Christensen 12e Chap09 2019

Chapter 9
Consolidation
Ownership
Issues
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General Overview
 The following topics are discussed in this chapter:
1. Subsidiary preferred stock (PS) outstanding
2. Changes in the parent’s ownership interest in the
subsidiary
3. Multiple ownership levels
4. Reciprocal or mutual ownership
5. Subsidiary stock dividends
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Learning Objective 9-1
Understand and explain how

the consolidation process
differs when the subsidiary
has preferred stock
outstanding.
OVERVIEW
Subsidiary Preferred Stock Outstanding
(1 of 2)
 Preferred stockholders normally have preference
over common shareholders with respect to
dividends and the distribution of assets in a
liquidation.
 The right to vote usually is withheld.
 Special attention must be given to the claim of a
subsidiary’s preferred shareholders on the net assets of
the subsidiary.
Subsidiary Preferred Stock Outstanding
(2 of 2)
 Consolidation with subsidiary preferred stock
outstanding
 The amount of subsidiary stockholders’ equity accruing
to preferred shareholders must be considered with the
elimination of the intercompany common stock
ownership.
 If the parent holds some of the subsidiary’s preferred
stock, its portion of the preferred stock interest must be
eliminated.
 Any portion of the subsidiary’s preferred stock interest
not held by the parent is assigned to the noncontrolling
interest.
Make calculations and

prepare consolidation
entries for a partially owned
subsidiary when the
subsidiary has preferred
stock outstanding.
OVERVIEW
Consolidation with Subsidiary Preferred
Stock Outstanding
Assume the following example:

1. Peerless Products purchases 80 percent of Special Foods’ common stock on
January 1, 20X1, at its book value of $240,000. At the date of combination, the
fair value of Special Foods’ common stock held by the noncontrolling
shareholders is equal to its book value of $60,000.
2. Peerless Products earns income from its own operations of $140,000 in 20X1
and declares dividends of $60,000.
3. Special Foods reports net income of $50,000 in 20X1 and declares common
dividends of $30,000.
Also assume that on January 1, 20X1, immediately after the combination,
Special Foods issues $100,000 of 12 percent preferred stock at par value, none
of which Peerless purchased. The regular $12,000 preferred dividend is paid in
20X1.
4. Assume that accumulated depreciation on Special Foods’ books on the
acquisition date is $200,000.
Consolidation Worksheet (1 of 4)
Preparing the worksheet:
 In order to prepare the consolidation worksheet, we first
analyze the book value of common equity in order to
prepare the basic consolidation entry.
 Because Special Foods was purchased for an amount equal
to the book value of net assets, there is no differential in
this example.
 In consolidation, the $12,000 preferred dividend is treated
as income assigned to the noncontrolling interest.
 Because Peerless holds none of Special Foods’ preferred
stock, the entire $12,000 is allocated to the noncontrolling
interest.
 To prepare the 20X1 consolidation worksheet, we first
analyze the book value of common equity to prepare the
basic consolidation entry:
Book Value Calculations:
NCI Investment Preferred Common Retained
20% + 80% = Stock + Stock + Earnings
Beginning book value 160,000 240,000 10 0,000 200,0 00 100,000
+ Net income 19,600 30,400 50,0 00
– Preferred dividends (12,000) 0 (12,000)
– Common dividends (6,000) (24,00 0) (30,000)
Ending book value 161,600 246,400 10 0,000 200,0 00 108,000
 An analysis of these book value calculations leads to the
following basic consolidation entry:
Basic Consolidation Entry:

Preferred Stock 100,000 Balance in PS account
Common Stock 200,000 Balance in CS account
Retained Earnings 100,000 Beginning balance in RE
Income from Special Foods 30,400 Peerless’s share of NI
NCI in NI of Special Foods 19,600 NCI share of NI
Dividends Declared, Preferred 12,000 100% of Special Foods’ pref. div.
Dividends Declared, Common 30,000 100% of Special Foods’ common div.
Investment in Spe cial Foods 246,400 Peerless' share of Special Foods' BV
NCI in NA of Special Foods 161,600 NCI share of Special Foods' book value
In addition to closing out Special Foods’ equity accounts, this elimination entry also eliminates
Peerless’s Investment in Special Foods and Income from Special Foods accounts:
Investment in Income from
Special Foods Special Foods
Acquisition 240,000
80% Net Income 30,400 30,400 80% Net Income
24,000 80% of
Common dividends
Ending Balance 246,400 30,400 Ending Balance
246,400 Basic 30,400
0 0
The only other consolidation entry is the accumulated depreciation consolidation entry:
These consolidation entries lead to the worksheet on the following slide:
December 31, 20X1, Consolidation Worksheet, First Year
Following Combination; 80 Percent Purchase at Book Value
Figure 9-1
Subsidiary Preferred Stock Held by
Parent (1 of 3)
 Preferred stock is eliminated along with the
subsidiary’s other equity accounts in the
consolidation process.
 Any dividend income from the subsidiary’s
preferred stock recorded by the parent also must
be eliminated.
Parent (2 of 3)
Assume Peanut acquired 75 percent of Snoopy’s voting

