. In this video, we will cover the necessary accounting entries for both the first and subsequent consolidations, focusing on the values before and after the investment/equity elimination task.

Select the play button below to learn how to identify the accounting entries for the purchase method.

Robert's Summary:

The video provides examples of the accounting entries before and after the manual booking of goodwill. The video also explains how goodwill and non-controlling interest is calculated. It further discusses the accounting entries for first and subsequent consolidation. The goal is to automate these entries for the purchase method.

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