ch08_Beams10e_sm

Chapter 8

CONSOLIDATIONS — CHANGES IN OWNERSHIP INTERESTS

Answers to Questions

1 Preacquisition earnings and dividends are the earnings and dividends applicable to an investment interest prior to its acquisition during an accounting period. Assume that P purchases an 80 percent interest in S on July 1, 2009 and that S has earnings of $100,000 between January 1 and July 1, 2009 and pays $50,000 dividends on May 1, 2009. In this case, preacquisition earnings and dividends are $80,000 and $40,000, respectively. Historically, preacquisition earnings purchased were shown as a deduction on the income statement to arrive at consolidated net income. Under SFAS No. 160, this is no longer the case. Instead, the consolidated income statement should only report revenues, expenses, gains and losses subsequent to the combination date. For example, in a Mmarch 31 acquisition, the consolidated income statement would only include income of the subsidiary from April 1 through December 31. The FASB reasons that acquirers purchase assets and assume liabilities, based on their fair values. Acquirers do not “purchase” preacquisition earnings, although fair values of net assets should reflect earning power of the acquired firm.

2 Preacquisition earnings are not recorded by a parent company under the equity method because the investor only recognizes income subsequent to acquisition on the interest acquired. Historically, preacquisition earnings purchased were shown as a deduction on the income statement to arrive at consolidated net income. Under SFAS No. 160, this is no longer the case. Instead, the consolidated income statement should only report revenues, expenses, gains and losses subsequent to the combination date. For example, in a Mmarch 31 acquisition, the consolidated income statement would only include income of the subsidiary from April 1 through December 31.

3 Noncontrolling stockholders of Sub Company held a 20 percent interest during the first half year and a 10 percent interest during the last half year and at year-end. But noncontrolling interest share for the year and total noncontrolling interest at year-end are computed for the 10 percent interest held by noncontrolling stockholders throughout the year.

4 Preacquisition income is similar to noncontrolling interest share because it represents the income of a subsidiary attributable to stockholders outside the consolidated entity. But preacquisition income is not income of the noncontrolling stockholder group at the date of the financial statements. In fact, preacquisition income relates to a previous controlling stockholder group when the interest acquired exceeds 50 percent. In such a case, it seems improper to report this as a deduction in the consolidated income statement. Rather, the fair value of net assets acquired should reflect the acquiree’s earnings history.

5 Under FASB Statement No. 160, a gain or loss is only recorded when the sold interest results in deconsolidation of the subsidiary, i.e., the parent no longer holds a controlling interest. The gain or loss on the sale of an equity interest is the difference between the proceeds from the sale (the fair value) and the recorded book value of the interest sold, provided that the investment is accounted for as a one-line consolidation. If another method of accounting has been used, the investment account must be converted to the equity method so that any gain or loss on sale is the same as if a one-line consolidation had been used previously.

When the parent maintains a controlling interest after the sale, the sale is treated as an equity transaction, with no gain or loss recognition. The parent debits cash or other consideration received in the sale, credits the investment account based on percent of carrying value sold, and records the difference as an adjustment to other paid-in capital.

© 2009 Pearson Education, Inc. publishing as Prentice Hall8-1

8-2 Consolidations — Changes in Ownership Interests

6 Conceptually, the income applicable to an equity interest sold during an accounting period should be included in investment income and consolidated net income. In this case, the gain or loss on sale is computed on the basis of the book value of the interest at the time of sale, and income is assigned to the increased noncontrolling interest only after the date of sale. As a practical expedient, a beginning-of-the-period sale date can be used such that no income is recognized on the interest sold up to the time of sale, and the gain or loss is computed on the book value at the beginning of the period. When this expedient is used, income must be assigned to the increased noncontrolling interest for the entire year of sale. The combined investment income and gain or loss on sale are the same under both approaches provided that the assumptions (beginning of the year and time of sale) are followed consistently. As noted in question 5, gain or loss on the sale of the equity interest is only recognized when the subsidiary is donconsolidated. Other wise, the gain or loss is an adjustment to other paid-in capital.

7 Assuming that no gain or loss is recognized, no adjustment of the parent’s investment account is necessary when the subsidiary sells additional shares to outside parties at book value because the parent’s share of underlying book value does not change. If additional shares are sold above book values, the parent’s share of the underlying equity of the subsidiary increases. This increase is recorded by the parent company as follows:

Investment in subsidiary XXAdditional paid-in capital XX

If the subsidiary sells additional shares below book value, the parent’s interest is decreased and the parent company records decreases in its investment and additional paid-in capital accounts. In all three cases (book value, above book value, or below book value), the parent company’s ownership percentage decreases from 80 percent (8,000 of 10,000 shares) to percent (8,000 of 12,000 shares).

No gain or loss is recognized, the change in underlying book value, adjusted for one-sixth [(80% – %) ¸ 80%] of any unamortized cost book value differential is reported as adjustment to additional paid-in capital, since the parent maintains its controlling interest. An alternative computation is to assume that the parent sold one-sixth of its interest for percent of the proceeds, the difference being the amount of adkustment to additional paid-in capital.

8 The acquisition of the 2,000 shares directly from the subsidiary increases the parent’s percentage interest from 80 percent (8,000 of 10,000 shares) to 5/6 (10,000 of 12,000 shares, or 83 1/3%). The change in the interest held does not affect the way in which the parent company records its additional investment. The parent company in all cases increases its investment account by the amount of cash paid or other consideration given for the additional investment. It makes no difference if the purchase price is above or below book value.

9 Treasury stock transactions by a subsidiary change the parent company’s proportionate interest in the subsidiary. Any changes in the parent’s share of the underlying book value of the subsidiary require adjustments in the parent company’s investment in subsidiary and additional paid-in capital accounts.

10 Gains and losses to a parent company (or equity investor) do not result from the treasury stock transactions of its subsidiaries (or equity investees). Although the parent’s investment interest may increase or decrease from such transactions, the predominate view is that such changes are of a capital nature and should be accounted for by additional paid-in capital adjustments rather than by recorded gains and losses.

