chp8

© 2011 Pearson Education, Inc. publishing as Prentice Hall 8-1

Chapter 8

CONSOLIDATIONS — CHANGES IN OWNERSHIP INTERESTS Answers to Questions 1 Preacquisition earnings and dividends are the earnings and dividends applicable to an investment interest

prior to its acquisition during an accounting period. Assume that P purchases an 80 percent interest in S on July 1, 2011 and that S has earnings of $100,000 between January 1 and July 1, 2011 and pays $50,000 dividends on May 1, 2011. In this case, preacquisition earnings and dividends are $100,000 and $40,000, respectively. Historically, preacquisition earnings purchased were shown as a deduction on the income statement to arrive at consolidated net income. Under current GAAP, this is no longer the case. Instead, the consolidated income statement should only report revenues, expenses, gains and losses subsequent to the acquisition. For example, in a March 31 acquisition, the consolidated income statement would only include income of the subsidiary from April 1 through December 31. GAAP reasons that acquirers purchase assets and assume liabilities, based on their fair values. Acquirers do not “purchase” preacquisition earnings, although fair values of net assets should reflect earning power of the acquired firm.

2 Preacquisition earnings are not recorded by a parent under the equity method because the investor only

recognizes income subsequent to acquisition on the interest acquired. Historically, preacquisition earnings purchased were shown as a deduction on the income statement to arrive at consolidated net income. Under current GAAP, this is no longer the case. Instead, the consolidated income statement should only report revenues, expenses, gains and losses subsequent to the combination date. For example, in a March 31 acquisition, the consolidated income statement would only include income of the subsidiary from April 1 through December 31.

3 Noncontrolling stockholders of Sub Company held a 20 percent interest during the first half year and a 10

percent interest during the last half year and at year-end. But noncontrolling interest at year-end is computed for the 10 percent interest held by noncontrolling stockholders at the end of the year. Noncontrolling interest share for the year has two parts: (1) annual income x 50% x 10% plus (2) annual income x 50% x 20%.

4 Preacquisition income is similar to noncontrolling interest share because it represents the income of a

subsidiary attributable to stockholders outside the consolidated entity. But preacquisition income is not income of the noncontrolling stockholders at the date of the financial statements. In fact, preacquisition income relates to a previous controlling stockholder group when the interest acquired exceeds 50 percent. In such a case, it seems improper to report this as a deduction in the consolidated income statement. Rather, the fair value of net assets acquired should reflect the acquiree’s earnings history.

5 Under GAAP, a gain or loss is only recorded when the sold interest results in deconsolidation of the

subsidiary, i.e., the parent no longer holds a controlling interest. The gain or loss on the sale of an equity interest is the difference between the proceeds from the sale (the fair value) and the recorded book value of the interest sold, provided that the investment is accounted for as a one-line consolidation. If another method of accounting has been used, the investment account must be converted to the equity method so that any gain or loss on sale is the same as if a one-line consolidation had been used previously.

When the parent maintains a controlling interest after the sale, the sale is treated as an equity transaction, with no gain or loss recognition. The parent debits cash or other consideration received in the sale, credits the investment account based on percent of carrying value sold, and records the difference as an adjustment to other paid-in capital.

8-2 Consolidations — Changes in Ownership Interests

© 2011 Pearson Education, Inc. publishing as Prentice Hall

6 Conceptually, the income applicable to an equity interest sold during an accounting period should be included in investment income and consolidated net income. In this case, the gain or loss on sale is computed on the basis of the book value of the interest at the time of sale, and income is assigned to the increased noncontrolling interest only after the date of sale. As a practical expedient, a beginning-of-the-period sale date can be used such that no income is recognized on the interest sold up to the time of sale, and the gain or loss is computed on the book value at the beginning of the period. When this expedient is used, income must be assigned to the increased noncontrolling interest for the entire year of sale. The combined investment income and gain or loss on sale are the same under both approaches provided that the assumptions (beginning of the year and time of sale) are followed consistently. As noted in question 5, gain or loss on the sale of the equity interest is only recognized when the subsidiary is deconsolidated. Other wise, the gain or loss is an adjustment to other paid-in capital.

7 Assuming that no gain or loss is recognized, no adjustment of the parent’s investment account is necessary

when the subsidiary sells additional shares to outside parties at book value because the parent’s share of underlying book value does not change. If additional shares are sold above book values, the parent’s share of the underlying equity of the subsidiary increases. This increase is recorded by the parent as follows:

Investment in subsidiary XX Additional paid-in capital XX If the subsidiary sells additional shares below book value, the parent’s interest is decreased and

the parent records decreases in its investment and additional paid-in capital accounts. In all three cases (at book value, above book value, or below book value), the parent’s ownership percentage decreases from 80 percent (8,000 of 10,000 shares) to 66 2

3 percent (8,000 of 12,000 shares).

No gain or loss is recognized, the change in underlying book value, adjusted for one-sixth [(80%

– 66 23 %) 80%] of any unamortized cost book value differential is reported as adjustment to additional

paid-in capital, since the parent maintains its controlling interest. An alternative computation is to assume that the parent sold one-sixth of its interest for 66 2

3 percent of the proceeds, the difference being the

amount of adjustment to additional paid-in capital. 8 The acquisition of the 2,000 shares directly from the subsidiary increases the parent’s percentage interest

from 80 percent (8,000 of 10,000 shares) to 5/6 (10,000 of 12,000 shares, or 83 1/3%). The change in the interest held does not affect the way in which the parent records its additional investment. The parent in all cases increases its investment account by the amount of cash paid or other consideration given for the additional investment. It makes no difference if the purchase price is above or below book value. But, if the purchase price is above the book value of equity acquired, then the excess is assigned to undervalued assets or goodwill. If the purchase price is below the book value of equity acquired, then the excess should be assigned to reduce overvalued identifiable assets or goodwill.

9 Treasury stock transactions by a subsidiary change the parent’s proportionate interest in the subsidiary.

Any changes in the parent’s share of the underlying book value of the subsidiary require adjustments in the parent’s investment in subsidiary and additional paid-in capital accounts.

