Chapter 8: Consolidations –

Changes in Ownership Interests

by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

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 Changes in Ownership: Objectives
1. Prepare consolidated statements when parent
company's ownership percentage increases or
decreases during the reporting period.
2. Apply consolidation procedures to interim
(midyear) acquisitions.
3. Record subsidiary/investee stock issuances and
treasury stock transactions.

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Consolidations – Changes in Ownership Interests
1: Changes in Ownership Percentage

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 Changes in Parent Ownership
Increases
1. Parent acquires controlling interest during
interim period
2. Parent acquires controlling interest in
stages
3. Parent acquires additional shares from
noncontrolling interest
Decreases
4. Parent sells shares but maintains control
5. Parent sells shares giving up control
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 Initial Acquisition of Control
Parent obtains control
– Determine implied value and allocate excess
– Apply consolidation procedures

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 Control is Maintained
Parent increases its share by buying more stock or
decreases its share by selling some stock
– Change in Investment in sub is based on the
underlying fair value of equity
– No gain or loss is recognized; paid in capital
is adjusted

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 Control Relinquished
Parent sells part of its Investment and no longer
retains control
– Reduce the Investment based on proportion
of interest sold
– Record gain or loss on sale
– Discontinue consolidation

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 Is There a Gain or Loss?
Basic rule: No gain or loss is recorded on equity
transactions with a firm's owners.
1. Control before and after the transaction is an
equity transaction
– No gain or loss
– Adjust paid in capital, if needed
2. No control before and control after
– Point of business acquisition
– No loss
– Might have gain on bargain purchase
3. Control before and no control after
– Disposition of asset
– Gain or loss is recorded
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Consolidations – Changes in Ownership Interests
2: Interim Acquisitions

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 Preacquisition Issues
Entity theory (APB Opinion No. 51)
– Income statement includes all revenues and
expenses
– Total consolidated income LESS
• Preacquisition earnings
• Noncontrolling interest share
• Equals Controlling interest share
Parent theory (FASB Statement No. 160)
– Income statement includes revenues and
expenses since acquisition
– Total consolidated income LESS
• Noncontrolling interest share
• Equals Controlling interest share
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 Equity Book Value on Interim Date
Book value of equity is needed as of acquisition
date
Adjust the beginning value for changes before
acquisition:
Beginning BV equity
+ preacquisition revenues
– preacquisition expenses
– preacquisition dividends
= BV equity at acquisition
Sales and expenses (not dividends) might be
assumed level
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 Simple Interim Acquisition
Puma acquires 80% of Sega for $2,400 on 5/1/09. Fixed
assets with a remaining life of 5 years are undervalued
by $600.
Sega's trial balance on 12/31/09 was:
Cash 50 Accounts payable 300
Inventories 900 Other liabilities 1,200
Fixed assets, net 2,800 Common stock 600
Retained earnings,
Cost of sales 1,500 1/1 1,350
Operating
expenses 600 Sales 2,700
Dividends 300 6,150
Sega's distributed $1506,150
dividends each on 3/1/09 and
12/1/09. Revenues and expenses are assumed to be
incurred uniformly over the year.
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 Find Book Value at Acquisition
Book value of equity on 1/1/09 $1,950
Preacquisition amounts:
Revenues 900 Jan-Apr
Cost of sales (500) Jan-Apr
Operating expenses (200) Jan-Apr
Dividends (150) none
Book value on 5/1/09 $2,000

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 Analysis and Amortizations
Cost of 80% of Sega 2,400
Implied value of Sega 3,000
Book value 2,000
Excess 1,000
Unamort Unamort
Allocated to: 5/5/09 2009 12/31/09
Fixed assets 600 (80) 520
Goodwill 400 0 400
Total 1,000 (80) 920

Sega's 2009 income 600

Income since May 1 400
Amortization (80) CI 80% share 256
Adjusted 320 NCI 20% share 64
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 Puma's Equity Entries

Investment in Sega 2,400

Cash 2,400
for acquisition
Cash 120
Investment in Sega 120
for dividends
Investment in Sega 256
Income from Sega 256
[(2/3)(2,700 - 1,500 - 600) - (2/3)(600/5yrs)]x80%

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Worksheet Income from Sega 256
elimination Dividends 120
entries for 2009 Investment in Sega 136
Noncontrolling interest share 64
Dividends 30
Notice the Noncontrolling interest 34
preacquisition Sales 900
revenues, Common stock 600
expenses and Retained earnings 1/1 1,350
dividends Fixed assets 600
included in the
Goodwill 400
third entry.
Cost of sales 500
Operating expenses 200
Dividends 150
Investment in Sega 2,400
Noncontrolling interest 600
Depreciation expense 80
Accumulated depreciation 80

