Chapter 09 - Consolidation Ownership Issues
CHAPTER 9
CONSOLIDATION OWNERSHIP ISSUES
ANSWERS TO QUESTIONS
Q9-1 Preferred stock of the subsidiary is eliminated in the consolidation process in a manner
comparable to that used in eliminating the common stock of the subsidiary. For those preferred
shares held by the parent company, a proportionate share of subsidiary income and net assets
assigned to the preferred shares is eliminated against the balance in the parent's investment
account. Subsidiary income and net assets assigned to preferred shares not held by the parent
are included as a part of the noncontrolling interest along with the balances assigned to
noncontrolling interest for common stock not held by the parent. The claim of the preferred
shareholders normally is computed before the common stock is eliminated so that any priority
claim associated with the preferred stock can be properly recognized and assigned to the
correct shareholder group.
Q9-2 All preferred shares held by the parent are eliminated against the balance in the
investment account. Those held by unrelated parties are included in the total assigned to the
noncontrolling interest.
Q9-3 Preferred dividends normally are deducted in arriving at income available to common
shareholders. When preferred dividends are paid by the subsidiary to shareholders other than
the parent, the income accruing to the common shares held by the parent company is reduced.
Therefore, they must be deducted to arrive at income available to the parent company
shareholders. No preferred dividends are deducted if the parent company owns all the shares or
if no dividends are declared and the preferred stock is noncumulative.
Q9-4 In the event the preferred shares are redeemed, the subsidiary must pay the call
premium and the net assets of the subsidiary will be reduced by the amount of the premium.
Because it is more conservative to assume the call premium will be paid, the amount of the
premium normally is added to the claim of the preferred shareholders and deducted from the
equity assigned to the common shareholders whenever consolidated statements are prepared.
Q9-5 The fair value of the net assets of the subsidiary is computed by deducting the fair value
of the subsidiary's liabilities from the fair value of its assets. When the subsidiary has preferred
stock outstanding, the claims of the preferred shareholders, including dividends in arrears and
participation rights held by preferred shareholders, must be taken into consideration in
determining the fair value of net assets available to common shareholders. These items, when
deducted from the fair value of the identifiable assets of the acquired company, will reduce the
amount of net assets assigned to common stock and potentially increase the amount reported
as goodwill.
Q9-6 The parent may record the difference between the carrying value and the sale price of
the shares as either a gain on sale of investment or an adjustment to its additional paid-in
capital. No gain or loss on the sale of subsidiary shares should be reported in the consolidated
statements. If the parent records a gain on the sale, it should be eliminated in the consolidation
process and treated as a part of additional paid-in capital of the consolidated entity.
9-1
Chapter 09 - Consolidation Ownership Issues
Q9-7 All common shareholders should share equally in the net assets of a company. When a
subsidiary sells additional shares to a nonaffiliate at a price in excess of existing book value, the
effect will be to increase the net book value of all shareholders. Because it is a capital
transaction, no gain or loss is recognized on the sale.
Q9-8 Each purchase of additional shares should be examined to determine the difference
between the price paid and underlying book value. When an amount greater than book value is
paid directly to the subsidiary for the shares, the book value of the shares held by the
noncontrolling interest will increase. As a result, the increase in the parent’s claim on the net
assets of the subsidiary will be less than the amount paid. When consolidated statements are
prepared, additional paid-in capital or retained earnings (if the parent has no additional paid-in
capital) must be debited for the increase in the balance assigned to the noncontrolling interest,
thereby reducing the amount reported in the consolidated balance sheet.
Q9-9 All the shares of the subsidiary are eliminated in preparing the consolidated statements.
Thus, treasury shares reported by the subsidiary are eliminated in the consolidation worksheet.
The effect of the retirement on the consolidated statements depends on the price paid and
whether the shares were purchased from the parent or from a nonaffiliate.
Q9-10 Indirect ownership is a general term used whenever one company owns shares of
another company and that company holds ownership in a third company. Indirect control occurs
when a majority of the shares of a particular company are held by one or more companies that
are, in turn, under the control of another company. By exercising its control over those
companies the parent can exercise control of the company indirectly owned.
Q9-11 A reciprocal relationship exists if Subsidiary A and Subsidiary B hold ownership in each
other. If Subsidiary A records investment income based on the reported net income of
Subsidiary B and Subsidiary B records investment income based on the reported net income of
Subsidiary A, the sum of the reported net income totals for the two companies may be
substantially greater than the sum of the reported operating income totals for the two
companies. Parent company net income will be overstated if the impact of the reciprocal
relationship is ignored when the parent company records investment income on its ownership in
the two subsidiaries.
Q9-12 Under the treasury stock method the parent company shares that have been purchased
by a subsidiary are reported as treasury stock in the consolidated balance sheet. The carrying
value of the shares is the amount paid by the subsidiary when they were purchased.
Q9-13 Consolidated net income will be reduced by $100,000. Income assigned to the
controlling interest will be reduced by $72,000 ($100,000 x 0.90 x 0.80) when the unrealized
profit of Tiny Corporation is eliminated. A total of $10,000 is treated as a reduction to the income
assigned to noncontrolling shareholders of Tiny Corporation ($100,000 x 0.10) and $18,000 is a
reduction of the income assigned to noncontrolling shareholders of Subsidiary Company
($100,000 x 0.90 x 0.20).
Q9-14 All three companies should be included in the consolidated financial statements. Slide
Company should be consolidated with Bit Company because Bit holds majority ownership of
Slide. Bit Company, in turn, should be consolidated with Snapper Corporation because Snapper
holds majority ownership of Bit.
Q9-15 A subsidiary's stock dividend results in the capitalization of some portion of its retained
earnings. Such an action will have no effect on the consolidated financial statements since the
entire stockholders' equity section of the subsidiary is eliminated in preparing the consolidation
worksheet.
9-2
Chapter 09 - Consolidation Ownership Issues
Q9-16 A 15 percent stock dividend is a small stock dividend and must be recorded by
capitalizing retained earnings equal to the market price per share of the stock times the number
of shares actually issued. As a result, retained earnings will decrease and the par value of stock
outstanding and additional paid-in capital will increase on the subsidiary's books. There should
be no change in the investment account balance reported by the parent. Thus, the only change
in the eliminating entries is the relative amount debited to each of the three individual
stockholders' equity accounts of the subsidiary.
Q9-17 When the parent or other affiliates own all the shares of all companies included in the
consolidation, the order in which the consolidation is completed may not be particularly critical.
On the other hand, when less than 100 percent ownership is held there is a much greater
chance of error in apportioning unrealized profits or other adjustments between noncontrolling
ownership and consolidated net income when some other sequence is used. By starting the
consolidation with the company furthest away from the parent, the computation of income
assigned to noncontrolling interest at each level can be most easily accomplished.
Q9-18 Clear-cut measures of control are not always readily available. For example, a partner
contributing a specified share of the partnership’s capital may have a different share of profits or
losses, a different proportion of distributions, or a greater or lesser degree of control than
indicated by the capital share.
Q9-19 There may be situations in which a company has significant influence over another
without holding voting common stock. For example, a company might use operating agreements
or other contracts to share in the profits of another company, guarantee a certain level of
profitability of another company, or participate in the operating decisions of another company.
9-3
Chapter 09 - Consolidation Ownership Issues
SOLUTIONS TO CASES
C9-1 Effect of Subsidiary Preferred Stock
When a parent company does not own all the shares of a subsidiary, income assigned to the
noncontrolling interest includes (1) a portion of subsidiary preferred dividends and (2) a portion
of earnings available to common shareholders.
To determine the amount of income to assign to preferred and common shareholders of the
subsidiary, the controller needs to have the following information about the preferred stock:
1. The number of preferred shares outstanding and the number owned by the parent and other
affiliates.
2. The annual preferred dividend rate per share and whether the dividends are cumulative or
noncumulative.
3. If the dividends are noncumulative, the amount of preferred dividends declared during the
period, if any.
In this particular case the parent does not appear to own any of the subsidiary's preferred
shares. Once the controller determines the portion of subsidiary income assignable to common
shareholders, consolidated net income attributable to the controlling interest is computed by
adding the parent's pro rata share of this amount to the parent's income from its own operations.
C9-2 Consolidated Stockholders’ Equity: Theory vs. Practice
a. Upon the sale of stock of a subsidiary, Xerox used to recognize a gain or loss in the
consolidated income statement equal to the company’s proportionate share of the
corresponding increase or decrease in that subsidiary’s equity. Under FASB 160 (ASC 810),
the sale of subsidiary shares is viewed as an equity transaction and does not affect income.
