8 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidations – Changes in Ownership Interests Chapter 8

8 - 2 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 1 Prepare consolidated statements when parent company’s ownership percentage increases or decreases during the reporting period.

8 - 3 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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.

8 - 4 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Income 1/1-4/14/1-12/31 1/1-12/31 Sales$25,000$75,000$100,000 Cost of sales and expenses 12,500 37,500 50,000 Net income$12,500$37,500$ 50,000 Dividends$10,000$15,000$ 25,000 Preacquisition Earnings

8 - 5 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Stockholders’ Equity Jan. 1 April 1 Dec. 31 Capital stock$200,000$200,000$200,000 Retained earnings 35,000 37,500 60,000 Stockholders’ equity$235,000$237,500$260,000 What is the book value acquired by Patter? $237,500 × 90% = $213,750 purchase price Preacquisition Earnings

8 - 6 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Sales (last three quarters of 2006)$75,000 Expenses (last three quarters) (37,500) Minority interest (last three quarters) (3,750) Effect on consolidated net income$33,750 Preacquisition Earnings

8 - 7 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Sales (full year)$100,000 Expenses (full year) (50,000) Preacquisition income (11,250) Minority interest (5,000) Effect on consolidated net income$ 33,750 Preacquisition Earnings

8 - 8 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Preacquisition dividends are eliminated in the consolidation process. $10,000$15,000 $25,000 Preacquisition Dividends

8 - 9 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Preacquisition Dividends Cash13,500 Investment in Sissy13,500 To record dividends received Cash13,500 Investment in Sissy13,500 To record dividends received $15,000 × 90% = 13,500

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Patter’s Investment 213,750 33, ,000 13,500 12/31/2006 Dividends

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Working Papers December 31, 2006 Adjustments/ Consol- Patter Sissy Eliminations idated 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 $ (200) $ $ (100) $300 $100 (50) $ 50 $ (25) $ 60 a c 5.00 b b 35 $400 (250) (5) (11.25) $ $ (100) $300 Income Statement a 13.5 b 9.0 c 2.5

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Working Papers December 31, 2006 Other assets Investment in Sissy Capital stock Retained earnings Minority interest $ $800 $ $800 $260 $ $260 a b b 200 b c 2.50 $ $826 Balance Sheet Adjustments/ Consol- Patter Sissy Eliminations idated

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 2 Apply consolidation procedures to interim (midyear) acquisitions.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Piecemeal Acquisitions Poca Corporation acquires a 90% interest in Sark Corporation in a series of separate stock purchases between July1, 2003, and October 1, 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 Piecemeal Acquisitions Date7/1/034/1/0410/1/05 Interest acquired 20% 40% 30% Investment cost$ 30$ 74$ 81 Equity January Income for year Equity at acquisition Equity December

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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 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 Working Paper Entries: 2005 aIncome from Sark27,000 Investment in Sark27,000 To eliminate investment income and return investment account to its beginning-of-the- period balance plus the $81,000 new investment

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Working Paper Entries: 2005 bPreacquisition Income 9,000 Retained Earnings – Sark 90,000 Capital Stock – Sark100,000 Goodwill 30,000 Investment in Sark210,000 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 Working Paper Entries: 2005 cMinority Interest Expense4,000 Minority Interest4,000 To record minority interest in Sark’s net income

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Sale of Ownership Interests l Sergio Corporation is a 90%-owned subsidiary of Pablo Corporation. l January 1, 2007: Pablo’s investment in Sergio equals $288,000. l 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 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 Sale of Ownership Interests l During 2007, Sergio reports income of $36,000. l Sergio pays dividends of $20,000 onJuly 1.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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 Sale of Interest at the Beginning of the Period Pablo’s Investment 288,000 28, ,800 32,000 16,000 Cash 40,000 16,000 Gain 8,000 Income from S 28,800 Dividends 12/31/2007

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Working Paper Entries: 2007 aIncome from Sergio28,800 Dividends – Sergio16,000 Investment in Sergio12,800 To eliminate income and dividends from Sergio and return the investment account to itsbeginning-of-the-period balance after the sale of the 10% interest

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Working Paper Entries: 2007 bCapital Stock – Sergio200,000 Retained Earnings – Sergio100,000 Goodwill 16,000 Investment in Sergio256,000 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 Working Paper Entries: 2007 cMinority Interest Expense7,200 Dividends4,000 Minority Interest3,200 To enter minority interest share of subsidiary income and dividends

