Ch 5: Consolidated Financial Statements with Less than 100% Ownership
Call Kai
Learn
Practice Test
Spaced Repetition
Match
Flashcards
Knowt Play1/24
There's no tags or description
Looks like no tags are added yet.
25 Terms
LO1 Explain consolidation on the date of acquisition for a non-wholly owned subsidiary.
LO1 Explain consolidation on the date of acquisition for a non-wholly owned subsidiary.
considering the case where other shareholders own a minority, or noncontrolling, interest in the sub in addition to the P
If the P still controls the S, it must still consolidate the fin st of the S with its own. Now we also have to keep track of the equity that the noncontrolling shareholders have in that sub
LO1 Explain consolidation on the date of acquisition for a non-wholly owned subsidiary.
Income Statements with Noncontrolling Interests
Consolidated rev and exp remain unchanged in the presence of noncontrolling shareholders
NI is allocated to the two groups of shareholders
1. consolidated NI attributable to Noncontrolling Shareholders
2. Consolidated NI attributable to Parent’s Shareholders (remaining)
We consolidate 100% of S’s rev and exp and then apportion NI to noncontrolling and parent
LO1 Explain consolidation on the date of acquisition for a non-wholly owned subsidiary.
Stockholder’’s Equity with Noncontrolling Interests
consolidated assets and liab remain unchanged in the presence on noncontrolling shareholders
SE section will clearly separate the interests of the two groups of shareholders
Shareholders of the P comp who have claim on the net assets of the total consolidated entry by virtue of their ownership of the P comp
Noncontrolling Shareholders of S who only have a claim on the net assets of the S (Noncontrolling Interests, NCI)
So, we consolidate 100% of assets and lib of the S and then apportion the SE btwn P and noncontrolling shareholders
On consolidated Spreadsheet: Noncontrolling Interest Equity is NOT equity in the P comp. It is equity in 1/more of the subs that are consolidate with the P comp and appears on consolidated BS
LO1 Explain consolidation on the date of acquisition for a non-wholly owned subsidiary.
Apportionment of BVSE and Identifiable Assets and Goodwill Allocation Ex
The BV of the Sub and the AAP assets and libs other than goodwill are apportioned btwn the P’s shareholders and the noncontrolling interests in proportion to their ownership in the comp
If the NCI own 20% of the comp, they are apportioned 20% of the Sub’s BV and 20% of the AAP other than goodwill in our [E] and [A] consolidation elimination entries
Assumptions: 1. Acquisition of 80% of the Sub for $1,570,000 2. NCI has FV of $380,000 3. FV of the identifiable net assets is $1,800,000
Goodwill is allocated to the controlling and noncontrolling interests:
100% of Sub: 1570000+380000= 195000 (Total FV of Investee Comp) - 1800000 = 150,000 Goodwill
Allocation of Goodwill to Controlling Interest: 1,570,000 - (80%*1800000) = 130,000
Allocation of Goodwill to Noncontrolling Interest: 380,000 - (20% * 1800000) = 20,000
Because the $150,000 is the result of combining the controlling and noncontrolling interests' fair values and subtracting the identifiable net assets.
To determine each group's share of goodwill, we calculate the difference between:
The fair value of that group's ownership interest.
That group's percentage of the identifiable net assets.
The controlling interest's goodwill is $130,000 because the parent paid $1,570,000 for its 80% interest, which represents $1,440,000 of identifiable net assets plus $130,000 of goodwill.
The NCI's goodwill is $20,000 because its $380,000 fair value represents $360,000 of identifiable net assets plus $20,000 of goodwill.
LO1 Explain consolidation on the date of acquisition for a non-wholly owned subsidiary.
Acquisition Date Consolidation with NCI
Assume: 1. Puch of 80% interest on 1/1/16 for 1,570,000 2. 20% NCI is 380,000 3. AAP is 950,000 4. PPE 500,000 (10,000 depr/yr) 5. Patent 300,000 (30,000 amort/yr) 6. Goodwill (130,000 P, 20,000 NCI)
1. Entry [E] — Eliminating Subsidiary Equity
Entry [E] removes the book value of the subsidiary’s stockholders' equity and splits it between the Parent (80%) and the Noncontrolling Interest (20%).
