Chapter 8 CONSOLIDATIONS CHANGES IN OWNERSHIP INTERESTS

Answers to Questions 1 Preacquisition earnings and dividends are t e earnings and dividends a!!"ica#"e to an invest$ent interest !rior to its acquisition during an accounting !eriod% Assu$e t at P !urc ases an &' !ercent interest in S on (u") *+ ,'** and t at S as earnings o- .*''+''' #et/een (anuar) * and (u") *+ ,'** and !a)s .0'+''' dividends on 1a) *+ ,'**% In t is case+ !reacquisition earnings and dividends are .*''+''' and .2'+'''+ res!ective")% Historica"")+ !reacquisition earnings !urc ased /ere s o/n as a deduction on t e inco$e state$ent to arrive at conso"idated net inco$e% 3nder current GAAP+ t is is no "onger t e case% Instead+ t e conso"idated inco$e state$ent s ou"d on") re!ort revenues+ e4!enses+ gains and "osses su#sequent to t e acquisition% 5or e4a$!"e+ in a 1arc 6* acquisition+ t e conso"idated inco$e state$ent /ou"d on") inc"ude inco$e o- t e su#sidiar) -ro$ A!ri" * t roug Dece$#er 6*% GAAP reasons t at acquirers !urc ase assets and assu$e "ia#i"ities+ #ased on t eir -air va"ues% Acquirers do not 7!urc ase8 !reacquisition earnings+ a"t oug -air va"ues o- net assets s ou"d re-"ect earning !o/er o- t e acquired -ir$% Preacquisition earnings are not recorded #) a !arent under t e equit) $et od #ecause t e investor on") recogni9es inco$e su#sequent to acquisition on t e interest acquired% Historica"")+ !reacquisition earnings !urc ased /ere s o/n as a deduction on t e inco$e state$ent to arrive at conso"idated net inco$e% 3nder current GAAP+ t is is no "onger t e case% Instead+ t e conso"idated inco$e state$ent s ou"d on") re!ort revenues+ e4!enses+ gains and "osses su#sequent to t e co$#ination date% 5or e4a$!"e+ in a 1arc 6* acquisition+ t e conso"idated inco$e state$ent /ou"d on") inc"ude inco$e o- t e su#sidiar) -ro$ A!ri" * t roug Dece$#er 6*% Noncontro""ing stoc: o"ders o- Su# Co$!an) e"d a ,' !ercent interest during t e -irst a"- )ear and a *' !ercent interest during t e "ast a"- )ear and at )ear;end% <ut noncontro""ing interest at )ear;end is co$!uted -or t e *' !ercent interest e"d #) noncontro""ing stoc: o"ders at t e end o- t e )ear% Noncontro""ing interest s are -or t e )ear as t/o !arts= >*? annua" inco$e 4 0'@ 4 *'@ !"us >,? annua" inco$e 4 0'@ 4 ,'@% Preacquisition inco$e is si$i"ar to noncontro""ing interest s are #ecause it re!resents t e inco$e o- a su#sidiar) attri#uta#"e to stoc: o"ders outside t e conso"idated entit)% <ut !reacquisition inco$e is not inco$e o- t e noncontro""ing stoc: o"ders at t e date o- t e -inancia" state$ents% In -act+ !reacquisition inco$e re"ates to a !revious contro""ing stoc: o"der grou! / en t e interest acquired e4ceeds 0' !ercent% In suc a case+ it see$s i$!ro!er to re!ort t is as a deduction in t e conso"idated inco$e state$ent% Rat er+ t e -air va"ue o- net assets acquired s ou"d re-"ect t e acquireeAs earnings istor)% 3nder GAAP+ a gain or "oss is on") recorded / en t e so"d interest resu"ts in deconso"idation o- t e su#sidiar)+ i%e%+ t e !arent no "onger o"ds a contro""ing interest% T e gain or "oss on t e sa"e o- an equit) interest is t e di--erence #et/een t e !roceeds -ro$ t e sa"e >t e -air va"ue? and t e recorded #oo: va"ue ot e interest so"d+ !rovided t at t e invest$ent is accounted -or as a one;"ine conso"idation% I- anot er $et od o- accounting as #een used+ t e invest$ent account $ust #e converted to t e equit) $et od so t at an) gain or "oss on sa"e is t e sa$e as i- a one;"ine conso"idation ad #een used !revious")% W en t e !arent $aintains a contro""ing interest a-ter t e sa"e+ t e sa"e is treated as an equit) transaction+ /it no gain or "oss recognition% T e !arent de#its cas or ot er consideration received in t e sa"e+ credits t e invest$ent account #ased on !ercent o- carr)ing va"ue so"d+ and records t e di--erence as an adBust$ent to ot er !aid;in ca!ita"% 6 Conce!tua"")+ t e inco$e a!!"ica#"e to an equit) interest so"d during an accounting !eriod s ou"d #e inc"uded in invest$ent inco$e and conso"idated net inco$e% In t is case+ t e gain or "oss on sa"e is co$!uted on t e #asis o- t e #oo: va"ue o- t e interest at t e ti$e o- sa"e+ and inco$e is assigned to t e
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Consolidations Changes in Ownership Interests

increased noncontro""ing interest on") a-ter t e date o- sa"e% As a !ractica" e4!edient+ a #eginning;o-;t e; !eriod sa"e date can #e used suc t at no inco$e is recogni9ed on t e interest so"d u! to t e ti$e o- sa"e+ and t e gain or "oss is co$!uted on t e #oo: va"ue at t e #eginning o- t e !eriod% W en t is e4!edient is used+ inco$e $ust #e assigned to t e increased noncontro""ing interest -or t e entire )ear o- sa"e% T e co$#ined invest$ent inco$e and gain or "oss on sa"e are t e sa$e under #ot a!!roac es !rovided t at t e assu$!tions >#eginning o- t e )ear and ti$e o- sa"e? are -o""o/ed consistent")% As noted in question 0+ gain or "oss on t e sa"e o- t e equit) interest is on") recogni9ed / en t e su#sidiar) is deconso"idated% Ot er /ise+ t e gain or "oss is an adBust$ent to ot er !aid;in ca!ita"% 7 Assu$ing t at no gain or "oss is recogni9ed+ no adBust$ent o- t e !arentAs invest$ent account is necessar) / en t e su#sidiar) se""s additiona" s ares to outside !arties at #oo: va"ue #ecause t e !arentAs s are o- under")ing #oo: va"ue does not c ange% I- additiona" s ares are so"d a#ove #oo: va"ues+ t e !arentAs s are o- t e under")ing equit) o- t e su#sidiar) increases% T is increase is recorded #) t e !arent as -o""o/s= Invest$ent in su#sidiar) Additiona" !aid;in ca!ita" DD DD

