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It may therefore be fairly said that the principle of consolidation has attained general acceptance. It may be well to mention, however, that a consolidated return for purposes of the revenue act may be a very different statement from the consolidated accounts prepared by the company for submission to its stockholders. The chief reasons for this difference are that for the revenue act foreign corporations are not brought into the consolidation and under the 1918 act companies organized after August 1, 1914, not successor to a then existing business, 50% of whose gross income was derived from government contracts made between April 6, 1917, and November 11, 1918, are not included. It might also happen that companies the stock of which was owned by another corporation to the extent of between 50 and 95%, might be consolidated in the statement submitted to stockholders but might be excluded in the statement prepared under the revenue act of 1918.

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The two principal points for consideration in regard to consolidated accounts are:

1—What companies should be consolidated.
2–How the consolidated account should be prepared.

WHAT COMPANIES SHOULD BE CONSOLIDATED The regulations of the revenue act of 1918 provide that the owning or controlling of 95% or more of the outstanding voting capital stock shall be deemed to constitute an affiliation, but that consolidated returns may be required even though the stock ownership is less than 95%; and the regulations call for disclosure of affiliations where the stock ownership is in excess of 50%. Under the revenue act, therefore, consolidation is obligatory when 95% or more of the voting stock is owned and may be called for when the stock ownership is in excess of 50%.

This leaves a wide range of possibilities, but it is not believed that any definite percentage can be laid down and the question of whether the accounts of a company should be consolidated or not for the purpose of published statements is largely one of judgment, bearing in mind always that the object of the consolidated balance-sheet is to show the true financial position of the company and its subsidiary companies. In doubtful or border-line cases the final test must be whether or not the true financial position is best shown by consolidation. HOW THE CONSOLIDATED ACCOUNTS SHOULD BE PREPARED

Consolidated Balance-Sheet The object of a consolidated balance-sheet is to show the true financial position of a company and its subsidiary companies with regard to the outside public; consequently all inter-company holdings of stock and all inter-company balances of every kind should be eliminated in the consolidated balance-sheet.

The most practical method of preparing a consolidated balance-sheet is to use analysis paper and then, depending on the number of companies and the number of accounts to be shown on the balance sheet, either list the asset and liability accounts on the side with a column for each company or list the companies on the side and have a column for each asset and liability account. The balance-sheet for each company should then be entered on the sheets and totals made of each account. A column or line should then be provided for eliminations and adjustments, and then a column or line for the final consolidated figures.

All inter-company current accounts should be shown separately and should be reconciled and any differences allocated to the proper asset or liability account. Thus if, as in the example shown later, it is found that a difference exists in the current account between two companies because goods shipped by one company have not been received and taken up on the books of the other, an entry should be made crediting inter-company account and charging inventory, as it is clear that the goods are still in the inventory of the group. When all differences on the inter-company accounts have been adjusted the inter-company debits will equal the inter-company credits and both should be eliminated.

The next elimination to be made is that of the inter-company holdings of capital stocks.

It will frequently be found that the book value of the stock of a subsidiary company on the books of the holding company is different from the par value of the stock of the subsidiary company and this difference has to be adjusted.

Where the book value of a subsidiary company in a balancesheet of the company holding that stock is in excess of the pa value of the stock plus the surplus of the subsidiary company at the date of acquisition the excess should be charged to goodwill. Where the book value of the stock of a subsidiary company in a balance sheet of the company holding that stock is less than the capital stock plus the surplus of the subsidiary company at date of acquisition, the difference should be credited to capital surplus, unless there is goodwill of a greater amount either on the accounts of the holding company or of the subsidiary company, or if there is goodwill of a greater amount arising from purchases of stocks of other subsidiary companies. This treatment is based on the assumption that goodwill is shown separately, but many companies in their published accounts do not show goodwill separately and simply have an account called "cost of properties." In this case the debits and credits would be made to this account instead of to goodwill or capital surplus.

