Chapter 05

Consolidation of Less-than-WhollyOwned Subsidiaries Acquired at More than Book Value

McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objective 1

Understand and explain how the consolidation process differs when the subsidiary is less-than-wholly owned and there is a differential.
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Differences in Consolidation in Chapter 5

Wholly Owned Subsidiary Partially Owned Subsidiary No Differential

Investment = Book Value Investment > Book Value

Chapter 2 Chapter 3

Chapter 4 Chapter 5

Differential

No NCI NCI Shareholders Shareholders

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Partial Ownership Example

Assume Parent owns land with a book value of $400,000. Parents 80%-owned subsidiary also owns land. At the time of the acquisition, Subs land has a FMV of $100,000 and a book value of $61,000. Thus, the land has excess value of $39,000. Issue Should Parent revalue the land by the full $39,000 in consolidation or only its share of the excess value ($31,200)?

NCI
20%

Parent
80%

Sub
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Partial Ownerships: Partial or Full Valuation? We learned earlier that full consolidation is required, as opposed to partial consolidation.

Thus, we consolidate 100% of the sub. This, however, refers to the BV of the subsidiary.

What about revaluation of assets to FMV?

The extent of revaluation of undervalued assets and goodwill can vary.

Parent Company Concept: Partial valuation 5-5

Partial Ownership Example

Parent Company Concept Parent Economic Unit Concept

Sub

DR

CR

Consolidate d $492,200

Land $400,000 $61,000 $31,200 Parent Sub DR CR

Consolidate d

Land $400,000 $61,000 $39,000

Both were used in the past. SFAS 141R requires the Entity Concept.

NCI
20%

Parent

$500,000

80%

Sub
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Partial Ownership: Undervalued Assets & GW

How much to revalue the Subsidiarys undervalued assets and goodwill?

Parent company concept: FMV

< 100% of

Revalued only to the extent of the parents percent ownership offsetting credit for the additional valuation increases the NCI in net

Entity concept: 100% of FMV

The
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Practice Quiz Question #1

Under which concept is goodwill assigned to the noncontrolling interest for consolidated financial reporting purposes? a. The entity concept. b. The parent company concept. c. Both a and b. d. None of the above.
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Practice Quiz Question #1 Solution

Under which concept is goodwill assigned to the noncontrolling interest for consolidated financial reporting purposes? a. The entity concept. b. The parent company concept. c. Both a and b. d. None of the above.
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Learning Objective 2

Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when there is a complex positive differential.
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Group Exercise 1: 80% Acquisition

Pepper Inc., a calendar-year reporting company, acquired 80% of Salt Inc.s outstanding common stock for $354,000 on 12/31/X8 when the fair value of Salts net assets was $422,500. The following data summarize the fair value calculation: Book value element Life remaining Common Stock $130,000 Retained Earnings 117,000 Under- or Over-valuation Inventory (6,500) 2 months Land 39,000 Indefinite Equipment 85,000 10 years Covenant-not-to-compete 52,000 4 years Goodwill element 26,000 Indefinite Total Cost $442,500 5-11

Group Exercise 1: 80% Acquisition

1. Prepare an analysis of the Investment account through 12/31/X8. 2. Prepare all consolidation entries as of 12/31/X8. 3. Prepare a consolidation worksheet at 12/31/X8. 4. What amount of income does Pepper report for 20X8?
Pepper, Inc. and Salt, Inc. Consolidated Worksheet as of December 1 1 X 11 , 1 Elimination Entries ConsoliPepper Salt DR CR dated Balance Sheet Cash 1 11 1 1, 1 2, 2 22 2 Accounts Receivable 1, 1 11 1 1, 1 11 1 Inventory 2 22 2 2, 2 2 22 2 2, 2 Investment in Salt: Book Value 1 11 1 1, 1 Excess Cost 1 11 1 1, 1 Land 1 11 1 1, 1 1, 1 11 1 Building & Equipment 1 11 1 1, 1 1 11 1 1, 1 Acc Depreciation (111 ) ,111 (11 ) ,111 Covenant N-T-C Goodwill Total Assets 1 11 1 1, 1 1 11 1 1, 1 Payables & Accruals 1 11 1 1, 1 2, 2 22 2 Long-term Debt 1, 1 11 1 1 11 1 1, 1 Common Stock 1 11 1 1, 1 1 11 1 1, 1 Additional PIC Retained Earnings 1 11 1 1, 1 1 11 1 1, 1 NCI in NA of Salt Total Liab & Equity 1 11 1 1, 1 1 11 1 1, 1

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Group Exercise 1: Solution

Book Value Calculations:
NCIs 20% Share of BV Balances, 12/31/X8

Salts Equity Accounts, BV Common = Stock Retained + Earnings

Peppers 80% Share of BV

The Basic Elimination Entry: Common Stock Retained Earnings Investment in Salt NCI in NA in Salt