I- t e su#sidiar) se""s additiona" s ares #e"o/ #oo: va"ue+ t e !arentAs interest is decreased and t e !arent records decreases in its invest$ent and additiona" !aid;in ca!ita" accounts% In a"" t ree cases >at #oo: va"ue+ a#ove #oo: va"ue+ or #e"o/ #oo: va"ue?+ t e !arentAs o/ners i! !ercentage decreases -ro$ &' !ercent >&+''' o- *'+''' s ares? to EE , 6 !ercent >&+''' o- *,+''' s ares?% No gain or "oss is recogni9ed+ t e c ange in under")ing #oo: va"ue+ adBusted -or one;si4t F>&'@ G EE , @? &'@H o- an) una$orti9ed cost #oo: va"ue di--erentia" is re!orted as adBust$ent to additiona" 6 !aid;in ca!ita"+ since t e !arent $aintains its contro""ing interest% An a"ternative co$!utation is to assu$e t at t e !arent so"d one;si4t o- its interest -or EE , 6 !ercent o- t e !roceeds+ t e di--erence #eing t e a$ount o- adBust$ent to additiona" !aid;in ca!ita"% 8 T e acquisition o- t e ,+''' s ares direct") -ro$ t e su#sidiar) increases t e !arentAs !ercentage interest -ro$ &' !ercent >&+''' o- *'+''' s ares? to 0IE >*'+''' o- *,+''' s ares+ or &6 *I6@?% T e c ange in t e interest e"d does not a--ect t e /a) in / ic t e !arent records its additiona" invest$ent% T e !arent in a"" cases increases its invest$ent account #) t e a$ount o- cas !aid or ot er consideration given -or t e additiona" invest$ent% It $a:es no di--erence i- t e !urc ase !rice is a#ove or #e"o/ #oo: va"ue% <ut+ it e !urc ase !rice is a#ove t e #oo: va"ue o- equit) acquired+ t en t e e4cess is assigned to underva"ued assets or good/i""% I- t e !urc ase !rice is #e"o/ t e #oo: va"ue o- equit) acquired+ t en t e e4cess s ou"d #e assigned to reduce overva"ued identi-ia#"e assets or good/i""% Treasur) stoc: transactions #) a su#sidiar) c ange t e !arentAs !ro!ortionate interest in t e su#sidiar)% An) c anges in t e !arentAs s are o- t e under")ing #oo: va"ue o- t e su#sidiar) require adBust$ents in t e !arentAs invest$ent in su#sidiar) and additiona" !aid;in ca!ita" accounts% Gains and "osses to a !arent >or equit) investor? do not resu"t -ro$ t e treasur) stoc: transactions o- its su#sidiaries >or equit) investees?% A"t oug t e !arentAs invest$ent interest $a) increase or decrease -ro$ suc transactions+ t e !redo$inate vie/ is t at suc c anges are o- a ca!ita" nature and s ou"d #e accounted -or #) additiona" !aid;in ca!ita" adBust$ents rat er t an #) recorded gains and "osses%

10

11

Stoc: s!"its and stoc: dividends #) a su#sidiar) do not a--ect t e a$ounts t at a!!ear in t e conso"idated -inancia" state$ents% <ut stoc: dividends #) a su#sidiar) resu"t in ca!ita"i9ation o- su#sidiar) retained earnings and t e a$ounts invo"ved in e"i$inations -or t e su#sidiar)As stoc: o"dersA equit) accounts are a--ected% SOLUTIONS TO EXERCISES Solution E8-1 Allocation of Sets net income: 2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 8

8-3

Controlling share of income ( 100,000 !0" 1#2 $ear% & ( 100,000 '0" 1#2 $ear% )oncontrolling interest share (*0" + 100,000 + , $ear% & (10" + 100,000 + ,% Preac-uisition income )ote. /his does not appear on the consolidated income statement. Allocation of Sets dividends: 0i1idends to Pie ( *0,000 !0"% & ( *0,000 '0"% )oncontrolling interest ( *0,000 + *0"% & ( *0,000 + 10"% Preac-uisition di1idends Solution E8-2 1 Income from 3ip for 2011. 20" interest + 220,000 + (#12 $ear 40" interest 220,000 1#* $ear /otal income from 3ip Preac-uisition income. 5nder 677P, no preac-uisition income appears on the consolidated income statement. /he income statement onl$ includes income of the subsidiar$ earned after the parent obtains its controlling interest. Control 8as established on 3eptember 1, 8hen Pin9s interest increased from 20" to 40", so the consolidated income statement includes 3ip income of (0,000 ( 220,000 + 1#* of $ear%. )oncontrolling interest share for 2011. (0,000 20"

(0,000 20,000 0

2(,000 12,000 0

42,000 2(,000 112,000

2.

*2,000

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Consolidations Changes in Ownership Interests

Solution E8-3 (amounts in thousands% Entry to record sale of 15% interest: Cash In1estment in 3ap ;ther paid<in capital /o record sale of 1:" interest in 3ap. No gain or loss on sale is recognized since Pet maintains an 85% controlling interest. Entry to record investment income for 2 11: In1estment in 3ap( 400 (:"% Income from 3ap /o record income from 3ap. !"ec#: In1estment balance =anuar$ 1, 2011 >ess. ?oo@ 1alue of interest sold 7dd. Income from 3ap In1estment balance 0ecember *1, 2011 5nderl$ing e-uit$ ( 2,400 (:"% 7dd. (:" of 6ood8ill A In1estment balance 0ecember *1, 2011 A )ote that implied total good8ill is Solution E8-4 (amounts in thousands% 1 6ain on sale of 20" interest. )o gain or loss is recogniBed since Pal maintains a 40" controlling interest. $eginning of t"e %eriod sale ass&m%tion 3elling price 1*0 ?oo@ 1alue of interest ( 2*4 in1estment 10' account balance 20"#(0"% 7dCustment to other paid<in capital 21 Act&al sale date ass&m%tion 3elling price ?oo@ 1alue of interest sold. ?eginning of the period balance 7dd. Income ( 1:0 1#* $ear (0"% Interest sold 7dCustment to increase additional paid<in capital 2 Income from 3ag $eginning of t"e %eriod sale ass&m%tion Income from 3ag( 1:0 40"% Act&al sale date ass&m%tion =anuar$ 1 to Da$ 1. 3hare of 3ag9s income ( 1:0 (0" 1#* $ear% Da$ 1 to 0ecember *1. 3hare of 3ag9s income ( 1:0 40" 2#* $ear% Income from 3ag 1*0 2*4 20 2!4 2:" !:0 440 '0

:10 :10

2,200 (440% :10 2,2:0 *,'10 *20 2,2:0 200 ( *20 # (:"%.

11' 11

'0 20 40 100

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Consolidations Changes in Ownership Interests

Solution E8-4 (continued% 3 In1estment in 3ag 0ecember *1, 2011 ?eginning of Period 3ale 7ssumption 2*4 (10'% '0 (2(% *4' 7ctual 3ale 0ate 7ssumption 2*4 (11'% 100 (2(% *4'

In1estment balance =anuar$ 1 ?oo@ 1alue of interest sold Income from 3ag 0i1idends In1estment balance 0ecember *1, 2011 Solution E8-5 (amounts in thousands% 1a Eair 1alue boo@ 1alue differential

Cost Implied fair 1alue of 3et ( 1,2!2 # !0"% ?oo@ 1alue ( 1,2(0 =anuar$ 1 balance & 100 income for : months < 40 di1idends in =anuar$ and 7pril% 6ood8ill 1b

1,2!2 1,(20 (1,:20% *00

Income from 3et ()ote. ;nl$ include earnings subse-uent to the ac-uisition date%. Income from 3et ( 220,000 !#12 $ear !0"% '(

1c

In1estment in 3et at 0ecember *1 In1estment cost 7dd. Income from 3et 0educt. 0i1idends ( 40,000 !0"% In1estment in 3et 0ecember *1, 2011 1,2!2 '( (22% 1,**0

Consolidation 8or@ing paper entries. a Income from 3et '( In1estment in 3et :4 0i1idends 22 /o eliminate income and di1idends from 3et and adCust in1estment account to its cost on =une 1. 1,000 Common stoc@, 10 par 3et :(0 Fetained earnings 3et 6ood8ill *00 In1estment in 3et 1,2!2 )oncontrolling interest :42 0i1idends 22 /o eliminate reciprocal in1estment and e-uit$ balances, record preac-uisition income and beginning noncontrolling interest, and eliminate preac-uisition di1idends. 2011 Pearson Education, Inc. publishing as Prentice Hall