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Income statement: Puma Sega DR CR Consol
Sales 5,000 2,700 900 6,800
Income from Sega 256 256 0
Cost of sales (2,100) (1,500) 500 (3,100)
Operating expense (800) (600) 80 200 (1,280)
Noncontrolling interest
share 64 (64)
Controlling interest share 2,356 600 2,356
State of retained earnings:
Retained earnings, 1/1 4,300 1,350 1,350 4,300
Add net income 2,356 600 2,356
Deduct dividends (1,000) (300) 120
30
150 (1,000)
Retained earnings, 12/31 5,656 1,650 5,656
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Balance sheet: Puma Sega DR CR Consol
Cash 950 50 1,000
Inventories 1,300 900 2,200
Fixed assets, net 5,170 2,800 600 80 8,490
Investment in Sega 2,536 136
2,400 0
Goodwill 400 400
Total 9,956 3,750 12,090
Accounts payable 500 300 800
Other liabilities 1,800 1,200 3,000
Common stock 2,000 600 600 2,000
Retained earnings 5,656 1,650 5,656
Noncontrolling interest 600
34 634
Total 9,956 3,750 12,090
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 Interim Acquisition in Stages
Poca acquired Sark in a series of acquisition, resulting in a
total 90% ownership.
Date Interest Investment
Acquired Cost
April 1 5% 7,000
July 1 5% 8,000
October 1 80% 210,000
90% 225,000
The total book value and fair value of Sark's net assets on
October 1 was $220,000.
Cost of 90% of Sark 225,000
Implied value of
Sark 250,000
Book value 220,000
Goodwill 30,000
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 Income Distribution
Sark's income allocation for the year:
Total Oct 1 - Dec 31 before Oct 1
CI 90% Preacquisitio
Income share NCI 10% Share n
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

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 Poca's Worksheet Entries
Income from Sark 9,000
Dividends 0
There were
no dividends Investment in Sark 9,000
before or Noncontrolling interest
after the share 1,000
acquisition Dividends 0
in this case. Noncontrolling interest 1,000
Zeros are Sales 112,500
included just Common stock 100,000
for clarity. Retained earnings 1/1 90,000
Expenses 82,500
Dividends 0
Investment in Sark 225,000
Noncontrolling interest 25,000
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Income statement: Poca Sark DR CR Consol
Sales 274,875 150,000 112,500 312,375
Income from Sark 9,000 9,000 0
Expenses (220,000) (110,000) 82,500 (247,500)
Noncontrolling interest share 1,000 (1,000)
Controlling interest share 63,875 40,000 63,875
State of retained earnings:
Retained earnings, 1/1 221,500 90,000 90,000 221,500
Add net income 63,875 40,000 63,875
Deduct dividends 0 0
Retained earnings, 12/31 285,375 130,000 285,375

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Balance sheet: Poca Sark DR CR Consol
Other assets 451,375 300,000 751,375
Investment in Sark 234,000 9,000
225,000 0
Goodwill 30,000 30,000
Total 685,375 300,000 781,375
Liabilities 100,000 70,000 170,000
Common stock 300,000 100,000 100,000 300,000
Retained earnings 285,375 130,000 285,375
Noncontrolling 25,000
interest 1,000 26,000
Total 685,375 300,000 781,375

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 Interim Sale, Continued Control
Pablo owns 90% of Sergio and its 1/1/10 $228 investment
balance reflects Sergio's underlying equity plus $18
goodwill ($20 total implied goodwill).
During 2010, Sergio reports $36 income and pays $20
dividends on July 1.
Pablo sells 10% interest in Sergio on April 1 for $40.
Before Interest After
the sale sold the sale
Pablo's interest in Sergio 90% 10% 80%
Investment account:
1/1 balance 288.0
Income to 4/1 8.1
4/1 balance 296.1 32.9 263.2
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 Investment in Sergio: T-account
Investment in Sergio
1/1 Balance 288.0
90% income to 4/1 8.1
4/1 sale of 10% (1/9 of
4/1 Balance 296.1 32.9 shares)
16.0 6/1 dividends (80%)
80% income since
4/1 21.6
12/31 Balance 268.8

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 Pablo's Entry for the Sale

Cash 40.0
Investment in Sergio 32.9
Additional paid in capital 7.1

No gain or loss is recorded. Since

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

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

Income to April 1: (36*.1*3/12) 0.9
Addition to NCI on April 1 32.9
Income since April 1: (36*.2*9/12) 5.4
Dividends (20*.2) (4.0)
Balance at Dec 31 $67.2

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 Worksheet Entries
Income from Sergio (8.1+21.6) 29.7
Dividends 16.0
Investment in Sergio 13.7
Noncontrolling interest share (0.9+5.4) 6.3
Dividends 4.0
Noncontrolling interest 2.3
Common stock 200.0
Retained earnings 1/1 100.0
Goodwill 20.0
Investment in Sergio (288-32.9) 255.1
Noncontrolling interest, 1/1 32.0
Noncontrolling interest, 4/1 32.9

