Solution Manual For Beams Chapter 8

Chapter 8 CONSOLIDATIONS — CHANGES IN OWNERSHIP INTERESTS Answers to Questions 1

Preacquisition earnings and dividends are the earnings and dividends applicable to an investment interest prior to its acquisition during an accounting period. Assume that P purchases an 80 percent interest in S on July 1, 2009 and that S has earnings of $100,000 between January 1 and July 1, 2009 and pays $50,000 dividends on May 1, 2009. In this case, preacquisition earnings and dividends are $80,000 and $40,000, respectively. Historically, preacquisition earnings purchased were shown as a deduction on the income statement to arrive at consolidated net income. Under SFAS No. 160, this is no longer the case. Instead, the consolidated income statement should only report revenues, expenses, gains and losses subsequent to the combination date. For example, in a Mmarch 31 acquisition, the consolidated income statement would only include income of the subsidiary from April 1 through December 31. The FASB reasons that acquirers purchase assets and assume liabilities, based on their fair values. Acquirers do not “purchase” preacquisition earnings, although fair values of net assets should reflect earning power of the acquired firm.

2

Preacquisition earnings are not recorded by a parent company under the equity method because the investor only recognizes income subsequent to acquisition on the interest acquired. Historically, preacquisition earnings purchased were shown as a deduction on the income statement to arrive at consolidated net income. Under SFAS No. 160, this is no longer the case. Instead, the consolidated income statement should only report revenues, expenses, gains and losses subsequent to the combination date. For example, in a Mmarch 31 acquisition, the consolidated income statement would only include income of the subsidiary from April 1 through December 31.

3

Noncontrolling stockholders of Sub Company held a 20 percent interest during the first half year and a 10 percent interest during the last half year and at year-end. But noncontrolling interest share for the year and total noncontrolling interest at year-end are computed for the 10 percent interest held by noncontrolling stockholders throughout the year.

4

Preacquisition income is similar to noncontrolling interest share because it represents the income of a subsidiary attributable to stockholders outside the consolidated entity. But preacquisition income is not income of the noncontrolling stockholder group at the date of the financial statements. In fact, preacquisition income relates to a previous controlling stockholder group when the interest acquired exceeds 50 percent. In such a case, it seems improper to report this as a deduction in the consolidated income statement. Rather, the fair value of net assets acquired should reflect the acquiree’s earnings history.

5

Under FASB Statement No. 160, a gain or loss is only recorded when the sold interest results in deconsolidation of the subsidiary, i.e., the parent no longer holds a controlling interest. The gain or loss on the sale of an equity interest is the difference between the proceeds from the sale (the fair value) and the recorded book value of the interest sold, provided that the investment is accounted for as a one-line consolidation. If another method of accounting has been used, the investment account must be converted to the equity method so that any gain or loss on sale is the same as if a one-line consolidation had been used previously. When the parent maintains a controlling interest after the sale, the sale is treated as an equity transaction, with no gain or loss recognition. The parent debits cash or other consideration received in the sale, credits the investment account based on percent of carrying value sold, and records the difference as an adjustment to other paid-in capital.

6

Conceptually, the income applicable to an equity interest sold during an accounting period should be included in investment income and consolidated net income. In this case, the gain or loss on sale is computed on the basis of the book value of the interest at the time of sale, and income is assigned to the © 2009 Pearson Education, Inc. publishing as Prentice Hall 8-1

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increased noncontrolling interest only after the date of sale. As a practical expedient, a beginning-of-theperiod sale date can be used such that no income is recognized on the interest sold up to the time of sale, and the gain or loss is computed on the book value at the beginning of the period. When this expedient is used, income must be assigned to the increased noncontrolling interest for the entire year of sale. The combined investment income and gain or loss on sale are the same under both approaches provided that the assumptions (beginning of the year and time of sale) are followed consistently. As noted in question 5, gain or loss on the sale of the equity interest is only recognized when the subsidiary is donconsolidated. Other wise, the gain or loss is an adjustment to other paid-in capital. 7

Assuming that no gain or loss is recognized, no adjustment of the parent’s investment account is necessary when the subsidiary sells additional shares to outside parties at book value because the parent’s share of underlying book value does not change. If additional shares are sold above book values, the parent’s share of the underlying equity of the subsidiary increases. This increase is recorded by the parent company as follows: Investment in subsidiary Additional paid-in capital

XX XX

If the subsidiary sells additional shares below book value, the parent’s interest is decreased and the parent company records decreases in its investment and additional paid-in capital accounts. In all three cases (book value, above book value, or below book value), the parent company’s ownership percentage decreases from 80 percent (8,000 of 10,000 shares) to 66 23 percent (8,000 of 12,000 shares). No gain or loss is recognized, the change in underlying book value, adjusted for one-sixth [(80% – 66 23 %)  80%] of any unamortized cost book value differential is reported as adjustment to additional paid-in capital, since the parent maintains its controlling interest. An alternative computation is to assume that the parent sold one-sixth of its interest for 66 23 percent of the proceeds, the difference being the amount of adkustment to additional paid-in capital. 8

The acquisition of the 2,000 shares directly from the subsidiary increases the parent’s percentage interest from 80 percent (8,000 of 10,000 shares) to 5/6 (10,000 of 12,000 shares, or 83 1/3%). The change in the interest held does not affect the way in which the parent company records its additional investment. The parent company in all cases increases its investment account by the amount of cash paid or other consideration given for the additional investment. It makes no difference if the purchase price is above or below book value.

9

Treasury stock transactions by a subsidiary change the parent company’s proportionate interest in the subsidiary. Any changes in the parent’s share of the underlying book value of the subsidiary require adjustments in the parent company’s investment in subsidiary and additional paid-in capital accounts.

10

Gains and losses to a parent company (or equity investor) do not result from the treasury stock transactions of its subsidiaries (or equity investees). Although the parent’s investment interest may increase or decrease from such transactions, the predominate view is that such changes are of a capital nature and should be accounted for by additional paid-in capital adjustments rather than by recorded gains and losses.