10 Gains and losses to a parent (or equity investor) do not result from the treasury stock transactions of its

subsidiaries (or equity investees). Although the parent’s investment interest may increase or decrease from such transactions, the predominate view is that such changes are of a capital nature and should be accounted for by additional paid-in capital adjustments rather than by recorded gains and losses.

11 Stock splits and stock dividends by a subsidiary do not affect the amounts that appear in the consolidated

financial statements. But stock dividends by a subsidiary result in capitalization of subsidiary retained earnings and the amounts involved in eliminations for the subsidiary’s stockholders’ equity accounts are affected.

Chapter 8 8-3


SOLUTIONS TO EXERCISES Solution E8-1 Allocation of Set’s net income: Controlling share of income ($100,000 70% 1/2 year) + ($100,000 90% 1/2 year) $ 80,000 Noncontrolling interest share (30% x $100,000 x ½ year) + (10% x $100,000 x ½) $20,000 Preacquisition income $ 0 Note: This does not appear on the consolidated income statement. Allocation of Set’s dividends: Dividends to Pie ($30,000 70%) + ($30,000 90%) $ 48,000 Noncontrolling interest ($30,000 x 30%) + ($30,000 x 10%) $ 12,000 Preacquisition dividends $ 0 Solution E8-2 1 Income from Sip for 2011: 40% interest x $240,000 x 8/12 year $64,000 60% interest $240,000 1/3 year $ 48,000

Total income from Sip $112,000 2. Preacquisition income: Under GAAP, no preacquisition income appears on the

consolidated income statement. The income statement only includes income of the subsidiary earned after the parent obtains its controlling interest. Control was established onSeptember 1, when Pin’s interest increased from 40% to 60%, so the consolidated income statement includes Sip income of $80,000 ($240,000 x 1/3 of year).

3 Noncontrolling interest share for 2011: $80,000 40% $ 32,000



Solution E8-3 (amounts in thousands) Entry to record sale of 15% interest: Cash 750 Investment in Sap 660 Other paid-in capital 90 To record sale of 15% interest in Sap. No gain or loss on sale is recognized

since Pet maintains an 85% controlling interest.

Entry to record investment income for 2011: Investment in Sap($600 85%) 510 Income from Sap 510 To record income from Sap. Check: Investment balance January 1, 2011 $4,400 Less: Book value of interest sold (660) Add: Income from Sap 510 Investment balance December 31, 2011 $4,250 Underlying equity ($4,600 85%) $3,910 Add: 85% of Goodwill * 340 Investment balance December 31, 2011 $4,250 * Note that implied total goodwill is $400 ($340 / 85%). Solution E8-4 (amounts in thousands) 1 Gain on sale of 20% interest: No gain or loss is recognized since Pal maintains a 60% controlling interest. Beginning of the period sale assumption Selling price $130 Book value of interest ($436 investment account balance 20%/80%) 109 Adjustment to other paid-in capital $ 21 Actual sale date assumption Selling price $130 Book value of interest sold: Beginning of the period balance $436 Add: Income ($150 1/3 year 80%) 40 476 Interest sold 25% 119 Adjustment to increase additional paid-in capital $ 11 2 Income from Sag Beginning of the period sale assumption Income from Sag($150 60%) $ 90 Actual sale date assumption January 1 to May 1: Share of Sag’s income ($150 80% 1/3 year) $ 40 May 1 to December 31: Share of Sag’s income ($150 60% 2/3 year) 60 Income from Sag $100

Chapter 8 8-5


Solution E8-4 (continued) 3 Investment in Sag December 31, 2011 Beginning of Actual Period Sale Sale Date Assumption Assumption Investment balance January 1 $436 $436 Book value of interest sold (109) (119) Income from Sag 90 100 Dividends (48) (48) Investment balance December 31, 2011 $369 $369 Solution E8-5 (amounts in thousands) 1a Fair value — book value differential Cost $1,274 Implied fair value of Set ($1,274 / 70%) $1,820 Book value ($1,480 January 1 balance + $100 income for 5 months - $60 dividends in January and April) (1,520) Goodwill $ 300 1b Income from Set (Note: Only include earnings subsequent to the

acquisition date). Income from Set ($240,000 7/12 year 70%) $ 98 1c Investment in Set at December 31 Investment cost $1,274 Add: Income from Set 98 Deduct: Dividends ($60,000 70%) (42) Investment in Set December 31, 2011 $1,330 2 Consolidation working paper entries: a Income from Set 98 Investment in Set 56 Dividends 42

To eliminate income and dividends from Set and adjust investment account to its cost on June 1.

b Common stock, $10 par — Set 1,000 Retained earnings — Set 580 Goodwill 300 Investment in Set 1,274 Noncontrolling interest 564 Dividends 42

To eliminate reciprocal investment and equity balances, record preacquisition income and beginning noncontrolling interest, and eliminate preacquisition dividends.

c Noncontrolling interest share 240,000 x 7/12 x 30% 42,000 Dividends 120,000 x 30% 36,000



Noncontrolling interest 6,000

Chapter 8 8-7


Solution E8-6 1 Investment in Sow (in thousands) Investment balance December 31, 2011 ($9,000 80%) $ 7,200 Cost of new shares ($25 60,000 shares) 1,500 Investment in Sow after new investment $ 8,700 2 Goodwill from new investment Sow’s stockholders’ equity after issuance ($9,000 + $1,500) $10,500 Pal’s ownership percentage (480,000 + 60,000 shares)/660,000 shares .8182 Pal’s book value after issuance 8,591.1 Less: Pal’s book value before issuance (7,200) Increase in book value from purchase (book value acquired) $ 1,391.1 Cost of 60,000 shares $ 1,500 Book value acquired (1,391.1) Goodwill from acquisition of new shares* $ 108.9

