1. © Pearson Education, Inc. publishing as Prentice Hall8-1 Chapter 8: Consolidations – Changes in Ownership Interests by Jeanne M. David, Ph.D., Univ. of Detroit Mercy to accompany Advanced Accounting, 10 th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn

2. © Pearson Education, Inc. publishing as Prentice Hall8-2 Changes in Ownership: Objectives 1.Prepare consolidated statements when parent company's ownership percentage increases or decreases during the reporting period. 2.Apply consolidation procedures to interim (midyear) acquisitions. 3.Record subsidiary/investee stock issuances and treasury stock transactions.

3. © Pearson Education, Inc. publishing as Prentice Hall8-3 1: Changes in Ownership Percentage Consolidations – Changes in Ownership Interests

4. © Pearson Education, Inc. publishing as Prentice Hall8-4 Changes in Parent Ownership Increases 1.Parent acquires controlling interest during interim period 2.Parent acquires controlling interest in stages 3.Parent acquires additional shares from noncontrolling interest Decreases 4.Parent sells shares but maintains control 5.Parent sells shares giving up control

5. © Pearson Education, Inc. publishing as Prentice Hall8-5 Initial Acquisition of Control Parent obtains control –Determine implied value and allocate excess –Apply consolidation procedures

6. © Pearson Education, Inc. publishing as Prentice Hall8-6 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

7. © Pearson Education, Inc. publishing as Prentice Hall8-7 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

8. © Pearson Education, Inc. publishing as Prentice Hall8-8 Is There a Gain or Loss? Basic rule: No gain or loss is recorded on equity transactions with a firm's owners. 1.Control before and after the transaction is an equity transaction –No gain or loss –Adjust paid in capital, if needed 2.No control before and control after –Point of business acquisition –No loss –Might have gain on bargain purchase 3.Control before and no control after –Disposition of asset –Gain or loss is recorded

9. © Pearson Education, Inc. publishing as Prentice Hall8-9 2: Interim Acquisitions Consolidations – Changes in Ownership Interests

10. © Pearson Education, Inc. publishing as Prentice Hall8-10 Preacquisition Issues Entity theory (APB Opinion No. 51) –Income statement includes all revenues and expenses –Total consolidated income LESS Preacquisition earnings Noncontrolling interest share Equals Controlling interest share Parent theory (FASB Statement No. 160) –Income statement includes revenues and expenses since acquisition –Total consolidated income LESS Noncontrolling interest share Equals Controlling interest share

11. © Pearson Education, Inc. publishing as Prentice Hall8-11 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

12. © Pearson Education, Inc. publishing as Prentice Hall8-12 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. Cash50Accounts payable300 Inventories900Other liabilities1,200 Fixed assets, net2,800Common stock600 Cost of sales1,500Retained earnings, 1/11,350 Operating expenses600Sales2,700 Dividends300 6,150

13. © Pearson Education, Inc. publishing as Prentice Hall8-13 Find Book Value at Acquisition Book value of equity on 1/1/09$1,950 Preacquisition amounts: Revenues900Jan-Apr Cost of sales(500)Jan-Apr Operating expenses(200)Jan-Apr Dividends(150)none Book value on 5/1/09$2,000

14. © Pearson Education, Inc. publishing as Prentice Hall8-14 Analysis and Amortizations Cost of 80% of Sega2,400 Implied value of Sega3,000 Book value2,000 Excess1,000 Unamort Allocated to:5/5/09200912/31/09 Fixed assets600(80)520 Goodwill4000 Total1,000(80)920 Sega's 2009 income600 Income since May 1400 Amortization(80) Adjusted320 CI 80% share256 NCI 20% share64

15. © Pearson Education, Inc. publishing as Prentice Hall8-15 Puma's Equity Entries Investment in Sega2,400 Cash 2,400 for acquisition Cash120 Investment in Sega 120 for dividends Investment in Sega256 Income from Sega 256 [(2/3)(2,700 - 1,500 - 600) - (2/3)(600/5yrs)]x80%

16. © Pearson Education, Inc. publishing as Prentice Hall8-16 Income from Sega256 Dividends 120 Investment in Sega 136 Noncontrolling interest share64 Dividends 30 Noncontrolling interest 34 Sales900 Common stock600 Retained earnings 1/11,350 Fixed assets600 Goodwill400 Cost of sales 500 Operating expenses 200 Dividends 150 Investment in Sega 2,400 Noncontrolling interest 600 Depreciation expense80 Accumulated depreciation 80 Worksheet elimination entries for 2009 Notice the preacquisition revenues, expenses and dividends included in the third entry.

