Let me please give you an example about consolidation. Firm A and Firm T balance sheets on January 1st, 2022, are presented in the next slide. Firm A acquires all shares of Firm T from $10 per share on January 1st, 2022. Firm T has 100 shares issued and outstanding on January 1st, 2022. Here is a simplified version of the balance sheets of Firms A and T. Please note that Firm A has a cash balance of $2,500 and has no equity investment yet. Question number 1 asks to provide the accounting entry on (a) transaction worksheet on January 1st, 2022. First, let's please determine the amount of investment. Firm A purchases 100 shares of Firm T from $10 each, meaning that the total amount of investment is $1,000. If you look at the transaction worksheet of the acquiror firm, cash goes down by $1,000, and investment is created as $1,000. Next, we can update the balance sheet of the acquiring firm. Cash decreases from $2,500 to $1,500 and (the) equity investment account is created with a balance of $1,000. The second question asks to provide the consolidated balance sheet on January 1st, 2022. Please note that, under (the) equity method of accounting, (the) investment account mirrors changes in the shareholder's equity of the target firm. In fact, if you recall the investment equation that we have discussed in the previous module, investment has three components: book value of assets, fair value adjustment, and goodwill. In this example, there is no fair value adjustment and there is no goodwill. Therefore, investment is the same as book value of assets of the target firm. What does book of assets represent? Book value of assets is the difference between total assets and total liabilities. In this example, equity investment is $1,000, which is equal to total assets, $3,000, minus total liabilities, which is $2,000 of the target firm. In consolidation, conceptually, we replace investment account with its components. In this particular example, investment account is replaced with total assets and total liabilities of the target firm. For example, cash balance of Firm A is $1,500 and cash balance of Firm T is $700, resulting in (a) consolidated cash balance of $2,200. Similarly, we sum balances of plant, property, and equipment and liabilities to find consolidated plant, property, and equipment, and liabilities. What is (the) consolidated shareholders' equity? Since we replace investment, in this particular example, with total assets and total liabilities, we do not take into consideration shareholders' equity of the target firm. Therefore, consolidated shareholders' equity is the same as shareholders' equity of the acquiring firm. In summary, consolidation is the replacement of equity (the) investment account with its components: book value of assets, fair value adjustment, and goodwill. Please note that acquiror and target firms still separately prepare their financial statements. It is just that when they need to report their financial statements externally, their financial statements are consolidated. Some students ask why we ignore (the) target firm shareholders' equity in consolidation. Acquirer firm shareholders own the acquirer, which in turn owns the target firm. Thus, the only shareholders of the consolidated entity is acquiror's shareholders. Let me please give you another example. Firm A and Firm T balance sheets on January 1st, 2022 are presented in the next slide. Firm A acquires all shares of Firm T from $15 per share on January 1st, 2022. Firm T has 100 shares issued and outstanding on January 1st, 2022. Firm T's net assets' values approximate their fair values except plant, property, and equipment. Plant, property, and equipment fair value exceeds its book value by $300 and plant, property, and equipment has five years of remaining life. Here we are given Firm A and Firm T balance sheets before investment is recorded. Question 1 asks to provide the accounting entry on (a) transaction worksheet on January 1st, 2022. We will start with calculating total investment. We know that acquiring firm purchases 100 shares of the target firm from $15 each, meaning that the initial amount of investment is $1,500. In the transaction worksheet, cash goes down by $1,500, and investment is created as $1,500. If we look at the updated balance sheet of (the) acquiring firm, cash decreases from 2,500 to $1,000, and we create an investment account of $1,500. The second question asks to provide the consolidated balance sheet on January 1st, 2022. Let's please remember the investment equation. The equity investment account has three components: book value of assets, fair value adjustment, and goodwill. Book value of assets is the difference between total assets of $3,000 and total liabilities of $2,000, which is going to be $1,000. Fair value adjustment is $300 due to plant, property, and equipment, which has five years of remaining life. This implies that goodwill in this particular example is $200. If we go to the consolidation process, we sum Firm A and Firm T cash balances and find consolidated cash balance of $1,700. For plant, property, and equipment consolidation, we sum plant, property, and equipment balances of Firm A and Firm T, but we also remember that plant, property, and equipment has a fair value adjustment of $300. Therefore, total consolidated plant, property, and equipment is $5,100. Next, the goodwill is created with a balance of $200. Consolidated liabilities is $2,500, which is the summation of liabilities of Firm A and Firm T. We also copy shareholders' equity of Firm A as the consolidated shareholders' equity. This example was special because we replaced equity investment with all three components of investments.