Consolidations - Changes in Ownership Interests: Answers To Questions 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.
© 2011 Pearson Education, Inc. publishing as Prentice Hall

8-1
8-2 Consolidations — Changes in Ownership Interests
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 23 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 23 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 on
September 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
* 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


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 18,000
Less: Dividends ($2,000 + $6,000) (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%) 82,000

Less: Cost of original investment (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)

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) $ 6,000

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

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 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
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
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
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
To record receipt of dividends ($60,000  10,000/12,000 shares).
December 31, 2012

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: 620
Gain on revaluation of investment $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 28
Less: Dividends for 2012 ($60  5/6) (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
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
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
Investment in Saw
Saw Beginning of Year
Actual Sale Date 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
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

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

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
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 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%) + (33.75)
($150,000  1/4 year  10%)
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 acquisition
date. 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
Adjustments and Consolidated

Pop Sat 80% Eliminations Statements
Income Statement
Sales $ 112,000 $ 50,000 a 12,000 $ 112,500
c 37,500
Income from Sat 3,800 b 3,800
Cost of sales 60,000* 20,000* d 1,000 a 12,000 54,000*
c 15,000
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 book
value 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
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
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
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

Pal Sid 70% Eliminations Statements
Income Statement
Sales $ 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 b 27,500
goods sold 200,000* 117,850* i 2,000 288,350*
Consolidated NI 108,400
Noncontrolling int. share h 8,400 8,400*
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*
Retained earnings
December 31 $ 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
$ 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
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)

Pam Corporation and Subsidiary

(in thousands)
80% Adjustments and Consolidated
Pam Sam Eliminations Statements
Income Statement
Sales $ 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*
Retained earnings
December 31 $ 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 g 522.5
e 8 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
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
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
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

Plant assets — net 10,000

Chapter 8 8-29
Pan Corporation and Subsidiary


Pan Sly 85% Eliminations Statements
Income Statement
Sales $ 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 500 237,000*
f 52,500
Consolidated net income 220,500*
Noncontrolling int. share h 3,000 3,000*
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*
Retained earnings
December 31 $ 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
$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

Consolidated Statement of Cash Flows
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
Working Paper for the Statement of Cash Flows (Indirect Method)
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 (498,000) f 500,000 h 2,000
depreciation
Land and buildings 0
Accumulated (28,000) f 28,000
depreciation
Total asset
changes (332,500)
Changes in Equities
Accounts payable (203,500) i 203,500
Dividends payable 0
Long-term note (300,000) j 300,000
payable
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.

Consolidations - Changes in Ownership Interests: Answers To Questions 1

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Chapter 8

CONSOLIDATIONS — CHANGES IN OWNERSHIP INTERESTS

© 2011 Pearson Education, Inc. publishing as Prentice Hall

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Allocation of Set’s net income:

Controlling share of income

Noncontrolling interest share

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

1 Income from Sip for 2011:

Total income from Sip $112,000

3 Noncontrolling interest share for 2011:

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Solution E8-3 (amounts in thousands)

Entry to record sale of 15% interest:

Entry to record investment income for 2011:

Solution E8-4 (amounts in thousands)

1 Gain on sale of 20% interest: No gain or loss is recognized since Pal

Actual sale date assumption

2 Income from Sag

© 2011 Pearson Education, Inc. publishing as Prentice Hall

3 Investment in Sag December 31, 2011

1a Fair value — book value differential

1b Income from Set (Note: Only include earnings subsequent to the

Income from Set ($240,000  7/12 year  70%) $ 98

1c Investment in Set at December 31

Investment cost $1,274

2 Consolidation working paper entries:

a Income from Set 98

b Common stock, $10 par — Set 1,000

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

© 2011 Pearson Education, Inc. publishing as Prentice Hall

© 2011 Pearson Education, Inc. publishing as Prentice Hall

1 Investment in Sow (in thousands)

Investment balance December 31, 2011 ($9,000  80%) $ 7,200

2 Goodwill from new investment

Sow’s stockholders’ equity after issuance

Cost of 60,000 shares $ 1,500

* This implies total goodwill is equal to $136,125.

1 Sod issues 30,000 shares to Pod at $20 per share

2 Sod sells 30,000 shares to the public at $20 per share

3 Sod sells 30,000 shares to the public; no gain or loss recognized:

Investment in Sod 115,200

Book value before issuance ($3,200,000  80%) $2,560,000

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Pam buys shares

1a Percentage ownership after additional investment:

1b Goodwill from additional investment (in thousands):

Book value of interest after sale

* This implies total goodwill is now equal to $114,286.

Outsiders buy shares

2a Percentage ownership after sale:

2b Change in underlying book value of investment in Sat:

Sat’s underlying equity after sale $2,600,000

2c Entry to adjust investment account:

Investment in Sat 160,000

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Preliminary computations of fair value — book value differentials:

July 1, 2012 acquisition

1 Income from Sum

2012 Income from Sum

2 Noncontrolling interest December 31, 2012