advanced acct pp ch08

to accompanyAdvanced Accounting, 11th edition

by Beams, Anthony, Bettinghaus, and Smith

Chapter 8

Consolidations – Changes in

Ownership Interests

Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

8-1

Consolidations - Changes in Ownership Interests: Objectives

1. Prepare consolidated statements when parent's ownership percentage increases or decreases during the reporting period.

2. Apply consolidation procedures to interim (mid-year) acquisitions.

3. Record subsidiary/investee stock issuances and treasury stock transactions.


8-2

1: CHANGES IN OWNERSHIP PERCENTAGE

Consolidations – Changes in Ownership Interests


8-3

Changes in Parent Ownership

Increases (acquires or maintains control)1. Parent acquires controlling interest during

interim period2. Parent acquires controlling interest in

stages3. Parent acquires additional shares from

noncontrolling interestDecreases (maintains or loses control)

4. Parent sells shares but maintains control5. Parent sells shares giving up control


8-4

Interim Acquisition of Control

Parent obtains control Determine implied value and allocate excess Apply consolidation procedures


8-5

Interim Acquisition Where Control is Maintained

Parent increases its share by buying more stock or decreases its share by selling some stock

Change in Investment in sub is based on the underlying fair value of equity

No gain or loss is recognized; paid in capital is adjusted


8-6

Interim Sale Where Control is Relinquished

Parent sells part of its investment and no longer maintains control

Reduce the investment based on proportion of interest sold

Record gain or loss on sale Discontinue consolidation


8-7

Is There a Gain or Loss?Basic rule: No gain or loss is recorded on equity transactions with a firm's owners.1.Control before and after the transaction is an equity transaction

No gain or loss Adjust paid in capital, if needed

2.No control before and control after Point of business acquisition No loss Might have gain on bargain purchase

3.Control before and no control after Disposition of asset Gain or loss is recorded


8-8

Preacquisition Earnings

Earnings prior to the date of acquisition are eliminated from consolidated income by one of two methods.

1.Exclude revenues and expenses of the subsidiary prior to acquisition from consolidated amounts, or2.Include the revenues and expenses of the subsidiary in the consolidated income statement for the full year and deduct preacquisition income as a separate item.


8-9

Equity Book Value on Interim Date

Calculate book value (equity) as of the acquisition date:

Beginning BV equity+ preacquisition revenues– preacquisition expenses – preacquisition dividends= BV equity at acquisition

Sales and expenses (not dividends) for the year may be assumed level.


8-10

2: INTERIM ACQUISITIONS


8-11


Simple Interim Acquisition: ExamplePot acquires 80% of Spot for $2,400 on 5/1/12. Fixed assets with a remaining life of 5 years are undervalued by $600. Spot distributed $150 dividends each on 3/1/12 and 12/1/12. Spot's trial balance on 12/31/12 was:

Revenues and expenses are assumed to be incurred uniformly over the year.

Cash 50 Accounts payable 300 Inventories 900 Other liabilities 1,200 Fixed assets, net 2,800 Common stock 600 Cost of sales 1,500 Retained earnings, 1/1 1,350 Operating expenses 600 Sales 2,700

Dividends 300 6,150 6,150


8-12

Find Book Value at Acquisition

Book value of equity on 1/1/12 $1,950

Preacquisition amounts:

Revenues 900 Jan-Apr

Cost of sales (500) Jan-Apr

Operating expenses (200) Jan-Apr

Dividends (150) none

Book value on 5/1/12 $2,000


8-13

Retained Earnings and Common Stock at 1/1/12.

Four months’ proportion of revenue and expenses.

Analysis and Amortizations

Cost of 80% of Spot 2,400

Implied value of Spot 3,000

Book value 2,000

Excess 1,000 Unamort UnamortAllocated to: 5/5/12 2012 12/31/12Fixed assets 600 (80) 520 Goodwill 400 0 400 Total 1,000 (80) 920

Spot's 20012 income 600 Income since May 1 400 Amortization (80)Adjusted 320

CI 80% share 256 NCI 20% share 64


8-14

$2,400 / .80

From previous calculation. $600/5 x 8/12.

