1. Chapter 8: Consolidations – Changes in Ownership Interests
Beams, Advanced Accounting 10e, Ch. 8
4/28/2019
Chapter 8: Consolidations – Changes in Ownership Interests
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
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2. Changes in Ownership: Objectives
Beams, Advanced Accounting 10e, Ch. 8
4/28/2019
Changes in Ownership: Objectives
Prepare consolidated statements when parent company's ownership percentage increases or decreases during the reporting period.
Apply consolidation procedures to interim (midyear) acquisitions.
Record subsidiary/investee stock issuances and treasury stock transactions.
Objective 1 Increases or decreases in ownership during period
Interim acquisitions
Preacquisition revenues, expenses, and dividends
APB Opinion No. 51 – deduct preacquisition earnings as a separate item
FASB Statement No. 160 – exclude preacquisition revenues, expenses and dividends
2. Consolidation with interim acquisition under FASB 160
Piecemeal acquisition within one year, cost to equity with no adjustment, consol w/o div
Sale of part of investment
At beginning of year
During the year
3. Noncontrolling interest computations – midyear sales of part of investment
Sale of investment in subsidiary with noncontrolling interest (or none) left
===================================================================
Sub issues CS to parent to increase parent's share
Issued at BV
Issued above BV, increasing GW
Issued below BV, decreasing (assets) GW
Sub issues CS to outside entities, decreasing parent's share
At BV
Above BV, increasing APIC
Below BV, decreasing APIC
Sub issues CS to both parent & outside entities, maintaining shares
- Sub stock dividends and/or stock splits
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3. 1: Changes in Ownership Percentage
Consolidations – Changes in Ownership Interests
1: Changes in Ownership Percentage
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4. Changes in Parent Ownership
Increases
Parent acquires controlling interest during interim period
Parent acquires controlling interest in stages
Parent acquires additional shares from noncontrolling interest
Decreases
Parent sells shares but maintains control
Parent sells shares giving up control
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5. Initial Acquisition of Control
Parent obtains control
Determine implied value and allocate excess
Apply consolidation procedures
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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
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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
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8. Is There a Gain or Loss?
Basic rule: No gain or loss is recorded on equity transactions with a firm's owners.
Control before and after the transaction is an equity transaction
No gain or loss
Adjust paid in capital, if needed
No control before and control after
Point of business acquisition
No loss
Might have gain on bargain purchase
Control before and no control after
Disposition of asset
Gain or loss is recorded
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9. 2: Interim Acquisitions
Consolidations – Changes in Ownership Interests
2: Interim Acquisitions
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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
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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
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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
Sales
2,700
Dividends
6,150
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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)
Operating expenses
(200)
Dividends
(150)
none
Book value on 5/1/09
$2,000
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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
Allocated to:
5/5/09
2009
12/31/09
Fixed assets
600
(80)
520
Goodwill
400
Total
1,000
920
Sega's 2009 income
600
Income since May 1
400
Amortization
(80)
Adjusted
320
CI 80% share
256
NCI 20% share 64
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15. Puma's Equity Entries Investment in Sega 2,400 Cash for acquisition
Cash
for acquisition
120
for dividends
256
Income from Sega
[(2/3)(2, , ) - (2/3)(600/5yrs)]x80%
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16. Worksheet elimination entries for 2009
Notice the preacquisition revenues, expenses and dividends included in the third entry.
Income from Sega
256
Dividends
120
Investment in Sega
136
Noncontrolling interest share 64 30
Noncontrolling interest 34
Sales
900
Common stock
600
Retained earnings 1/1
1,350
Fixed assets
Goodwill
400
Cost of sales
500
Operating expenses
200
150
2,400
Depreciation expense 80
Accumulated depreciation
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17. Noncontrolling interest share 64 (64) Controlling interest share 2,356
Income statement:
Puma
Sega DR CR
Consol
Sales
5,000
2,700
900
6,800
Income from Sega
256
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
State of retained earnings:
Retained earnings, 1/1
4,300
1,350
Add net income
Deduct dividends
(1,000)
(300)
120 30
150
Retained earnings, 12/31
5,656
1,650
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18. Noncontrolling interest 34 634
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
Goodwill
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
Retained earnings
5,656
1,650
Noncontrolling interest 34
634
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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
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
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20. Income Distribution Sark's income allocation for the year: Total
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
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21. Poca's Worksheet Entries
Income from Sark
9,000
Dividends
Investment in Sark
Noncontrolling interest share
1,000
Noncontrolling interest
Sales
112,500
Common stock
100,000
Retained earnings 1/1
90,000
Expenses
82,500
225,000
25,000
There were no dividends before or after the acquisition in this case. Zeros are included just for clarity.
