Chapter 8 Consolidations Changes in Ownership Interests

to accompany Advanced Accounting, 11th edition by Beams, Anthony, Bettinghaus, and Smith
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Consolidations Changes in Ownership Interests: Objectives

1. Prepare consolidated statements when parent's ownership percentage increases or decreases during the reporting period. 2. Apply consolidation procedures to interim (mid-year) acquisitions. 3. Record subsidiary/investee stock issuances and treasury stock transactions.
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Consolidations Changes in Ownership Interests

1: CHANGES IN OWNERSHIP PERCENTAGE

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Changes in Parent Ownership

Increases (acquires or maintains control) 1. Parent acquires controlling interest during interim period 2. Parent acquires controlling interest in stages 3. Parent acquires additional shares from noncontrolling interest Decreases (maintains or loses control) 4. Parent sells shares but maintains control 5. Parent sells shares giving up
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Interim Acquisition of Control

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

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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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Interim Acquisition Where Control is Maintained

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Parent sells part of its investment and no longer maintains control Reduce the investment based on proportion of interest sold Record gain or loss on sale Discontinue consolidation

Interim Sale Where Control is Relinquished

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Is There a Gain or Loss?

asic rule: No gain or loss is recorded on equity transactions with a firm's owners. ontrol before and after the transaction is an equity transaction No gain or loss Adjust paid in capital, if needed o control before and control after Point of business acquisition No loss Might have gain on bargain
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Preacquisition Earnings
Earnings prior to the date of acquisition are eliminated from consolidated income by one of two methods. 1.Exclude revenues and expenses of the subsidiary prior to acquisition from consolidated amounts, or 2.Include the revenues and expenses of the subsidiary in the consolidated income statement for the full year and deduct preacquisition income as a separate item.
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Equity Book Value on Interim Date

Calculate book value (equity) as of the acquisition date: Beginning BV equity + preacquisition revenues preacquisition expenses preacquisition dividends = BV equity at acquisition Sales and expenses (not dividends) for the year may be assumed level.
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Consolidations Changes in Ownership Interests

2: INTERIM ACQUISITIONS

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Cash Inventories Fixed assets, net Cost of sales Operating expenses Dividends

Pot acquires 80% of Spot for $2,400 on 5/1/12. Fixed assets with a remaining life of 5 years are undervalued by $600. Spot distributed $150 dividends each on 3/1/12 and 12/1/12. Spot's trial balance on 12/31/12 was:
50 Accounts payable 900 Other liabilities 2,800 Common stock 1,500 Retained earnings, 1/1 600 Sales 300 6,150

Simple Interim Acquisition: Example

300 1,200 600 1,350 2,700

Revenues and expenses are assumed to be incurred uniformly over the year.
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6,150

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Find Book Value at Acquisition

Retained Earnings and Common Stock at 1/1/12. Four months proportion of revenue and expenses.

Book value of equity on 1/1/12 Preacquisition amounts: Revenues Cost of sales Operating expenses Dividends Book value on 5/1/12

$1,950 900 Jan-Apr (500)Jan-Apr (200)Jan-Apr (150)none $2,000

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Analysis and Amortizations

Cost of 80% of Spot Implied value of Spot Book value Excess 2,400 3,000 2,000 1,000
$2,400 / . 80 From previous calculation. $600/5 x 8/12.

Allocated to: Fixed assets Goodwill Total Spot's 20012 income Income since May 1 Amortization Adjusted 600 400 (80) 320

Unamort 5/5/12 600 400 1,000

2012 (80) 0 (80)

Unamort 12/31/12 520 400 920

CI 80% share NCI 20% share

256 64
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Pot's Equity Entries

These entries are made in Pots general ledger:
Investment in Spot Cash for acquisition Cash Investment in Spot for dividends Investment in Spot Income from Spot for income from sub 2,400 2,400 120 120 256 256

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Worksheet elimination entries for 2012. Notice the preacquisition revenues, expenses, and dividends included in the third entry.

