Chapter 8: Consolidations –
Changes in Ownership Interests
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
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8-1
Changes in Ownership: Objectives
1. Prepare consolidated statements when parent
company's ownership percentage increases or
decreases during the reporting period.
2. Apply consolidation procedures to interim
(midyear) acquisitions.
3. Record subsidiary/investee stock issuances and
treasury stock transactions.
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Consolidations – Changes in Ownership Interests
1: Changes in Ownership Percentage
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Changes in Parent Ownership
Increases
1. Parent acquires controlling interest during
interim period
2. Parent acquires controlling interest in
stages
3. Parent acquires additional shares from
noncontrolling interest
Decreases
4. Parent sells shares but maintains control
5. Parent sells shares giving up control
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Initial Acquisition of Control
Parent obtains control
– Determine implied value and allocate excess
– Apply consolidation procedures
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Control is Maintained
Parent increases its share by buying more stock or
decreases its share by selling some stock
– Change in Investment in sub is based on the
underlying fair value of equity
– No gain or loss is recognized; paid in capital
is adjusted
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8-6
Control Relinquished
Parent sells part of its Investment and no longer
retains control
– Reduce the Investment based on proportion
of interest sold
– Record gain or loss on sale
– Discontinue consolidation
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8-7
Is There a Gain or Loss?
Basic rule: No gain or loss is recorded on equity
transactions with a firm's owners.
1. Control before and after the transaction is an
equity transaction
– No gain or loss
– Adjust paid in capital, if needed
2. No control before and control after
– Point of business acquisition
– No loss
– Might have gain on bargain purchase
3. Control before and no control after
– Disposition of asset
– Gain or loss is recorded
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8-8
Consolidations – Changes in Ownership Interests
2: Interim Acquisitions
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8-9
Preacquisition Issues
Entity theory (APB Opinion No. 51)
– Income statement includes all revenues and
expenses
– Total consolidated income LESS
• Preacquisition earnings
• Noncontrolling interest share
• Equals Controlling interest share
Parent theory (FASB Statement No. 160)
– Income statement includes revenues and
expenses since acquisition
– Total consolidated income LESS
• Noncontrolling interest share
• Equals Controlling interest share
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Equity Book Value on Interim Date
Book value of equity is needed as of acquisition
date
Adjust the beginning value for changes before
acquisition:
Beginning BV equity
+ preacquisition revenues
– preacquisition expenses
– preacquisition dividends
= BV equity at acquisition
Sales and expenses (not dividends) might be
assumed level
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8-11
Simple Interim Acquisition
Puma acquires 80% of Sega for $2,400 on 5/1/09. Fixed
assets with a remaining life of 5 years are undervalued
by $600.
Sega's trial balance on 12/31/09 was:
Cash
50 Accounts payable
300
Inventories
900 Other liabilities
1,200
Fixed assets, net
2,800 Common stock
600
Cost of sales
1,500 Retained earnings, 1/1 1,350
Operating expenses
600 Sales
2,700
Dividends
300
6,150
6,150
Sega's distributed $150 dividends each on 3/1/09 and
12/1/09. Revenues and expenses are assumed to be
incurred uniformly over the year.
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Find Book Value at Acquisition
Book value of equity on 1/1/09 $1,950
Preacquisition amounts:
Revenues
900 Jan-Apr
Cost of sales
Operating expenses
Dividends
Book value on 5/1/09
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(500) Jan-Apr
(200) Jan-Apr
(150) none
$2,000
8-13
Analysis and Amortizations
Cost of 80% of Sega
Implied value of Sega
Book value
Excess
2,400
3,000
2,000
1,000
Allocated to:
Fixed assets
Goodwill
Total
Sega's 2009 income
Income since May 1
Amortization
Adjusted
600
400
(80)
320
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Unamort
5/5/09
600
400
1,000
2009
(80)
0
(80)
CI 80% share
NCI 20% share
Unamort
12/31/09
520
400
920
256
64
8-14
Puma's Equity Entries
Investment in Sega
Cash
for acquisition
Cash
Investment in Sega
for dividends
Investment in Sega
Income from Sega
2,400
2,400
120
120
256
256
[(2/3)(2,700 - 1,500 - 600) - (2/3)(600/5yrs)]x80%
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Worksheet
elimination
entries for 2009
Notice the
preacquisition
revenues,
expenses and
dividends
included in the
third entry.