11

Stock splits and stock dividends by a subsidiary do not affect the amounts that appear in the consolidated financial statements. But stock dividends by a subsidiary result in capitalization of subsidiary retained earnings and the amounts involved in eliminations for the subsidiary’s stockholders’ equity accounts are affected.

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SOLUTIONS TO EXERCISES Solution E8-1 Allocation of Sweet’s net income: Controlling share of income ($100,000  70%  1 year) + ($100,000  20%  1/2 year)

$ 80,000

Noncontrolling interest share ($100,000  10%  1 year)

$ 10,000

Preacquisition income ($100,000  20%  1/2 year) Note: This does not appear on the consolidated income statement. Companies only include subsidiary earnings subsequent to the acquisition date.

$ 10,000

Allocation of Sweet’s dividends: Dividends to Pie ($30,000  70%) + ($30,000  90%)

$ 48,000

Noncontrolling interest ($60,000  10%)

$

6,000

Preacquisition interests ($30,000  20%)

$

6,000

Solution E8-2 1

Income from Superstore for 2009: 60% interest  $240,000  1/3 year

2

Preacquisition income: Under SFAS No. 160, no preacquisition income appears on the consolidated income statement. The income statement only includes income of the subsidiary earned after the parent obtains its controlling interest. Control was established on September 1, when Pinnacle’s interest increased from 40% to 60%, so the consolidated income statement includes Superstore income of $80,000 ($240,000 x 1/3 of year).

3

Noncontrolling interest share for 2009: $80,000  40%

$ 48,000

$ 32,000

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Solution E8-3 (amounts in thousands) Entry to record sale of 15% interest: Cash Investment in Swamp Other paid-in capital To record sale of 15% interest in Swamp. No gain or loss on sale is recognized since Peat maintains an 85% controlling interest. Entry to record investment income for 2009: Investment in Swamp($600  85%) Income from Swamp To record income from Swamp.

750 660 90

510 510

Check: Investment balance January 1, 2009 Less: Book value of interest sold Add: Income from Swamp Investment balance December 31, 2009 Underlying equity ($4,600  85%) Add: 85% of Goodwill * Investment balance December 31, 2009 * Note that implied total goodwill is $400 ($340 / 85%).

$4,400 (660) 510 $4,250 $3,910 340 $4,250

Solution E8-4 (amounts in thousands) 1

Gain on sale of 20% interest: No gain or loss is recognized since Pauley maintains a 60% controlling interest. Beginning of the period sale assumption Selling price $130 Book value of interest ($436 investment 109 account balance  20%/80%) Adjustment to other paid-in capital $ 21 Actual sale date assumption Selling price Book value of interest sold: Beginning of the period balance Add: Income ($150  1/3 year  80%) Interest sold Adjustment to increase additional paid-in capital 2 Income from Savage Beginning of the period sale assumption Income from Savage($150  60%) Actual sale date assumption January 1 to May 1: Share of Savage’s income ($150  80%  1/3 year) May 1 to December 31: Share of Savage’s income ($150  60%  2/3 year) Income from Savage

$130 $436 40 476 25%

119 $ 11

$ 90 $ 40 60 $100

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Solution E8-4 (continued) 3

Investment in Savage December 31, 2009

Investment balance January 1 Book value of interest sold Income from Savage Dividends Investment balance December 31, 2009

Beginning of Period Sale Assumption $436 (109) 90 (48) $369

Actual Sale Date Assumption $436 (119) 100 (48) $369

Solution E8-5 (amounts in thousands) 1a

Fair value — book value differential Cost Implied fair value of Stork ($1,274 / 70%) Book value ($1,480 January 1 balance + $100 income for 5 months - $60 dividends in January and April) Goodwill

1b

$

98

Investment in Stork at December 31 Investment cost Add: Income from Stork Deduct: Dividends ($60,000  70%) Investment in Stork December 31, 2009

2

(1,520) $ 300

Income from Stork (Note: Only include earnings subsequent to the acquisition date). Income from Stork ($240,000  7/12 year  70%)

1c

$1,274 $1,820

$1,274 98 (42) $1,330

Consolidation working paper entries: a

Income from Stork 98 Investment in Stork 56 Dividends 42 To eliminate income and dividends from Stork and adjust investment account to its cost on June 1.

b

1,000 Common stock, $10 par — Stork 580 Retained earnings — Stork Goodwill 300 Investment in Stork 1,274 Noncontrolling interest 564 Dividends 42 To eliminate reciprocal investment and equity balances, record preacquisition income and beginning noncontrolling interest, and eliminate preacquisition dividends. © 2009 Pearson Education, Inc. publishing as Prentice Hall

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Solution E8-6 1

Investment in Sower (in thousands) Investment balance December 31, 2009 ($9,000  80%) Cost of new shares ($25  60,000 shares) Investment in Sower after new investment

2

$ 7,200 1,500 $ 8,700

Goodwill from new investment Sower’s stockholders’ equity after issuance ($9,000 + $1,500) Petal’s ownership percentage (480,000 + 60,000 shares)/660,000 shares Petal’s book value after issuance Less: Petal’s book value before issuance Increase in book value from purchase (book value acquired) Cost of 60,000 shares Book value acquired Goodwill from acquisition of new shares* *

$10,500 .8182 8,591.1 (7,200) $ 1,391.1 $ 1,500 (1,391.1) $ 108.9

This implies total goodwill is equal to $136,125.

Solution E8-7 1

Sod issues 30,000 shares to Pod at $20 per share Pod’s ownership interest before issuance: 176,000/220,000 shares = 80% Pod’s ownership interest after issuance: 206,000/250,000 shares = 82.4%

2

Sod sells 30,000 shares to the public at $20 per share Pod’s ownership interest after issuance: 176,000/250,000 shares = 70.4%

3

Sod sells 30,000 shares to the public; no gain or loss recognized: Investment in Sod 115,200 Additional paid-in capital 115,200 To record increase in investment in Sod computed as follows: Book value before issuance ($3,200,000  80%) Book value after issuance ($3,800,000  70.4%) Additional paid-in capital

$2,560,000 2,675,200 $ 115,200

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Solution E8-8 Primetime buys shares 1a

Percentage ownership after additional investment: 700,000/1,000,000 = 70%

1b

Goodwill from additional investment (in thousands): Book value of interest after sale $2,600  70% Book value of interest before sale $2,100  2/3 Book value of interest acquired Cost of interest Goodwill from additional investment * *

$1,820 1,400 420 500 $ 80

This implies total goodwill is now equal to $114,286.

