Chapter 04 - Consolidated Financial Statements and Outside Ownership
CHAPTER 4
CONSOLIDATED FINANCIAL STATEMENTS
AND OUTSIDE OWNERSHIP
Chapter Outline
I.
Outside ownership may be present within any business combination.
A. Complete ownership of a subsidiary is not a prerequisite for consolidation—only enough
voting shares need be owned so that the acquiring company has the ability to control
the decision-making process of the acquired company.
B. Any ownership interest in a subsidiary company by a party unrelated to the acquiring
company is termed a noncontrolling interest.
II.
Valuation of subsidiary assets and liabilities poses a challenge when a noncontrolling
interest is present.
A. The accounting emphasis is placed on the entire entity that results from the business
combination when control has been obtained. The parent company that controls its
subsidiary must consolidate 100% of subsidiary assets, liabilities, revenues, and
expense are consolidated even when its ownership is less than 100%.
B. The consolidated valuation basis for a newly acquired subsidiary is the acquisition-date
fair value of the company (most frequently determined by the consideration transferred
and the fair value of the noncontrolling interest); specific subsidiary assets and liabilities
are measured at their acquisition-date fair values.
C. The noncontrolling interest balance is reported in the parent’s consolidated financial
statements as a component of stockholders' equity.
III.
Consolidations involving a noncontrolling interest—subsequent to the date of acquisition
A. Four noncontrolling interest figures are determined for reporting purposes
1. Beginning of year balance sheet amount
2. Net income attributable to noncontrolling interest
3. Dividends declared by subsidiary during the period attributable to the noncontrolling
interest
4. End of year balance sheet amount
B. Noncontrolling interest balances are accumulated in a separate column in the
consolidation worksheet
1. The beginning of year figure is entered on the worksheet as a component of Entries
S and A
2. The net income attributable to the noncontrolling interest is established by a
columnar entry that simultaneously reports the balance in both the consolidated
income statement and the noncontrolling interest column
3. Dividends declared to these outside owners are reflected by extending the
subsidiary's Dividends declared balance (after eliminating intra-entity transfers) into
the noncontrolling interest column as a reduction
4. The end of year noncontrolling interest total is the summation of the three items
above and is reported in stockholders' equity.
4-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
IV. Step acquisitions
A. An acquiring company may make several different purchases of a subsidiary's stock in
order to gain control
B. Upon attaining control, all of the parent’s previous investments in the subsidiary are
adjusted to fair value and a gain or loss recognized as appropriate
C. Upon attaining control, the valuation basis for the subsidiary is established at its total
fair value (the sum of the fair values of the controlling and noncontrolling interests)
D. Post-control subsidiary stock acquisitions by the parent are considered transactions
with current owners of the consolidated entity. Thus such post-control stock acquisitions
neither result in gains or losses nor provide a basis for subsidiary asset remeasurement
to fair value. The difference between the sale proceeds and the carrying value of the
shares sold (equity method) is recorded as an adjustment to the parent’s additional paid
in capital.
V. Sales of subsidiary stock
A. The proper book value must be established within the parent's Investment account so
that the sales transaction can be correctly recorded
B. The investment balance is adjusted as if the equity method had been applied during the
entire period of ownership
C. If only a portion of the shares are being sold, the book value of the investment account
is reduced using either a FIFO or a weighted-average cost flow assumption
D. If the parent maintains control, any difference between the proceeds of the sale and the
equity-adjusted book value of the share sold is recognized as an adjustment to
additional paid-in capital.
E. If the parent loses control with the sale of the subsidiary shares, the difference between
the proceeds of the sale and the equity-adjusted book value of the share sold is
recognized as a gain or loss.
F. Any interest retained by the parent company should be accounted for by either
consolidation, the equity method, or the fair value method depending on the influence
remaining after the sale.
Answer to Discussion Question:
Do you think the FASB made the correct decision in requiring consolidated financial
statements to recognize all subsidiary’s assets and liabilities at fair value
regardless of the percentage ownership acquired by the parent?
As the quotes from the five accounting professionals illustrate, the decision to require the
revaluation of 100% of a newly controlled subsidiary’s assets and liabilities—regardless of
percentage ownership—was not without some controversy. Students can use the quotes to
discuss cost-benefit issues, relevance of capturing the underlying economics, use of hypothetical
transactions in financial reporting, potential for abuse, etc. The requirement to value all acquisition
date subsidiary assets at 100% fair value thus provides a useful vehicle for the class to discuss the
many issues surrounding standard setters’ decisions.
4-2
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
Answer to Discussion Question:
DOES GAAP UNDERVALUE POST-CONTROL STOCK ACQUISITIONS?
From the Berkshire Hathaway 2012 annual 10-K report:
We have owned a controlling interest in Marmon Holdings, Inc. (“Marmon”) since 2008. In the fourth
quarter of 2012, pursuant to the terms of the 2008 Marmon acquisition agreement, we acquired an
additional 10% of the outstanding shares of Marmon held by noncontrolling interests for aggregate
consideration of approximately $1.4 billion. Approximately $800 million of the consideration was paid
in the fourth quarter of 2012, and the remainder is payable in March 2013. In the fourth quarter of
2010, we acquired 16.6% of Marmon’s outstanding common stock for approximately $1.5 billion. As
a result of these acquisitions, our ownership interest in Marmon has increased to approximately
90%.
These purchases were accounted for as acquisitions of noncontrolling interests. The differences
between the consideration paid or payable and the carrying amounts of the noncontrolling interests
acquired were recorded as reductions in Berkshire’s shareholders equity of approximately $700
million in 2012 and $614 million in 2010. We are contractually required to acquire substantially all of
the remaining noncontrolling interests of Marmon no later than March 31, 2014, for an amount that
will be based on Marmon’s future operating results.
On the date control is established, the new subsidiary’s valuation basis is established.
Subsequent acquisitions of any remaining portions of the noncontrolling interests do not establish
a new valuation basis for the subsidiary. In the Berkshire case, the new valuation basis for Marmon
was established in 2008 when its 64% control was acquired. Berkshire then increases Marmon’s
consolidated carrying amount as Marmon earns income, not by subsequent purchases of
Marmon’s noncontrolling shares.
Berkshire’s payments for its post-control equity acquisitions (16% and 10%) were in excess of
Marmon’s proportionate carrying amounts. Because these transactions were with owners (not
outside parties), no gain or loss is recorded. Berkshire reduces its paid-in capital the for excess of
the purchase price over the carrying amount. The accounting is similar to retirement of stock for a
payment in excess of the company’s proportionate carrying amount.
Mr.Buffett may be correct that the current market value of Marmon is $4.6 bilion more that its
carrying amount. However, GAAP does not, in general, record unrealized increases in a firm’s
market value as increases in reported asset amounts.
4-3
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
Answers to Questions
1.
"Noncontrolling interest" refers to an equity interest that is held in a member of a business
combination by an unrelated (outside) party.
2.
Acquisition method = $220,000 (fair value)
3.
A control premium is the portion of an acquisition price (above currently traded market
values) paid by a parent company to induce shareholders to sell a sufficient number of
shares to obtain control. The extra payment typically becomes part of the goodwill acquired
in the acquisition attributable to the parent company.
4.
Current accounting standards require the noncontrolling interest to appear in the
stockholders' equity section. The noncontrolling interest's share of the subsidiary’s net
income is shown as an allocated component of consolidated net income.
5.
The ending noncontrolling interest is determined on a consolidation worksheet by adding
the four components found in the noncontrolling interest column: (1) the beginning balance
of the subsidiary’s book value, (2) the noncontrolling interest share of the adusted
acquisition-date excess fair over book value allocation, (3) its share of current year net
income, (4) less dividends declared to these outside owners.
6.
Allsports should remove the pre-acquisition revenues and expenses from the consolidated
totals. These amounts were earned (incurred) prior to ownership by Allsports and therefore
should are not earnings for the current parent company owners.
7.
Following the second acquisition, consolidation is appropriate. Once Tree gains control, the
10% previous ownership is included at fair value as part of the total consideration
transferred by Tree in the acquisition.
8.
When a company sells a portion of an investment, it must remove the carrying value of that
portion from its investment account. The carrying value is based upon application of the
equity method. Thus, if either the initial value method or the partial equity method has been
used, Duke must first restate the account to the equity method before recording the sales
transaction. The same method is applied to the operations of the current period occurring
prior to the time of sale.
9.
Unless control is surrendered, the acquisition method views the sale of subsidiary's stock
as a transaction with its owners. Thus, no gain or loss is recognized. The difference
between the sale proceeds and the carrying value of the shares sold (equity method) is
accounted for as an adjustment to the parent’s additional paid in capital.
10.
The accounting method choice for the remaining shares depends upon the current
relationship between the two firms. If Duke retains control, consolidation is still required.
However, if the parent now can only significantly influence the decision-making process,
the equity method is applied. A third possibility is Duke may have lost the power to exercise
even significant influence. The fair value method then is appropriate.
4-4
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
Answers to Problems
1. C
2. A At the date control is obtained, the parent consolidates subsidiary assets at
fair value ($549,000 in this case) regardless of the parent’s percentage
ownership.
3. D In consolidating the subsidiary's figures, all intra-entity balances must be
eliminated in their entirety for external reporting purposes. Even though the
subsidiary is less than fully owned, the parent nonetheless controls it.
4. C An asset acquired in a business combination is initially valued at 100%
acquisition-date fair value and subsequently amortized its useful life.
Patent fair value at January 1, 2014 .....................................................
Amortization for 2 years (10 year remaining life) .............................
Patent reported amount December 31, 2015 .....................................
$45,000
(9,000)
$36,000
5. C
6. B Combined revenues ................................................................................. $1,100,000
Combined expenses................................................................................. (700,000)
Excess acquisition-date fair value amortization ..............................
(15,000)
Consolidated net income ........................................................................ $385,000
Less: noncontrolling interest share ($85,000 × 40% ) ......................
(34,000)
Consolidated net income to Chamberlain Corporation .................. $351,000
7. C Consideration transferred by Pride......................................................
Noncontrolling interest fair value .........................................................
Star acquisition-date fair value .............................................................
Star book value ..........................................................................................
Excess fair over book value ...................................................................
to equipment (8 year remaining life) ...............................
to customer list (4 year remaining life) ..........................
$ 80,000
100,000
Combined revenues .................................................................................
Combined expenses............................................................ $545,000
Excess fair value amortization .........................................
35,000
Consolidated net income ........................................................................
$540,000
60,000
$600,000
420,000
$180,000
Amort.
$10,000
25,000
$35,000
$783,000
580,000
$203,000
8. A Under the equity method, consolidated RE = parent’s RE.
9. B
4-5
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
10. A Amie, Inc. fair value at July 1, 2015:
30% previously owned fair value (30,000 shares × $5) ..................
60% new shares acquired (60,000 shares × $6) ................................
10% NCI fair value (10,000 shares × $5) ..............................................
Acquisition-date fair value......................................................................
Net assets' fair value ................................................................................
Goodwill ......................................................................................................
$150,000
360,000
50,000
$560,000
500,000
$60,000
12. B Fair value of 30% noncontrolling interest on April 1.......................
30% of net income for remainder of year ($240,000 × 30% ) ..........
Noncontrolling interest December 31..................................................
$165,000
72,000
$237,000
11. C
13. C Proceeds of $80,000 less $64,000 (⅓ × $192,000) book value = $16,000
Control is maintained so excess proceeds go to APIC.
14. B Combined revenues ................................................................................. $1,300,000
Combined expenses................................................................................. (800,000)
Trademark amortization ..........................................................................
(6,000)
Patented technology amortization .......................................................
(8,000)
Consolidated net income ....................................................................... $486,000
15. C Subsidiary net income
($100,000 – $14,000 excess amortizations) ..................................
Noncontrolling interest percentage .....................................................