Income from Sega
Dividends
Investment in Sega
Noncontrolling interest share
Dividends
Noncontrolling interest
Sales
Common stock
Retained earnings 1/1
Fixed assets
Goodwill
Cost of sales
Operating expenses
Dividends
Investment in Sega
Noncontrolling interest
Depreciation expense
Accumulated depreciation
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256
120
136
64
30
34
900
600
1,350
600
400
500
200
150
2,400
600
80
80
8-16
Income statement:
Puma
Sega
DR CR
Sales
5,000 2,700
900
Income from Sega
256
256
Cost of sales
(2,100) (1,500)
500
Operating expense
(800) (600)
80 200
Noncontrolling interest share
64
Controlling interest share
2,356
600
State of retained earnings:
Retained earnings, 1/1
4,300 1,350 1,350
Add net income
2,356
600
Deduct dividends
(1,000) (300)
120
30
150
Retained earnings, 12/31
5,656 1,650
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Consol
6,800
0
(3,100)
(1,280)
(64)
2,356
4,300
2,356
(1,000)
5,656
8-17
Balance sheet:
Cash
Inventories
Fixed assets, net
Investment in Sega
Puma
950
1,300
5,170
2,536
Sega
50
900
2,800
Goodwill
Total
Accounts payable
Other liabilities
Common stock
Retained earnings
Noncontrolling interest
9,956
500
1,800
2,000
5,656
3,750
300
1,200
600
1,650
9,956
3,750
Total
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DR
CR Consol
1,000
2,200
600
80 8,490
136
2,400
0
400
400
12,090
800
3,000
600
2,000
5,656
600
34
634
12,090
8-18
Interim Acquisition in Stages
Poca acquired Sark in a series of acquisition, resulting in a
total 90% ownership.
Date
Interest
Investment
Acquired Cost
April 1
5%
7,000
July 1
5%
8,000
October 1
80%
210,000
90%
225,000
The total book value and fair value of Sark's net assets on
October 1 was $220,000.
Cost of 90% of Sark 225,000
Implied value of Sark 250,000
Book value
220,000
Goodwill
30,000
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Income Distribution
Sark's income allocation for the year:
Total
Oct 1 - Dec 31
before Oct 1
Income CI 90% share NCI 10% Share Preacquisition
Sales
150,000
Expenses (110,000)
Net income
40,000
33,750
(24,750)
9,000
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3,750
(2,750)
1,000
112,500
(82,500)
30,000
8-20
Poca's Worksheet Entries
There were
no dividends
before or
after the
acquisition
in this case.
Zeros are
included just
for clarity.
Income from Sark
9,000
Dividends
0
Investment in Sark
9,000
Noncontrolling interest share
1,000
Dividends
0
Noncontrolling interest
1,000
Sales
112,500
Common stock
100,000
Retained earnings 1/1
90,000
Expenses
82,500
Dividends
0
Investment in Sark
225,000
Noncontrolling interest
25,000
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8-21
Income statement:
Sales
Income from Sark
Expenses
Poca
Sark
CR
Consol
274,875
150,000 112,500
312,375
9,000
9,000
0
(220,000) (110,000)
Noncontrolling interest share
Controlling interest share
DR
82,500 (247,500)
1,000
63,875
40,000
221,500
90,000
63,875
40,000
0
0
285,375
130,000
(1,000)
63,875
State of retained earnings:
Retained earnings, 1/1
Add net income
Deduct dividends
Retained earnings, 12/31
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90,000
221,500
63,875
285,375
8-22
Balance sheet:
Other assets
Poca
Sark
451,375 300,000
Investment in Sark
234,000
DR
CR
9,000
225,000
Consol
751,375
30,000
0
30,000
Total
Liabilities
Common stock
685,375 300,000
100,000 70,000
300,000 100,000 100,000
781,375
170,000
300,000
Retained earnings
Noncontrolling
interest
285,375 130,000
285,375
Goodwill
Total
25,000
1,000
685,375 300,000
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26,000
781,375
8-23
Interim Sale, Continued Control
Pablo owns 90% of Sergio and its 1/1/10 $228 investment
balance reflects Sergio's underlying equity plus $18
goodwill ($20 total implied goodwill).
