Beams10e_Ch08 Changes in Ownership Interest.ppt

8/11/2019 Beams10e_Ch08 Changes in Ownership Interest.ppt

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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 editionby Floyd A. Beams, Robin P. Clement,

Joseph H. Anthony, and Suzanne Lowensohn


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1: Changes in Ownership Percentage

Consolidations Changes in Ownership Interests


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Changes in Parent Ownership

Increases1. Parent acquires controlling interest during

interim period2. Parent acquires controlling interest in

stages3. Parent acquires additional shares from

noncontrolling interestDecreases4. Parent sells shares but maintains control5. Parent sells shares giving up control


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Initial Acquisition of Control

Parent obtains control Determine implied value and allocate excess Apply consolidation procedures


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Control is Maintained

Parent increases its share by buying more stock ordecreases its share by selling some stock

Change in Investment in sub is based on theunderlying fair value of equity

No gain or loss is recognized; paid in capitalis adjusted


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Control Relinquished

Parent sells part of its Investment and no longerretains control

Reduce the Investment based on proportionof interest sold

Record gain or loss on sale Discontinue consolidation


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Is There a Gain or Loss?Basic rule: No gain or loss is recorded on equity

transactions with a firm's owners.

1. Control before and after the transaction is an

equity transaction No gain or loss Adjust paid in capital, if needed

2. No control before and control after Point of business acquisition No loss Might have gain on bargain purchase

3. Control before and no control after Disposition of asset Gain or loss is recorded


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2: Interim Acquisitions



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Preacquisition IssuesEntity theory (APB Opinion No. 51)

Income statement includes all revenues andexpenses

Total consolidated income LESS Preacquisi tion earni ngs Noncontroll ing interest share Equals Controll ing interest share

Parent theory (FASB Statement No. 160) Income statement includes revenues and

expenses since acquisition Total consolidated income LESS

Noncontroll ing interest share Equals Controll ing interest share


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Equity Book Value on Interim DateBook value of equity is needed as of acquisition

dateAdjust 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 beassumed level


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Simple Interim AcquisitionPuma acquires 80% of Sega for $2,400 on 5/1/09. Fixed

assets with a remaining life of 5 years are undervaluedby $600.

Sega's trial balance on 12/31/09 was:

Sega's distributed $150 dividends each on 3/1/09 and12/1/09. Revenues and expenses are assumed to beincurred uniformly over the year.

Cash 50 Accounts payable 300Inventories 900 Other liabilities 1,200Fixed assets, net 2,800 Common stock 600Cost of sales 1,500 Retained earnings, 1/1 1,350Operating expenses 600 Sales 2,700Dividends 300 6,150

6,150


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Find Book Value at Acquisition

Book value of equity on 1/1/09 $1,950Preacquisition amounts:Revenues 900 Jan-AprCost of sales (500) Jan-AprOperating expenses (200) Jan-AprDividends (150) none

Book value on 5/1/09 $2,000


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Analysis and AmortizationsCost of 80% of Sega 2,400Implied value of Sega 3,000Book value 2,000Excess 1,000 Unamort Unamort

Allocated to: 5/5/09 2009 12/31/09Fixed assets 600 (80) 520Goodwill 400 0 400

Total 1,000 (80) 920

Sega's 2009 income 600Income since May 1 400Amortization (80)Adjusted 320

CI 80% share 256 NCI 20% share 64


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Puma's Equity Entries

Investment in Sega 2,400Cash 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%


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Income from Sega 256Dividends 120Investment in Sega 136

Noncontrolling interest share 64Dividends 30

Noncontrolling interest 34Sales 900Common stock 600

Retained earnings 1/1 1,350Fixed assets 600Goodwill 400

Cost of sales 500Operating expenses 200

Dividends 150Investment in Sega 2,400 Noncontrolling interest 600

Depreciation expense 80Accumulated depreciation 80

Worksheeteliminationentries for 2009

Notice the preacquisitionrevenues,expenses anddividendsincluded in thethird entry.


