Each of the consolidated financial statements is prepared as if it is taken from a single set of books that is being used to account for the overall consolidated entity. There is, of course, no set of books for the consolidated entity, and as in the preparation of the consolidated balance sheet, the consolidation process starts with the data recorded on the books of the individual consolidating companies. The account balances from the books of the individual companies are placed in the three-part worksheet, and entries are made to eliminate the effects of intercorporate ownership and transactions. The consolidation approach and procedures are the same whether the subsidiary being consolidated was acquired or created.

100 Percent Ownership, Created Or Acquired At Book Value — Example

To understand the process of consolidation subsequent to the start of a parent-subsidiary relationship, assume that on January 1, 20X1, Peerless Products Corporation acquires all of the common stock of Special Foods Inc. for $300,000, an amount equal to Special Foods’ book value on that date. At that time, Special Foods has $200,000 of common stock outstanding and retained earnings of $100,000, summarized as follows:

Consolidated financial statements