Subsidiary Book Value of Equity:
\text{Common Stock }(\100,000)+\text{APIC }(\125,000)+\text{Retained Earnings }(\775,000)=\bm{\1,000,000}
Allocation:
Debit: Common Stock = $100,000 Debit: APIC = $125,000 Debit: Retained Earnings = 775,000
Credit Equity Investment (Parent 80% share):
\1,000,000 \times 80\% = \mathbf{\800,000}\text{[cite: 1]}
Credit Noncontrolling Interest (NCI 20% share):
\1,000,000 \times 20\% = \mathbf{\200,000}\text{[cite: 1]}
2. Entry [A] — Allocating Acquisition Acquisition Differential (AAP)
Entry [A] recognizes the differential (excess of fair value over book value) of $950,000 and assigns it to the specific assets and the ownership accounts.
Step A: Debits (Asset Write-Ups)
PPE, net: $500,000 (given AAP allocation)
Patent: $300,000 (given AAP allocation)
Goodwill: $150,000 ($130,000 Parent share + $20,000 NCI share)
Total Asset Debits:
\$500,000 + \$300,000 + \150,000 = \mathbf{\950,000}\text{[cite: 1]}
Step B: Credits (Allocating the Excess)
Credit Equity Investment:
\text{Total Purchase Price } (\1,570,000) - \text{Equity Investment in [E]} (\800,000)=$770,000[cite: 1]
(Alternatively: 80% of Identifiable AAP ($800,000 x 0.80 = $640,000) + Parent Goodwill ($130,000) = $770,000)
Credit Noncontrolling Interest (NCI):
\text{Total NCI Fair Value } (\380,000) - \text{NCI Share in [E]} (\200,000)=$180,000[cite: 1]
(Alternatively: 20% of Identifiable AAP ($800,000 * 0.20 = $160,000) + NCI Goodwill ($20,000) = 180,000)
3. Ending Balance Check on the Balance Sheet
Equity Investment Account:
\1,570,000 \text{ (Initial Investment)} - \800,000 \text{ [E]} - \770,000 \text{ [A]} = \mathbf{\0}\text{[cite: 1]}
(Fully eliminated)
[cite: 1]
Noncontrolling Interest Account:
\200,000 \text{ [E]} + \180,000 [A]=$380,000[cite: 1]
(Matches total NCI fair value)
LO2 Explain allocation of profit to controlling and noncontrolling interests and consolidation subsequent to the date of acquisition for a non-wholly owned subsidiary
Consolidation Subsequent to Acquisition
Assume: Sub reports NI of 210000; Pays dividends of 21000; AAP amort is 40,000 for the yr
Equity Investment Account: Beg DR Bal (1,570,000) + Income (loss) from Sub (P recognizes proportionate share of NI) (210000*.80= 168,000) - Amort of AAP assets (P recognizes proportionate share of AAP amort) (40,000*.80=32000) - Dividends Received (16800)= End Bal (1,689,200
Noncontrolling Interest Account: Beg CR Bal (380,000) - Amort of AAP Assets (NCI recognizes proportionate share of AAP amort) (40,000*.20= 80000) + Allocation of profit attributable to noncontrolling interests (NCI recognizes proportionate share of NI) (210,000*.20= 42,000) - Dividends Received 4,200 = End Bal (409,000)
LO2 Explain allocation of profit to controlling and noncontrolling interests and consolidation subsequent to the date of acquisition for a non-wholly owned subsidiary
CEADI Entries Subsequent to Acquistion
[C] Entry: Eliminates all changes in the Equity Investment and establishes Noncontrolling Interest accounts during the consolidation period. The NCI credit includes the net income attributable to the NCI less the dividends paid to the NCI.
