241

Chapter 8

Chapter 8
CONSOLIDATIONS - CHANGES IN OWNERSHIP INTERESTS
Electronic supplement

W8-1 Midyear poolings are accounted for by recording the investment at the
book value of the subsidiary's net assets at the time of pooling. In other
words, the investment is recorded equal to beginning of the period net assets,
increased by earnings up to the date of pooling and reduced by dividends paid
prior to pooling. Since pooled income is equal to the combined income of the
pooled entities for the entire year in which the pooling occurs, the investor
records income from the pooled subsidiary up to the date of pooling.

242

Consolidations - Changes in Ownership Interests

W8-2
Pelvis's income excluding direct costs of combination
Less: Direct costs of combination
Add: Income from Solace for year ($100,000 x 90%)
Consolidated net income

$300,000
(75,000)
90,000
$315,000

W8-3
1

Income and dividends from Schenck

Income from Schenck

Sales ($1,500,000 - $1,200,000 expenses) x 90%

$270,000

Dividends

$126,000

($210,000 - $70,000 pre-pooling dividends) x 90%

Investment balance December 31, 2000

Stockholders' equity December 31, 2000

($1,000,000 + $500,000 + $300,000 income - $210,000 dividends)
Percent ownership
Investment balance December 31, 2000
Alternative computation:
Schenck's equity at January 1
Add: Income January 1 - May 1
Less: Dividends paid prior to pooling
Schenck's equity at May 1
Percent pooled
Investment balance May 1
Add: Income from Schenck May 1 - December 31
($1,500,000 - $1,200,000) x 90% x 2/3 year
Less: Dividends ($210,000 - $70,000) x 90%
Investment balance December 31, 2000

$1,590,000
90%
$1,431,000
$1,500,000
100,000
(70,000)
1,530,000
90%
1,377,000
180,000
(126,000)
$1,431,000

243

Chapter 8

W8-4
1

Entry to record pooling

Investment in Stockard
Other paid-in capital
Capital stock, $5 par
Retained earnings
Income from Stockard

$3,060,000
100,000
$2,100,000
700,000
360,000

To record 90% pooling of interest computed

as follows:
Total stockholders' equity at September 1 ($3,100,000 +
$400,000 income - $100,000 dividends)
$ 3,400,000
Percent acquired
90%
Investment in Stockard
$ 3,060,000
Capital stock after pooling ($10,000,000 +
$2,100,000)
Paid-in capital before pooling:
Padgett's
$10,100,000
Stockard's ($2,200,000 x 90%)
1,980,000
Reduction in maximum retained earnings
(Retained earnings $900,000 - $100,000
dividends) x 90%
Less: Reduction in retained earnings
Retained earnings
2

$12,100,000
12,080,000
20,000

$
$
$

720,000
20,000
700,000

Share of Stockard's dividends and income

Cash

$ 90,000
Investment in Stockard

$ 90,000

To record share of Stockard's $100,000

dividends after September 1.
Investment in Stockard
Income from Stockard

$225,000

To record share of Stockard's income from

September 1 through December 31 ($250,000 x 90%).
Check:

Investment in Stockard = $3,060,000 - $90,000 dividends +

$225,000 income = $3,195,000
Underlying equity = $3,550,000 x 90% = $3,195,000

$225,000

244

Consolidations - Changes in Ownership Interests

W8-5
1a

Issuance of stock for combination

Investment in Seay
Other paid-in capital
Common stock, $10 par

$4,000,000
1,000,000
$4,000,000

Income from Seay

1,000,000

To record issuance of 400,000 shares in a

pooling of interests with Seay and take up
income from Seay for the first eight months.
1b

Entries to account for investment in 2000

Cash

500,000

Investment in Seay

500,000

500,000

To record receipt of dividends from Seay.

Investment in Seay
Income from Seay

500,000

To take up income from Seay for last four

months of 2000.