stock for $300,000 (an amount equal to 75 percent of the
book value of net assets). At the time of the acquisition,
Snoopy had common stock of $150,000, retained
earnings of $250,000, and $80,000 of par value, 10
percent preferred stock. During 20X1, the first fiscal year
after the acquisition, Snoopy reported net income of
$60,000 and declared dividends of $20,000. Assume
Peanut also purchased 50 percent of Snoopy’s
preferred stock.
Parent (3 of 3)
In order to prepare the basic consolidation entry, we first analyze the book value of equity and
the related investment accounts in Peanut’s common and preferred stock, the noncontrolling
interest, and preferred dividend income accounts at the end of 20X1 as follows:
NCI Inv. PS Pref. Div. Inv. CS Preferred Common Retained
50%/25% 50% Income 50% + + +
75% Stock Stock Earnings = + +
Original Book Value 140,000) 40,000 300,000) 80,000 150,000 250,000

+ Net Income 17,000) 4,000) 39,000) 60,000
- Preferred Dividends (4,000) (4,000) )
(8,000)
- Common Dividends (5,000) (15,000)
(20,000)
Basic Consolidation Entry
Ending Book Value 148,000) 40,000 0 324,000 80,000 150,000 282,000
Preferred Stock 80,000 ¬ Balance in PS account
Common Stock 150,000 ¬ Balance in CS account
Retained Earnings 250,000 ¬ Beginning balance in RE
Income from Snoopy 39,000 ¬ Peanut’s 75% of NI to common interest
Dividends Income—Preferred 4,000 ¬ Peanut’s share of preferred dividends
NCI in NI of Snoopy 17,000 ¬ NCI share of NI
Dividends Declared, Preferred ¬ 100% of Sub’s preferred dividends
8,000 ¬ 100% of Common dividends
Dividends Declared, Common ¬ Net BV left in investment CS account
20,000 ¬ Net BV left in investment PS account
Investment in Snoopy CS ¬ NCI share of net book value
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explain how consolidation
procedures differ when the
parent’s ownership interest
changes during the
accounting period.
Changes in the ownership interest
Changes in the parent’s

ownership interest in the
subsidiary
Subsidiary Changes in
Parent’s Purchase of Parent’s Sale of Subsidiary Sale
Purchase it’s own ownership
Additional Shares Subsidiary Shares Additional shares
share interest
From Nonaffiliate From

To Nonaffiliate To Nonaffliate Nonaffiliate Gain Control
From Subsidiary To Subsiadiary To Parent From Parent Loss Control
Parent’s Purchase Additional Shares from
Nonaffiliate (1 of 3)
 When a parent purchases additional shares of a subsidiary
but continues to hold a controlling interest, IFRS 10/PSAK
65 makes clear that this is considered to be an equity
transaction and no gain or loss may be recognized in
consolidated net income.
 An adjustment is required to the amount assigned to the
noncontrolling interest to reflect its change in ownership of
the subsidiary.
 The difference between the fair value of the consideration
exchanged in the equity transaction and the adjustment to
the noncontrolling interest results in an adjustment to the
stockholders’ equity attributable to the controlling interest,
through an adjustment to additional paid-in capital.
Parent’s Purchase of Additional Shares from
share for $420,000 (an amount equal to 60 percent of the
book value of net assets) on January 2, 20X1 . At the time
of the acquisition, Snoopy had common stock of $500,000,
retained earnings of $200,000. During 20X1, the first
fiscal year after the acquisition, Snoopy reported net
income of $50,000 and declared dividends of $30,000.
Assume Peanut purchases additional shares (30%
ownership) from nonaffiliated party on December
31, 20X1 for $250,000 cash. Peanut’s new post-
purchase ownership percentage was 90 percent.
Investment in Snoopy
Acquisition 420,000
60% of 20X1 NI 30,000
18,000 60% of 20X1 Div.
250,000
34,000 Adjustment to Investment
12/31/X1 Balance 648,000

90% x 720,000 = 648,000
720,000 = 500,000 + 200,000 + 50,000 – 30,000 30% x 720,000 = 216,000
Investment in Snoopy 216,000

Additional Paid in Capital 34,000
Cash 250,000
Consolidation Worksheet—20X1
NCI Peanut Common Retained
Stock Earnings + = +
Beginning Book Value (40:60) 280,000 420,000 500,000 200,000

+ Net Income (40:60) 20,000 30,000 50,000
- Dividend (40:60) (12,000) (18,000) (30,000)
Purchase Additional (216,000) 216,000 -
Ending Book Value (10:90) 72,000 648,000 500,000 220,000