Pot's Equity Entries

Investment in Spot 2,400 Cash 2,400

for acquisition Cash 120

Investment in Spot 120 for dividends Investment in Spot 256

Income from Spot 256

for income from sub


8-15

These entries are made in Pot’s general ledger:

Income from Spot 256 Dividends 120 Investment in Spot 136

Noncontrolling interest share 64 Dividends 30 Noncontrolling interest 34

Sales 900 Common stock 600 Retained earnings 1/1 1,350 Fixed assets 600 Goodwill 400

Cost of sales 500 Operating expenses 200 Dividends 150 Investment in Spot 2,400 Noncontrolling interest 600

Depreciation expense 80 Accumulated depreciation 80

Worksheet elimination entries for 2012.

Notice the preacquisition revenues, expenses, and dividends included in the third entry.


8-16

Income statement: Pot Spot DR CR ConsolSales 5,000 2,700 900 6,800 Income from Spot 256 256 0 Cost of sales (2,100) (1,500) 500 (3,100)Operating expense (800) (600) 80 200 (1,280)Noncontrolling interest share 64 (64)Controlling interest share 2,356 600 2,356 State of retained earnings: Retained earnings, 1/1 4,300 1,350 1,350 4,300 Add net income 2,356 600 2,356 Deduct dividends (1,000) (300) 120

30

150 (1,000)Retained earnings, 12/31 5,656 1,650 5,656


8-17

Balance sheet: Pot Spot DR CR ConsolCash 950 50 1,000 Inventories 1,300 900 2,200 Fixed assets, net 5,170 2,800 600 80 8,490

Investment in Spot 2,536 136

2,400 0 Goodwill 400 400 Total 9,956 3,750 12,090 Accounts payable 500 300 800 Other liabilities 1,800 1,200 3,000 Common stock 2,000 600 600 2,000 Retained earnings 5,656 1,650 5,656 Noncontrolling interest 600 34 634 Total 9,956 3,750 12,090


8-18

Piecemeal Acquisition: ExamplePepper acquired Salt in a series of acquisitions, resulting in a total 90% ownership.

The total book value and fair value of Salt's net assets on October 1 (date control was acquired) was $220,000.

Interest Investment Date Acquired CostApril 1 5% 7,000 July 1 5% 8,000 October 1 80% 210,000 90% 225,000

Cost of 90% of Salt 225,000 Implied value of Salt 250,000 Book value 220,000 Goodwill 30,000


8-19

Income Distribution

Salt's income allocation for the year:

Total Oct 1 - Dec 31 before Oct 1

Income CI 90% share NCI 10% SharePreacquisitio

n

Sales 150,000 33,750 3,750 112,500

Expenses (110,000) (24,750) (2,750) (82,500)

Net income 40,000 9,000 1,000 30,000


8-20

Pepper's Worksheet Entries

Income from Salt 9,000 Dividends 0 Investment in Salt 9,000

Noncontrolling interest share 1,000

Dividends 0 Noncontrolling interest 1,000

Sales 112,500 Common stock 100,000 Retained earnings 1/1 90,000

Expenses 82,500 Dividends 0 Investment in Salt 225,000 Noncontrolling interest 25,000

There were no dividends before or after the acquisition in this case. Zeros are included just for clarity.