Instead, the difference between the fair value of the consideration received and the change in
the amount of the noncontrolling interest is recognized as an adjustment to stockholders’ equity
(usually additional paid-in capital).
b. Occidental Petroleum has generally treated subsidiary preferred stock as a liability (the
amount is small). It should be reported as part of the noncontrolling interest.
9-4
Chapter 09 - Consolidation Ownership Issues
C9-3 Sale of Subsidiary Shares
MEMO
To:
Robert Reader
Vice President of Finance
Book Corporation
From:
Re:
, CPA
Recognition of Gain on Sale of Subsidiary Shares
Previous accounting standards did not specifically address the issue of how to treat a sale of
subsidiary shares when the parent retained controlling ownership. However, a common practice
was to recognize a gain or loss on the sale of shares.
The FASB’s recent issuance of FASB 160 (ASC 810) makes clear that, from a consolidated
perspective, a parent’s sale of subsidiary shares while maintaining control is an equity
transaction. Accordingly, no gain or loss on the sale should be reported in the consolidated
income statement. Instead, equity should be adjusted by the difference between the
consideration received and the change in the parent’s subsidiary interest.
In the current situation, Book’s interest in Lance prior to its sale of Lance shares was $360,000,
an amount equal to 90 percent of Lance’s $400,000 book value. Immediately following the sale
of Lance shares, Book’s remaining 60 percent interest in Lance is $240,000 ($400,000 x 0.60),
a decrease of $120,000 ($360,000 - $240,000). The difference between the proceeds received
and the change in the book value of Book’s interest in Lance is as follows:
Proceeds received ($5.60 x 30,000 shares)
Change in book value of interest ($360,000 - $240,000)
Required adjustment to equity
$168,000
120,000
$ 48,000
This $48,000 difference should be reported within equity in the consolidated balance sheet.
Although alternatives exist in terms of how to meet the FASB’s reporting requirement, the
following entry to record the sale of shares on Book’s books would be consistent with the
FASB’s requirement and probably the most efficient approach:
Cash
Investment in Lance Company Stock
168,000
120,000
Additional Paid-In Capital
48,000
The additional paid-in capital recorded on Book’s books would carry over to the consolidated
balance sheet and would be included in consolidated equity.
If Book elected to record a $48,000 gain on the sale of Lance shares instead of recognizing
additional paid-in capital as shown in the entry, that gain would have to be transferred to
additional paid-in capital in the preparation of consolidated financial statements.
Primary citation:
FASB 160 (ASC 810)
9-5
Chapter 09 - Consolidation Ownership Issues
C9-4 Sale of Subsidiary Shares
(a) With a sale of shares to a nonaffiliate, net resources have been brought into the
consolidated entity and the noncontrolling shareholders have an additional claim. The excess of
the proceeds received from the sale over the change in the parent’s interest in the subsidiary
increases the amount of additional paid-in capital reported in the consolidated balance sheet. A
sale of subsidiary shares to a nonaffiliate also changes the amount of income assigned to the
noncontrolling interest in the consolidated income statement and the amount of net assets
assigned to the noncontrolling interest in the consolidated balance sheet.
(b) When a parent sells shares of one subsidiary to another subsidiary, net resources to the
consolidated entity do not change. Any gain recorded by the parent must be eliminated when
the investment balance reported by the subsidiary is eliminated in preparing consolidated
financial statements. A change in the claim of the noncontrolling interest is likely to occur if the
subsidiary that purchases the shares is not wholly owned. As a result, there may be some
change in consolidated income and the balance sheet totals assigned to noncontrolling interest.
C9-5 Reciprocal Ownership
A great many factors beyond the immediate impact on reported earnings may be important in
deciding on the use of the funds. Items such as the following should be considered:
1. Are the excess funds held by Thorson available only temporarily or are they not likely to be
needed in the foreseeable future?
2. Will there be any regulatory or taxation problems associated with one or more of the
alternatives?
3. Can shares of the companies be purchased in the desired quantities and at existing market
prices or are there potential difficulties associated with one or more alternatives?
4. Is it desirable to acquire more shares of either subsidiary since controlling ownership already
is in the hands of Strong Manufacturing?
5. Have the noncontrolling shareholders of either subsidiary been troublesome or caused the
parent to refrain from actions that it might otherwise have taken?
With the information given, it is difficult to determine which action will have the most favorable
impact on consolidated net income. The earnings of each company, the number of shares
outstanding, and the relative market prices of the shares each will have an effect. In general,
reported income is maximized by purchasing the shares with the lowest price-earnings ratio.
9-6
Chapter 09 - Consolidation Ownership Issues
C9-6 Complex Organizational Structures
a. Atlas America is a corporation. Its operations involve the development, production, and
distribution of natural gas, and to a lesser extent, oil. It also offers tax-advantaged investment
programs for gas and oil investors.
b. The subsidiaries of Atlas America include corporations, limited liability companies (LLCs), and
both general and limited partnerships. The company fully consolidates its subsidiaries. In
accordance with industry practice, the company reflects its interests in energy partnerships in its
consolidated statements using pro rata consolidation.
c. Atlas Pipeline Holdings is a subsidiary of Atlas America. It has complete ownership of Atlas
Pipeline Partners GP, LLC, a limited liability company that is the general partner of Atlas
Pipeline Partners, L.P. The only cash generating assets of Atlas Pipeline Holdings are its
indirect interests in Atlas Pipeline Partners, L.P.
d. Atlas Pipeline Partners, L.P. is a partnership, specifically a publicly-traded limited partnership.
A limited partnership must have at least one general partner with unlimited liability, and it may
have numerous limited partners whose liability is limited and may not participate in the
management of the partnership. Atlas Pipeline Partners, L.P. has a number of subsidiaries,
including general and limited partnerships, corporations, and limited liability companies. Limited
liability companies, in general, have the advantages of corporations with less of the formalities.
They often have certain tax advantages over corporations. Atlas Pipeline Partners, L.P. is
managed by its general partner, Atlas Pipeline Partners GP, LLC. The executives responsible
for Atlas Pipeline’s management are employees of Atlas America, as indicated in Atlas
Pipeline’s Form 10-K, in the item entitled Directors and Executive Officers of the Registrant.
These employees not only manage Atlas Pipeline Partners, L.P., but also Atlas America and its
other affiliates.
e. Atlas Pipeline Partners, L.P. presents consolidated financial statements in which it
consolidates all of its wholly-owned and majority-owned subsidiaries. NOARK Pipeline System
is a limited partnership that is 100 percent owned by Atlas Pipeline Partners. Prior to 2006, Atlas
Pipeline Partners owned 75 percent of NOARK. Atlas consolidates 100 percent of NOARK, and
previously also consolidated 100 percent of NOARK even though it was only 75 percent owned.
f. Prior to 2004, Atlas America was a wholly owned subsidiary of Resource America, Inc. In
2004, Atlas America had an initial public offering of common stock, with the proceeds distributed
to Resource America. Subsequently, Resource America spun off Atlas America by distributing
its shares to its stockholders.
9-7
Chapter 09 - Consolidation Ownership Issues
C9-7 Evaluating Investments
a. Dow Chemical has well over 100 subsidiaries, as shown in its Form 10-K. According to the
company’s “Principles of Consolidation and Basis of Presentation” in its 10-K, Dow consolidates
all majority-owned subsidiaries over which it has control and also entities for which Dow has a
controlling financial interest. Intercompany transactions and balances are eliminated.
b. Dow reports investments in nonconsolidated affiliates using the equity method. It includes
joint ventures, partnerships, and companies that are 20 to 50 percent owned in the category of
nonconsolidated affiliates. Several of Dow’s nonconsolidated affiliates are 50-percent owned
and several are 49-percent owned. Excluding several special-situation investments, the total
differential was $65 million at December 31, 2006, and $61 million at December 31, 2005. The
differentials relating to MEGlobal, Equipolymers, and EQUATE Petrochemical were negative
differentials resulting from a difference in valuations between U.S. and foreign accounting
principles.
c. The evaluation of Dow’s goodwill for impairment is performed in conjunction with the
company’s annual budgeting process.
d. Dow Chemical’s 50-percent investment in Dow Corning suffered a significant loss in value
judged to be other than temporary in 1995 when Dow Corning declared bankruptcy. As
discussed in Dow’s 2005 Form 10-K, the company wrote down the investment and recognized a
loss at the time of the bankruptcy.