DR Income (loss) from subsidiary 136,000 and DR Consol. NI attributable to NCI 34,000
CR Dividends 21,000, CR Equity investment 119,200, and CR Noncontrolling interest ($34,000 - $4,200) 29,800
[E] Entry: Eliminates subsidiary Stockholders' Equity @ BOY. The credit to the Equity Investment eliminates the BOY balance recognized in the parent's Equity Investment account. The credit to the Noncontrolling Interest equity account establishes its balance @ BOY.
DR Common stock @ BOY 100,000, DR APIC @ BOY 125,000, and DR Retained earnings @ BOY 775,000
CR Equity investment @ BOY ($1,000,000 × 80%) 800,000 and CR Noncontrolling interest @ BOY ($1,000,000 × 20%) 200,000
[A] Entry: The debits recognize the BOY AAP ($950,000 @ BOY) on the consolidated balance sheet. The credits eliminate the parent's share of the BOY AAP from its Equity Investment account and recognize the noncontrolling interests' share of the AAP in the NCI equity account. [Note that the allocation of the 100% AAP is equal to the split calculated in footnote 9.]
DR PPE, net @ BOY (100% AAP) 500,000, DR Patent @ BOY (100% AAP) 300,000, and DR Goodwill @ BOY (100% AAP) 150,000
CR Equity investment @ BOY (see footnote 9.) 770,000 and CR Noncontrolling interest (see footnote 9.) 180,000
[D] Entry: The debit to Operating Expenses recognizes depreciation/amortization expense relating to the identifiable AAP assets, and the credits to PPE, net and Patent, adjust the balances to reflect their correct end-of-year totals.
DR Operating expenses (AAP amort.) 40,000
CR PPE, net (for 100% AAP amort.) 10,000 and CR Patent (for 100% AAP amort.) 30,000
[I] Entry: Not applicable in this example (we cover this topic later in the chapter)
LO2 Explain allocation of profit to controlling and noncontrolling interests and consolidation subsequent to the date of acquisition for a non-wholly owned subsidiary
Consolidated IS and RE and BS
is contains : consolidated NI attributable to noncontrolling assets and contributed NI attributable to parent
RE on consolidated BS contains consolidated NI attributable to parent
consolidated BS contains Noncontrolling Interest equity: Beg Bal + NI of noncontrolling interest - div to noncontrolling shareholders
the Noncontrolling Interest Equity account is reported on the consolidated BS separately from the parent’s equity, and should be clearly identified and labeled
LO3 Explain intercompany profit elimination in consolidated financial statements in the presence of noncontrolling interests when the parent uses the equity method of preconsolidation investment bookkeeping.
Intercomp Transfers of Inventory: P owns less than 100% of Sub
Whether the intercomp transfer is upstream or downstream
100% of the intercomp is deferred profit is always eliminated from the consolidated fin st at the date of intercomp inventory transfer
the reduction of end inv for the deferred profit will inc COGS: Beg Inv + Purch - End Inv = COGS
when the inv is transferred to an unaffiliated party, the deferred profit is recognized as dec to COGS
When the Inventory Transaction is Upstream
the deferred profit adj also affect the noncontrolling interest bal by the noncontrolling interest percentage
bc noncontrolling interests only have an interest in the sub in which they own stock. so any affect on the subs NI also affects the income that is attributable to the noncontrolling shareholders and their noncontrolling interest equity account is also affected on the consolidated BS
When the Inventory Transaction is Downstream
noncontrolling interest is unaffected by deferred profit
LO3 Explain intercompany profit elimination in consolidated financial statements in the presence of noncontrolling interests when the parent uses the equity method of preconsolidation investment bookkeeping.
