BCLAA8e Ab.az.Chapter 08

8/13/2019 BCLAA8e Ab.az.Chapter 08

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8 - 12003 Prentice Hall Business Publishing,Advanced Accounting8/e,Beams/Anthony/Clement/Lowensohn

ConsolidationsChanges in

Ownership Interests

Chapter 8


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Learning Objective 1

Prepare consolidated statements

when parent companys ownership

percentage increases or decreases

during the reporting period.


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Preacquisition Earnings

Preacquisition earnings orpurchased income

is income that was earned by the subsidiary

(in the accounting period of the acquisition)

prior to the acquisition.

Patter Corporation purchases a 90% interest in

Sissy Company on April 1, 2006, for $213,750.


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Income 1/1-4/1 4/1-12/31 1/1-12/31

Sales $25,000 $75,000 $100,000

Cost of sales and expenses 12,500 37,500 50,000

Net income $12,500 $37,500 $ 50,000

Dividends $10,000 $15,000 $ 25,000



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Stockholders Equity Jan. 1 April 1 Dec. 31

Capital stock $200,000 $200,000 $200,000

Retained earnings 35,000 37,500 60,000Stockholders equity$235,000 $237,500 $260,000

What is the book value acquired by Patter?

$237,500 90% = $213,750 purchase price



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Sales (last three quarters of 2006) $75,000Expenses (last three quarters) (37,500)

Minority interest (last three quarters) (3,750)

Effect on consolidated net income $33,750



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Sales (full year) $100,000Expenses (full year) (50,000)

Preacquisition income (11,250)

Minority interest (5,000)Effect on consolidated net income $ 33,750



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Preacquisition dividends are eliminated

in the consolidation process.

$10,000 $15,000

$25,000

Preacquisition Dividends


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Preacquisition Dividends

Cash 13,500

Investment in Sissy 13,500

To record dividends received

$15,000 90% = 13,500


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Consolidation

Patters Investment

213,75033,750

234,000

13,50012/31/2006 Dividends


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Working Papers December 31, 2006

Adjustments/ Consol-Patter Sissy Eliminations idated

Sales

Income from Sissy

Expenses

Minority interest expense

($50,000 10%)

Preacquisition income

Net income

Retained earningsPatterRetained earningsSissy

Add: Net income

Dividends

Retained earnings 12/31/06

$300

33.75

(200)

$133.75

$266.25

133.75

(100)

$300

$100

(50)

$ 50

$ 35

50

(25)

$ 60

a 33.75

c 5.00

b 11.25

b 35

$400

(250)

(5)

(11.25)

$133.75

$266.25

133.75

(100)

$300

Income Statement

a 13.5b 9.0c 2.5


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Other assets

Investment in Sissy

Capital stock

Retained earnings

Minority interest

$566

234

$800

$500

300

$800

$260

$260

$200

60

$260

a 20.25

b 213.75

b 200

b 23.50

c 2.50

$826

$826

500

300

26

$826

Balance SheetAdjustments/ Consol-

Patter Sissy Eliminations idated


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Apply consolidation procedures to

interim (midyear) acquisitions.


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Piecemeal Acquisitions

Poca Corporation acquires a 90% interest in SarkCorporation in a series of separate stock purchases

between July1, 2003, and October 1, 2005.


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Date 7/1/03 4/1/04 10/1/05

Interest acquired 20% 40% 30%Investment cost $ 30 $ 74 $ 81

Equity January 1 100 150 190

Income for year 50 40 40

Equity at acquisition 125 160 220

Equity December 31 150 190 230


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What is the initial goodwill from

each of the three acquisitions?

$125 20% = $25

$30$25 = $5

$16040% = $64

$74$64 = $10


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$220 30% = $66

$81$66 = $15

At December 31, 2005, Pocas investment

in Sark account balance is $237,000.

This consists of $185,000 total

cost plus income of $52,000.


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Working Paper Entries: 2005

a Income from Sark 27,000Investment in Sark 27,000

To eliminate investment income and return

investment account to its beginning-of-the-

period balance plus the $81,000 new investment


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b Preacquisition Income 9,000Retained EarningsSark 90,000

Capital StockSark 100,000Goodwill 30,000Investment in Sark 210,000Minority Interest 19,000

To eliminate investment in Sark and Sarks equitybalances, and enter preacquisition income, goodwill,and beginning-of-the-period minority interest


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c Minority Interest Expense 4,000

Minority Interest 4,000

To record minority interest in Sarks net income


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Sale of Ownership Interests

Sergio Corporation is a 90%-owned

subsidiary of Pablo Corporation. January 1, 2007: Pablos investment

in Sergio equals $288,000.

Sergios stockholders equity on this

date consists of $200,000 capital stock

and $100,000 retained earnings.


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Did Pablo acquire goodwill?

$300,000 90% = $270,000

$288,000$270,000 = $18,000


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During 2007, Sergio reports income of $36,000. Sergio pays dividends of $20,000 on July 1.


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Sale of Interest at the Beginning

of the Period

Pablo sells a 10% interest in Sergio

(one-ninth of its holdings) onJanuary 1, 2007 for $40,000.

