Consolidations – Changes in
Ownership Interests
Chapter 8
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8-1
Learning Objective 1
Prepare consolidated statements
when parent company’s ownership
percentage increases or decreases
during the reporting period.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8-2
Preacquisition Earnings
Preacquisition earnings or purchased income
is income that was earned by the subsidiary
(in the accounting period of the acquisition)
prior to the acquisition.
Patter Corporation purchases a 90% interest in
Sissy Company on April 1, 2006, for $213,750.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8-3
Preacquisition Earnings
Income
Sales
Cost of sales and expenses
Net income
$25,000 $75,000 $100,000
12,500 37,500
50,000
$12,500 $37,500 $ 50,000
Dividends
$10,000 $15,000 $ 25,000
1/1-4/1
4/1-12/31 1/1-12/31
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8-4
Preacquisition Earnings
Stockholders’ Equity Jan. 1
Capital stock
$200,000
Retained earnings
35,000
Stockholders’ equity $235,000
April 1
$200,000
37,500
$237,500
Dec. 31
$200,000
60,000
$260,000
What is the book value acquired by Patter?
$237,500 × 90% = $213,750 purchase price
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8-5
Preacquisition Earnings
Sales (last three quarters of 2006)
Expenses (last three quarters)
Minority interest (last three quarters)
Effect on consolidated net income
$75,000
(37,500)
(3,750)
$33,750
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8-6
Preacquisition Earnings
Sales (full year)
Expenses (full year)
Preacquisition income
Minority interest
Effect on consolidated net income
$100,000
(50,000)
(11,250)
(5,000)
$ 33,750
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8-7
Preacquisition Dividends
$25,000
$10,000
$15,000
Preacquisition dividends are eliminated
in the consolidation process.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8-8
Preacquisition Dividends
Cash
13,500
Investment in Sissy
To record dividends received
13,500
$15,000 × 90% = 13,500
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8-9
Consolidation
12/31/2006
Patter’s Investment
213,750
33,750 13,500
234,000
Dividends
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 10
Working Papers December 31, 2006
Income Statement
Sales
Income from Sissy
Expenses
Minority interest expense
($50,000 × 10%)
Preacquisition income
Net income
Retained earnings – Patter
Retained earnings – Sissy
Add: Net income
Dividends
Retained earnings 12/31/06
Adjustments/ ConsolPatter Sissy Eliminations idated
$300
$100
$400
33.75
a 33.75
(200)
(50)
(250)
c 5.00
b 11.25
$133.75 $ 50
$266.25
$ 35 b 35
133.75 50
(100)
(25)
$300
$ 60
(5)
(11.25)
$133.75
$266.25
a 13.5
b 9.0
c 2.5
133.75
(100)
$300
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 11
Working Papers December 31, 2006
Balance Sheet
Patter Sissy
Adjustments/
Eliminations
Other assets
$566 $260
Investment in Sissy 234
Capital stock
Retained earnings
Minority interest
Consolidated
$826
a 20.25
b 213.75
$800 $260
$500 $200 b 200
300
60
$800 $260
$826
500
300
b 23.50
c 2.50
26
$826
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 12
Learning Objective 2
Apply consolidation procedures to
interim (midyear) acquisitions.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 13
Piecemeal Acquisitions
Poca Corporation acquires a 90% interest in Sark
Corporation in a series of separate stock purchases
between July1, 2003, and October 1, 2005.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 14
Piecemeal Acquisitions
Date
Interest acquired
Investment cost
Equity January 1
Income for year
Equity at acquisition
Equity December 31
7/1/03 4/1/04 10/1/05
20%
40%
30%
$ 30 $ 74 $ 81
100
150
190
50
40
40
125
160
220
150
190
230
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 15
Piecemeal Acquisitions
What is the initial goodwill from
each of the three acquisitions?
$125 × 20% = $25
$30 – $25 = $5
$160× 40% = $64
$74 – $64 = $10
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 16
Piecemeal Acquisitions
$220 × 30% = $66
$81 – $66 = $15
At December 31, 2005, Poca’s investment
in Sark account balance is $237,000.