Common Stock 500,000 ¬ Original amount invested (100%)
Income from Snoopy 30,000 ¬ Peanut’s share of reported NI
NCI in NI of Snoopy 20,000 ¬ NCI share of reported NI
Dividends Declared ¬ 100% of dividends
30,000 ¬ Net amount of BV left in inv. acct.
Investment in Snoopy ¬ NCI’s share of net book value
648,000
NCI in NA of Snoopy
Parent’s Sale of Subsidiary Shares to
 When a parent sells some shares of a subsidiary but
continues to hold a controlling interest, IFRS 10/PSAK 65
makes clear that this is considered to be an equity
transaction and no gain or loss may be recognized in
consolidated net income.
 An adjustment is required to the amount assigned to the
noncontrolling interest to reflect its change in ownership of
the subsidiary.
 The difference between the fair value of the consideration
exchanged in the equity transaction and the adjustment to
the noncontrolling interest results in an adjustment to the
stockholders’ equity attributable to the controlling interest,
through an adjustment to additional paid-in capital.
stock for $300,000 (an amount equal to 75 percent of the
book value of net assets). At the time of the acquisition,
Snoopy had common stock of $150,000, retained earnings
of $250,000. During 20X1, the first fiscal year after the
acquisition, Snoopy reported net income of $60,000 and
declared dividends of $20,000.
Assume Peanut sold some of its shares to a
nonaffiliated party in beginning of 20X2 for $25,000
cash, recording a gain of $3,000. Peanut’s new post-
sale ownership percentage was 70 percent. In 20X2,
Snoopy had income of $70,000 and paid dividends of
$30,000.
Acquisition 300,000
75% of 20X1 NI 45,000
15,000 75% of 20X1 Div.
12/31/X1 Balance 330,000
22,000 Shares sold to NCI
70% of 20X2 NI 49,000
21,000 70% of 20X2 Div.
12/31/X2 Balance 336,000
Cash 25,000
Consolidation Worksheet—20X2
In order to prepare the consolidation worksheet at the end of the year, we first
analyze the book value component to construct the basic consolidation entry:
30%70%Stock Earnings + = +
Original Book Value 132,000) 308,000 150,000 290,000

+ Net Income 21,000) 49,000) 70,000
- Dividends (9,000) (21,000)
(30,000)
Ending Book Value 144,000) 336,000) 150,000 330,000)

Dividends Declared ¬ 100% of dividends
336,000
NCI in NA of Snoopy
Subsidiary’s Sale of Additional Shares
to Nonaffiliate (1 of 4)
 Increases the total stockholders’ equity of the
consolidated entity by the amount received by the
subsidiary from the sale.
 Increases the subsidiary’s total shares
outstanding and reduces the percentage
ownership held by the parent company.
 Increases the dollar amount assigned to the
noncontrolling interest in the consolidated
financial statements.
 The resulting amounts of the controlling and
noncontrolling interests are affected by two
factors:
1. The number of shares sold to nonaffiliates, and
2. The price at which the shares are sold to nonaffiliates
 Difference between book value and sale price of
subsidiary shares:
 If the sale price of new shares equals the book value of
outstanding shares, there is no change in the existing
shareholders’ claim.
 The consolidation entries used are simply changed to
recognize the increase in the claim of the
noncontrolling shareholders and the corresponding
increase in the stockholders’ equity balances of the
subsidiary.
 Difference between book value and sale price of
subsidiary shares:
 All common shareholders are assigned a pro rata
portion of the difference.
 The book value of the subsidiary’s shares held by the
parent changes.
 This change is recognized by the parent by adjusting the
carrying amount of its investment in the subsidiary and
additional paid-in capital.
 The parent’s additional paid-in capital is then carried to
the workpaper in consolidation.
to Parent (1 of 13)
 At a price equal to the book value of the existing
shares:
 A sale of additional shares directly from a less-than-
wholly owned subsidiary to its parent increases the
parent’s ownership percentage.
 The increase in the parent’s investment account equals
the increase in the stockholders’ equity of the
subsidiary.
 The net book value assigned to the noncontrolling
interest remains unchanged.
 Normal consolidation entries are made based on the
parent’s new ownership percentage.
to Parent (2 of 13)
 Sale of additional shares to the parent at an
amount other than book value:
 It increases the carrying amount of its investment by
the fair value of the consideration given.
 In consolidation, the amount of the noncontrolling
interest must be adjusted to reflect the change in its
interest in the subsidiary.
 IFRS 10/PSAK 65 then requires an adjustment to
consolidated equity (additional paid-in capital) for the
difference between any consideration given or received
by the consolidated entity and the amount of the
adjustment to the noncontrolling interest.
to Parent (3 of 13)
 If the shares are sold at an amount equal to the book value
of common equity, the value of the NCI in net assets will not
change.
 If the shares are sold at an amount greater than the book
value of common equity, the value of the NCI in net assets
will increase.
 If the shares are sold at an amount less than the book value
of common equity, the value of the NCI in net assets will
decrease.
to Parent (4 of 13)
Assume Peanut acquired 75 percent of Snoopy’s no par

