Chapter 8: Consolidations Changes in Ownership Interests

by Jeanne M. David, Ph.D., Univ. of Detroit Mercy to accompany Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn

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8-1

Changes in Ownership: Objectives

1. Prepare consolidated statements when parent company's ownership percentage increases or decreases during the reporting period. 2. Apply consolidation procedures to interim (midyear) acquisitions. 3. Record subsidiary/investee stock issuances and treasury stock transactions.

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Consolidations Changes in Ownership Interests

1: Changes in Ownership Percentage

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Changes in Parent Ownership

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

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

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Control is Maintained
Parent increases its share by buying more stock or decreases its share by selling some stock Change in Investment in sub is based on the underlying fair value of equity No gain or loss is recognized; paid in capital is adjusted

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Control Relinquished
Parent sells part of its Investment and no longer retains control Reduce the Investment based on proportion of interest sold Record gain or loss on sale Discontinue consolidation

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Is There a Gain or Loss?

Basic rule: No gain or loss is recorded on equity transactions with a firm's owners. 1. Control before and after the transaction is an equity transaction No gain or loss Adjust paid in capital, if needed 2. No control before and control after Point of business acquisition No loss Might have gain on bargain purchase 3. Control before and no control after Disposition of asset Gain or loss is recorded
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Consolidations Changes in Ownership Interests

2: Interim Acquisitions

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8-9

Preacquisition Issues
Entity theory (APB Opinion No. 51) Income statement includes all revenues and expenses Total consolidated income LESS Preacquisition earnings Noncontrolling interest share Equals Controlling interest share Parent theory (FASB Statement No. 160) Income statement includes revenues and expenses since acquisition Total consolidated income LESS Noncontrolling interest share Equals Controlling interest share
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Equity Book Value on Interim Date

Book value of equity is needed as of acquisition date Adjust the beginning value for changes before acquisition: Beginning BV equity + preacquisition revenues preacquisition expenses preacquisition dividends = BV equity at acquisition Sales and expenses (not dividends) might be assumed level
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Simple Interim Acquisition

Puma acquires 80% of Sega for $2,400 on 5/1/09. Fixed assets with a remaining life of 5 years are undervalued by $600. Sega's trial balance on 12/31/09 was: Cash 50 Accounts payable 300 Inventories 900 Other liabilities 1,200 Fixed assets, net 2,800 Common stock 600 Cost of sales 1,500 Retained earnings, 1/1 1,350 Operating expenses 600 Sales 2,700 Dividends 300 6,150 6,150 Sega's distributed $150 dividends each on 3/1/09 and 12/1/09. Revenues and expenses are assumed to be incurred uniformly over the year.
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Find Book Value at Acquisition

Book value of equity on 1/1/09 $1,950 Preacquisition amounts: Revenues 900 Jan-Apr Cost of sales (500) Jan-Apr Operating expenses (200) Jan-Apr Dividends (150) none Book value on 5/1/09 $2,000

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8-13

Analysis and Amortizations

Cost of 80% of Sega Implied value of Sega Book value Excess 2,400 3,000 2,000 1,000 Allocated to: Fixed assets Goodwill Total
600 400 (80) 320

Unamort 5/5/09 600 400 1,000

2009 (80) 0 (80)

Unamort 12/31/09 520 400 920

Sega's 2009 income Income since May 1 Amortization Adjusted

CI 80% share NCI 20% share

256 64
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Puma's Equity Entries

Investment in Sega Cash for acquisition Cash Investment in Sega for dividends Investment in Sega Income from Sega 2,400 2,400 120 120 256 256

[(2/3)(2,700 - 1,500 - 600) - (2/3)(600/5yrs)]x80%

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8-15

Worksheet elimination entries for 2009 Notice the preacquisition revenues, expenses and dividends included in the third entry.

