chapter 8: consolidations - changes in ownership interests

© Pearson Education, Inc. publishing as Prentice Hall 8-1

Chapter 8: Consolidations – Changes in Ownership Interests

by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompanyAdvanced Accounting, 10th editionby Floyd A. Beams, Robin P. Clement,

Joseph H. Anthony, and Suzanne Lowensohn


Changes in Ownership: Objectives1. Prepare consolidated statements when parent

company's ownership percentage increases or decreases during the reporting period.

2. Apply consolidation procedures to interim (midyear) acquisitions.

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


1: Changes in Ownership Percentage1: Changes in Ownership PercentageConsolidations – Changes in Ownership Interests


Changes in Parent Ownership Increases

1. Parent acquires controlling interest during interim period

2. Parent acquires controlling interest in stages3. Parent acquires additional shares from

noncontrolling interestDecreases

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


Initial Acquisition of ControlParent obtains control

– Determine implied value and allocate excess– Apply consolidation procedures


Control is MaintainedParent 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


Control RelinquishedParent sells part of its Investment and no longer

retains control– Reduce the Investment based on proportion

of interest sold– Record gain or loss on sale– Discontinue consolidation


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


2: Interim Acquisitions2: Interim AcquisitionsConsolidations – Changes in Ownership Interests


Preacquisition IssuesEntity theory (APB Opinion No. 51)

– Income statement includes all revenues and expenses

– Total consolidated income LESS• Preacquisition earnings• Noncontrolling interest share• Equals Controlling interest share

Parent theory (FASB Statement No. 160)– Income statement includes revenues and

expenses since acquisition– Total consolidated income LESS

• Noncontrolling interest share • Equals Controlling interest share


Equity Book Value on Interim DateBook value of equity is needed as of acquisition

dateAdjust the beginning value for changes before

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

Sales and expenses (not dividends) might be assumed level


Simple Interim AcquisitionPuma acquires 80% of Sega for $2,400 on 5/1/09. Fixed assets with a

remaining life of 5 years are undervalued by $600. Sega's trial balance on 12/31/09 was:

Sega's distributed $150 dividends each on 3/1/09 and 12/1/09. 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


Find Book Value at AcquisitionBook value of equity on 1/1/09 $1,950 Preacquisition amounts: Revenues 900 Jan-AprCost of sales (500) Jan-AprOperating expenses (200) Jan-AprDividends (150) noneBook value on 5/1/09 $2,000


Analysis and AmortizationsCost of 80% of Sega 2,400 Implied value of Sega 3,000 Book value 2,000 Excess 1,000 Unamort Unamort

Allocated to: 5/5/09 2009 12/31/09Fixed assets 600 (80) 520 Goodwill 400 0 400 Total 1,000 (80) 920

Sega's 2009 income 600 Income since May 1 400 Amortization (80)Adjusted 320

CI 80% share 256 NCI 20% share 64


Puma's Equity Entries

Investment in Sega 2,400 Cash 2,400

for acquisition Cash 120

Investment in Sega 120 for dividends Investment in Sega 256

Income from Sega 256 [(2/3)(2,700 - 1,500 - 600) - (2/3)(600/5yrs)]x80%


Income from Sega 256 Dividends 120 Investment in Sega 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 Sega 2,400 Noncontrolling interest 600

Depreciation expense 80 Accumulated depreciation 80

Worksheet elimination entries for 2009

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


Income statement: Puma Sega DR CR ConsolSales 5,000 2,700 900 6,800 Income from Sega 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


Balance sheet: Puma Sega 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 Sega 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


Interim Acquisition in StagesPoca acquired Sark in a series of acquisition, resulting in a

total 90% ownership.

The total book value and fair value of Sark's net assets on October 1 was $220,000.

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

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


Income DistributionSark's income allocation for the year:

Total Oct 1 - Dec 31 before Oct 1

Income CI 90% share NCI 10% SharePreacquisitio

nSales 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


Poca's Worksheet EntriesIncome from Sark 9,000

Dividends 0 Investment in Sark 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 Sark 225,000 Noncontrolling interest 25,000

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


Income statement: Poca Sark DR CR Consol

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

Income from Sark 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


Balance sheet: Poca Sark DR CR ConsolOther assets 451,375 300,000 751,375 Investment in Sark 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


Interim Sale, Continued ControlPablo owns 90% of Sergio and its 1/1/10 $228 investment

balance reflects Sergio's underlying equity plus $18 goodwill ($20 total implied goodwill).

During 2010, 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


Investment in Sergio: T-accountInvestment 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


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.


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


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


Interim Sale, Loss of Control1. 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 differenceThe "parent" no longer consolidates the

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

method as appropriate


3: Subsidiary's Stock Transactions3: Subsidiary's Stock TransactionsConsolidations – Changes in Ownership Interests


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 ownership shares5. Sub issues stock to both parent & noncontrolling

interest6. Sub issues stock split or stock dividend


Stroh Issues Stock to PurdyPurdy owns 80% of Stroh, acquired at $180.

Stroh issues additional shares to Purdy. Outstanding shares increased from 10K to 12K.

Purdy had owned 8K of the 10K, but now owns 10K of the 12K shares.

Cost of 80% of Stroh $180 Implied value of Stroh $225 Book value of Stroh 200 Excess, goodwill $25


Before saleStroh's equity 200 Goodwill 25 Total value 225 Purdy's Investment in Stroh 180 Purdy'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

Stroh's equity, after the issuance 240 270 230 Purdy's Investment, after 220 250 210.0 Purdy'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 Purdy paid for the additional shares of Stroh


Purdy's Entry Purdy acquires additional shares directly from

Stroh at book value, $40.

If Purdy had paid $70 (above book value) or $30 (below book value), only the amount in the entry would change.

The analysis above shows different amounts of goodwill which will be used in the consolidation worksheet.

Investment in Stroh 40 Cash 40


Stat Issues Stock to OutsidersPuny 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, but now owns 8K of the 12K shares.

Cost of 80% of Stat $180 Implied value of Stat $225 Book value of Stat 200 Excess, goodwill $25


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 Stroh issues the shares to outside entities. Puny adjusts the value of its Investment in Stat account.


Puny's Adjusting Entry

for $40: no entry needed for $70 Investment in Stat 20.0

Additional paid in capital 20.0 for $30 Additional paid in capital 6.7

Investment in Stat 6.7


Shelly Purchases Treasury StockPointer owns 80% of Shelly acquired for $160, at

cost equal to book value.

Pointer holds 8K of Shelly's 10K shares outstanding. Shelly reacquires 0.4K shares from outsiders.

Pointer now holds 8K of Shelly's 9.6K shares outstanding.

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


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 goodwill and none is created by Shelly purchasing treasury stock. Pointer adjusts the balance in its Investment in Shelly account.


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

Additional paid in capital 1.7


Stock Splits/ Stock DividendsA 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


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chapter 8: consolidations - changes in ownership interests

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