During 2010, Sergio reports $36 income and pays $20
dividends on July 1.
Pablo sells 10% interest in Sergio on April 1 for $40.
Pablo's interest in Sergio
Investment account:
1/1 balance
Income to 4/1
4/1 balance
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Before Interest
the sale
sold
90%
10%
288.0
8.1
296.1
32.9
After
the sale
80%
263.2
8-24
Investment in Sergio: T-account
1/1 Balance
90% income to 4/1
4/1 Balance
Investment in Sergio
288.0
8.1
296.1 32.9 4/1 sale of 10% (1/9 of shares)
16.0 6/1 dividends (80%)
80% income since 4/1 21.6
12/31 Balance
268.8
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Pablo's Entry for the Sale
Cash
Investment in Sergio
Additional paid in capital
40.0
32.9
7.1
No gain or loss is recorded. Since
Pablo retains control, the sale of
some shares is treated as an owner
transaction; the difference impacts
paid in capital.
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8-26
Noncontrolling Interest Calculations
Balance on Jan 1: (288*.1/.9)
Income to April 1: (36*.1*3/12)
Addition to NCI on April 1
Income since April 1: (36*.2*9/12)
Dividends (20*.2)
Balance at Dec 31
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$32.0
0.9
32.9
5.4
(4.0)
$67.2
8-27
Worksheet Entries
Income from Sergio (8.1+21.6)
Dividends
Investment in Sergio
Noncontrolling interest share (0.9+5.4)
Dividends
Noncontrolling interest
Common stock
Retained earnings 1/1
Goodwill
Investment in Sergio (288-32.9)
Noncontrolling interest, 1/1
Noncontrolling interest, 4/1
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29.7
16.0
13.7
6.3
4.0
2.3
200.0
100.0
20.0
255.1
32.0
32.9
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Interim Sale, Loss of Control
1. Bring investment account up to date,
recognizing partial year's income as
appropriate
2. Determine BV of fraction of investment sold
3. Compare to selling price
4. Record a gain or loss on difference
The "parent" no longer consolidates the
"subsidiary"
• That relationship has been dissolved
• Parent will use equity or fair value/cost
method as appropriate
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Consolidations – Changes in Ownership Interests
3: Subsidiary's Stock Transactions
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Subsidiary Actions
Subsidiary actions increasing Parent share
1. Sub issues additional shares to Parent
2. Sub reacquires shares from noncontrolling interest
Subsidiary actions decreasing Parent share
3. Sub issues additional shares to noncontrolling
interests
4. Sub reacquires shares from Parent
Subsidiary actions not impacting ownership shares
5. Sub issues stock to both parent & noncontrolling
interest
6. Sub issues stock split or stock dividend
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Stroh Issues Stock to Purdy
Purdy owns 80% of Stroh, acquired at $180.
Cost of 80% of Stroh
Implied value of Stroh
Book value of Stroh
Excess, goodwill
$180
$225
200
$25
Stroh issues additional shares to Purdy.
Outstanding shares increased from 10K to 12K.
Purdy had owned 8K of the 10K, but now owns
10K of the 12K shares.