Polly Corporation and Subsidiary

Partial Balance Sheet
at December 31, 2000

Stockholders' equity
Common stock, $10 par
Retained earnings
Consolidated stockholders' equity
a

$12,000,000
5,000,000a
$17,000,000

Polly's retained earnings January 1, 2000

$ 3,000,000

Net income ($4,500,000 + $1,500,000 from Seay)

Dividends paid
Consolidated retained earnings December 31, 2000

6,000,000
(4,000,000)
$ 5,000,000

Check:
Investment in Seay December 31, 2000:
($4,000,000 + $500,000 - $500,000)
Seay's stockholders' equity December 31, 2000:
($3,500,000 on January 1 + $1,500,000 net income $1,000,000 dividends)

$ 4,000,000
$ 4,000,000

245

Chapter 8

W8-6

[AICPA adapted]

Purl's separate income for 2000

Add: Purl's income from Scott:
Scott's income for last six months of 2000
Less: Deferred inventory profit
Consolidated net income
2

$375,000
(45,000)

330,000
$1,905,000

Purl's separate income for 2000

Add: Purl's income from Scott
Scott's income for 2000
Less: Deferred inventory profit
Consolidated net income

W8-7

$1,575,000

$1,575,000
$600,000
(45,000)

555,000
$2,130,000

[AICPA adapted]

Entry on June 30, 2000 to record the pooling

Investment in Shaw ($9,000,000 x 90%)
$8,100,000
Capital stock (630,000 shares x $5)
Additional paid-in capital
Retained earnings

$3,150,000
90,000
4,860,000

Common stock $6,500,000 + $3,150,000 = $9,650,000

Additional paid-in capital $4,400,000 + $90,000 = $4,490,000

Retained earnings $6,100,000 + $4,860,000 = $10,960,000

Consolidated net income

= $2,820,000

Minority interest ($9,000,000 + $500,000 - $350,000) x 10%

= $915,000

$2,100,000 + ($800,000 x 90%)

246

Consolidations - Changes in Ownership Interests

W8-8
Preliminary computation
Entry to record pooling on April 1, 2000
Investment in Simon
Other paid-in capital
Capital stock, $10 par
Retained earnings

$486,000
100,000
$550,000
36,000

To record 90% pooling with Simon. Investment in Simon is computed

as: (Stockholders' equity at January 1 $560,000 - $20,000
dividends) x 90%.
Entry to record dividends received from Simon in 2000
Cash
$ 54,000
Investment in Simon

$ 54,000

Entry to record share of Simon's income on December 31, 2000

Investment in Simon
$ 90,000
Income from Simon
$ 90,000

Proctor Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2000
|
|
90% | Adjustments and
|Consolidated
| Proctor | Simon |
Eliminations
|Balance Sheet
|
|
|
|
|
Assets
|
|
|
|
|
Cash
|$ 278,000|$ 70,000|
|
| $ 348,000
Other assets
| 2,400,000| 650,000|
|
|
3,050,000
Investment in Simon |
522,000|
|
|a 522,000|
Total assets
|$3,200,000|$720,000|
|
| $3,398,000
|
|
|
|
|
Equities
|
|
|
|
|
Liabilities
|$ 124,000|$140,000|
|
| $ 264,000
Capital stock-$10 par| 1,550,000| 300,000|a 300,000|
|
1,550,000
Additional paid-in
|
|
|
|
|
capital
|
| 200,000|a 200,000|
|
Retained earnings
| 1,526,000| 80,000|a 80,000|
|
1,526,000
Minority interest
|
|
|
|a 58,000|
58,000
Total equities
|$3,200,000|$720,000|
|
| $3,398,000
|
|
|
|
|

247

Chapter 8

W8-9
Supporting computations
Poe accounts for its investment in Spy under an incomplete equity method.
($20,000 x 3/4 year x 100%) + ($20,000 x 1/4 year x 75%) = $18,750
Schedule to convert to equity basis
Retained
Investment
Earnings-Poe
in Spy
Prior year's effects
Inventory December 31, 2003
($5,400 x 100%)
$(5,400)
$(5,400)
Current year's effects
Inventory December 31, 2003
Inventory December 31, 2004
($3,000 x 75%)
Correction of $17,500 reported
gain less $15,000 correct
gain on salea
Adjustments

5,400
(2,250)

Income
from Spy

$ 5,400
(2,250)

(2,500)
$(5,400)

$(4,750)

Gain on Sale

$(2,500)
$ 3,150

$(2,500)

Computation of correct gain assuming no unrealized profit is:

$75,000 - [25% x ($230,000 + $15,000 - $5,000)] = $15,000

Working paper entry to correct for prior errors

a

Gain on sale
Retained earnings-Poe December 31, 2003
Income from Spy
Investment in Spy

