Consolidation -

Changes in Ownership
Puji Rahayu
pujirahayu06@ugm.ac.id
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
Learning Objectives
• 8.1 Apply consolidation procedures to interim (midyear)
acquisitions.
• 8.2 Prepare consolidated statements when the parent company’s
ownership percentage increases or decreases during the reporting
period.
• 8.3 Record subsidiary/ investee stock issuances and treasury stock
transactions.
 Interim or Midyear Acquisition

• We need to eliminate
• Preacquisition income
• Preacquisition dividends
Example
• Pop acquires 90% shares of Son on April, 1 2017. Son reported net
income and dividends as follows. Required: records preacquisition
income and dividends.
Jan 1 – April 1 April 1 – Dec 31 Jan 1 – Dec 31
Sales $50.000 $150.000 $200.000
Cost of Sales 25.000 75.000 100.000
Net Income $25.000 $75.000 $100.000
Dividends $20.000 $30.000 $50.000

Stockholders’Equity
Capital Stock $400.000 $400.000 400.000
RE 70.000 75.000 120.000
Stockholers’ Equity $470.000 $475.000 $520.000
Preacquisition Income and Dividends
Sales $150.000
Cost of Sales (75.000)
NCI (7.500)
CI $67.500

Dividends 27.000
Elimination Entries
Debit Credit
a. Investment in Son 67.500
Income from Son 67.500
To record Net Income from Son
b. Cash 27.000
Investment in Son 27.000
To record Dividends from Son
c. Sales 50.000
Cost of Sales 25.000
Capital Stock 400.000
RE 70.000
Dividends 18.000
Investment in Son 427.500
NCI 49.500
To record reciprocal investment etc.
Elimination Entries - continued
Debit Credit
NCI Share 7.500
Dividends 5.000
NCI Interest 2.500
 Piecemeal Acquisitions

• a series of separate stock purchases over a period of time

• Piecemeal acquisitions require the previously held investment to be
remeasured at fair value at the date control of the subsidiary is
obtained.
Example
• Pop Corp. acquires Son Corp. in a series of separate stock
purchases between March 1 and October 1, 2018.
• Son earned income during the year as follows: January 1 through
September 30—$30,000 and October 1 through December
31—$10,000.
• Data concerning the acquisitions and interests acquired are as
follows: Date Interest Acquired Investment Cost Equity at
Acquisition Date
March 1 5% 7.000
April 1 5% 8.000
Oct 1 80% 210.000 220.000
Example
• Required:
• When do Pop has to reclassified its ownership in Son at fair value?

• Answer:
• October 1
Example
Cost of 90% of Son 225,000
Implied value of Son 250,000
Book value 220,000
Goodwill 30,000
Example
Debit Credit
a. Income from Son 9.000
Investment in Son 9.000
b. Sales 112.500
Cost of Sales 82.500
Capital Stock 100.000
RE 90.000
Goodwill 42.500
Investment in Son 236.250
Noncontrolling Interest 26.250
c. NCI Shares 1.000
NCI Interest 1.000
Income Distribution
Son's income allocation for the year:
Total Oct 1 - Dec 31 before Oct 1
Blank Income CI 90% share NCI 10% share Preacquisition
Sales 150,000 33,750 3,750 112,500
Expenses (110,000) (24,750) (2,750) (82,500)
Net income 40,000 9,000 1,000 30,000
 Pop's Worksheet Entries
Income from Son 9,000  blank
Dividends  blank 0
Investment in Son  blank 9,000
There were no
dividends Noncontrolling interest share 1,000  blank
before or after Dividends  blank 0
the acquisition
in this case. Noncontrolling interest  blank 1,000
Zeros are Sales 112,500  blank
included just Common stock 100,000  blank
for clarity.
Retained earnings 1/1 90,000  blank
Cost of Sales & Expenses  blank 82,500
Dividends  blank 0
Investment in Son  blank 225,000
Noncontrolling interest  blank 25,000
 Income Statement
Income statement Pop Son DR CR Consol
Sales 274,875 150,000 112,500  blank 312,375
Income from Son 9,000  blank 9,000  blank 0
Gain from revaluation of Investment
in Son 11,250  blank  blank  blank 11,250
Expenses (220,000) (110,000)  blank 82,500 (247,500)
Noncontrolling interest share  blank  blank 1,000  blank (1,000)
Controlling interest share 75,125 40,000  blank  blank 75,125
State of retained earnings:  blank  blank  blank  blank  blank
Retained earnings, 1/1 221,500 90,000 90,000  blank 221,500
Add net income 75,125 40,000  blank  blank 75,125
Deduct dividends 0 0  blank  blank  blank
Retained earnings, 12/31 296,625 130,000  blank  blank 296,625
 Balance Sheet
Balance sheet Pop Son DR CR Consol
Other assets 451,375 300,000 Blank Blank 751,375
Investment in Son 245,250 Blank Blank 9,000 Blank
Blank Blank Blank Blank 236,250 0
Goodwill Blank Blank 42,500 Blank 42,500
Total 696,625 300,000 Blank Blank 793,875
Liabilities 100,000 70,000 Blank Blank 170,000
Common stock 300,000 100,000 100,000 Blank 300,000
Retained earnings 296,625 130,000 Blank Blank 296,625
Noncontrolling 26,250
interest Blank Blank Blank 1,000 27,250
Total 696,625 300,000 Blank Blank 793,875
 Interim Sale, Continued Control:
Example
● Pam owns 90% of Sun. Pam’s 1/1/17 $228
investment balance reflects Sun's underlying
equity plus $18 goodwill ($20 total implied
goodwill). During 2017, Sun reports $36 income
and pays $20 dividends on July 1.
● Pam sells 10% interest in Sun on January 1 for
$40.