Income from Sega Dividends Investment in Sega Noncontrolling interest share Dividends Noncontrolling interest Sales Common stock Retained earnings 1/1 Fixed assets Goodwill Cost of sales Operating expenses Dividends Investment in Sega Noncontrolling interest Depreciation expense Accumulated depreciation

256
120 136

64
30 34

900 600 1,350 600 400

500 200 150 2,400 600 80 80
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Income statement: Puma Sega DR CR Sales 5,000 2,700 900 Income from Sega 256 256 Cost of sales (2,100) (1,500) 500 Operating expense (800) (600) 80 200 Noncontrolling interest share 64 Controlling interest share 2,356 600 State of retained earnings: Retained earnings, 1/1 4,300 1,350 1,350 Add net income 2,356 600 Deduct dividends (1,000) (300) 120 30 150 Retained earnings, 12/31 5,656 1,650
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Consol 6,800 0 (3,100) (1,280) (64) 2,356 4,300 2,356

(1,000) 5,656
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Balance sheet: Cash Inventories Fixed assets, net Investment in Sega

Puma 950 1,300 5,170 2,536

Sega 50 900 2,800

Goodwill Total Accounts payable Other liabilities Common stock Retained earnings Noncontrolling interest
Total

9,956 500 1,800 2,000 5,656

3,750 300 1,200 600 1,650

9,956

3,750

CR Consol 1,000 2,200 600 80 8,490 136 2,400 0 400 400 12,090 800 3,000 600 2,000 5,656 600 34 634 12,090
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DR

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Interim Acquisition in Stages

Poca acquired Sark in a series of acquisition, resulting in a total 90% ownership. Date Interest Investment Acquired Cost April 1 5% 7,000 July 1 5% 8,000 October 1 80% 210,000 90% 225,000 The total book value and fair value of Sark's net assets on October 1 was $220,000. Cost of 90% of Sark 225,000 Implied value of Sark 250,000 Book value 220,000 Goodwill 30,000
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Income Distribution
Sark's income allocation for the year:
Total Oct 1 - Dec 31 before Oct 1 Income CI 90% share NCI 10% Share Preacquisition 150,000 33,750 3,750 112,500 (24,750) 9,000 (2,750) 1,000 (82,500) 30,000

Sales

Expenses (110,000) Net income 40,000

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8-20

Poca's Worksheet Entries

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

Poca 274,875 9,000

Sark

DR

CR

Consol 312,375 0

150,000 112,500 9,000

(220,000) (110,000) 1,000 63,875 40,000

82,500 (247,500) (1,000) 63,875

221,500 63,875 0 285,375

90,000 40,000 0 130,000

90,000

221,500 63,875

285,375
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Balance sheet: Other assets Investment in Sark Goodwill Total Liabilities Common stock Retained earnings Noncontrolling interest Total

Poca Sark 451,375 300,000 234,000

DR

CR 9,000 225,000

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

30,000 685,375 300,000 100,000 70,000 300,000 100,000 100,000 285,375 130,000 25,000 1,000 685,375 300,000

26,000 781,375
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Interim Sale, Continued Control

Pablo owns 90% of Sergio and its 1/1/10 $228 investment balance reflects Sergio's underlying equity plus $18 goodwill ($20 total implied goodwill). During 2010, Sergio reports $36 income and pays $20 dividends on July 1. Pablo sells 10% interest in Sergio on April 1 for $40.
Before Interest the sale sold 90% 10% 288.0 8.1 296.1 After the sale 80%

Pablo's interest in Sergio Investment account: 1/1 balance Income to 4/1 4/1 balance
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32.9

263.2
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Investment in Sergio: T-account

1/1 Balance 90% income to 4/1 Investment in Sergio 288.0 8.1

4/1 Balance

296.1 32.9 4/1 sale of 10% (1/9 of shares) 16.0 6/1 dividends (80%) 80% income since 4/1 21.6 12/31 Balance 268.8

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Pablo's Entry for the Sale

Cash Investment in Sergio Additional paid in capital 40.0 32.9 7.1

No gain or loss is recorded. Since Pablo retains control, the sale of some shares is treated as an owner transaction; the difference impacts paid in capital.
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Noncontrolling Interest Calculations

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

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

255.1 32.0 32.9

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Interim Sale, Loss of Control

1. Bring investment account up to date, recognizing partial year's income as appropriate 2. Determine BV of fraction of investment sold 3. Compare to selling price 4. Record a gain or loss on difference The "parent" no longer consolidates the "subsidiary" That relationship has been dissolved Parent will use equity or fair value/cost method as appropriate
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Consolidations Changes in Ownership Interests