voting stock (7,500 shares) on 1/1/20X1 for $300,000
(an amount equal to 75 percent of the book value of net
assets). At the time of the acquisition, Snoopy had
common stock of $150,000, retained earnings of
$250,000. During 20X1, the first fiscal year after the
Assume Snoopy sold Peanut 2,500 additional shares
for $130,000 on 1/1/20X2, increasing Peanut’s
ownership percentage to 80 percent.
to Parent (5 of 13)
The book value per share of common equity prior to
the issuance of the new shares is:
Common Stock $150,000
Retained Earnings 290,000
Total BV of Equity $440,000
BV per share = $440,000 ÷ 10,000 = $44/share
Since the new shares are issued at $52/share
($130,000 ÷ 2,500), which is greater than the $44
BV per share, the value of the NCI in NA will
INCREASE by $4,000:
to Parent (6 of 13)
Before Sale Following Sale
Common stock $150,000) $280,000
Retained earnings 290,000) 290,000

Total stockholders’ equity $440,000) $570,000

Snoopy’s total stockholders’ equity $440,000) $570,000
Peanut’s proportionate share 75%) 80%
Book value of Peanut’s investment $330,000) $456,000
NCI after sale ($570,000 × 0.20) $114,000)

NCI before sale ($440,000 × 0.25) (110,000)
Increase in book value of NCI $4,000)
to Parent (7 of 13)
Although Peanut pays $130,000 for the additional 2,500 shares,
the NCI increases by $4,000, reducing the value of Peanut’s
investment in these shares to $126,000 (130,000 – 4,000):

Additional Paid in Capital /RE 4,000
Cash 130,000
Acquisition 300,000
75% of 20X1 NI 45,000
15,000 75% of 20X1 Div.
12/31/X1 Balance 330,000
Value of the
shares purchased 126,000
1/1/X2 Balance 456,000
to Parent (8 of 13)
In order to prepare the consolidation worksheet on the date the additional shares are
purchased, we first analyze the book value component to construct the basic
consolidation entry:

25%/20% 75%/80% Stock + Earnings = +
Before Purchase Book Value 110,000) 330,000) 150,000 290,000

New Shares Issued 4,000) 126,000) 130,000
Ending Book Value 114,000) 456,000) 280,000 290,000

Investment in Snoopy ¬ Net amount of BV left in inv. acct.
456,000 ¬ NCI’s share of net book value
NCI in NA of Snoopy
114,000
to Parent (9 of 13)
Assume Peanut acquired 75 percent of Snoopy’s no par

voting stock (7,500 shares) on 1/1/20X1 for $300,000
(an amount equal to 75 percent of the book value of net
Assume Snoopy sold Peanut 2,500 additional shares
for $80,000 on 1/1/20X2, increasing Peanut’s
ownership percentage to 80 percent.
to Parent (10 of 13)
The book value per share of common equity prior to
the issuance of the new shares is:
Common Stock $150,000
Retained Earnings 290,000
Total BV of Equity $440,000
BV per share = $440,000 ÷ 10,000 = $44/share
Since the new shares are issued at $32/share
($80,000 ÷ 2,500 ), which is less than the $44 BV
per share, the value of the NCI in NA will
DECREASE by $6,000:
Common stock $150,000) $230,000
Retained earnings 290,000) 290,000

Total stockholders’ equity $440,000) $520,000

Snoopy’s total stockholders’ equity $440,000) $520,000
Peanut’s proportionate share 75%) 80%
Book value of Peanut’s investment $330,000) $416,000
NCI after sale ($520,000 × 0.20) $104,000)

NCI before sale ($440,000 × 0.25) (110,000)
Decrease in book value of NCI ($6,000)
Although Peanut pays $80,000 for the additional 2,500 shares,
the NCI decreases by $6,000, increasing the value of Peanut’s
investment in these shares to $86,000 (80,000 + 6,000):

Cash 80,000
Acquisition 300,000
75% of 20X1 NI 45,000
15,000 75% of 20X1 Div.
12/31/X1 Balance 330,000
Value of the
shares purchased 86,000
1/1/X2 Balance 416,000


25%/20% 75%/80% Stock + Earnings = +
Before Purchase Book Value 110,000) 330,000) 150,000 290,000

New Shares Issued (6,000) 86,000 ) 80,000
Ending Book Value 104,000) 416,000) 230,000 290,000

