E5-26A: Cost-Method
Consolidation for MajorityOwned Subsidiary
Brett Bronenkamp
Haoyi Du
Stephen Jones
Kevin McCarthy
Alicia Rackers
Calculations
Dividends Declared - Knight Co.
Percent Owned
Eliminate Dividend Income from Sub.
Net Income of Knight Co.
Sales
Depreciation Expense
Other Expenses
Net Income of Knight Co.
Noncontrolling Percentage
Income to Noncontrolling Interest
20,000
80%
16,000
200,000
-15,000
-155,000
30,000
20%
6,000
Dividends Declared - Knight Co.
Noncontrolling %
Assign Dividends to Noncontrolling Interest
20,000
20%
4,000
R/E Knight Co. December 31, 20X7
R/E Knight Co. January 1, 20X7
Undistributed Earnings
Noncontrolling Interest Percentage
Increase Assignable to Noncontrolling Interest
70,000
-50,000
20,000
20%
4,000
Elimination Entries, Dec 31, 20X7
E1
E2
E3
E4
Dividend Income
Dividends Declared
Eliminate Dividend Income from Subsidiary
16,000
16,000
Income to Noncontrolling Interest
Dividends Declared
Noncontrolling Interest
Assign income to noncontrolling interest
6,000
Common Stock Knight Co.
Retained Earnings, Jan 1
Investment in Knight Co. Stock
Noncontrolling Interest
Eliminate original investment balance
100,000
50,000
Retained Earnings, Jan 1
Noncontrolling Interest
Assign undistributed prior earnings of subsidiary
to noncontrolling interest.
4,000
2,000
120,000
30,000
4,000
4,000
Item
Sales
Dividend Income
Credits
Depreciation Expense
Other Expenses
Debits
Consolidated Net Income
Income to Noncontrolling Interest
Income, carry forward
Retained Earnings, Jan 1
Income, from above
Eliminations
Debit
Credit
Lintner Corporation Knight Company
300,000
200,000
(1) 16,000
16,000
316,000
200,000
25,000
15,000
251,000
155,000
276,000
170,000
40,000
268,000
40,000
308,000
30,000
70,000
30,000
100,000
Consolidated
500,000
500,000
40,000
406,000
446,000
54,000
-6,000
48,000
(2) 6,000
22,000
(3) 50,000
(4) 4,000
22,000
284,000
48,000
332,000
(1) 16,000
(2) 4,000
20,000
Dividends Declared
Retained Earnings, Dec 31, carry forward
-25,000
283,000
-20,000
80,000
Current Assets
Depreciable Assets
Investment in Knight Co. Stock
Debits
183,000
500,000
120,000
803,000
80,000
300,000
380,000
1,063,000
Accumulated Depreciation
Accounts Payable
Common Stock
Retained Earnigs, from above
200,000
120,000
200,000
283,000
90,000
110,000
100,000
80,000
(3) 100,000
76,000
290,000
230,000
200,000
307,000
803,000
380,000
176,000
76,000
263,000
800,000
(3) 120,000
Noncontrolling Interest
Credits
-25,000
307,000
20,000
(2) 2,000
(3) 30,000
(4) 4,000
176,000
36,000
1,063,000
Lintner Corp. and Subsidiary
Consolidated Income Statement
Year Ended December 31, 20X7
Sales
Depreciation
Other Expenses
Total Expenses
Consolidated Net Income
Income to Noncontrolling Interest
Income to Controlling Interest
500,000
40,000
406,000
-446,000
54,000
-6,000
48,000
Lintner Corp. and Subsidiary
Consolidated Retained Earnings Statement
Year Ended December 31, 20X7
Retained Earnings, Jan. 1, 20X7
Income to Controlling Interest 20X7
Dividends Declared, 20X7
Retained Earnings, Dec. 31, 20X7
284,000
48,000
332,000
-25,000
307,000
Lintner Corp. and Subsidiary
Consolidated Balance Sheet
December 31, 20X7
Current Assets
Depreciable Assets
Accumulated Depreciation
Total Assets
Accounts Payable
Stockholders Equity
Controlling Interest
Common Stock
Retained Earnings
Total Controlling Interest
Noncontrolling Interest
Total Stockholders Equity
Total Liabilities and Stockholders Equity
263,000
800,000
-290,000
510,000
773,000
230,000
200,000
307,000
507,000
36,000
543,000
773,000
Differences Between the Cost and Equity
Method
● The choice of the cost or equity method has no effect on
the consolidated financial statements.
● Under the cost method, in the year of the combination no
entries are made on the parent’s books to write off the
portions of the differential that expire during that year.
● Consolidation differences become more evident in the
second year of ownership.
● Under the cost method, the investment elimination entry
continues to be the same in each subsequent year unless
there is a change in ownership level or a change in the
number of subsidiary shares outstanding.

Questions?