How to Prepare a Three-Part Consolidation Work Paper

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A consolidation work paper is an accounting document used to show how a business consolidates its assets after it acquires another, usually smaller, business. The three-part consolidation work paper shows the summary of three different other financial statements crucial to an acquisition: income statement, retained earnings statement and balance sheet. Creating a consolidated work paper is the first step in creating a new financial record keeping system. The two businesses were keeping separate records, even immediately after the acquisition, but now they must join together as one company and keep one set of financial records. The three-part consolidation work paper is the first of these financial records to be created.

Divide a worksheet into three equal horizontal sections. Designate the top part of the paper for the consolidated income statement, the middle part for a consolidated statement of retained earnings and the bottom section for the consolidated balance sheet. Work will flow down the page, from left to right.

Use the most recent income sheet information the companies have available, provided by either their accounting departments or the annual investor's report if they are public companies.

Create an income statement for the two companies as if they were one. Combine accounts receivable, revenue and expenses data from each company to have one value for each term. Write these terms in the income statement portion of the worksheet. Use these values to work your way down the sheet, filling in the necessary values for the retained earnings statement terms and the balance sheet terms, such as retained earnings, assets and cost of goods sold.

Make eliminating entries on the worksheet if goods and cash were exchanged between these two companies after the acquisition but before the worksheet consolidation -- for example, if Company A purchased $10 of materials from Company B. On the consolidated worksheet, this transaction will appear for record-keeping purposes, but an eliminating entry also will appear showing a $10 cash flow from Company B to Company A to keep the books even. If eliminating entries are not made, it will appear as though the company is making profit when it is simply moving resources around the company.