11 Stock splits and stock dividends by a subsidiary do not affect the amounts that appear in the consolidated financial statements. But stock dividends by a subsidiary result in capitalization of subsidiary retained earnings and the amounts involved in eliminations for the subsidiary’s stockholders’ equity accounts are affected.

© 2009 Pearson Education, Inc. publishing as Prentice Hall

Chapter 8 8-3

SOLUTIONS TO EXERCISES

Solution E8-1

Allocation of Sweet’s net income:

Controlling share of income ($100,000 ´ 70% ´ 1 year) + ($100,000 ´ 20% ´ 1/2 year) $ 80,000

Noncontrolling interest share ($100,000 ´ 10% ´ 1 year) $ 10,000

Preacquisition income ($100,000 ´ 20% ´ 1/2 year) $ 10,000Note: This does not appear on the consolidated income statement. Companies only include subsidiary earnings subsequent to the acquisition date.

Allocation of Sweet’s dividends:

Dividends to Pie ($30,000 ´ 70%) + ($30,000 ´ 90%) $ 48,000

Noncontrolling interest ($60,000 ´ 10%) $ 6,000

Preacquisition interests ($30,000 ´ 20%) $ 6,000

Solution E8-2

1 Income from Superstore for 2009:

60% interest ´ $240,000 ´ 1/3 year $ 48,000

2 Preacquisition income:Under SFAS No. 160, no preacquisition income appears on the consolidated income statement. The income statement only includes income of the subsidiary earned after the parent obtains its controlling interest. Control was established on September 1, when Pinnacle’s interest increased from 40% to 60%, so the consolidated income statement includes Superstore income of $80,000 ($240,000 x 1/3 of year).

3 Noncontrolling interest share for 2009:$80,000 ´ 40% $ 32,000



Solution E8-3 (amounts in thousands)

Entry to record sale of 15% interest:Cash 750

Investment in Swamp 660Other paid-in capital 90

To record sale of 15% interest in Swamp. No gain or loss on sale is recognized

since Peat maintains an 85% controlling interest.

Entry to record investment income for 2009:Investment in Swamp($600 ´ 85%) 510

Income from Swamp 510To record income from Swamp.

Check:Investment balance January 1, 2009 $4,400Less: Book value of interest sold (660)Add: Income from Swamp 510 Investment balance December 31, 2009 $4,250Underlying equity ($4,600 ´ 85%) $3,910Add: 85% of Goodwill * 340 Investment balance December 31, 2009 $4,250* Note that implied total goodwill is $400 ($340 / 85%).

Solution E8-4 (amounts in thousands)

1 Gain on sale of 20% interest: No gain or loss is recognized since Pauley maintains a 60% controlling interest.Beginning of the period sale assumptionSelling price $130Book value of interest ($436 investment account balance ´ 20%/80%) 109 Adjustment to other paid-in capital $ 21

Actual sale date assumptionSelling price $130Book value of interest sold:

Beginning of the period balance $436Add: Income ($150 ´ 1/3 year ´ 80%) 40

476Interest sold 25 % 119

Adjustment to increase additional paid-in capital $ 11

2 Income from SavageBeginning of the period sale assumptionIncome from Savage($150 ´ 60%) $ 90Actual sale date assumptionJanuary 1 to May 1:Share of Savage’s income ($150 ´ 80% ´ 1/3 year) $ 40May 1 to December 31:Share of Savage’s income ($150 ´ 60% ´ 2/3 year) 60 Income from Savage $100


Chapter 8 8-5

Solution E8-4 (continued)

3 Investment in Savage December 31, 2009

Beginning of ActualPeriod Sale Sale DateAssumption Assumption

Investment balance January 1 $436 $436Book value of interest sold (109) (119)Income from Savage 90 100Dividends (48 ) (48 )Investment balance December 31, 2009 $369 $369

Solution E8-5

(amounts in thousands)

1a Fair value — book value differential

Cost $1,274Implied fair value of Stork ($1,274 / 70%) $1,820Book value ($1,480 January 1 balance + $100 income for 5 months - $60 dividends in January and April) (1,520)Goodwill $ 300

1b Income from Stork (Note: Only include earnings subsequent to the acquisition date).

Income from Stork ($240,000 ´ 7/12 year ´ 70%) $ 98

1c Investment in Stork at December 31

Investment cost $1,274Add: Income from Stork 98Deduct: Dividends ($60,000 ´ 70%) (42 )Investment in Stork December 31, 2009 $1,330

2 Consolidation working paper entries:

a Income from Stork 98Investment in Stork 56Dividends 42

To eliminate income and dividends from Stork and adjust investment account to its cost on June 1.

b Common stock, $10 par — Stork 1,000Retained earnings — Stork 580Goodwill 300

Investment in Stork 1,274Noncontrolling interest 564Dividends 42

To eliminate reciprocal investment and equity balances, record preacquisition income and beginning noncontrolling interest, and eliminate preacquisition dividends.


Chapter 8 8-7

Solution E8-6

1 Investment in Sower (in thousands)

Investment balance December 31, 2009 ($9,000 ´ 80%) $ 7,200Cost of new shares ($25 ´ 60,000 shares) 1,500

Investment in Sower after new investment $ 8,700

2 Goodwill from new investment

Sower’s stockholders’ equity after issuance ($9,000 + $1,500) $10,500Petal’s ownership percentage (480,000 + 60,000 shares)/660,000 shares .8182 Petal’s book value after issuance 8,591.1Less: Petal’s book value before issuance (7,200 )

Increase in book value from purchase (book value acquired) $ 1,391.1

Cost of 60,000 shares $ 1,500Book value acquired (1,391.1 )

Goodwill from acquisition of new shares* $ 108.9

* This implies total goodwill is equal to $136,125.