Outsiders buy shares 2a

Percentage ownership after sale: 600,000/1,000,000 = 60%

2b

Change in underlying book value of investment in Satellite: Satellite’s underlying equity after sale Primetime’s interest Book value of Primetime’s investment in Satellite after the sale Less: Book value before the sale Increase in book value of investment

2c

$2,600,000 60% 1,560,000 1,400,000 $ 160,000

Entry to adjust investment account: Investment in Satellite Additional paid-in capital

160,000 160,000

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Solution E8-9 Preliminary computations of fair value — book value differentials: April 1, 2009 acquisition Cost of 4,000 shares (20% interest) $ 64,000 Implied total fair value of Sum ($64,000 / 20%) $320,000 Book value of Sum on april 1 acquisition date: Beginning stockholders’ equity $280,000 20,000 Add: Income for 3 months ($80,000  ¼ year) Stockholders’ equity April 1 300,000 Goodwill $ 20,000 July 1, 2010 acquisition Cost of 8,000 shares (40% interest) Implied total fair value of Sum ($164,000 / 40%) Book value on July 1 acquisition date: Beginning stockholders’ equity Add: Income for 6 months ($80,000  1/2 year) Less: Dividends May 1 Stockholders’ equity July 1 Goodwill (amount is unchanged by this transaction) 1

2 3

$164,000 $410,000 $360,000 40,000 (10,000)

Income from Sum 2009 Income from Sum for 2009 ($80,000  20%  3/4 year)

$ 12,000

2010 Income from Sum for 2010 20% share of reported income ($80,000  20%) 40% share of reported income ($80,000  40%  1/2 year) Income from Sum

$ 16,000 16,000 $ 32,000

Noncontrolling interest December 31, 2010 (($420,000 book value + $20,000 goodwill) 40%)

$176,000

Preacquisition income (does not appear in come statement) Sum income Time before acquisition Percent acquired in 2010 Preacquisition income ($80,000  .5  .4)

4

390,000 $ 20,000

$ 80,000 1/2 40% $ 16,000

Investment balance at December 31, 2010 Cost of 20% investment Income from Sum for 2009 Cost of 40% investment Income from Sum for 2010 Less: Dividends ($2,000 + $6,000) Investment in Sum

$ 64,000 12,000 164,000 32,000 (8,000) $264,000

Check: Share of Sum’s December 31, 2010 equity ($420,000  60%) Add: 60% of $20,000 Goodwill

$252,000 12,000

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Investment in Sum

$264,000

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Consolidations — Changes in Ownership Interests

Solution E8-10 Preliminary computations Investment cost July 1, 2010

$675,000

Implied total fair value of Sandridge ($675,000 / 90%) Less: Book value of Sandridge at acquisition: Equity of Sandridge Mines December 31, 2009 $700,000 Add: Income for 1/2 year 50,000 Equity of Sandridge Mines July 1, 2010 Excess (book value = underlying equity)

$750,000

1

750,000 0

Investment income from Sandridge Mines Income from Sandridge — 2010 ($100,000  1/2 year  90%) Income from Sandridge — 2011: January 1 to July 1 ($80,000  1/2 year  90%) July 1 to December 31 ($80,000  1/2 year  80%)

$ 45,000

$ 36,000 32,000 $ 68,000

Investment in Sandridge Mines Cost July 1, 2010 Add: Income from Sandridge — 2010 Less: Dividends paid in December ($50,000  90%)

$675,000 45,000 (45,000)

Investment balance December 31, 2010

675,000 (79,000) 68,000 (24,000)

Less: Book value of 1/9 interest sold on July 1, 2011a Add: Income from Sandridge — 2011 Less: Dividends paid in December ($30,000  80%) Investment balance December 31, 2011 a

$640,000

Sale of 10% interest July 1, 2011: Equity of Sandridge Mines December 31, 2009 Add: Income less dividends — 2010 Add: Income for 1/2 year — 2011 Equity of Sandridge Mines July 1, 2011 Interest sold

$700,000 50,000 40,000 790,000 10%

Underlying equity of interest sold

$ 79,000

Gain on sale of 1/9 interest ($85,000 proceeds - $79,000) Since Piccolo maintains a controlling interest, the gain is not recorded, but shown as an adjustment to additional paidin capital.

$

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Solution E8-10 (continued) 2

Noncontrolling interest share Noncontrolling interest share — 2010: ($100,000 income  10% interest)

$ 10,000

Noncontrolling interest share — 2011: ($80,000  1/2 year  10%) + ($80,000  1/2 year  20%)

$ 12,000

Noncontrolling interest December 31, 2010 Equity of Sandridge Mines January 1 Add: Income less dividends for 2010 Equity of Sandridge Mines December 31 Noncontrolling interest percentage

$700,000 50,000 750,000 10%

Noncontrolling interest December 31 Noncontrolling interest December 31, 2011 Equity of Sandridge Mines January 1 Add: Income less dividends for 2011 Equity of Sandridge Mines December 31 Noncontrolling interest percentage

$ 75,000

Noncontrolling interest December 31

$750,000 50,000 800,000 20% $160,000

Solution E8-11 Preliminary computations: Investment cost January 1, 2010 Implied total fair value of Sanyo ($690,000 / 75%) Book value of Sanyo Excess fair value over book value = Goodwill

$

1

$

920,000 (800,000) $ 120,000

Underlying book value December 31, 2010 $1,000,000 equity  75%

2

690,000

$

750,000

Percentage ownership before purchase of additional shares 30,000 shares owned/40,000 shares outstanding = 75% interest Percentage ownership after purchase of additional shares 40,000 shares owned/50,000 shares outstanding = 80% interest