* This implies total goodwill is equal to $136,125. Solution E8-7 1 Sod issues 30,000 shares to Pod at $20 per share Pod’s ownership interest before issuance: 176,000/220,000 shares = 80% Pod’s ownership interest after issuance: 206,000/250,000 shares = 82.4% 2 Sod sells 30,000 shares to the public at $20 per share Pod’s ownership interest after issuance: 176,000/250,000 shares = 70.4% 3 Sod sells 30,000 shares to the public; no gain or loss recognized: Investment in Sod 115,200 Additional paid-in capital 115,200

To record increase in investment in Sod computed as follows:

Book value before issuance ($3,200,000 80%) $2,560,000 Book value after issuance ($3,800,000 70.4%) 2,675,200 Additional paid-in capital $ 115,200



Solution E8-8 Pam buys shares 1a Percentage ownership after additional investment: 700,000/1,000,000 = 70% 1b Goodwill from additional investment (in thousands): Book value of interest after sale $2,600 70% $1,820 Book value of interest before sale $2,100 2/3 1,400 Book value of interest acquired 420 Cost of interest 500 Goodwill from additional investment * $ 80

* This implies total goodwill is now equal to $114,286. Outsiders buy shares 2a Percentage ownership after sale: 600,000/1,000,000 = 60% 2b Change in underlying book value of investment in Sat: Sat’s underlying equity after sale $2,600,000 Pam’s interest 60% Book value of Pam’s investment in Sat after the sale 1,560,000 Less: Book value before the sale 1,400,000 Increase in book value of investment $ 160,000 2c Entry to adjust investment account: Investment in Sat 160,000 Additional paid-in capital 160,000

Chapter 8 8-9


Solution E8-9 Preliminary computations of fair value — book value differentials: April 1, 2011 acquisition Cost of 4,000 shares (20% interest) $ 64,000 Implied total fair value of Sum ($64,000 / 20%) $320,000 Book value of Sum on april 1 acquisition date: Beginning stockholders’ equity $280,000 Add: Income for 3 months ($80,000 ¼ year) 20,000 Stockholders’ equity April 1 300,000 Goodwill $ 20,000 July 1, 2012 acquisition Cost of 8,000 shares (40% interest) $164,000 Implied total fair value of Sum ($164,000 / 40%) $410,000 Book value on July 1 acquisition date: Beginning stockholders’ equity $360,000 Add: Income for 6 months ($80,000 1/2 year) 40,000 Less: Dividends May 1 (10,000) Stockholders’ equity July 1 390,000 Goodwill (amount is unchanged by this transaction) $ 20,000 1 Income from Sum 2011 Income from Sum for 2011 ($80,000 20% 3/4 year) $ 12,000 2012 Income from Sum 20% share of reported income ($80,000 20%) $ 16,000 40% share of reported income ($80,000 40% 1/2 year) 16,000 Income from Sum $ 32,000 2 Noncontrolling interest December 31, 2012

(($420,000 book value + $20,000 goodwill) 40%) $176,000

3 Preacquisition income does not appear in income statement. 4 Investment balance at December 31, 2012 Cost of 20% investment $ 64,000 Income from Sum for 2011 12,000 Cost of 40% investment 164,000 Income from Sum for 2012 32,000 Gain on revaluation of investment

Less: Dividends ($2,000 + $6,000) 18,000 (8,000)

Investment in Sum $282,000 Implied fair value of Sum ($164,000/0.4) $410,000

Fair value of original investment($410,000 x 20%) Less: Cost of original investment

82,000 (64,000)

Gain on revaluation of investment $ 18,000



Solution E8-10 Preliminary computations Investment cost July 1, 2012 $675,000 Implied total fair value of Sad ($675,000 / 90%) $750,000 Less: Book value of Sad at acquisition: Equity of Sad December 31, 2011 $700,000 Add: Income for 1/2 year 50,000 Equity of Sad July 1, 2012 750,000 Excess (book value = underlying equity) 0 1 Investment income from Sad Income from Sad — 2012 ($100,000 1/2 year 90%) $ 45,000 Income from Sad — 2013: January 1 to July 1 ($80,000 1/2 year 90%) $ 36,000 July 1 to December 31 ($80,000 1/2 year 80%) 32,000 $ 68,000 Investment in Sad Cost July 1, 2012 $675,000 Add: Income from Sad — 2012 45,000 Less: Dividends paid in December ($50,000 90%) (45,000) Investment balance December 31, 2012 675,000 Less: Book value of 1/9 interest sold on July 1, 2013a (79,000) Add: Income from Sad — 2013 68,000 Less: Dividends paid in December ($30,000 80%) (24,000) Investment balance December 31, 2013 $640,000 a Sale of 10% interest July 1, 2013: Equity of Sad December 31, 2011 $700,000 Add: Income less dividends — 2012 50,000 Add: Income for 1/2 year — 2013 40,000 Equity of Sad July 1, 2013 790,000 Interest sold 10% Underlying equity of interest sold $ 79,000 Gain on sale of 1/9 interest ($85,000 proceeds - $79,000)

Since Pit maintains a controlling interest, the gain is not recorded, but shown as an adjustment to additional paid-in capital.

$ 6,000

Chapter 8 8-11


Solution E8-10 (continued) 2 Noncontrolling interest share Noncontrolling interest share — 2012:

($100,000 income 10% interest x 1/2 year) $ 5,000

Noncontrolling interest share — 2013: ($80,000 1/2 year 10%) + ($80,000 1/2 year 20%) $ 12,000 Noncontrolling interest December 31, 2012 Equity of Sad January 1 $700,000 Add: Income less dividends for 2012 50,000 Equity of Sad December 31 750,000 Noncontrolling interest percentage 10% Noncontrolling interest December 31 $ 75,000 Noncontrolling interest December 31, 2013 Equity of Sad January 1 $750,000 Add: Income less dividends for 2013 50,000 Equity of Sad December 31 800,000 Noncontrolling interest percentage 20% Noncontrolling interest December 31 $160,000 Solution E8-11 Preliminary computations: Investment cost January 1, 2012 $ 690,000 Implied total fair value of Soy ($690,000 / 75%) $ 920,000 Book value of Soy (800,000) Excess fair value over book value = Goodwill $ 120,000 1 Underlying book value December 31, 2012 $1,000,000 equity 75% $ 750,000 2 Percentage ownership before purchase of additional shares 30,000 shares owned/40,000 shares outstanding = 75% interest Percentage ownership after purchase of additional shares 40,000 shares owned/50,000 shares outstanding = 80% interest 3 Investment in Soy balance January 3, 2013 Investment cost January 1, 2012 $ 690,000 Add: Share of Soy’s income less dividends for 2012 ($200,000 75%) 150,000 Investment in Soy December 31, 2012 840,000 Add: Additional investment — January 3, 2013 (10,000 shares $30) 300,000 Investment in Soy balance January 3, 2013 $1,140,000