Investment in Snoopy ¬ Net amount of BV left in inv. acct.
NCI in NA of Snoopy
104,000
Subsidiary’s Purchase of Shares from
 A subsidiary’s purchase of shares from a
nonaffiliate
 Sometimes a subsidiary purchases treasury shares
from noncontrolling shareholders, who may be willing
sellers.
 The parent’s equity in the net assets of the subsidiary
may change as a result of the transaction.
 When this occurs, the amount of the change must be
recognized in preparing the consolidated statements.

stock (7,500 shares) on 1/1/20X1 for $300,000 (an
amount equal to 75 percent of the book value of net
Assume Snoopy repurchased 625 shares for $40,000
on 1/1/20X2 from a nonaffiliate.
Before After
Repurchase Repurchase
Peanut’s Shares 7,500 7,500
NCI’s Shares 2,500 1,875
Total Shares 10,000 9,375
75% 80%
Before After
Common stock $250,000) $250,000)
Retained earnings 190,000) 190,000)
Total stockholders’ equity 440,000) 440,000)
Less: Treasury stock ___________ (40,000)
Total stockholders’ Equity $440,000) $400,000)
Before After
Snoopy’s total stockholders’ equity $440,000) $400,000)
Peanut’s proportionate share 75% 80%)
Book value of Peanut’s investment $330,000) $320,000)
NCI after sale ($400,000 × 0.20) $80,000)

NCI before sale ($440,000 × 0.25) (110,000)
Decrease in book value of NCI ($30,000)

NCI Peanut Common Treasury Retained
25%/20% 75%/80% + Stock = Stock + Earnings +
BV Before Repurchase 110,000) 330,000)) 250,000 190,000

Shares Repurchased (30,000) (10,000) ) (40,000)
Ending Book Value 80,000) 320,000)) 250,000 (40,000) 190,000

Treasury Stock ¬ Treasury stock
320,000
NCI in NA of Snoopy
Additional Paid in Capital / RE 10,000

Acquisition 300,000
75% of 20X1 NI 45,000
15,000 75% of 20X1 Div.
12/31/X1 Balance 330,000
10,000 Shares Purchased from NCI
1/1/X2 Balance 320,000

Subsidiary’s Purchase of Shares from Parent
(1 of 6)
 When this happens, the parent has traditionally
recognized a gain or loss on the difference between the
selling price and the change in the carrying amount of its
investment.
 From a consolidated viewpoint, the transaction represents
an internal transfer and does not give rise to a gain or loss.
 A better approach is for the parent to adjust additional
paid-in capital rather than record a gain or loss on the
transaction.
(2 of 6)

stock (7,500 shares) on 1/1/20X1 for $300,000 (an
amount equal to 75 percent of the book value of net
Assume Snoopy repurchased 3,750 shares for
$40,000 on 1/1/20X2 from Peanut.
(3 of 6)
Before After
Peanut’s Shares 7,500 3,750
NCI’s Shares 2,500 2,500
Total Shares 10,000 6,250
75% 60%
(4 of 6)
Before After
Common stock $250,000) $250,000)
Retained earnings 190,000) 190,000)
Total stockholders’ equity 440,000) 440,000)
Less: Treasury stock ___________) (40,000)
Total stockholders’ equity $440,000) $400,000)
Before After
Snoopy’s total stockholders’ equity $440,000) $400,000)
Peanut’s proportionate share 75%) 60%)
Book value of Peanut’s investment $330,000) $240,000)
NCI after sale ($400,000 × 0.40) $160,000)

NCI before sale ($440,000 × 0.25) (110,000)
Increase in book value of NCI $50,000)
(5 of 6)

NCI Peanut Common Treasury
= Retained
+ + +
40% 60% Stock Stock Earnings
BV Before Repurchase 110,000) 330,000)) 250,000 190,000

Shares Repurchased 50,000) (90,000) ) (40,000)
Ending Book Value 160,000) 240,000)) 250,000 (40,000) 190,000

Treasury Stock ¬ Treasury stock
240,000
NCI in NA of Snoopy
(6 of 6)
Cash 40,000
Additional Paid in Capital / RE 50,000
Acquisition 300,000
75% of 20X1 NI 45,000
15,000 75% of 20X1 Div.
12/31/X1 Balance 330,000
90,000 Shares Purchased from
Peanut
1/1/X2 Balance 240,000
Changes in the ownership interest
Changes in the parent’s

ownership interest in the
subsidiary
Subsidiary Changes in
Parent’s Purchase of Parent’s Sale of Subsidiary Sale
Purchase it’s own ownership
Additional Shares Subsidiary Shares Additional shares
share interest
From Nonaffiliate From