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Stroh's equity
Goodwill
Total value
Purdy's Investment in Stroh
Purdy's share of BV of equity
Goodwill
Total value
Stroh's equity, after the issuance
Purdy's Investment, after
Purdy's share of equity, 10/12 share
New measure of goodwill
Total
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Before sale
200
25
225
180
160
20
180
Goodwill may go
up or down
depending on the
value Purdy paid
for the additional
shares of Stroh
Sell at BV Sell > BV Sell < BV
for $40
for $70
for $30
240
270
230
220
250
210.0
200
225
191.7
20
25
18.3
220
250
210.0
8-33
Purdy's Entry
Purdy acquires additional shares directly from
Stroh at book value, $40.
Investment in Stroh
Cash
40
40
If Purdy had paid $70 (above book value) or $30
(below book value), only the amount in the entry
would change.
The analysis above shows different amounts of
goodwill which will be used in the consolidation
worksheet.
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Stat Issues Stock to Outsiders
Puny owns 80% of Stat, acquired at $180.
Cost of 80% of Stat
Implied value of Stat
Book value of Stat
Excess, goodwill
$180
$225
200
$25
Stat issues additional shares to outside entities.
Outstanding shares increased from 10K to 12K.
Puny had owned 8K of the 10K, but now owns 8K
of the 12K shares.
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Stat equity
Goodwill
Total value
Puny's Investment
Puny's share of BV of equity
Goodwill
Total value
Stat equity, after
Puny's Investment current balance
Puny's share of equity, 10/12 share
Old goodwill
Total, new balance in Investment
Adjustment
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Before sale
200
25
225
180
160
20
180
Puny's measure of
goodwill does not
change when
Stroh issues the
shares to outside
entities. Puny
adjusts the value
of its Investment
in Stat account.
Sell at BV Sell > BV Sell < BV
for $40
for $70
for $30
240
270
230
180
180.0
180
160
180
153.3
20
20
20.0
200
173.3
180
0
+20
-6.7
8-36
Puny's Adjusting Entry
for $40:
no entry needed
for $70
Investment in Stat
Additional paid in capital
for $30
Additional paid in capital
Investment in Stat
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20.0
20.0
6.7
6.7
8-37
Shelly Purchases Treasury Stock
Pointer owns 80% of Shelly acquired for $160, at
cost equal to book value.
Cost of 80% of Shelly
Implied value of Shelly
Book value of Shelly
Excess, goodwill
$160
$200
200
$0
Pointer holds 8K of Shelly's 10K shares
outstanding. Shelly reacquires 0.4K shares from
outsiders.
Pointer now holds 8K of Shelly's 9.6K shares
outstanding.
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Before treasury stock
Shelly's equity
200
Goodwill
0
Total value
200
Pointer's Investment in Shelly
160
Pointer's share of BV of equity
160
Goodwill
0
Total value
160
Shelly's equity, after
Pointer's Investment current balance
Pointer's share of equity, 8/9.6
Old goodwill
Total, new balance in Investment
Adjustment needed
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There was no
goodwill and
none is created by
Shelly purchasing
treasury stock.
Pointer adjusts the
balance in its
Investment in
Shelly account.
Buy = BV Buy > BV Buy < BV
for $8
for $12
for $6
192
188
194
160
160.0
160
160
156.7
161.7
0
0.0
0.0
156.7
161.7
160
0
-3.3
+1.7
8-39
Pointer's Adjustment
Pointer's entry when Shelly purchases treasury
shares from outsiders.
Treasury stock purchased for $8
no entry needed
Treasury stock purchased for $12
Additional paid in capital
Investment in Stroh
Treasury stock purchased for $6
Investment in Stroh
Additional paid in capital
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3.3
3.3
1.7
1.7
8-40
Stock Splits/ Stock Dividends
A subsidiary may issue stock dividends or stock
splits
– Impact is proportional on both controlling
and noncontrolling interests
– Percentage ownership does not change
– Stock dividends capitalize some of the
subsidiary's retained earnings
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Publishing as Prentice Hall
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