Profit Elimination for Upstream Inventory Sales
Given:
Prior Period:
Transfer price for inventory sale: $300,000
Cost of goods sold: $230,000
Gross profit: $70,000
Percentage of inventory remaining: 25%
Gross profit deferred: $17,500
Intercompany receivable/payable at end of period (paid in beginning of next period): $90,000
Current Period:
Transfer price for inventory sale: $400,000
Cost of goods sold: $320,000
Gross profit: $80,000
Percentage of inventory remaining: 35%
Gross profit deferred: $28,000
Intercompany receivable/payable at end of period (paid in beginning of next period): $100,000
Analysis of Sub:
Subsidiary Net Income Calculation:
Subsidiary net income (as reported): $210,000
Recognition of prior year gain: 17,500
Deferral of current period gain: (28,000)
we are recognizing and deferring 100% of the gross profit
AAP depreciation/amortization: (40,000)
Adjusted subsidiary net income: $159,500
Allocation:
Parent (80%): $127,600
Subsidiary (20%): 31,900
Adjusted subsidiary net income: $159,500
LO3 Explain intercompany profit elimination in consolidated financial statements in the presence of noncontrolling interests when the parent uses the equity method of preconsolidation investment bookkeeping.
Profit Elimination for Downstream Inventory Sales
For downstream in sales, the adj sub income does not reflect gross profit on the sale. That GP only affects the parents, not the subs, IS, and therefore does not affect the noncontrolling shareholders
since there is no inventory profit effect in the subs NI, the amnt of the subs NI that is allocated to the noncontrolling interests will be different for a downstream sale
noncontrolling interests are ONLY affected by the subs NI, so be careful to identify which IS are affected by any intercomp asset sales
only UPSTREAM asset sales affect the noncontrolling shareholders
income allocated to the noncontrolling shareholders is higher for downstream sale of inv bc nc shareholders have not been affected by the GP on the intercomp sale since it was downstream
also affects NCI equity account
Subsidiary Net Income Calculation:
Subsidiary net income (as reported): $210,000
AAP depreciation/amortization: (40,000)
Adjusted subsidiary net income: $170,000
Allocation:
Parent (80%): $136,000
Subsidiary (20%): 34,000
Adjusted subsidiary net income: $170,000
LO4 Explain intercompany profit elimination in consolidated financial statements in the presence of noncontrolling interests when to parent uses the cost method of preconsolidation investment bookkeeping.
Post Acquisition Consolidation: P owns less than 100% of sub- Cost Method
Assumptions:
On 1/1/15, parent acquires 80% of subsidiary for $234,000
AAP
Buildings & Equipment: $22,500 (3,750amortization)</span></p></li><li><p><span>Goodwill:</span><spanstyle="line−height:1.15;">\underline{48,000}$ ($43,200 controlling / $4,800 NCI)
Total: $70,500
In 2018: Downstream inventory sale ($15,000 inventory remaining w/ subsidiary, 35% gross profit)
In 2019: Upstream inventory sale ($22,500 inventory remaining w/ subsidiary, 35% gross profit)
On 12/31/17, upstream building and equipment sale for $63,000 ($9,000 gain, 6 year life and $1,500 of gain is confirmed at 12/31/19)
Subsidiary reports net income of $66,000 for 2019
Under Cost Method: P does not recognize in the equity investment account: equity income, aap amort, and profit on intercomp asset sales; so we adjust for those items in adj entry
[ADJ] amnt:
$115,200: 80% x [BOY Sub retained earnings ($165,000) – RE @ acquisition ($21,000)] (80% of change in subsidiary Retained Earnings from acquisition date through BOY)
(12,000): 80% x [AAP amortization ($3,750/yr) x 4 years since acquisition] (Cumulative 80% AAP amortization from acquisition date through BOY)
(5,250): 100% x ($15,000 x 35 GP%) (100% of the BOY downstream unconfirmed intercompany inventory profits)
(6,000): 80% x [Gain on equipment sale ($9,000) - 1,500confirmed@12/31/16](</span>80 91,950 (Total)
Income Attributable to NCI
$13,200: 20% x Sub net income ($66,000) (NCI share of the subsidiary's reported net income for 2016)
(750): 20% x AAP amortization for 2016 ($3,750/yr) (20% AAP amortization for 2016)
(1,575): 20% x (EOY upstream profit in inventory $22,500 x 35GP%) (20% of the EOY upstream intercompany inventory profits deferred from 2016)
300: 20% x Upstream confirmed depreciation Asset profit ($1,500) (20% of the upstream confirmed intercompany depreciable asset profits)
$11,175: NCI Income Total
Consolidated NCI
$81,000: 20% x Sub stockholders' equity ($405,000) (NCI share of the subsidiary's reported stockholders' equity at December 31, 2016)
5,550: Unamortized AAP @ 2016 ([$22,500 x 20%] − 5 x [$3,750/yr x 20%]) + $4,800 (unamortized 20% AAP at December 31, 2016)
(1,575): 20% x EOY upstream profit in inventory [$22,500 x 35GP%] (20% of the EOY upstream intercompany inventory profits deferred from 2016)
(1,200): 20% x Upstream unconfirmed depreciable asset profit ($9,000 − 2 x $1,500) (20% of the upstream unconfirmed intercompany depreciable asset profits)
$83,775: Consolidated noncontrolling interest Total
LO4 Explain intercompany profit elimination in consolidated financial statements in the presence of noncontrolling interests when to parent uses the cost method of preconsolidation investment bookkeeping.