Net income attributable to noncontrolling interest..........................
Fair value of noncontrolling interest at acquisition date ...............
40% change in previous year Solar book value................................
($530,000 – $400,000) × 40% ............................................................
40% of excess fair value amortization—year one ............................
Net income attributable to noncontrolling interest (above) ..........
Noncontrolling interest at end of year ................................................
16. A West trademark balance..........................................................................
Solar trademark balance .........................................................................
Acquisition-date fair value allocation ..................................................
Excess fair value amortization for two years ....................................
Consolidated trademarks........................................................................
$86,000
40%
$34,400
$200,000
52,000
(5,600)
34,400
$280,800
$260,000
200,000
60,000
(12,000)
$508,000
4-6
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
17. A Acquisition-date fair value ($60,000 ÷ 80% ) .......................................
Strand's book value .................................................................................
Fair value in excess of book value ......................................................
$75,000
(50,000)
$25,000
Excess assigned to inventory (60% ) ................................... $15,000
Excess assigned to goodwill (40% ) ..................................... $10,000
Park current assets ..................................................................................
Strand current assets ..............................................................................
Excess inventory fair value ....................................................................
Consolidated current assets ..................................................................
$70,000
20,000
15,000
$105,000
18. D Park noncurrent assets ...........................................................................
Strand noncurrent assets .......................................................................
Excess fair value to goodwill .................................................................
Consolidated noncurrent assets ..........................................................
$90,000
40,000
10,000
$140,000
19. B Add the two book values and include 10% (the $6,000 current portion) of the
loan taken out by Park to acquire Strand.
20. B Add the two book values and include 90% (the $54,000 noncurrent portion) of
the loan taken out by Park to acquire Strand.
21. C Park stockholders' equity .......................................................................
Noncontrolling interest at fair value (20% × $75,000) .....................
Total stockholders' equity ......................................................................
22.
$80,000
15,000
$95,000
(15 minutes) (Compute consolidated net income and noncontrolling
interest)
2014
2015
a. Harrison net income ............................................................. $220,000 $260,000
Starr net income ....................................................................
70,000
90,000
Acquisition-date excess fair value amortization ..........
(8,000)
(8,000)
Consolidated net income .................................................... $282,000 $342,000
b. Starr fair value............................................................................................ $1,200,000
Fair value of consideration transferred .............................................. 1,125,000
Noncontrolling interest fair value .........................................................
$75,000
Noncontrolling interest fair value January 1, 2014 (above)............
2014 income to NCI ([$70,000 – $8,000] × 10%) .....................................
2014 dividends to NCI .............................................................................
Noncontrolling interest reported value December 31, 2014 .....
2015 net income attributable to NCI ([$90,000 – $8,000] × 10%) .......
2015 dividends to NCI .............................................................................
Noncontrolling interest reported value December 31, 2015
$75,000
6,200
(3,000)
78,200
8,200
(3,000)
$83,400
4-7
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
23. (30 minutes) (Consolidated balances, allocation of consolidated net income to
controlling and noncontrolling interest, calculation of noncontrolling interest).
a. Stayer’s technology processes:
Acquisition-date fair value (20 year remaining life)
2015 amortization
Technology processes 12/31/15
$1,000,000
(50,000)
$ 950,000
b. Stayer’s building:
Acquisition-date fair value (10 year remaining life)
2015 depreciation
Building 12/31/15
-or$175,500 + $150,000 – $15,000 = $310,500
$345,000
(34,500)
$310,500
c. Controlling interest in consolidated net income:
Net income–Johnsonville
Net income–Stayer adjusted for excess fair value
amortization (see part d below)
Consolidated net income
Less: net income attributable to noncontrolling
interest (see part d below)
Net income attributable to Johnsonville Co.
$650,000
285,000
935,000
(57,000)
$878,000
-ORJohnsonville’s separate net income
Stayer’s reported net income
Excess fair value amortization:
Technology processes
Building ($345,000 – $195,000) ÷ 10 years
Stayer’s adjusted net income
Johnsonville’s ownership percentage
Net income attributable to Johnsonville Co.
d. Net income attributable to noncontrolling interest:
Stayer’s reported net income
Excess fair value amortization:
Technology processes
Building ($345,000 – $195,000) ÷ 10 years
Stayer’s adjusted net income
Noncontrolling interest percentage
Net income attributable to noncontrolling interest
$650,000
350,000
(50,000)
(15,000)
285,000
80%
228,000
$878,000
350,000
(50,000)
(15,000)
285,000
20%
$57,000
4-8
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
23. (continued)
e. Noncontrolling interest:
Acquisition-date balance 1/1/15
Total Stayer fair value ($3,000,000 ÷ 80% )
$3,750,000
Noncontrolling interest percentage
20%
Noncontrolling interest acquisition-date fair value
$750,000
Net income attributable to noncontrolling interest
57,000
Noncontrolling interest share of Stayer dividends (20% × $50,000)
(10,000)
Noncontrolling interest 12/31/15
$ 797,000
24. (40 minutes) (Several valuation and income determination questions for a
business combination involving a noncontrolling interest.)
a. Business combinations are recorded generally at the fair value of the
consideration transferred by the acquiring firm plus the acquisition-date fair
value of the noncontrolling interest.
Patterson’s consideration transferred ($31.25 × 80,000 shares) ........... $2,500,000
Noncontrolling interest fair value ($30.00 × 20,000 shares) ....................
600,000
Soriano’s total fair value January 1 ........................................................... $3,100,000
b. Each identifiable asset acquired and liability assumed in a business combination
is initially reported at its acquisition-date fair value.
c. In periods subsequent to acquisition, the subsidiary’s assets and liabilities are
reported at their book values adjusted for acquisition-date fair value allocations
and for subsequent amortization and depreciation on those allocations. Except
for certain financial items, the subsidiary’s assets and liabilities are not
continually adjusted for changing fair values.
d. Soriano’s total fair value January 1 ........................................................... $3,100,000
Soriano’s net assets book value................................................................. 1,290,000
Excess acquisition-date fair value over book value .............................. $1,810,000
Adjustments from book to fair values .......................................................
Buildings and equipment .............................................. (250,000)
Trademarks .......................................................................
200,000
Patented technology ...................................................... 1,060,000
Unpatented technology .................................................
600,000
1,610,000
Goodwill
...................................................................................................... $ 200,000
e. Combined revenues ....................................................................................... $4,400,000
Combined expenses....................................................................................... (2,350,000)
Building and equipment excess depreciation.........................................
50,000
Trademark excess amortization ..................................................................
(20,000)
Patented technology amortization ............................................................. (265,000)
Unpatented technology amortization ........................................................ (200,000)
Consolidated net income .............................................................................. $1,615,000
4-9
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
24. (continued)
To noncontrolling interest:
Soriano’s revenues................................................................................... $1,400,000
Soriano’s expenses .................................................................................. (600,000)
Total excess amortization expenses (above) .................................... (435,000)
Soriano’s adjusted net income.............................................................. $ 365,000
Noncontrolling interest percentage ownership ................................
20%
Net income attributable to noncontrolling interest.......................... $ 73,000
To controlling interest:
Consolidated net income ........................................................................ $1,615,000
Net income attributable to noncontrolling interest..........................
(73,000)
Net income attributable to Patterson ................................................... $1,542,000
-ORPatterson’s revenues ............................................................................... $3,000,000
Patterson’s expenses .............................................................................. 1,750,000
Patterson’s separate net income .......................................................... $1,250,000
Patterson’s share of Soriano’s adjusted net income
(80% × $365,000) ............................................................................
292,000
Consolidated net income attributable to Patterson ......................... $1,542,000
f. Fair value of noncontrolling interest January 1...................................... $ 600,000
Net income attributable to noncontrolling interest................................
73,000
Dividends (20% × $30,000)............................................................................
(6,000)
Noncontrolling interest December 31........................................................ $ 667,000
g. If Soriano’s acquisition-date total fair value was $2,250,000, then a bargain
purchase has occurred.
Collective fair values of Soriano’s net assets ......................................... $2,900,000
Soriano’s total fair value January 1 ........................................................... $2,250,000
Bargain purchase............................................................................................ $ 650,000
The acquisition method requires that the subsidiary assets acquired and
liabilities assumed be recognized at their acquisition date fair values regardless
of the assessed fair value. Therefore, none of Soriano’s identifiable assets and
liabilities would change as a result of the assessed fair value. When a bargain
purchase occurs, however, no goodwill is recognized.
4-10
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
25. (30 minutes) Step acquisition.
a. Investment in Sellinger
Cash
Additional paid-in capital
445,000
415,000
30,000
Acquisition-date fair value ($1,141,000 ÷ .7)
Sellinger net income 2014
Excess fair value amortization 2014
Sellinger dividends 2014
Acquisition-date adjusted subsidiary value 12/31/14
Percent acquired 1/1/15
Acquisition-date based value of newly acquired shares
Acquisition price for 25% interest
Credit to Palka’s APIC
b. Initial value for 70% acquisition
70% of adjusted 2014 subsidiary net income
($340,000 – $40,000)
70% of subsidiary dividends 2014
Adjusted fair value of newly acquired shares
95% of adjusted subsidiary 2015 net income
($440,000 – $40,000)
95% of subsidiary dividends 2015
Investment in Sellinger 12/31/15
$1,630,000
340,000
(40,000)
(150,000)
1,780,000
0.25
$ 445,000
415,000
$ 30,000
$1,141,000
210,000
(105,000)
445,000
380,000
(171,000)
$1,900,000
4-11
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
26. (20 Minutes) (Determine consolidated income balances, includes a mid-year
acquisition)
a.
Acquisition-date total fair value ............................. $594,000
Book value of net assets........................................... (400,000)
Fair value in excess of book value ........................ $194,000
Excess fair value assigned to specific
Remaining
Annual excess
accounts based on fair value
life
amortizations
Patent .................................................................. 140,000 5 years
$28,000
Land
.................................................................. 10,000
Buildings ................................................................ 30,000 10 years
3,000
Goodwill ................................................................. 14,000
Total
..................................................................
-0$31,000
Consolidated figures following January 1 acquisition date:
Combined revenues ...................................................................................... $1,500,000
Combined expenses....................................................................................... (1,031,000)
Consolidated net income ..............................................................................
469,000
Net income to noncontrolling interest ([200,000 – 31,000] × 30%) ........
(50,700)
Net income attributable to Parker, Inc....................................................... $ 418,300
b. Consolidated figures following April 1 acquisition date:
Combined revenues (1).................................................................................. $1,350,000
Combined expenses (2) ................................................................................. (923,250)
Consolidated net income ............................................................................. $ 426,750
Net income attributable to noncontrolling interest (3) ..........................
(38,025)
Net income attributable to Parker, Inc ....................................................... $ 388,725
(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues
(2) $600,000 Parker expenses plus $300,000 of post-acquisition Sawyer expenses plus
$23,250 amortization expenses for 9 months
(3) ($200,000 – 31,000) adjusted subsidiary net income × 30% × ¾ year
4-12
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
27.
(15 minutes) Consolidated figures with noncontrolling interest
Fair value of company (given)
Book value
Fair value in excess of book value
to machine ($50,000 – $10,000)
to process trade secret
$60,000
(10,000)
50,000
40,000 ÷ 10 = $4,000 per year
$10,000 ÷ 4 = 2,500 per year
$6,500 per year
Consolidated figures:

