 Oh, and welcome to the session. This is Professor Farhad in which we would look at CPA exam questions that deal with the topic of business consolidation, which is covered on the FAR section of the CPA exam and in advanced accounting. Business consolidation is one of these topics that intimidate many students. The reason is simple. They either did not learn it in college or if they learned it, they forgot about it. And the CPA exam prep course don't do a good job going in details about business consolidation. It's not they don't do a good job, whether it's Becker, Roger, Wiley or Glein. It's, they feel that's not their job. Their job is to review the material with you. It's not to teach you, because if you want to learn the material, I have the solution for you. Visit my website, farhadlectures.com. And this is where I have a full advanced accounting course that will teach you consolidation from A to Z or whatever topic you need from consolidation. So this is what I offer. I offer something different than your CPA prep course. I don't replace it. I don't substitute your CPA prep course. You still need your CPA prep course. I only shed a light, emphasize the topics that need to be emphasized. As always, I'm gonna also remind you to connect with me on LinkedIn. Subscribe to my YouTube at least where you have access to 1800 plus accounting, auditing, finance, as well as Excel tutorial. If you like my lectures, please like them, share them. Look, if you're listening to me now, that means my lectures benefit you. If they benefit you, share them with others so other people can benefit as well and connect with me on Instagram. On my website, this is where you will find the additional resources, lectures, exercises, so on and so forth to learn what you need to learn specifically today about business consolidation. Today's session is a very basic business consolidation problem. And there's a point I'm gonna try to make from this problem. What is the point? The point is this. This is the question that you are giving. And I'm gonna ask you four questions about this information. Notice here four questions. You will never see something like this on the exam. What do you see on the CPA exam? On the CPA exam, you may see something like this where you have A, B, C, D and you choose the right answer or I'm gonna turn this into a consolidation or you might see something like this. An Excel sheet where you'll have to select the right debits and credit and input the answers. It doesn't matter whether you are giving a simulation, whether you are giving a multiple choice or whether I'm going over this problem this way. The reason I go over it this way because that's the difference between me again and a CPA for my job is to teach you, teach you then whatever they throw at you on the exam day, you'll be like, okay, bring it on, I am ready. Okay, so let's go ahead and go over this and I would say this is a basic. It doesn't get any more basic than this for a consolidation problem. So if you're having any issue with this problem, it means you need to learn your basic consolidation. I don't have to keep telling you. Go to my website if you want to do so. So let's go ahead and start with this problem. On January 1st, 2003, parent company, usually they call it P to emphasize it's the parent company or to make it easier for you, report a total asset of 470, liabilities of 270 and stockholders equity obviously of 200 because stockholders equity plus liability should equal to asset. At that date, the sub-corporation, which is the corporation that they bought, report a total asset of 190, total liabilities of 135. On the exam, they may not give you the equity but you would know that the equity is 55, okay? Following lengthy negotiation, the parent company paid the sub-company shareholders $44,000 cash for it's 80% of the voting common shares of the sub. So that's what they did. They paid them $44,000. They bought 80% of the company. What does that mean they bought 80%? It means they are going to consolidate. Why? Because they purchased more than 50%. Be careful for tax purposes, you need 80%. For financial, all what you need is more than 50. So be careful, okay? Some students, they see for example 75, I would say, oh, we don't need to consolidate because it's not 80. Not at all, for far, all what you need for far is 50% to consolidate. And you do the consolidation as if you purchased 100% and you account for NCI, which we'll talk about that shortly. Okay, so let's go ahead and start to answer these questions. What amount of total asset did the parent company report in its individual balance sheet? Well, now we're talking about the parent company individual balance sheet. Well, let's think about it. What did they have in their individual balance sheet? Be careful, this is not consolidation in their individual balance sheet. Here's what they did. They had 470,000 of assets. They paid 44,000 in cash to buy the company. Then they purchased an investment in the subsidiaries for 44,000. Guess what? 470 minus 44 plus 44 equal to $470. Simply put, they did something like this. They debit investment in sub 470,000 and they credited cash 470,000. So the point is they still have the same amount of asset. All what they did is they took one form of assets which is cash and they replace it into another form of asset, which is the investment in the subsidiaries. So be careful, they're asking about the individual parent company. What amount of total asset was reported in the consolidated balance sheet? Now we're talking about what happened when they consolidate the two companies, the parent and the sub, when they consolidate what should be the amount here. Yeah, let's go back up here and work this problem or we can work it. Yeah, let's work it here since I have it here. Well, here's what happened. The parent company will have 470,000. Then they paid 44. So basically they paid 44, but when they paid this 44, they paid