Suggested Integrated Approach for mastering Complex Consolidations
Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP
Calculate and organize the profits and losses on intercompany transactions and balances
Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders' equity of the subsidiary
Reconstruct the activity in the parent's pre-consolidation Equity Investment T-account for the year of consolidation
Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP
Calculate and organize the profits and losses on intercompany transactions and balances
Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders' equity of the subsidiary
Reconstruct the activity in the parent's pre-consolidation Equity Investment T-account for the year of consolidation
LO6 Explain the computation of earnings per share for consolidated companies
Basic EPS:
unaffected by the presence of sub comps and noncontrolling interests
(Consolidated NI - Preferred Dividends) / Weighted Average Number of Common Share Outstanding
the preferred div are of the Parent comp
WANCSO is the parent’s common shares outstanding
Diluted EPS:
adds the effects of conversion of all convertible securities and exercise of all options at their earliest possible opportunity (if not anti-dilutive) for both the parent and its sub
(NI of P - Preferred Div + Adj for P Securities + (Shares held * Sub Diluted EPS)) / (Weighted Avg Number of CS Outstanding + Additional Shares Outstanding from Dilution)
LO7 Explain the effects on consolidated financial statements of changes in the ownership percentage of a subsidiary
Accounting for Changes in Ownership
Accounting for an acquisition on the date when control is achieved in a step acquisition
All of the Equity Investments made by the investor in the investee must be revalued, and any gain or loss as a result of the revaluation should be recognized currently in income.
Goodwill is measured - This only occurs on the date that the parent obtains control.
Assume
Book Value of Equity investment is $184,500 for 35% of investee
Market value is estimated at $245,000
The Equity Investment must now be written up to its fair value with the following journal entry:
Journal Entry
Debit: Equity investment — 60,500
Credit: Gain on revaluation of subsidiary — 60,500
(to record the write-up of the Equity Investment account to its fair value)
Following the write-up, Goodwill is estimated in the usual way. Assume that:
The parent's 80% controlling Equity Investment has a fair value of $560,000
The noncontrolling interest has a fair value of $140,000, and
The fair value of the identifiable net assets is $540,000
Goodwill Calculation
$560,000: Fair value of parent's controlling interest in subsidiary
+ 140,000: The fair value of any noncontrolling interest in the subsidiary
= 700,000: Total fair value of the investee company
− 540,000: Fair value of the identifiable assets acquired and liabilities assumed
= $160,000: Goodwill (i.e., positive residual)
Inclusion of Subsidiary's Income Statement Following Acquisition of a Controlling Interest
When a subsidiary is initially consolidated, the consolidated financial statements include the subsidiary's revenues, expenses, gains, and losses only from the date the subsidiary is initially consolidated.
Companies are required to present income statements for the current year and the previous two years for comparison in annual reports and 10-K filings.