 Blank Before Interest After

 Blank the sale sold the sale
Pop's interest in Son 90% 10% 80%
Investment account:  Blank  Blank  Blank
1/1 balance 288.0  Blank  Blank
 Blank  Blank  Blank  Blank
 Blank  Blank  Blank  Blank
 Pam's Entry for the Sale
Cash 40.0  blank
Investment in Sun  blank 32.0
Additional paid in capital  blank 8.0

No gain or loss is recorded. Since

Pop retains control, the sale of
some shares is treated as an
owner transaction; the difference
impacts paid-in capital.
Noncontrolling Interest Calculations

Balance on Jan 1: (288*.1/.9) $32.0

Income since Jan 1: (36*.2) 7.2
Dividends (20*.2) (4.0)
Balance at Dec 31 $35.2
 Worksheet Entries

Income from Sun 28.8  blank

Dividends  blank 16.0
Investment in Sun  blank 12.8
Noncontrolling interest share (0.9+5.4) 7.2  blank
Dividends  blank 4.0
Noncontrolling interest  blank 3.2
Common stock 200.0  blank
Retained earnings 1/1 100.0  blank
Goodwill 20.0  blank
Investment in Sun (288-32.9)  blank 256.0
Noncontrolling interest, 1/1  blank 64.0
 Interim Sale, Loss of Conatrol: Example

1. Bring investment account up to date, recognizing partial year's

income as appropriate
2. Determine BV of fraction of investment sold
3. Compare to selling price
4. Record a gain or loss on difference
5. The "parent" no longer consolidates the "subsidiary"
• That relationship has been dissolved
• Parent will use equity or fair value/cost method as
appropriate
 Subsidiary Actions

Subsidiary actions increasing Parent share

– Sub issues additional shares to Parent
– Sub reacquires shares from noncontrolling
interest

Subsidiary actions decreasing Parent share

– Sub issues additional shares to noncontrolling
interests
– Sub reacquires shares from Parent
 Subsidiary Actions

Subsidiary actions not impacting ownership

– Sub issues stock to both parent & noncontrolling interest
– Sub issues stock split or stock dividend
 Subsidiary Issues Stock to Parent: Example

● Pam owns 80% of Sun, acquired at $180.

