Upon consolidation, the original organizations cease to exist and are supplanted by a new entity.A parent company can acquire another company by purchasing its net assets or by purchasing a majority share of its common stock.Treatment of Purchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.Purchase differentials have two components: Purchase differentials need to be amortized over their useful life; however, new accounting guidance states that goodwill is not amortized or reduced until it is permanently impaired, or the underlying asset is sold.Such disclosures are: When a company purchases 20% or less of the outstanding common stock, the purchasing company’s influence over the acquired company is not significant.(APB 18 specifies conditions where ownership is less than 20% but there is significant influence).There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company".Consolidation is the practice, in business, of legally combining two or more organizations into a single new one.
Treatment to the acquired company: The acquired company records in its books the elimination of its net assets and the receipt of cash, receivables or investment in the acquiring company (if what was received from the transfer included common stock from the purchasing company).
Under the equity method, the purchaser records its investment at original cost.
This balance increases with income and decreases for dividends from the subsidiary that accrue to the purchaser.
The purchasing company uses the cost method to account for this type of investment.
Under the cost method, the investment is recorded at cost at the time of purchase.