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Group Exercise 1: Solution Worksheet Entries

Book Value Calculations:
NCIs 20% Share of BV Balances, 12/31/X849,400 Salts Equity Accounts, BV Common = Stock 130,000 Retained + Earnings 117,000

Peppers 80% Share of BV 197,600

The Basic Elimination Entry: Common Stock Retained Earnings Investment in Salt NCI in NA in Salt

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Group Exercise 1: Solution Worksheet Entries

Book Value Calculations:
NCIs 20% Share of BV Balances, 12/31/X849,400 Salts Equity Accounts, BV Common = Stock 130,000 Retained + Earnings 117,000

Peppers 80% Share of BV 197,600

The Basic Elimination Entry: Common Stock Retained Earnings Investment in Salt NCI in NA in Salt 130,000 117,000 197,600 49,400

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Group Exercise 1: Solution Worksheet Entries

Excess Value Calculations: Net Assets Equipment Peppers 80%Salts Under- or (Over-) Valuation of = Share of Share of Excess Value Excess Value Inventory Land Covenant Goodwill NCIs 20%

Balances, 12/31/X8 The Excess Value Reclassification Entry: Land Building & Equipment Covenant N-T-C Goodwill Inventory Investment in Salt NCI in NA of Salt The Accumulated Depreciation Elimination Entry: Accumulated Depreciation Building & Equipment

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Group Exercise 1: Solution Worksheet Entries

Excess Value Calculations: Net Assets Equipment Peppers 80%Salts Under- or (Over-) Valuation of = Share of Share of Excess Value Excess Value Inventory Land Covenant Goodwill 156,400 (6,500) 39,000 85,000 NCIs 20%

Balances, 12/31/X8 39,100 52,000 26,000 The Excess Value Reclassification Entry: Land Building & Equipment Covenant N-T-C Goodwill Inventory Investment in Salt NCI in NA of Salt

The Accumulated Depreciation Elimination Entry: Accumulated Depreciation Building & Equipment

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Group Exercise 1: Solution Worksheet Entries

Excess Value Calculations: Net Assets Equipment Peppers 80%Salts Under- or (Over-) Valuation of = Share of Share of Excess Value Excess Value Inventory Land Covenant Goodwill 156,400 (6,500) 39,000 85,000 NCIs 20%

Balances, 12/31/X8 39,100 52,000 26,000

The Excess Value Reclassification Entry: Land 39,000 Building & Equipment 85,000 Covenant N-T-C 52,000 Goodwill 26,000 Inventory 6,500 Investment in Salt 156,400 NCI in NA of Salt 39,100

The Accumulated Depreciation Elimination Entry: Accumulated Depreciation Building & Equipment

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Group Exercise 1: Solution Worksheet Entries

Excess Value Calculations: Net Assets Equipment Peppers 80%Salts Under- or (Over-) Valuation of = Share of Share of Excess Value Excess Value Inventory Land Covenant Goodwill 156,400 (6,500) 39,000 85,000 NCIs 20%

Balances, 12/31/X8 39,100 52,000 26,000

The Excess Value Reclassification Entry: Land 39,000 Building & Equipment 85,000 Covenant N-T-C 52,000 Goodwill 26,000 Inventory 6,500 Investment in Salt 156,400 NCI in NA of Salt 39,100

The Accumulated Depreciation Elimination Entry: Accumulated Depreciation57,200 Building & Equipment 57,200

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Group Exercise 1: Completed Worksheet

Pepper, Inc. and Salt, Inc. Consolidated Worksheet as of December 1 ,11 1 1 X Elimination Entries ConsoliPepper Salt DR CR dated 11 1 1 ,1 1 1 ,1 1 11 11 1 1 ,1 1 2, 2 22 2 1, 1 11 1 22 2 2 ,2 2 Balance Sheet Cash Accounts Receivable Inventory Investment in Salt: Book Value Excess Cost Land Building & Equipment Acc Depreciation Covenant N-T-C Goodwill Total Assets Payables & Accruals Long-term Debt Common Stock Additional PIC Retained Earnings NCI in NA of Salt Total Liab & Equity

11 ,1 1

22 2 2 ,2 2 22 2 2 ,2 2 11 1 1 ,1 1

11 1 1 ,1 1 11 1 1 ,1 1 11 1 1 ,1 1 11 1 1 ,1 1 11 1 1 ,1 1 1, 1 11 1 1 ,1 1 11 11 1 1 ,1 1 11 1 1 ,1 1 11 1 1 ,1 1 1 ,1 1 1 ,1 1 1 1 1 11 11 1 ,1 1 (111 ) ,111 (11 ) 1 ,1 1 ,111 1 1 (111 ) ,111 1 ,1 1 11 1, 1 11 1 1 ,1 1 11 1, 1 11 1 11 1 1 ,1 1 1 1 1 1 1 1 1 1 1 11 1 1 1 ,1 1 1,1 1 1,1 1 , 1 ,1 1 11 1 1 ,1 1 1, 1 11 1 11 1 1 ,1 1 1 ,1 1 11 11 1 1 ,1 1 11 1 1 ,1 1 11 1 1 ,1 1 11 1 11 1 1 ,1 1 1 ,1 1 11 1 1 ,1 1 11 1 1 ,1 1 11 1 1 ,1 1 11 1 1 ,1 1 11 1 1 ,1 1 1 ,1 1 11 1, 1 11 1 1 ,1 1 11 11 1 1 ,1 1 11 1 11 1 1 ,1 1 1,1 1 1 ,1 1 11 1 1 1 1 , 1 ,1 1

