Pearson Education, Inc.

publishing as Prentice Hall 8-1

Chapter 8: Consolidations
Changes in Ownership Interests
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany
Advanced Accounting, 10
th
edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
Pearson Education, Inc. publishing as Prentice Hall 8-2
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.
Pearson Education, Inc. publishing as Prentice Hall 8-3
1: Changes in Ownership Percentage
Consolidations Changes in Ownership Interests
Pearson Education, Inc. publishing as Prentice Hall 8-4
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

Pearson Education, Inc. publishing as Prentice Hall 8-5
Initial Acquisition of Control
Parent obtains control
Determine implied value and allocate excess
Apply consolidation procedures
Pearson Education, Inc. publishing as Prentice Hall 8-6
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

Pearson Education, Inc. publishing as Prentice Hall 8-7
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
Pearson Education, Inc. publishing as Prentice Hall 8-8
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
Pearson Education, Inc. publishing as Prentice Hall 8-9
2: Interim Acquisitions
Consolidations Changes in Ownership Interests
Pearson Education, Inc. publishing as Prentice Hall 8-10
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
Pearson Education, Inc. publishing as Prentice Hall 8-11
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
Pearson Education, Inc. publishing as Prentice Hall 8-12
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:









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.
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
Pearson Education, Inc. publishing as Prentice Hall 8-13
Find Book Value at Acquisition
Book value of equity on 1/1/09 $1,950
Preacquisition amounts:
Revenues 900 Jan-Apr
Cost of sales (500) Jan-Apr
Operating expenses (200) Jan-Apr
Dividends (150) none
Book value on 5/1/09 $2,000
Pearson Education, Inc. publishing as Prentice Hall 8-14
Analysis and Amortizations
Cost of 80% of Sega 2,400
Implied value of Sega 3,000
Book value 2,000
Excess 1,000
Unamort Unamort
Allocated to: 5/5/09 2009 12/31/09
Fixed assets 600 (80) 520
Goodwill 400 0 400
Total 1,000 (80) 920
Sega's 2009 income 600
Income since May 1 400
Amortization (80)
Adjusted 320
CI 80% share 256
NCI 20% share 64
Pearson Education, Inc. publishing as Prentice Hall 8-15
Puma's Equity Entries
Investment in Sega 2,400
Cash 2,400
for acquisition
Cash 120
Investment in Sega 120
for dividends
Investment in Sega 256
Income from Sega 256
[(2/3)(2,700 - 1,500 - 600) - (2/3)(600/5yrs)]x80%
Pearson Education, Inc. publishing as Prentice Hall 8-16
Income from Sega 256
Dividends 120
Investment in Sega 136
Noncontrolling interest share 64
Dividends 30
Noncontrolling interest 34
Sales 900
Common stock 600
Retained earnings 1/1 1,350
Fixed assets 600
Goodwill 400
Cost of sales 500
Operating expenses 200
Dividends 150
Investment in Sega 2,400
Noncontrolling interest 600
Depreciation expense 80
Accumulated depreciation 80
Worksheet
elimination
entries for 2009


Notice the
preacquisition
revenues,
expenses and
dividends
included in the
third entry.
Pearson Education, Inc. publishing as Prentice Hall 8-17
Income statement: Puma Sega DR CR Consol
Sales 5,000 2,700 900 6,800
Income from Sega 256 256 0
Cost of sales (2,100) (1,500) 500 (3,100)
Operating expense (800) (600) 80 200 (1,280)
Noncontrolling interest share 64 (64)
Controlling interest share 2,356 600 2,356
State of retained earnings:
Retained earnings, 1/1 4,300 1,350 1,350 4,300
Add net income 2,356 600 2,356
Deduct dividends (1,000) (300) 120
30
150 (1,000)
Retained earnings, 12/31 5,656 1,650 5,656
Pearson Education, Inc. publishing as Prentice Hall 8-18
Balance sheet: Puma Sega DR CR Consol
Cash 950 50 1,000
Inventories 1,300 900 2,200
Fixed assets, net 5,170 2,800 600 80 8,490
Investment in Sega 2,536 136
2,400 0
Goodwill 400 400
Total 9,956 3,750 12,090
Accounts payable 500 300 800
Other liabilities 1,800 1,200 3,000
Common stock 2,000 600 600 2,000
Retained earnings 5,656 1,650 5,656
Noncontrolling interest 600
34 634
Total 9,956 3,750 12,090
Pearson Education, Inc. publishing as Prentice Hall 8-19
Interim Acquisition in Stages
Poca acquired Sark in a series of acquisition, resulting in a
total 90% ownership.







