10-1
10-2
1: Preferred Stock
10-3
10-4
10-5
10-6
10-7
$396
$440
$500
(105)
395
Excess, goodwill
$45
10-8
Allocations
NCI share
Preferred
Income allocation:
Sol's net income
Amortizations
Income to allocate
50
0
50
Allocated to preferred
(10)
Allocated to common
40
$10 income
$10 dividend
CI share
(90%)
NCI share
(10%
common)
$4 income
$2 dividend
$36 income
Dividends
30
Allocated to preferred
(10)
Allocated to common
20
$18 dividend
10-9
Worksheet
Entries
with
Preferred
Stock Held
by
Outsiders
There is an
entry for NCI
share, PS that
parallels the
entry for NCI
share, CS.
Preferred Stock
is eliminated.
36
Dividends
18
Investment in Sol
18
Dividends
Noncontrolling interest, CS
10
Dividends
10
Preferred stock
100
Common stock
200
40
160
45
10-10
10-11
10-12
1,500
300
1,200
Retained earnings
2,300
Total equity
5,300
10-13
Calculations
Book value of preferred stock
$52 x ($1,500 / $50par) = $1,560
Book value of Shem's common stock
$5,300 total equity $1,560 = $3,740
Shem's total value with goodwill
$3,740 + $100 = $3,840
Investment in Shem, CS (80%) = $3,072
Noncontrolling interest, CS (20%) = $768
Noncontrolling interest, PS (30%) = $468
Parent acquired 70% of Shem's PS for $950
Investment in Shem, PS (70%, book) = $1,092
Or
Investment in Shem, PS (70%, cost) = $950
The difference, $142 = 1092-950, increases the parent's other
paid in capital
2009 Pearson Education, Inc. publishing as
10-14
1,092
Cash
950
142
Worksheet entry:
Preferred stock
Common stock
1,500
300
1,200
Retained earnings
2,300
Goodwill
Investment in Shem, CS (80%)
100
3,072
10-15
950
Cash
950
Worksheet entry
Preferred stock
Common stock
1,500
300
1,200
Retained earnings
2,300
Goodwill
Investment in Shem, CS (80%)
Investment in Shem, PS (70%)
100
3,072
950
10-16
Comparison of Methods
Both result in the same consolidated amounts
Constructive retirement
Records the Other paid in capital (parent's) at
acquisition
Investment is at book value
Simplifies consolidation process!
Cost basis
Records the Other paid in capital (parent's) as part of
the consolidation process
Investment is at cost
10-17
10-18
EPS Requirements
GAAP requires firms report basic and diluted
(where applicable) EPS
EPS is disclosed on a consolidated basis
Main issue: Subsidiary's capital structure
Subsidiary potentially dilutive securities
convertible into subsidiary common stock
Subsidiary potentially dilutive securities
convertible into parent common stock
2009 Pearson Education, Inc. publishing as
10-19
10-20
10-21
10-22
10-23
10-24
10-25
10-26
10-27
10-28
10-29
10-30
3: Income Taxes
10-31
10-32
10-33
Undistributed Earnings
Parson owns 30% of Seaton's common stock.
Seaton's income, $600
Seaton's dividends, $200
Parson's applicable tax rate = 34%
Parson's deferred tax liability
= [30%($600 - $200)] x 20% x 34% = $8.16
Seaton's earnings are allowed the 80% deduction,
so only 20% is subject to tax.
If Seaton was a consolidated subsidiary, its
earnings would be excluded and Parson would
have no deferred tax liability.
2009 Pearson Education, Inc. publishing as
10-34
10-35
Example
Pool owns 90% of Sal. The tax rate is 34%. Pretax
operating income of Pool and Sal are $150 and $50. Sal
paid dividends of $20 and Sal's dividends are subject to
the 100% exclusion.
During the year, intercompany sales were $50 and there
remains $10 in unrealized profits in ending inventory.
10-36
10-37
10-38
10-39
Business Combinations
Tax free combinations
Mergers or consolidations
Exchange of voting stock for another
corporation's stock
Exchange of voting stock for another
corporation's assets
Purchase acquisitions may be either
Tax free
Taxable
2009 Pearson Education, Inc. publishing as
10-40
10-41
10-42