This consists of $185,000 total
cost plus income of $52,000.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 17
Working Paper Entries: 2005
a Income from Sark
27,000
Investment in Sark
27,000
To eliminate investment income and return
investment account to its beginning-of-theperiod balance plus the $81,000 new investment
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 18
Working Paper Entries: 2005
b Preacquisition Income
9,000
Retained Earnings – Sark
90,000
Capital Stock – Sark
100,000
Goodwill
30,000
Investment in Sark
210,000
Minority Interest
19,000
To eliminate investment in Sark and Sark’s equity
balances, and enter preacquisition income, goodwill,
and beginning-of-the-period minority interest
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 19
Working Paper Entries: 2005
c Minority Interest Expense
4,000
Minority Interest
4,000
To record minority interest in Sark’s net income
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 20
Sale of Ownership Interests
Sergio Corporation is a 90%-owned
subsidiary of Pablo Corporation.
 January 1, 2007: Pablo’s investment
in Sergio equals $288,000.
 Sergio’s stockholders’ equity on this
date consists of $200,000 capital stock
and $100,000 retained earnings.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 21
Sale of Ownership Interests
Did Pablo acquire goodwill?
$300,000 × 90% = $270,000
$288,000 – $270,000 = $18,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 22
Sale of Ownership Interests
During 2007, Sergio reports income of $36,000.
 Sergio pays dividends of $20,000 on July 1.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 23
Sale of Interest at the Beginning
of the Period
Pablo sells a 10% interest in Sergio
(one-ninth of its holdings) on
January 1, 2007 for $40,000.
$288,000 ÷ 9 = $32,000
$18,000 ÷ 9 = $2,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 24
Sale of Interest at the Beginning
of the Period
12/31/2007
Cash
40,000
16,000
Pablo’s Investment
288,000 32,000
28,800 16,000
268,800
Gain
8,000
Dividends
Income from S
28,800
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 25
Working Paper Entries: 2007
a Income from Sergio
28,800
Dividends – Sergio
16,000
Investment in Sergio
12,800
To eliminate income and dividends from
Sergio and return the investment account
to its beginning-of-the-period balance
after the sale of the 10% interest
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 26
Working Paper Entries: 2007
b Capital Stock – Sergio
200,000
Retained Earnings – Sergio 100,000
Goodwill
16,000
Investment in Sergio
256,000
Minority Interest (20%)
60,000
To eliminate reciprocal investment and equity
balances, and to record goodwill and
beginning minority interest
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 27
Working Paper Entries: 2007
c Minority Interest Expense
7,200
Dividends
4,000
Minority Interest
3,200
To enter minority interest share of subsidiary
income and dividends
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 28
Working Papers December 31, 2007
Adjustments/ ConsolPablo Sergio Eliminations idated
$600
$136
$736
28.8
a 28.8
8
8
(508.8) (100)
(608.8)
Income Statement
Sales
Income from Sergio
Gain on sale
Expenses
Minority interest expense
($36,000 × 10%)
Net income
$128
Retained earnings – Pablo $210
Retained earnings – Sergio
Add: Net income
128
Dividends
(80)
Retained earnings 12/31/07 $258
c
7.2
(7.2)
$128
$210
$ 36
$100 b 100
36
(20)
$116
128
a 16
c 4
(80)
$258
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 29
Working Papers December 31, 2007
Balance Sheet
Other assets
Investment in Sergio
Pablo Sergio
$639.2 $350
268.8
Goodwill
Liabilities
Capital stock
Retained earnings
Minority interest
Adjustments/
Eliminations
a 12.8
b 256
b 16
$908
$150
500
258
$908
Consolidated
$ 989.2
16
$1,005.2
$ 184
500
258
$350
$ 34
200 b 200
116
$350
b 60
c 3.2
63.2
$1,005.2
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 30
Sale of Interest During an
Accounting Period
Main issues
Obtain proper book value for shares sold.
Calculate the remainder for unamortized
components of the investment account.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 31
Sale of Interest During an
Accounting Period
Pablo sells the 10% interest in Sergio
on April 1, 2007, for $40,000.
The sale may be recorded as of April 1
or, as an expedient, as of January 1.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 32
Sale of Interest During an
Accounting Period
Assume the sale is recorded on April 1, 2007.