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 Interim Sale, Loss of Control
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
The "parent" no longer consolidates the
"subsidiary"
• That relationship has been dissolved
• Parent will use equity or fair value/cost
method as appropriate
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Consolidations – Changes in Ownership Interests
3: Subsidiary's Stock Transactions

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 Subsidiary Actions
Subsidiary actions increasing Parent share
1. Sub issues additional shares to Parent
2. Sub reacquires shares from noncontrolling interest

Subsidiary actions decreasing Parent share

3. Sub issues additional shares to noncontrolling
interests
4. Sub reacquires shares from Parent

Subsidiary actions not impacting ownership shares

5. Sub issues stock to both parent & noncontrolling
interest
6. Sub issues stock split or stock dividend
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 Stroh Issues Stock to Purdy
Purdy owns 80% of Stroh, acquired at $180.
Cost of 80% of Stroh $180
Implied value of Stroh $225
Book value of Stroh 200
Excess, goodwill $25

Stroh issues additional shares to Purdy.

Outstanding shares increased from 10K to 12K.
Purdy had owned 8K of the 10K, but now owns
10K of the 12K shares.
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 Before sale
Stroh's equity 200
Goodwill 25
Goodwill may go
Total value 225
up or down
Purdy's Investment in Stroh 180
depending on the
Purdy's share of BV of equity 160 value Purdy paid
Goodwill 20 for the additional
Total value 180 shares of Stroh

Sell at BV Sell > BV Sell < BV

for $40 for $70 for $30
Stroh's equity, after the issuance 240 270 230
Purdy's Investment, after 220 250 210.0
Purdy's share of equity, 10/12 share 200 225 191.7
New measure of goodwill 20 25 18.3
Total 220 250 210.0

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 Purdy's Entry
Purdy acquires additional shares directly from
Stroh at book value, $40.
Investment in Stroh 40
Cash 40
If Purdy had paid $70 (above book value) or $30
(below book value), only the amount in the entry
would change.
The analysis above shows different amounts of
goodwill which will be used in the consolidation
worksheet.
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Stat Issues Stock to Outsiders
Puny owns 80% of Stat, acquired at $180.
Cost of 80% of Stat $180
Implied value of Stat $225
Book value of Stat 200
Excess, goodwill $25
Stat issues additional shares to outside entities.
Outstanding shares increased from 10K to 12K.
Puny had owned 8K of the 10K, but now owns 8K
of the 12K shares.
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 Before sale
Stat equity 200 Puny's measure of
Goodwill 25 goodwill does not
change when
Total value 225 Stroh issues the
Puny's Investment 180 shares to outside
Puny's share of BV of equity 160 entities. Puny
Goodwill 20 adjusts the value
Total value 180 of its Investment
in Stat account.
Sell at BV Sell > BV Sell < BV
for $40 for $70 for $30
Stat equity, after 240 270 230
Puny's Investment current balance 180 180 180.0
Puny's share of equity, 10/12 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

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 Puny's Adjusting Entry
for $40:
no entry needed
for $70
Investment in Stat 20.0
Additional paid in capital 20.0
for $30
Additional paid in capital 6.7
Investment in Stat 6.7

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 Shelly Purchases Treasury Stock
Pointer owns 80% of Shelly acquired for $160, at
cost equal to book value.
Cost of 80% of Shelly $160
Implied value of Shelly $200
Book value of Shelly 200
Excess, goodwill $0

Pointer holds 8K of Shelly's 10K shares

outstanding. Shelly reacquires 0.4K shares from
outsiders.
Pointer now holds 8K of Shelly's 9.6K shares
outstanding.
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 Before treasury stock
Shelly's equity 200 There was no
Goodwill 0 goodwill and
Total value 200 none is created by
Pointer's Investment in Shelly 160 Shelly purchasing
treasury stock.
Pointer's share of BV of equity 160
Pointer adjusts
Goodwill 0 the balance in its
Total value 160 Investment in
Shelly account.
Buy = BV Buy > BV Buy < BV
for $8 for $12 for $6
Shelly's equity, after 192 188 194
Pointer's Investment current balance 160 160 160.0
Pointer'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

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 Pointer's Adjustment
Pointer's entry when Shelly purchases treasury
shares from outsiders.
Treasury stock purchased for $8
no entry needed
Treasury stock purchased for $12
Additional paid in capital 3.3
Investment in Stroh 3.3
Treasury stock purchased for $6
Investment in Stroh 1.7
Additional paid in capital 1.7

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 Stock Splits/ Stock Dividends
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

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