Solution E8-7

1 Sod issues 30,000 shares to Pod at $20 per sharePod’s ownership interest before issuance: 176,000/220,000 shares = 80%Pod’s ownership interest after issuance: 206,000/250,000 shares = 82.4%

2 Sod sells 30,000 shares to the public at $20 per sharePod’s ownership interest after issuance: 176,000/250,000 shares = 70.4%

3 Sod sells 30,000 shares to the public; no gain or loss recognized:

Investment in Sod 115,200Additional paid-in capital 115,200

To record increase in investment in Sod computed as follows:

Book value before issuance ($3,200,000 ´ 80%) $2,560,000Book value after issuance ($3,800,000 ´ 70.4%) 2,675,200 Additional paid-in capital $ 115,200



Solution E8-8

Primetime buys shares

1a Percentage ownership after additional investment:

700,000/1,000,000 = 70%

1b Goodwill from additional investment (in thousands):

Book value of interest after sale$2,600 ´ 70% $1,820

Book value of interest before sale$2,100 ´ 2/3 1,400

Book value of interest acquired 420Cost of interest 500 Goodwill from additional investment * $ 80

* This implies total goodwill is now equal to $114,286.

Outsiders buy shares

2a Percentage ownership after sale:

600,000/1,000,000 = 60%

2b Change in underlying book value of investment in Satellite:

Satellite’s underlying equity after sale $2,600,000Primetime’s interest 60 %Book value of Primetime’s investment in Satellite after the sale 1,560,000Less: Book value before the sale 1,400,000 Increase in book value of investment $ 160,000

2c Entry to adjust investment account:

Investment in Satellite 160,000Additional paid-in capital 160,000


Chapter 8 8-9

Solution E8-9

Preliminary computations of fair value — book value differentials:April 1, 2009 acquisitionCost of 4,000 shares (20% interest) $ 64,000Implied total fair value of Sum ($64,000 / 20%) $320,000Book value of Sum on april 1 acquisition date:

Beginning stockholders’ equity $280,000Add: Income for 3 months ($80,000 ´ ¼ year) 20,000 Stockholders’ equity April 1 300,000

Goodwill $ 20,000

July 1, 2010 acquisitionCost of 8,000 shares (40% interest) $164,000Implied total fair value of Sum ($164,000 / 40%) $410,000Book value on July 1 acquisition date:

Beginning stockholders’ equity $360,000Add: Income for 6 months ($80,000 ´ 1/2 year) 40,000Less: Dividends May 1 (10,000 )Stockholders’ equity July 1 390,000

Goodwill (amount is unchanged by this transaction) $ 20,000

1 Income from Sum

2009Income from Sum for 2009 ($80,000 ´ 20% ´ 3/4 year) $ 12,000

2010 Income from Sum for 201020% share of reported income ($80,000 ´ 20%) $ 16,00040% share of reported income ($80,000 ´ 40% ´ 1/2 year) 16,000

Income from Sum $ 32,000

2 Noncontrolling interest December 31, 2010 (($420,000 book value + $20,000 goodwill)´ 40%) $176,000

3 Preacquisition income (does not appear in come statement)

Sum income $ 80,000Time before acquisition 1/2Percent acquired in 2010 40%Preacquisition income ($80,000 ´ .5 ´ .4) $ 16,000

4 Investment balance at December 31, 2010

Cost of 20% investment $ 64,000Income from Sum for 2009 12,000Cost of 40% investment 164,000Income from Sum for 2010 32,000Less: Dividends ($2,000 + $6,000) (8,000 )

Investment in Sum $264,000

Check:Share of Sum’s December 31, 2010 equity ($420,000 ´ 60%) $252,000Add: 60% of $20,000 Goodwill 12,000

Investment in Sum $264,000


Chapter 8 8-11

Solution E8-10

Preliminary computations

Investment cost July 1, 2010 $675,000

Implied total fair value of Sandridge ($675,000 / 90%) $750,000Less: Book value of Sandridge at acquisition:

Equity of Sandridge Mines December 31, 2009 $700,000Add: Income for 1/2 year 50,000 Equity of Sandridge Mines July 1, 2010 750,000

Excess (book value = underlying equity) 0

1 Investment income from Sandridge Mines

Income from Sandridge — 2010 ($100,000 ´ 1/2 year ´ 90%) $ 45,000

Income from Sandridge — 2011:January 1 to July 1 ($80,000 ´ 1/2 year ´ 90%) $ 36,000July 1 to December 31 ($80,000 ´ 1/2 year ´ 80%) 32,000

$ 68,000

Investment in Sandridge Mines Cost July 1, 2010 $675,000Add: Income from Sandridge — 2010 45,000Less: Dividends paid in December ($50,000 ´ 90%) (45,000 )

Investment balance December 31, 2010 675,000

Less: Book value of 1/9 interest sold on July 1, 2011a (79,000)Add: Income from Sandridge — 2011 68,000Less: Dividends paid in December ($30,000 ´ 80%) (24,000 )

Investment balance December 31, 2011 $640,000

a Sale of 10% interest July 1, 2011:Equity of Sandridge Mines December 31, 2009 $700,000Add: Income less dividends — 2010 50,000

Add: Income for 1/2 year — 2011 40,000 Equity of Sandridge Mines July 1, 2011 790,000Interest sold 10 %

Underlying equity of interest sold $ 79,000

Gain on sale of 1/9 interest ($85,000 proceeds - $79,000)Since Piccolo maintains a controlling interest, the gain is not recorded, but shown as an adjustment to additional paid-in capital.