4 Percentage ownership if shares sold to outside entities 30,000 shares owned/50,000 shares outstanding = 60% interest 5 Investment in Soy balance January 3, 2013 Investment in Soy December 31, 2012 (see 3 above) $ 840,000 Add: Increase in book value from change in

ownership interest:

Book value after additional 10,000 shares were issued ($1,300,000 equity 60%) $780,000 Book value before additional 10,000 shares were issued ($1,000,000 equity 75%) (750,000) 30,000 Investment in Soy balance - January 3, 2013 $ 870,000 Solution E8-12 Preliminary computations: Cost of additional investment (2,000 shares $80) $160,000 Implied total fair value of Son $160,000 / (2,000/12,000)

$960,000

Less: Book value of Son after issuance 710,000 Excess fair value over book value $250,000 January 2, 2012 Investment in Son 160,000 Cash 160,000

To record purchase of additional 2,000 shares of Son. December 2012 Cash 50,000 Investment in Son 50,000

To record receipt of dividends ($60,000 10,000/12,000 shares). December 31, 2012 Investment in Son 75,000 Income from Son 75,000

To record income from Son($90,000 10,000/12,000).

Chapter 8 8-13


Solution E8-13 1 Investment in Sir (in thousands) Cost $1,800 Add: 90% of $300 increase in equity since 2011 270 Investment in Sir January 1, 2013 $2,070 2 Entry on Pat’s books (no gain or loss recognized) Investment in Sir 180 Additional paid-in capital 180

To recognize change in book value of investment from Sir’s sale of additional shares, computed as follows:

Underlying equity after issuance ($2,400 75%) $1,800 Underlying equity before issuance ($1,800 90%) (1,620) $ 180 SOLUTIONS TO PROBLEMS Solution P8-1 Preliminary computations (in thousands): Cost of 40,000 shares July 1, 2011 $620 Implied total fair value of Sin ($620 / 80%) $775 Book value of Sin ($550 + $50 income) (600) Excess fair value over book value $175 Cost of 10,000 shares January 1, 2012 $162 Implied fair value of Sin [$162/(10/60)] $972 Fair value of original investment: [$972 x (40/60)]

$648

Less: Carrying value of original investment: Gain on revaluation of investment

620 $28

1 Investment in Sin — December 31, 2011 Investment cost $620 Add: Income from Sin- $100 1/2 year 80% 40 Less: Dividends ($50 80%) (40) Investment in Sin December 31, 2011 $620 2 Income from Sin — 2012 Share of Sin’s income ($150 5/6) $125 3 Investment in Sin — December 31, 2012 Investment balance December 31, 2011 $620 Add: Additional investment 162 Add: Income from Sin — 2012 125 Add: Revaluation of original investment

Less: Dividends for 2012 ($60 5/6) 28 (50)

Investment in Sin December 31, 2012 $885

Chapter 8 8-15


Solution P8-2 1 Investment in Sit (in thousands) Underlying equity $26,000 80% $20,800 Goodwill (80%) 2,000 Investment in Sit January 1, 2013 $22,800 2 Percentage interest after stock issuance Shares owned 960,000/1,600,000 outstanding shares = 60% interest 3 No gain or loss recognized on issuance of additional shares Investment in Sit 2,000 Other paid-in capital 2,000

To recognize change in ownership interest computed as: Underlying equity after sale ($38,000 60%) less underlying equity before sale of additional shares ($26,000 80%).

Solution P8-3 1 Journal entry to record sale as of actual sale date Cash 120,000 Additional paid-in capital 1,500 Investment in Saw 121,500

To record sale of 1/9 of investment in Saw. Book value of interest sold is computed as follows:

Investment balance December 31, 2010 $1,039,500 Add: Income from Saw for one-half year ($280,000 1/2 year 90%) 126,000 Less: Dividends ($80,000 90%) (72,000) Book value of investment on July 1, 2011 $1,093,500 Book value of interest sold ($1,093,500/9) $ 121,500 2 Journal entry to record sale as of January 1, 2011 Cash 120,000 Additional paid-in capital 12,500 Investment in Saw 107,500

To record sale of 1/9 of investment in Saw. Book value of interest sold is computed as follows:

Investment balance December 31, 2010 $1,039,500 Less: Dividends (72,000) Book value adjusted for dividends $ 967,500 Book value of interest sold ($967,500/9) $ 107,500 3 Reconciliation

Investment in Saw

Actual Sale Date

Investment in Saw

Beginning of Year Sale Date

Balance January 1, 2011 $1,039,500 $1,039,500 Add: Income from Saw January 1 — July 1 126,000 112,000 July 1 — December 31 112,000 1l2,000 Less: Dividends First half-year (72,000) (72,000) Last half-year (64,000) (64,000) Less: Book value of interest sold (121,500) (107,500)



Balance December 31, 2011 $1,020,000 $1,020,000 Solution P8-4 (in thousands) Entries on Pan’s books to reflect the change in ownership interest: Option 1 Pan sells 30,000 shares of Son Cash 1,500 Investment in Son 870 Additional paid-in capital 630

To record sale of 30,000 shares at $50 per share. No gain or loss is recognized since Pan maintains a controlling interest.

