BCLAA8e Ab - Az.chapter 08

Consolidations Changes in Ownership Interests Chapter 8
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8-1
Learning Objective 1
Prepare consolidated statements when parent companys ownership percentage increases or decreases during the reporting period.
8-2
Preacquisition Earnings
Preacquisition earnings or purchased 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.
8-3
Income Sales Cost of sales and expenses Net income Dividends
1/1-4/1
4/1-12/31 1/1-12/31
$25,000 $75,000 $100,000 12,500 37,500 50,000 $12,500 $37,500 $ 50,000 $10,000 $15,000 $ 25,000
8-4
Stockholders Equity Jan. 1 Capital stock $200,000 Retained earnings 35,000 Stockholders equity $235,000 April 1 $200,000 37,500 $237,500 Dec. 31 $200,000 60,000 $260,000
What is the book value acquired by Patter? $237,500 90% = $213,750 purchase price
8-5
Sales (last three quarters of 2006) Expenses (last three quarters) Minority interest (last three quarters) Effect on consolidated net income
$75,000 (37,500) (3,750) $33,750
8-6
Sales (full year) Expenses (full year) Preacquisition income Minority interest Effect on consolidated net income
$100,000 (50,000) (11,250) (5,000) $ 33,750
8-7
Preacquisition Dividends
$25,000 $10,000 $15,000
Preacquisition dividends are eliminated in the consolidation process.
8-8
Preacquisition Dividends
Cash 13,500 Investment in Sissy To record dividends received $15,000 90% = 13,500
13,500
8-9
Consolidation
Patters Investment 213,750 33,750 13,500 234,000
12/31/2006
Dividends
8 - 10
Working Papers December 31, 2006

Income Statement Sales Income from Sissy Expenses Minority interest expense ($50,000 10%) Preacquisition income Net income Retained earnings Patter Retained earnings Sissy Add: Net income Dividends Retained earnings 12/31/06 Adjustments/ ConsolPatter Sissy Eliminations idated $300 $100 $400 33.75 a 33.75 (200) (50) (250) c 5.00 b 11.25 $133.75 $ 50 $266.25 $ 35 b 35 133.75 50 (100) (25) $300 $ 60 (5) (11.25) $133.75 $266.25
a 13.5 b 9.0 c 2.5
133.75 (100) $300

8 - 11

Balance Sheet
Patter Sissy
Adjustments/ Eliminations
Consolidated
Other assets $566 $260 Investment in Sissy 234

$800 $260 $500 $200 b 200 300 60 $800 $260
$826
a 20.25 b 213.75 $826 500 300
Capital stock Retained earnings
Minority interest
b 23.50 c 2.50
26 $826
8 - 12
Apply consolidation procedures to interim (midyear) acquisitions.
8 - 13
Piecemeal Acquisitions
Poca Corporation acquires a 90% interest in Sark Corporation in a series of separate stock purchases between July1, 2003, and October 1, 2005.
8 - 14
Date Interest acquired Investment cost Equity January 1 Income for year Equity at acquisition Equity December 31 7/1/03 4/1/04 10/1/05 20% 40% 30% $ 30 $ 74 $ 81 100 150 190 50 40 40 125 160 220 150 190 230
8 - 15
What is the initial goodwill from each of the three acquisitions?
$125 20% = $25 $30 $25 = $5
$160 40% = $64 $74 $64 = $10

8 - 16
$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.
8 - 17
Working Paper Entries: 2005
a Income from Sark 27,000 Investment in Sark 27,000 To eliminate investment income and return investment account to its beginning-of-theperiod balance plus the $81,000 new investment
8 - 18

b Preacquisition Income 9,000 Retained Earnings Sark 90,000 Capital Stock Sark 100,000 Goodwill 30,000 Investment in Sark 210,000 Minority Interest 19,000 To eliminate investment in Sark and Sarks equity balances, and enter preacquisition income, goodwill, and beginning-of-the-period minority interest
8 - 19
c Minority Interest Expense 4,000 Minority Interest 4,000 To record minority interest in Sarks net income
8 - 20
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.
8 - 21

Did Pablo acquire goodwill?
$300,000 90% = $270,000
$288,000 $270,000 = $18,000

8 - 22
During 2007, Sergio reports income of $36,000. Sergio pays dividends of $20,000 on July 1.
8 - 23
Sale of Interest at the Beginning of the Period

Pablo sells a 10% interest in Sergio (one-ninth of its holdings) on January 1, 2007 for $40,000.
$288,000 9 = $32,000
$18,000 9 = $2,000
8 - 24
Sale of Interest at the Beginning of the Period

Pablos Investment 288,000 32,000 28,800 16,000 268,800 Gain 8,000
Dividends
12/31/2007
Cash 40,000 16,000
Income from S 28,800
8 - 25

a Income from Sergio 28,800 Dividends Sergio 16,000 Investment 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
8 - 26

b Capital Stock Sergio 200,000 Retained Earnings Sergio 100,000 Goodwill 16,000 Investment in Sergio 256,000 Minority Interest (20%) 60,000 To eliminate reciprocal investment and equity balances, and to record goodwill and beginning minority interest
8 - 27
c Minority Interest Expense 7,200 Dividends 4,000 Minority Interest 3,200 To enter minority interest share of subsidiary income and dividends
8 - 28