Income from Spot Dividends Investment in Spot Noncontrolling interest share Dividends Noncontrolling interest Sales Common stock Retained earnings 1/1 Fixed assets Goodwill Cost of sales Operating expenses Dividends Investment in Spot Noncontrolling interest Depreciation expense Accumulated depreciation
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256 120 136 64 30 34 900 600 1,350 600 400 500 200 150 2,400 600 80 80
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Income statement: Sales Income from Spot Cost of sales Operating expense Noncontrolling interest share Controlling interest share State of retained earnings: Retained earnings, 1/1 Add net income Deduct dividends

Pot Spot DR CR Consol 5,000 2,700 900 6,800 256 256 0 (2,100) (1,500) 500 (3,100) (800) (600) 80 200 (1,280) 64 (64) 2,356 600 2,356 4,300 2,356 (1,000) 1,350 1,350 600 (300) 120 30 1,650 4,300 2,356

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

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Balance sheet: Cash Inventories Fixed assets, net Investment in Spot Goodwill Total Accounts payable Other liabilities Common stock Retained earnings Noncontrolling interest Total

Pot Spot 950 50 1,300 900 5,170 2,800 2,536

DR 600

CR Consol 1,000 2,200 80 8,490 136 2,400 0 400 12,090 800 3,000 2,000 5,656 600 34 634 12,090
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400 9,956 500 1,800 2,000 5,656 9,956 3,750 300 1,200 600 1,650 3,750

600

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Pepper acquired Salt in a series of acquisitions, resulting in a total 90% ownership.

Date April 1 July 1 October 1 Interest Investment Acquired Cost 5% 7,000 5% 8,000 80% 210,000 90% 225,000

Piecemeal Acquisition: Example

The total book value and fair value of Salt's net assets on October 1 (date control was acquired) was $220,000. Cost of 90% of Salt 225,000
Implied value of Salt Book value Goodwill
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250,000 220,000 30,000

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Income Distribution
Salt's income allocation for the year:
Total Income Sales Expenses Net income 150,000 (110,000) 40,000 Oct 1 - Dec 31 33,750 (24,750) 9,000 3,750 (2,750) 1,000 before Oct 1 112,500 (82,500) 30,000 CI 90% share NCI 10% Share Preacquisition

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Pepper's Worksheet Entries

There were no dividends before or after the acquisition in this case. Zeros are included just for clarity.
Income from Salt Dividends Investment in Salt Noncontrolling interest share Dividends Noncontrolling interest Sales Common stock Retained earnings 1/1 Expenses Dividends Investment in Salt Noncontrolling interest
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9,000 0 9,000 1,000 0 1,000 112,500 100,000 90,000 82,500 0 225,000 25,000
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Income statement: Sales Income from Salt Expenses Noncontrolling interest share Controlling interest share State of retained earnings: Retained earnings, 1/1 Add net income Deduct dividends Retained earnings, 12/31

Pepper 274,875 9,000

Salt

DR 9,000

CR

Consol 312,375 0

150,000 112,500 82,500 1,000

(220,000) (110,000) 63,875 221,500 63,875 0 285,375 40,000 90,000 40,000 0 130,000 90,000

(247,500) (1,000) 63,875 221,500 63,875 285,375

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Balance sheet: Other assets Investment in Salt Goodwill Total Liabilities Common stock Retained earnings Noncontrolling interest Total

Pepper Salt 451,375 300,000 234,000

DR

CR 9,000 225,000

Consol 751,375 0 30,000 781,375 170,000 300,000 285,375

30,000 685,375 300,000 100,000 70,000 300,000 100,000 100,000 285,375 130,000 25,000 1,000 685,375 300,000
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26,000 781,375
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Interim Sale, Continued Control: Example

Pablo owns 90% of Sergio. Pablos 1/1/12 $228 investment balance reflects Sergio's underlying equity plus $18 goodwill ($20 total implied goodwill). During 2012, Sergio reports $36 income and pays $20 dividends on July 1. Pablo sells 10% interest in Sergio on April 1 for $40.
Pablo's interest in Sergio Investment account: 1/1 balance Income to 4/1 4/1 balance Before Interest After the sale sold the sale 90% 10% 80% 288.0 8.1 296.1

32.9

263.2
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Investment in Sergio: T-account

Investment in Sergio 1/1 Balance 90% income to 4/1 4/1 Balance 80% income since 4/1 12/31 Balance 288.0 8.1 296.1 32.9 4/1 sale of 10% (1/9 of shares) 16.0 6/1 dividends (80%) 21.6 268.8

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Pablo's Entry for the Sale

Cash Investment in Sergio Additional paid in capital 40.0 32.9 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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Noncontrolling Interest Calculations

Balance on Jan 1: (288*.1/.9) Income to April 1: (36*.1*3/12) Addition to NCI on April 1 Income since April 1: (36*.2*9/12) Dividends (20*.2) Balance at Dec 31 $32.0 0.9 32.9 5.4 (4.0) $67.2