3

Investment in Sanyo balance January 3, 2011 Investment cost January 1, 2009 Add: Share of Sanyo’s income less dividends for 2009 ($200,000  75%) Investment in Sanyo December 31, 2009 Add: Additional investment — January 3, 2011

$

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690,000 150,000 840,000

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(10,000 shares  $30) Investment in Sanyo balance January 3, 2011

300,000 $1,140,000

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Percentage ownership if shares sold to outside entities 30,000 shares owned/50,000 shares outstanding = 60% interest

5

Investment in Sanyo balance January 3, 2011 Investment in Sanyo December 31, 2009 (see 3 above) Add: Increase in book value from change in ownership interest: Book value after additional 10,000 shares were issued ($1,300,000 equity  60%) Book value before additional 10,000 shares were issued ($1,000,000 equity  75%) Investment in Sanyo balance - January 3, 2011

$

840,000

$

30,000 870,000

$780,000 (750,000)

Solution E8-12 Preliminary computations: Cost of additional investment (2,000 shares  $80)

$160,000

Implied total fair value of Saton $160,000 / (2,000/12,000) Less: Book value of Saton after issuance Excess fair value over book value

$960,000 710,000 $250,000

January 2, 2010 Investment in Saton 160,000 Cash 160,000 To record purchase of additional 2,000 shares of Saton. December 2010 Cash

50,000 Investment in Saton 50,000 To record receipt of dividends ($60,000  10,000/12,000 shares).

December 31, 2010 Investment in Saton 75,000 Income from Saton To record income from Saton($90,000  10,000/12,000).

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75,000

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Solution E8-13 1

2

Investment in Striper (in thousands) Cost Add: 90% of $300 increase in equity since 2009 Investment in Striper January 1, 2011

$1,800 270 $2,070

Entry on Patrick’s books (no gain or loss recognized) Investment in Striper 180 Additional paid-in capital 180 To recognize change in book value of investment from Striper’s sale of additional shares, computed as follows: $1,800 Underlying equity after issuance ($2,400  75%) (1,620) Underlying equity before issuance ($1,800  90%) $ 180

SOLUTIONS TO PROBLEMS Solution P8-1 Preliminary computations (in thousands): Cost of 40,000 shares July 1, 2009

$620

Implied total fair value of Spindle ($620 / 80%) Book value of Spindle ($550 + $50 income) Excess fair value over book value

$775 (600) $175

Cost of 10,000 shares January 1, 2010 Book value after issuance ($762  5/6) Book value before issuance ($600  80%) Excess fair value over book value of 10,000 shares acquired 1

2

3

$162 $635 (480)

(155) $ 7

Investment in Spindle — December 31, 2009 Investment cost Add: Income from Spindle- $100  1/2 year  80% Less: Dividends ($50  80%) Investment in Spindle December 31, 2009

$620 40 (40) $620

Income from Spindle — 2010 Share of Spindle’s income ($150  5/6)

$125

Investment in Spindle — December 31, 2010 Investment balance December 31, 2009 Add: Additional investment Add: Income from Spindle — 2010 Less: Dividends for 2010 ($60  5/6) Investment in Spindle December 31, 2010

$620 162 125 (50) $857

Check: Share of Spindle’s equity ($852  5/6) Goodwill [ ($175 x 80%) + ($210 x (5/6 – 80%) ]

$710 147

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Investment in Spindle December 31, 2010

$857

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Solution P8-2 1

Investment in Smithtown (in thousands) Underlying equity $26,000  80% Goodwill (80%) Investment in Smithtown January 1, 2011

$20,800 2,000 $22,800

2

Percentage interest after stock issuance Shares owned 960,000/1,600,000 outstanding shares = 60% interest

3

No gain or loss recognized on issuance of additional shares Investment in Smithtown 2,000 Other paid-in capital 2,000 To recognize change in ownership interest computed as: Underlying equity after sale ($38,000  60%) less underlying equity before sale of additional shares ($26,000  80%).

Solution P8-3 1

Journal entry to record sale as of actual sale date Cash 120,000 Additional paid-in capital 1,500 Investment in Shawnee 121,500 To record sale of 1/9 of investment in Shawnee. Book value of interest sold is computed as follows: Investment balance December 31, 2008 Add: Income from Shawnee for one-half year ($280,000  1/2 year  90%) Less: Dividends ($80,000  90%) Book value of investment on July 1, 2009 Book value of interest sold ($1,093,500/9)

2

126,000 (72,000) $1,093,500 $ 121,500

Journal entry to record sale as of January 1, 2009 Cash 120,000 Additional paid-in capital 12,500 Investment in Shawnee 107,500 To record sale of 1/9 of investment in Shawnee. Book value of interest sold is computed as follows: Investment balance December 31, 2008 Less: Dividends Book value adjusted for dividends Book value of interest sold ($967,500/9)

3

$1,039,500

$1,039,500 (72,000) $ 967,500 $ 107,500

Reconciliation

Balance January 1, 2009 Add: Income from Shawnee January 1 — July 1 July 1 — December 31 Less: Dividends

Investment in Shawnee Actual Sale Date $1,039,500 126,000 112,000

Investment in Shawnee Beginning of Year Sale Date $1,039,500 112,000 1l2,000

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First half-year Last half-year Less: Book value of interest sold Balance December 31, 2009

(72,000) (64,000) (121,500) $1,020,000

(72,000) (64,000) (107,500) $1,020,000

Solution P8-4 (in thousands) Entries on Panama’s books to reflect the change in ownership interest: Option 1 Panama sells 30,000 shares of Shenandoah Cash

1,500 Investment in Shenandoah 870 Additional paid-in capital 630 To record sale of 30,000 shares at $50 per share. No gain or loss is recognized since parent maintains a controlling interest.

