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Consolidated Balance sheets: issues of goodwill, differentia

Trying to understand some of the processes regarding the goodwill and differential in the consolidated balance sheet process.

1. Explain why consolidated financial statements become increasingly important when the purchase differential is very large.

2. How does an eliminating entry differ from an adjusting entry? (I know this is similar to the intercompany transactions, I think, just not sure how they are related)

3. What is the term differential used to indicate?

Solution Preview

Consolidated financial statements are necessary when one company owns a controlling interest in another. The fair representation of the parent company requires that all pieces of its business be presented for the benefit of stakeholders. The purchase differential arises when the purchase price of an entity is greater than the basis of the assets in the acquired company.

This could result from several common circumstances such as
1. The acquired company has appreciated assets on its books. Remember that the cost principle won't allow those assets to ...

Solution Summary

The solution explains the process of consolidation when there are differences between the purchase price and the separate assets. Two examples are presented. How the differential account is used is explained in detail. The links include sample journal entries for better understanding.