Option 2 Son issues and sells 40,000 shares to the public Investment in Son 630 Additional paid-in capital 630

To record adjustment in ownership computed as follows: Book value after sale of 40,000 shares ($12,440 75%) $9,330 Book value before sale of 40,000 shares ($10,440 5/6) (8,700) Increase in book value of investment from sale $ 630 Option 3 Son reissues 40,000 shares of treasury stock Investment in Son 630 Additional paid-in capital 630

To record adjustment in ownership computed the same as 2 above.

Consolidated Stockholders’ Equity at January 1, 2012

Option 1 Option 2 Option 3 Common stock $10,000 $10,000 $10,000 Additional paid-in capital 3,630 3,630 3,630 Retained earnings 7,000 7,000 7,000 Noncontrolling interesta 2,610 3,110 3,110 Total stockholders’ equity $23,240 $23,740 $23,740 a Noncontrolling interest under option 1: $10,440 25% Noncontrolling interest under options 2 and 3: $12,440 25%

Chapter 8 8-17


Solution P8-5 Preliminary computations: Cost of 9,000 shares (90% interest) January 1, 2011 $ 810,000 Implied total fair value of Sal ($810,000 / 90%) $ 900,000 Book value of Sal ($500,000 + $300,000) (800,000) Excess fair value over book value = Goodwill $ 100,000 1 Investment balance December 31, 2011 Cost January 1, 2011 (9,000 shares $90) $ 810,000 Add: Share of Sal’s 2011 income ($50,000 90%) 45,000 Investment in Sal December 31 $ 855,000

2 Goodwill at December 31, 2012(Pal purchased additional shares) Goodwill from January 1, 2011 purchase $ 100,000 Goodwill from January 1, 2012 purchase: Book value before purchase($850,000 x 90%) $ 765,000 Book value after purchase($1,350,000 x 931/3%) (1,260,000) Book value acquired (495,000) Cost of additional 5,000 shares 500,000 Goodwill from January 1, 2012 $ 5,000 Goodwill at December 31, 2012 $ 105,000 3 Additional paid-in capital (outsider purchased additional shares) Book value after issuance ($1,350,000 60%) $ 810,000 Book value before issuance ($850,000 90%) (765,000) Additional paid-in capital (gain is not recognized) $ 45,000 4 Noncontrolling interest December 31, 2012 (outsider purchased shares) Subsidiary equity January 1, 2011 $ 800,000 Increase for 2011 50,000 Increase for 2012 70,000 Sale of additional shares 500,000 Book value $1,420,000 Goodwill 100,000 Fair value of Sal equity December 31, 2012 $1,520,000 Noncontrolling interest percentage 6,000/15,000 shares 40% Noncontrolling interest December 31, 2012 $ 608,000



Solution P8-6 1 Investment in Sod December 31, 2012 Investment in Sod January 2, 2011 $ 98,000 Increase for 2011 ($30,000 retained earnings increase 70%) 21,000 Purchase of additional 20% interest June 30, 2012 37,000 Increase for income for 2012: ($30,000 1/2 year 70%) + ($30,000 1/2 year 90%) 24,000 Dividends 2012: ($10,000 90%) (9,000) Investment in Sod December 31, 2012 $171,000 2 Goodwill December 31, 2012 January 2, 2011 purchase: Cost of 70% interest $ 98,000 Implied fair value of Sod ($98,000 / 70%) $140,000 Less: Book value of Sod 120,000 Goodwill $ 20,000 June 30, 2012 purchase: Cost of 20% interest $ 37,000 Implied fair value of Sod ($37,000 / 20%) $185,000 Less: Book value of Sod 165,000 Goodwill - December 31, 2012 $ 20,000 3 Consolidated net income Sales $600,000 Cost of sales (400,000) Expenses (70,000) Consolidated net income 130,000 Noncontrolling interest share * 6,000 Controlling share of net income $124,000

* Noncontrolling share is 10% for full year plus 20% for ½ year.

Alternative: Pot’s reported income = Controlling share of net income $124,000 4 Consolidated retained earnings December 31, 2012 Beginning retained earnings $200,000 Add: Controlling share of Consolidated net income — 2012 124,000 Less: Dividends (64,000) Consolidated retained earnings — ending $260,000 Alternative solution: Pot’s reported ending retained earnings = Consolidated

retained earnings — ending $260,000

5 Noncontrolling interest December 31, 2012 Equity of Sod December 31, 2012 $170,000 Goodwill 20,000 Fair value of Sod $190,000 Noncontrolling interest percentage 10% Noncontrolling interest December 31, 2012 $ 19,000

Chapter 8 8-19


Solution P8-7 1 Pod Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2012

(in thousands) Sales $3,200 Cost of sales (1,900) Gross profit 1,300 Depreciation expense (700) Other expenses (150) Consolidated net income 450 Noncontrolling interest share ($150,000 20%) +

($150,000 1/4 year 10%) (33.75)

Controlling share of Consolidated net income $ 416.25 Note: Should also add Gain on revaluation of investment of $66,750 to Consolidated income statement. Calculation: Implied fair value of Subsidiary $95,000/0.1 = $950,000 Fair value of original investment $950,000 x 70% = $665,000 Less: Carrying value of original investment 598,250 Gain on revaluation of investment $66,750 Carrying value of original investment= $600,000 + ($150,000 x 3/12 x 70%) – ($40,000 x 70%) = $598,250

2 Schedule to allocate Saw’s income and dividends Saw’s income: Controlling share: ($150,000 x 70% x 3/12) + ($150,000 x 80% x 9/12) = 116,250 Noncontrolling share: ($150,000 x 30% x 3/12) + ($150,000 x 20% x 9/12) = 33,750 Saw’s dividends: Controlling share: ($40,000 x 70%) + ($40,000 x 80%) = $60,000 Noncontrolling share: ($40,000 x 30%) + ($40,000 x 20%) = $20,000



Solution P8-8 Preliminary computations Cost October 1, 2011 $ 82,400 Implied fair value of Sat ($82,400 / 80%) $103,000 Book value on October 1 acquisition date: Book value on January 1, 2011 $70,000 Add: Income January 1 to October 1 ($24,000 3/4 year) 18,000 Deduct: Dividends March 15 (5,000) Book value October 1 83,000 Goodwill $ 20,000 Income from Sat for 2011 Share of Sat’s net income ($24,000 1/4 year 80%) $ 4,800 Less: Unrealized profit in Sat’s ending inventory (1,000) Income from Sat $ 3,800 * Preacquisition income ($24,000 3/4 year 100%) $18,000 * Preacquisition dividends ($5,000 80%) $ 4,000 * Noncontrolling interest share ($6,000 20%) $ 1,200 * Under GAAP, preacquisition earnings are not shown as a reduction of consolidated net income. Rather, we only include earnings and dividends subsequent to the acquisitiondate. Preacquistion amounts are disclosed in required pro-forma disclosures for acquisitions. The worksheet on the following page reflects these adjustments.