Selling price of 10% interest
$40,000
Less: Book value of interest sold:
Investment balance January 1 $288,000
Equity in income
$36,000 × 1/4 year × 90%
8,100
Portion of investment sold
$296,100
× 1/9
32,900
Gain
$ 7,100
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 33
Sale of Interest During an
Accounting Period
$36,000 × 1/4 year × 90% = $ 8,100
$36,000 × 3/4 year × 80% = 21,600
$29,700
$29,700 – $16,000 = $13,700
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 34
Sale of Interest During an
Accounting Period
12/31/2007
Cash
40,000
16,000
Pablo’s Investment
288,000 32,900
8,100 16,000
21,600
268,800
Gain
7,100
Dividends
Income from S
8,100
21,600
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 35
Changes in Ownership Interests from
Subsidiary Stock Transactions
Subsidiary stock issuances provide
a means of expanding operations
through external financing.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 36
Sale of Additional Shares
by a Subsidiary
Purdy Corporation owns an 80% interest
in Stroh Corporation.
Purdy’s investment in Stroh is $180,000 on
January 1, 2007, equal to 80% of Stroh’s $200,000
stockholders’ equity plus $20,000 goodwill.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 37
Sale of Additional Shares
by a Subsidiary
$200,000 × 80% = $160,000
$160,000 ÷ $20 = 8,000 shares
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 38
Sale of Additional Shares
by a Subsidiary
Capital stock, $10 par
Additional paid-in capital
Retained earnings
Total shareholders’ equity
$100,000
60,000
40,000
$200,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 39
Subsidiary Sells Shares to Parent
Stroh sells an additional 2,000 shares to Purdy at
book value of $20 per share on January 2, 2007.
January 1 before sale: 8,000 ÷ 10,000 = 80%
January 2 after sale: 10,000 ÷ 12,000 = 831/3%
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 40
Subsidiary Sells Shares to Parent
January 1 January 2
Before Sale After Sale
Stroh’s stockholders’ equity
Purdy’s interest
Purdy’s equity in Stroh
Goodwill
Investment in Stroh balance
$200,000 $240,000
80%
831/3%
$160,000 $200,000
20,000
20,000
$180,000 $220,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 41
Subsidiary Sells Shares to Parent
If Stroh sells the additional shares at $35 per share.
Price paid by Purdy (2,000 × $35)
$70,000
Book value acquired:
Underlying book value after purchase
($200,000 + $70,000) × 831/3%
$225,000
Underlying book value before purchase
($200,000 × 80%)
160,000
Book value acquired
65,000
Excess cost over book value
$ 5,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 42
Subsidiary Sells Shares
to Outside Entity
Sale at $20
Stroh’s stockholders’ equity
Purdy’s interest
Purdy’s equity in Stroh
after issuance
Purdy’s equity in Stroh
before issuance
Increase in Purdy’s
equity in Stroh
Sale at $35
$240,000
$270,000
662/3%
662/3%
$160,000
$180,000
160,000
160,000
0
$ 20,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 43
Learning Objective 3
Record subsidiary/investee stock
issuances and treasury
stock transactions.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 44
Treasury Stock Transactions
by a Subsidiary
The acquisition of treasury stock by a
subsidiary decreases subsidiary equity
and subsidiary shares outstanding.
If the subsidiary acquires treasury stock
from minority shareholders at book
value, no change in the parent’s share
in the subsidiary equity results.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 45
Treasury Stock Transactions
by a Subsidiary
Shelly is an 80% subsidiary of Pointer Corporation.
Shelly has 10,000 shares of common stock
outstanding at December 31, 2007.
On January 1, 2008, Shelly purchased 400
shares of its own stock from minority stockholders.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 46
Treasury Stock Transactions
by a Subsidiary
Shelly’s equity before purchase
of 400 shares of treasury stock
Capital stock, $10 par
Retained earnings
Total equity
Pointer’s share of Shelly’s
book value (80%)
$100,000
100,000
$200,000
$160,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 47
Treasury Stock Transactions
by a Subsidiary
400 shares
Capital stock
Retained earnings
Total
Less: Treasury stock
Total equity
Pointer’s interest
Pointer’s share of
Shelly’s book value
@$20
@$30
@$15
$100,000 $100,000 $100,000
100,000 100,000 100,000
$200,000 $200,000 $200,000
8,000
12,000
6,000
$192,000 $188,000 $194,000
5/6
5/6
5/6
$160,000 $156,667 $161,667
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 48
End of Chapter 8
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
8 - 49