Net income attributable to noncontrolling interest
= 40%  ($50,000 revenues less $26,500 expenses) = $9,400

End-of-year noncontrolling interest:
Beginning balance (40%  $60,000)
Net income allocation (from above)
Dividend reduction (40%  $5,000)
End-of-year noncontrolling interest
$24,000
9,400
(2,000)
$31,400

Machine (net) = $45,000 ($9,000 book value plus $40,000 excess allocation
less $4,000 excess depreciation for one year).

Process trade secret (net) = $10,000 – $2,500 = $7,500
4-13
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
28. (45 minutes) Noncontrolling interest in the presence of a control premium.
a.
Goodwill allocation:
Parflex
Acquisition-date fair value
$344,000
Share of identifiable net assets ($324,000 + $18,000) 307,800
Goodwill allocation
$36,200
b. Investment in Eagle
Initial value
Change in Eagle’s RE × 90%
($341,000 – $174,000) × 90%
Excess amortization (3 years) × 90%
Investment in Eagle 12/31/15
NCI
$36,000
34,200
$1,800
$344,000
150,300
(5,400)
$488,900
-ORInvestment in Eagle
Initial value
2013-2014 change in Eagle’s RE × 90%
($278,000 – $174,000) × 90%
Excess fair value amortization
Equity income 2015 (below)
Eagle 2015 dividends × 90%
Investment in Eagle 12/31/15
Equity in Eagle’s earnings:
Eagles reported 2015 net income
Excess equipment amortization
Adjusted net income
Parflex ownership share
Equity in Eagle’s earnings
$344,000
93,600
(3,600)
79,200
(24,300)
$488,900
$90,000
(2,000)
$88,000
90%
$79,200
4-14
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
28. continued
c. December 31, 2015
Sales
Parflex
Eagle
Adjustments
NCI
Consolidated
(862,000)
(366,000)
(1,228,000)
Cost of goods sold
515,000
209,000
724,000
Depreciation expense
191,200
67,000
E
2,000
260,200
Equity in Eagle's earnings
Separate company net
income
(79,200)
0
I
79,200
0
(235,000)
(90,000)
Consolidated net income
(243,800)
to noncontrolling interest
(8,800)
to Parflex Corporation
8,800
(235,000)
Retained earnings, 1/1
(500,000)
(278,000)
Net income (above)
(235,000)
(90,000)
Dividends declared
130,000
27,000
(605,000)
(341,000)
(605,000)
Cash and receivables
135,000
82,000
217,000
Inventory
255,000
136,000
391,000
Investment in Eagle
488,900
0
Retained earnings, 12/31
Property & equipment (net)
964,000
328,000
Goodwill
S 278,000
(500,000)
(235,000)
24,300
D
24,300
A1
14,000
A2
38,000
D
385,200
S
12,600
A1
36,200
A2
79,200
I
2,000
E
2,700
130,000
-0-
1,304,000
38,000
Total assets
1,842,900
546,000
1,950,000
Liabilities
(722,900)
(55,000)
(777,900)
Common stock
(515,000)
(150,000)
S 150,000
NCI 1/1
(515,000)
42,800
S
1,400
A1
1,800
A2
NCI 12/31
Retained earnings, 12/31
Total liabilities and equities
(46,000)
(52,100)
(605,000)
(341,000)
(1,842,900)
(546,000)
(52,100)
(605,000)
585,500
585,500
(1,950,000)
4-15
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
29. (25 Minutes) (Determine consolidated balances for a step acquisition).
a. Amsterdam fair value implied by price paid by Morey
$560,000 ÷ 70% =
$800,000
b. Revaluation gain:
1/1 equity investment in Amsterdam (book value)
25% net income for 1st 6 months
Investment book value at 6/30
Fair value of investment at 6/30 (25% × $800,000)
Gain on revaluation to fair value
$178,000
8,750
186,750
200,000
$ 13,250
c. Goodwill at 12/31:
Fair value of Amsterdam at 6/30
Book value at 6/30 (700,000 + [70,000 ÷ 2])
Excess fair value
Allocation to goodwill (no impairment)
$800,000
735,000
$ 65,000
$ 65,000
d. Noncontrolling interest:
5% fair value balance at 6/30
5% subsidiary net income from 6/30 to 12/31
5% subsidiary dividends
Noncontrolling interest 12/31
$40,000
1,750
(1,000)
$40,750
4-16
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
30. (30 Minutes) (Reporting the sale of a portion of an investment in a subsidiary.)
a. Posada records an accrual of $7,950 (see computation below) as "Equity
Income from Sold Shares of Sabathia" for the January 1, 2015 to October
1, 2015 period which will appear in the 2015 consolidated income
statement. The consolidation will continue to include all of Sabathia's
accounts but now recognizing a 40% noncontrolling interest.
Sabathia fair value 1/1/13 ............................................... $1,200,000
Sabathia book value ........................................................ (1,130,000)
Patent ..................................................................................
$70,000
Remaining life of patent .................................................
5 years
Annual amortization ........................................................
$14,000
Posada’s share of Sabathia’s net income accruing to shares sold:
Sabathia's net income......................................................
$120,000
Excess patent fair value amortization .........................
(14,000)
Sabathia's adjusted net income ....................................
106,000
Fraction of year held ........................................................
9/12
Sabathia’s adjusted net income for 9 months ..........
79,500
Percentage owned by Posada .......................................
70%
Posada’s share of Sabathia’s 9 month net income
55,650
Shares sold—1,000 out of 7,000 ..................................
1/7
Posada’s income for shares sold ................................
$7,950
b. As long as control is maintained, the acquisition method considers
transactions in the stock of a subsidiary, whether purchases or sales, as
transactions in the equity of the consolidated entity.
Posada’s investment book value 10/1/15
1/1/15 balance (given—equity method) ...................... $1,085,000
Recognition of 1/1/15–10/1/15 period:
Income accrual ($120,000 × 70% × ¾) ..................
63,000
Dividends ($40,000 × 70% × ¾) ...............................
(21,000)
Amortization ($14,000 × 70% × ¾) ..........................
(7,350)
Pre-sale investment book value—10/1/15 .................. $1,119,650
Computation of income effect—sale transaction
10/1/15 book value (above) ............................................ $1,119,650
Portion of investment sold (1,000/7,000 shares) .....
1/7
Book value of investment sold ..................................... $ 159,950
Proceeds ............................................................................
191,000
Credit to Posada’s additional paid-in capital ........... $ 31,050
c. Because Posada continues to hold 6,000 shares of Sabathia, control is still
maintained and consolidated financial statements would be appropriate
with a noncontrolling interest of 40 percent.
4-17
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
31.
(35 Minutes) (Consolidation entries and the effect of different investment
methods)
a. From the original fair value allocation, $30,000 is assigned based on the
fair value of the patent. With a 5-year remaining life, excess amortization
will be $6,000 per year.
Because the equity method is in use, no Entry *C is required.
Entry S
Common stock (Bandmor) ................................ 300,000
Retained earnings, 1/1/15 (Bandmor) ............. 268,000
Investment in Bandmor (70% ) ....................
397,600
Noncontrolling interest in Bandmor, 1/1/15
170,400
(To eliminate stockholders' equity accounts of subsidiary and
recognize outside ownership. Retained earnings figure includes 2013
and 2014 net income and dividends.)
Entry A
Patent ...................................................................... 18,000
Goodwill .................................................................. 190,000
Investment in Bandmor ................................
145,600
Noncontrolling interest in Bandmor (30% )
62,400
(To recognize unamortized portions of acquisition-date fair value
allocations. No control premium, so goodwill is allocated
proportionately. Patent has undergone two years amortization)
Entry I
Equity in Bandmor earnings ............................. 72,800
Investment in Bandmor ................................
72,800
(To eliminate intra-entity income balance. Equity accrual of $72,800
[70% × ($110,000 – 6,000 amortization)] has been recorded)
Entry D
Investment in Bandmor ...................................... 42,000
Dividends declared ........................................
42,000
(To eliminate current intra-entity dividend transfers—70% of $60,000)
Entry E
Amortization expense ..........................................
Patent .................................................................
(To recognize amortization for current year)
6,000
Entry P
Accounts payable ................................................ 22,000
Accounts receivable ......................................
(To eliminate intra-entity payable/receivable balance)
6,000
22,000
4-18
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
31. (continued)
b. If the initial value method had been applied, the parent would have
recorded only the subsidiary dividends declared as income rather than an
equity accrual. Therefore, Entry *C is needed to adjust the parent's
beginning retained earnings for 2015 to the equity method. During 2013
and 2014, the subsidiary earned a total net income of $171,000 but
declared dividends of only $83,000. The parent's share of the difference is
$61,600 (70% of $88,000 [$171,000 - $83,000]). In addition, the parent’s 70%
share of excess amortization expense for two years must also be included
($8,400 = 2 years × $6,000 per year × 70% ). The net amount to be
recognized is $53,200 ($61,600 - $8,400).
ENTRY *C
Investment in Bandmor ......................................
Retained earnings, 1/1/15 ............................
53,200
53,200
c. If the partial equity method had been applied, only the excess amortization
expenses for the previous two years would have been omitted from the
parent's retained earnings. As shown above, that figure is $8,400 (2 years
× $6,000 per year × 70% ).
ENTRY *C
Retained earnings, 1/1/15 ..................................
Investment in Bandmor ................................
8,400
8,400
d. Net income attributable to noncontrolling interest—2015
[($110,000 – 6,000) × 30% ] .................................
$31,200
Noncontrolling interest (NCI) fair value January 1, 2013
$210,000
Adjustments to original basis:
2013 NI to noncontrolling interest ........................
$20,700
Dividends to NCI..............................................
(11,700)
9,000
2014 NI to noncontrolling interest ........................
Dividends to NCI..............................................
$27,000
(13,200)
2015 Net income to noncontrolling interest ......
Dividends to NCI..............................................
Noncontrolling interest in Bandmor 12/31/15......
$31,200
(18,000)
13,800
13,200
$246,000
–OR–
Worksheet adjustment S ................................................................
Worksheet adjustment A................................................................
2015 net income attributable to noncontrolling interest .......
2015 dividends to noncontrolling interest ...............................
Noncontrolling interest in Bandmor 12/31/15...........................
$170,400
62,400
31,200
(18,000)
$246,000
4-19
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
32.
(45 Minutes) (Asks about several consolidated balances and consolidation
process. Includes the different accounting methods to record investment.)
a. Schedule 1—Fair Value Allocation and Excess Amortizations
Consideration transferred by Miller .......... $664,000
Noncontrolling interest fair value ............... 166,000
Taylor’s fair value............................................ $830,000
Taylor’s book value ........................................ (600,000)
Fair value in excess of book value ............ 230,000
Excess fair value assigned to specific
accounts based on fair value
Excess fair value assigned to buildings
Remaining
life
Annual excess
amortizations
80,000
20 years
Goodwill ............................................................ $150,000 indefinite
Total ..............................................................
$4,000
-0$4,000
b. $150,000 (see schedule 1 above)
c. Entry (S)
Common stock (Taylor) ............................................
Additional paid-in capital (Taylor) .........................
Retained earnings (Taylor) ......................................
Investment in Taylor Company (80% ) ............
Noncontrolling interest in Taylor (20% ) .........
300,000
90,000
210,000
480,000
120,000
Entry (A)—no control premium
Buildings ......................................................................
Goodwill ........................................................................
Investment in Taylor Company (80% ) ............
Noncontrolling interest in Taylor (20% ) .........
80,000
150,000
184,000
46,000
d. (1) Equity method
Income accrual (80% ) .................................................
Excess amortization expense ..................................
Investment income ...............................................
$56,000
(3,200)
$52,800
(2) Partial equity method
Income accrual (80% ) .................................................
$56,000
(3) Initial value method
Dividends received (80% ) .........................................
$8,000
4-20
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
32. (continued)
e. (1) Equity method
Initial fair value paid .................................................... $664,000
Income accrual 2013–2015 ($260,000 × 80% ) ...... 208,000
Dividends 2013–2015 ($45,000 × 80% ) ..................
(36,000)
Excess amortizations 2013–2015 ($3,200 × 3) .....
(9,600)
Investment in Taylor—12/31/15 ......................... $826,400
(2) Partial Equity Method
Investment in Taylor—12/31/15 = $836,000 (initial value paid plus
income accrual of $208,000 less dividends of $36,000 [no excess
amortizations])
(3) Initial Value Method
Investment in Taylor—12/31/15 = $664,000 (original value paid)
f. Using the acquisition method, the allocation will be the total difference
($80,000) between the buildings' book value and fair value. Based on a 20
year remaining life, annual excess amortization is $4,000.
Miller book value—buildings ..............................................
$800,000
Taylor book value—buildings .............................................
300,000
Allocation .................................................................................
80,000
Excess amortizations for 2013–2014 ($4,000 × 2) .........
(8,000)
Consolidated buildings account .................................. $1,172,000
g. Acquisition-date fair value allocated to goodwill
(see schedule 1 above) .................................................
$150,000
h. If the parent has been applying the equity method, the stockholders'
equity accounts on its books will already represent consolidated totals.
The common stock and additional paid-in capital figures to be reported are
the parent balances only. As to retained earnings, the equity method will
properly record all subsidiary net income and amortization so that the
parent balance is also a reflection of the consolidated total.
4-21
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
33.
(20 Minutes) (A variety of consolidated balances-midyear acquisition)
Consideration transferred by Karson
(cash and contingent consideration) .......... $1,360,000
Noncontrolling interest fair value ....................
340,000
Reilly’ fair value (given) ....................................... $1,700,000
Book value of Reilly.............................................. (1,450,000)*
Fair value in excess of book value ................... $250,000
Excess fair value assigned to specific
accounts based on fair value
Trademarks ........................................................
Goodwill ..............................................................
Total
..................................................................
Remaining
life
Annual excess
amortizations
150,000 5 years
$100,000 indefinite
*Reilly book value, January 1
(Common stock + APIC + RE) .........................
Increase in book value:
Net income (revenues less cost of
goods sold and expenses) .....................
Dividends .......................................................
Change during year .....................................
Change during first 6 months of year......
Reilly book value, July 1 (acquisition date) ......
$30,000
-0$30,000
$1,400,000
$120,000
(20,000)
$100,000
CONSOLIDATION TOTALS:
 Sales (1)
50,000
$1,450,000
$1,050,000

Cost of goods sold (2)
540,000

Operating expenses (3)
265,000

Consolidated net income

Net income attributable to noncontrolling interest (4)
$245,000
$9,000
(1) $800,000 Karson revenues plus $250,000 (post-acquisition subsidiary
revenue)
(2) $400,000 Karson COGS plus $140,000 (post-acquisition subsidiary COGS)
(3) $200,000 Karson operating expenses plus $50,000 (post-acquisition
subsidiary operating expenses) plus ½ year excess amortization of $15,000
(4) 20% of post-acquisition subsidiary net income less excess fair value
amortization [20% × ½ year × (120,000 – 30,000)] = $9,000

Retained earnings, 1/1 = $1,400,000 (the parent’s balance because the
subsidiary was acquired during the current year)

Trademarks = $935,000 (add the two book values and the excess fair value
allocation after taking one-half year excess amortization)