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c )oncontrolling interest share 220,000 + !#12 + *0" 0i1idends 120,000 + *0" )oncontrolling interest

22,000 *4,000 4,000

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8-8

Consolidations Changes in Ownership Interests

Solution E8-6 1 In1estment in 3o8 (in thousands% In1estment balance 0ecember *1, 2011 ( ',000 (0"% Cost of ne8 shares ( 2: 40,000 shares% In1estment in 3o8 after ne8 in1estment 2 6ood8ill from ne8 in1estment 3o89s stoc@holders9 e-uit$ after issuance ( ',000 & 1,:00% Pal9s o8nership percentage (2(0,000 & 40,000 shares%#440,000 shares Pal9s boo@ 1alue after issuance >ess. Pal9s boo@ 1alue before issuance Increase in boo@ 1alue from purchase (boo@ 1alue ac-uired% Cost of 40,000 shares ?oo@ 1alue ac-uired 6ood8ill from ac-uisition of ne8 sharesA A /his implies total good8ill is e-ual to 1*4,12:. 10,:00 .(1(2 (,:'1.1 (!,200% 1,*'1.1 1,:00 (1,*'1.1% 10(.' !,200 1,:00 (,!00

Solution E8-7 1 3od issues *0,000 shares to Pod at 20 per share Pod9s o8nership interest before issuance. 1!4,000#220,000 shares G (0" Pod9s o8nership interest after issuance. 204,000#2:0,000 shares G (2.2" 3od sells *0,000 shares to the public at 20 per share Pod9s o8nership interest after issuance. 1!4,000#2:0,000 shares G !0.2" 3od sells *0,000 shares to the publicH no gain or loss recogniBed. In1estment in 3od 11:,200 7dditional paid<in capital 11:,200 /o record increase in in1estment in 3od computed as follo8s. ?oo@ 1alue before issuance ( *,200,000 (0"% ?oo@ 1alue after issuance ( *,(00,000 !0.2"% 7dditional paid<in capital 2,:40,000 2,4!:,200 11:,200

2 3

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Solution E8-8 Pam '&ys s"ares 1a Percentage o8nership after additional in1estment. !00,000#1,000,000 G !0" 1b 6ood8ill from additional in1estment (in thousands%. ?oo@ 1alue of interest after sale 2,400 !0" ?oo@ 1alue of interest before sale 2,100 2#* ?oo@ 1alue of interest ac-uired Cost of interest 6ood8ill from additional in1estment A A /his implies total good8ill is no8 e-ual to 112,2(4. 1,(20 1,200 220 :00 (0

(&tsiders '&y s"ares 2a Percentage o8nership after sale. 400,000#1,000,000 G 40" 2b Change in underl$ing boo@ 1alue of in1estment in 3at. 3at9s underl$ing e-uit$ after sale Pam9s interest ?oo@ 1alue of Pam9s in1estment in 3at after the sale >ess. ?oo@ 1alue before the sale Increase in boo@ 1alue of in1estment 2c Entr$ to adCust in1estment account. In1estment in 3at 7dditional paid<in capital 140,000 140,000 2,400,000 40" 1,:40,000 1,200,000 140,000

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8-10

Consolidations Changes in Ownership Interests

Solution E8Preliminar$ computations of fair 1alue boo@ 1alue differentials. A%ril 1) 2 11 ac*&isition Cost of 2,000 shares (20" interest% 42,000 Implied total fair 1alue of 3um ( 42,000 # 20"% *20,000 ?oo@ 1alue of 3um on april 1 ac-uisition date. ?eginning stoc@holders9 e-uit$ 2(0,000 20,000 7dd. Income for * months ( (0,000 I $ear% 3toc@holders9 e-uit$ 7pril 1 *00,000 6ood8ill 20,000 +&ly 1) 2 12 ac*&isition Cost of (,000 shares (20" interest% Implied total fair 1alue of 3um ( 142,000 # 20"% ?oo@ 1alue on =ul$ 1 ac-uisition date. ?eginning stoc@holders9 e-uit$ 7dd. Income for 4 months ( (0,000 1#2 $ear% >ess. 0i1idends Da$ 1 3toc@holders9 e-uit$ =ul$ 1 6ood8ill (amount is unchanged b$ this transaction% 1 Income from 3um 2 11 Income from 3um for 2011 ( (0,000 20" *#2 $ear% 2 12 Income from 3um 20" share of reported income ( (0,000 20"% 20" share of reported income ( (0,000 20" 1#2 $ear% Income from 3um 2 3 4 )oncontrolling interest 0ecember *1, 2012 (( 220,000 boo@ 1alue & 20,000 good8ill% 20"% Preac-uisition income does not appear in income statement. In1estment balance at 0ecember *1, 2012 Cost of 20" in1estment Income from 3um for 2011 Cost of 20" in1estment Income from 3um for 2012 6ain on re1aluation of in1estment >ess. 0i1idends ( 2,000 & 4,000% In1estment in 3um Implied fair 1alue of 3um ( 142,000#0.2% Eair 1alue of original in1estment( 210,000 + 20"% >ess. Cost of original in1estment 6ain on re1aluation of in1estment 42,000 12,000 142,000 *2,000 1(,000 ((,000% 2(2,000 210,000 (2,000 (42,000% 1(,000 12,000 14,000 14,000 *2,000 1!4,000 142,000 210,000 *40,000 20,000 (10,000% *'0,000 20,000

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8-11

Solution E8-1! "#$li%ina#& co%'utation( In1estment cost =ul$ 1, 2012 Implied total fair 1alue of 3ad ( 4!:,000 # '0"% >ess. ?oo@ 1alue of 3ad at ac-uisition. E-uit$ of 3ad 0ecember *1, 2011 7dd. Income for 1#2 $ear E-uit$ of 3ad =ul$ 1, 2012 E+cess (boo@ 1alue G underl$ing e-uit$% 1 ,nvestment income from Sad Income from 3ad 2012 ( 100,000 1#2 $ear '0"% Income from 3ad 201*. =anuar$ 1 to =ul$ 1 ( (0,000 1#2 $ear '0"% =ul$ 1 to 0ecember *1 ( (0,000 1#2 $ear (0"% In1estment in 3ad Cost =ul$ 1, 2012 7dd. Income from 3ad 2012 >ess. 0i1idends paid in 0ecember ( :0,000 '0"% In1estment balance 0ecember *1, 2012 >ess. ?oo@ 1alue of 1#' interest sold on =ul$ 1, 201*a 7dd. Income from 3ad 201* >ess. 0i1idends paid in 0ecember ( *0,000 (0"% In1estment balance 0ecember *1, 201*
a 3ale of 10" interest =ul$ 1, 201*. E-uit$ of 3ad 0ecember *1, 2011 7dd. Income less di1idends 2012 7dd. Income for 1#2 $ear 201* E-uit$ of 3ad =ul$ 1, 201* Interest sold 5nderl$ing e-uit$ of interest sold 6ain on sale of 1#' interest ( (:,000 proceeds < !',000% 3ince Pit maintains a controlling interest, the gain is not recorded, but sho8n as an adCustment to additional paid<in capital.