Chapter 8 8-21


Solution P8-8 (continued)

Pop Corporation and Subsidiary Consolidation Working Papers

for the year ended December 31, 2011

Pop

Sat 80%

Adjustments and Eliminations

Consolidated Statements

Income Statement Sales

$ 112,000

$ 50,000

a 12,000 c 37,500

$ 112,500

Income from Sat 3,800 b 3,800 Cost of sales 60,000* 20,000* d 1,000 a 12,000

c 15,000 54,000*

Operating expenses 25,100* 6,000* c 4,500 26,600* Consolidated net income 31,900 Noncontrolling int. share f 1,200 1,200*

Controlling share of NI $ 30,700 $ 24,000 $ 30,700

Retained Earnings

Retained earnings — Pop

$ 30,000

$ 30,000

Retained earnings — Sat $ 20,000 e 20,000

Net income 30,700 24,000 30,700

Dividends 20,000* 10,000* b 4,000 c 5,000 f 1,000

20,000*

Retained earnings December 31

$ 40,700

$ 34,000

$ 40,700

Balance Sheet Cash

$ 5,100

$ 7,000

$ 12,100

Accounts receivable 10,400 17,000 g 6,000 21,400 Note receivable 5,000 10,000 15,000 Inventories 30,000 16,000 d 1,000 45,000

Plant assets — net 88,000 60,000 148,000

Investment in Sat 82,200 b 200 e 82,400 Goodwill e 20,000 20,000 $ 220,700 $ 110,000 $ 261,500

Accounts payable $ 15,000 $ 16,000 g 6,000 $ 25,000 Notes payable 25,000 10,000 35,000 Capital stock 140,000 50,000 e 50,000 140,000 Retained earnings 40,700 34,000 40,700

$ 220,700 $ 110,000

Noncontrolling interest — beginning c 13,000 e 7,600

Noncontrolling interest December 31 f 200 20,800 $ 261,500 * Deduct



Solution P8-9 Supporting computations: Fair value — book value differential Investment cost $175,000 Implied total fair value of Sid ($175,000 / 70%) $250,000 Less: Book value of Sid ($250,000 equity on January 1 plus $10,000 net income (1/4 year) less $10,000 dividends) 250,000 Fair value — book value differential 0 Allocation of Sid’s reported net income Pal company ($40,000 3/4 year 70%) $ 21,000

Preacquisition income ($40,000 1/4 year 100%) 10,000

Noncontrolling interest share ($40,000 1 year 30%x 3/4) 9,000 Sid’s net income $ 40,000 Pal’s income from Sid Equity in Sid’s income $ 21,000 Constructive gain on Pal’s bonds Note that bonds payable has a book value of $105,400 on December 31, 2011. A half-year of premium amortization ($300) yields a bookvalue of $105,700 at July 1, 2011

( $105,700 book value on July 1 less $102,850 on December 31) 2,850 Recognition of constructive gain on separate books ($2,850 6/114 months) (150) Gain on intercompany sale of equipment — downstream [$30,000 - ($36,000/2)] (12,000) Piecemeal recognition of gain on equipment — downstream

($12,000/3 years 1/2 year) 2,000 Gain on intercompany sale of land — upstream

($10,000 - $8,000 cost) 70% (1,400) Income from Sid $ 12,300

Chapter 8 8-23


Solution P8-9 (continued) Worksheet entries in journal form a Income from Sid 12,300 Dividends - Sid 7,000 Investment in Sid common 5,300 Eliminate intercompany post-acquisition earnings and

dividends and return Investment to beginning balance.

b Sales * 37,500 Cost of sales * 27,500 Dividends – Sid* 10,000 Retained earnings - Sid 50,000 Common stock - Sid 200,000 Investment in Sid - common 175,000 Noncontrolling interest 75,000 Eliminate preacquisition earnings and dividends.

Eliminate Sid’s equity accounts, the investment account and establish beginning noncontrolling interest.

c Gain on plant assets 12,000 Plant assets 12,000 Eliminate intercompany gain on sale of equipment. d Gain on plant assets 2,000 Plant assets 2,000 Eliminate intercompany gain on sale of land. e Interest income 5,850

Interest expense 5,700

Gain on bond retirement 2,850 Investment in Pal bonds 102,700

Bonds payable 100,000 Premium on bonds 5,400 Record constructive retirement of bonds payable. f Interest payable 6,000 Interest receivable 6,000 Eliminate reciprocal interest accounts. g Other current liabilities 7,000 Other current assets 7,000 Eliminate reciprocal for unpaid intercompany

dividends.

h Noncontrolling interest share 8,400 Dividends - Sid 3,000 Noncontrolling interest 5,400 Record noncontrolling interest share of earnings and

post-acquisition dividends.

i Plant assets 2,000 Expenses 2,000 Eliminate excess depreciation on equipment.