To Nonaffiliate To Nonaffliate Nonaffiliate Gain Control
From Subsidiary To Subsiadiary To Parent From Parent Loss Control
A Business Combination Achieved in Stages
 According to PSAK 22, in a business combination achieved

in stages, the acquirer shall remeasure its previously held
equity interest in the acquiree at its acquisition‑date fair
value and recognise the resulting gain or loss, if any, in
profit or loss or other comprehensive income, as
appropriate.
 In prior reporting periods, the acquirer may have
recognised changes in the value of its equity interest in the
acquiree in other comprehensive income. If so, the amount
that was recognised in other comprehensive income shall
be recognised on the same basis as would be required if the
acquirer had disposed directly of the previously held equity
interest.
The effects of multiple purchases of a subsidiary’s

stock on the consolidation process are illustrated in
the following example:
Assume that on January 1, 20X0, Special Foods has $200,000 of common

stock outstanding and retained earnings of $60,000. During 20X0, 20X1, and
20X2, Special Foods reports the following information:
Peerless Products purchases its 80 percent interest in Special Foods in
several blocks, as follows:
All of the differential relates to land held by Special Foods. Note that Peerless
does not gain control of Special Foods until January 1, 20X2.
The investment account on Peerless’s books includes the
following amounts through 20X1:
Investment in
Special Foods
Purchase 20% CS 56,000
20% Net Income 8,000
12/31/X0 Balance 99,000
9,000 30% of Dividend
12/31/X1 Balance 105,000
When Peerless gains control of Special Foods on January 1, 20X2, assume
that the fair value of the 30 percent equity interest it already holds in Special
Foods is $111,000, and the fair value of Special Foods’ 20 percent remaining
noncontrolling is $74,000. The book value of Special Foods as a whole on
that date is $320,000. Under PSAK 22, the differential at the date of
combination is computed as follows:
Because all of the differential relates to land, it is not amortized or written off
either on Peerless’s books or for consolidation.
Under PSAK 22, Peerless must remeasure the equity interest it already held
in Special Foods to its fair value at the date of combination and recognize a
gain or loss for the difference between the fair value and its carrying amount:
The total balance of the investment account on Peerless’s

books immediately after the combination is:
Because Peerless Products gains control of Special Foods on January 1, 20X2,
consolidated statements are prepared for the year 20X2. The ending balance
in the Investment in Special Foods account at the end of 20X2 is calculated as
follows:
Investment in
Special Foods
12/31/X1 Balance 105,000
Fair Value Adjustment 6,000
1/1/X2 Balance 296,000
32,000 80% of Dividend
12/31/X2 Balance 324,000
To prepare the consolidation worksheet at the end of the year, we first analyze the
book value component to construct the basic consolidation entry:

NCI 20% + Peerless 80% = Common Stock + Retained Earnings
Beginning book value 64,000 256,000 200,000 120,000
+ Net income 15,000 60,000 75,000
– Dividends (8,000) (32,000) (40,000)
Ending book value 71,000 284,000 200,000 155,000
Basic Consolidation Entry:

Common Stock 200,000 Common stock balance
Retained Earnings 120,000 Beginning balance in RE
Income from Special Foods 60,000 Peerless’s share of reported NI
NCI in NI of Special Foods 15,000 NCI share of reported NI
Dividends Declared 40,000 100% of dividends
Investment in Special Foods 284,000 Net amount of BV in inv. acct.
NCI in NA of Special Foods 71,000 NCI’s share of net BV
We then analyze the differential and its changes during the
period:
Land 5 0,000 Excess value from undervalued land

Investment in Special Foods 40,000 Peerless’s share of excess value
NCI in NA of Special Foods 10,000 NCI’s share of excess value
Loss of Control
Based on PSAK 65, if a parent loses control of a subsidiary, the

parent:
(a) derecognises the assets and liabilities of the former subsidiary
from the consolidated statement of financial position.
(b) recognises any investment retained in the former subsidiary at
its fair value when control is lost and subsequently accounts for
it and for any amounts owed by or to the former subsidiary in
accordance with relevant IFRSs. That fair value shall be
regarded as the fair value on initial recognition of a financial
asset in accordance with PSAK 71 or, when appropriate, the
cost on initial recognition of an investment in an associate or
joint venture.
(c) recognises the gain or loss associated with the loss of control
attributable to the former controlling interest.
Parent’s Sale the Shares to Nonaffiliate (1 of 3)

share for $420,000 (an amount equal to 60 percent of the
book value of net assets) on January 2, 20X1 . At the time
of the acquisition, Snoopy had common stock of $500,000,
retained earnings of $200,000. During 20X1, the first
fiscal year after the acquisition, Snoopy reported net
income of $50,000 and declared dividends of $30,000.
Assume Peanut sales the shares (40% ownership) to
nonaffiliated party on December 31, 20X1 for
$300,000 cash. Peanut’s new post-sale ownership
percentage was 20 percent.
40% x 720,000 =
Fair Value of Consideration Received 300,000
288,000
Carrying Amount of Investment Disposed 288,000
Gain on Disposal (a) 12,000 720,000 = 500,000
+ 200,000 + 50,000
– 30,000
Fair Value of the Remaining Investment 150,000 40% = 300,000, so
Carrying Amount of the Remaining Investment 144,000 20% = 150,000
Gain on Fair Value Adjustment (b) 6,000