9-8
Chapter 09 - Consolidation Ownership Issues
SOLUTIONS TO EXERCISES
E9-1 Multiple-Choice Questions on Preferred Stock Ownership
1.
d
$50,000 = $20,000 + $30,000
2.
c
$29,000 = $20,000 + 0.30($30,000)
3.
b
Only the retained earnings of the acquiring company is included.
4.
a
The portion held by the parent is eliminated when the preferred investment is
eliminated, and the portion held by nonaffiliates is eliminated and included with the
balance reported as noncontrolling interest in the consolidated balance sheet.
E9-2 Multiple-Choice Questions on Multilevel Ownership
1.
b
$188,000 = $100,000 + 0.80[$80,000 + (0.60 x $50,000)]
2.
b
$20,000 = 0.40 x $50,000
3.
c
$22,000 = 0.20 x [$80,000 + (0.60 x $50,000)]
4.
c
$42,000 = (0.40 x $50,000) + {0.20 x [$80,000 + (0.60 x $50,000)]}
5.
b
$2,400 = 0.80 x {0.60 x [($150,000 + $100,000 - $200,000) / 10 years)]}
E9-3 Acquisition of Preferred Shares
Eliminating entry:
Preferred stock
Common stock
Retained earnings
100,000
50,000
150,000
Investment in Separate CS
140,000
Investment in Separate PS
60,000
NCI in NA of Separate
100,000
9-9
Chapter 09 - Consolidation Ownership Issues
E9-4 Reciprocal Ownership [AICPA Adapted]
a.
None of Simba's dividends is reported in the consolidated statements. All of Simba's
dividends are eliminated in the consolidation process.
b.
Only 90 percent of Pride's dividends are included in the consolidated retained
earnings statement. The dividend payment on the 10 percent owned by Simba is an
intercorporate payment to an affiliate and must be eliminated in the consolidation
process.
E9-5 Subsidiary with Preferred Stock Outstanding
Eliminating entry:
Preferred stock
Common stock
Retained earnings
Investment in Separate CS
Investment in Separate PS
NCI in NA of Separate
200,000
150,000
210,000
270,000
80,000
210,000
E9-6 Subsidiary with Preferred Stock Outstanding
a.
Entries recorded by Clayton Corporation:
Investment in Topple Common Stock
Investment in Topple Preferred Stock
Cash
Record purchase of Topple stock.
270,000
80,000
350,000
Cash
25,500
Investment in Topple Common Stock
25,500
Record dividends from Topple: $25,500 = ($50,000 - $16,000) x 0.75
Cash
6,400
Dividend Income
Record dividends on preferred stock from Topple: $16,000 x 0.40
6,400
Investment in Topple Common Stock
40,500
Income from Subsidiary
40,500
Record equity-method income: $40,500 = ($70,000 - $16,000) x 0.75
9-10
Chapter 09 - Consolidation Ownership Issues
E9-6 (continued)
b. Elimination entries:
NOTE: This answer assumes that the $50,000 in dividends paid includes the preferred
dividends.
Book Value Calculations:
NCI
60%/25
%
Original book value
210,000
+
Inv.
PS
40%
+
Pref.
Div.
Income
40%
80,000
23,100
6,400
- Preferred dividends
(9,600)
(6,400)
- Common dividends
(8,500)
215,000
Inv. CS
75%
270,000
+ Net income
Ending Book Value
+
=
Preferred
Stock
200,000
+
Common
Stock
150,000
40,500
Preferred stock
Common stock
Retained earnings
Income from Topple Co.
Dividends Income--Preferred
NCI in NI of Topple Co.
Dividends declared, Preferred
Dividends declared, Common
Investment in Topple Co. CS
Investment in Topple Co. PS
NCI in NA of Topple Co.
0
210,000
(16,000)
285,000
200,000
150,000
210,000
40,500
6,400
23,100
16,000
34,000
285,000
80,000
215,000
9-11
Retained
Earnings
70,000
(25,500)
80,000
+
(34,000)
200,000
150,000
230,000
Chapter 09 - Consolidation Ownership Issues
E9-7 Preferred Dividends and Call Premium
a.
Culbertson Company's contribution to 20X2 consolidated net income is equal to
its reported net income of $70,000.
b.
Income assigned to noncontrolling interest:
Preferred shares [0.40($100,000 x 0.12)]
Common shares {0.10[$70,000 - ($100,000 x 0.12)]}
Total income assigned to noncontrolling interest
c.
$ 4,800
5,800
$10,600
Retained earnings assignable to preferred shareholders:
Dividends in arrears [5 years x ($100,000 x 0.12)]
Call feature ($2 x 10,000 shares)
Total retained earnings assigned to preferred stock
d.
Book value of common shares:
Par value of common shares outstanding
Retained earnings balance
Less: Balance assigned to preferred shares
Book value of common shares
e.
$60,000
20,000
$80,000
$300,000
$380,000
(80,000)
300,000
$600,000
Total noncontrolling interest:
Preferred stock [0.40($100,000 + $80,000)]
Common stock (0.10 x $600,000)
Total noncontrolling interest
9-12
$ 72,000
60,000
$132,000
Chapter 09 - Consolidation Ownership Issues
E9-8 Multilevel Ownership
a.
Consolidated net income for 20X6 is $190,000 ($90,000 + $40,000
+ $60,000)
b.
Income of $36,800 is assigned to the noncontrolling interest:
Income from Dally ($40,000 x 0.35)
Income from Latent [($60,000 + $16,000) x 0.30]
Total income assigned to noncontrolling interest
c.
Income of $153,200 is assigned to the controlling interest:
Consolidated net income
Less: Income assigned to noncontrolling interest
Income assigned to controlling interest
d.
$14,000
22,800
$36,800
Only the $45,000 of dividends paid by Grasper Corporation to its
shareholders will be reported as dividends declared in Grasper’s
20X6 consolidated retained earnings statement.
9-13
$190,000
(36,800)
$153,200
Chapter 09 - Consolidation Ownership Issues
E9-9 Eliminating entries for Multilevel Ownership
a.
Journal entries recorded by Brown Corporation on its investment in Tann Company:
(1)
(2)
(3)
b.
Investment in Tann Company Stock
Cash
Record purchase of Tann Company stock.
120,000
120,000
Cash
9,000
Investment in Tann Company Stock
Record dividends from Tann Company: $15,000 x 0.60
Investment in Tann Company Stock
Income from Tann Company
Record equity-method income: $40,000 x 0.60
9,000
24,000
24,000
Journal entries recorded by Promise Enterprises on its investment in Brown
Corporation:
(1)
(2)
(3)
Investment in Brown Corporation Stock
Cash
Record purchase of Brown Corporation stock.
315,000
315,000
Cash
45,000
Investment in Brown Corporation Stock
Record dividends from Brown Corporation: $50,000 x 0.90
45,000
Investment in Brown Corporation Stock
129,600
Income from Brown Corporation
Record equity-method income: ($120,000 + $24,000) x 0.90
129,600
c.
Book Value Calculations:
+
Original book value
+ Net Income
- Dividends
Ending book value
NCI 40%
80,000
16,000
(6,000)
90,000
Common stock
Additional paid-in capital
Retained earnings
Income from Tann Co.
NCI in NI of Tann Co.
Dividends declared
Investment in Tann Co.
NCI in NA of Tann Co.
Brown
Corp.
60%
120,000
24,000
(9,000)
135,000
=
Common
Stock
100,000
100,000
100,000
60,000
40,000
24,000
16,000
15,000
135,000
90,000
9-14
+
Add.
Paid-In
Capital
60,000
60,000
+
Retained
Earnings
40,000
40,000
(15,000)
65,000
Chapter 09 - Consolidation Ownership Issues
E9-9 (continued)
Book Value Calculations:
+
Original book value
+ Net Income
- Dividends
Ending book value
NCI 10%
35,000
14,400
(5,000)
44,400
Common stock
Additional paid-in capital
Retained earnings
Income from Brown Corp.
NCI in NI of Brown Corp.
Dividends declared
Investment in Brown Corp.
NCI in NA of Brown Corp.
Promise
90%
315,000
129,600
(45,000)
399,600
=
Common
Stock
150,000
150,000
+
Add.