4!:,000 !:0,000 !00,000 :0,000 !:0,000 0

2:,000

*4,000 *2,000 4(,000 4!:,000 2:,000 (2:,000% 4!:,000 (!',000% 4(,000 (22,000% 420,000
!00,000 :0,000 20,000 !'0,000 10" !',000 4,000

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Consolidations Changes in Ownership Interests

Solution E8-1! (continued% 2 Noncontrolling interest s"are )oncontrolling interest share 2012. ( 100,000 income 10" interest + 1#2 $ear% )oncontrolling interest share 201*. ( (0,000 1#2 $ear 10"% & ( (0,000 1#2 $ear 20"% Noncontrolling interest -ecem'er .1) 2 12 E-uit$ of 3ad =anuar$ 1 7dd. Income less di1idends for 2012 E-uit$ of 3ad 0ecember *1 )oncontrolling interest percentage )oncontrolling interest 0ecember *1 Noncontrolling interest -ecem'er .1) 2 1. E-uit$ of 3ad =anuar$ 1 7dd. Income less di1idends for 201* E-uit$ of 3ad 0ecember *1 )oncontrolling interest percentage )oncontrolling interest 0ecember *1 Solution E8-11 Preliminar$ computations. In1estment cost =anuar$ 1, 2012 Implied total fair 1alue of 3o$ ( 4'0,000 # !:"% ?oo@ 1alue of 3o$ E+cess fair 1alue o1er boo@ 1alue G 6ood8ill 1 /nderlying 'oo# val&e -ecem'er .1) 2 12 1,000,000 e-uit$ !:" 2 Percentage o0ners"i% 'efore %&rc"ase of additional s"ares *0,000 shares o8ned#20,000 shares outstanding G !:" interest Percentage o8nership after purchase of additional shares 20,000 shares o8ned#:0,000 shares outstanding G (0" interest 3 ,nvestment in Soy 'alance +an&ary .) 2 1. In1estment cost =anuar$ 1, 2012 7dd. 3hare of 3o$9s income less di1idends for 2012 ( 200,000 !:"% In1estment in 3o$ 0ecember *1, 2012 7dd. 7dditional in1estment =anuar$ *, 201* 2011 Pearson Education, Inc. publishing as Prentice Hall 4'0,000 1:0,000 (20,000 !:0,000 4'0,000 '20,000 ((00,000% 120,000 :,000

12,000 !00,000 :0,000 !:0,000 10" !:,000 !:0,000 :0,000 (00,000 20" 140,000

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(10,000 shares *0% In1estment in 3o$ balance =anuar$ *, 201*

*00,000 1,120,000

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8-14

Consolidations Changes in Ownership Interests

Percentage o0ners"i% if s"ares sold to o&tside entities *0,000 shares o8ned#:0,000 shares outstanding G 40" interest

,nvestment in Soy 'alance +an&ary .) 2 1. In1estment in 3o$ 0ecember *1, 2012 (see * abo1e% 7dd. Increase in boo@ 1alue from change in o8nership interest. ?oo@ 1alue after additional 10,000 shares 8ere issued ( 1,*00,000 e-uit$ 40"% ?oo@ 1alue before additional 10,000 shares 8ere issued ( 1,000,000 e-uit$ !:"% In1estment in 3o$ balance < =anuar$ *, 201* (20,000

!(0,000 (!:0,000% *0,000 (!0,000

Solution E8-12 Preliminary com%&tations: Cost of additional in1estment (2,000 shares Implied total fair 1alue of 3on 140,000 # (2,000#12,000% >ess. ?oo@ 1alue of 3on after issuance E+cess fair 1alue o1er boo@ 1alue +an&ary 2) 2 12 In1estment in 3on 140,000 Cash /o record purchase of additional 2,000 shares of 3on. -ecem'er 2 12 Cash (0% 140,000 '40,000 !10,000 2:0,000

140,000

:0,000 In1estment in 3on :0,000 /o record receipt of di1idends ( 40,000 10,000#12,000 shares%.

-ecem'er .1) 2 12 In1estment in 3on !:,000 Income from 3on /o record income from 3on( '0,000 10,000#12,000%.

!:,000

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Chapter 8

8-15

Solution E8-13 1 ,nvestment in Sir 1in t"o&sands2 Cost 7dd. '0" of *00 increase in e-uit$ since 2011 In1estment in 3ir =anuar$ 1, 201* Entry on Pats 'oo#s 1no gain or loss recognized2 In1estment in 3ir 1(0 7dditional paid<in capital 1(0 /o recogniBe change in boo@ 1alue of in1estment from 3ir9s sale of additional shares, computed as follo8s. 1,(00 5nderl$ing e-uit$ after issuance ( 2,200 !:"% (1,420% 5nderl$ing e-uit$ before issuance ( 1,(00 '0"% 1(0 SOLUTIONS TO "RO)LE*S Solution "8-1 Preliminary com%&tations 1in t"o&sands2: Cost of 20,000 shares =ul$ 1, 2011 Implied total fair 1alue of 3in ( 420 # (0"% ?oo@ 1alue of 3in ( ::0 & :0 income% E+cess fair 1alue o1er boo@ 1alue Cost of 10,000 shares =anuar$ 1, 2012 Implied fair 1alue of 3in J 142#(10#40%K Eair 1alue of original in1estment. J '!2 + (20#40%K >ess. Carr$ing 1alue of original in1estment. 6ain on re1aluation of in1estment 1 ,nvestment in Sin -ecem'er .1) 2 11 In1estment cost 7dd. Income from 3in< 100 1#2 $ear (0" >ess. 0i1idends ( :0 (0"% In1estment in 3in 0ecember *1, 2011 ,ncome from Sin 2 12 3hare of 3in9s income ( 1:0 :#4% ,nvestment in Sin -ecem'er .1) 2 12 In1estment balance 0ecember *1, 2011 7dd. 7dditional in1estment 7dd. Income from 3in 2012 7dd. Fe1aluation of original in1estment >ess. 0i1idends for 2012 ( 40 :#4% In1estment in 3in 0ecember *1, 2012 '!2 42( 420 2( 420 20 (20% 420 12: 420 !!: (400% 1!: 142 1,(00 2!0 2,0!0

420 142 12: 2( (:0% ((:

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8-16

Consolidations Changes in Ownership Interests

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Chapter 8

8-17

Solution "8-2 1 ,nvestment in Sit 1in t"o&sands2 5nderl$ing e-uit$ 24,000 (0" 6ood8ill ((0"% In1estment in 3it =anuar$ 1, 201* 20,(00 2,000 22,(00

2 3

Percentage interest after stoc# iss&ance 3hares o8ned '40,000#1,400,000 outstanding shares G 40" interest No gain or loss recognized on iss&ance of additional s"ares In1estment in 3it 2,000 ;ther paid<in capital 2,000 /o recogniBe change in o8nership interest computed as. 5nderl$ing e-uit$ after sale ( *(,000 40"% less underl$ing e-uit$ before sale of additional shares ( 24,000 (0"%.

