Chapter 8: Discussion Questions

CHAPTER 8: CONSOLIDATIONS – CHANGES IN OWNERSHIP INTERESTS

DISCUSSION QUESTIONS – SOLUTIONS

Question E8-1

Set’s net income allocation between:

a) Controlling interest share

(100,000 x 70% x ½) + (100,000 x 90% x ½) = 80,000

b) Non-controlling interest share

(100,000 x 30% x ½) + (100,000 x 10% x ½) = 20,000

c) Pre-acquisition net income = 0

Set’s dividends allocation between:

d) Controlling interest share

(30,000 x 70%) + (30,000 x 90% ) = 48,000

e) Non-controlling interest share

(30,000 x 30%) + (30,000 x 10% ) = 12,000

f) Pre-acquisition dividends = 0

Question E8-5

1) a) Goodwill
Cost of investment 1,274,000
Implied FV of equity
(1,274,000 ÷ 0.7) 1,820,000
BV of equity* 1,520,000
Goodwill 300,000

*BV of equity: Beg. Bal of equity + Pre-acquisition net income – pre-acquisition dividend
: 1,480,000 + 100,000 – 60,000 = 1,520,000

b) Pig income from Set

240,000 x 7/12 x 70% = 98,000

c) Investment in Set account balance at Dec 31, 2011

Investment cost 1,274,000
(+) Income from Set 98,000
(-) Dividends (60,000 x 70%) (42,000)
Investment in Set at Dec 31 1,330,000

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 Chapter 8: Discussion Questions

Question 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, 2013 a (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) $ 6,000

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

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 Chapter 8: Discussion Questions

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