Paid-In
Capital
60,000
60,000
+
Retained
Earnings
140,000
144,000
(50,000)
234,000
150,000
60,000
140,000
129,600
14,400
50,000
399,600
44,400
E9-10 Reciprocal Ownership
Operating income of Grower Supply Corporation
Operating income of Schultz Company
Consolidated net income
Less: Income to noncontrolling interest:
($50,000 x 0.15)
Income to controlling interest
9-15
$112,000
50,000
$162,000
(7,500)
$154,500
Chapter 09 - Consolidation Ownership Issues
E9-11 Consolidated Balance Sheet with Reciprocal Ownership
Common stock
Retained earnings
Investment in Short Co.
NCI in NA of Short Co.
Treasury Stock
Investment in Talbott Co.
200,000
240,000
352,000
88,000
61,000
61,000
Talbott
Co.
Balance Sheet
Cash
Accounts Receivable
Inventory
Buildings & Equipment
(net)
Investment in Short Co.
Investment in Talbott Co.
Total Assets
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Treasury Stock
NCI in NA of Short Co.
Total Liabilities &
Equity
Short
Co.
78,000
120,000
150,000
39,000
80,000
120,000
400,000
352,000
300,000
1,100,000
61,000
600,000
90,000
400,000
300,000
310,000
60,000
100,000
200,000
240,000
1,100,000
600,000
9-16
Elimination Entries
DR
CR
Consolidated
117,000
200,000
270,000
0
352,000
61,000
413,000
700,000
0
0
1,287,000
88,000
150,000
500,000
300,000
310,000
(61,000)
88,000
88,000
1,287,000
200,000
240,000
61,000
501,000
Chapter 09 - Consolidation Ownership Issues
E9-11 (continued)
Talbott Company and Subsidiary
Consolidated Balance Sheet
December 31, 20X9
Current Assets:
Cash
Accounts Receivable
Inventory
Noncurrent Assets:
Buildings and Equipment (net)
Total Assets
$117,000
200,000
270,000
$
587,000
700,000
$1,287,000
Current Liabilities:
Accounts Payable
Bonds Payable
Stockholders' Equity:
Controlling Interest:
Common Stock
Retained Earnings
Total Controlling Interest
Noncontrolling Interest
Total Equity before Reduction for Treasury Shares
Less: Treasury Shares
Total Stockholders’ Equity
Total Liabilities and Stockholders' Equity
9-17
$ 150,000
500,000
$300,000
310,000
$610,000
88,000
$698,000
(61,000)
637,000
$1,287,000
Chapter 09 - Consolidation Ownership Issues
E9-12 Subsidiary Stock Dividend
a.
Lake Company:
Stock Dividends Declared
Common Stock
40,000
40,000
Lindale Company: No entry required.
b.
Book Value Calculations:
NCI
30%
Original book value
Lindale
Co.
70%
=
+
100,000
Retained
Earnings
210,000
7,500
17,500
25,000
(3,000)
(7,000)
(10,000)
-Stock Dividend
Ending book value
Common
Stock
90,000
+ Net Income
- Dividends
+
94,500
220,500
Common stock
140,000
Retained earnings
200,000
Income from Lake Co.
200,000
40,000
(40,000)
140,000
175,000
17,500
NCI in NI of Lake Co.
7,500
Dividends declared
10,000
Stock dividends declared
40,000
Investment in Lake Co.
220,500
NCI in NA of Lake Co.
94,500
c.
Book Value Calculations:
NCI
30%
+
Lindale
Co.
70%
=
Common
Stock
+
Retained
Earnings
Original book value
94,500
220,500
140,000
175,000
Total
94,500
220,500
140,000
175,000
Common stock
140,000
Retained earnings
175,000
Investment in Lake Co.
NCI in NA of Lake Co.
220,500
94,500
9-18
Chapter 09 - Consolidation Ownership Issues
E9-13 Sale of Subsidiary Shares by Parent
a.
Investment in Acme Concrete, January 1,
20X5:
Purchase price
$360,000
Acme net income in 20X3 and 20X4
$100,000
Dividends paid by Acme in 20X3 and 20X4
(40,000)
$
60,000
x
0.80
Proportion of stock held by Stable
48,000
$408,000
Balance prior to sale of shares
b.
Journal entry recorded by Stable Home Builders for sale of shares:
Cash
120,000
Investment in Acme Stock
Additional Paid-in Capital
$102,000 = $408,000 x 4,000 / [($200,000 / $10) x 0.80]
c.
102,000
18,000
Eliminating entries:
Book Value Calculations:
NCI
40%
Original book value
+
Stable
60%
204,000
306,000
+ Net Income
20,000
- Dividends
(8,000)
30,000
(12,000
)
Ending book value
216,000
324,000
Common stock
200,000
Retained earnings
310,000
Income from Acme
30,000
NCI in NI of Acme
20,000
Dividends declared
20,000
Investment in Acme
324,000
NCI in NA of Acme
216,000
9-19
=
Common
Stock
200,000
+
Retained
Earning
s
310,000
50,000
(20,000)
200,000
340,000
Chapter 09 - Consolidation Ownership Issues
E9-14 Purchase of Additional Shares from Nonaffiliate
a.
Purchase price, December 31, 20X7
Modern Products Company net income for 20X8
($230,000 + $20,000 - $200,000)
Proportion of stock held by Weal
Income from subsidiary
Dividend received from Modern Products Company
($20,000 x 0.60)
Balance in investment account, December 31, 20X8
b.
Balance in investment account, December 31, 20X8
Purchase of additional shares on January 1, 20X9
Investment balance January 1, 20X9, after purchase
Modern Products Company net income for 20X9
($280,000 + $20,000 - $230,000)
Proportion of stock held by Weal
Less: Amortization of differential on stock
purchased January 1, 20X9: ($20,000 / 10 years)
Income from subsidiary
Dividend received from Modern Products
Company ($20,000 x 0.80)
Balance in investment account, December 31, 20X9
9-20
$210,000
$50,000
x 0.60
30,000
(12,000)
$228,000
$228,000
96,000
$324,000
$70,000
x 0.80
$56,000
(2,000)
54,000
(16,000)
$362,000
Chapter 09 - Consolidation Ownership Issues
E9-14 (continued):
c.
Eliminating entries:
Book Value Calculations:
Original book value
+ Net Income
- Dividends
Ending book value
NCI
20%
76,000
14,000
(4,000)
86,000
+
Well Corp.
80%
304,000
56,000
(16,000)
344,000
Basic elimination entry
Common stock
Retained earnings
Income from Modern Products Co.
NCI in NI of Modern Products
Co.
Dividends declared
Investment in Modern Products Co.
NCI in NA of Modern Products Co.
Excess Value (Differential) Calculations:
Well Corp. 100%
Beginning balance
20,000
Changes
(2,000)
Ending balance
18,000
Common
Stock
150,000
=
150,000
+
Retained
Earnings
230,000
70,000
(20,000)
280,000
150,000
230,000
56,000
14,000
20,000
344,000
86,000
=
Patents
20,000
(2,000)
18,000
Note: Although Well Corp. owns 80 percent of the common stock, the entire differential related
to patents is attributed to Well since the differential only arose for the 20X9 stock purchase.
Amortized excess value reclassification entry:
Amortization Expense
Income from Modern Products Co.
2,000
2,000
Excess value (differential) reclassification entry:
Patents
18,000
Investment in Modern Products Co.
9-21
18,000
Chapter 09 - Consolidation Ownership Issues
E9-15 Repurchase of Shares by Subsidiary from Nonaffiliate
a.
b.
Book value of Quinn stock outstanding
Cost of treasury shares repurchased
Book value of remaining shares outstanding
Proportion of remaining shares held by noncontrolling
Interest (2,000 / 8,000)
Adjusted book value of shares held
Book value of shares held before treasury stock
repurchase by Quinn ($500,000 x 0.20)
Reduction of noncontrolling interest
Consideration given by Quinn Manufacturing
Increase in equity attributable to parent
Investment in Quinn Manufacturing
Additional Paid-In Capital
$500,000
(84,000)
$416,000
x
0.25
$104,000
(200,000)
$ 96,000
(84,000)
$ 12,000
12,000
12,000
c.
Book Value Calculations:
NCI
25%
+
Original book value
200,000
300,000
Shares repurchased
(96,000)
12,000
Ending book value
104,000
312,000
Common stock
100,000
Additional paid-in capital
150,000
Retained earnings
250,000
Treasury stock
=
Blatant
75%
Com.