Goodwill = $100,000 (the original allocation)
4-22
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
34.
(25 Minutes) (A variety of consolidated questions and balances)
a. Nascent applies the initial value method because the original price of
$414,000 is still in the Investment in Sea-Breeze account. In addition, the
Investment Income account is equal to 60 percent of the dividends
declared by the subsidiary during the year.
b. Consideration transferred in acquisition.. $414,000
Noncontrolling interest fair value ............... 276,000
Sea-Breeze fair value 1/1/12 ......................... $690,000
Sea-Breeze book value 1/1/12
550,000
Excess fair value over book value
$140,000
Excess fair value assigned to specific
Remaining
accounts based on fair value
life
Buildings ..................................................... 60,000 6 years
Equipment ................................................... (20,000) 4 years
Patent ........................................................... 100,000 10 years
Total ............................................................
-0-
Annual excess
amortizations
$10,000
(5,000)
10,000
$15,000
c. If the equity method had been applied, the Investment Income account
would show the basic equity accrual less amortization: 60% of (the
subsidiary's net income of $90,000 less $15,000 excess fair value
amortization) = $45,000.
d. The initial value method recognizes neither the increase in the
subsidiary's book value nor the excess amortization expenses for prior
years. At the acquisition date, the subsidiary’s book value was $550,000
as indicated by the assets less liabilities. At the beginning of the current
year, the book value of the subsidiary is $780,000 as indicated by
beginning stockholders' equity balances.
Increase in book value during prior years
($780,000 – $550,000) ..................................................................
Less excess amortization ................................................................
Net increase in book value ...............................................................
Ownership ............................................................................................
Increase required in parent's retained earnings, 1/1 /15 ..........
Parent's retained earnings, 1/1/15 as reported ..........................
Parent’s share of consolidated retained earnings, 1/1 /15........
e. Consolidated net income and allocation
 Revenues (add book values)
 Expenses (add book values and excess amortization)
 Consolidated net Income
 Net income attributable to noncontrolling interest
($90,000 – 15,000) × 40%
 Net income attributable to Nascent, Inc.
$230,000
(45,000)
$185,000
60%
$111,000
700,000
$811,000
$900,000
(635,000)
$265,000
30,000
$235,000
4-23
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
34. (continued)
f. Consolidated buildings, 1/1/12 (subsidiary):
Book value ......................................................................................
Acquisition-date fair-value allocation ....................................
Consolidation figure ....................................................................
$300,000
60,000
$360,000
g. Consolidated buildings, 12/31/15:
Parent's book value .....................................................................
Subsidiary's book value .............................................................
Original allocation ........................................................................
Amortization ($10,000 × 4 years) .............................................
Consolidated balance .................................................................
$700,000
200,000
60,000
(40,000)
$920,000
4-24
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
35. (Acquisition Method Consolidated Balances)
December 31, 2015
Revenues
Cost of goods sold
Depreciation expense
Amortization expense
Interest expense
Equity in San Marco Income
Separate company
net income
Paloma
(1,843,000)
1,100,000
125,000
275,000
27,500
(121,500)
San Marco
(675,000)
322,000
120,000
11,000
7,000
(437,000)
(215,000)
Adjustments
& Eliminations
NCI
(E) 80,000
(I)121,500
Consolidated net income
To noncontrolling interest
(13,500)
To Paloma Company
(2,625,000)
(437,000)
350,000
(395,000)
(215,000)
25,000
Retained Earnings 12/31
(2,712,000)
(585,000)
Current Assets
Investment in San Marco
1,204,000
1,854,000
430,000
Accounts Payable
Notes Payable
NCI in San Marco
Common Stock
Additional Paid-In Capital
Retained Earnings 12/31
Total Liab. and SE
(450,500)
(13,500)
(437,000)
Retained Earnings 1/1
Net Income
Dividends declared
Customer base
Buildings and Equipment
Copyrights
Goodwill
Total Assets
Consolidated
(2,518,000)
1,422,000
245,000
366,000
34,500
-0-
(S)395,000
(D) 22,500
2,500
(2,625,000)
(437,000)
350,000
(2,712,000)
1,634,000
(D) 22,500
(A)720,000
(S)769,500
(A)985,500
(I) 121,500
(E) 80,000
-0-
-0931,000
950,000
-0863,000
107,000
4,939,000
1,400,000
640,000
1,794,000
1,057,000
375,000
5,500,000
(485,000)
(542,000)
(200,000)
(155,000)
(685,000)
(697,000)
(A)375,000
(S) 85,500
(A)109,500
(900,000)
(300,000)
(2,712,000)
(4,939,000)
(400,000)
(60,000)
(585,000)
(1,400,000)
(S)400,000
(S) 60,000
2,174,000
2,174,000
(195,000)
(206,000)
(206,000)
(900,000)
(300,000)
(2,712,000)
(5,500,000)
4-25
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
35. (Continued)
Fair value at acquisition date
Relative fair values of identifiable net assets
90% and 10% of $1,525,000 (acquisition date
recorded fair value plus customer base)
Goodwill
Controlling Noncontrolling
Interest
Interest
$1,710,000
$190,000
1,372,500
$337,500
152,500
$37,500
b. If the acquisition-date fair value of the noncontrolling interest was $167,500, both
goodwill (NCI portion) and the noncontrolling interest balance would be reduced
equally by $22,500 as follows:
Fair value of San Marco Company (1,710,000 + 167,500)
Carrying amount acquired
Excess fair value
to customer base
to goodwill
$1,877,500
725,000
1,152,500
800,000
$352,500
Noncontrolling interest balance beginning of year*
Net income attributable to noncontrolling interest
Dividends declared to noncontrolling interest
Noncontrolling interest end of year
* NCI at beginning of year
Common stock-subsidiary
APIC-subsidiary
Retained earnings-subsidiary 1/1
Total
Noncontrolling interest percentage
Noncontrolling share of subsidiary book value
Noncontrolling share of 1/1 customer base excess
Noncontrolling share of goodwill (below)
Noncontrolling interest 1/1
Fair value at acquisition date
Relative fair values of identifiable net assets
90% and 10% of $1,525,000 (acquisition date
recorded fair value plus customer base)
Goodwill
$(172,500)
(13,500)
2,500
$(183,500)
$400,000
60,000
395,000
$855,000
10%
85,500
72,000
15,000
$172,500
Controlling Noncontrolling
Interest
Interest
$1,710,000
$167,500
1,372,500
$ 337,500
152,500
$15,000
4-26
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
36.
(60 Minutes) (Consolidation worksheet and income statement with parent
using initial value method. Also consolidated balances with a control
premium paid by parent.)
a.
Fair Value Allocation and Amortization
Consideration transferred by Holtz .................. $576,000
Noncontrolling interest fair value ..................... 144,000
Devine total fair value 1/1/14 .............................. $720,000
Devine book value 1/1/14 .................................... (326,500)
Fair value in excess of book value .................. $393,500
Excess fair value assigned to specific
accounts based on fair value:
Building.............................................................. 85,500
Trademark ....................................................... 64,000
Goodwill............................................................. $244,000
Remaining
life
5 years
10 years
indefinite
Annual excess
amortizations
$17,100
6,400
-0$23,500
Explanation of Consolidation Entries Found on Worksheet
Entry *C: Convert the parent’s 1/1/15 retained earnings balance from the
initial value method to the accrual basis.
Change in subsidiary RE from 1/1/14 to 1/1/15 ........
Excess amortization for 2014 .....................................
Adjusted subsidiary RE increase...............................
Percentage ownership by parent ...............................
*C conversion entry .....................................................
$70,000
23,500
$46,500
80%
$37,200
Entry S: Eliminates stockholders' equity accounts of subsidiary while
recognizing noncontrolling interest balance (20% ) as of the beginning of
the current year.
Entry A: Recognizes acquisition-date fair value allocations less one year of
amortization for building and trademark and increases beginning balance
of the noncontrolling interest for its share.
Entry I: Eliminates Intra-entity dividends declared by subsidiary and recorded
as income by parent.
Entry E: Recognizes amortization expense for current year.
Columnar entry—Recognizes net income attributable to noncontrolling
interest [($97,000 – $23,500) × 20% ].
4-27
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
36. a. (continued)
HOLTZ CORPORATION AND DEVINE, INC.
Consolidation Worksheet
For Year Ending December 31, 2015
Accounts
Holtz
Corporation
Devine
Inc.
Sales
Cost of goods sold
Operating expenses
Dividend income
Separate company net income
Consolidated net income
NI attributable to noncontrolling interest
NI attributable to Holtz Corp.
(641,000)
198,000
273,000
(16,000)
(186,000)
Retained earnings, 1/1
Net income (above)
Dividends declared
Retained earnings, 12/31
(762,000)
(186,000)
70,000
(878,000)
(296,500)
(97,000)
20,000
(373,500)
Current assets
Investment in Devine
121,000
576,000
120,500
-0-
887,000
149,000
-01,733,000
335,000
236,000
-0691,500
(535,000)
(320,000)
(878,000)
(218,000)
(100,000)
(373,500)
Buildings and equipment (net)
Trademarks
Goodwill
Total assets
Liabilities
Common stock
Retained earnings, 12/31 (above)
NCI in Devine, 1/1
NCI in Devine, 12/31
Total liabilities and equities
(399,000)
176,000
126,000
___ _-0(97,000)
Consolidation Entries
Debit
Credit
Noncontrolling Consolidated
Interest
Totals
(1,040,000)
374,000
422,500
-0-
(E) 23,500
(I) 16,000
(243,500)
14,700
(228,800)
(14,700)
(S) 296,500
(*C) 37,200
(I)
(*C) 37,200
(A) 68,400
(A) 57,600
(A)244,000
16,000
(691,500)
4,000
241,500
-0-
(S)317,200
(A)296,000
(E) 17,100
(E) 6,400
1,273,300
436,200
244,000
2,195,000
(753,000)
(320,000)
(958,000)
(S)100,000
(S) 79,300
(A) 74,000
(1,733,000)
(799,200)
(228,800)
70,000
(958,000)
843,200
843,200
(153,300)
(164,000)
(164,000)
(2,195,000)
4-28
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
36. (continued)
b.
HOLTZ CORPORATION AND DEVINE, INC.
Consolidated Income Statement
For Year Ending December 31, 2015
Sales
Cost of goods sold
Operating expenses
Total expenses
Consolidated net income
$1,040,000
$374,000
422,500
796,500
$243,500
To 20% noncontrolling interest
To Holtz Corporation
$14,700
$228,800
c. Consideration transferred by Holtz for 80% of Devine
Noncontrolling interest fair value ($4.76 × 20,000 shares)
Devine fair value
Fair value of Devine’s underlying net assets
Goodwill
$576,000
95,200
$671,200
476,000
$195,200
If the noncontrolling interest fair value was $4.76 per share at the acquisition
date, then goodwill declines to $195,200. The noncontrolling interest total would
also decline from $164,000 to $115,200.
Worksheet entries (S), (A1) and (A2) assuming a $4.76 noncontrolling interest
acquisition-date fair value:
(S)
Common stock-Devine
Retained earnings- Devine 1/1
Investment in Devine
Noncontrolling interest
100,000
296,500
(A1) Buildings and equipment (net)
Trademarks
Investment in Devine
Noncontrolling interest
68,400
57,600
317,200
79,300
100,800
25,200
(A2) Goodwill
Investment in Devine
195,200
195,200
Fair value at acquisition date
Relative fair values of identifiable net assets
80% and 20% of $476,000 (acquisition date
fair value of net identifiable assets)
Goodwill
Controlling Noncontrolling
Interest
Interest
$576,000
$95,200
380,800
$195,200
95,200
-0-
4-29
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
37.
(40 Minutes) (Determine consolidated balances.)
Acquisition-date subsidiary fair value (given) ....
$1,003,400
Book value of subsidiary (given) ...........................
(690,000)
Fair value in excess of book value ........................
$313,400
Allocations to specific accounts based on difference
between fair value and book value
Land .........................................................................
$225,000
Buildings and equipment ...................................
(24,000)
Copyright ................................................................
94,000
Notes payable .......................................................
18,400
313,400
Total ..............................................................
-0Annual excess amortizations:
Buildings and equipment [$(24,000) ÷ 10 years]
Copyright ($94,000 ÷ 20 years)
Notes payable ($18,400 ÷ 8 years)
Total
$(2,400)
4,700
2,300
$4,600
Consolidated Totals:

Revenues = $2,079,880 (add the two book values)

Cost of goods sold = $1,206,000 (add the two book values)

Depreciation expense = $283,200 (add the two book values less $2,400
excess adjustment)

Amortization expense = $10,800 (add the two book values plus $4,700
excess adjustment)

Interest expense = $63,600 (add the two book values plus $2,300 excess
adjustment)

Equity in income of Sierra = -0- (eliminated so that the individual revenues
and expenses of the subsidiary can be included in the consolidated
figures)

Consolidated net income = $516,280 (revenues less expenses)

Net income attributable to noncontrolling interest = $44,280 ($226,000
reported subsidiary net income less $4,600 net excess amortization
expense multiplied by 20 percent outside ownership)

Net income to Padre Company = $472,000 ($516,280 consolidated net
income less noncontrolling interest share of $44,280)

Retained earnings, 1/1 = $1,275,000 (parent company balance only)

Dividends declared = $260,000 (parent company balance; subsidiary's
declarations to parent are intra-entity, declarations to outside owners
decrease noncontrolling interest balance)
4-30
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
37. (continued)

Retained earnings, 12/31 = $1,487,000 (consolidated balance on 1/1 plus net
income to Padre Co. less Padre’s dividends declared) or simply the
parent’s RE because parent employs the equity method.

Current assets = $1,620,860 (add the two book values)

Investment in Sierra = -0- (eliminated so that the individual assets and
liabilities of the subsidiary can be included in the consolidated figures)

Land = $650,000 (add the book values plus the $225,000 excess allocation)

Buildings and equipment (net) = $1,162,800 (add the book values less the
$24,000 allocation [asset was overvalued] plus the excess amortization)

Copyright = $205,200 (book value plus $94,000 excess allocation less
amortization for the year)

Total assets = $3,638,860

Accounts payable = $469,000 (add book values)

Notes payable = $700,900 (add the book values less $18,400 excess
allocation plus amortization)

Noncontrolling interest in subsidiary = $231,960 (20% of fair value as of 1/1
[$200,680] plus net income attributable to noncontrolling interest [$44,280]
less dividends declared to outside owners [$13,000])

Common stock = $300,000 (parent company balance)

Additional paid-in capital = 450,000 (parent company balance)

Retained earnings, 12/31 = $1,487,000 (computed above)