$ 6,000



Solution E8-10 (continued)

2 Noncontrolling interest share

Noncontrolling interest share — 2010: ($100,000 income ´ 10% interest) $ 10,000

Noncontrolling interest share — 2011: ($80,000 ´ 1/2 year ´ 10%) + ($80,000 ´ 1/2 year ´ 20%) $ 12,000

Noncontrolling interest December 31, 2010Equity of Sandridge Mines January 1 $700,000Add: Income less dividends for 2010 50,000 Equity of Sandridge Mines December 31 750,000Noncontrolling interest percentage 10 %

Noncontrolling interest December 31 $ 75,000

Noncontrolling interest December 31, 2011Equity of Sandridge Mines January 1 $750,000Add: Income less dividends for 2011 50,000 Equity of Sandridge Mines December 31 800,000Noncontrolling interest percentage 20 %

Noncontrolling interest December 31 $160,000

Solution E8-11

Preliminary computations:Investment cost January 1, 2010 $ 690,000

Implied total fair value of Sanyo ($690,000 / 75%) $ 920,000Book value of Sanyo (800,000 )Excess fair value over book value = Goodwill $ 120,000

1 Underlying book value December 31, 2010

$1,000,000 equity ´ 75% $ 750,000

2 Percentage ownership before purchase of additional shares

30,000 shares owned/40,000 shares outstanding = 75% interest

Percentage ownership after purchase of additional shares


3 Investment in Sanyo balance January 3, 2011

Investment cost January 1, 2009 $ 690,000Add: Share of Sanyo’s income less dividends for 2009 ($200,000 ´ 75%) 150,000 Investment in Sanyo December 31, 2009 840,000Add: Additional investment — January 3, 2011 (10,000 shares ´ $30) 300,000


Chapter 8 8-13

Investment in Sanyo balance January 3, 2011 $1,140,000



4 Percentage ownership if shares sold to outside entities


5 Investment in Sanyo balance January 3, 2011

Investment in Sanyo December 31, 2009 (see 3 above) $ 840,000Add: Increase in book value from change in ownership interest:Book value after additional 10,000 shares

were issued ($1,300,000 equity ´ 60%) $780,000Book value before additional 10,000 shares

were issued ($1,000,000 equity ´ 75%) (750,000) 30,000 Investment in Sanyo balance - January 3, 2011 $ 870,000

Solution E8-12

Preliminary computations:Cost of additional investment (2,000 shares ´ $80) $160,000

Implied total fair value of Saton $160,000 / (2,000/12,000) $960,000Less: Book value of Saton after issuance 710,000Excess fair value over book value $250,000

January 2, 2010Investment in Saton 160,000

Cash 160,000To record purchase of additional 2,000 shares of Saton.

December 2010Cash 50,000

Investment in Saton 50,000To record receipt of dividends ($60,000 ´ 10,000/12,000 shares).

December 31, 2010Investment in Saton 75,000

Income from Saton 75,000To record income from Saton($90,000 ´ 10,000/12,000).


Chapter 8 8-15

Solution E8-13

1 Investment in Striper (in thousands)Cost $1,800Add: 90% of $300 increase in equity since 2009 270

Investment in Striper January 1, 2011 $2,070

2 Entry on Patrick’s books (no gain or loss recognized)

Investment in Striper 180Additional paid-in capital 180

To recognize change in book value of investment from Striper’s sale of additional shares, computed as follows:Underlying equity after issuance ($2,400 ´ 75%) $1,800Underlying equity before issuance ($1,800 ´ 90%) (1,620)

$ 180

SOLUTIONS TO PROBLEMS

Solution P8-1

Preliminary computations (in thousands):Cost of 40,000 shares July 1, 2009 $620

Implied total fair value of Spindle ($620 / 80%) $775Book value of Spindle ($550 + $50 income) (600)Excess fair value over book value $175

Cost of 10,000 shares January 1, 2010 $162Book value after issuance ($762 ´ 5/6) $635Book value before issuance ($600 ´ 80%) (480) (155)Excess fair value over book value of 10,000 shares acquired

$ 7

1 Investment in Spindle — December 31, 2009Investment cost $620Add: Income from Spindle- $100 ´ 1/2 year ´ 80% 40Less: Dividends ($50 ´ 80%) (40 )

Investment in Spindle December 31, 2009 $620

2 Income from Spindle — 2010Share of Spindle’s income ($150 ´ 5/6) $125

3 Investment in Spindle — December 31, 2010Investment balance December 31, 2009 $620Add: Additional investment 162Add: Income from Spindle — 2010 125Less: Dividends for 2010 ($60 ´ 5/6) (50 )


Check:Share of Spindle’s equity ($852 ´ 5/6) $710Goodwill [ ($175 x 80%) + ($210 x (5/6 – 80%) ] 147



Chapter 8 8-17

Solution P8-2

1 Investment in Smithtown (in thousands)Underlying equity $26,000 ´ 80% $20,800Goodwill (80%) 2,000

Investment in Smithtown January 1, 2011 $22,800

2 Percentage interest after stock issuanceShares owned 960,000/1,600,000 outstanding shares = 60% interest

3 No gain or loss recognized on issuance of additional sharesInvestment in Smithtown 2,000

Other paid-in capital 2,000To recognize change in ownership interest computed as: Underlying equity after sale ($38,000 ´ 60%) less underlying equity before sale of additional shares ($26,000 ´ 80%).

Solution P8-3

1 Journal entry to record sale as of actual sale dateCash 120,000Additional paid-in capital 1,500

Investment in Shawnee 121,500To record sale of 1/9 of investment in Shawnee. Book value of interest sold is computed as follows:

Investment balance December 31, 2008 $1,039,500Add: Income from Shawnee for one-half year

($280,000 ´ 1/2 year ´ 90%) 126,000Less: Dividends ($80,000 ´ 90%) (72,000 )Book value of investment on July 1, 2009 $1,093,500Book value of interest sold ($1,093,500/9) $ 121,500

2 Journal entry to record sale as of January 1, 2009Cash 120,000

Additional paid-in capital 12,500Investment in Shawnee 107,500

To record sale of 1/9 of investment in Shawnee. Book value of interest sold is computed as follows:

Investment balance December 31, 2008 $1,039,500Less: Dividends (72,000 )Book value adjusted for dividends $ 967,500Book value of interest sold ($967,500/9) $ 107,500

3 Reconciliation

Investment in Shawnee

Actual Sale Date

Investment in Shawnee

Beginning of Year Sale Date

Balance January 1, 2009 $1,039,500 $1,039,500Add: Income from Shawnee

January 1 — July 1 126,000 112,000July 1 — December 31 112,000 1l2,000

Less: Dividends



First half-year (72,000) (72,000)Last half-year (64,000) (64,000)

Less: Book value of interest sold (121,500 ) (107,500 )Balance December 31, 2009 $1,020,000 $1,020,000

Solution P8-4

(in thousands)

Entries on Panama’s books to reflect the change in ownership interest:

Option 1 Panama sells 30,000 shares of Shenandoah

Cash 1,500Investment in Shenandoah 870Additional paid-in capital 630

To record sale of 30,000 shares at $50 per share. No gain or loss is recognized since parent maintains a controlling interest.