Stock
100,000
+
Add.
Paid-In
Capital
+
Treasur
y Stock
150,000
+
Retained
Earnings
250,000
(84,000)
100,000
84,000
Investment in Quinn
312,000
NCI in NA of Quinn
104,000
9-22
150,000
(84,000)
250,000
Chapter 09 - Consolidation Ownership Issues
E9-16 Sale of Shares by Subsidiary to Nonaffiliate
a.
Computation of change in book value of Schroeder Corporation shares held by
Browne Corporation:
Common stock, $10 par value
Additional paid-in capital
Retained earnings
Total stockholders' equity of Schroeder
Proportion of stock held by Browne
Corporation:
11,000 / 15,000
11,000 / (15,000 + 5,000)
Book value of shares
Before
Sale
After
Sale
$150,000
50,000
400,000
$600,000
$ 200,000
400,000
400,000
$1,000,000
x
.733
$440,000
Increase in book value of shares held by
Browne Corporation
b.
x
.550
$ 550,000
$ 110,000
Investment in Schroeder Stock
Additional Paid-In Capital
110,000
110,000
c.
Book Value Calculations:
NCI
45%
+
Browne
Corp.
55%
=
Common
Stock
+
Add.
Paid-In
Capital
Original book value
160,000
440,000
150,000
50,000
New Shares
290,000
110,000
50,000
350,000
Ending book value
450,000
550,000
200,000
400,000
Common stock
200,000
Additional paid-in capital
400,000
Retained earnings
400,000
Investment in Schroeder Corp.
550,000
NCI in NA of Schroeder Corp.
450,000
9-23
+
Retained
Earnings
400,000
400,000
Chapter 09 - Consolidation Ownership Issues
E9-17 Multiple-Choice Questions on Intercorporate Investments
1. d
2. a
3. a
E9-18 Alternative Reporting for Investment in Partnership
Assets
Investment in TF
Partnership
Total Assets
Liabilities
Interest of
Outside Partners
Owners’ Equity
Total Liabilities
and Equity
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Cost Method
$510,000
Moss Company Balance Sheet
Pro Rata
Equity Method
Consolidation
$510,000
$622,500(d)
Full
Consolidation
$760,000(f)
90,000
$600,000
99,000(b)
$609,000
$622,500
$760,000
$ 40,000
$ 40,000
$ 53,500(e)
$ 70,000(g)
569,000(c)
121,000(h)
569,000(c)
560,000(a)
$600,000
569,000(c)
$609,000
$622,500
$560,000 = $510,000 + $90,000 - $40,000
$99,000 = $90,000 + [($220,000 - ($90,000/0.45)) x 0.45]
$569,000 = $560,000 + [($220,000 - ($90,000/0.45)) x 0.45]
$622,500 = $510,000 + ($250,000 x 0.45)
$53,500 = $40,000 + ($30,000 x 0.45)
$760,000 = $510,000 + $250,000
$70,000 = $40,000 + $30,000
$121,000 = [($250,000 - $30,000) x 0.55]
9-24
$760,000
Chapter 09 - Consolidation Ownership Issues
SOLUTIONS TO PROBLEMS
P9-19 Multiple-Choice Questions on Preferred Stock Ownership
1.
2.
d
b
Book value of shares held by noncontrolling interest:
Preferred stock ($100,000 x 0.30)
Common stock [($200,000 + $50,000) x 0.20]
Total book value
Income to noncontrolling preferred shareholders
[($100,000 x 0.10) x 0.30]
Income to noncontrolling common shareholders:
Reported net income of Upland Company
Income to preferred shareholders
Income to common shareholders
Proportion of common stock owned by
noncontrolling interest
Total income to noncontrolling interest
3.
b
Reported net income of Upland Company
Operating income of Stacey Company
Consolidated net income
Less: Income to noncontrolling interest
Income to controlling interest
4.
c
Controlling interest:
Common stock
Retained earnings
Total controlling interest
Noncontrolling interest: ($250,000 x 0.20) +
($100,000 x 0.30)
Total stockholders’ equity
5.
a
$30,000
50,000
$80,000
$3,000
$30,000
(10,000)
$20,000
x
0.20
All preferred shares of the subsidiary are eliminated in preparing the
consolidated financial statements.
9-25
4,000
$7,000
$ 30,000
100,000
$130,000
(7,000)
$123,000
$ 300,000
350,000
$ 650,000
80,000
$730,000
Chapter 09 - Consolidation Ownership Issues
P9-20 Multilevel Ownership with Differential
a.
Journal entries recorded by Corn Corporation on its investment in Bark Company:
Investment in Bark Company Stock
Cash
Record purchase of Bark Company stock.
406,000
406,000
Cash
14,000
Investment in Bark Company Stock
Record dividends from Bark Company: $20,000 x 0.70
14,000
Investment in Bark Company Stock
Income from Bark Company
Record equity-method income: $30,000 x 0.70
21,000
21,000
Income from Bark Company
2,100
Investment in Bark Company Stock
2,100
Amortize differential related to buildings and equipment: ($30,000 / 10 years)
x 0.70
b.
Journal entries recorded by Purple Corporation on its investment in Corn Corporation:
Cash
20,000
Investment in Corn Corporation Stock
Record dividends from Corn Corporation: $25,000 x 0.80
20,000
Investment in Corn Corporation Stock
63,120
Income from Corn Corporation
Record equity-method income: ($60,000 + $18,900) x 0.80
63,120
Income from Corn Corporation
8,000
Investment in Corn Corporation Stock
Amortize differential related to trademark: ($50,000 / 5 years) x 0.80
9-26
8,000
Chapter 09 - Consolidation Ownership Issues
P9-20 (continued)
c. Eliminating Entries
Book Value Calculations:
Original book value
+ Net Income
- Dividends
Ending book value
NCI
30%
165,000
9,000
(6,000)
168,000
+
Basic elimination entry
Common stock
Retained earnings
Income from Bark Co.
NCI in NI of Bark Co.
Dividends declared
Investment in Bark Co.
NCI in NA of Bark Co.
Corn
Corp.
70%
385,000
21,000
(14,000)
392,000
=
Common
Stock
250,000
+
250,000
Retained
Earnings
300,000
30,000
(20,000)
310,000
250,000
300,000
21,000
9,000
20,000
392,000
168,000
Excess Value (Differential) Calculations:
Beginning balance
Changes
Ending balance
NCI
30%
9,000
(900)
8,100
+
Corn
Corp. 70%
21,000
(2,100)
18,900
=
Buildings
and
Equipment
30,000
30,000
Amortized excess value reclassification entry:
Depreciation expense
Income from Bark Co.
NCI in NI of Bark Co.
3,000
2,100
900
Excess value (differential) reclassification entry:
Buildings and Equipment
30,000
Accumulated Depreciation
Investment in Bark Co.
NCI in NA of Bark Co.
9-27
3,000
18,900
8,100
+
Acc.
Depr.
0
(3,000)
(3,000)
Chapter 09 - Consolidation Ownership Issues
P9-20 (continued)
Book Value Calculations:
Original book value
+ Net Income
- Dividends
Ending book value
NCI
20%
134,000
15,780
(5,000)
144,780
Basic elimination entry
Common stock
Retained earnings
Income from Corn Corp.
NCI in NI of Corn Corp.
Dividends declared
Investment in Corn Corp.
NCI in NA of Corn Corp.
+
Purple
Corp.
80%
536,000
63,120
(20,000)
579,120
=
Common
Stock
400,000
400,000
400,000
270,000
63,120
15,780
25,000
579,120
144,780
Excess Value (Differential) Calculations:
NCI
Purple
20%
Corp. 80%
+
Beginning balance
6,000
24,000
Changes
(2,000)
(8,000)
Ending balance
4,000
16,000
=
Trademark
30,000
(10,000)
20,000
Amortized excess value reclassification entry:
Amortization Expense
Income from Corn Corp.
NCI in NI of Corn Corp.
10,000
8,000
2,000
Excess value (differential) reclassification entry:
Trademark
20,000
Investment in Corn Corp.
NCI in NA of Corn Corp.
9-28
16,000
4,000
+
Retained
Earnings
270,000
78,900
(25,000)
323,900
Chapter 09 - Consolidation Ownership Issues
P9-21 Subsidiary Stock Dividend
Alternative 1: Pound Manufacturing stock is split 2:1.