3: Subsidiary's Stock Transactions

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Subsidiary Actions
Subsidiary actions increasing Parent share 1. Sub issues additional shares to Parent 2. Sub reacquires shares from noncontrolling interest Subsidiary actions decreasing Parent share 3. Sub issues additional shares to noncontrolling interests 4. Sub reacquires shares from Parent

Subsidiary actions not impacting ownership shares 5. Sub issues stock to both parent & noncontrolling interest 6. Sub issues stock split or stock dividend
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Stroh Issues Stock to Purdy

Purdy owns 80% of Stroh, acquired at $180.
Cost of 80% of Stroh Implied value of Stroh $180 $225

Book value of Stroh Excess, goodwill

200 $25

Stroh issues additional shares to Purdy. Outstanding shares increased from 10K to 12K. Purdy had owned 8K of the 10K, but now owns 10K of the 12K shares.
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Stroh's equity Goodwill Total value Purdy's Investment in Stroh Purdy's share of BV of equity Goodwill Total value

Before sale 200 25 225 180 160 20 180

Goodwill may go up or down depending on the value Purdy paid for the additional shares of Stroh

Stroh's equity, after the issuance Purdy's Investment, after Purdy's share of equity, 10/12 share New measure of goodwill Total
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Sell at BV Sell > BV Sell < BV for $40 for $70 for $30 240 270 230 220 250 210.0 200 225 191.7 20 25 18.3 220 250 210.0
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Purdy's Entry
Purdy acquires additional shares directly from Stroh at book value, $40.
Investment in Stroh Cash 40

40

If Purdy had paid $70 (above book value) or $30 (below book value), only the amount in the entry would change. The analysis above shows different amounts of goodwill which will be used in the consolidation worksheet.
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Stat Issues Stock to Outsiders

Puny owns 80% of Stat, acquired at $180.
Cost of 80% of Stat Implied value of Stat $180 $225

Book value of Stat Excess, goodwill

200 $25

Stat issues additional shares to outside entities. Outstanding shares increased from 10K to 12K. Puny had owned 8K of the 10K, but now owns 8K of the 12K shares.
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Stat equity Goodwill Total value Puny's Investment Puny's share of BV of equity Goodwill Total value

Before sale 200 25 225 180 160 20 180

Puny's measure of goodwill does not change when Stroh issues the shares to outside entities. Puny adjusts the value of its Investment in Stat account.

Stat equity, after Puny's Investment current balance Puny's share of equity, 10/12 share Old goodwill Total, new balance in Investment Adjustment
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Sell at BV Sell > BV Sell < BV for $40 for $70 for $30 240 270 230 180 180.0 180 160 180 153.3 20 20 20.0 200 173.3 180 0 +20 -6.7
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Puny's Adjusting Entry

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

20.0
20.0

6.7
6.7

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Shelly Purchases Treasury Stock

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

Pointer holds 8K of Shelly's 10K shares outstanding. Shelly reacquires 0.4K shares from outsiders. Pointer now holds 8K of Shelly's 9.6K shares outstanding.
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Before treasury stock Shelly's equity 200 Goodwill 0 Total value 200 Pointer's Investment in Shelly 160 Pointer's share of BV of equity 160 Goodwill 0 Total value 160

There was no goodwill and none is created by Shelly purchasing treasury stock. Pointer adjusts the balance in its Investment in Shelly account.

Shelly's equity, after Pointer's Investment current balance Pointer's share of equity, 8/9.6 Old goodwill Total, new balance in Investment Adjustment needed
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Buy = BV Buy > BV Buy < BV for $8 for $12 for $6 192 188 194 160 160.0 160 160 156.7 161.7 0 0.0 0.0 156.7 161.7 160 0 -3.3 +1.7
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Pointer's Adjustment
Pointer's entry when Shelly purchases treasury shares from outsiders.
Treasury stock purchased for $8 no entry needed Treasury stock purchased for $12 Additional paid in capital Investment in Stroh Treasury stock purchased for $6 Investment in Stroh Additional paid in capital

3.3
3.3 1.7

1.7

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8-40

Stock Splits/ Stock Dividends

A subsidiary may issue stock dividends or stock splits Impact is proportional on both controlling and noncontrolling interests Percentage ownership does not change Stock dividends capitalize some of the subsidiary's retained earnings

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