Cost of 80% of Sun $180

Implied value of Sun $225
Book value of Sun 200
Excess, goodwill $25

● Sun issues additional shares to Pam. Outstanding

shares increased from 10K to 12K.
● Pam had owned 8K of the 10K (80%), but now
owns 10K of the 12K shares (83.33%).
 Pam's Entry

● Pam acquires additional shares directly from Sun at book value,

$40 ($20 per share).
Investment in Sun 40  blank
Cash  blank 40

● If Pam had paid $70 (above book value) or $30

(below book value), only the amount in the entry
would change.
● The following analysis shows different amounts of
goodwill which will be used in the consolidation
worksheet.
 Pam's Entry (continued)
Blank Before sale
Sun's equity 200 Goodwill may
go up or down
Goodwill 25 depending on
Total value 225 the value Pam
Pam's Investment in Sun 180 paid for the
additional
Pam's share of BV of equity 160 shares of Sun.
Goodwill 20
Total value 180

Sell at BV Sell > BV Sell < BV

 Blank for $40 for $70 for $30
Sun's equity, after the issuance 240 270 230
Pam's Investment, after 220 250 210.0
Pam's share of equity, 10/17 share 200 225 191.7
New measure of goodwill 20 25 18.3
Total 220 250 210.0
 Sub Issues Stock to Outsiders: Example

● Pam owns 80% of Sun, acquired at $180.

Cost of 80% of Sun $180
Implied value of Sun $225
Book value of Sun 200
Excess, goodwill $25

● Sun issues additional shares to outside entities.

Outstanding shares increased from 10K to 12K.
● Pam had owned 8K of the 10K (80%), but now
owns 8K of the 12K shares (66.67%).
 Before Sale
 Blank Before sale
Pam's measure of
goodwill does not Sun equity 200
change when Stat Goodwill 25
issues the shares Total value 225
to outside Pam's Investment 180
entities, just the Pam's share of BV of equity 160
value of its
Goodwill 20
Investment in
Sun account. Total value 180

Sell at BV Sell > BV Sell < BV

Blank for $40 for $70 for $30
Sun equity, after 240 270 230
Pam's Investment current balance 180 180 180.0
Pam's share of equity, 10/17 share 160 180 153.3
Old goodwill 20 20 20.0
Total, new balance in Investment 180 200 173.3
Adjustment 0 +20 -6.7
 Pam's Adjusting Entry

for $40:  blank  blank

no entry needed  blank  blank
for $70  blank  blank
Investment in Sun 20.0  blank
Additional paid in capital  blank 20.0
for $30  blank  blank
Additional paid in capital 6.7  blank
Investment in Sun   blank 6.7
 Son Purchases Treasury Stock: Example

● Pop owns 80% of Son acquired for $160, at cost equal to book
value.
Cost of 80% of Son $160
Implied value of Son $200
Book value of Son 200
Excess, goodwill $0

● Pop holds 8K of Son's 10K shares outstanding

(80%). Son reacquires 0.4K shares from
outsiders.
● Pop now holds 8K of Sin's 9.6K shares outstanding
(83.33%).
 Before Treasury Stock
Blank Before treasury stock
There was no prior
goodwill; none is Son's equity 200
created by Son Goodwill 0
purchasing treasury Total value 200
stock. Pop adjusts Pop's Investment in Son 160
the balance in its
Investment account. Pop's share of BV of equity 160
Goodwill 0
Total value 160

Buy = BV Buy > BV Buy < BV

 Blank for $8 for $12 for $6
Son's equity, after 192 188 194
Pop's Investment current balance 160 160 160.0
Pop's share of equity, 8/9.6 160 156.7 161.7
Old goodwill 0 0.0 0.0
Total, new balance in Investment 160 156.7 161.7
Adjustment needed 0 -3.3 +1.7
 Pop's Adjustment

Pop's entry when Son purchases treasury shares

from outsiders.

Treasury stock purchased for $8  blank  blank

no entry needed  blank  blank
Treasury stock purchased for $12  blank  blank
Additional paid in capital 3.3  blank
Investment in Son  blank 3.3
Treasury stock purchased for $6  blank  blank
Investment in Son 1.7  blank
Additional paid in capital   blank 1.7
 Sub Stock Splits/ Stock Dividends:
Example
A subsidiary may issue stock dividends or stock
splits.
– Impact is proportional on both controlling and
noncontrolling interests.
– Percentage ownership does not change.
– Stock dividends capitalize some of the
subsidiary's retained earnings.
Thank You