Book Value Calculations:
Original book value
-Stock Dividend
Ending book value
NCI
32%
144,000
+
144,000
Common stock
Additional paid-in capital
Retained earnings
Investment in Pound
NCI in NA of Pound
Quick
Sales
68%
306,000
=
306,000
Common
Stock
100,000
0
100,000
+
Add.
Paid-In
Capital
70,000
+
Retained
Earnings
280,000
0
280,000
+
Retained
Earnings
280,000
(200,000)
80,000
70,000
100,000
70,000
280,000
306,000
144,000
Alternative 2: A stock dividend of 4,000 shares is issued.
Book Value Calculations:
Original book value
-Stock Dividend
Ending book value
NCI
32%
144,000
+
144,000
Quick
Sales
68%
306,000
=
306,000
Common stock
140,000
Additional paid-in capital
230,000
Retained earnings
280,000
Stock dividends declared
Investment in Pound
NCI in NA of Pound
Common
Stock
100,000
40,000
140,000
+
Add.
Paid-In
Capital
70,000
160,000
230,000
200,000
306,000
144,000
Alternative 3: A stock dividend of 1,500 shares is issued.
Book Value Calculations:
Original book value
-Stock Dividend
Ending book value
NCI
32%
144,000
144,000
+
Quick
Sales
68%
306,000
=
306,000
Common stock
115,000
Additional paid-in capital
130,000
Retained earnings
280,000
Stock dividends declared
Investment in Pound
NCI in NA of Pound
75,000
306,000
144,000
9-29
Common
Stock
100,000
15,000
115,000
+
Add.
Paid-In
Capital
70,000
60,000
130,000
+
Retained
Earnings
280,000
(75,000)
205,000
Chapter 09 - Consolidation Ownership Issues
P9-22 Subsidiary Preferred Stock Outstanding
a.
Book Value Calculations:
NCI
60%/30%
+
Inv. PS
40%
Original book value
- Dividends in arrears (based on
common stock ownership)
+ Dividends in arrears to
owners
225,000
19,200
12,800
Ending Book Value
234,600
92,800
200,000
Common stock
150,000
Retained earnings
200,000
b.
80,000
(9,600)
Preferred stock
Inv. CS
70%
245,000
=
Pref.
Stock
+
Com.
Stock
+
Ret.
Earn.
200,000
150,000
200,000
200,000
150,000
200,000
(22,400)
Investment in Pert Co. CS
222,600
Investment in Pert Co. PS
92,800
NCI in NA of Pert Co.
+
222,600
234,600
Consolidated net income and income to controlling
interest:
Operating income of Emerald Corporation
Net income of Pert
Consolidated net income
Income to noncontrolling interest:
Income from preferred stock of Pert Company
($16,000 x 0.60)
Income from common stock of Pert Company
[($34,000 - $16,000) x 0.30]
Income to noncontrolling interest
Income to controlling interest
Alternate computation of income to controlling interest
Operating income of Emerald Corporation
Income from preferred stock of Pert Company
($16,000 x 0.40)
Income from common stock of Pert Company
[($34,000 - $16,000) x 0.70]
Income to controlling interest
9-30
$ 80,000
34,000
$114,000
$ 9,600
5,400
(15,000)
$ 99,000
$80,000
6,400
12,600
$99,000
Chapter 09 - Consolidation Ownership Issues
P9-23 Ownership of Subsidiary Preferred Stock
a.
Preferred stockholders' claim on net assets of Jacobs:
Liquidation value of preferred stock ($101 per share)
20X6 dividends in arrears ($200,000 x 0.10)
Total preferred stockholder claim, December 31, 20X6
b.
Book value of Jacobs common shares acquired by Presley:
Total Jacobs stockholders' equity, December 31, 20X6
Claim of preferred stockholders
Book value of Jacobs common stock
Portion acquired by Presley
Book value of common shares acquired by Presley
c.
$1,800,000
1,200,000
$3,000,000
(2,933,000)
$ 67,000
Income to noncontrolling interest, 20X7:
Jacobs net income
Less: impairment of goodwill
Less: 20X7 preferred dividends ($200,000 x 0.10)
Income accruing to common shareholders
Noncontrolling common shareholders' interest
Income to noncontrolling common shareholders
Preferred dividends to noncontrolling
shareholders ($20,000 x 0.80)
Total income to noncontrolling shareholders
e.
$3,155,000
(222,000)
$2,933,000
x
0.60
$1,759,800
Goodwill associated with acquisition of common shares:
Consideration given by Presley to acquire shares
Fair value of noncontrolling interest in common shares
Total fair value
Book value of common shares
Goodwill
d.
$202,000
20,000
$222,000
$280,000
(26,000)
(20,000)
$234,000
x
0.40
$ 93,600
16,000
$109,600
Note: This answer assumes the fully adjusted equity method. We forgot to change
the wording from “basic” equity method in the previous edition.
Presley's income from investment in subsidiary common stock:
Jacobs net income
Less: 20X7 preferred dividends ($200,000 x 0.10)
Less: impairment of goodwill
Income accruing to common shareholders
Presley's proportionate share
Presley's share of income to common shareholders
9-31
$280,000
(20,000)
(26,000)
$234,000
x
0.60
$140,400
Chapter 09 - Consolidation Ownership Issues
P9-23 (continued)
f.
Noncontrolling interest, December 31, 20X7:
Total amount assigned to noncontrolling interest:
Noncontrolling interest - common
Noncontrolling interest - preferred
Total noncontrolling interest
$1,289,600
161,600
$1,451,200
Assigned to noncontrolling interest - common
Jacobs stockholders' equity, January 1, 20X7
20X7 net income
Less: Preferred dividends
Less: Common dividends
Total Jacobs stockholders' equity, December 31, 20X7
Claim of preferred stockholders
Book value of Jacobs' common stock
Unimpaired goodwill at December 31, 20X7 ($67,000 - $26,000)
Total basis for common shareholders
Noncontrolling stockholders' interest
Noncontrolling interest — common
$3,155,000
280,000
(40,000)
(10,000)
$3,385,000
(202,000)
$3,183,000
41,000
$3,224,000
x
0.40
$1,289,600
Assigned to noncontrolling interest - preferred
Total Jacobs preferred stockholders' equity,
January 1, 20X7
Less: Dividends in arrears paid during 20X7
Jacobs preferred stockholders' equity,
December 31, 20X7
Noncontrolling stockholders' interest
Noncontrolling interest — preferred
9-32
$222,000
(20,000)
$202,000
x
0.80
$161,600
Chapter 09 - Consolidation Ownership Issues
P9-23 (continued)
g. Eliminating entries:
Basic elimination entry:
Preferred Stock
200,000
Premium on Preferred Stock
5,000
Common Stock
500,000
Additional Paid-In Capital
797,600
Retained Earnings
1,650,000
Income from Jacobs Jacuzzi
156,000
Dividends Income--Preferred
8,000
NCI in NI of Jacobs Jacuzzi
120,000
Dividends declared, Preferred
40,000
Dividends declared, Common
10,000
Investment in Jacobs Jacuzzi CS
1,909,800
Investment in Jacobs Jacuzzi PS
42,000
NCI in NA of Jacobs Jacuzzi
1,434,800
Excess Value (Differential) Calculations:
Presley Pools
NCI 40% +
60%
Beginning balance
Changes
Ending balance
=
Goodwill
26,800
40,200
67,000
(10,400)
(15,600)
(26,000)
16,400
24,600
41,000
Amortized excess value reclassification entry:
Goodwill impairment loss
26,000
Income from Jacobs Jacuzzi
15,600
NCI in NI of Jacobs Jacuzzi
10,400
Excess value (differential) reclassification entry:
Goodwill
41,000
Investment in Jacobs Jacuzzi
24,600
NCI in NA of Jacobs Jacuzzi
16,400
9-33
Chapter 09 - Consolidation Ownership Issues
P9-24 Consolidation Worksheet with Subsidiary Preferred Stock
a.
Book Value Calculations:
NCI
40%/10%
Original book value
+
115,000
Inv. PS
60%
Pref.
Div.
Income
+ 60%
120,000
12,500
9,000
- Preferred dividends
(6,000)
(9,000)
- Common dividends
(1,000)
120,500
120,000
Preferred stock
200,000
Common stock
100,000
Retained earnings
250,000
Dividends Income--Preferred
NCI in NI of White Corp.
=
Pref.
Stock
200,000
+
Com.