Total liabilities and equities = $3,638,860
4-31
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
37. (continued) Acquisition Method
Accounts
Padre
Sierra
Revenues ..............................................
Cost of goods sold ..............................
Depreciation expense..........................
Amortization expense..........................
Interest expense...................................
Equity in income of Sierra .................
Separate company net income...........
Consolidated net income ....................
NI to noncontrolling interest ............
NI to Padre Company .......................
Retained earnings 1/1 .........................
Net income (above) .............................
Dividends declared .............................
Retained earnings 12/31 ...............
Current assets .....................................
Investment in Sierra ............................
..........................................................
..........................................................
Land ......................................................
Buildings and equipment (net)...........
Copyright .............................................
Total assets ...................................
Accounts payable ...............................
Notes payable ......................................
NCI in Sierra 1/1 ...................................
NCI in Sierra 12/31 ...............................
..........................................................
Common stock ....................................
Additional paid-in capital ....................
Retained earnings 12/31.... (above) …
Total liab. and stockholders' equity
(1,394,980)
774,000
274,000
-052,100
(177,120)
(472,000)
(684,900)
432,000
11,600
6,100
9,200
-0(226,000)
Consolidation Entries
Debit
Credit
(E)
Noncontrolling Consolidated
Interest
Totals
(2,079,880)
1,206,000
283,200
10,800
63,600
-0-
2,400
(E) 4,700
(E) 2,300
(I) 177,120
(44,280)
(1,275,000)
(472,000)
260,000
(1,487,000)
856,160
927,840
360,000
909,000
-03,053,000
(275,000)
(541,000)
(300,000)
(450,000)
(1,487,000)
(3,053,000)
(530,000)
(226,000)
65,000
(691,000)
764,700
65,000
275,400
115,900
1,221,000
(194,000)
(176,000)
(100,000)
(60,000)
(691,000)
(1,221,000)
(S) 530,000
(D) 52,000
13,000
(516,280)
44,280
(472,000)
(1,275,000)
(472,000)
260,000
(1,487,000)
1,620,860
(D) 52,000 (S) 552,000
(I) 177,120
(A) 250,720
(A) 225,000
(E) 2,400 (A) 24,000
(A) 94,000 (E) 4,700
(A) 18,400 (E) 2,300
(S) 138,000
(A) 62,680
(S) 100,000
(S) 60,000
1,265,920
1,265,920
-0650,000
1,162,800
205,200
3,638,860
(469,000)
(700,900)
(200,680)
(231,960)
(231,960)
(300,000)
(450,000)
(1,487,000)
(3,638,860)
4-32
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
38.
a.
b.
(55 Minutes) (Consolidated worksheet)
Consideration transferred by Adams
$603,000
Noncontrolling interest fair value
67,000
Acquisition-date total fair value
$670,000
Book value of Barstow (CS + RE 12/31/13)
(460,000)
Excess fair value over book value
210,000
Excess fair value assigned to specific
Remaining Annual excess
accounts based on fair value
life
amortizations
Land
$30,000
—
—
Buildings
(20,000)
10 years
($2,000)
Equipment
40,000
5 years
8,000
Patents
50,000
10 years
5,000
Notes payable
20,000
5 years
4,000
120,000
Goodwill
$90,000 indefinite
-0Total
$15,000
Because investment income is exactly 90 percent of Barstow's reported
earnings, Adams apparently is applying the partial equity method.
c. d. Explanation of Consolidation Entries Found on Worksheet
Entry *C—Converts Adams's financial records from the partial equity method
to the equity method by recognizing amortization for 2014. Total expense
was $15,000 but only 90 percent (or $13,500) applied to the parent.
Entry S—Eliminates subsidiary's stockholders' equity while recording
noncontrolling interest balance as of January 1, 2015.
Entry A—Records unamortized allocation balances as of January 1, 2015.
The acquisition method attributes 10 percent of these amounts to the noncontrolling interest.
Entry I—Eliminates intra-entity income accrual for 2015.
Entry D—Eliminates intra-entity dividend transfers.
Entry E—Records amortization expense for current year.
Columnar Entry—Recognizes noncontrolling interest's share of consolidated
net income as follows:
Net income attributable to noncontrolling interest (Columnar Entry)
Barstow reported net income ............................................................... $120,000
Excess amortization expenses 2015....................................................
(15,000)
Adjusted net income of Barstow ................................................... $105,000
Noncontrolling interest ownership .....................................................
10%
Net income attributable to noncontrolling interest.................... $ 10,500
4-33
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
38. c. and d. (continued)
ADAMS CORPORATION AND BARSTOW, INC.
Consolidation Worksheet-Acquisition Method
For Year Ending December 31, 2015
Adams Corp.
Revenues
Cost of goods sold
Depreciation expense
Amortization expense
Interest expense
Investment income
Separate company net income
Consolidated net income
NI to noncontrolling interest
NI to Adams Corporation
Barstow Inc.
(940,000)
480,000
100,000
(280,000)
90,000
55,000
40,000
(108,000)
(428,000)
15,000
-0(120,000)
(1,367,000)
(340,000)
Net income
Dividends declared
Retained earnings, 12/31
(428,000)
110,000
(1,685,000)
(120,000)
70,000
(390,000)
Land
Buildings
Equipment
Patents
Goodwill
Total assets
Note s payable
Common stock
Retained earnings, 12/31
Interest
610,000
702,000
250,000
380,000
490,000
873,000
-0-03,055, 000
150,000
250,000
150,000
-0-0800,000
(860,000)
(510,000)
(1,685,000)
(230,000)
(180,000)
(390,000)
(C*) 13,500
(S) 340,000
(A)
(E)
(A)
(A)
(A)
30,000
2,000
32,000
45,000
90,000
(A) 16,000
(S) 180,000
(800,000)
934,500
7,000
560,000
724,000
1,047,000
40,000
90,000
3,321,000
(A) 18,000
(E)
8,000
(E)
5,000
(E)
(414,500)
110,000
(1,658,000)
860,000
-0-
(*C) 13,500
(S) 468,000
(A) 175,500
(I) 108,000
4,000
(S) 52,000
(A) 19,500
(3,055,000)
(425,000)
10,500
(414,500)
(1,353,500)
(D) 63,000
(D) 63,000
Totals
(1,220,000)
570,000
161,000
5,000
59,000
-0-
(E)
6,000
(E)
5,000
(E)
4,000
(I) 108,000
Noncontrolling interest
Total liabilities and stockholders' equity
Credit
Consolidated
(10,500)
Retained earnings, 1/1
Current a ssets
Investment in Barstow
Debit
Noncontrolling
(1,078,000)
(510,000)
(1,658,000)
(71,500)
(75,000)
934,500
4-34
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(75,000)
(3,321,000)
Chapter 04 - Consolidated Financial Statements and Outside Ownership
39. (25 minutes) (Consolidated balances after a mid-year acquisition)
a. Investment account balance indicates the initial value method.
Consideration transferred by Gibson ........ $528,000
Noncontrolling interest fair value .............. 352,000
Davis acquisition-date fair value ............... 880,000
Book value of Davis (see below)................. (765,000)
Fair value in excess of book value ............ $115,000
Excess fair value assigned to specific
Remaining Annual excess
accounts based on fair value:
life
amortizations
Equipment (overvalued) .................... (30,000) 5 years
$(6,000)
Goodwill ................................................ $145,000 indefinite
-0Total .............................................................
$(6,000)
Amortization for 9 months .....................
$(4,500)
Acquisition-date subsidiary book value:
Book value of Davis, 1/1/15 (CS + 1/1 RE) .................
$740,000
Increase in book value-net income (dividends
were declared after acquisition) ............................ $100,000
Time prior to purchase (3 months) .............................. × ¼ year
25,000
Book value of Davis, 4/1/15 (acquisition date) .........
$765,000
Consolidated income statement:
Revenues (1)
Cost of goods sold (2)
$405,000
Operating expenses (3)
214,500
Consolidated net income
Net income attributable to noncontrolling interest (4)
Net income to Gibson Company
$825,000
619,500
205,500
28,200
$177,300
(1) $900,000 combined revenues less $75,000 (preacquisition subsidiary
revenue)
(2) $440,000 combined COGS less $35,000 (preacquisition subsidiary COGS)
(3) $234,000 combined operating expenses less $15,000 (preacquisition
subsidiary operating expenses) less nine month excess overvalued
equipment depreciation reduction of $4,500