17. © Pearson Education, Inc. publishing as Prentice Hall8-17 Income statement:PumaSegaDRCRConsol Sales5,0002,700900 6,800 Income from Sega256 0 Cost of sales(2,100)(1,500) 500(3,100) Operating expense(800)(600)80200(1,280) Noncontrolling interest share 64 (64) Controlling interest share2,356600 2,356 State of retained earnings: Retained earnings, 1/14,3001,350 4,300 Add net income2,356600 2,356 Deduct dividends(1,000)(300) 120 30 150(1,000) Retained earnings, 12/315,6561,650 5,656

18. © Pearson Education, Inc. publishing as Prentice Hall8-18 Balance sheet:PumaSegaDRCRConsol Cash95050 1,000 Inventories1,300900 2,200 Fixed assets, net5,1702,800600808,490 Investment in Sega2,536 136 2,4000 Goodwill 400 Total9,9563,750 12,090 Accounts payable500300 800 Other liabilities1,8001,200 3,000 Common stock2,000600 2,000 Retained earnings5,6561,650 5,656 Noncontrolling interest 600 34634 Total9,9563,750 12,090

19. © Pearson Education, Inc. publishing as Prentice Hall8-19 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. DateInterestInvestment AcquiredCost April 15%7,000 July 15%8,000 October 180%210,000 90%225,000 Cost of 90% of Sark225,000 Implied value of Sark250,000 Book value220,000 Goodwill30,000

20. © Pearson Education, Inc. publishing as Prentice Hall8-20 Income Distribution Sark's income allocation for the year: TotalOct 1 - Dec 31before Oct 1 IncomeCI 90% shareNCI 10% SharePreacquisition Sales150,00033,7503,750112,500 Expenses(110,000)(24,750)(2,750)(82,500) Net income40,0009,0001,00030,000

21. © Pearson Education, Inc. publishing as Prentice Hall8-21 Poca's Worksheet Entries Income from Sark9,000 Dividends 0 Investment in Sark 9,000 Noncontrolling interest share1,000 Dividends 0 Noncontrolling interest 1,000 Sales112,500 Common stock100,000 Retained earnings 1/190,000 Expenses 82,500 Dividends 0 Investment in Sark 225,000 Noncontrolling interest 25,000 There were no dividends before or after the acquisition in this case. Zeros are included just for clarity.

22. © Pearson Education, Inc. publishing as Prentice Hall8-22 Income statement:PocaSarkDRCRConsol Sales274,875150,000112,500 312,375 Income from Sark9,000 0 Expenses(220,000)(110,000) 82,500(247,500) Noncontrolling interest share 1,000 (1,000) Controlling interest share63,87540,000 63,875 State of retained earnings: Retained earnings, 1/1221,50090,000 221,500 Add net income63,87540,000 63,875 Deduct dividends00 Retained earnings, 12/31285,375130,000 285,375

23. © Pearson Education, Inc. publishing as Prentice Hall8-23 Balance sheet:PocaSarkDRCRConsol Other assets451,375300,000 751,375 Investment in Sark234,000 9,000 225,0000 Goodwill 30,000 Total685,375300,000 781,375 Liabilities100,00070,000 170,000 Common stock300,000100,000 300,000 Retained earnings285,375130,000 285,375 Noncontrolling interest 25,000 1,000 26,000 Total685,375300,000 781,375

24. © Pearson Education, Inc. publishing as Prentice Hall8-24 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. BeforeInterestAfter the salesoldthe sale Pablo's interest in Sergio90%10%80% Investment account: 1/1 balance288.0 Income to 4/18.1 4/1 balance296.132.9263.2

25. © Pearson Education, Inc. publishing as Prentice Hall8-25 Investment in Sergio: T-account Investment in Sergio 1/1 Balance288.0 90% income to 4/18.1 4/1 Balance296.132.94/1 sale of 10% (1/9 of shares) 16.06/1 dividends (80%) 80% income since 4/121.6 12/31 Balance268.8

26. © Pearson Education, Inc. publishing as Prentice Hall8-26 Pablo's Entry for the Sale Cash40.0 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.