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Income statement: Puma Sega DR CR Consol Sales 5,000 2,700 900 6,800

Income from Sega 256 256 0Cost 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 2,356State of retained earnings: Retained earnings, 1/1 4,300 1,350 1,350 4,300Add net income 2,356 600 2,356

Deduct dividends (1,000) (300) 12030

150 (1,000) Retained earnings, 12/31 5,656 1,650 5,656


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Balance sheet: Puma Sega DR CR Consol Cash 950 50 1,000Inventories 1,300 900 2,200Fixed assets, net 5,170 2,800 600 80 8,490Investment in Sega 2,536 136

2,400 0Goodwill 400 400

Total 9,956 3,750 12,090Accounts payable 500 300 800Other liabilities 1,800 1,200 3,000Common stock 2,000 600 600 2,000

Retained earnings 5,656 1,650 5,656 Noncontrolling interest 60034 634

Total 9,956 3,750 12,090


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Interim Acquisition in StagesPoca 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 InvestmentAcquired Cost

April 1 5% 7,000July 1 5% 8,000October 1 80% 210,000

90% 225,000

Cost of 90% of Sark 225,000Implied value of Sark 250,000Book value 220,000Goodwill 30,000


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Income Distribution

Sark's income allocation for the year:Total Oct 1 - Dec 31 before Oct 1

Income CI 90% share NCI 10% Share Preacquisition

Sales 150,000 33,750 3,750 112,500Expenses (110,000) (24,750) (2,750) (82,500)

Net income 40,000 9,000 1,000 30,000


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Poca's Worksheet EntriesIncome from Sark 9,000

Dividends 0Investment in Sark 9,000

Noncontrolling interest share 1,000Dividends 0

Noncontrolling interest 1,000Sales 112,500Common stock 100,000Retained earnings 1/1 90,000

Expenses 82,500Dividends 0Investment in Sark 225,000

Noncontrolling interest 25,000

There wereno dividends

before orafter theacquisitionin this case.Zeros areincluded just

for clarity.


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Income statement: Poca Sark DR CR Consol

Sales 274,875 150,000 112,500 312,375Income 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 63,875Deduct dividends 0 0

Retained earnings, 12/31 285,375 130,000 285,375


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Balance sheet: Poca Sark DR CR Consol

Other assets 451,375 300,000 751,375

Investment in Sark 234,000 9,000225,000 0

Goodwill 30,000 30,000Total 685,375 300,000 781,375

Liabilities 100,000 70,000 170,000Common stock 300,000 100,000 100,000 300,000Retained earnings 285,375 130,000 285,375

Noncontrollinginterest

25,0001,000 26,000

Total 685,375 300,000 781,375


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Interim Sale, Continued ControlPablo owns 90% of Sergio and its 1/1/10 $228 investment

balance reflects Sergio's underlying equity plus $18goodwill ($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 Afterthe sale sold the sale

Pablo's interest in Sergio 90% 10% 80%Investment account:

1/1 balance 288.0Income to 4/1 8.14/1 balance 296.1 32.9 263.2


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Investment in Sergio: T-account

Investment in Sergio

1/1 Balance 288.090% income to 4/1 8.14/1 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


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Pablo's Entry for the Sale

Cash 40.0Investment in Sergio 32.9Additional paid in capital 7.1

No gain or loss is recorded. Since

Pablo retains control, the sale ofsome shares is treated as an ownertransaction; the difference impacts

paid in capital.


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Noncontrolling Interest Calculations

Balance on Jan 1: (288*.1/.9) $32.0Income to April 1: (36*.1*3/12) 0.9Addition to NCI on April 1 32.9Income since April 1: (36*.2*9/12) 5.4Dividends (20*.2) (4.0)

Balance at Dec 31 $67.2


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Worksheet EntriesIncome from Sergio (8.1+21.6) 29.7

Dividends 16.0Investment in Sergio 13.7

Noncontrolling interest share (0.9+5.4) 6.3Dividends 4.0

Noncontrolling interest 2.3Common stock 200.0Retained earnings 1/1 100.0

Goodwill 20.0Investment in Sergio (288-32.9) 255.1 Noncontrolling interest, 1/1 32.0 Noncontrolling interest, 4/1 32.9


