How to Consolidate Financial Statements After a Merger

by Eileen Rojas; Updated September 26, 2017
Consolidated financial statements combine financial information.

A merger occurs when two companies decide to combine into one and operate as a single company. Through a merger, a company can acquire competitive advantages in the market by expanding its product line and increasing its market share. Mergers can also be viewed as anticompetitive; large companies interested in acquiring competitors can be accused of antitrust law violations if the resulting company controls excessive market share in a particular sector. When a merger is completed, the new combined business will report consolidated financial statements at the end of the year.

Step 1

Identify the accounts that will be eliminated in the preparation of consolidated financial statements. A merger involves acquiring 100 percent of another entity. The consolidated financials will eliminate certain subsidiary accounts that will not be reported on in the statements. Balance sheet asset accounts are adjusted to reflect their fair value and a goodwill (intangible asset account) or gain account may be recorded.

Step 2

Prepare eliminating journal entries for accounts not reported on the financial statements. The consolidation eliminating entry is prepared by recording a debit for the account balances of the subsidiary’s common stock, paid in capital and retained earnings accounts. The sum of these three accounts is the subsidiary’s book value.

Debits are also recorded for all of the subsidiary’s balance sheet accounts to adjust them to fair value, including identified intangible assets. Goodwill may be recorded if the subsidiary’s book value subtracted by the investment in subsidiary account equals a difference. This difference is subtracted by the adjustment to the subsidiary’s balance sheet and intangible asset accounts. The remaining positive total is recorded to goodwill. If the amount remaining is negative, a gain is reported on the consolidated income statement.

The entry must also include a credit to the investment in a subsidiary account for its balance; the credit eliminates the account.

Step 3

Prepare journal entries to eliminate intercompany transactions. Intercompany transactions are transactions between the parent and subsidiary.

For the balance sheet, transactions amounts between parent and subsidiary relating to advances on accounts receivable/payable; amounts affecting accounts receivable/payable; dividends receivable/payable; and bonds receivable/payable are all eliminated.

For the income statement, transactions amounts related to bond interest expense/income; gain on sale and depreciation expense for fixed assets; and sale and cost of goods sold of inventory are also eliminated.

Step 4

Prepare the consolidated balance sheet. The balance sheet includes asset, liability and owner’s equity accounts for parent and subsidiary with the exception of the accounts eliminated in the previous steps.

Step 5

Prepare the consolidated income statement. The income statement includes the parent’s and subsidiary’s revenues and expenses. The subsidiary’s revenues and expenses reported should be those earned and incurred after the subsidiary was acquired.


  • “Financial: CPA Exam Review”; DeVry/Becker Educational Development Corp.; 2009

About the Author

Eileen Rojas holds a bachelor's and master's degree in accounting from Florida International University. She has more than 10 years of combined experience in auditing, accounting, financial analysis and business writing.

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