Stock
100,000
58,500
0
58,500
9,000
12,500
Dividends declared, Preferred
15,000
Dividends declared, Common
10,000
Investment in White Corp. CS
364,500
Investment in White Corp. PS
120,000
NCI in NA of White Corp.
120,500
Eliminate intercompany payable/receivable:
Dividends Payable
9,000
Dividends Receivable
9,000
9-34
+
Ret.
Earn.
250,000
80,000
(15,000)
(9,000)
Basic elimination entry:
Income from White Corp.
Inv. CS
90%
315,000
+ Net income
Ending Book Value
+
364,500
(10,000)
200,000
100,000
305,000
Chapter 09 - Consolidation Ownership Issues
P9-24 (continued)
b.
Income Statement
Sales
Dividend Income
Less: COGS
Less: Depreciation Expense
Less: Other Expenses
Income from White Co
Consolidated Net Income
NCI in Net Income
Controlling Interest in NI
Statement of Retained Earnings
Beginning Balance
Net Income
Less: Dividends Declared,
Preferred
Less: Dividends Declared,
Common
Ending Balance
Balance Sheet
Cash
Accounts Receivable
Dividends Receivable
Inventory
Buildings and Equipment (net)
Investment in White Co. CS
Investment in White Co. PS
Total Assets
Accounts Payable
Bonds Payable
Dividends Payable
Preferred Stock
Common Stock
Retained Earnings
NCI in NA of White Co
Total Liabilities & Equity
Elimination Entries
DR
CR
Brown
Co.
White
Co
500,000
9,000
(280,000)
(40,000)
(131,000)
58,500
116,500
300,000
0
(170,000)
(30,000)
(20,000)
0
80,000
116,500
80,000
58,500
67,500
12,500
80,000
435,000
116,500
250,000
80,000
250,000
80,000
(60,000)
491,500
(10,000)
305,000
58,000
80,000
9,000
100,000
360,000
364,500
120,000
1,091,500
100,000
120,000
0
200,000
270,000
0
0
690,000
100,000
300,000
0
0
200,000
491,500
70,000
0
15,000
200,000
100,000
305,000
9,000
200,000
100,000
330,000
1,091,500
690,000
639,000
9-35
0
800,000
0
(450,000)
(70,000)
(151,000)
0
129,000
(12,500)
116,500
0
435,000
116,500
15,000
0
10,000
25,000
(60,000)
491,500
9,000
(15,000)
330,000
0
364,500
120,000
493,500
158,000
200,000
0
300,000
630,000
0
0
1,288,000
25,000
120,500
145,500
170,000
300,000
6,000
0
200,000
491,500
120,500
1,288,000
9,000
0
Consolidated
Chapter 09 - Consolidation Ownership Issues
P9-25 Subsidiary Stock Transactions
a.
(1)
(2)
Book value of Beta Company stock outstanding
Cost of treasury shares repurchased
Book value of remaining shares outstanding
Proportion of remaining shares held by noncontrolling
Interest (1,500 / 9,000)
Adjusted book value of shares held
Book value of shares held before treasury stock
repurchase by Beta Company ($500,000 x 0.25)
Reduction of noncontrolling interest
Consideration given by Beta Company
Decrease in equity attributable to parent
x .1667
$ 72,000
(125,000)
$ 53,000
(68,000)
$ (15,000)
Journal entry recorded by Apex Corporation:
Retained Earnings
Investment in Beta Company Stock
(3)
$500,000
(68,000)
$432,000
15,000
15,000
Eliminating entries:
Book Value Calculations:
NCI
16.7%
Original book value
Ending book value
Apex
Corp.
83.3%
=
125,000
375,000
7,500
37,500
(53,000)
(15,000)
79,500
397,500
+ Net Income
Shares repurchased
+
Common stock
Additional paid-in capital
Retained earnings
Income from Beta Co.
NCI in NI of Beta Co.
Treasury stock
Investment in Beta Co.
NCI in NA of Beta Co.
Common
Stock
100,000
+
Add.
Paid-In
Capital
+ Treasury
Stock
80,000
+ Retained
Earnings
320,000
45,000
(68,000)
100,000
100,000
80,000
320,000
37,500
7,500
68,000
397,500
79,500
9-36
80,000
(68,000)
365,000
Chapter 09 - Consolidation Ownership Issues
P9-25 (continued)
b.
(1) Book value of Beta Company stock outstanding
Cost of treasury shares repurchased
Book value of remaining shares outstanding
Proportion of remaining shares held by noncontrolling
Interest (2,500 / 9,000)
Adjusted book value of shares held by noncontrolling
Interest
Book value of shares held before treasury stock
repurchase by Beta Company ($500,000 x 0.25)
Increase in equity attributable to parent
$500,000
(68,000)
$432,000
x
.2778
$120,000
(125,000)
$ 5,000
(2) Journal entry recorded by Apex Corporation:
Cash
Investment in Beta Company Stock
Additional Paid-In Capital
68,000
63,000
5,000
(3) Eliminating entries:
Book Value Calculations:
NCI
27.8%
Original book value
+
Apex
Corp.
72.2%
=
125,000
375,000
+ Net Income
12,500
32,500
Shares repurchased
(5,000)
(63,000)
132,500
344,500
Ending book value
Common stock
Additional paid-in capital
Retained earnings
100,000
100,000
80,000
NCI in NI of Beta Co.
12,500
Add.
Paid-In
Capital
+
Treasury
Stock
80,000
+
Retained
Earnings
320,000
(68,000)
320,000
32,500
+
45,000
100,000
Income from Beta Co.
Treasury stock
Common
Stock
68,000
Investment in Beta Co.
344,500
NCI in NA of Beta Co.
132,500
9-37
80,000
(68,000)
365,000
Chapter 09 - Consolidation Ownership Issues
P9-26 Sale of Subsidiary Shares
a.
Book Value Calculations:
NCI
40%
Original book value
+
Penn
Corp.
60%
=
Common
Stock
Add.
Paid-In
Capital
Retained
Earnings
100,000
150,000
12,000
18,000
30,000
- Dividends
(4,000)
(6,000)
(10,000)
108,000
162,000
100,000
Basic elimination entry:
Common stock
Additional paid-in capital
Retained earnings
100,000
20,000
130,000
Income from ENC Co.
18,000
NCI in NI of ENC Co.
12,000
Dividends declared
10,000
Investment in ENC Co.
162,000
NCI in NA of ENC Co.
108,000
Eliminate gain on sale of ENC stock:
Gain on Sale of ENC Stock
Additional paid-in capital
10,000
10,000
9-38
20,000
+
+ Net Income
Ending book value
100,000
+
20,000
130,000
150,000
Chapter 09 - Consolidation Ownership Issues
P9-26 (continued)
b.
Penn
Corp.
ENC Co.
280,000
10,000
(210,000)
(20,000)
(21,000)
18,000
57,000
170,000
0
(100,000)
(15,000)
(25,000)
0
30,000
57,000
30,000
Statement of Retained Earnings
Beginning Balance
320,000
57,000
Net Income
Less: Dividends Declared
(15,000)
Ending Balance
362,000
130,000
30,000
(10,000)
150,000
Income Statement
Sales
Gain on Sale of ENC Stock
Less: COGS
Less: Depreciation Expense
Less: Other Expenses
Income from ENC Co.
Consolidated Net Income
NCI in Net Income
Controlling Interest in NI
Balance Sheet
Cash
Accounts Receivable
Inventory
Buildings and Equipment
Less: Accumulated
Depreciation
Investment in ENC Co.
Total Assets
Accounts Payable
Bonds Payable
Common Stock
Additional Paid-In Capital
Retained Earnings
NCI in NA of ENC Co.
Total Liabilities & Equity
Elimination Entries
DR
CR
130,000
40,000
170,000
30,000
70,000
120,000
650,000
35,000
50,000
100,000
230,000
(170,000)
162,000
862,000
(95,000)
0
320,000
50,000
200,000
200,000
50,000
362,000
20,000
30,000
100,000
20,000
150,000
100,000
20,000
170,000
862,000
320,000
290,000
9-39
0
450,000
0
(310,000)
(35,000)
(46,000)
0
59,000
(12,000)
47,000
0
10,000
10,000
320,000
47,000
(15,000)
352,000
10,000
18,000
28,000
12,000
40,000
Consolidated
0
65,000
120,000
220,000
880,000
0
162,000
162,000
(265,000)
0
1,020,000
10,000
10,000
108,000
128,000
70,000
230,000
200,000
60,000
352,000
108,000
1,020,000
Chapter 09 - Consolidation Ownership Issues
P9-27 Sale of Shares by Subsidiary to Nonaffiliate
a.