Option 2 Shenandoah issues and sells 40,000 shares to the public

Investment in Shenandoah 630Additional paid-in capital 630

To record adjustment in ownership computed as follows:Book value after sale of 40,000 shares ($12,440 ´ 75%) $9,330Book value before sale of 40,000 shares ($10,440 ´ 5/6) (8,700)Increase in book value of investment from sale $ 630

Option 3 Shenandoah reissues 40,000 shares of treasury stock

Investment in Shenandoah 630Additional paid-in capital 630

To record adjustment in ownership computed the same as 2 above.

Consolidated Stockholders’ Equityat January 1, 2010

Option 1 Option 2 Option 3

Common stock $10,000 $10,000 $10,000Additional paid-in capital 3,630 3,630 3,630Retained earnings 7,000 7,000 7,000Noncontrolling interesta 2,610 3,110 3,110

Total stockholders’ equity $23,240 $23,740 $23,740

a Noncontrolling interest under option 1: $10,440 ´ 25%Noncontrolling interest under options 2 and 3: $12,440 ´ 25%


Chapter 8 8-19

Solution P8-5

Preliminary computations:Cost of 9,000 shares (90% interest) January 1, 2009 $ 810,000

Implied total fair value of Sala ($810,000 / 90%) $ 900,000Book value of Sala ($500,000 + $300,000) (800,000 )

Excess fair value over book value = Goodwill $ 100,000

1 Investment balance December 31, 2009

Cost January 1, 2009 (9,000 shares ´ $90) $ 810,000Add: Share of Sala’s 2009 income ($50,000 ´ 90%) 45,000

Investment in Sala December 31 $ 855,000

2 Goodwill at December 31, 2010(Pallo purchased additional shares)

Goodwill from January 1, 2009 purchase $ 100,000Goodwill from January 1, 2010 purchase: Book value before purchase $ 850,000 Book value after purchase (1,350,000) Book value acquired (500,000) Cost of additional 5,000 shares 500,000 Goodwill from January 1, 2010 $ 0 Goodwill at December 31, 2010 $ 100,000

3 Additional paid-in capital (outsider purchased additional shares)

Book value after issuance ($1,350,000 ´ 60%) $ 810,000Book value before issuance ($850,000 ´ 90%) (765,000 )

Additional paid-in capital (gain is not recognized) $ 45,000

4 Noncontrolling interest December 31, 2010 (outsider purchased shares)

Subsidiary equity January 1, 2009 $ 800,000Increase for 2009 50,000Increase for 2010 70,000Sale of additional shares 500,000 Book value $1,420,000Goodwill 100,000 Fair value of Subsidiary equity December 31, 2010 $1,520,000

Noncontrolling interest percentage 6,000/15,000 shares 40 %Noncontrolling interest December 31, 2010 $ 608,000



Solution P8-6

1 Investment in Stake December 31, 2010Investment in Stake January 2, 2009 $ 98,000Increase for 2009 ($30,000 retained earnings increase ´ 70%)

21,000

Purchase of additional 20% interest June 30, 2010 37,000Increase 2010: ($30,000 ´ 1/2 year ´ 70%) + ($30,000 ´ 1/2 year ´ 90%) 24,000Dividends 2010: ($10,000 ´ 90%) (9,000 )

Investment in Stake December 31, 2010 $171,000

2 Goodwill December 31, 2010January 2, 2009 purchase:Cost of 70% interest $ 98,000

Implied fair value of Stake ($98,000 / 70%) $140,000Less: Book value of Stake 120,000 Goodwill $ 20,000

June 30, 2010 purchase:Cost of 20% interest $ 37,000

Implied fair value of Stake ($37,000 / 20%) $185,000Less: Book value of Stake 165,000 Goodwill - December 31, 2010 $ 20,000

3 Consolidated net incomeSales $600,000Cost of sales (400,000)Expenses (70,000 )Consolidated net income 130,000Noncontrolling interest share * 6,000 Controlling share of net income $124,000

* Noncontrolling share is 10% for full year plus 20% for ½ year. Alternative:Post’s reported income = Controlling share of net income $124,000

4 Consolidated retained earnings December 31, 2010Beginning retained earnings $200,000Add: Controlling share of Consolidated net income — 2010 124,000Less: Dividends (64,000 )

Consolidated retained earnings — ending $260,000Alternative solution:Post’s reported ending retained earnings = Consolidated retained earnings — ending $260,000

5 Noncontrolling interest December 31, 2010Equity of Stake December 31, 2010 $170,000Goodwill 20,000 Fair value of Stake $190,000Noncontrolling interest percentage 10 %

Noncontrolling interest December 31, 2010 $ 19,000


Chapter 8 8-21



Solution P8-7

1 Percy Corporation and SubsidiaryConsolidated Income Statement

for the year ended December 31, 2010(in thousands)

Sales $3,200Cost of sales (1,900)

Gross profit 1,300Depreciation expense (700)Other expenses (150 )

Consolidated net income 450Noncontrolling interest share ($150,000 ´ 20%) + ($150,000 ´ 1/4 year ´ 10%)

(33.75 )

Controlling share of Consolidated net income $ 416.25

2 Schedule to allocate Sawyer’s income and dividendsControl. Noncontrol. Preacquisition Total

Sawyer’s income 70% $105,000 20% $33,75 $135,00010% 11,250 15,000

Allocation $116,250 $33,750 $150,000

Dividends 70% $ 56,000 20% $16,000 $ 72,00010% 4,000 $4,000 8,000

Allocation $ 60,000 $16,000 $4,000 $ 80,000

Solution P8-8

Preliminary computationsCost October 1, 2009 $ 82,400

Implied fair value of Sat ($82,400 / 80%) $103,000Book value on Octobwer 1 acquisition date:

Book value on January 1, 2009 $70,000Add: Income January 1 to October 1 ($24,000 ´ 3/4 year) 18,000Deduct: Dividends March 15 (5,000 )Book value October 1 83,000

Goodwill $ 20,000

Income from Sat for 2009Share of Sat’s net income ($24,000 ´ 1/4 year ´ 80%) $ 4,800Less: Unrealized profit in Sat’s ending inventory (1,000 )Income from Sat $ 3,800

* Preacquisition income ($24,000 ´ 3/4 year ´ 80%) $14,400

* Preacquisition dividends ($5,000 ´ 80%) $ 4,000

* Noncontrolling interest share ($6,000 ´ 20%) $ 1,200


Chapter 8 8-23

* Under SFAS No. 160, preacquisition earnings are not shown as a reduction of consolidated net income. Rather, we only include earnings and dividends subsequent to the acquisition date. Preacquistion amounts are disclosed in required pro-forma disclosures for acquisitions. The worksheet on the following page reflects these adjustments.

Solution P8-8 (continued)

Pop Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 2009

Pop Sat 80%Adjustments andEliminations

ConsolidatedStatements

Income StatementSales $ 112,000 $ 50,000 a 12,000

c 37,500$ 112,500

Income from Sat 3,800 b 3,800

Cost of sales 60,000* 20,000* d 1,000 a 12,000c 15,000

54,000*

Operating expenses 25,100* 6,000* c 4,500 26,600*

Consolidated net income 31,900

Noncontrolling int. share f 1,200 1,200*

Controlling share of NI $ 30,700 $ 24,000 $ 30,700

Retained Earnings

Retained earnings — Pop $ 30,000 $ 30,000

Retained earnings — Sat $ 20,000 e 20,000

Net income 30,700ü 24,000ü 30,700

Dividends 20,000* 10,000* b 4,000c 5,000f 1,000 20,000*

Retained earnings December 31 $ 40,700 $ 34,000 $ 40,700

Balance SheetCash $ 5,100 $ 7,000 $ 12,100

Accounts receivable 10,400 17,000 G 6,000 21,400

Note receivable 5,000 10,000 15,000

Inventories 30,000 16,000 d 1,000 45,000

Plant assets — net 88,000 60,000 148,000

Investment in Sat 82,200 b 200

e 82,400

Goodwill e 20,000 20,000

$ 220,700 $ 110,000 $ 261,500

Accounts payable $ 15,000 $ 16,000 g 6,000 $ 25,000

Notes payable 25,000 10,000 35,000

Capital stock 140,000 50,000 e 50,000 140,000



Retained earnings 40,700ü 34,000ü 40,700

$ 220,700 $ 110,000

Noncontrolling interest — beginning c 13,000e 7,600

Noncontrolling interest December 31 f 200 20,800

$ 261,500* Deduct


Chapter 8 8-25

Solution P8-9

Supporting computations:

Fair value — book value differential

Investment cost $175,000

Implied total fair value of Sid ($175,000 / 70%) $250,000Less: Book value of Sid ($250,000 equity on January 1 plus $10,000 net income (1/4 year) less $10,000 dividends) 250,000 Fair value — book value differential 0

Allocation of Sid’s reported net income

Parent company ($40,000 ´ 3/4 year ´ 70%) $ 21,000Preacquisition income ($40,000 ´ 1/4 year ´ 70%) 7,000Noncontrolling interest share ($40,000 ´ 1 year ´ 30%) 12,000

Sid’s net income $ 40,000

Pal’s income from Sid

Equity in Sid’s income $ 21,000

Constructive gain on parent’s bondsNote that bonds payable has a book value of $105,400 on December 31, 2009. A half-year of premium amortization ($300) yields a book value of $105,700 at July 1, 2009. ( $105,700 book value on July 1 less $102,850 on December 31) 2,850

Recognition of constructive gain on separate books ($2,850 ´ 6/114 months) (150)

Gain on intercompany sale of equipment — downstream [$30,000 - ($36,000/2)] (12,000)

Piecemeal recognition of gain on equipment — downstream ($12,000/3 years ´ 1/2 year) 2,000

Gain on intercompany sale of land — upstream ($10,000 - $8,000 cost) ´ 70% (1,400 )

Income from Sid $ 12,300




Worksheet entries in journal form

a Income from Sid 12,300 Dividends - Sid 7,000 Investment in Sid common 5,300Eliminate intercompany post-acquisition earnings and dividends and return Investment to beginning balance.

b Sales * 37,500 Cost of sales * 27,500 Dividends – Sid* 10,000Retained earnings - Sid 50,000Common stock - Sid 200,000 Investment in Sid - common 175,000 Noncontrolling interest 75,000Eliminate preacquisition earnings and dividends. Eliminate Sid’s equity accounts, the investment account and establish beginning noncontrolling interest.

c Gain on plan assets 12,000 Plan assets 12,000Eliminate intercompany gain on sale of equipment.

d Gain on plan assets 2,000 Plan assets 2,000Eliminate intercompany gain on sale of land.

e Interest income 5,850 Interest expense 5,700 Gain on bond retirement 2,850 Investment in Pal bonds 102,700Bonds payable 100,000Premium on bonds 5,400Record constructive retirement of bonds payable.

f Interest payable 6,000 Interest receivable 6,000Eliminate reciprocal interest accounts.

g Other current liabilities 7,000 Other current assets 7,000Eliminate reciprocal for unpaid intercompany dividends.

h Noncontrolling interest share 8,400 Dividends - Sid 3,000 Noncontrolling interest 5,400Record noncontrolling interest share of earnings and post-acquisition dividends.

i Plan assets 2,000 Expenses 2,000Eliminate excess depreciation on equipment.