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How Do the Elimination Entries Change?

1. The basic elimination entry:
Common Stock (S) XXX Additional Paid-in Capital (S) XXX Retained Earnings, Beginning Balance (S) XXX Income from Sub % NI NCI in NI of Sub % NI Dividends Declared Investment in Sub % BV NCI in NA of Sub

XXX % BV

2. The excess value reclassification entry:

Asset 1 Asset 2 Goodwill Investment in Sub NCI in NA of Sub XXX XXX XXX % Excess % Excess
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How Do the Elimination Entries Change?

3. The amortized excess value reclassification entry: Cost of Sales XXX Other Expenses XXX Income from Sub % Adj. NCI in NI of Sub % Adj. This entry reclassifies the equity method amortization of cost in excess of book from Income from Sub to the appropriate expense accounts where the costs would have been had the Sub used FMV instead of BV. 4. The accumulated depreciation elimination entry:
Accumulated Depreciation Building & Equipment
Acquisiti on Date
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XXX XXX

Group Exercise 2: 80% End of First Year

Continuation of Exercise 1 1.Update the analysis of the Investment account through 12/31/X9. 2.Prepare the consolidation entries as of 12/31/X9. 3. Prepare a consolidation worksheet at 12/31/X9.
P p e In .a dS lt In . e p r, c n a , c C n o a e W rk h e a o D c m e o s lid t d o s e t s f e e b r , X 22 2 22 E in t nE t s lim a io n rie Ppe epr S lt a D R C R 11 1 1 11 , (1 ,1 )1 1 1 1 (1 1 )1 , 1 1 (1 ,1 )1 1 1 1 1 11 11 , 1 11 11 , 11 1 1 11 , 1 11 11 , (1 1 )1 , 1 1 11 1 1 11 , 1 11 11 , 1 11 11 , 11 1 1 11 , C no o s lidtd ae In o eSa e e t c m t t mn S le a s 1 1, 1 , 1 1 1 1 C s of S le ot a s (2 ,2 )2 2 2 2 D p cia nEx e s e re tio p ne ( 1 1 )1 , 1 1 S AEx e s & p ne (1 ,1 )1 1 1 1 In o efro S lt cm ma 1 11 11 , N tIn o e e cm 11 1 1 11 , N I inN tIn o e C e cm C inN tIn o e I e cm 11 1 1 11 , Sa e e to R t in dE rn g t t m n f e a e a in s B la c , /1 1 a ne /X 1 11 1 1 11 , A d N t In om d: e c e 11 1 1 11 , Le s D e d s : ivid n s (1 ,1 )1 1 1 1 B la c , 11 a n e / 111 /X 11 1 1 11 , B la c S e t a ne h e Cs ah 22 2 2 22 , A o n R ce b cc u ts e iva le 11 1 1 11 , In n ry ve to 11 1 1 11 , In s e t inS lt: ve tm n a B o V lu ok a e 11 1 1 11 , Ex s C s ce s o t 11 1 1 11 , La d n 11 1 1 11 , B ild g&Eq ip e t u in u mn 11 1 1 11 , A D p c tio cc e re ia n (1 ,1 )1 1 1 1 C ve a t N o n n -T-C G o will od To a A s t t l s es 11 1 1 11 , Pa b s&A ya le ccru ls a 1 11 11 , Lo g rmD b n -te et 1 11 11 , C m o S ck o m n to 11 1 1 11 , R ta e Ea in s e in d rn g 11 1 1 11 , N I inN t A s ts C e se To a L b&E u y t l ia q it 11 1 1 11 ,

1 11 11 , 11 1 1 11 , (1 1 )1 , 1 1

11 1 1 11 , 1 11 11 , 11 1 1 11 , 11 1 1 11 , 11 1 1 11 , 11 1 1 11 ,

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Group Exercise 2: 80% End of First Year

Book Value Calculations: NCIs 20% Share of BV Balances, 1/1/X9 Add: NI from Salt Less Dividends Balances, 12/31/X9 The Basic Elimination Entry: PeppersSalts Equity Accounts, BV 80% Share Common Retained = + of BV Stock Earnings