$288,000 9 = $32,000 $18,000 9 = $2,000


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Sale of Interest at the Beginning

of the Period

Pablos Investment

288,000

28,800268,800

32,000

16,000

Cash40,000

16,000

Gain8,000

Income from S28,800

Dividends

12/31/2007


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a Income from Sergio 28,800

DividendsSergio 16,000Investment in Sergio 12,800

To eliminate income and dividends from

Sergio and return the investment account

to its beginning-of-the-period balance

after the sale of the 10% interest


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b Capital StockSergio 200,000

Retained EarningsSergio 100,000

Goodwill 16,000Investment in Sergio 256,000

Minority Interest (20%) 60,000

To eliminate reciprocal investment and equitybalances, and to record goodwill and

beginning minority interest


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c Minority Interest Expense 7,200Dividends 4,000

Minority Interest 3,200

To enter minority interest share of subsidiary

income and dividends


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Adjustments/ Consol-Pablo Sergio Eliminations idated

SalesIncome from SergioGain on sale

ExpensesMinority interest expense

($36,000 10%)Net incomeRetained earnings Pablo

Retained earnings SergioAdd: Net incomeDividends

Retained earnings 12/31/07

$60028.88

(508.8)

$128$210

128(80)

$258

$136

(100)

$ 36

$10036(20)

$116

a 28.8

c 7.2

b 100

a 16c 4

$736

8

(608.8)

(7.2)$128$210

128

(80)$258

Income Statement


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Other assets

Investment in Sergio

Goodwill

Liabilities

Capital stock

Retained earnings

Minority interest

$639.2

268.8

$908

$150

500

258$908

$350

$350

$ 34

200

116$350

a 12.8

b 256

b 16

b 200

b 60

c 3.2

$ 989.2

16$1,005.2

$ 184

500

258

63.2

$1,005.2

Balance SheetAdjustments/ Consol-

Pablo Sergio Eliminations idated


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Sale of Interest During an

Accounting Period

Obtain proper book value for shares sold.

Calculate the remainder for unamortized

components of the investment account.

Main issues


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Accounting Period

Pablo sells the 10% interest in Sergio

on April 1, 2007, for $40,000.

The sale may be recorded as of April 1or, as an expedient, as of January 1.

l f i


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Accounting Period

Assume the sale is recorded on April 1, 2007.

Selling price of 10% interest $40,000

Less: Book value of interest sold:

Investment balance January 1 $288,000

Equity in income

$36,000 1/4year 90% 8,100

Portion of investment sold $296,1001/9 32,900

Gain $ 7,100

S l f i


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Accounting Period

$29,700$16,000 = $13,700

$36,000 1/4year 90% = $ 8,100$36,000 3/4year 80% = 21,600

$29,700

S l f I D i


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Accounting Period

Pablos Investment

288,000

8,10021,600

268,800

32,900

16,000

12/31/2007

Dividends

Cash40,000

16,000

Gain7,100

Income from S8,100

21,600

Ch i O hi I f


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Changes in Ownership Interests from

Subsidiary Stock Transactions

Subsidiary stock issuances providea means of expanding operations

through external financing.


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S l f Addi i l Sh


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Sale of Additional Shares

by a Subsidiary

$200,000 80% = $160,000

$160,000 $20 = 8,000 shares

S l f Additi l Sh


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Sale of Additional Shares

by a Subsidiary

Capital stock, $10 par $100,000

Additional paid-in capital 60,000

Retained earnings 40,000Total shareholders equity $200,000


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Subsidiary Sells Shares to Parent

Stroh sells an additional 2,000 shares to Purdy at

book value of $20 per share on January 2, 2007.

January 1 before sale: 8,000 10,000 = 80%

January 2 after sale: 10,000 12,000 = 831/3%


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January 1 January 2Before Sale After Sale

Strohs stockholders equity $200,000 $240,000

Purdys interest 80% 831/3%

Purdys equity in Stroh $160,000 $200,000

Goodwill 20,000 20,000Investment in Stroh balance $180,000 $220,000


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If Stroh sells the additional shares at $35 pershare.

Price paid by Purdy (2,000 $35) $70,000

Book value acquired:

Underlying book value after purchase

($200,000 + $70,000) 831/3% $225,000

Underlying book value before purchase($200,000 80%) 160,000

Book value acquired 65,000

Excess cost over book value $ 5,000

S b idi S ll Sh


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Subsidiary Sells Shares

to Outside Entity

Sale at $20 Sale at $35

Strohs stockholders equity $240,000 $270,000

Purdys interest 662/3% 662/3%

Purdys equity in Stroh

after issuance $160,000 $180,000

Purdys equity in Stroh

before issuance 160,000 160,000Increase in Purdys

equity in Stroh 0 $ 20,000


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Record subsidiary/investee stock

issuances and treasury

stock transactions.

T St k T ti


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Treasury Stock Transactions

by a Subsidiary

The acquisition of treasury stock by a

subsidiary decreases subsidiary equity

and subsidiary shares outstanding.

If the subsidiary acquires treasury stock

from minority shareholders at book

value, no change in the parents sharein the subsidiary equity results.

T St k T ti


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by a Subsidiary

Shelly is an 80% subsidiary of Pointer Corporation.

Shelly has 10,000 shares of common stockoutstanding at December 31, 2007.

On January 1, 2008, Shelly purchased 400

shares of its own stock from minority stockholders.

T St k T ti


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by a Subsidiary

Capital stock, $10 par $100,000

Retained earnings 100,000

Total equity $200,000

Pointers share of Shellysbook value (80%) $160,000

Shellys equity before purchase

of 400 shares of treasury stock

Treas r Stock Transactions


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Capital stock $100,000 $100,000 $100,000

Retained earnings 100,000 100,000 100,000Total $200,000 $200,000 $200,000

Less: Treasury stock 8,000 12,000 6,000

Total equity $192,000 $188,000 $194,000

Pointers interest 5/6 5/6 5/6Pointers share of

Shellys book value $160,000 $156,667 $161,667

@$20 @$30 @$15400 shares


by a Subsidiary


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End of Chapter 8

BCLAA8e Ab.az.Chapter 08

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