Advanced accounting 10th by a beams athony ch08

Parent acquires additional shares from noncontrolling interest Decreases 4.. Parent sells shares but maintains control 5.. Control is MaintainedParent increases its share by buying mor

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

Changes in Ownership: Objectives

1 Prepare consolidated statements when parent company's

ownership percentage increases or decreases during the

1: Changes in Ownership Percentage

Consolidations – Changes in Ownership Interests

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

Initial Acquisition of Control

Parent obtains control

– Determine implied value and allocate excess

– Apply consolidation procedures

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

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

2: Interim Acquisitions

Consolidations – Changes in Ownership Interests

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

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

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:

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.

Cost of sales 1,500 Retained earnings, 1/1 1,350 Operating

Find Book Value at Acquisition

Book value of equity on 1/1/09 $1,950  

Analysis and Amortizations

Puma's Equity Entries

Income from Sega 256  

Investment in Sega   136 Noncontrolling interest share 64  

Noncontrolling interest   34

Common stock 600   Retained earnings 1/1 1,350   Fixed assets 600  

Cost of sales   500 Operating expenses   200 Dividends   150

Investment in Sega   2,400 Noncontrolling interest   600 Depreciation expense 80  

Income statement: Puma Sega DR CR Consol

Balance sheet: Puma Sega DR CR Consol

Interim Acquisition in Stages

Poca acquired Sark in a series of acquisition, resulting in a total 90% ownership.

The total book value and fair value of Sark's net assets on October 1 was $220,000.

Income Distribution

Sark's income allocation for the year:

Net

Poca's Worksheet Entries

Income statement: Poca Sark DR CR Consol Sales 274,875 150,000 112,500   312,375 Income from Sark 9,000   9,000   0 Expenses (220,000) (110,000)   82,500 (247,500) Noncontrolling interest share     1,000   (1,000) Controlling interest share 63,875 40,000     63,875

State of retained earnings:          

Retained earnings, 1/1 221,500 90,000 90,000   221,500 Add net income 63,875 40,000     63,875

Retained earnings, 12/31 285,375 130,000     285,375

Balance sheet: Poca Sark DR CR Consol

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.

Investment in Sergio: T-account

Pablo's Entry for the Sale

Additional paid in capital   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

Noncontrolling Interest Calculations

Income since April 1: (36*.2*9/12) 5.4

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

3: Subsidiary's Stock Transactions

Consolidations – Changes in Ownership Interests

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

Stroh Issues Stock to Purdy

Purdy owns 80% of Stroh, acquired at $180.

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.

Cost of 80% of Stroh $180

Implied value of Stroh $225 Book value of Stroh 200

  Before sale

Purdy's Investment in Stroh 180

Purdy's share of BV of equity 160

  Sell at BV Sell > BV Sell < BV

  for $40 for $70 for $30 Stroh's equity, after the issuance 240 270 230 Purdy's Investment, after 220 250 210.0 Purdy's share of equity, 10/12 share 200 225 191.7

Goodwill may go

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

Stat Issues Stock to Outsiders

Puny owns 80% of Stat, acquired at $180.

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

Cost of 80% of Stat $180

Implied value of Stat $225

  Sell at BV Sell > BV Sell < BV

  for $40 for $70 for $30

Puny's Investment current balance 180 180 180.0

Puny's share of equity, 10/12 share 160 180 153.3

Total, new balance in Investment 180 200 173.3

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.

Puny's Adjusting Entry

Shelly Purchases Treasury Stock

Pointer owns 80% of Shelly acquired for $160, at cost

equal to book value

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.

Cost of 80% of Shelly $160

Implied value of Shelly $200 Book value of Shelly 200

 Before treasury stock

Pointer's Investment in Shelly 160

Pointer's share of BV of equity 160

  for $8 for $12 for $6

Pointer's Investment current balance 160 160 160.0

Pointer's share of equity, 8/9.6 160 156.7 161.7

There was no goodwill and none is created by Shelly purchasing treasury stock

Pointer adjusts the balance in its Investment in Shelly account.

Treasury stock purchased for $12    

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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