Common Stock Retained Earnings, 1/1/X9 Income from Salt NCI in NI of Salt Dividends Declared Investment in Salt NCI in NA of Salt
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Group Exercise 2: 80% End of First Year

Book Value Calculations: NCIs 20% Share of BV Balances, 1/1/X9 49,400 Add: NI from Salt 15,600 Less Dividends (9,100) Balances, 12/31/X955,900 The Basic Elimination Entry: PeppersSalts Equity Accounts, BV 80% Share Common Retained = + of BV Stock Earnings 197,600 62,400 ( 36,400) 223,600 130,000 78,000 ( 45,500) 130,000 149,500 117,000

Common Stock Retained Earnings, 1/1/X9 Income from Salt NCI in NI of Salt Dividends Declared Investment in Salt NCI in NA of Salt
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Group Exercise 2: 80% End of First Year

Book Value Calculations: NCIs 20% Share of BV Balances, 1/1/X9 49,400 Add: NI from Salt 15,600 Less Dividends (9,100) Balances, 12/31/X955,900 The Basic Elimination Entry: PeppersSalts Equity Accounts, BV 80% Share Common Retained = + of BV Stock Earnings 197,600 62,400 ( 36,400) 223,600 130,000 78,000 ( 45,500) 130,000 149,500 117,000

Common Stock Retained Earnings, 1/1/X9 Income from Salt NCI in NI of Salt Dividends Declared Investment in Salt NCI in NA of Salt
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Group Exercise 2: 80% End of First Year

Book Value Calculations: NCIs 20% Share of BV Balances, 1/1/X9 49,400 Add: NI from Salt 15,600 Less Dividends (9,100) Balances, 12/31/X955,900 The Basic Elimination Entry: PeppersSalts Equity Accounts, BV 80% Share Common Retained = + of BV Stock Earnings 197,600 62,400 ( 36,400) 223,600 130,000 78,000 ( 45,500) 130,000 149,500 117,000

Common Stock Retained Earnings, 1/1/X9 Income from Salt NCI in NI of Salt Dividends Declared Investment in Salt NCI in NA of Salt

130,000 117,000 62,400 15,600 45,500 223,600 55,900

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Group Exercise 2: 80% End of First Year

Excess Value Calculations: NCIs Peppers
Element 20% 80% Salts Under- or (Over-) Valuation of Net Assets Land Equipment Share of Share of Inventory Acc Dep Covenant Goodwill Remaining Life Excess Value Excess Value 2 months Balances, 1/1/X9 Less: Amortization Balances, 12/31/X9

Indefinite 10 years 4 years

The Amortized Excess Value Reclassification Entry: Depreciation Expense S&A Expense Cost of Sales Income from Salt NCI in NI of Salt The Accumulated Depreciation Elimination Entry: Accumulated Depreciation Building & Equipment
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The Excess Value Reclassification Entry: Land Building & Equipment Covenant N-T-C Goodwill Accumulated Depreciation Investment in Salt NCI in NA of Salt

Group Exercise 2: 80% End of First Year Excess Value Calculations:

NCIs
Element 20%

Peppers
80% Salts Under- or (Over-) Valuation of Net Assets Land Equipment

Share of = Share of Inventory Acc Dep Covenant Goodwill Remaining Life Excess Value Excess Value 2 months 39,100 52,000 ( 3,000) (13,000) 36,100 39,000 156,400 26,000 ( 12,000) 144,400 26,000 (6,500) 6,500 0

Indefinite 10 years 4 years 39,000 0 39,000 85,000 85,000 (8,500) (8,500)

Balances, 1/1/X9 Less: Amortization Balances, 12/31/X9

The Excess Value Reclassification Entry: Land Building & Equipment Covenant N-T-C Goodwill Accumulated Depreciation Investment in Salt NCI in NA of Salt

The Amortized Excess Value Reclassification Entry: Depreciation Expense S&A Expense Cost of Sales Income from Salt NCI in NI of Salt

The Accumulated Depreciation Elimination Entry: Accumulated Depreciation Building & Equipment

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Group Exercise 2: 80% End of First Year Excess Value Calculations:

NCIs
Element 20%

Peppers
80% Salts Under- or (Over-) Valuation of Net Assets Land Equipment

Share of Share of Inventory Acc Dep Covenant Goodwill Remaining Life Excess Value Excess Value 2 months Balances, 1/1/X9 52,000 Less: Amortization (13,000) Balances, 12/31/X9 39,000 39,100 26,000 ( 3,000) 36,100 26,000 156,400 ( 12,000) 144,400 (6,500) 6,500 0

Indefinite 10 years 4 years 39,000 0 39,000 85,000 85,000 (8,500) (8,500)

The Excess Value Reclassification Entry: Land

Depreciation Expense Building & Equipment 85,000 S&A Expense Covenant N-T-C 39,000 Cost of Sales Goodwill 26,000 Income from Salt Accumulated Depreciation NCI in NI of Salt 8,500 Investment in Salt 144,400 The Accumulated NCI in NA of Salt 36,100 Depreciation Elimination Entry: Accumulated Depreciation Building & Equipment