Solution "8-3 1 +o&rnal entry to record sale as of act&al sale date Cash 120,000 7dditional paid<in capital 1,:00 In1estment in 3a8 121,:00 /o record sale of 1#' of in1estment in 3a8. ?oo@ 1alue of interest sold is computed as follo8s. In1estment balance 0ecember *1, 2010 7dd. Income from 3a8 for one<half $ear ( 2(0,000 1#2 $ear '0"% >ess. 0i1idends ( (0,000 '0"% ?oo@ 1alue of in1estment on =ul$ 1, 2011 ?oo@ 1alue of interest sold ( 1,0'*,:00#'% 2 1,0*',:00 124,000 (!2,000% 1,0'*,:00 121,:00

+o&rnal entry to record sale as of +an&ary 1) 2 11 Cash 120,000 7dditional paid<in capital 12,:00 In1estment in 3a8 10!,:00 /o record sale of 1#' of in1estment in 3a8. ?oo@ 1alue of interest sold is computed as follo8s. In1estment balance 0ecember *1, 2010 >ess. 0i1idends ?oo@ 1alue adCusted for di1idends ?oo@ 1alue of interest sold ( '4!,:00#'% 1,0*',:00 (!2,000% '4!,:00 10!,:00 In1estment in 3a8 ?eginning of Lear 3ale 0ate 1,0*',:00 112,000 1l2,000

3econciliation In1estment in 3a8 7ctual 3ale 0ate 1,0*',:00 124,000 112,000

?alance =anuar$ 1, 2011 7dd. Income from 3a8 =anuar$ 1 =ul$ 1 =ul$ 1 0ecember *1 >ess. 0i1idends

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8-18

Consolidations Changes in Ownership Interests

Eirst half<$ear >ast half<$ear >ess. ?oo@ 1alue of interest sold ?alance 0ecember *1, 2011 Solution "8-4 (in thousands%

(!2,000% (42,000% (121,:00% 1,020,000

(!2,000% (42,000% (10!,:00% 1,020,000

Entries on Pan9s boo@s to reflect the change in o8nership interest. ;ption 1 Pan sells *0,000 shares of 3on Cash 1,:00 In1estment in 3on (!0 7dditional paid<in capital 4*0 /o record sale of *0,000 shares at :0 per share. )o gain or loss is recogniBed since Pan maintains a controlling interest.

;ption 2 3on issues and sells 20,000 shares to the public In1estment in 3on 7dditional paid<in capital 4*0 4*0

/o record adCustment in o8nership computed as follo8s. ?oo@ 1alue after sale of 20,000 shares ( 12,220 !:"% ?oo@ 1alue before sale of 20,000 shares ( 10,220 :#4% Increase in boo@ 1alue of in1estment from sale ;ption * 3on reissues 20,000 shares of treasur$ stoc@

',**0 ((,!00% 4*0

In1estment in 3on 4*0 7dditional paid<in capital 4*0 /o record adCustment in o8nership computed the same as 2 abo1e.

Con(oli+at$+ Stoc,-ol+$#(. E/uit& at =anuar$ 1, 2012 ;ption 1 Common stoc@ 7dditional paid<in capital Fetained earnings )oncontrolling interesta /otal stoc@holders9 e-uit$
a

;ption 2 10,000 *,4*0 !,000 *,110 2*,!20

;ption * 10,000 *,4*0 !,000 *,110 2*,!20

10,000 *,4*0 !,000 2,410 2*,220

)oncontrolling interest under option 1. 10,220 2:" )oncontrolling interest under options 2 and *. 12,220 2:"

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Chapter 8

8-19

Solution "8-5 Preliminary com%&tations: Cost of ',000 shares ('0" interest% =anuar$ 1, 2011 Implied total fair 1alue of 3al ( (10,000 # '0"% ?oo@ 1alue of 3al ( :00,000 & *00,000% E+cess fair 1alue o1er boo@ 1alue G 6ood8ill 1 ,nvestment 'alance -ecem'er .1) 2 11 Cost =anuar$ 1, 2011 (',000 shares '0% 7dd. 3hare of 3al9s 2011 income ( :0,000 '0"% In1estment in 3al 0ecember *1 2 (10,000 2:,000 (::,000 (10,000 '00,000 ((00,000% 100,000

4ood0ill at -ecem'er .1) 2 121Pal %&rc"ased additional s"ares% 6ood8ill from =anuar$ 1, 2011 purchase 6ood8ill from =anuar$ 1, 2012 purchase. ?oo@ 1alue before purchase( (:0,000 + '0"% !4:,000 ?oo@ 1alue after purchase( 1,*:0,000 + '*1#*"% (1,240,000% ?oo@ 1alue ac-uired (2':,000% Cost of additional :,000 shares :00,000 6ood8ill from =anuar$ 1, 2012 :,000 6ood8ill at 0ecember *1, 2012 100,000

10:,000

Additional %aid5in ca%ital 1o&tsider %&rc"ased additional s"ares2 ?oo@ 1alue after issuance ( 1,*:0,000 40"% ?oo@ 1alue before issuance ( (:0,000 '0"% 7dditional paid<in capital (gain is not recogniBed% (10,000 (!4:,000% 2:,000

Noncontrolling interest -ecem'er .1) 2 12 1o&tsider %&rc"ased s"ares2

3ubsidiar$ e-uit$ =anuar$ 1, 2011 Increase for 2011 Increase for 2012 3ale of additional shares ?oo@ 1alue 6ood8ill Eair 1alue of 3al e-uit$ 0ecember *1, 2012
)oncontrolling interest percentage 4,000#1:,000 shares )oncontrolling interest 0ecember *1, 2012

(00,000 :0,000 !0,000 :00,000 1,220,000 100,000 1,:20,000 20" 40(,000

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8-20

Consolidations Changes in Ownership Interests

Solution "8-6 1 ,nvestment in Sod -ecem'er .1) 2 12 In1estment in 3od =anuar$ 2, 2011 '(,000 Increase for 2011 ( *0,000 retained earnings increase !0"% 21,000 Purchase of additional 20" interest =une *0, 2012 *!,000 Increase for income for 2012. 22,000 ( *0,000 1#2 $ear !0"% & ( *0,000 1#2 $ear '0"% (',000% 0i1idends 2012. ( 10,000 '0"% In1estment in 3od 0ecember *1, 2012 1!1,000 4ood0ill -ecem'er .1) 2 12 =anuar$ 2, 2011 purchase. Cost of !0" interest Implied fair 1alue of 3od ( '(,000 # !0"% >ess. ?oo@ 1alue of 3od 6ood8ill =une *0, 2012 purchase. Cost of 20" interest Implied fair 1alue of 3od ( *!,000 # 20"% >ess. ?oo@ 1alue of 3od 6ood8ill < 0ecember *1, 2012 3 !onsolidated net income 3ales Cost of sales E+penses Consolidated net income )oncontrolling interest share A Controlling share of net income A )oncontrolling share is 10" for full $ear plus 20" for , $ear. 7lternati1e. Pot9s reported income G Controlling share of net income !onsolidated retained earnings -ecem'er .1) 2 12 ?eginning retained earnings 7dd. Controlling share of Consolidated net income 2012 >ess. 0i1idends Consolidated retained earnings ending 7lternati1e solution. Pot9s reported ending retained earnings G Consolidated retained earnings ending
Noncontrolling interest -ecem'er .1) 2 12

'(,000 120,000 120,000 20,000 *!,000 1(:,000 14:,000 20,000 400,000 (200,000% (!0,000% 1*0,000 4,000 122,000

122,000 200,000 122,000 (42,000% 240,000 240,000 1!0,000 20,000 1'0,000 10" 1',000

E-uit$ of 3od 0ecember *1, 2012 6ood8ill Eair 1alue of 3od )oncontrolling interest percentage )oncontrolling interest 0ecember *1, 2012

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Chapter 8

8-21

Solution "8-7 1 "o+ Co#'o#ation an+ Sub(i+ia#& Consolidated Income 3tatement for the $ear ended 0ecember *1, 2012 (in thousands% 3ales Cost of sales 6ross profit 0epreciation e+pense ;ther e+penses Consolidated net income )oncontrolling interest share ( 1:0,000 20"% & ( 1:0,000 1#2 $ear 10"% Controlling share of Consolidated net income *,200 (1,'00% 1,*00 (!00% (1:0% 2:0 (**.!:% 214.2:

)ote. 3hould also add 6ain on re1aluation of in1estment of 44,!:0 to Consolidated income statement. Calculation. Implied fair 1alue of 3ubsidiar$ ':,000#0.1 G ':0,000 Eair 1alue of original in1estment ':0,000 + !0" G 44:,000 >ess. Carr$ing 1alue of original in1estment :'(,2:0 6ain on re1aluation of in1estment 44,!:0 Carr$ing 1alue of original in1estmentG ( 20,000 + !0"% G :'(,2:0 2 400,000 & ( 1:0,000 + *#12 + !0"% M