Option 2 Shenandoah issues and sells 40,000 shares to the public Investment in Shenandoah Additional paid-in capital

630 630

To record adjustment in ownership computed as follows: Book value after sale of 40,000 shares ($12,440  75%) Book value before sale of 40,000 shares ($10,440  5/6) Increase in book value of investment from sale

$9,330 (8,700) $ 630

Option 3 Shenandoah reissues 40,000 shares of treasury stock Investment in Shenandoah 630 Additional paid-in capital 630 To record adjustment in ownership computed the same as 2 above.

Consolidated Stockholders’ Equity at January 1, 2010

Common stock Additional paid-in capital Retained earnings Noncontrolling interesta Total stockholders’ equity a

Option 1

Option 2

Option 3

$10,000 3,630 7,000 2,610 $23,240

$10,000 3,630 7,000 3,110 $23,740

$10,000 3,630 7,000 3,110 $23,740

Noncontrolling interest under option 1: $10,440  25% Noncontrolling interest under options 2 and 3: $12,440  25%

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Solution P8-5 Preliminary computations: Cost of 9,000 shares (90% interest) January 1, 2009

$

Implied total fair value of Sala ($810,000 / 90%) Book value of Sala ($500,000 + $300,000) Excess fair value over book value = Goodwill 1

$

900,000 (800,000) $ 100,000

Investment balance December 31, 2009 Cost January 1, 2009 (9,000 shares  $90) Add: Share of Sala’s 2009 income ($50,000  90%) Investment in Sala December 31 2

$ $

$

100,000

$

100,000

$ 850,000 (1,350,000) (500,000) 500,000 $ 0

Additional paid-in capital (outsider purchased additional shares) Book value after issuance ($1,350,000  60%) Book value before issuance ($850,000  90%) Additional paid-in capital (gain is not recognized)

4

810,000 45,000 855,000

Goodwill at December 31, 2010(Pallo purchased additional shares) Goodwill from January 1, 2009 purchase Goodwill from January 1, 2010 purchase: Book value before purchase Book value after purchase Book value acquired Cost of additional 5,000 shares Goodwill from January 1, 2010 Goodwill at December 31, 2010

3

810,000

$

810,000 (765,000) $ 45,000

Noncontrolling interest December 31, 2010 (outsider purchased shares)

Subsidiary equity January 1, 2009 Increase for 2009 Increase for 2010 Sale of additional shares Book value Goodwill Fair value of Subsidiary equity December 31, 2010 Noncontrolling interest percentage 6,000/15,000 shares Noncontrolling interest December 31, 2010

$

800,000 50,000 70,000 500,000 $1,420,000 100,000 $1,520,000 $

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40% 608,000

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Solution P8-6 1

Investment in Stake December 31, 2010 Investment in Stake January 2, 2009 $ 98,000 Increase for 2009 ($30,000 retained earnings increase  70%) 21,000 Purchase of additional 20% interest June 30, 2010 37,000 Increase 2010: 24,000 ($30,000  1/2 year  70%) + ($30,000  1/2 year  90%) (9,000) Dividends 2010: ($10,000  90%) Investment in Stake December 31, 2010 $171,000

2

Goodwill December 31, 2010 January 2, 2009 purchase: Cost of 70% interest Implied fair value of Stake ($98,000 / 70%) Less: Book value of Stake Goodwill June 30, 2010 purchase: Cost of 20% interest Implied fair value of Stake ($37,000 / 20%) Less: Book value of Stake Goodwill - December 31, 2010

3

*

4

5

$ 98,000 $140,000 120,000 $ 20,000 $ 37,000 $185,000 165,000 $ 20,000

Consolidated net income Sales Cost of sales Expenses Consolidated net income Noncontrolling interest share * Controlling share of net income

$600,000 (400,000) (70,000) 130,000 6,000 $124,000

Noncontrolling share is 10% for full year plus 20% for ½ year. Alternative: Post’s reported income = Controlling share of net income

$124,000

Consolidated retained earnings December 31, 2010 Beginning retained earnings Add: Controlling share of Consolidated net income — 2010 Less: Dividends Consolidated retained earnings — ending Alternative solution: Post’s reported ending retained earnings = Consolidated retained earnings — ending

$200,000 124,000 (64,000) $260,000 $260,000

Noncontrolling interest December 31, 2010

Equity of Stake December 31, 2010 Goodwill Fair value of Stake Noncontrolling interest percentage Noncontrolling interest December 31, 2010

$170,000 20,000 $190,000 10% $ 19,000

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8-22

Consolidations — Changes in Ownership Interests

Solution P8-7 1

Percy Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2010 (in thousands) Sales Cost of sales Gross profit Depreciation expense Other expenses Consolidated net income Noncontrolling interest share ($150,000  20%) + ($150,000  1/4 year  10%) Controlling share of Consolidated net income

2

$3,200 (1,900) 1,300 (700) (150) 450 (33.75) $

Schedule to allocate Sawyer’s income and dividends Noncontrol. Preacquisition Control. Sawyer’s income

70% 10%

Allocation Dividends

70% 10%

Allocation

$105,000 11,250 $116,250

20%

$ 56,000 4,000 $ 60,000

20%

$33,75

Total $135,000 15,000 $150,000

$33,750 $16,000 $16,000

416.25

$ 72,000 8,000 $ 80,000

$4,000 $4,000

Solution P8-8 Preliminary computations Cost October 1, 2009 Implied fair value of Sat ($82,400 / 80%) Book value on Octobwer 1 acquisition date: Book value on January 1, 2009 Add: Income January 1 to October 1 ($24,000  3/4 year) Deduct: Dividends March 15 Book value October 1 Goodwill

$ 82,400 $103,000 $70,000 18,000 (5,000) 83,000 $ 20,000

Income from Sat for 2009 Share of Sat’s net income ($24,000  1/4 year  80%) Less: Unrealized profit in Sat’s ending inventory Income from Sat

$ 4,800 (1,000) $ 3,800

* Preacquisition income ($24,000  3/4 year  80%)

$14,400

* Preacquisition dividends ($5,000  80%)

$ 4,000

* Noncontrolling interest share ($6,000  20%)

$ 1,200

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Chapter 8

8-23

* Under SFAS No. 160, preacquisition earnings are not shown as a reduction of consolidated net income. Rather, we only include earnings and dividends subsequent to the acquisition date. Preacquistion amounts are disclosed in required pro-forma disclosures for acquisitions. The worksheet on the following page reflects these adjustments.