it to the shareholders, shareholders of the other company. They paid it to the shareholders, but in return, they purchased the assets of the subsidiaries. So when they consolidated, they would say, okay, we had 470,000 in assets. We paid 44,000 to the shareholders, therefore we credit this account. So basically put, simply put, we're gonna debit 190 credit 44, and this is basically what we'll end up doing. So what happened is this, 470 minus 44,000 plus 190, it's gonna give us 616,000. And this is the consolidated amount. Now also this question could be given to you in a multiple choice. For example, what's the parent company? I answered it, but the question, the answer is 470. I could also give you this question and give you four answers, or I can give you a simulation to complete. So notice it's the same thing. It's presented to you differently as long as you understand the no worries you'll be able to do fine. And that's my strategy. Many students ask me questions like this. What's the 10 topics I need to know for the exam? There's no such a thing. You need to know everything. You need to know everything 75 to 80%. So you can't pass. Because if you don't know a topic, you will fail. If you don't know a major topic, so if you are weak, if you are weak in business consolidation, some people would say, you know what, I'm not gonna have time to study business consolidation. I'm just gonna let it go. I may not get any questions about business consolidation. That's not how the software work. That's not how it works. The way it works, they might give you a simple problem like this one. And if you get it wrong, they would know you're having problem with consolidation. They will give you another problem. If you get it wrong again, they will start to say, okay, this candidate does not know consolidation. It'll give you a third and fourth problem. And if you get them wrong, guess what? You are going to get something less than 75%, which is a failing grade. So don't take your chances. On the CPA exam, you don't take any chances because the software is smart enough to know whether you are prepared or not. So be prepared. What amount of total liabilities was reported and the consolidated balance sheet? I mean, come on, you would know this, you should know this right away. The amount of liabilities is you add the liabilities. Liabilities are easy to deal with because you don't have to worry about the cash and the investment account that you paid for. So you just add them both up and they will add up to 400 and 5,000. So all what we did is we took the liabilities of the liabilities of the parent plus the liabilities of the sub and you add them up. Now, what they might give you 80%, they might say because you purchased 80%, they may give you an answer where you only bought 80% of the sub. Now, although you bought 80%, you consolidate 100% because you are in control, okay? What amount of stockholders equity was reported in the consolidated balance sheet? This is also another tricky questions. So simply put, what do we report in the stockholders' equity and the overall stockholders' equity? Well, we have, and this is again, very simple problem. I'm just giving you stockholders' equity in one figure, but it doesn't matter whether the stockholders' equity is 55,000 for the sub or 200,000 for the parent. It does not matter. The concept is the same. First of all, the equity of the sub will not appear on the consolidated financial statement. What does that mean? Let me show you here in a picture. The equity of the sub will not appear on the consolidated. What amount appears the parent and any NCI, any non-controlling interest? The reason you consolidate is to get rude. You bought them, you bought their equity. You consolidate them through assets and liabilities and whatever the NCI, the non-controlling interests you're gonna account for it, but you don't account for their equity. I mean, if you go through my course, I emphasize this point again and again and again where you'll get sick of it. So let's see what we have here. What we have here is this. We have, you paid $44,000. That's what you paid for the company. Well, if you paid $44,000 and you paid 80%, let's see what's the implied value of the company. Well, you paid $44,000 and as a result, you purchased 0.8. So let's see what is the implied value of the company. $44,000 divided by 0.8. Wow, 55,000. The implied value of the company equal to 55,000. Why did I say wow? Because that makes my life easy. If the implied value, it means the fair market value of the company is 55 and the book value is 55, I don't have to worry about extra fair value. That's why I said at the beginning, this problem is easy, is basic. Now, the implied value is 55. Well, if the implied value is 55, the NCI will get 20%. 20% is 11,000. Therefore, NCI equal to 11,000. The question is what do I report in the consolidated balance sheet? I would report the, take this one out, stockholders' equity of the sub out. I'm gonna report the equity of the, the equity of the parent. This is what will survive in the consolidation plus NCI, which is 11,000, which will give me 211,000. Simply put, here would go 211,000. 211,000 and you could always, if you have time, you should always double check yourself. Total asset, 616 equal to liabilities plus owner's equity, 616. As always, I'm gonna remind you to like my recording. If this benefits you, if these type of sessions benefit you, check out my website. I have plenty of exercises for you to learn business consolidation. Don't go into the exam without being prepared. Big mistake, don't take your chances. Your CPA is a lifetime investment. You don't take any chances with that. What you do is you prepare. Don't shortchange yourself. My fee is a nominal fee. My fee is a nominal fee. It's really meaningless for an investment in your exam, in your career that's gonna pay dividend for years to come. Good luck, study hard and stay safe.