Pal Corporation and Subsidiary Consolidation Working Papers


Pal

Sid 70%




$ 287,100

$ 150,000

b 37,500

$ 399,600

Income from Sid 12,300 a 12,300

Gain on bonds e 2,850 2,850

Gain on plant assets 12,000 2,000 c 12,000 d 2,000

Interest income 5,850 e 5,850

Interest expense 11,400* e 5,700 5,700*

Expenses — includes cost of goods sold

200,000*

117,850*

b 27,500 i 2,000

288,350*

Consolidated NI 108,400

Noncontrolling int. share h 8,400 8,400*

Controlling share of NI $ 100,000 $ 40,000 $ 100,000

Retained Earnings

Retained earnings — Pal

$ 250,000

$ 250,000

Retained earnings — Sid $ 50,000 b 50,000

Net income 100,000 40,000 100,000

Dividends 50,000* 20,000* a 7,000 b 10,000 h 3,000

50,000*


$ 300,000

$ 70,000

$ 300,000

Balance Sheet Cash

$ 17,000

$ 4,000

$ 21,000

Interest receivable 6,000 f 6,000

Inventories 140,000 60,000 200,000

Other current assets 110,000 20,000 g 7,000 123,000

Plant assets — net 502,700 107,300 i 2,000 c 12,000 d 2,000

598,000

Investment — Sid common 180,300 a 5,300 b 175,000

Investment — Pal bonds 102,700 e 102,700

$ 950,000 $ 300,000 $ 942,000

Interest payable $ 6,000 f 6,000

Other current liabilities 38,600 $ 30,000 g 7,000 $ 61,600

12% bonds payable 100,000 e 100,000

Premium on bonds 5,400 e 5,400

Common stock 500,000 200,000 b 200,000 500,000

Retained earnings 300,000 70,000 300,000

$ 950,000 $ 300,000

Noncontrolling interest ($250,000 30%) b 75,000

Noncontrolling interest December 31

($268,000 30%)

h 5,400

80,400

$ 942,000

Chapter 8 8-25


Solution P8-10 Supporting computations: Investment cost of 70% interest $420,000 Implied total fair value of Sam ($420,000 / 70%) $600,000 Book value of Sam 500,000 Goodwill $100,000 Investment cost of 10% interest $ 67,500 Implied total fair value of Sam ($67,500 / 10%) $675,000 Book value of Sam: Beginning equity January 1, 2012 $550,000 Add: Income for 1/2 year 50,000 Less: June dividends (25,000) Book value at July 1, 2012 575,000 Goodwill (unchanged) $100,000 Investment in Sam account: Investment cost January 1, 2011 $420,000 Add: 2011 share of retained earnings increase ($50,000 70%) $ 35,000 Less: Unrealized profit in ending inventory (5,000) Less: Unrealized gain on land (8,000) 22,000 Investment balance December 31, 2011 $442,000 Add: Investment cost of 10% interest 67,500 Add: Income from Sam for 2012 $100,000 70% interest 1 year $ 70,000

$100,000 10% interest 1/2 year 5,000 Add: Beginning inventory profits 5,000 Less: Ending inventory profits (6,000) Less: Gain: intercompany sale machinery (40,000) Add: Piecemeal recognition of gain ($40,000/5 1/2 year) 4,000 38,000 Less: Dividends from Sam ($25,000 70%) + ($25,000 80%) (37,500) Investment balance December 31, 2012 $510,000




Pam Corporation and Subsidiary Consolidation Working Papers

for the year ended December 31, 2012 (in thousands)

Pam

80% Sam




$ 900

$ 500

a 48

$1,352

Income from Sam 38 f 38

Gain on machinery 40 d 40

Cost of sales 400* 300* c 6 a 48 b 5

653*

Depreciation expense 90* 60* d 4 146*

Other expenses 160* 40* 200*

Consolidated net income 353

Noncontrolling int. share h 25 25*

Controlling share of NI $ 328 $ 100 $ 328

Retained Earnings

Retained earnings — Pam

$ 155

$ 155

Retained earnings — Sam $ 250 g 250

Controlling share of NI 328 100 328

Dividends 200* 50* f 37.5 h 10 g 2.5

200*


$ 283

$ 300

$ 283

Balance Sheet Cash

$ 20

$ 80

$ 100

Accounts receivable 130 30 i 25 135

Dividends receivable 20 j 20

Inventories 90 70 c 6 154

Other current items 20 80 100

Land 50 40 e 8 82

Buildings — net 60 105 165

Machinery — net 100 320 d 36 384

Investment in Sam 510 b 5 e 8

g 522.5 f .5

Goodwill g 100 100

1,000 $ 725 $1,220

Accounts payable $ 177 $ 40 i 25 $ 192

Dividends payable 100 25 j 20 105

Other liabilities 140 60 200

Capital stock, $10 par 300 300 g 300 300

Retained earnings 283 300 283

$1,000 $ 725

Noncontrolling interest, January 1 g 125

Noncontrolling interest, December 31 h 15 140

$1,220 * Deduct

Chapter 8 8-27


Solution P8-11 Preliminary computations: Investment cost of 85% of Sly August 1, 2011 $522,750 Implied fair value of Sly ($522,750 / 85%) $615,000 Book value August 1, 2011: Capital stock $500,000 Retained earnings 100,000 Add: Income for 7 months 35,000 Less: Dividends for 1/2 year (20,000) Stockholders’ equity August 1, 2011 615,000 Fair value – book value differential $ 0 Investment cost August 1, 2011 $522,750 Equity in income $60,000 5/12 year 85% $ 21,250 Less: Deferred inventory profit from upstream sale $5,000 85% (4,250) Less: Deferred profit from sale of equipment $10,000 profit - ($2,000 1/4 year) (9,500) Income from Sly 2011 7,500 Less: Dividends from Sly $20,000 85% (17,000) Investment in Sly December 31, 2011 $513,250 Noncontrolling interest share of post-acquisition income, adjusted for the inventory profit: ($25,000 - $5,000) 15% = $3,000 Preacquisition earnings ($35,000 100%) = $35,000 Working paper entries: a Sales 60,000 Cost of sales 60,000

To eliminate intercompany sales. b Cost of sales 5,000 Inventories 5,000

To defer unrealized inventory profits. c Sales 50,000 Cost of sales 40,000 Plant assets — net 10,000

To eliminate intercompany sale of inventory item to be used as equipment.

d Plant assets — net 500 Operating expense 500

To record depreciation for 1/4 year on intercompany gain on plant asset.