20% x 720,000 =
144,000
Total Gain (a + b) 18,000
Cash 300,000
Gain 12,000
Gain 6,000
Acquisition 420,000
60% of 20X1 NI 30,000
18,000 60% of 20X1 Div.
Fair Value Adj 6,000 288,000 Investment disposed
12/31/X1 Balance 150,000
Fair Value of 20%

remaining ownership
Practice Quiz Question #2
Which of the following statements is false?

a. When a parent sells some subsidiary
shares to a nonaffiliate but maintains
control, no gain or loss is recognized.
b. A subsidiary’s sale of additional shares to
the parent at book value results in a gain.
c. A sale of additional shares to the parent at
an amount other than book value increases
the investment by the fair value of the
consideration given.
d. A subsidiary’s purchases of shares from
the parent may result in an adjustment to
Practice Quiz Question #2 Solution
Which of the following statements is false?

a. When a parent sells some subsidiary
shares to a nonaffiliate but maintains
control, no gain or loss is recognized.
b. A subsidiary’s sale of additional shares to
the parent at book value results in a gain.
c. A sale of additional shares to the parent at
an amount other than book value increases
the investment by the fair value of the
consideration given.
d. A subsidiary’s purchases of shares from
the parent may result in an adjustment to

prepare consolidation
entries for a partially owned
subsidiary when the
subsidiary has a complex
ownership structure.
OVERVIEW
Alternative Ownership Structures
Figure 9-2
Complex Ownership Structures (1 of 2)
 Direct ownership
 The parent has controlling interest in each of the
subsidiaries.
 Multilevel ownership
 The parent has only indirect control over the company
controlled by its subsidiary.
 The consolidation entries used are similar to those used
in a simple ownership situation, but careful attention
must be given to the sequence in which the data are
brought together.
Complex Ownership Structures (2 of 2)
 Reciprocal ownership or mutual holdings
 The parent owns a majority of the subsidiary’s
common stock and the subsidiary holds some of the
parent’s common shares.
 If mutual shareholdings are ignored in consolidation,
some reported amounts may be materially overstated.
Multilevel Ownership and Control
(1 of 2)
 When consolidated statements are prepared, they include
companies in which the parent has only an indirect
investment along with those in which it holds direct
ownership.
 The complexity of the consolidation process increases as
additional ownership levels are included.
 The amount of income and net assets to be assigned to
the controlling and noncontrolling shareholders, and the
amount of unrealized profits and losses to be eliminated,
must be determined at each level of ownership.
Multilevel Ownership and Control
(2 of 2)
 When a number of different levels of ownership exist, the
first step normally is to consolidate the bottom, or most
remote, subsidiaries with the companies at the next
higher level.
 This sequence is continued up through the ownership
structure until the subsidiaries owned directly by the
parent company are consolidated with it.
 Income is apportioned between the controlling and
noncontrolling shareholders of the companies at each
level.
Reciprocal or Mutual Ownership
 The treasury stock method is used to deal with
reciprocal relationships.
 Purchases of a parent’s stock by a subsidiary are
treated in the same way as if the parent had
repurchased its own stock and was holding it in the
treasury.
 The subsidiary normally accounts for the investment
in the parent’s stock using the cost method.
Understand and explain how

consolidation procedures
differ when the subsidiary
pays stock dividends.
OVERVIEW
Subsidiary Stock Dividends (1 of 4)
 Stock dividends are issued proportionally to all
common stockholders.
 The relative interests of the controlling and
noncontrolling stockholders do not change.
 The investment’s carrying amount on the parent’s
books also is unaffected.
 The stockholders’ equity accounts of the subsidiary do
change, although total stockholders’ equity does not.
 The stock dividend represents a permanent
capitalization of retained earnings, thus:
 Decreasing retained earnings and increasing capital
stock and, perhaps, additional paid-in capital
 Effect on the preparation of consolidated
financial statements for the period:
 The stock dividend declaration must be eliminated
along with the increased common stock and increased
additional paid-in capital, if any.
Assume Peanut acquired 75 percent of Snoopy’s

voting stock on 1/1/20X1 for $300,000 (an amount
equal to 75 percent of the book value of net assets).
At the time of the acquisition, Snoopy had common
stock of $250,000, retained earnings of $150,000.
During 20X1, the first fiscal year after the
acquisition, Snoopy reported net income of $60,000
and declared dividends of $20,000. Assume Snoopy
declared a 25 percent stock dividend on
12/31/20X1.
Common Stock $250,000 × 25% = $62,500 stock div.
In order to prepare the consolidation worksheet at the end of the year, we first
analyze the book value component to construct the basic consolidation entry:
25%75%Stock Earnings + = +
Original Book Value 100,000) 300,000) 250,000 150,000)