39,000

The Amortized Excess Value Reclassification Entry:

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Group Exercise 2: 80% End of First Year Excess Value Calculations:

NCIs
Element 20%

Peppers
80% Salts Under- or (Over-) Valuation of Net Assets Land Equipment 4 years

Share of Share of Inventory Acc Dep Covenant Goodwill Remaining Life Excess Value Excess Value 2 months Balances, 1/1/X9 52,000 Less: Amortization (13,000) Balances, 12/31/X9 39,000 39,100 26,000 ( 3,000) 36,100 26,000 156,400 ( 12,000) 144,400 (6,500) 6,500 0

Indefinite 10 years 39,000 0 39,000 85,000 85,000

(8,500) (8,500)

The Excess Value Reclassification Entry: Land

39,000

The Amortized Excess Value Reclassification Entry: Depreciation Expense 8,500 S&A Expense 13,000 Cost of Sales Income from Salt NCI in NI of Salt

Building & Equipment 85,000 Covenant N-T-C 39,000 Goodwill 26,000 Accumulated Depreciation 8,500 Investment in Salt 144,400 NCI in NA of Salt 36,100

6,500 12,000 3,000

The Accumulated Depreciation Elimination Entry: Accumulated Depreciation Building & Equipment
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Group Exercise 2: 80% End of First Year Excess Value Calculations:

NCIs
Element 20%

Peppers
80% Salts Under- or (Over-) Valuation of Net Assets

Share of Share of Inventory Acc Dep Covenant Goodwill Remaining Life Excess Value Excess Value 2 months Balances, 1/1/X9 52,000 Less: Amortization (13,000) Balances, 12/31/X9 39,000 39,100 26,000 ( 3,000) 36,100 26,000 156,400 ( 12,000) 144,400 (6,500) 6,500 0

Land

Equipment 4 years

Indefinite 10 years 39,000 0 39,000 85,000 85,000

(8,500) (8,500)

The Amortized Excess Value The Excess Value Reclassification Entry: Reclassification Entry: Land 39,000 Depreciation Expense 8,500 Building & Equipment 85,000 S&A Expense 13,000 Covenant N-T-C 39,000 Cost of Sales 6,500 Goodwill 26,000 Income from Salt 12,000 Accumulated Depreciation NCI in NI of Salt 3,000 8,500 The Accumulated Investment in Salt 144,400 Depreciation NCI in NA of Salt 36,100 Elimination Entry: Accumulated Depreciation57,200 Building & Equipment 57,200 5-32

Group Exercise 2: 80% End of First Year

Beginning Balance:

Goodwill = 20,800 Identifiable Excess = 135,600 Book value = 197,600

Ending Balance:

Investment in Salt
BB 354,000 80% NI 62,40036,400 80% 12,000 DividendExcess Amort. EB 80% 368,000

Goodwill = 20,800 Identifiable Excess = 123,600 Book value = 223,600

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Group Exercise 3: Solution

Notice how the worksheet entries eliminate Peppers equity method accounts:

Investment in Salt
BB 80% NI 354,000 62,400

Income from Salt

62,400 80% NI 50,400 Adj. Balance 12,000 Excess Amort. 0
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36,400 80% Dividend 12,000 Excess EB Amort. 12,000 368,000 223,600 80% Basic 62,400 144,400 Excess 0 Reclass.

Group Exercise 2: 80% End of First Year

Pepper, Inc. and Salt, Inc. Consolidated Worksheet as of December , X 1 1 11 1 Elimination Entries ConsoliPepper Salt DR CR dated Income Statement Sales 11 11 1 1 11 1 , 1, 1 1, 1 11 11 1 , 1, 1 Cost of Sales (2 2,2 2)2 1,1 1)1 2 (1 1 11 1 (1 1,1 1)1 , 1 1 Depreciation E xpense (1 1 1)1(1 1 1)1 11 1 ,1 ,1 , 1 (1 1,1 1)1 1 S&A E xpense (1 1,1 1)1 1,1 1)11 , 1 1 (1 1 11 1 (1 1,1 1)1 1 I ncome from Salt 1, 1 11 1 1, 1 11 1 1 , 1 11 1 Net Income 1 11 1 1 , 1 1 , 1 1, 1 11 1 11 1 1 , 1 1 11 1 11 1 1, 1 NCI in Net Income 1, 1 11 1 11 1 (1 1 1)1 , 1 ,1 CI in Net Income 1 11 1 1 , 1 1 , 1 1, 1 11 1 11 1 1 , 1 1 11 1 11 1 1, 1