Chapter 8 8-27


Pal Corporation and SubsidiaryConsolidation Working Papers


Pal Sid 70%Adjustments andEliminations


Income StatementSales $ 287,100 $ 150,000 b 37,500 $ 399,600

Income from Sid 12,300 a 12,300

Gain on bonds a 2,850 2,850

Gain on plant assets 12,000 2,000 c 12,000d 2,000

Interest income 5,850 e 5,850

Interest expense 11,400* e 5,700 5,700*

Expenses — includes cost of goods sold 200,000* 117,850*

b 27,500i 2,000 288,350*

Consolidated NI 106,400

Noncontrolling int. share h 8,400 8,400*


Retained Earnings

Retained earnings — Pal $ 250,000 $ 250,000

Retained earnings — Sid $ 50,000 b 50,000

Net income 100,000ü 40,000ü 100,000

Dividends 50,000* 20,000* a 7,000b 10,000h 3,000 50,000*



Interest receivable 6,000 f 6,000

Inventories 140,000 60,000 200,000

Other current assets 110,000 20,000 g 7,000 123,000

Plant assets — net 502,700 107,300 i 2,000 c 12,000d 2,000 598,000

Investment — Sid common 180,300 a 5,300b 175,000

Investment — Pal bonds 102,700 e 102,700

$ 950,000 $ 300,000 $ 942,000

Interest payable $ 6,000 f 6,000

Other current liabilities 38,600 $ 30,000 g 7,000 $ 61,600

12% bonds payable 100,000 e 100,000

Premium on bonds 5,400 e 5,400

Common stock 500,000 200,000 b 200,000 500,000


$ 950,000 $ 300,000

Noncontrolling interest ($250,000 ´ 30%) b 75,000

Noncontrolling interest December 31 ($268,000 ´ 30%) i 5,400 80,400

$ 942,000



Solution P8-10

Supporting computations:

Investment cost of 70% interest $420,000

Implied total fair value of Sam ($420,000 / 70%) $600,000Book value of Sam 500,000

Goodwill $100,000

Investment cost of 10% interest $ 67,500

Implied total fair value of Sam ($67,500 / 10%) $675,000Book value of Sam:

Beginning equity January 1, 2010 $550,000Add: Income for 1/2 year 50,000Less: June dividends (25,000 )Book value at July 1, 2010 575,000

Goodwill (unchanged) $100,000

Investment in Sam account:Investment cost January 1, 2009 $420,000Add: 2009 share of retained earnings increase ($50,000 ´ 70%) $ 35,000Less: Unrealized profit in ending inventory (5,000)Less: Unrealized gain on land (8,000) 22,000 Investment balance December 31, 2009 $442,000Add: Investment cost of 10% interest 67,500Add: Income from Sam for 2010

$100,000 ´ 70% interest ´ 1 year $ 70,000$100,000 ´ 10% interest ´ 1/2 year 5,000Add: Beginning inventory profits 5,000Less: Ending inventory profits (6,000)Less: Gain: intercompany sale machinery (40,000)Add: Piecemeal recognition of gain

($40,000/5 ´ 1/2 year) 4,000 38,000Less: Dividends from Sam

($25,000 ´ 70%) + ($25,000 ´ 80%) (37,500 )Investment balance December 31, 2010 $510,000


Chapter 8 8-29


Poco Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 2010(in thousands)

Poco80%Sam

Adjustments andEliminations


Income StatementSales $ 900 $ 500 a 48 $1,352

Income from Sam 38 f 38

Gain on machinery 40 d 40

Cost of sales 400* 300* c 6 a 48b 5 653*

Depreciation expense 90* 60* d 4 146*

Other expenses 160* 40* 200*

Consolidated net income 353

Noncontrolling int. share h 25 25*

Controlling share of NI $ 328 $ 100 $ 328

Retained Earnings

Retained earnings — Poco $ 155 $ 155

Retained earnings — Sam $ 250 g 250

Controlling share of NI 328ü 100ü 328

Dividends 200* 50* f 37.5h 10g 2.5 200*

Retained earnings December 31 $ 283 $ 300 $ 283

Balance SheetCash $ 20 $ 80 $ 100

Accounts receivable 130 30 i 25 135

Dividends receivable 20 j 20

Inventories 90 70 c 6 154

Other current items 20 80 100

Land 50 40 e 8 82

Buildings — net 60 105 165

Machinery — net 100 320 d 36 384

Investment in Sam 510 b 5e 8

g 522.5f .5

Goodwill g 100 100

1,000 $ 725 $1,220

Accounts payable $ 177 $ 40 i 25 $ 192

Dividends payable 100 25 j 20 105

Other liabilities 140 60 200

Capital stock, $10 par 300 300 g 300 300

Retained earnings 283ü 300ü 283

$1,000 $ 725

Noncontrolling interest, January 1 g 125

Noncontrolling interest, December 31 h 5 140

$1,220* Deduct



Solution P8-11

Preliminary computations:

Investment cost of 85% of Sly August 1, 2009 $522,750

Implied fair value of Sly ($522,750 / 85%) $615,000Book value August 1, 2009:

Capital stock $500,000Retained earnings 100,000Add: Income for 7 months 35,000Less: Dividends for 1/2 year (20,000 )Stockholders’ equity August 1, 2009 615,000

Fair value – book value differential $ 0

Investment cost August 1, 2009 $522,750

Equity in income $60,000 ´ 5/12 year ´ 85% $ 21,250Less: Deferred inventory profit from upstream sale $5,000 ´ 85% (4,250)Less: Deferred profit from sale of equipment $10,000 profit - ($2,000 ´ 1/4 year) (9,500 )

Income from Sly 2009 7,500Less: Dividends from Sly $20,000 ´ 85% (17,000 )Investment in Sly December 31, 2009 $513,250

Noncontrolling interest share of post-acquisition income, adjusted for the inventory profit: ($25,000 - $5,000) ´ 15% = $3,000

Preacquisition earnings ($35,000 ´ 85%) = $29,750Under SFAS No. 160, pre-acquisition earnings and dividends are closed to retained earnings, and the consolidated income statement reports only post-acquisition earnings.

Working paper entries:

a Sales 60,000Cost of sales 60,000

To eliminate intercompany sales.

b Cost of sales 5,000Inventories 5,000

To defer unrealized inventory profits.

c Sales 50,000Cost of sales 40,000Plant assets — net 10,000

To eliminate intercompany sale of inventory item to be used as equipment.

d Plant assets — net 500Operating expense 500

To record depreciation for 1/4 year on intercompany gain on plant asset.