(4) 40% of post-acquisition subsidiary net income less excess amortization
b.
Goodwill = $145,000 (original allocation)
Equipment = $774,500 (add the two book values less $30,000
reduction to fair value plus $4,500 nine months excess
amortization)
Common stock = $630,000 (parent company balance only)
Buildings = $1,124,000 (add the two book values)
Dividends declared = $80,000 (parent company balance only)
4-35
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
40. (40 minutes) Determine consolidated balance for a mid-year acquisition.
a.
Consideration transferred by Truman ............ $720,000
Noncontrolling interest fair value ....................
290,000
Atlanta’s acquisition-date total fair value....... $1,010,000
Book value of Atlanta........................................... (840,000)
Fair value in excess of book value ................... $ 170,000
Excess fair value assigned to specific
accounts based on fair value
Patent .................................................................
Goodwill ..............................................................
Total
..................................................................
b.
Remaining
life
100,000 5 years $20,000
$ 70,000 indefinite
-0$20,000
Goodwill allocation with control premium
Fair values at acquisition date
Relative fair values of identifiable net assets
70% and 30% of $940,000 (acquisition date
book value plus patent = net asset fair value)
Goodwill
c.
Annual excess
amortizations
Controlling Noncontrolling
Interest
Interest
$720,000
$290,000
Initial value at acquisition date
Truman’s share of Atlanta’s net income for half year
([$120,000 – 20,000 amortization × ½ year] × 70% )
Dividends 2015 ($80,000 × ½ year × 70% )
Investment account balance 12/31/15
658,000
$ 62,000
282,000
$ 8,000
$720,000
35,000
(28,000)
$727,000
4-36
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
40. (continued)
d. Consolidated Worksheet
TRUMAN COMPANY AND SUBSIDIARY ATLANTA COMPANY
Consolidation Worksheet
For Year Ending December 31, 2015
Truman
Revenues
(670,000)
Operating Expenses
402,000
Net income of subsidiary
(35,000)
Separate company net income
(303,000)
Consolidated net income
Net income attributable to NCI
Net income attributable to Truman
Atlanta
(400,000)
280,000
Retained earnings, 1/1
Net income (above)
Dividends declared
(500,000)
(120,000)
80,000
Retained earnings 12/31
(823,000)
(303,000)
145,000
Current assets
Investment in Atlanta
481,000
727,000
390,000
Land
Buildings
Patent
Goodwill
Total assets
388,000
701,000
200,000
630,000
(S)140,000
(S) 500,000
Cons.
(870,000)
552,000
-0-
(D) 28,000
2,297,000
1,220,000
(816,000)
(95,000)
(405,000)
(981,000)
(360,000)
(300,000)
(20,000)
(540,000)
12,000
145,000
(981,000)
871,000
-0-
(S)588,000
(I) 35,000
(A1) 70,000
(A2) 62,000
588,000
1,331,000
90,000
70,000
2,950,000
(E) 10,000
(1,176,000)
(95,000)
(405,000)
(981,000)
(S) 300,000
(S) 20,000
(A1) 30,000
(A2) 8,000
(S) 252,000
(1,220,000)
1,263,000
(318,000)
15,000
(303,000)
(823,000)
(303,000)
(S) 40,000
(D) 28,000
(A1)100,000
(A2) 70,000
(2,297,000)
NCI
(15,000)
(540,000)
Noncontrolling interest 12/31
Total liab. and equity
(S)200,000
(E) 10,000
(I) 35,000
(120,000)
(981,000)
Liabilities
Common stock
Additional paid-in capital
Retained earnings 12/31
Noncontrolling interest 7/1
Adjustments & Eliminations
1,263,000
(290,000)
(293,000)
(293,000)
(2,950,000)
4-37
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
41. (60 minutes) (Consolidated statements for a step acquisition)
a.
Fair value of Sysinger 1/1/15 (given)
Book value of Sysinger 1/1/15 (CS + APIC + RE)
Excess fair value over book value
To customer contract (4 year remaining life)
To goodwill
b.
Equity in earnings of Sysinger
2015 net income (150,000 × 95% )
Amortization (100,000 × 95% )
Equity in earnings of Sysinger
$142,500
(95,000)
$47,500
Revaluation of 15% block to fair value
Consideration transferred
2014 net income (100,000 × 15% )
2014 dividends (30,000 × 15% )
Book value at 1/1/15
Fair value at 1/1/15
Gain on revaluation
$184,500
15,000
(4,500)
195,000
262,500
$67,500
Investment account balance
Fair value at 1/1/15 (15% block)
Consideration transferred 1/1/15 (80% block)
Equity earnings 2015
Net income (95% × 150,000)
Customer contract amortization
Dividends (40,000 × 95% )
Investment in Sysinger 12/31/15
$1,750,000
1,300,000
450,000
400,000
$50,000
$262,500
1,400,000
142,500
(95,000)
47,500
(38,000)
$1,672,000
4-38
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
41. (Continued) c.
Accounts
Revenues
Operating expense s
Equity earnings of Sysinger
Gain on revaluation
Separate company net income
Consolidated net income
NI attributable to noncontrolling interest
NI attributable to Allan Company
Allan and Sysinger
Consolidation Worksheet
For Year Ending December 31, 2015
Allan
Sysinger
Consolidation Entries
Company
Company
Debit
Credi t
(931,000)
(380,000)
615,000
230,000
(E)100,000
(47,500)
-0(I) 47,500
(67,500)
-0(431,000)
(150,000)
(2,500)
Retained earnings, 1/1
Net income
Dividends declared
Retained earnings 12/31
(965,000)
(431,000)
140,000
(1,256,000)
(600,000)
(150,000)
40,000
(710,000)
Current a ssets
Investment in Sysinger
288,000
1,672, 000
540,000
-0-
826,000
850,000
-0-
590,000
370,000
-0-01,500, 000
Property, plant, and equipment
Patented technology
Customer contract
Goodwill
Total assets
Noncontrolling Consolidated
Interest
Totals
(1,311,000)
945,000
-0(67,500)
3,636, 000
Liabilities
Common stock
Additional paid-in capital
Retained earnings 12/31
NCI in Sysinger, 1/1
(1,300,000)
(900,000)
(180,000)
(1,256,000)
-0-
(90,000)
(500,000)
(200,000)
(710,000)
-0-
NCI in Sysinger, 12/31
Total liab. and stockholders' equity
-0(3,636,000)
-0(1,500,000)
(S) 600, 000
(D)
(D) 38,000
(A) 400, 000
(A) 50,000
38,000
2,000
(965,000)
(431,000)
140,000
(1,256,000)
828,000
-0-
(S)1,235,000
(I) 47,500
(A) 427,500
1,416,000
1,220,000
300,000
50,000
3,814,000
(E) 100, 000
(1,390,000)
(900,000)
(180,000)
(1,256,000)
(S) 500,000
(S) 200, 000
(S) 65,000
(A) 22,500
1,935, 500
(433,500)
2,500
(431,000)
(87,500)
(88,000)
1,935, 500
4-39
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(88,000)
(3,814,000)
Chapter 04 - Consolidated Financial Statements and Outside Ownership
42. (60 minutes) (Step acquisition—control previously acquired.)
a. According to the acquisition method, the valuation basis for a subsidiary is
established on the date control is obtained, in this case January 1, 2014.
Subsequent acquisitions are valued consistent with this initial value after
adjusting the investment for subsidiary net income and other changes.
Because subsequent acquisitions are considered as transactions in the parent’s
own equity, no gains or losses are recorded. Differences in cash paid and the
underlying value are recorded as adjustments to APIC.
Fair value of Keane Company 1/1/14 ($573,000 ÷ 60% )
Keane net income 2014
Excess fair value amortization for copyright
Keane dividends 2014
Initial fair value adjusted to 1/1 /15
Percent acquired in step acquisition
Value assigned to 30% acquisition
Cash paid for the 30% acquisition
Credit to APIC from 30% step acquisition
$955,000
150,000
(20,000)*
(80,000)
$1,005,000
30%
301,500
300,000
$ 1,500
*Fair value of Keane Company 1/1/14 ($573,000 ÷ 60% )
Book value of Keane Company 1/1/14 (given)
Excess fair value over book value
To copyright (6 year remaining life)
To goodwill
$955,000
810,000
145,000
120,000
$25,000
Entry to record 30% additional investment in Keane:
1/1/15
Investment in Keane
Cash
APIC from step acquisition
301,500
b. Investment in Keane Company 1/1/14
2014 Equity earnings [60% × (150,000 – 20,000)]
2014 Dividends from Keane (60% × $80,000)
Additional acquisition of 30% interest
2015 Equity earnings [90% × (180,000 – 20,000)]
2015 Dividends from Keane (90% × $60,000)
Investment in Keane Company 12/31/15
300,000
1,500
$573,000
78,000
(48,000)
301,500
144,000
(54,000)
$994,500
4-40
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
42. (continued) part c.
BRETZ, INC. AND KEANE COMPANY
Consolidation Worksheet
Year Ending December 31, 2015
Accounts
Revenues
Operating expense s
Equity in Keane’s income
Separate company net income
Consolidated net income
NI attributable to noncontrolling interest
NI attributable to Bretz, Inc.
Bretz, Inc.
(402,000)
200,000
(144,000)
(346,000)
Retained earnings, 1/1
Net income (above)
Dividends declared
Retained earnings, 12/31
(797,000)
(346,000)
143,000
(1,000,000)
Current a ssets