5-35

Group Exercise 2: 80% End of First Year

P p e In .a dS lt In . e p r, c n a , c C n o a e W rks e ta ofD c m e o s lid t d o h e s e e b r , X 22 22 2 E in t nE t s lim a io n rie Pp e epr S lt a D R C R 11 1 1 11 , (111 ) ,111 (11 ) ,111 (111 ) ,111 1, 1 1 1 1 1, 1 1 1 1 11 1 1 11 , 1, 1 1 1 1 (11 ) ,111 11 1 1 11 , 1, 1 1 1 1 1, 1 1 1 1 11 1 1 11 , 11 1 1 11 , 11 1 1 11 , 1, 1 1 1 1 11 1 1 11 , (11 ) ,111 1, 1 1 1 1 1, 1 1 1 1 1, 1 1 1 1 1, 1 1 1 1 1, 1 1 1 1 11 1 1 11 , 1, 1 1 1 1 11 , 1 1 11 1 1 11 , 11 1 1 11 , (111 ) ,111 1, 1 1 1 1 1, 1 1 1 1 1 1, 1 , 1 1 1 1 11 1 1 11 , 11 1 1 11 , 11 1 1 11 , 11 1 1 11 , 1, 1 1 1 1 1 1, 1 , 1 1 1 1 C n olios dtd ae 1 1, 1 , 1 1 1 1 (111 ) ,111 (111 ) ,111 (111 ) ,111 11 1 1 11 , (11 )1 ,11 11 1 1 11 , 11 1 1 11 , 11 1 1 11 , (111 ) ,111 11 1 1 11 , 11 1 1 11 , 11 1 1 11 , 11 1 1 11 , In o eSa e e t c m t t mn S le a s 1 1, 1 , 1 1 1 1 C t of S le os a s (222 ) ,222 D pre tionEx e se e cia pn (11 ) ,111 S AEx e s & p ne (111 ) ,111 In com fromS lt e a 1, 1 1 1 1 N tIn o e e cm 11 1 1 11 , N I inN tIn o e C e cm C inN tIn o e I e cm 11 1 1 11 , Sa e e to R t in dE rn g t t m n f e a e a in s B la ce / /X 1 a n , 11 11 1 1 11 , A d: N t In d e com e 11 1 1 11 , Le : D e s ss ivid nd (111 ) ,111 B la c , 11/ X a n e / 111 11 1 1 11 , B la c S e t a ne he C sh a 11 1 1 11 , A ccou tsR ce b n e iva le 11 1 1 11 , In n ve tory 11 1 1 11 , In s e t inS lt: ve tm n a B ook V lu a e 11 1 1 11 , Ex s C ce s ost 11 1 1 11 , La nd 11 1 1 11 , B ild g&Eq ip e t u in u mn 11 1 1 11 , A D p cia cc e re tion (111 ) ,111 C nnN ove a t -T-C G will ood Tot l A s t a s es 11 1 1 11 , Pa b s&Accru ls ya le a 1, 1 1 1 1 Lon -te D b g rm e t 1, 1 1 1 1 C m S om on tock 11 1 1 11 , R ta e Ea in s e in d rn g 11 1 1 11 , N I inN t As e C e s ts Tot l L b&E u y a ia q it 11 1 1 11 , 11 , 1 1 11 , 1 1 1, 1 1 1 1 1, 1 1 1 1 1, 1 1 1 1 1, 1 1 1 1 1, 1 1 1 1 11 1 1 11 , 1, 1 1 1 1 11 1 1 11 ,

1, 1 1 1 1 1, 1 1 1 1 11 , 1 1 1, 1 1 1 1

1, 1 1 1 1 1, 1 1 1 1 1, 1 1 1 1

11 1 1 11 , 1, 1 1 1 1 11 1 1 11 , 11 1 1 11 , 11 1 1 11 ,

11 1 1 11 ,

11 1 1 11 , 11 1 1 11 ,

1, 1 1 1 1 1, 1 1 1 1 1, 1 1 1 1

11 1 1 11 ,

11 1 1 11 ,

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Learning Objective 3

Understand and explain what happens when a parent company ceases to consolidate a subsidiary.

5-37

Discontinuance of Consolidation A parent should stop consolidating a subsidiary if it can no longer exercise control. Two possible scenarios:

The parent loses control of a subsidiary and no longer holds an equity interest. The parent loses control but still holds an equity interest.