Sc"ed&le to allocate Sa0s income and dividends

3a89s income. Controlling share. ( 1:0,000 + !0" + *#12% & ( 1:0,000 + (0" + '#12% G 114,2:0 )oncontrolling share. ( 1:0,000 + *0" + *#12% & ( 1:0,000 + 20" + '#12% G **,!:0 3a89s di1idends. Controlling share. ( 20,000 + !0"% & ( 20,000 + (0"% G )oncontrolling share. ( 20,000 + *0"% & ( 20,000 + 20"% G

40,000 20,000

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8-22

Consolidations Changes in Ownership Interests

Solution "8-8 Preliminary com%&tations Cost ;ctober 1, 2011 Implied fair 1alue of 3at ( (2,200 # (0"% ?oo@ 1alue on ;ctober 1 ac-uisition date. ?oo@ 1alue on =anuar$ 1, 2011 7dd. Income =anuar$ 1 to ;ctober 1 ( 22,000 *#2 $ear% 0educt. 0i1idends Darch 1: ?oo@ 1alue ;ctober 1 6ood8ill Income from 3at for 2011 3hare of 3at9s net income ( 22,000 1#2 $ear (0"% >ess. 5nrealiBed profit in 3at9s ending in1entor$ Income from 3at A Preac-uisition income ( 22,000 *#2 $ear 100"% A Preac-uisition di1idends ( :,000 (0"%
A )oncontrolling interest share ( 4,000 20"% A 5nder 677P, preac-uisition earnings are not sho8n as a reduction of consolidated net income. Father, 8e onl$ include earnings and di1idends subse-uent to the ac-uisition date. Preac-uistion amounts are disclosed in re-uired pro<forma disclosures for ac-uisitions. /he 8or@sheet on the follo8ing page reflects these adCustments.

(2,200 10*,000 !0,000 1(,000 (:,000% (*,000 20,000 2,(00 (1,000% *,(00 1(,000 2,000 1,200

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Chapter 8

8-23

Solution "8-8 (continued% "o' Co#'o#ation an+ Sub(i+ia#& Consolidation Nor@ing Papers for the $ear ended 0ecember *1, 2011
Pop ,ncome Statement 3ales Income from 3at Cost of sales ;perating e+penses Consolidated net income )oncontrolling int. share 112,000 *,(00 40,000 A 2:,100 A 3at (0" :0,000 7dCustments and Eliminations Consolidated 3tatements 112,:00

a 12,000 c *!,:00 b *,(00 20,000 A d 1,000 4,000 A f 1,200

a 12,000 c 1:,000 c 2,:00

:2,000 A 24,400 A *1,'00 1,200 A *0,!00

Controlling share of )I
3etained Earnings Fetained earnings Pop Fetained earnings 3at )et income 0i1idends

*0,!00

22,000

*0,000 *0,!00 20,000 A 20,000 e 20,000 22,000 10,000 A

*0,000 *0,!00 b c f 2,000 :,000 1,000

20,000 A 20,!00

Fetained earnings 0ecember *1 $alance S"eet Cash 7ccounts recei1able )ote recei1able In1entories Plant assets net In1estment in 3at 6ood8ill

20,!00

*2,000

:,100 10,200 :,000 *0,000 ((,000 (2,200

!,000 1!,000 10,000 14,000 40,000 b 200

g d

4,000 1,000

12,100 21,200 1:,000 2:,000 12(,000

e (2,200 e 20,000 220,!00 7ccounts pa$able )otes pa$able Capital stoc@ Fetained earnings 1:,000 2:,000 120,000 20,!00 220,!00 110,000 14,000 g 4,000 10,000 :0,000 e :0,000 *2,000 110,000 c 1*,000 e !,400 f 200 20,000 241,:00 2:,000 *:,000 120,000 20,!00

)oncontrolling interest beginning )oncontrolling interest 0ecember *1

20,(00 241,:00

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8-24
A 0educt

Consolidations Changes in Ownership Interests

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 8

8-25

Solution "8S&%%orting com%&tations: Eair 1alue boo@ 1alue differential In1estment cost Implied total fair 1alue of 3id ( 1!:,000 # !0"% >ess. ?oo@ 1alue of 3id ( 2:0,000 e-uit$ on =anuar$ 1 plus 10,000 net income (1#2 $ear% less 10,000 di1idends% Eair 1alue boo@ 1alue differential Allocation of Sids re%orted net income Pal compan$ ( 20,000 *#2 $ear !0"% Preac-uisition income ( 20,000 1#2 $ear 100"% )oncontrolling interest share ( 20,000 1 $ear *0"+ *#2% 3id9s net income Pals income from Sid E-uit$ in 3id9s income Constructi1e gain on Pal9s bonds )ote that bonds pa$able has a boo@ 1alue of 10:,200 on 0ecember *1, 2011. 7 half<$ear of premium amortiBation ( *00% $ields a boo@ 1alue of 10:,!00 at =ul$ 1, 2011 ( 10:,!00 boo@ 1alue on =ul$ 1 less 102,(:0 on 0ecember *1% Fecognition of constructi1e gain on separate boo@s ( 2,(:0 4#112 months% 6ain on intercompan$ sale of e-uipment do8nstream J *0,000 < ( *4,000#2%K Piecemeal recognition of gain on e-uipment do8nstream ( 12,000#* $ears 1#2 $ear% 6ain on intercompan$ sale of land upstream ( 10,000 < (,000 cost% !0" Income from 3id 21,000 21,000 10,000 ',000 20,000 1!:,000 2:0,000 2:0,000 0

2,(:0 (1:0%

(12,000% 2,000

(1,200% 12,*00

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8-26

Consolidations Changes in Ownership Interests

Solution "8-

0continu$+1

6or#s"eet entries in 7o&rnal form a Income from 3id 12,*00 0i1idends < 3id In1estment in 3id common Eliminate intercompan$ post<ac-uisition earnings and di1idends and return In1estment to beginning balance. 3ales A *!,:00 Cost of sales A 0i1idends M 3idA Fetained earnings < 3id :0,000 Common stoc@ < 3id 200,000 In1estment in 3id < common )oncontrolling interest Eliminate preac-uisition earnings and di1idends. Eliminate 3id9s e-uit$ accounts, the in1estment account and establish beginning noncontrolling interest. 6ain on plant assets 12,000 Plant assets Eliminate intercompan$ gain on sale of e-uipment. 6ain on plant assets 2,000 Plant assets Eliminate intercompan$ gain on sale of land. Interest income :,(:0 Interest e+pense 6ain on bond retirement In1estment in Pal bonds ?onds pa$able 100,000 Premium on bonds :,200 Fecord constructi1e retirement of bonds pa$able. Interest pa$able 4,000 Interest recei1able Eliminate reciprocal interest accounts. ;ther current liabilities !,000 ;ther current assets Eliminate reciprocal for unpaid intercompan$ di1idends. )oncontrolling interest share (,200 0i1idends < 3id )oncontrolling interest Fecord noncontrolling interest share of earnings and post<ac-uisition di1idends. Plant assets 2,000 E+penses Eliminate e+cess depreciation on e-uipment. !,000 :,*00