+ Net Income 15,000) 45,000 ) 60,000)
- Dividends (5,000) (15,000)
(20,000)
- Stock Dividend 62,500
(62,500)
Basic
EndingConsolidation Entry330,000) 312,500 127,500)
Book Value 110,000)
Common Stock 312,500 ¬ Common Stock balance
Dividends Declared ¬ 100% of sub’s dividends declared
20,000 ¬ 100% of sub’s stock dividends
Stock dividends declared ¬ Net amount of BV left in inv. acct.
QUIZ
P ortfolio Corpora tion a cquire d 70 pe rce nt owne rs hip of Inde x Compa ny on Ja nua ry 1, 20X6, a t
unde rlying book va lue . At tha t da te , the fa ir va lue of the noncontrolling inte re s t wa s e qua l to 30
pe rce nt of the book va lue of Inde x. On Ja nua ry 1, 20X8, P ortfolio s old 1,000 s ha re s of Inde x
Compa ny for $20,000 to Adve nture Corpora tion a nd re corde d a $5,000 ga in. Tria l ba la nce s for the
compa nie s on De ce mbe r 31, 20X8, conta in the following da ta :
Inde x Compa ny's ne t income wa s e a rne d e ve nly throughout the ye a r. Both compa nie s de cla re d
a nd pa id the ir divide nds on De ce mbe r 31, 20X8. P ortfolio us e s the fully a djus te d e quity me thod in
a ccounting for its inve s tme nt in Inde x.
Re quire d:
1) P re pa re the e limina tion e ntrie s ne e de d to comple te a full cons olida tion works he e t for 20X8.
2) P re pa re a cons olida tion works he e t for 20X8.
QUIZ
QUIZ - Solution
Conclusion
The End

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Christensen 12e Chap09 2019

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Chapter 9

Understand and explain how

Make calculations and

Assume the following example:

Ending book value 161,600 246,400 10 0,000 200,0 00 108,000

Basic Consolidation Entry:

These consolidation entries lead to the worksheet on the following slide:

Assume Peanut acquired 75 percent of Snoopy’s voting

Original Book Value 140,000) 40,000 300,000) 80,000 150,000 250,000

Make calculations and

Changes in the parent’s

From Nonaffiliate From

From Subsidiary To Subsiadiary To Parent From Parent Loss Control

12/31/X1 Balance 648,000

Investment in Snoopy 216,000

Beginning Book Value (40:60) 280,000 420,000 500,000 200,000

Basic Consolidation Entry

Original Book Value 132,000) 308,000 150,000 290,000

Basic Consolidation Entry

Assume Peanut acquired 75 percent of Snoopy’s no par

Retained earnings 290,000) 290,000

Before Sale Following Sale

NCI after sale ($570,000 × 0.20) $114,000)

Investment in Snoopy 126,000

1/1/X2 Balance 456,000

Book Value Calculations:

Before Purchase Book Value 110,000) 330,000) 150,000 290,000

Ending Book Value 114,000) 456,000) 280,000 290,000

Basic Consolidation Entry

Assume Peanut acquired 75 percent of Snoopy’s no par

Retained earnings 290,000) 290,000

Before Sale Following Sale

NCI after sale ($520,000 × 0.20) $104,000)

Investment in Snoopy 86,000

1/1/X2 Balance 416,000

Book Value Calculations:

Before Purchase Book Value 110,000) 330,000) 150,000 290,000

Ending Book Value 104,000) 416,000) 230,000 290,000

Basic Consolidation Entry

Assume Peanut acquired 75 percent of Snoopy’s voting

NCI after sale ($400,000 × 0.20) $80,000)

Book Value Calculations:

BV Before Repurchase 110,000) 330,000)) 250,000 190,000

Ending Book Value 80,000) 320,000)) 250,000 (40,000) 190,000

Basic Consolidation Entry

Additional Paid in Capital / RE 10,000

10,000 Shares Purchased from NCI

1/1/X2 Balance 320,000

Assume Peanut acquired 75 percent of Snoopy’s voting

NCI after sale ($400,000 × 0.40) $160,000)

Book Value Calculations:

BV Before Repurchase 110,000) 330,000)) 250,000 190,000

Ending Book Value 160,000) 240,000)) 250,000 (40,000) 190,000

Basic Consolidation Entry

Changes in the parent’s

From Nonaffiliate From

From Subsidiary To Subsiadiary To Parent From Parent Loss Control

 According to PSAK 22, in a business combination achieved

The effects of multiple purchases of a subsidiary’s

Assume that on January 1, 20X0, Special Foods has $200,000 of common

The total balance of the investment account on Peerless’s

Book Value Calculations:

Basic Consolidation Entry:

Land 5 0,000 Excess value from undervalued land