Solution P8-8 (continued) Pop Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2009 Pop Income Statement Sales

$

112,000

Income from Sat Cost of sales

3,800 60,000 *

Operating expenses Consolidated net income Noncontrolling int. share

25,100 *

Controlling share of NI $

30,700

Retained Earnings Retained earnings — Pop Retained earnings — Sat Net income Dividends

Retained earnings December 31 Balance Sheet Cash Accounts receivable Note receivable Inventories Plant assets — net Investment in Sat

Adjustments and Eliminations

Sat 80% $

50,000

a 12,000 c 37,500 b 3,800 20,000 * d 1,000 6,000 * f

$

$

$

$

20,000 e 20,000 24,000ü 10,000 *

40,700

$

34,000

$

5,100 10,400 5,000 30,000 88,000 82,200

$

7,000 17,000 10,000 16,000 60,000 b

54,000 *

$

26,600 * 31,900 1,200 * 30,700

$

30,000

1,200

24,000

$

112,500

a 12,000 c 15,000 c 4,500

30,000 30,700ü 20,000 *

Consolidated Statements

30,700 b c f

4,000 5,000 1,000

G

6,000

d

1,000

20,000 * $

40,700

$

12,100 21,400 15,000 45,000 148,000

200 e 82,400

Goodwill

e 20,000

Accounts payable Notes payable Capital stock

$

220,700

$

110,000

$

15,000 25,000 140,000

$

16,000 10,000 50,000

$ g

6,000

e 50,000

$

20,000 261,500 25,000 35,000 140,000

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8-24

Consolidations — Changes in Ownership Interests

Retained earnings $

40,700ü 220,700 $

Noncontrolling interest — beginning Noncontrolling interest December 31

34,000ü 110,000

40,700

c 13,000 e 7,600 f 200 $

*

20,800 261,500

Deduct

© 2009 Pearson Education, Inc. publishing as Prentice Hall

Chapter 8

8-25

Solution P8-9 Supporting computations: Fair value — book value differential Investment cost

$175,000

Implied total fair value of Sid ($175,000 / 70%) Less: Book value of Sid ($250,000 equity on January 1 plus $10,000 net income (1/4 year) less $10,000 dividends) Fair value — book value differential

$250,000 250,000 0

Allocation of Sid’s reported net income Parent company ($40,000  3/4 year  70%) Preacquisition income ($40,000  1/4 year  70%) Noncontrolling interest share ($40,000  1 year  30%) Sid’s net income

$ 21,000 7,000 12,000 $ 40,000

Pal’s income from Sid Equity in Sid’s income

$ 21,000

Constructive gain on parent’s bonds Note that bonds payable has a book value of $105,400 on December 31, 2009. A half-year of premium amortization ($300) yields a book value of $105,700 at July 1, 2009. ( $105,700 book value on July 1 less $102,850 on December 31)

2,850

Recognition of constructive gain on separate books ($2,850  6/114 months) Gain on intercompany sale of equipment — downstream [$30,000 - ($36,000/2)]

(150)

(12,000)

Piecemeal recognition of gain on equipment — downstream ($12,000/3 years  1/2 year) Gain on intercompany sale of land — upstream ($10,000 - $8,000 cost)  70% Income from Sid

2,000

(1,400) $ 12,300

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8-26

Consolidations — Changes in Ownership Interests

Solution P8-9 (continued) Worksheet entries in journal form a

b

c d e

f g

h

i

Income from Sid 12,300 Dividends - Sid Investment in Sid common Eliminate intercompany post-acquisition earnings and dividends and return Investment to beginning balance. Sales * 37,500 Cost of sales * Dividends – Sid* Retained earnings - Sid 50,000 Common stock - Sid 200,000 Investment in Sid - common Noncontrolling interest Eliminate preacquisition earnings and dividends. Eliminate Sid’s equity accounts, the investment account and establish beginning noncontrolling interest. Gain on plan assets 12,000 Plan assets Eliminate intercompany gain on sale of equipment. Gain on plan assets 2,000 Plan assets Eliminate intercompany gain on sale of land. Interest income 5,850 Interest expense Gain on bond retirement Investment in Pal bonds Bonds payable 100,000 Premium on bonds 5,400 Record constructive retirement of bonds payable. Interest payable 6,000 Interest receivable Eliminate reciprocal interest accounts. Other current liabilities 7,000 Other current assets Eliminate reciprocal for unpaid intercompany dividends. Noncontrolling interest share 8,400 Dividends - Sid Noncontrolling interest Record noncontrolling interest share of earnings and post-acquisition dividends. Plan assets 2,000 Expenses Eliminate excess depreciation on equipment.

7,000 5,300

27,500 10,000 175,000 75,000

12,000 2,000 5,700 2,850 102,700

6,000 7,000

3,000 5,400

2,000

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Chapter 8

8-27

Solution P8-9 (continued) Pal Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2009 Pal Income Statement Sales Income from Sid Gain on bonds Gain on plant assets

$

287,100 12,300

200,000*

100,000

Retained Earnings Retained earnings — Pal

$

250,000

2,000

c d e

12,000 2,000 5,850

117,850*

$

40,000

$

50,000

100,000ü 50,000*

300,000

$

70,000

$

17,000

$

4,000 6,000 60,000 20,000 107,300

Plant assets — net Investment — Sid common

180,300

b

Investment — Pal bonds 950,000

$

6,000 38,600 100,000 5,400 500,000 300,000ü

$

950,000

Noncontrolling interest ($250,000  30%) Noncontrolling interest December 31

$ $

a

2,850

e b i

5,700 27,500 2,000

30,000

399,600 2,850

5,700* 288,350* 106,400 8,400* $

100,000

$

250,000 100,000

a b h

f

i

2,000

7,000 10,000 3,000

50,000* $

300,000

$

21,000

6,000 200,000 123,000

g 7,000 c 12,000 d 2,000 a 5,300 b 175,000 e 102,700

300,000

200,000 70,000ü $

$

50,000

102,700 $

Consolidated Statements

8,400

40,000ü 20,000*

$

140,000 110,000 502,700

($268,000  30%)