2!,:00 10,000 1!:,000 !:,000

c d e

12,000 2,000

:,!00 2,(:0 102,!00

f g

4,000 !,000

*,000 :,200

2,000

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Chapter 8

8-27

Solution "8-

(continued% "al Co#'o#ation an+ Sub(i+ia#& Consolidation Nor@ing Papers for the $ear ended 0ecember *1, 2011
Pal 3id !0" 1:0,000 b a c d e 7dCustments and Eliminations *!,:00 12,*00 e 12,000 2,000 :,(:0 11,200A 200,000A 11!,(:0A h 100,000 20,000 (,200 12,000 2,000 :,(:0 e b i :,!00 2!,:00 2,000 :,!00A 2((,*:0A 10(,200 (,200A 100,000 2,(:0 Consolidated 3tatements *'',400 2,(:0

,ncome Statement 3ales Income from 3id 6ain on bonds 6ain on plant assets Interest income Interest e+pense E+penses includes cost of goods sold Consolidated )I )oncontrolling int. share Controlling share of )I 3etained Earnings Fetained earnings Pal Fetained earnings 3id )et income 0i1idends

2(!,100 12,*00

2:0,000 :0,000 100,000 :0,000A 20,000 20,000A b :0,000

2:0,000 100,000 a b h !,000 10,000 *,000

:0,000A *00,000

Fetained earnings 0ecember *1 $alance S"eet Cash Interest recei1able In1entories ;ther current assets Plant assets net In1estment 3id common In1estment Pal bonds

*00,000

!0,000

1!,000 120,000 110,000 :02,!00 1(0,*00

2,000 4,000 40,000 20,000 10!,*00

21,000 f 4,000 200,000 12*,000 :'(,000

2,000

102,!00 ':0,000 *00,000 *0,000 f 4,000 g !,000 e 100,000 e :,200 b 200,000 4,000 *(,400 100,000 :,200 :00,000 *00,000 ':0,000

g !,000 c 12,000 d 2,000 a :,*00 b 1!:,000 e 102,!00

'22,000 41,400

Interest pa$able ;ther current liabilities 12" bonds pa$able Premium on bonds Common stoc@ Fetained earnings

200,000 !0,000 *00,000

:00,000 *00,000 b h !:,000 :,200 (0,200 '22,000

)oncontrolling interest ( 2:0,000 *0"% )oncontrolling interest 0ecember *1 ( 24(,000 *0"%

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8-28

Consolidations Changes in Ownership Interests

Solution "8-1! S&%%orting com%&tations: In1estment cost of !0" interest Implied total fair 1alue of 3am ( 220,000 # !0"% ?oo@ 1alue of 3am 6ood8ill In1estment cost of 10" interest Implied total fair 1alue of 3am ( 4!,:00 # 10"% ?oo@ 1alue of 3am. ?eginning e-uit$ =anuar$ 1, 2012 7dd. Income for 1#2 $ear >ess. =une di1idends ?oo@ 1alue at =ul$ 1, 2012 6ood8ill (unchanged% In1estment in 3am account. In1estment cost =anuar$ 1, 2011 7dd. 2011 share of retained earnings increase ( :0,000 !0"% >ess. 5nrealiBed profit in ending in1entor$ >ess. 5nrealiBed gain on land In1estment balance 0ecember *1, 2011 7dd. In1estment cost of 10" interest 7dd. Income from 3am for 2012 100,000 !0" interest 1 $ear 100,000 10" interest 1#2 $ear 7dd. ?eginning in1entor$ profits >ess. Ending in1entor$ profits >ess. 6ain. intercompan$ sale machiner$ 7dd. Piecemeal recognition of gain ( 20,000#: 1#2 $ear% >ess. 0i1idends from 3am ( 2:,000 !0"% & ( 2:,000 (0"% In1estment balance 0ecember *1, 2012 220,000 400,000 :00,000 100,000 4!,:00 4!:,000 ::0,000 :0,000 (2:,000% :!:,000 100,000 220,000 *:,000 (:,000% ((,000%

22,000 222,000 4!,:00

!0,000 :,000 :,000 (4,000% (20,000% 2,000 *(,000 (*!,:00% :10,000

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Chapter 8

8-29

Solution "8-1! (continued% "a% Co#'o#ation an+ Sub(i+ia#& Consolidation Nor@ing Papers for the $ear ended 0ecember *1, 2012 (in thousands%
Pam ,ncome Statement 3ales Income from 3am 6ain on machiner$ Cost of sales 0epreciation e+pense ;ther e+penses Consolidated net income )oncontrolling int. share Controlling share of )I 3etained Earnings Fetained earnings Pam Fetained earnings 3am Controlling share of )I 0i1idends '00 *( 20 200A '0A 140A (0" 3am

7dCustments and Eliminations

Consolidated 3tatements 1,*:2

:00

*00A 40A 20A

a f d c

2( *( 20 4

a b d

2( : 2

h *2( 100

2:

4:*A 124A 200A *:* 2:A *2(

1:: 2:0 *2( 200A 100 :0A g 2:0

1:: *2( f h g *!.: 10 2.:

200A 2(*

Fetained earnings 0ecember *1 $alance S"eet Cash 7ccounts recei1able 0i1idends recei1able In1entories ;ther current items >and ?uildings net Dachiner$ net In1estment in 3am 6ood8ill

2(*

*00

20 1*0 20 '0 20 :0 40 100 :10

(0 *0 !0 (0 20 10: *20 b : e ( g 100 !2: 20 2: 40 *00 *00 !2: i C 2: 20

i C c e d

2: 20 4 ( *4

100 1*: 1:2 100 (2 14: *(2

g :22.: f .: 100 1,220 1'2 10: 200 *00 2(* g 12: h 1:

1,000 7ccounts pa$able 0i1idends pa$able ;ther liabilities Capital stoc@, 10 par Fetained earnings 1!! 100 120 *00 2(* 1,000 )oncontrolling interest, =anuar$ 1 )oncontrolling interest, 0ecember *1
A 0educt

g *00

120 1,220

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8-30

Consolidations Changes in Ownership Interests

Solution "8-11 Preliminar$ computations. In1estment cost of (:" of 3l$ 7ugust 1, 2011 Implied fair 1alue of 3l$ ( :22,!:0 # (:"% ?oo@ 1alue 7ugust 1, 2011. Capital stoc@ Fetained earnings 7dd. Income for ! months >ess. 0i1idends for 1#2 $ear 3toc@holders9 e-uit$ 7ugust 1, 2011 Eair 1alue M boo@ 1alue differential In1estment cost 7ugust 1, 2011 E-uit$ in income 40,000 :#12 $ear (:" >ess. 0eferred in1entor$ profit from upstream sale :,000 (:" >ess. 0eferred profit from sale of e-uipment 10,000 profit < ( 2,000 1#2 $ear% Income from 3l$ 2011 >ess. 0i1idends from 3l$ 20,000 (:" In1estment in 3l$ 0ecember *1, 2011 in1entor$ profit. ( 2:,000 < :,000% 1:" G *,000 *:,000 21,2:0 (2,2:0% (',:00% !,:00 (1!,000% :1*,2:0 :22,!:0 41:,000 :00,000 100,000 *:,000 (20,000% 41:,000 0 :22,!:0

)oncontrolling interest share of post<ac-uisition income, adCusted for the

Preac-uisition earnings ( *:,000 100"% G 6or#ing %a%er entries: a 3ales

40,000 Cost of sales /o eliminate intercompan$ sales. 40,000 :,000 :,000

Cost of sales In1entories /o defer unrealiBed in1entor$ profits. 3ales

:0,000 Cost of sales 20,000 10,000 Plant assets net /o eliminate intercompan$ sale of in1entor$ item to be used as e-uipment.

:00 Plant assets net ;perating e+pense :00 /o record depreciation for 1#2 $ear on intercompan$ gain on plant asset.