8-21

Income statement: Pepper Salt DR CR Consol

Sales 274,875 150,000 112,500 312,375

Income from Salt 9,000 9,000 0

Expenses (220,000) (110,000) 82,500 (247,500)

Noncontrolling interest share 1,000 (1,000)

Controlling interest share 63,875 40,000 63,875

State of retained earnings:

Retained earnings, 1/1 221,500 90,000 90,000 221,500

Add net income 63,875 40,000 63,875

Deduct dividends 0 0

Retained earnings, 12/31 285,375 130,000 285,375


8-22

Balance sheet: Pepper Salt DR CR Consol

Other assets 451,375 300,000 751,375

Investment in Salt 234,000 9,000

225,000 0

Goodwill 30,000 30,000

Total 685,375 300,000 781,375

Liabilities 100,000 70,000 170,000

Common stock 300,000 100,000 100,000 300,000

Retained earnings 285,375 130,000 285,375

Noncontrolling interest

25,0001,000 26,000

Total 685,375 300,000 781,375 Copyright ©2012 Pearson Education,

Inc. Publishing as Prentice Hall8-23

Interim Sale, Continued Control: Example

Pablo owns 90% of Sergio. Pablo’s 1/1/12 $228 investment balance reflects Sergio's underlying equity plus $18 goodwill ($20 total implied goodwill). During 2012, Sergio reports $36 income and pays $20 dividends on July 1.Pablo sells 10% interest in Sergio on April 1 for $40.

Before Interest After the sale sold the salePablo's interest in Sergio 90% 10% 80%Investment account:

1/1 balance 288.0 Income to 4/1 8.1 4/1 balance 296.1 32.9 263.2


8-24

Investment in Sergio: T-account

Investment in Sergio

1/1 Balance 288.0

90% income to 4/1 8.1

4/1 Balance 296.1 32.9 4/1 sale of 10% (1/9 of shares)

16.0 6/1 dividends (80%)

80% income since 4/1 21.6

12/31 Balance 268.8


8-25

Pablo's Entry for the Sale

Cash 40.0

Investment in Sergio 32.9

Additional paid in capital 7.1

No gain or loss is recorded. Since Pablo retains control, the sale of some shares is treated as an owner transaction; the difference impacts paid in capital.


8-26

Noncontrolling Interest Calculations

Balance on Jan 1: (288*.1/.9) $32.0

Income to April 1: (36*.1*3/12) 0.9

Addition to NCI on April 1 32.9

Income since April 1: (36*.2*9/12) 5.4

Dividends (20*.2) (4.0)

Balance at Dec 31 $67.2


8-27

Worksheet EntriesIncome from Sergio (8.1+21.6) 29.7

Dividends 16.0 Investment in Sergio 13.7

Noncontrolling interest share (0.9+5.4) 6.3 Dividends 4.0 Noncontrolling interest 2.3

Common stock 200.0 Retained earnings 1/1 100.0 Goodwill 20.0

Investment in Sergio (288-32.9) 255.1 Noncontrolling interest, 1/1 32.0 Noncontrolling interest, 4/1 32.9


8-28

Interim Sale, Loss of Control: Example

1. Bring investment account up to date, recognizing partial year's income as appropriate

2. Determine BV of fraction of investment sold3. Compare to selling price4. Record a gain or loss on difference5. The "parent" no longer consolidates the

"subsidiary" That relationship has been dissolved Parent will use equity or fair value/cost method

as appropriate


8-29

3: SUBSIDIARY’S STOCK TRANSACTIONS


8-30


Subsidiary ActionsSubsidiary actions increasing Parent share

1. Sub issues additional shares to Parent2. Sub reacquires shares from noncontrolling interest

Subsidiary actions decreasing Parent share3. Sub issues additional shares to noncontrolling interests4. Sub reacquires shares from Parent

Subsidiary actions not impacting ownership5. Sub issues stock to both parent & noncontrolling interest6. Sub issues stock split or stock dividend


8-31

Sub Issues Stock to Parent: Example

Pratt owns 80% of Strut, acquired at $180.

Strut issues additional shares to Pratt. Outstanding shares increased from 10K to 12K.Pratt had owned 8K of the 10K (80%), but now owns 10K of the 12K shares (66.67%).

Cost of 80% of Strut $180

Implied value of Strut $225

Book value of Strut 200

Excess, goodwill $25


8-32

Pratt's Entry

Pratt acquires additional shares directly from Strut at book value, $40.