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Worksheet Entries
Income from Sergio (8.1+21.6) Dividends Investment in Sergio Noncontrolling interest share (0.9+5.4) Dividends Noncontrolling interest Common stock Retained earnings 1/1 Goodwill Investment in Sergio (288-32.9) Noncontrolling interest, 1/1 Noncontrolling interest, 4/1
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29.7 16.0 13.7 6.3 4.0 2.3 200.0 100.0 20.0 255.1 32.0 32.9
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Interim Sale, Loss of Control: Example

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 5. 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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Consolidations Changes in Ownership Interests

3: SUBSIDIARYS STOCK TRANSACTIONS

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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 5. Sub issues stock to both parent & Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall noncontrolling interest

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Sub Issues Stock to Parent: Example

Pratt owns 80% of Strut, acquired at $180.
Cost of 80% of Strut Implied value of Strut Book value of Strut Excess, goodwill $180 $225 200 $25

Strut issues additional shares to Pratt. Outstanding shares increased from 10K to 12K. Pratt had owned 8K of the 10K (80%), but now owns 10K of the 12K shares (66.67%).
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Pratt's Entry
Pratt acquires additional shares directly from Strut at book value, $40. Investment in Strut 40 Cash 40 If Pratt had paid $70 (above book value) or $30 (below book value), only the amount in the entry would change. The following analysis shows different amounts of goodwill which will be used in the consolidation worksheet.
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Strut's equity Goodwill Total value Pratt's Investment in Strut Pratt's share of BV of equity Goodwill Total value

Before sale 200 25 225 180 160 20 180 for $40 240 220 200 20 220

Goodwill may go up or down depending on the value Pratt paid for the additional shares of Strut

Sell at BV Sell > BV Sell < BV Strut's equity, after the issuance Pratt's Investment, after Pratt's share of equity, 10/12 share New measure of goodwill Total for $70 270 250 225 25 250 for $30 230 210.0 191.7 18.3 210.0
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Sub Issues Stock to Outsiders: Example

Puny owns 80% of Stat, acquired at $180.
Cost of 80% of Stat Implied value of Stat Book value of Stat Excess, goodwill $180 $225 200 $25

Stat issues additional shares to outside entities. Outstanding shares increased from 10K to 12K. Puny had owned 8K of the 10K (80%), but now owns 8K of the 12K shares (66.67%).
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Puny's measure of goodwill does not change when Stat issues the shares to outside entities, just the value of its Investment in Stat account.

Stat equity Goodwill Total value Puny's Investment Puny's share of BV of equity Goodwill Total value

Before sale 200 25 225 180 160 20 180

Stat equity, after Puny's Investment current balance Puny's share of equity, 10/12 share Old goodwill Total, new balance in Investment Adjustment

Sell at BV Sell > BV Sell < BV for $40 for $70 for $30 240 270 230 180 180 180.0 160 180 153.3 20 20 20.0 180 200 173.3 0 +20 -6.7
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Puny's Adjusting Entry

for $40: no entry needed for $70 Investment in Stat Additional paid in capital for $30 Additional paid in capital Investment in Stat 6.7 6.7 20.0 20.0

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Sub Purchases Treasury Stock: Example

Pointer owns 80% of Shelly acquired for $160, at cost equal to book value.
Cost of 80% of Shelly Implied value of Shelly Book value of Shelly Excess, goodwill $160 $200 200 $0

Pointer holds 8K of Shelly's 10K shares outstanding (80%). Shelly reacquires 0.4K shares from outsiders. Pointer now holds 8K of Shelly's 9.6K shares outstanding (83.33%)
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Before treasury stock Shelly's equity 200 Goodwill 0 There was no prior Total value 200 goodwill; none is Pointer's Investment in Shelly 160 created by Shelly Pointer's share of BV of equity 160 purchasing treasury 0 stock. Pointer adjusts Goodwill Total value 160 the balance in its
Investment account. Shelly's equity, after Pointer's Investment current balance Pointer's share of equity, 8/9.6 Old goodwill Total, new balance in Investment Adjustment needed Buy = BV Buy > BV Buy < BV for $8 for $12 for $6 192 188 194 160 160 160.0 160 156.7 161.7 0 0.0 0.0 160 156.7 161.7 0 -3.3 +1.7
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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 Investment in Shelly Treasury stock purchased for $6 Investment in Shelly Additional paid in capital
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3.3 3.3 1.7 1.7

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Sub Stock Splits/ Stock Dividends: Example

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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