37,500 12,300

h

Retained earnings — Sid Net income Dividends

Interest payable Other current liabilities 12% bonds payable Premium on bonds Common stock Retained earnings

b a

5,850

$

Balance Sheet Cash Interest receivable Inventories Other current assets

150,000

11,400*

Consolidated NI Noncontrolling int. share Controlling share of NI

Retained earnings December 31

$

12,000

Interest income Interest expense Expenses — includes cost of goods sold

Adjustments and Eliminations

Sid 70%

f 6,000 g 7,000 e 100,000 e 5,400 b 200,000

598,000

$

942,000

$

61,600

500,000 300,000

300,000 b

75,000

i

5,400

80,400 $

942,000

© 2009 Pearson Education, Inc. publishing as Prentice Hall

8-28

Consolidations — Changes in Ownership Interests

Solution P8-10 Supporting computations: Investment cost of 70% interest

$420,000

Implied total fair value of Sam ($420,000 / 70%) Book value of Sam Goodwill

$600,000 500,000 $100,000

Investment cost of 10% interest

$ 67,500

Implied total fair value of Sam ($67,500 / 10%) Book value of Sam: Beginning equity January 1, 2010 Add: Income for 1/2 year Less: June dividends Book value at July 1, 2010 Goodwill (unchanged)

$675,000

Investment in Sam account: Investment cost January 1, 2009 Add: 2009 share of retained earnings increase ($50,000  70%) Less: Unrealized profit in ending inventory Less: Unrealized gain on land Investment balance December 31, 2009 Add: Investment cost of 10% interest Add: Income from Sam for 2010 $100,000  70% interest  1 year $100,000  10% interest  1/2 year Add: Beginning inventory profits Less: Ending inventory profits Less: Gain: intercompany sale machinery Add: Piecemeal recognition of gain ($40,000/5  1/2 year) Less: Dividends from Sam ($25,000  70%) + ($25,000  80%) Investment balance December 31, 2010

$550,000 50,000 (25,000) 575,000 $100,000 $420,000 $ 35,000 (5,000) (8,000)

22,000 $442,000 67,500

$ 70,000 5,000 5,000 (6,000) (40,000) 4,000

38,000 (37,500) $510,000

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Chapter 8

8-29

Solution P8-10 (continued) Poco Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 (in thousands) 80% Sam

Poco Income Statement Sales Income from Sam Gain on machinery Cost of sales

$

900 38 40 400*

Depreciation expense Other expenses Consolidated net income Noncontrolling int. share Controlling share of NI

$

328

Retained Earnings Retained earnings — Poco

$

155

Balance Sheet Cash Accounts receivable Dividends receivable Inventories Other current items Land

500

300*

90* 160*

$

100

$

250

283

$

300

$

20 130 20 90 20 50 60

$

80 30

1,000 $

177 100 140 300 283ü

$1,000 Noncontrolling interest, January 1 Noncontrolling interest, December 31 *

$

725

$

40 25 60 300 300ü

$

48 5 4

653* 146* 200* 353 25* $

328

$

155 328

b 5 e 8 g 100

Goodwill

a b d

f h g

320

510

$1,352

g 250

70 80 40 105

100

Consolidated Statements

25

100ü 50*

$

Machinery — net Investment in Sam

48 38 40 6

60* 40*

328ü 200*

Buildings — net

Accounts payable Dividends payable Other liabilities Capital stock, $10 par Retained earnings

a f d c

h

Retained earnings — Sam Controlling share of NI Dividends

Retained earnings December 31

$

Adjustments and Eliminations

37.5 10 2.5

i j c

25 20 6

e

8

d

36

200* $

283

$

100 135 154 100 82 165 384

g 522.5 f .5 100 $1,220

i j

25 20

$

g 300

192 105 200 300 283

725 g 125 h 5

140 $1,220

Deduct

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8-30

Consolidations — Changes in Ownership Interests

Solution P8-11 Preliminary computations: Investment cost of 85% of Sly August 1, 2009

$522,750

Implied fair value of Sly ($522,750 / 85%) Book value August 1, 2009: Capital stock Retained earnings Add: Income for 7 months Less: Dividends for 1/2 year Stockholders’ equity August 1, 2009 Fair value – book value differential

$615,000 $500,000 100,000 35,000 (20,000) 615,000 0

$

Investment cost August 1, 2009 Equity in income $60,000  5/12 year  85% Less: Deferred inventory profit from upstream sale $5,000  85% Less: Deferred profit from sale of equipment $10,000 profit - ($2,000  1/4 year) Income from Sly 2009 Less: Dividends from Sly $20,000  85% Investment in Sly December 31, 2009

$522,750 $ 21,250 (4,250) (9,500) 7,500 (17,000) $513,250

Noncontrolling interest share of post-acquisition income, adjusted for the

inventory profit: ($25,000 - $5,000)  15% = $3,000 Preacquisition earnings ($35,000  85%) = $29,750 Under SFAS No. 160, pre-acquisition earnings and dividends are closed to retained earnings, and the consolidated income statement reports only postacquisition earnings. Working paper entries: a

Sales

60,000 Cost of sales To eliminate intercompany sales.

b

Cost of sales Inventories To defer unrealized inventory profits.