Book Value Calculations:
NCI
33.3%
+
Craft
Corp.
66.7%
=
Common
Stock
+
Add.
Paid-In
Capital
Original book value
120,000
480,000
200,000
50,000
New Shares
140,000
40,000
40,000
140,000
Ending book value
260,000
520,000
240,000
190,000
Common stock
240,000
Additional paid-in capital
190,000
Retained earnings
350,000
Investment in Delta Corp.
520,000
NCI in NA of Delta Corp.
260,000
+
$240,000 = $200,000 + ($10 x 4,000 shares)
$190,000 = $50,000 + [($45 - $10) x 4,000 shares]
$520,000 = $780,000 x (16,000 shares / 24,000 shares)
$260,000 = $780,000 x (8,000 shares / 24,000 shares)
Journal entry recorded by Craft Corporation:
Investment in Delta Corporation Stock
Additional Paid-In Capital
Book value of shares held by Craft:
After sale $780,000 x (16,000 / 24,000)
Before sale $600,000 x (16,000 / 20,000)
Increase in book value
40,000
40,000
$520,000
(480,000)
$ 40,000
9-40
Retained
Earnings
350,000
350,000
Chapter 09 - Consolidation Ownership Issues
P9-27 (continued)
b.
Balance Sheet
Cash
Accounts Receivable
Inventory
Buildings and Equipment
Less: Accumulated Depr.
Investment in Delta Corp.
Total Assets
Accounts Payable
Mortgages Payable
Taxes Payable
Common Stock
Additional Paid-In Capital
Retained Earnings
NCI in NA of Delta Corp.
Total Liabilities & Equity
c.
Craft
Corp.
Delta
Corp.
50,000
90,000
180,000
700,000
(200,000)
520,000
1,340,000
230,000
120,000
200,000
600,000
(220,000)
0
930,000
70,000
250,000
70,000
Elimination Entries
DR
CR
0
300,000
220,000
500,000
80,000
240,000
190,000
350,000
240,000
190,000
350,000
1,340,000
930,000
780,000
Consolidated
520,000
520,000
280,000
210,000
380,000
1,300,000
(420,000)
0
1,750,000
260,000
260,000
140,000
250,000
80,000
300,000
220,000
500,000
260,000
1,750,000
Craft Corporation and Subsidiary
Consolidated Balance Sheet
January 1, 20X3
Current Assets:
Cash
Accounts Receivable
Inventory
Noncurrent Assets:
Buildings and Equipment
Less: Accumulated Depreciation
Total Assets
$
280,000
210,000
380,000
$1,300,000
(420,000)
Current Liabilities:
Accounts Payable
Taxes Payable
Mortgages Payable
Stockholders’ Equity:
Controlling Interest:
Common Stock
Additional Paid-In Capital
Retained Earnings
Total Controlling Interest
Noncontrolling Interest
Total Stockholders’ Equity
Total Liabilities and Stockholders' Equity
$ 140,000
80,000
$
870,000
880,000
$1,750,000
$ 220,000
250,000
$ 300,000
220,000
500,000
$1,020,000
260,000
1,280,000
$1,750,000
9-41
Chapter 09 - Consolidation Ownership Issues
P9-28 Sale of Additional Shares to Parent
a. Eliminating entry:
Lane's Previous Shares
New Shares Purchased by Lane
Lane's Total Shares
7,500
2,500
10,000
Lane's New %
New NCI %
80%
20%
Total Original Shares
New Shares
Total Shares
10,000
2,500
12,500
(10,000/12,500)
Book Value Calculations:
NCI
20%
+
Lane
80%
=
Common
Stock
+
Add.
Paid-In
Capital
Original book value
87,500
262,500
100,000
50,000
New Shares
12,500
137,500
25,000
125,000
100,000
400,000
125,000
175,000
Ending book value
Common stock
125,000
Additional paid-in capital
175,000
Retained earnings
200,000
Investment in Tin Corp.
400,000
NCI in NA of Tin Corp.
100,000
+
Retained
Earnings
200,000
200,000
Journal entry recorded by Tin Corporation:
Cash
Common Stock
Additional Paid-In Capital
150,000
25,000
125,000
Journal entry recorded by Lane Manufacturing:
Investment in Tin Corporation Stock
Additional Paid-In Capital
Cash
137,500
12,500
150,000
2-42
Chapter 09 - Consolidation Ownership Issues
P9-28 (continued)
b.
Tin
Corp.
Lane
Balance Sheet
Cash
Accounts Receivable
Inventory
Buildings and Equipment
Less: Accumulated Depreciation
Investment in Tin Corp.
Total Assets
Accounts Payable
Bonds Payable
Common Stock
Additional Paid-In Capital
Retained Earnings
NCI in NA of Tin Corp.
Total Liabilities & Equity
Elimination Entries
DR
CR
77,500
60,000
100,000
600,000
(150,000)
400,000
1,087,500
210,000
100,000
180,000
600,000
(240,000)
50,000
400,000
200,000
37,500
400,000
50,000
300,000
125,000
175,000
200,000
125,000
175,000
200,000
1,087,500
850,000
500,000
850,000
2-43
0
Consolidated
400,000
400,000
287,500
160,000
280,000
1,200,000
(390,000)
0
1,537,500
100,000
100,000
100,000
700,000
200,000
37,500
400,000
100,000
1,537,500
Chapter 09 - Consolidation Ownership Issues
P9-29 Complex Ownership Structure
The overall ownership structure can be diagrammed as follows:
First
Boston
0.80
Gulfside
0.10
0.60
Paddock
Consolidated net income of $98,800 is reported:
Operating income of First Boston
Operating income of Gulfside
Operating income of Paddock
Total earnings available
Income to noncontrolling interests:
Paddock .40[$50,000 + .10($30,000)]
Gulfside .20[$34,000 + .60($10,000)]
Consolidated net income
P9-30 Investment in Joint Venture
= ($60,000 - $52,000) / [($330,000 - $50,000) –
($293,000 - $45,000)]
a.
25 percent
b.
$782,500 = $700,000 + ($330,000 x 0.25)
2-44
$ 44,000
34,000
50,000
$128,000
$21,200
8,000
(29,200)
$ 98,800
Chapter 09 - Consolidation Ownership Issues
P9-31 Investment in Partnership
Cost Method
$800,000
Assets
Investment in DF
Partnership
Total Assets
Liabilities
Interest of
Outside Partners
Owners’ Equity
Total Liabilities
and Equity
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(a)
(b)
(c)
(d)
(e)
(f)
Full
Consolidation
$1,180,000 (f)
96,000
$896,000
105,000(b)
$905,000
$ 914,000
$1,180,000
$175,000
$175,000
$ 184,000(e)
$ 205,000(g)
730,000(c)
245,000(h)
730,000(c)
721,000(a)
$896,000
$721,000
$105,000
$730,000
$914,000
$184,000
$1,180,000
$205,000
$245,000
Sales Revenues
Expenses
Income from
Partnership
Income to
Outside Partners
Net Income
Down Corporation Balance Sheet
Pro Rata
Equity Method
Consolidation
$800,000
$ 914,000(d)
=
=
=
=
=
=
=
=
730,000(c)
$905,000
$ 914,000
$1,180,000
$730,000 - $105,000 + $96,000
given
given
$800,000 + ($380,000 x 0.30)
$175,000 + ($30,000 x 0.30)
$800,000 + $380,000
$175,000 + $30,000
$350,000 x 0.70
Cost Method
$500,000
(345,000)
Down Corporation Income Statement
Pro Rata
Equity Method
Consolidation
$ 500,000
$620,000 (b)
(345,000)
(456,000)(c)
Full
Consolidation
$900,000 (d)
(715,000)(e)
9,000(a)
$155,000
$ 9,000
$620,000
$456,000
$900,000
$715,000
$ 21,000
=
=
=
=
=
=
$164,000
[($400,000 - $370,000) x 0.30]
$500,000 + ($400,000 x 0.30)
$345,000 + ($370,000 x 0.30)
$500,000 + $400,000
$345,000 + $370,000
[($400,000 - $370,000) x 0.70]
2-45
$164,000
(21,000) (f)
$164,000