If Pratt had paid $70 (above book value) or $30 (below book value), only the amount in the entry would change.The following analysis shows different amounts of goodwill which will be used in the consolidation worksheet.

Investment in Strut 40

Cash 40


8-33

Before saleStrut's equity 200 Goodwill 25 Total value 225 Pratt's Investment in Strut 180 Pratt's share of BV of equity 160 Goodwill 20 Total value 180

Sell at BV Sell > BV Sell < BV for $40 for $70 for $30

Strut's equity, after the issuance 240 270 230 Pratt's Investment, after 220 250 210.0 Pratt's share of equity, 10/12 share 200 225 191.7 New measure of goodwill 20 25 18.3 Total 220 250 210.0

Goodwill may go up or down depending on the value Pratt paid for the additional shares of Strut


8-34

Sub Issues Stock to Outsiders: Example

Puny owns 80% of Stat, acquired at $180.

Stat issues additional shares to outside entities. Outstanding shares increased from 10K to 12K.Puny had owned 8K of the 10K (80%), but now owns 8K of the 12K shares (66.67%).

Cost of 80% of Stat $180

Implied value of Stat $225

Book value of Stat 200

Excess, goodwill $25


8-35

Before saleStat equity 200 Goodwill 25 Total value 225 Puny's Investment 180 Puny's share of BV of equity 160 Goodwill 20 Total value 180

Sell at BV Sell > BV Sell < BV for $40 for $70 for $30

Stat equity, after 240 270 230 Puny's Investment current balance 180 180 180.0 Puny's share of equity, 10/12 share 160 180 153.3 Old goodwill 20 20 20.0 Total, new balance in Investment 180 200 173.3 Adjustment 0 +20 -6.7

Puny's measure of goodwill does not change when Stat issues the shares to outside entities, just the value of its Investment in Stat account.


8-36

Puny's Adjusting Entry

for $40:

no entry needed

for $70

Investment in Stat 20.0


for $30


Investment in Stat 6.7


8-37

Sub Purchases Treasury Stock: Example

Pointer owns 80% of Shelly acquired for $160, at cost equal to book value.

Pointer holds 8K of Shelly's 10K shares outstanding (80%). Shelly reacquires 0.4K shares from outsiders. Pointer now holds 8K of Shelly's 9.6K shares outstanding (83.33%)

Cost of 80% of Shelly $160 Implied value of Shelly $200 Book value of Shelly 200 Excess, goodwill $0


8-38

Before treasury stockShelly's equity 200 Goodwill 0 Total value 200 Pointer's Investment in Shelly 160 Pointer's share of BV of equity 160 Goodwill 0 Total value 160

Buy = BV Buy > BV Buy < BV for $8 for $12 for $6

Shelly's equity, after 192 188 194 Pointer's Investment current balance 160 160 160.0 Pointer's share of equity, 8/9.6 160 156.7 161.7 Old goodwill 0 0.0 0.0 Total, new balance in Investment 160 156.7 161.7 Adjustment needed 0 -3.3 +1.7

There was no prior goodwill; none is created by Shelly purchasing treasury stock. Pointer adjusts the balance in its Investment account.


8-39

Pointer's Adjustment

Pointer's entry when Shelly purchases treasury shares from outsiders.

Treasury stock purchased for $8 no entry needed Treasury stock purchased for $12 Additional paid in capital 3.3

Investment in Shelly 3.3 Treasury stock purchased for $6 Investment in Shelly 1.7



8-40

Sub Stock Splits/ Stock Dividends: Example

A subsidiary may issue stock dividends or stock splits

Impact is proportional on both controlling and noncontrolling interests

Percentage ownership does not change Stock dividends capitalize some of the subsidiary's

retained earnings


8-41

This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. Thework and materials from it is should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials.

!

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.


8-42

advanced acct pp ch08

Documents

outstanding shares increased

bv sell

bv sell

issues additional shares

equity goodwill total

issues stock

12k shares

reacquires shares