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Parent No Longer Holds an Equity Interest If a parent loses control of a subsidiary and no longer holds an equity interest in the former subsidiary,

Parent recognizes a gain or loss for the difference between

any proceeds received from the event leading to loss of control, and the carrying amount of the parents equity interest.
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Example: Parent No Longer Holds an Equity Interest

Assume that on December 31, 20X9, Peppers Investment in Salt account has a balance of $368,000. Also assume that Peppers 80% interest in Salt has a fair value of $410,000. On January 1, 20X0, Pepper sells all of its Salt shares for $400,000. How should Pepper account for this transaction? Sale proceeds $400,000 Less: Carrying value of the investment (368,000) Gain on sale $32,000 Cash Investment in Salt Gain on sale 400,000 368,000 32,000
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Parent Maintains an Equity Interest If the parent loses control but maintains a noncontrolling equity interest in the former subsidiary,

Parent must recognize a gain or loss for the difference, at the date control is lost, between:

the sum of any proceeds received by the parent and the fair value of its remaining equity interest in the former subsidiary, and the carrying amount of the parents total interest in the subsidiary.
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Example: Parent Maintains an Equity Interest

Assume that on December 31, 20X9, Peppers Investment in Salt account has a balance of $368,000. Also assume that Peppers 80% interest in Salt has a fair value of $410,000. On January 1, 20X0, Pepper sells half (remaining 40%) of Salts shares for $200,000. How should Pepper account for this Investment in transaction? Salt
Sale proceeds $200,000 Plus: Fair value of remaining investment 205,000 $405,000 Less: Entire carrying value of investment (368,000) Gain on Sale $37,000 Cash 200,000 Investment in Salt 163,000 Gain on Sale 37,000
368,000 163,000 205,000
Remainin g interest revalued at fair value

5-42

Practice Quiz Question #2

Paul Corp. owns 90% of Sam Inc.s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells all of its Sam Inc. shares for $200,000 and records a gain of a. $30,000. b. $50,000. c. $70,000.
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Practice Quiz Question #2 Solution

Paul Corp. owns 90% of Sam Inc.s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells all of its Sam Inc. shares for $200,000 and records a gain of a. $30,000 ($200,000 $170,000). b. $50,000.
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Practice Quiz Question #3

Paul Corp. owns 90% of Sam Inc.s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000 and records a gain of a. $30,000. b. $50,000. c. $85,000.
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Practice Quiz Question #3 Solution

Paul Corp. owns 90% of Sam Inc.s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000 and records a gain of a. $30,000. b. $50,000. c. $85,000.
5-46

Practice Quiz Question #4

Paul Corp. owns 90% of Sam Inc.s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000. What is the carrying amount of the remaining shares? a. $85,000 b. $125,000 c. $170,000
5-47

Practice Quiz Question #4 Solution

Paul Corp. owns 90% of Sam Inc.s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000. What is the carrying amount of the remaining shares? a. $85,000 b. $125,000 c. $170,000
5-48

Practice Quiz Question #s 3-4 Solutions

Paul Corp. Owns 90% of Sam Inc.s outstanding common stock. The carrying value of the investment in Sam is $170,000, and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000.
Sale proceeds $130,000 Plus: Fair value of remaining investment 125,000 $255,000 Less: Entire carrying value of investment (170,000) Gain on Sale $85,000 Cash 130,000 Investment in Sam 45,000 Gain on Sale 85,000 Investment in Sam 170,000
45,000 125,000
Remainin g interest revalued at fair value

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Learning Objective 4

Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when there is a complex positive differential and other comprehensive income.
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Treatment of Other Comprehensive Income FASB 130 requires that companies separately report other comprehensive income.

Includes revenues, expenses, gains, and losses that under GAAP are excluded from net income. Other comprehensive income accounts are temporary accounts that are closed at the end of each period to a special stockholders equity account, Accumulated Other Comprehensive Income. The consolidation worksheet normally
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Group Exercise 3: 80% with OCI

Assume that during 20X9, Salt purchases $10,000 of investments classified as available-for-sale. By December 31, 20X9, the fair value of the securities increases to $30,000. Other than the effects of accounting for Salts investment in securities, the financial information reported at December 31, 20X9, is identical to that presented in the previous examples.
Adjusting entry recorded by Salt: Investment in Available-for-Sale Securities20,000 Unrealized Gain on Investments (OCI)

20,000

Adjusting entry recorded by Pepper: Investment in Salt 16,000 Other Comprehensive Income from Salt Unrealized Gain on Investments (OCI)

16,000
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Group Exercise 3: 80% with OCI

Other comprehensive income entry: OCI from Salt 16,000 OCI to NCI 4,000 Investment in Salt 16,000 NCI in NA of Salt 4,000

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Group Exercise 2: 80% End of First Year