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22. Noncontrolling interest share 1,000 (1,000)
Income statement:
Poca
Sark DR CR
Consol
Sales
274,875
150,000
112,500
312,375
Income from Sark
9,000
Expenses
(220,000)
(110,000)
82,500
(247,500)
Noncontrolling interest share
1,000
(1,000)
Controlling interest share
63,875
40,000
State of retained earnings:
Retained earnings, 1/1
221,500
90,000
Add net income
Deduct dividends
Retained earnings, 12/31
285,375
130,000
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23. Noncontrolling interest 25,000 1,000 26,000
Balance sheet:
Poca
Sark DR CR
Consol
Other assets
451,375
300,000
751,375
Investment in Sark
234,000
9,000
225,000
Goodwill
30,000
Total
685,375
781,375
Liabilities
100,000
70,000
170,000
Common stock
Retained earnings
285,375
130,000
Noncontrolling interest
25,000
1,000
 26,000
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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
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
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25. Investment in Sergio: T-account
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
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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.
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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
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28. Worksheet Entries Income from Sergio (8.1+21.6) 29.7 Dividends 16.0
Dividends
16.0
Investment in Sergio
13.7
Noncontrolling interest share ( )
6.3
4.0
Noncontrolling interest
2.3
Common stock
200.0
Retained earnings 1/1
100.0
Goodwill
20.0
Investment in Sergio ( )
255.1
Noncontrolling interest, 1/1
32.0
Noncontrolling interest, 4/1
32.9
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29. Interim Sale, Loss of Control
Bring investment account up to date, recognizing partial year's income as appropriate
Determine BV of fraction of investment sold
Compare to selling price
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
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30. 3: Subsidiary's Stock Transactions
Consolidations – Changes in Ownership Interests
3: Subsidiary's Stock Transactions
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31. Subsidiary Actions Subsidiary actions increasing Parent share
Sub issues additional shares to Parent
Sub reacquires shares from noncontrolling interest
Subsidiary actions decreasing Parent share
Sub issues additional shares to noncontrolling interests
Sub reacquires shares from Parent
Subsidiary actions not impacting ownership shares
Sub issues stock to both parent & noncontrolling interest
Sub issues stock split or stock dividend
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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
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33. Purdy's Investment in Stroh 180 Purdy's share of BV of equity 160 20
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 20
Goodwill may go up or down depending on the value Purdy paid for the additional shares of Stroh
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
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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
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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
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36. 180.0 200 173.3 Before sale Stat equity 200 Goodwill 25 Total value
Before sale
Stat equity
200
Goodwill 25
Total value
225
Puny's Investment
180
Puny's share of BV of equity
160 20
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.
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
180.0
Puny's share of equity, 10/12 share
160
153.3
Old goodwill 20
20.0
Total, new balance in Investment
200
173.3
Adjustment
+20
-6.7
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37. Puny's Adjusting Entry for $40: no entry needed for $70
no entry needed
for $70
Investment in Stat
20.0
Additional paid in capital
for $30
6.7
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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
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39. 160.0 Before treasury stock Shelly's equity 200 Goodwill Total value
Total value
Pointer's Investment in Shelly
160
Pointer's share of BV of equity
There was no goodwill and none is created by Shelly purchasing treasury stock. Pointer adjusts the balance in its Investment in Shelly account.
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
160.0
Pointer's share of equity, 8/9.6
156.7
161.7
Old goodwill
0.0
Total, new balance in Investment
Adjustment needed
-3.3
+1.7
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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
Treasury stock purchased for $6
1.7
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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
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