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Interim Sale, Loss of Control1. Bring investment account up to date,

recognizing partial year's income asappropriate

2. Determine BV of fraction of investment sold3. Compare to selling price4. Record a gain or loss on differenceThe "parent" no longer consolidates the

"subsidiary" That r elationship has been dissolved Parent wil l use equi ty or fair value/cost

method as appropriate


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3: Subsidiary's Stock Transactions



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Subsidiary Actions Subsidiary actions increasing Parent share

1. Sub issues additional shares to Parent2. Sub reacquires shares from noncontrolling interest

Subsidiary actions decreasing Parent share3. Sub issues additional shares to noncontrolling

interests4. Sub reacquires shares from Parent

Subsidiary actions not impacting ownership shares5. Sub issues stock to both parent & noncontrolling

interest6. Sub issues stock split or stock dividend


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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 owns10K of the 12K shares.

Cost of 80% of Stroh $180

Implied value of Stroh

$225Book value of Stroh 200Excess, goodwill $25


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Before saleStroh's equity 200Goodwill 25Total value 225Purdy's Investment in Stroh 180Purdy's share of BV of equity 160Goodwill 20Total value 180

Sell at BV Sell > BV Sell < BVfor $40 for $70 for $30

Stroh's equity, after the issuance 240 270 230Purdy's Investment, after 220 250 210.0Purdy's share of equity, 10/12 share 200 225 191.7

New measure of goodwill 20 25 18.3Total 220 250 210.0

Goodwill may go

up or downdepending on thevalue Purdy paidfor the additionalshares of Stroh


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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 8Kof the 12K shares.

Cost of 80% of Stat $180

Implied value of Stat $225Book value of Stat 200Excess, goodwill $25


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Before saleStat equity 200Goodwill 25

Total value 225Puny's Investment 180Puny's share of BV of equity 160Goodwill 20Total value 180

Sell at BV Sell > BV Sell < BVfor $40 for $70 for $30

Stat equity, after 240 270 230Puny's Investment current balance 180 180 180.0Puny's share of equity, 10/12 share 160 180 153.3Old goodwill 20 20 20.0Total, new balance in Investment 180 200 173.3Adjustment 0 +20 -6.7

Puny's measure ofgoodwill does notchange whenStroh issues theshares to outsideentities. Punyadjusts the valueof its Investment

in Stat account.


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Puny's Adjusting Entry

for $40:

no entry needed

for $70

Investment in Stat 20.0Additional paid in capital 20.0

for $30

Additional paid in capital 6.7Investment in Stat 6.7


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Shelly Purchases Treasury StockPointer 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 fromoutsiders.

Pointer now holds 8K of Shelly's 9.6K sharesoutstanding.

Cost of 80% of Shelly $160

Implied value of Shelly $200Book value of Shelly 200Excess, goodwill $0


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Before treasury stockShelly's equity 200Goodwill 0

Total value 200Pointer's Investment in Shelly 160Pointer's share of BV of equity 160Goodwill 0Total value 160

Buy = BV Buy > BV Buy < BVfor $8 for $12 for $6

Shelly's equity, after 192 188 194Pointer's Investment current balance 160 160 160.0Pointer's share of equity, 8/9.6 160 156.7 161.7Old goodwill 0 0.0 0.0Total, new balance in Investment 160 156.7 161.7Adjustment needed 0 -3.3 +1.7

There was nogoodwill andnone is created byShelly purchasingtreasury stock.Pointer adjusts the

balance in itsInvestment in

Shelly account.


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Pointer's Adjustment

Pointer's entry when Shelly purchases treasuryshares from outsiders.

Treasury stock purchased for $8 no entry neededTreasury stock purchased for $12Additional paid in capital 3.3

Investment in Stroh 3.3

Treasury stock purchased for $6Investment in Stroh 1.7Additional paid in capital 1.7


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Stock Splits/ Stock Dividends

A subsidiary may issue stock dividends or stocksplits

Impact is proportional on both controllingand noncontrolling interests

Percentage ownership does not change Stock dividends capitalize some of the

subsidiary's retained earnings


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Beams10e_Ch08 Changes in Ownership Interest.ppt

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