The total book value and fair value of Sark's net assets on
October 1 was $220,000.


Date Interest Investment
Acquired Cost
April 1 5% 7,000
July 1 5% 8,000
October 1 80% 210,000
90% 225,000
Cost of 90% of Sark 225,000
Implied value of Sark 250,000
Book value 220,000
Goodwill 30,000
Pearson Education, Inc. publishing as Prentice Hall 8-20
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 33,750 3,750 112,500
Expenses (110,000) (24,750) (2,750) (82,500)
Net income 40,000 9,000 1,000 30,000
Pearson Education, Inc. publishing as Prentice Hall 8-21
Poca's Worksheet Entries
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
There were
no dividends
before or
after the
acquisition
in this case.
Zeros are
included just
for clarity.
Pearson Education, Inc. publishing as Prentice Hall 8-22
Income statement: Poca Sark DR CR Consol
Sales 274,875 150,000 112,500 312,375
Income from Sark 9,000 9,000 0
Expenses (220,000) (110,000) 82,500 (247,500)
Noncontrolling interest share 1,000 (1,000)
Controlling interest share 63,875 40,000 63,875
State of retained earnings:
Retained earnings, 1/1 221,500 90,000 90,000 221,500
Add net income 63,875 40,000 63,875
Deduct dividends 0 0
Retained earnings, 12/31 285,375 130,000 285,375
Pearson Education, Inc. publishing as Prentice Hall 8-23
Balance sheet: Poca Sark DR CR Consol
Other assets 451,375 300,000 751,375
Investment in Sark 234,000 9,000
225,000 0
Goodwill 30,000 30,000
Total 685,375 300,000 781,375
Liabilities 100,000 70,000 170,000
Common stock 300,000 100,000 100,000 300,000
Retained earnings 285,375 130,000 285,375
Noncontrolling
interest
25,000
1,000 26,000
Total 685,375 300,000 781,375
Pearson Education, Inc. publishing as Prentice Hall 8-24
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.

Before Interest After
the sale sold the sale
Pablo's interest in Sergio 90% 10% 80%
Investment account:
1/1 balance 288.0
Income to 4/1 8.1
4/1 balance 296.1 32.9 263.2
Pearson Education, Inc. publishing as Prentice Hall 8-25
Investment in Sergio: T-account
Investment in Sergio
1/1 Balance 288.0
90% income to 4/1 8.1
4/1 Balance 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
Pearson Education, Inc. publishing as Prentice Hall 8-26
Pablo's Entry for the Sale
Cash 40.0
Investment in Sergio 32.9
Additional paid in capital 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.
Pearson Education, Inc. publishing as Prentice Hall 8-27
Noncontrolling Interest Calculations
Balance on Jan 1: (288*.1/.9) $32.0
Income to April 1: (36*.1*3/12) 0.9
Addition to NCI on April 1 32.9
Income since April 1: (36*.2*9/12) 5.4
Dividends (20*.2) (4.0)
Balance at Dec 31 $67.2
Pearson Education, Inc. publishing as Prentice Hall 8-28
Worksheet Entries
Income from Sergio (8.1+21.6) 29.7
Dividends 16.0
Investment in Sergio 13.7
Noncontrolling interest share (0.9+5.4) 6.3
Dividends 4.0
Noncontrolling interest 2.3
Common stock 200.0
Retained earnings 1/1 100.0
Goodwill 20.0
Investment in Sergio (288-32.9) 255.1
Noncontrolling interest, 1/1 32.0
Noncontrolling interest, 4/1 32.9
Pearson Education, Inc. publishing as Prentice Hall 8-29
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
Pearson Education, Inc. publishing as Prentice Hall 8-30
3: Subsidiary's Stock Transactions
Consolidations Changes in Ownership Interests
Pearson Education, Inc. publishing as Prentice Hall 8-31
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

Pearson Education, Inc. publishing as Prentice Hall 8-32
Stroh Issues Stock to Purdy
Purdy owns 80% of Stroh, acquired at $180.