Objections have frequently been made to the elimination of the surplus of the subsidiary company at date of acquisition, and claim has been made that this surplus should form part of the consolidated surplus; but it seems to be clear that when a company buys the stock of another company it also purchases the surplus accumulated to the date of purchase, and consequently the surplus at date of acquisition should in consolidation be treated in the same way as the capital stock. If any dividends are received out of that surplus they should be credited to the cost of the investment on the books of the holding company.

By applying to consolidated accounts the principle that a company cannot make profits before it has begun business, we reach the conclusion that the profit and loss account of a parent or holding company should reflect only the profits of that company from its inception together with the profits of subsidiary companies from the dates of their acquisition.

Where one corporation does not own the whole of the capital stock of a subsidiary company, but where the accounts are to be consolidated, the amount to be eliminated should be the par value of the stock of the subsidiary company owned by the company and the proportion of the surplus at date of acquisition applicable to the stock owned. When this amount has been eliminated with the corresponding debit or credit to goodwill or to capital surplus, it will leave the par value of the stock of the subsidiary company in the hands of the public and the pro rata share of the surplus at date of acquisition, which together with the proportion of the surplus since acquisition should be shown on the balance-sheet as capital stock of subsidiary companies in hands of public at book value. Subsequent earnings of the subsidiary company should be divided according to the stock owned by the parent company and that in the hands of the public—the proportion applicable to the stock of the parent company being taken into the profit and loss account of that company and the proportion applicable to the stock in the hands of the public being added to the book value of the stock in the hands of the public.

Some corporations have not followed this method but have taken up in the consolidated assets and liabilities the proportion of each asset and liability applicable to the stock owned. It is not believed that this is the best technique, nor that it is the best method of showing the financial position of the consolidated companies. If one company owns 90% of the stock of another company, the inclusion of 90% of the plant and other assets and 90% of the liabilities of the subsidiary company does not really show the true position; and it seems more reasonable to assume that all the assets and all the liabilities belong to the consolidated group with a liability to outsiders of the value of the stock owned by them.

The method of taking up a proportion of the assets and liabilities also gives rise to some rather peculiar results in intercompany accounts. For example, if the parent company has an account receivable of $1,000 against the subsidiary company (say 90% owned) and the subsidiary company a corresponding liability to the parent company, then if the percentage of the assets and liabilities of the subsidiary company is taken this would result in showing the inter-company item as only $900.00 in the subsidiary company's liabilities against the $1,000.00 on the parent company, and it would, therefore, be necessary to treat $100.00 as an account receivable from outsiders in the consolidated statement.

Another item which requires careful investigation in consolidated accounts is that of inventories. If the various companies in a consolidation buy or sell from one another and if these transactions are not put through at cost, the inventories of some of the companies will contain inter-company profit. As the object of the consolidated balance-sheet is to show the financial position of the group as a unit this would be equivalent to a single company's taking up inventories at a valuation higher than cost.

In these cases the inter-company profit in the inventory both at the beginning and end of the period should be ascertained and entries made charging surplus at the beginning of the period with the inter-company profit at the beginning of the period, crediting inventories with the inter-company profit at the end of the period and charging or crediting the profits of the year with the increase or decrease of the inter-company profit in the inventories at end of the year compared with that at the beginning of the year.

It frequently happens that there may be within a group control of other corporations which are not consolidated on account of the holdings being perhaps a bare majority of the stock. It is largely a matter of judgment whether or not the group's proportion of the earnings of these controlled companies should be taken into the accounts of the group. Certainly where there is a control which is not exercised it would not appear that the proportion of the earnings of the controlled company should be taken up, but that only dividends actually received should be credited to profit and loss. Where, however, control is exercised, there seems no reason why the proportion of profits or losses of the controlled company should not be taken into the accounts. The entry to be made on the books of the holding company would be to charge undivided profits of controlled companies—which in the published accounts might be added to the investment in controlled companies

and credit profit and loss. As dividends are received cash will be debited and undivided profits of controlled companies credited.

In certain cases where investments in controlled companies represent a substantial portion of the assets of a company, it is

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