P pp r,In .a dS lt,Inc e e c n a . C s on olid t dW ae orksh e a of D c m e et s ee b r Pp r e pe Ba n S e t la ce h e C sh a AccountsRe iva ce ble Inve ntory Inve e inAFSS curitie stm nt e s Inve e inS lt: stm nt a Book Va lue Ex ssC ce ost La nd Building&Equipm nt e Acc D pre tion e cia C na N-T-C ove nt G oodwill Tota A s ts l se Pa ble &Accrua ya s ls Long rmDe -te bt C m S om on tock Re ine Ea ta d rning s Accum te O I, 11 ula d C / 111 /X NC inNA of S lt I a 11 1 1, 1 1 22 2 2, 2 2 11 1 1, 1 1 S lt a 1, 1 1 1 1 2, 2 2 2 2 11 1 1 11 , 1, 1 1 1 1 11 1 1 11 , 11 1 1 11 , 1, 1 1 1 1 1, 1 1 1 1 11 1 1 11 , (11 ) ,111 1, 1 1 1 1 1, 1 1 1 1 1, 1 1 1 1 1, 1 1 1 1 1, 1 1 1 1 11 1 1, 1 1 1, 1 1 1 1 11 , 1 1 11 1 1 11 , 11 1 1 11 , (111 ) ,111 1, 1 1 1 1 1, 1 1 1 1 1 1, 1 , 1 1 1 1 11 1 1 11 , 11 1 1 11 , 11 1 1 11 , 11 1 1 11 , 1, 1 1 1 1 1, 1 1 1 1 , 11 1 X 11 Elim a ionEn rie in t t s D R C R C s on olid te a d 22 2 2 22 , 11 1 1 11 , 11 1 1 11 , 1, 1 1 1 1

11 1 1, 1 1 11 1 1, 1 1 11 1 1, 1 1 11 1 1, 1 1 (111 ) ,111

11 1 1, 1 1 1, 1 1 1 1 1, 1 1 1 1 11 1 1, 1 1 11 1 1, 1 1 1, 1 1 1 1

11 1 1 11 , 1, 1 1 1 1 11 1 1 11 , 11 1 1 11 , 11 1 1 11 , 1, 1 1 1 1

11 1 1 11 ,

11 1 1, 1 1 11 1 1, 1 1 1, 1 1 1 1

Tota Lia &Eq it l b u y O e C p he siveIn th r om re n com e Accum te O I, / 11 1 ula d C /X O I fromS lt C a Unre lize G inonInve e a d a stm nts O r C pre nsiveIncom to NC the om he e I Accum te O I, 11 ula d C / 111 /X

11 1 1, 1 1

11 1 1 11 ,

11 1 1, 1 1

1, 1 1 1 1 1 1, 1 1 1 1 1, 1 1 1 1 11 , 1 1 11 1 1 11 ,

1 1, 1 , 1 1 1 1

1 1, 1 1 1 1

1 1, 1 1 1 1 1, 1 1 1 1 11 , 1 1 1, 1 1 1 1

1, 1 1 1 1

1, 1 1 1 1

1 1 1, 1 1 1 1 (1 ) ,111 1, 1 1 1 1

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Learning Objective 5

Understand and explain additional considerations associated with consolidation.

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Additional Considerations Subsidiary valuation accounts at acquisition

FASB 141R indicates that all assets and liabilities acquired in a business combination should be valued at their acquisition-date fair values and no valuation accounts are to be carried over.
Its application in consolidation following a stock acquisition is less clear.

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Additional Considerations Deficit in RE Negative retained earnings of subsidiary at acquisition

A parent company may acquire a subsidiary with a negative in its retained earnings account. The basic elimination entry will have a credit rather than a debit to Retained Earnings.

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Additional Considerations Deficit in RE

The basic elimination entry:
Common Stock (S) XXX Additional Paid-in Capital (S) XXX Income from Sub % NI NCI in NI of Sub % NI Retained Earnings, Beginning Balance (S) XXX Dividends Declared XXX Investment in Sub % BV NCI in NA of Sub % BV

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Additional Considerations

Other stockholders equity accounts

In general, all stockholders equity accounts accruing to the common shareholders receive the same treatment as common stock and are eliminated at the time common stock is eliminated.

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Additional Considerations
Subsidiarys disposal of differentialrelated assets

Both the parents equity-method income and consolidated net income are affected. Parents books: The portion of the differential included in the subsidiary investment account that relates to the asset sold must be written off by the parent under the equity method as a reduction in both the income from the subsidiary and the investment account. In consolidation, the portion of the differential related to the asset sold is treated as an adjustment to consolidated income.
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Additional Considerations
Inventory

Any inventory-related differential is assigned to inventory for as long as the subsidiary holds the units. In the period in which the inventory units are sold, the inventory-related differential is assigned to Cost of Goods Sold. The inventory costing method used by the subsidiary determines the period in which the differential cost of goods sold is recognized. FIFO: The inventory units on hand on the date of combination are viewed as being the first units sold after the combination . LIFO: The inventory units on the date of combination are viewed as remaining in the 5-61

Additional Considerations
Fixed Assets

A differential related to land held by a subsidiary is added to the Land balance in the consolidation workpaper each time a consolidated balance sheet is prepared.

If the subsidiary sells the land to which the differential relates, the differential is treated in the consolidation workpaper as an adjustment to the gain or loss on the sale of the land in the period of the sale.

The sale of differential-related equipment is treated in the same manner as land except that the amortization for the current and previous periods must be considered. 5-62

Conclusion

The End The End