Chapter 8 8-31

P8-11 (continued)

e Income from Sly 7,500Investment in Sly 9,500

Dividends 17,000To eliminate income and dividends and return investment account to its beginning-of-the-period balance.

f Capital stock 500,000Retained earnings 100,000

Investment in Sly 522,750Noncontrolling interest 92,250

Sales * 233,333 Cost of sales * 145,833 Operating expenses * 52,500 Dividends * 20,000

To eliminate reciprocal equity and investment balances, and enter beginning noncontrolling interest (* adjusted for preacquisition earnings and dividends).

g Dividends payable 17,000Dividends receivable 17,000

To eliminate reciprocal dividends receivable and payable amounts.

h Noncontrolling Interest Share 3,000Dividends 3,000

To enter Noncontrolling Interest share of subsidiary post-acquisition income and dividends.

Alternative to entry c:Sales 50,000

Cost of sales 50,000

Cost of sales 10,000Plant assets — net 10,000




Pak Corporation and SubsidiaryConsolidation Working Papers


Pak Sly 85%Adjustments andEliminations


Income StatementSales $ 910,000 $ 400,000 a 60,000

c 50,000f 233,333 $ 966,667

Income from Sly 7,500 e 7,500

Cost of sales 500,000* 250,000* b 5,000 a 60,000c 40,000f 145,833 509,167*

Operating expense 200,000* 90,000* d 500f 52,500

237,000*

Consolidated net income 220,,500*

Noncontrolling int. share h 3,000 3,000*


Retained Earnings

Retained earnings — Pak $ 192,500 $ 192,500

Retained earnings — Sly $ 100,000 f 100,000

Net income 217,500ü 60,000ü 217,500

Dividends 100,000* 40,000* e 17,000f 20,000h 3,000 100,000*



Dividends receivable 17,000 g 17,000

Accounts receivable 120,000 70,000 190,000

Inventories 300,000 150,000 b 5,000 445,000

Plant assets — net 880,000 500,000 d 500 c 10,000 1,370,500

Investment in Sly 513,250 e 9,500 f 522,750

$1,864,000 $ 730,000 $2,049,250

Accounts payable $ 154,000 $ 90,000 $ 244,000

Dividends payable 20,000 g 17,000 3,000

Capital stock 1,400,000 500,000 f 500,000 1,400,000


$1,864,000 $ 730,000

Noncontrolling interest January 1 f 92,250

Noncontrolling interest December 31 92,250


Chapter 8 8-33

$2,049,250



Solution P8-12

Indirect Method

Poff Corporation and SubsidiaryConsolidated Statement of Cash Flowsfor the year ended December 31, 2010

Cash Flows from Operating ActivitiesConsolidated net income – controlling share $300,000

Adjustments to reconcile net income to cash provided by operating activities:

Noncontrolling interest share $ 22,000Depreciation expense 528,000Decrease in accounts receivable 2,500Decrease in prepaid expenses 20,000Decrease in accounts payable (203,500)Increase in inventories (130,000)Gain on sale of 10% interest * (5,700 ) 233,300

Net cash flows from operating activities 533,300

Cash Flows from Investing ActivitiesPurchase of equipment $(100,000)Sale of 10% interest in subsidiary 72,700

Net cash flows from investing activities (27,300)

Cash Flows from Financing ActivitiesCash paid on long-term note $(300,000)Payment of cash dividends — controlling (200,000)Payment of cash dividends — noncontrolling (10,000 )

Net cash flows from financing activities (510,000)

Decrease in cash for 2010 (4,000)Cash on hand January 1, 2010 50,500

Cash on hand December 31, 2010 $ 46,500

* Note: Since Poff maintains a controlling interest in Sato, no gain or loss should have been recognized on sale of the 10 interest. Rather, this amount should appear as an increase in other paid-in capital. The net effect on the statement of cash flows is the same.


Chapter 8 8-35

Solution P8-12 (continued)Poff Corporation and Subsidiary

Working Papers for the Statement of Cash Flows (Indirect Method)for the year ended December 31, 2010

Reconciling Items Cash Flows Cash Flows Cash FlowsYear’s from Investing FinancingChange Debit Credit Operations Activities Activities

Asset ChangesCash (4,000)Accounts

receivable — net (2,500) e 2,500

Inventories 130,000 k 130,000Prepaid expenses (20,000) l 20,000Equipment 90,000 h 10,000 g 100,000Accumulated depreciation

(498,000) f 500,000 h 2,000

Land and buildings 0Accumulated depreciation

(28,000) f 28,000

Total asset changes (332,500)

Changes in EquitiesAccounts payable (203,500) i 203,500Dividends payable 0Long-term note payable

(300,000) j 300,000

Common stock 0Retained earnings 100,000 a 300,000 c 200,000

Noncontrol. int. 20% 71,000 b 22,000 d 10,000

h 59,000Changes in equities (332,500)

Consolidated net income a 300,000 300,000

Noncontrolling int. share b 22,000 22,000

Purchase of equipment g 100,000 (100,000)

Depreciation — equipment and buildings f 528,000 528,000Gain - sale of 10% subsidiary Interest h 5,700 (5,700)Decrease in accounts receivable

e 2,500 2,500

Increase in inventories k 130,000 (130,000)Decrease in prepaid expenses l 20,000 20,000Decrease in accounts payable i 203,500 (203,500)Cash paid on long-term note j 300,000 (300,000)

Paid dividends — controlling c 200,000 (200,000)

Paid dividends —noncontrol. d 10,000 (10,000)

Sale of 10% interest in Subsidiary h 72,700 72,700

1,890,700 1,890,700 533,300 (27,300) (510,000)



Cash decrease for 2010 = $533,300 - $27,300 - $510,000 = $(4,000).* Note: Since Poff maintains a controlling interest in Sato, no gain or loss should have been recognized on sale of the 10 interest. Rather, this amount should appear as an increase in other paid-in capital. The net effect on the statement of cash flows is the same.


ch08_Beams10e_sm

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