60,000 5,000 5,000

c

Sales

50,000 Cost of sales 40,000 10,000 Plant assets — net To eliminate intercompany sale of inventory item to be used as equipment.

d

500 Plant assets — net Operating expense 500 To record depreciation for 1/4 year on intercompany gain on plant asset. © 2009 Pearson Education, Inc. publishing as Prentice Hall

Chapter 8

8-31

P8-11 (continued) e

Income from Sly 7,500 Investment in Sly 9,500 Dividends 17,000 To eliminate income and dividends and return investment account to its beginning-of-the-period balance.

f

Capital stock 500,000 Retained earnings 100,000 Investment in Sly 522,750 Noncontrolling interest 92,250 Sales * 233,333 Cost of sales * 145,833 Operating expenses * 52,500 Dividends * 20,000 To eliminate reciprocal equity and investment balances, and enter beginning noncontrolling interest (* adjusted for preacquisition earnings and dividends).

g

Dividends payable 17,000 Dividends receivable 17,000 To eliminate reciprocal dividends receivable and payable amounts.

h

Noncontrolling Interest Share 3,000 Dividends 3,000 To enter Noncontrolling Interest share of subsidiary postacquisition income and dividends.

Alternative to entry c: Sales Cost of sales Cost of sales Plant assets — net

50,000 50,000 10,000

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10,000

8-32

Consolidations — Changes in Ownership Interests

Solution P8-11 (continued) Pak Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2009 Pak Income Statement Sales

$

910,000

Income from Sly Cost of sales

7,500 500,000*

Operating expense

200,000*

Consolidated net income Noncontrolling int. share Controlling share of NI $ Retained Earnings Retained earnings — Pak Retained earnings — Sly Net income Dividends

Retained earnings December 31 Balance Sheet Cash Dividends receivable Accounts receivable Inventories Plant assets — net Investment in Sly

Accounts payable Dividends payable Capital stock Retained earnings

$

$

217,500

$

a 60,000 c 50,000 f 233,333 $ e 7,500 250,000* b 5,000 a 60,000 c 40,000 f 145,833 90,000* d 500 f 52,500

60,000

100,000 f 100,000 60,000ü 40,000* e f h

966,667

509,167* 237,000*

$

220,,500* 3,000* 217,500

$

192,500

3,000

192,500 217,500ü 100,000*

Consolidated Statements

400,000

h

$

$

Adjustments and Eliminations

Sly 85%

217,500 17,000 20,000 3,000

100,000*

310,000

$

120,000

$

310,000

33,750 17,000 120,000 300,000 880,000 513,250 $1,864,000

$

10,000

$

43,750

$

730,000

$2,049,250

$

$

90,000 20,000 g 17,000 500,000 f 500,000 120,000ü 730,000

$

$

154,000

g 70,000 150,000 500,000

1,400,000 310,000ü $1,864,000 $

Noncontrolling interest January 1 Noncontrolling interest December 31

d e

17,000 190,000 445,000 1,370,500

b 5,000 500 c 10,000 9,500 f 522,750

f

244,000 3,000 1,400,000 310,000

92,250 92,250 $2,049,250

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Chapter 8

8-33

© 2009 Pearson Education, Inc. publishing as Prentice Hall

8-34

Consolidations — Changes in Ownership Interests

Solution P8-12 Indirect Method Poff Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2010 Cash Flows from Operating Activities Consolidated net income – controlling share Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Depreciation expense Decrease in accounts receivable Decrease in prepaid expenses Decrease in accounts payable Increase in inventories Gain on sale of 10% interest *

$300,000

$

22,000 528,000 2,500 20,000 (203,500) (130,000) (5,700)

Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Sale of 10% interest in subsidiary

533,300 $(100,000) 72,700

Net cash flows from investing activities Cash Flows from Financing Activities Cash paid on long-term note Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Net cash flows from financing activities

233,300

(27,300) $(300,000) (200,000) (10,000) (510,000)

Decrease in cash for 2010 Cash on hand January 1, 2010 Cash on hand December 31, 2010

(4,000) 50,500 $ 46,500

* Note: Since Poff maintains a controlling interest in Sato, no gain or loss should have been recognized on sale of the 10 interest. Rather, this amount should appear as an increase in other paid-in capital. The net effect on the statement of cash flows is the same.

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Chapter 8

8-35

Solution P8-12 (continued) Poff Corporation and Subsidiary Working Papers for the Statement of Cash Flows (Indirect Method) for the year ended December 31, 2010 Reconciling Items Year’s Change Asset Changes Cash Accounts receivable — net Inventories Prepaid expenses Equipment Accumulated depreciation Land and buildings Accumulated depreciation Total asset changes Changes in Equities Accounts payable Dividends payable Long-term note payable Common stock Retained earnings Noncontrol. int. 20%

Debit

Credit

Cash Flows Cash Flows Cash Flows from Investing Financing Operations Activities Activities

(4,000) (2,500) 130,000 (20,000) 90,000 (498,000)

e

2,500

k 130,000 l 20,000 h 10,000 g 100,000 f 500,000 h 2,000

0 (28,000) f

28,000

(332,500) (203,500) 0 (300,000) 0 100,000 71,000

Changes in equities (332,500) Consolidated net income Noncontrolling int. share Purchase of equipment Depreciation — equipment and buildings Gain - sale of 10% subsidiary Interest Decrease in accounts receivable Increase in inventories Decrease in prepaid expenses Decrease in accounts payable Cash paid on long-term note Paid dividends — controlling Paid dividends —noncontrol. Sale of 10% interest in Subsidiary

i 203,500 j 300,000

a 300,000 c 200,000 b 22,000 d 10,000 h 59,000

a 300,000 b 22,000

300,000 22,000

g 100,000

(100,000) f 528,000

h

5,700 e

2,500

l

20,000

k 130,000 i 203,500 j 300,000 c 200,000 d 10,000

528,000 (5,700) 2,500 (130,000) 20,000 (203,500) (300,000) (200,000) (10,000)

h 72,700 1,890,700 1,890,700

72,700 533,300

(27,300)

(510,000)

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8-36

Consolidations — Changes in Ownership Interests

Cash decrease for 2010 = $533,300 - $27,300 - $510,000 = $(4,000). * Note: Since Poff maintains a controlling interest in Sato, no gain or loss should have been recognized on sale of the 10 interest. Rather, this amount should appear as an increase in other paid-in capital. The net effect on the statement of cash flows is the same.

© 2009 Pearson Education, Inc. publishing as Prentice Hall