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.

Cost of 80% of Stroh $180
Implied value of Stroh $225
Book value of Stroh 200
Excess, goodwill $25
Pearson Education, Inc. publishing as Prentice Hall 8-33
Before sale
Stroh's equity 200
Goodwill 25
Total value 225
Purdy's Investment in Stroh 180
Purdy's share of BV of equity 160
Goodwill 20
Total value 180
Sell at BV Sell > BV Sell < BV
for $40 for $70 for $30
Stroh's equity, after the issuance 240 270 230
Purdy's Investment, after 220 250 210.0
Purdy's share of equity, 10/12 share 200 225 191.7
New measure of goodwill 20 25 18.3
Total 220 250 210.0
Goodwill may go
up or down
depending on the
value Purdy paid
for the additional
shares of Stroh
Pearson Education, Inc. publishing as Prentice Hall 8-34
Purdy's Entry
Purdy acquires additional shares directly from
Stroh at book value, $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.
Investment in Stroh 40
Cash 40
Pearson Education, Inc. publishing as Prentice Hall 8-35
Stat Issues Stock to Outsiders
Puny owns 80% of Stat, acquired at $180.





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.

Cost of 80% of Stat $180
Implied value of Stat $225
Book value of Stat 200
Excess, goodwill $25
Pearson Education, Inc. publishing as Prentice Hall 8-36
Before sale
Stat equity 200
Goodwill 25
Total value 225
Puny's Investment 180
Puny's share of BV of equity 160
Goodwill 20
Total value 180
Sell at BV Sell > BV Sell < BV
for $40 for $70 for $30
Stat equity, after 240 270 230
Puny's Investment current balance 180 180 180.0
Puny's share of equity, 10/12 share 160 180 153.3
Old goodwill 20 20 20.0
Total, new balance in Investment 180 200 173.3
Adjustment 0 +20 -6.7
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.
Pearson Education, Inc. publishing as Prentice Hall 8-37
Puny's Adjusting Entry
for $40:
no entry needed
for $70
Investment in Stat 20.0
Additional paid in capital 20.0
for $30
Additional paid in capital 6.7
Investment in Stat 6.7
Pearson Education, Inc. publishing as Prentice Hall 8-38
Shelly Purchases Treasury Stock
Pointer owns 80% of Shelly acquired for $160, at
cost equal to book value.




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.

Cost of 80% of Shelly $160
Implied value of Shelly $200
Book value of Shelly 200
Excess, goodwill $0
Pearson Education, Inc. publishing as Prentice Hall 8-39
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
Buy = BV Buy > BV Buy < BV
for $8 for $12 for $6
Shelly's equity, after 192 188 194
Pointer's Investment current balance 160 160 160.0
Pointer's share of equity, 8/9.6 160 156.7 161.7
Old goodwill 0 0.0 0.0
Total, new balance in Investment 160 156.7 161.7
Adjustment needed 0 -3.3 +1.7
There was no
goodwill and
none is created by
Shelly purchasing
treasury stock.
Pointer adjusts the
balance in its
Investment in
Shelly account.
Pearson Education, Inc. publishing as Prentice Hall 8-40
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 3.3
Investment in Stroh 3.3
Treasury stock purchased for $6
Investment in Stroh 1.7
Additional paid in capital 1.7
Pearson Education, Inc. publishing as Prentice Hall 8-41
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
Pearson Education, Inc. publishing as Prentice Hall 8-42
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Publishing as Prentice Hall
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