P8-11 (continued)

E Income from Sly 7,500 Investment in Sly 9,500 Dividends 17,000

To eliminate income and dividends and return investment account to its beginning-of-the-period balance.

F Capital stock 500,000 Retained earnings 100,000 Investment in Sly 522,750 Noncontrolling interest 92,250 Sales * 233,333 Cost of sales * 145,833 Operating expenses * 52,500 Dividends * 20,000

To eliminate reciprocal equity and investment balances, and enter beginning noncontrolling interest (* adjusted for preacquisition earnings and dividends).

G Dividends payable 17,000 Dividends receivable 17,000

To eliminate reciprocal dividends receivable and payable amounts. H Noncontrolling Interest Share 3,000 Dividends 3,000

To enter Noncontrolling Interest share of subsidiary post-acquisition income and dividends.

Alternative to entry c: Sales 50,000 Cost of sales 50,000 Cost of sales 10,000 Plant assets — net 10,000

Chapter 8 8-29



Pan Corporation and Subsidiary Consolidation Working Papers


Pan

Sly 85%




$ 910,000

$ 400,000

a 60,000 c 50,000 f 233,333

$ 966,667

Income from Sly 7,500 e 7,500 Cost of sales 500,000* 250,000* b 5,000 a 60,000

c 40,000 f 145,833

509,167*

Operating expense 200,000* 90,000* d 500 f 52,500

237,000*

Consolidated net income 220,500* Noncontrolling int. share h 3,000 3,000* Controlling share of NI $ 217,500 $ 60,000 $ 217,500

Retained Earnings

Retained earnings — Pan

$ 192,500

$ 192,500

Retained earnings — Sly $ 100,000 f 100,000

Net income 217,500 60,000 217,500

Dividends 100,000* 40,000* e 17,000 f 20,000 h 3,000

100,000*


$ 310,000

$ 120,000

$ 310,000

Balance Sheet Cash

$ 33,750

$ 10,000

$ 43,750

Dividends receivable 17,000 g 17,000 Accounts receivable 120,000 70,000 190,000 Inventories 300,000 150,000 b 5,000 445,000

Plant assets — net 880,000 500,000 d 500 c 10,000 1,370,500

Investment in Sly 513,250 e 9,500 f 522,750 $1,864,000 $ 730,000 $2,049,250

Accounts payable $ 154,000 $ 90,000 $ 244,000 Dividends payable 20,000 g 17,000 3,000 Capital stock 1,400,000 500,000 f 500,000 1,400,000 Retained earnings 310,000 120,000 310,000

$1,864,000 $ 730,000

Noncontrolling interest January 1 f 92,250 Noncontrolling interest December 31 92,250 $2,049,250



Solution P8-12 Indirect Method

Pop Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2012

Cash Flows from Operating Activities Consolidated net income – controlling share $300,000 Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share $ 22,000 Depreciation expense 528,000 Decrease in accounts receivable 2,500 Decrease in prepaid expenses 20,000 Decrease in accounts payable (203,500) Increase in inventories (130,000) Gain on sale of 10% interest * (5,700) 233,300 Net cash flows from operating activities 533,300 Cash Flows from Investing Activities Purchase of equipment $(100,000) Sale of 10% interest in subsidiary 72,700 Net cash flows from investing activities (27,300) Cash Flows from Financing Activities Cash paid on long-term note $(300,000) Payment of cash dividends — controlling (200,000) Payment of cash dividends — noncontrolling (10,000) Net cash flows from financing activities (510,000) Decrease in cash for 2012 (4,000) Cash on hand January 1, 2012 50,500 Cash on hand December 31, 2012 $ 46,500 * Note: Since Pop maintains a controlling interest in Sat, no gain or loss should have been recognized on sale of the 10% interest. Rather, this amount should appear as an increase in other paid-in capital. The net effect on the statement of cash flows is the same.

Chapter 8 8-31


Solution P8-12 (continued) Pop Corporation and Subsidiary

Working Paper for the Statement of Cash Flows (Indirect Method) for the year ended December 31, 2012

Reconciling Items Cash Flows Cash Flows Cash Flows Year’s from Investing Financing Change Debit Credit Operations Activities Activities

Asset Changes Cash (4,000) Accounts

receivable — net (2,500)

e 2,500

Inventories 130,000 k 130,000 Prepaid expenses (20,000) l 20,000 Equipment 90,000 h 10,000 g 100,000 Accumulated depreciation

(498,000) f 500,000 h 2,000

Land and buildings 0 Accumulated depreciation

(28,000) f 28,000

Total asset changes (332,500) Changes in Equities Accounts payable (203,500) i 203,500 Dividends payable 0 Long-term note payable

(300,000) j 300,000

Common stock 0 Retained earnings 100,000 a 300,000 c 200,000 Noncontrol. int. 20% 71,000 b 22,000 d 10,000

h 59,000 Changes in equities (332,500) Controlling int.share a 300,000 300,000 Noncontrolling int. share b 22,000 22,000

Purchase of equipment g 100,000 (100,000)

Depreciation — equipment

and buildings f 528,000 528,000 Gain - sale of 10% subsidiary Interest h 5,700 (5,700) Decrease in accounts receivable e 2,500 2,500 Increase in inventories k 130,000 (130,000) Decrease in prepaid expenses l 20,000 20,000 Decrease in accounts payable i 203,500 (203,500) Cash paid on long-term note j 300,000 (300,000)

Paid dividends — controlling c 200,000 (200,000)

Paid dividends —noncontrol. d 10,000 (10,000)

Sale of 10% interest in Subsidiary

h 72,700

72,700

1,890,700 1,890,700 533,300 (27,300) (510,000) Cash decrease for 2012 = $533,300 - $27,300 - $510,000 = $(4,000). * Note: Since Pop maintains a controlling interest in Sat, no gain or loss should have been recognized on sale of the 10% interest. Rather, this amount



should appear as an increase in other paid-in capital. The net effect on the statement of cash flows is the same.

chp8

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