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 8

8-31

"8-11 (continued% E Income from 3l$ !,:00 In1estment in 3l$ ',:00 0i1idends 1!,000 /o eliminate income and di1idends and return in1estment account to its beginning<of<the<period balance. Capital stoc@ :00,000 Fetained earnings 100,000 In1estment in 3l$ :22,!:0 )oncontrolling interest '2,2:0 3ales A 2**,*** Cost of sales A 12:,(** ;perating e+penses A :2,:00 0i1idends A 20,000 /o eliminate reciprocal e-uit$ and in1estment balances, and enter beginning noncontrolling interest (A adCusted for preac-uisition earnings and di1idends%. 0i1idends pa$able 1!,000 0i1idends recei1able 1!,000 /o eliminate reciprocal di1idends recei1able and pa$able amounts. )oncontrolling Interest 3hare *,000 0i1idends *,000 /o enter )oncontrolling Interest share of subsidiar$ post< ac-uisition income and di1idends. :0,000 :0,000 10,000 10,000

Alternative to entry c: 3ales Cost of sales Cost of sales Plant assets net

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8-32

Consolidations Changes in Ownership Interests

Solution "8-11 (continued% "an Co#'o#ation an+ Sub(i+ia#& Consolidation Nor@ing Papers for the $ear ended 0ecember *1, 2011
Pan ,ncome Statement 3ales '10,000 3l$ (:" 200,000 7dCustments and Eliminations Consolidated 3tatements

Income from 3l$ Cost of sales

!,:00 :00,000A

;perating e+pense Consolidated net income )oncontrolling int. share Controlling share of )I 3etained Earnings Fetained earnings Pan Fetained earnings 3l$ )et income 0i1idends

200,000A

a 40,000 c :0,000 f 2**,*** e !,:00 2:0,000A b :,000 a 40,000 c 20,000 f 12:,(** '0,000A d :00 f :2,:00 h *,000

'44,44!

:0',14!A 2*!,000A 220,:00A *,000A 21!,:00

21!,:00

40,000

1'2,:00 21!,:00 100,000A 100,000 f 100,000 40,000 20,000A e f h 120,000

1'2,:00 21!,:00 1!,000 20,000 *,000

100,000A *10,000

Fetained earnings 0ecember *1 $alance S"eet Cash 0i1idends recei1able 7ccounts recei1able In1entories Plant assets net In1estment in 3l$

*10,000

**,!:0 1!,000 120,000 *00,000 ((0,000 :1*,2:0 1,(42,000 1:2,000 1,200,000 *10,000 1,(42,000

10,000 g !0,000 1:0,000 :00,000 !*0,000 '0,000 20,000 g 1!,000 :00,000 f :00,000 120,000 !*0,000 f '2,2:0 1!,000

2*,!:0 1'0,000 22:,000 1,*!0,:00 2,02',2:0 222,000 *,000 1,200,000 *10,000

d e

b :,000 :00 c 10,000 ',:00 f :22,!:0

7ccounts pa$able 0i1idends pa$able Capital stoc@ Fetained earnings

)oncontrolling interest =anuar$ 1 )oncontrolling interest 0ecember *1

'2,2:0 2,02',2:0

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 8

8-33

2011 Pearson Education, Inc. publishing as Prentice Hall

8-34

Consolidations Changes in Ownership Interests

Solution "8-12 ,ndirect 8et"od "o' Co#'o#ation an+ Sub(i+ia#& Consolidated 3tatement of Cash Elo8s for the $ear ended 0ecember *1, 2012 Cash Elo8s from ;perating 7cti1ities Consolidated net income M controlling share 7dCustments to reconcile net income to cash pro1ided b$ operating acti1ities. )oncontrolling interest share 0epreciation e+pense 0ecrease in accounts recei1able 0ecrease in prepaid e+penses 0ecrease in accounts pa$able Increase in in1entories 6ain on sale of 10" interest A )et cash flo8s from operating acti1ities Cash Elo8s from In1esting 7cti1ities Purchase of e-uipment 3ale of 10" interest in subsidiar$ )et cash flo8s from in1esting acti1ities Cash Elo8s from Einancing 7cti1ities Cash paid on long<term note Pa$ment of cash di1idends controlling Pa$ment of cash di1idends n oncontrolling )et cash flo8s from financing acti1ities 0ecrease in cash for 2012 Cash on hand =anuar$ 1, 2012 Cash on hand 0ecember *1, 2012 (*00,000% (200,000% (10,000% (:10,000% (2,000% :0,:00 24,:00 (100,000% !2,!00 (2!,*00% *00,000

22,000 :2(,000 2,:00 20,000 (20*,:00% (1*0,000% (:,!00%

2**,*00 :**,*00

9 Note: Since Po% maintains a controlling interest in Sat) no gain or loss s"o&ld "ave 'een recognized on sale of t"e 1 % interest. 3at"er) t"is amo&nt s"o&ld a%%ear as an increase in ot"er %aid5in ca%ital. :"e net effect on t"e statement of cas" flo0s is t"e same.

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 8

8-35

Solution "8-12 (continued% "o' Co#'o#ation an+ Sub(i+ia#& Nor@ing Paper for the 3tatement of Cash Elo8s (Indirect Dethod% for the $ear ended 0ecember *1, 2012
Feconciling Items Lear9s Change Asset !"anges Cash 7ccounts recei1able net In1entories Prepaid e+penses E-uipment 7ccumulated depreciation >and and buildings 7ccumulated depreciation /otal asset changes !"anges in E*&ities 7ccounts pa$able 0i1idends pa$able >ong<term note pa$able Common stoc@ Fetained earnings )oncontrol. int. 20" (2,000% (2,:00% 1*0,000 (20,000% '0,000 (2'(,000% e 2,:00 0ebit Credit Cash Elo8s Cash Elo8s Cash Elo8s from In1esting Einancing ;perations 7cti1ities 7cti1ities

@ 1*0,000 l 20,000 h 10,000 g 100,000 f :00,000 h 2,000

0 (2(,000% f

2(,000

(**2,:00% (20*,:00% 0 (*00,000% 0 100,000 !1,000 i 20*,:00 C *00,000

a *00,000 c 200,000 b 22,000 d 10,000 h :',000

Changes in e-uities (**2,:00% Controlling int.share )oncontrolling int. share Purchase of e-uipment 0epreciation e-uipment and buildings 6ain < sale of 10" subsidiar$ Interest 0ecrease in accounts recei1able Increase in in1entories 0ecrease in prepaid e+penses 0ecrease in accounts pa$able Cash paid on long<term note Paid di1idends controlling Paid di1idends noncontrol. 3ale of 10" interest in 3ubsidiar$

a *00,000 b 22,000 g 100,000 f :2(,000 h :,!00 e @ 1*0,000 l i 20*,:00 C *00,000 c 200,000 d 10,000 h !2,!00 1,('0,!00 1,('0,!00 20,000 2,:00

*00,000 22,000 (100,000% :2(,000 (:,!00% 2,:00 (1*0,000% 20,000 (20*,:00% (*00,000% (200,000% (10,000% !2,!00 :**,*00 (2!,*00% (:10,000%

2011 Pearson Education, Inc. publishing as Prentice Hall

8-36

Consolidations Changes in Ownership Interests

Cash decrease for 2012 G :**,*00 < 2!,*00 < :10,000 G (2,000%. 9 Note: Since Po% maintains a controlling interest in Sat) no gain or loss s"o&ld "ave 'een recognized on sale of t"e 1 % interest. 3at"er) t"is amo&nt s"o&ld a%%ear as an increase in ot"er %aid5in ca%ital. :"e net effect on t"e statement of cas" flo0s is t"e same.

2011 Pearson Education, Inc. publishing as Prentice Hall