Investment in Keane Company
Trademarks
Copyrights
Equipment (net)
Goodwill
Total assets
Liabilities
Common stock
Additional paid-in capital
APIC-step acqui sition
Retained earnings,12/31
Non-controlling interest 1/1
Non-controlling interest 12/31
Total liabilities and equities
Keane Co.
(300,000)
120,000
Consolidation Entries Noncontrolling Consolidated
Debit
Credi t
Interest
Totals
(702,000)
(E) 20,000
340,000
(I) 144,000
(180,000)
(16,000)
224,000
994,500
(500,000)
(180,000)
60,000
(620,000)
(S) 500,000
(D) 54,000
6,000
190,000
106,000
210,000
380,000
600,000
300,000
110,000
1,914, 500
1,200, 000
(D)54,000
(S) 792,000
(A) 112,500
(I) 144,000
(A)100, 000
(E) 20,000
(200,000)
(300,000)
(80,000)
706,000
590,000
490,000
25,000
2,225,000
(653,000)
(400,000)
(60,000)
(1,500)
(1,000,000)
(S)300, 000
(S) 80,000
(620,000)
(A) 12,500
(S) 88,000
(1,914,500)
(1,200,000)
1,223, 000
(797,000)
(346,000)
143,000
(1,000,000)
414,000
0
(A) 25,000
(453,000)
(400,000)
(60,000)
(1,500)
(1,000,000)
(362,000)
16,000
(346,000)
(100,500)
(110,500)
1,223, 000
4-41
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(110,500)
(2,225,000)
Chapter 04 - Consolidated Financial Statements and Outside Ownership
ACCOUNTING THEORY RESEARCH CASE: NONCONTROLLING INTEREST
In deliberations prior to the issuance of SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements,” the FASB considered three alternatives for
displaying the noncontrolling interest in the consolidated balance sheet
What were these three alternatives?
1. As a liability
2. As equity
3. In the “mezzanine” area between liabilities and owners’ equity
What criteria did the FASB use to evaluate the desirability of each alternative?
The FASB evaluated whether the classifications conformed to current definitions
of financial statement elements (assets, liabilities, or equity) as articulated in
FASB Concept Statement No. 6.
In what specific ways did FASB Concept Statement 6 affect the FASB’s evaluation
of these alternatives?
From SFAS 160 paragraphs 32-34
If it required that the noncontrolling interest be reported in the
mezzanine, the Board would have had to create a new element—
noncontrolling interest in subsidiaries—specifically for consolidated
financial statements. The Board concluded that no compelling reason
exists to create a new element specifically for consolidated financial
statements to report the interests in a subsidiary held by owners other
than the parent. The Board believes that using the existing elements of
financial statements along with appropriate labeling and disclosure
provides financial information in the consolidated financial statements
that is representationally faithful, understandable, and relevant to the
entity’s owners, creditors, and other resource providers.
The Board concluded that a noncontrolling interest in a subsidiary does
not meet the definition of a liability in the Board’s conceptual framework.
Paragraph 35 of Concepts Statement 6 defines liabilities as “probable
future sacrifices of economic benefits arising from present obligations of
a particular entity to transfer assets or provide services to other entities
in the future as a result of past transactions or events”
The Board concluded that a noncontrolling interest represents the
residual interest in the net assets of a subsidiary within the consolidated
group held by owners other than the parent. The noncontrolling interest,
therefore, meets the definition of equity in Concepts Statement 6.
Paragraph 49 of Concepts Statement 6 defines equity (or net assets) as
“the residual interest in the assets of an entity that remains after
deducting its liabilities.”
4-42
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
RESEARCH CASE: COCA-COLA’S ACQUISITION OF COCA-COLA ENTERPRISES
1. How did Coca-Cola allocate the acquisition-date fair value of CCE among the assets
acquired and liabilities assumed?
Note 2 (Acquisitions and Divestitures) of Coca-Cola’s 2010 10-K shows the following
allocation for the CCE acquisition:
Cash and cash equivalents
Marketable securitie s
Trade accounts receivable
Inventories
Other current a ssets
Property, plant and equipment
Bottlers' franchi se rights with indefinite lives
Other intangible assets
Other noncurrent asse ts
Total identifiable assets acquired
$ 49
7
1,194
696
744
5,385
5,100
1,032
261
14,468
Accounts payable and accrued expenses
Loans and note s payable
Long-term debt
Pension and other postretirement liabilities
Other noncurrent liabilities
Total liabilities assumed
1,826
266
9,345
1,313
2,603
15,353
Net liabilities assumed
Goodwill
Less: Noncontrolling interests
(885)
7,746
13
Net assets acquired
$ 6,848
2. What are employee replacement awards? How did Coca-Cola account for the
replacement award value provided to the former employees of CCE?
Employee replacement award represent various share-based payments to employees
that the acquiring firm replaces with new awards based on its shares. The ASC
requires that if replacement awards are based on past service, their fair value is
included in consideration transferred. If the replacement award are for future service,
their value is expensed as incurred. Coca-Cola followed the ASC for its replacement
awards (10-K Note 2).
3. How did Coca-Cola account for its 33 percent interest in CCE prior to the acquisition
of the 67 percent not already owned by Coca-Cola?
Coca-Cola used the equity method to account for its previous 33 percent investment in
CCE (10-K page 53).
4. Upon acquisition of the additional 67 percent interest, how did Coca-Cola account for
the change in fair value of its original 33 percent ownership interest?
“We remeasured our equity interest in CCE to fair value upon the close of the
transaction. As a result, we recognized a gain of approximately $4,978 million, which
was classified in the line item other income (loss) — net in our consolidated statement
of income.” (10-K Note 2).
4-43
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 04 - Consolidated Financial Statements and Outside Ownership
INSTAPOWER: FASB ASC AND IFRS RESEARCH CASE
1. What is the total consideration transferred by Q-Car to acquire its 90 percent
controlling interest in InstaPower?
Cash
Shares of Q-Car stock
Contingency
Total consideration transferred
$60,000,000
27,000,000
10,000,000
$97,000,000
The shares of Q-Car stock and the contingency are both measured at their
acquisition-date fair values (ASC 805-30-30-7, ASC 805-30-25-5).
2. What values should Q-Car assign to identifiable assets and liabilities as part of the
acquisition accounting?
Cash
Accounts receivable
Land
Building
Machinery
Trademark
Research and development asset
Accounts payable
Total identifiable net asset fair value
$ 270,000
800,000
2,930,000
19,000,000
46,000,000
8,000,000
14,000,000
(1,000,000)
$90,000,000 (ASC 805-20-30-1)
3. What is the acquisition-date value assigned to the 10 percent noncontrolling interest?
What are the noncontrolling interest valuation alternatives available under IFRS?
Under U.S. GAAP, the acquisition-date noncontrolling interest is measured at its fair
value. In this case, there are no readily available market values for the noncontrolling
shares so Q-Car has relied on other valuation techniques to arrive at an estimated fair
value of $11,000,000.
IFRS allows two alternative measures for the noncontrolling interest. The first is
identical to the U.S. measure. The second alternative uses the noncontrolling interest
percentage of the fair value of the subsidiary’s identifiable net assets. In this case, the
second alternative provides a value of $9,000,000 ($90,000,000 x 10%).
4. Under U.S. GAAP, what amount should Q-Car recognize as goodwill from the
acquisition? What alternative valuations are available for goodwill under IFRS?
Goodwill under U.S. GAAP (ASC 805-30-30-1) and IFRS alternative 1 (IFRS 3 IN 8):
Consideration transferred (above)
Acqui si tion-date noncontrolling interest fair value
Acqui si tion-date value assigned to subsidiary
Net assets acquired fair value (above)
Goodwill
$ 97,000,000
11,000,000
$108,000,000
90,000,000
$ 18,000,000
Goodwill under IFRS alternative 2:
Consideration transferred (above)
Acqui si tion-date NCI value assigned (above)
Acqui si tion-date value assigned to subsidiary
Net assets acquired fair value (above)
Goodwill
$ 97,000,000
9,000,000
$106,000,000
90,000,000
$ 16,000,000
4-44
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.