Income Statement Sales Income from Sergio Gain on sale Expenses Minority interest expense ($36,000 10%) Net income $128 Retained earnings Pablo $210 Retained earnings Sergio Add: Net income 128 Dividends (80) Retained earnings 12/31/07 $258 Adjustments/ ConsolPablo Sergio Eliminations idated $600 $136 $736 28.8 a 28.8 8 8 (508.8) (100) (608.8)
c
$ 36
7.2
(7.2) $128 $210 128

a 16 c 4 (80) $258
8 - 29
$100 b 100 36 (20) $116

Balance Sheet Other assets Investment in Sergio Goodwill Liabilities Capital stock Retained earnings $908 $150 500 258 $908
Pablo Sergio $639.2 $350 268.8
Adjustments/ Eliminations a 12.8 b 256 b 16
Consolidated $ 989.2
$350 $ 34 200 b 200 116 $350
16 $1,005.2 $ 184 500 258
Minority interest
b 60 c 3.2
63.2 $1,005.2
8 - 30
Sale of Interest During an Accounting Period

Main issues
Obtain proper book value for shares sold. Calculate the remainder for unamortized components of the investment account.
8 - 31

Pablo sells the 10% interest in Sergio on April 1, 2007, for $40,000.
The sale may be recorded as of April 1 or, as an expedient, as of January 1.

8 - 32

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 1/4 year 90% 8,100 Portion of investment sold $296,100 1/9 32,900 Gain $ 7,100
8 - 33
$36,000 1/4 year 90% = $ 8,100 $36,000 3/4 year 80% = 21,600 $29,700
$29,700 $16,000 = $13,700

8 - 34

Pablos Investment 288,000 32,900 8,100 16,000 21,600 268,800 Gain 7,100
Dividends
12/31/2007
Cash 40,000 16,000
Income from S 8,100 21,600

8 - 35
Changes in Ownership Interests from Subsidiary Stock Transactions
Subsidiary stock issuances provide a means of expanding operations through external financing.
8 - 36
Sale of Additional Shares by a Subsidiary

Purdy Corporation owns an 80% interest in Stroh Corporation.
Purdys investment in Stroh is $180,000 on January 1, 2007, equal to 80% of Strohs $200,000 stockholders equity plus $20,000 goodwill.
8 - 37
$200,000 80% = $160,000
$160,000 $20 = 8,000 shares
8 - 38
Capital stock, $10 par Additional paid-in capital Retained earnings Total shareholders equity
$100,000 60,000 40,000 $200,000

8 - 39
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%

8 - 40

January 1 January 2 Before Sale After Sale Strohs stockholders equity Purdys interest Purdys equity in Stroh Goodwill Investment in Stroh balance $200,000 $240,000 80% 831/3% $160,000 $200,000 20,000 20,000 $180,000 $220,000
8 - 41

If Stroh sells the additional shares at $35 per share. 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
8 - 42
Subsidiary Sells Shares to Outside Entity

Sale at $20 Strohs stockholders equity Purdys interest Purdys equity in Stroh after issuance Purdys equity in Stroh before issuance Increase in Purdys equity in Stroh Sale at $35 $240,000 $270,000 662/3% 662/3%
$160,000
160,000 0
$180,000
160,000 $ 20,000
8 - 43
Record subsidiary/investee stock issuances and treasury stock transactions.
8 - 44
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 share in the subsidiary equity results.
8 - 45

Shelly is an 80% subsidiary of Pointer Corporation.
Shelly has 10,000 shares of common stock outstanding at December 31, 2007. On January 1, 2008, Shelly purchased 400 shares of its own stock from minority stockholders.
8 - 46

Shellys equity before purchase of 400 shares of treasury stock Capital stock, $10 par Retained earnings Total equity Pointers share of Shellys book value (80%) $100,000 100,000 $200,000
$160,000
8 - 47

400 shares Capital stock Retained earnings Total Less: Treasury stock Total equity Pointers interest Pointers share of Shellys book value @$20 @$30 @$15 $100,000 $100,000 $100,000 100,000 100,000 100,000 $200,000 $200,000 $200,000 8,000 12,000 6,000 $192,000 $188,000 $194,000
5/6 5/6 5/6
$160,000 $156,667 $161,667

8 - 48
End of Chapter 8
8 - 49

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Consolidations Changes in Ownership Interests Chapter 8

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Income Sales Cost of sales and expenses Net income Dividends

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

$75,000 (37,500) (3,750) $33,750

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

$100,000 (50,000) (11,250) (5,000) $ 33,750

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Preacquisition dividends are eliminated in the consolidation process.

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Working Papers December 31, 2006

133.75 (100) $300

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Working Papers December 31, 2006

Other assets $566 $260 Investment in Sissy 234

Capital stock Retained earnings

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Apply consolidation procedures to interim (midyear) acquisitions.

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

$160 40% = $64 $74 $64 = $10

Working Paper Entries: 2005

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Working Paper Entries: 2005

Working Paper Entries: 2005

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Sale of Ownership Interests

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Sale of Ownership Interests

$300,000 90% = $270,000

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

Sale of Ownership Interests

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Sale of Interest at the Beginning of the Period

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Sale of Interest at the Beginning of the Period

Cash 40,000 16,000

Income from S 28,800

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Working Paper Entries: 2007

Working Paper Entries: 2007

Working Paper Entries: 2007

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Working Papers December 31, 2007

(7.2) $128 $210 128

$100 b 100 36 (20) $116

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Working Papers December 31, 2007

Pablo Sergio $639.2 $350 268.8

Adjustments/ Eliminations a 12.8 b 256 b 16

$350 $ 34 200 b 200 116 $350

16 $1,005.2 $ 184 500 258

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Sale of Interest During an Accounting Period

Sale of Interest During an Accounting Period

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

Sale of Interest During an Accounting Period

Sale of Interest During an Accounting Period

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

Sale of Interest During an Accounting Period