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Working Papers December 31, 2007 Adjustments/ Consol- Pablo Sergio Eliminations idated Sales Income from Sergio Gain on sale Expenses Minority interest expense ($36,000 × 10%) Net income Retained earnings – Pablo Retained earnings – Sergio Add: Net income Dividends Retained earnings 12/31/07 $ (508.8) $128 $ (80) $258 $136 (100) $ 36 $ (20) $116 a 28.8 c 7.2 b 100 a 16 c 4 $736 8 (608.8) (7.2) $128 $ (80) $258 Income Statement

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Working Papers December 31, 2007 Other assets Investment in Sergio Goodwill Liabilities Capital stock Retained earnings Minority interest $ $908 $ $908 $350 $ $350 a 12.8 b 256 b 16 b 200 b 60 c 3.2 $ $1,005.2 $ $1,005.2 Balance Sheet Adjustments/ Consol- Pablo Sergio Eliminations idated

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Sale of Interest During an Accounting Period Obtain proper book value for shares sold. Calculate the remainder for unamortized components of the investment account. Main issues

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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 Sale of Interest During an Accounting Period Assume the sale is recorded on April 1, 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 Sale of Interest During an Accounting Period $29,700 – $16,000 = $13,700 $36,000 × 1/4 year × 90% =$ 8,100 $36,000 × 3/4 year × 80% = 21,600 $29,700

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Sale of Interest During an Accounting Period Pablo’s Investment 288,000 8,100 21, ,800 32,900 16,000 12/31/2007 Dividends Cash 40,000 16,000 Gain 7,100 Income from S 8,100 21,600

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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 Sale of Additional Shares by a Subsidiary Purdy Corporation owns an 80% interest in Stroh Corporation. 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. 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 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 Sale of Additional Shares by a Subsidiary Capital stock, $10 par$100,000 Additional paid-in capital 60,000 Retained earnings 40,000 Total shareholders’ equity$200,000 Capital stock, $10 par$100,000 Additional paid-in capital 60,000 Retained earnings 40,000 Total shareholders’ equity$200,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Subsidiary Sells Shares to Parent Stroh sells an additional 2,000 shares to Purdy at book value of $20 per share on January 2, Stroh sells an additional 2,000 shares to Purdy at book value of $20 per share on January 2, January 1 before sale: 8,000 ÷ 10,000 = 80% January 2 after sale: 10,000 ÷ 12,000 = 83 1/3 %

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Subsidiary Sells Shares to Parent January 1 January 2 Before Sale After Sale Stroh’s stockholders’ equity$200,000$240,000 Purdy’s interest 80% 83 1/3 % Purdy’s equity in Stroh$160,000$200,000 Goodwill 20,000 20,000 Investment in Stroh balance$180,000$220,000 Stroh’s stockholders’ equity$200,000$240,000 Purdy’s interest 80% 83 1/3 % Purdy’s equity in Stroh$160,000$200,000 Goodwill 20,000 20,000 Investment in Stroh balance$180,000$220,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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) × 83 1/3 %$225,000 Underlying book value before purchase ($200,000 × 80%) 160,000 Book value acquired 65,000 Excess cost over book value $ 5,000 Price paid by Purdy (2,000 × $35) $70,000 Book value acquired: Underlying book value after purchase ($200,000 + $70,000) × 83 1/3 %$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 Subsidiary Sells Shares to Outside Entity Sale at $20 Sale at $35 Stroh’s stockholders’ equity$240,000$270,000 Purdy’s interest 66 2/3 % 66 2/3 % Purdy’s equity in Stroh after issuance$160,000$180,000 Purdy’s equity in Stroh before issuance 160, ,000 Increase in Purdy’s equity in Stroh 0$ 20,000 Stroh’s stockholders’ equity$240,000$270,000 Purdy’s interest 66 2/3 % 66 2/3 % Purdy’s equity in Stroh after issuance$160,000$180,000 Purdy’s equity in Stroh before issuance 160, ,000 Increase in Purdy’s equity in Stroh 0$ 20,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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 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 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, 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 Treasury Stock Transactions by a Subsidiary Capital stock, $10 par$100,000 Retained earnings 100,000 Total equity$200,000 Pointer’s share of Shelly’s book value (80%)$160,000 Capital stock, $10 par$100,000 Retained earnings 100,000 Total equity$200,000 Pointer’s share of Shelly’s book value (80%)$160,000 Shelly’s equity before purchase of 400 shares of treasury stock

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Capital stock$100,000$100,000$100,000 Retained earnings 100, , ,000 Total$200,000$200,000$200,000 Less: Treasury stock 8,000 12,000 6,000 Total equity$192,000$188,000$194,000 Pointer’s interest 5/6 5/6 5/6 Pointer’s share of Shelly’s @$15400 shares Treasury Stock Transactions by a Subsidiary

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn End of Chapter 8