$2,500
5,400
$3,150
4,750

Alternative beginning-of-the-period sale assumption

The 25% interest sold could have been based on a beginning-of-the-period
sale assumption in which case the gain would be $20,100 computed as: $75,000
- [25% x ($230,000 beginning equity of Spy - $5,400 unrealized profit - $5,000
pre-sale dividends)]. In this case, the $59,250 ending minority interest
would consist of:
Minority interest December 31, 2003
Add: 25% of realized income
($20,000 income + $5,400 - $3,000) x 25%
Less: 25% of dividends actually received ($5,000 x 25%)
Minority interest December 31, 2004

$ 54,900
5,600
(1,250)
$ 59,250

Under the beginning-of-the-period sale assumption, Poe's net income and

consolidated net income would consist of:
Sales - cost of sales - other expenses
$ 63,750
Gain on sale
20,100
Income from Spy (75% of Spy's realized income)
($20,000 + $5,400 - $3,000) x 75%
16,800
Net income (equal to consolidated net income)
$100,650

248
W8-9

Consolidations - Changes in Ownership Interests

(continued)
Poe Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2004

|
|
| Adjustments and |Consolidated
|
Poe
| Spy 75% |
Eliminations
| Statements
|
|
|
|
|
Income Statement
|
|
|
|
|
Sales
|$463,750 |$130,000 |b 130,000|
| $463,750
Income from Spy
| 18,750 |
|e 21,900|a
3,150|
Gain on Spy stock
| 17,500 |
|a
2,500|
|
15,000
Cost of sales
| 260,000*| 100,000*|d
3,000|b 130,000|
|
|
|
|c
5,400|
227,600*
Other expenses
| 140,000*| 10,000*|
|
|
150,000*
Minority expense
|
|
|h
500 |
|
500*
Net income
|$100,000 |$ 20,000 |
|
| $100,650
|
|
|
|
|
Retained Earnings
|
|
|
|
|
Retained earnings -Poe|$200,000 |
|a
5,400|
| $194,600
Retained earnings -Spy|
|$ 30,000 |f 30,000|
|
Net income
| 100,000 | 20,000 |
|
|
100,650
Dividends
| 50,000*| 10,000*|
|e
8,750|
|h
1,250|
50,000*
Retained earnings
|
|
|
|
|
December 31, 2004
|$250,000 |$ 40,000 |
|
| $245,250
|
|
|
|
|
Balance Sheet
|
|
|
|
|
Cash
|$107,500 |$ 20,000 |
|
| $127,500
Inventories
| 100,000 | 50,000 |
|d
3,000|
147,000
Other current assets | 110,000 | 30,000 |
|g 13,000|
127,000
Plant assets
| 300,000 | 200,000 |
|
|
500,000
Investment in Spy
| 182,500 |
|c
5,400|a
4,750|
|
|
|
|e 13,150|
|
|
|
|f 170,000|
|$800,000 |$300,000 |
|
| $901,500
|
|
|
|
|
Accounts payable
|$150,000 |$ 60,000 |g 13,000|
| $197,000
Capital stock
| 400,000 | 200,000 |f 200,000|
|
400,000
Retained earnings
| 250,000 | 40,000 |
|
|
245,250
|$800,000 |$300,000 |
|
|
Minority interest October 1, 2004
|
|
|
($240,000 X 25%)
|
|f 60,000|
Minority interest December 31, 2004
|h
750|
|
59,250
|
|
|
| $901,500
|
|
|
|
*Deduct

Minority interest expense is 25% of ($5,000 income - $3,000 deferred inventory

profit).

249

Chapter 8

W8-10
Supporting computations
Investment in Skrye account
July 1, 2000: 90% interest recorded at book value
($310,000 beginning stockholders' equity +
$20,000 income to July 1) x 90%
December 2000:

$297,000

Dividends received ($20,000 x 90%)

(18,000)

December 31, 2000: Income from Skrye (last half year)

Share of Skrye's reported income ($20,000 x 90%)
$18,000
Add: Constructive gain on bonds
($50,600 - $49,100)
1,500
Less: Unrealized inventory profit from
upstream sales ($1,000 x 90%)
(900)
Balance December 31, 2000
July 1, 2001:
December 2001:

297,600

5% interest acquired for cash

29,500

Dividends received ($20,000 x 95%)

December 31, 2001:

18,600

(19,000)

Income from Skrye

First half year (assume unrealized inventory

profits realized ($20,000 + $1,000) x 90%
Last half year $20,000 - $1,200 unrealized
inventory profit from upstream sales) x 95%
Amortization of gain on bonds ($1,500/3 years)
Patent amortization 12,000 (see below) / 10 years
x 1/2 year

$18,900
17,860
(500)
(600)

35,660

Balance December 31, 2001

$343,760

Preacquisition income (assume unrealized inventory profits

from 2000 are realized in first half of 2001)
$21,000 x 5% acquired

$1,050

Minority interest expense for 2001

Skrye's reported income
Add: Unrealized profits-beginning inventory
Less: Unrealized profits-ending inventory
Skrye's realized income
Minority interest percentage

$1,990

Patent (on 5% purchase)

Purchase price
Equity purchased:
Starting equity
$330,000
Net income to date 20,000
Book value
$350,000
Interest purchased
5%

$29,500

17,500

$40,000
1,000
(1,200)
39,800
5%

250
Patent

Consolidations - Changes in Ownership Interests

$12,000

251

Chapter 8

W8-10

(continued)
Psi Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2001

|
|
|
Income Statement
|
Sales
|$
Income from Skrye
|
Interest income
|
Cost of sales
|
|
Operating expenses
|
Interest expense
|
Preacquisition income |
Minority expense
|
Net income
|$
|
Retained Earnings
|
Retained earnings-Psi |$
Retained earnings-Skrye|
Net income
|
Dividends
|

|
| Adjustments and |Consolidated
|Skrye 95%|
Eliminations
| Statements
|
|
|
|
|
|
|
|
613,840 |$250,200 |a 48,000|
| $ 816,040
35,660 |
|e 35,660|
|
|
4,800 |d
4,800|
|
400,000*| 170,000*|c
1,200|a 48,000|
|
|
|b
1,000|
522,200 *
141,400*| 45,000*|g
600|
|
187,000 *
8,600*|
|
|d
4,300|
4,300 *
|
|f
1,050|
|
1,050 *
|
|i
1,990|
|
1,990 *
99,500 |$ 40,000 |
|
| $
99,500
|
|
|
|
|
|
|
|
200,000 |
|
|
| $ 200,000
|$ 80,000 |f 80,000|
|
99,500 | 40,000 |
|
|
99,500
50,000*| 20,000*|
|e 19,000|
|i 1,000*|
50,000*
Retained earnings
|
|
|
|
|
December 31, 2001
|$ 249,500 |$100,000 |
|
| $ 249,500
|
|
|
|
|
Balance Sheet
|
|
|
|
|
Cash
|$
47,500 |$ 8,600 |
|
| $
56,100
Accounts receivable
|
88,240 | 67,000 |
|h
2,040|
153,200
Inventories
|
120,000 | 40,000 |
|c
1,200|
158,800
Plant assets -net
|
500,000 | 200,000 |
|
|
700,000
Investment -Psi bonds |
| 49,400 |
|d 49,400|
Investment-Skrye stock|
343,760 |
|b
950|e 16,660|
|
|
|
|d
1,500|
|
|
|
|f 326,550|
Patent
|
|
|f 12,000|g
600|
11,400
|$1,099,500 |$365,000 |
|
| 1,079,500
|
|
|
|
|
Accounts payable
|$
50,000 |$ 11,000 |h
2,040|
| $
58,960
Other current
|
|
|
|
|
liabilities
|
9,200 |
4,000 |
|
|
13,200
9% bonds payable
|
100,000 |
|d 50,000|
|
50,000
Premium on bonds
|
|
|
|
|
payable
|
800 |
|d
400|
|
400
Capital stock $10 par |
500,000 | 150,000 |f 150,000|
|
500,000
Other paid-in capital |
190,000 | 100,000 |f 100,000|
|
190,000
Retained earnings
|
249,500 |100,000 |
|
|
249,500
|$1,099,500 |$365,000 |
|
|
|
|
|
Minority interest beginning
|b
50|f 16,500|
Minority interest December 31, 2001
|
|i
990|
17,440
|
|
| $1,079,500
|
|
|
*Deduct
Psi