27. © Pearson Education, Inc. publishing as Prentice Hall8-27 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 132.9 Income since April 1: (36*.2*9/12) 5.4 Dividends (20*.2) (4.0) Balance at Dec 31$67.2

28. © Pearson Education, Inc. publishing as Prentice Hall8-28 Worksheet Entries Income from Sergio (8.1+21.6)29.7 Dividends 16.0 Investment in Sergio 13.7 Noncontrolling interest share (0.9+5.4)6.3 Dividends 4.0 Noncontrolling interest 2.3 Common stock200.0 Retained earnings 1/1100.0 Goodwill20.0 Investment in Sergio (288-32.9) 255.1 Noncontrolling interest, 1/1 32.0 Noncontrolling interest, 4/1 32.9

29. © Pearson Education, Inc. publishing as Prentice Hall8-29 Interim Sale, Loss of Control 1.Bring investment account up to date, recognizing partial year's income as appropriate 2.Determine BV of fraction of investment sold 3.Compare to selling price 4.Record a gain or loss on difference The "parent" no longer consolidates the "subsidiary" That relationship has been dissolved Parent will use equity or fair value/cost method as appropriate

30. © Pearson Education, Inc. publishing as Prentice Hall8-30 3: Subsidiary's Stock Transactions Consolidations – Changes in Ownership Interests

31. © Pearson Education, Inc. publishing as Prentice Hall8-31 Subsidiary Actions Subsidiary actions increasing Parent share 1.Sub issues additional shares to Parent 2.Sub reacquires shares from noncontrolling interest Subsidiary actions decreasing Parent share 3.Sub issues additional shares to noncontrolling interests 4.Sub reacquires shares from Parent Subsidiary actions not impacting ownership shares 5.Sub issues stock to both parent & noncontrolling interest 6.Sub issues stock split or stock dividend

32. © Pearson Education, Inc. publishing as Prentice Hall8-32 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 Stroh200 Excess, goodwill$25

33. © Pearson Education, Inc. publishing as Prentice Hall8-33 Before sale Stroh's equity200 Goodwill25 Total value225 Purdy's Investment in Stroh180 Purdy's share of BV of equity160 Goodwill20 Total value180 Sell at BVSell > BVSell < BV for $40for $70for $30 Stroh's equity, after the issuance240270230 Purdy's Investment, after220250210.0 Purdy's share of equity, 10/12 share200225191.7 New measure of goodwill202518.3 Total220250210.0 Goodwill may go up or down depending on the value Purdy paid for the additional shares of Stroh

34. © Pearson Education, Inc. publishing as Prentice Hall8-34 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 Stroh40 Cash 40

35. © Pearson Education, Inc. publishing as Prentice Hall8-35 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 Stat200 Excess, goodwill$25

36. © Pearson Education, Inc. publishing as Prentice Hall8-36 Before sale Stat equity200 Goodwill25 Total value225 Puny's Investment180 Puny's share of BV of equity160 Goodwill20 Total value180 Sell at BVSell > BVSell < BV for $40for $70for $30 Stat equity, after240270230 Puny's Investment current balance180 180.0 Puny's share of equity, 10/12 share160180153.3 Old goodwill20 20.0 Total, new balance in Investment180 200173.3 Adjustment0+20-6.7 Puny's measure of goodwill does not change when Stroh issues the shares to outside entities. Puny adjusts the value of its Investment in Stat account.

37. © Pearson Education, Inc. publishing as Prentice Hall8-37 Puny's Adjusting Entry for $40: no entry needed for $70 Investment in Stat20.0 Additional paid in capital 20.0 for $30 Additional paid in capital6.7 Investment in Stat 6.7

38. © Pearson Education, Inc. publishing as Prentice Hall8-38 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 Shelly200 Excess, goodwill$0

39. © Pearson Education, Inc. publishing as Prentice Hall8-39 Before treasury stock Shelly's equity200 Goodwill0 Total value200 Pointer's Investment in Shelly160 Pointer's share of BV of equity160 Goodwill0 Total value160 Buy = BVBuy > BVBuy < BV for $8for $12for $6 Shelly's equity, after192188194 Pointer's Investment current balance160 160.0 Pointer's share of equity, 8/9.6160156.7161.7 Old goodwill00.0 Total, new balance in Investment160 156.7161.7 Adjustment needed0-3.3+1.7 There was no goodwill and none is created by Shelly purchasing treasury stock. Pointer adjusts the balance in its Investment in Shelly account.

40. © Pearson Education, Inc. publishing as Prentice Hall8-40 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 capital3.3 Investment in Stroh 3.3 Treasury stock purchased for $6 Investment in Stroh1.7 Additional paid in capital 1.7

41. © Pearson Education, Inc. publishing as Prentice Hall8-41 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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