LO7 Explain the effects on consolidated financial statements of changes in the ownership percentage of a subsidiary
Accounting for Additional Purchase of Stock Subsequent to Date of Control
If the parent owns less than 100% of the outstanding stock of a controlled subsidiary, and
If the parent subsequently purchases additional shares from the noncontrolling shareholders, then
the purchase of those additional shares is recorded by a reduction of the noncontrolling interest and an increase or decrease in Additional Paid-In Capital for the difference between the book value of the noncontrolling interest purchased and the cash payment.
Assume
Parent owns 80% of the subsidiary and
Purchases an additional 10% interest in its subsidiary from the noncontrolling shareholders (one-half of the outstanding noncontrolling interest shares) for a purchase price of $225,000.
On that date, the 20% noncontrolling interest is equal to $409,800 (½ = $204,900).
Journal Entry
Debit: Equity investment — 204,900
Debit: APIC — 20,100
Credit: Cash — 225,000
(to record the purchase of an additional 10% interest in subsidiary from the noncontrolling shareholders)
Sale of All of the Equity Investment by the Investor
If the parent sells the subsidiary, the sale is treated like the sale of any asset.
Journal Entry
Debit: Cash — 800,000
Credit: Equity investment — 656,800
Credit: Gain on sale — 143,200
(to record the sale of 100% of the Equity Investment)
In addition, depending on the significance of this subsidiary to the overall operations of the parent, this disposal could qualify for treatment as a Discontinued Operation (i.e., net of tax presentation at the bottom of the income statement).
If the disposal does not qualify as a Discontinued Operation, the gain or loss should be presented as part of Income from Continuing Operations.
If the parent sells a portion of the subsidiary stock that it owns, but retains control over the subsidiary, the sale is viewed as a transaction among owners (parent and noncontrolling shareholders).
As a result, no gain or loss is recognized in the consolidated income statement.
Assume
The parent sells 10% of the stock that it owns in its wholly owned subsidiary for $60,000.
The subsidiary reports a balance of stockholders’ equity of $530,000 on the date of sale.
The Equity Investment was originally acquired at book value.
Journal Entry
Debit: Cash — 60,000
Credit: Equity investment — 53,000
Credit: APIC (parent) — 7,000
(to record the parent’s sale of 10% of the stock owned in the subsidiary)
LO7 Explain the effects on consolidated financial statements of changes in the ownership percentage of a subsidiary
Sale of CS by Sub to Outside Parties
as a result of the sale, the parent now owns a smaller % of the sub’s CS than it did before the sale
the Equity Inv account will always be equal to the proportion of the sub’s SE that the P owns, plus the BV of unamortized AAP assets that the P owns, if any
the implication is this: any Inc (dec) in SE of the sub resulting resulting from the sale of additional shares must result in a corresponding inc (dec) in the Equity Investment account on the P’s BS
Assume a wholly-owned subsidiary:
Equity investment = Sub BVSE = $1,000,000
Subsidiary sells a 20% interest to outsiders for $300,000
The journal entry made by the parent is:
Equity Investment ................. 40,000
APIC ............................... 40,000
(To record the increase in the Equity Investment account resulting from the
subsidiary's sale of 100,000 shares of common stock above book value)
The parent owns 80% of a sub with a BVSE = $1,300,000 and the parent's Equity Investment should be equal to:
80% × $1,300,000 = $1,040,000
It must be written up by:
$1,040,000 − $1,000,000 = $40,000
Deconsolidation of the Sub
Once the parent loses control and deconsolidates the subsidiary, the parent recognizes a gain or loss on the deconsolidation.
This gain or loss is computed as follows:
Plain Text
The fair value of any consideration received
+ The fair value of any retained noncontrolling investment in the
former subsidiary at the date the subsidiary is deconsolidated
+ The carrying amount of any noncontrolling interest in the former
subsidiary at the date the subsidiary is deconsolidated
- The carrying amount of the former subsidiary's assets and liabilities
-----------------------------------------------------------------------
= Gain or loss on the deconsolidation of a subsidiary