Solution manual advanced accounting 11th by beams chapter08

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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, 2011 and that S has earnings of $100,000 between January 1 and July 1, 2011 and pays $50,000
dividends on May 1, 2011. In this case, preacquisition earnings and dividends are $100,000 and $40,000,
respectively. Historically, preacquisition earnings purchased were shown as a deduction on the income
statement to arrive at consolidated net income. Under current GAAP, this is no longer the case. Instead,
the consolidated income statement should only report revenues, expenses, gains and losses subsequent to
the acquisition. For example, in a March 31 acquisition, the consolidated income statement would only
include income of the subsidiary from April 1 through December 31. GAAP 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 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
current GAAP, 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 March 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 at year-end is
computed for the 10 percent interest held by noncontrolling stockholders at the end of the year.
Noncontrolling interest share for the year has two parts: (1) annual income x 50% x 10% plus (2) annual
income x 50% x 20%.

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 stockholders 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 GAAP, 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.

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8-1


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Consolidations — Changes in Ownership Interests

8-2

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
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 deconsolidated. 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 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 records decreases in its investment and additional paid-in capital accounts. In all three cases (at
book value, above book value, or below book value), the parent’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 adjustment 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 records its additional investment. The parent 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. But, if
the purchase price is above the book value of equity acquired, then the excess is assigned to undervalued
assets or goodwill. If the purchase price is below the book value of equity acquired, then the excess should
be assigned to reduce overvalued identifiable assets or goodwill.

9

Treasury stock transactions by a subsidiary change the parent’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’s investment in subsidiary and additional paid-in capital accounts.

10

Gains and losses to a parent (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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Chapter 8

8-3

SOLUTIONS TO EXERCISES
Solution E8-1
Allocation of Set’s net income:
Controlling share of income
($100,000  70%  1/2 year) + ($100,000  90%  1/2 year)

$ 80,000

Noncontrolling interest share
(30% x $100,000 x ½ year) + (10% x $100,000 x ½)
Preacquisition income
Note: This does not appear on the consolidated income statement.

$20,000
$
0

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

$ 48,000

Noncontrolling interest ($30,000 x 30%) + ($30,000 x 10%)

$ 12,000

Preacquisition dividends

$

0

Solution E8-2
1

2.

3

Income from Sip for 2011:
40% interest x $240,000 x 8/12 year
60% interest  $240,000  1/3 year

$64,000
$ 48,000

Total income from Sip
$112,000
Preacquisition income:
Under GAAP, 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 Pin’s interest increased from 40% to 60%,
so the consolidated income statement includes Sip income of
$80,000 ($240,000 x 1/3 of year).
Noncontrolling interest share for 2011:
$80,000  40%

$ 32,000

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Consolidations — Changes in Ownership Interests

8-4

Solution E8-3 (amounts in thousands)
Entry to record sale of 15% interest:
Cash
Investment in Sap
Other paid-in capital
To record sale of 15% interest in Sap.
No gain or loss on sale is recognized
since Pet maintains an 85% controlling
interest.
Entry to record investment income for 2011:
Investment in Sap($600  85%)
Income from Sap
To record income from Sap.

750
660
90

510
510

Check:
Investment balance January 1, 2011
Less: Book value of interest sold
Add: Income from Sap
Investment balance December 31, 2011
Underlying equity ($4,600  85%)
Add: 85% of Goodwill *

Investment balance December 31, 2011
* 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 Pal
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 Sag
Beginning of the period sale assumption
Income from Sag($150  60%)
Actual sale date assumption
January 1 to May 1:
Share of Sag’s income ($150  80%  1/3 year)
May 1 to December 31:
Share of Sag’s income ($150  60%  2/3 year)
Income from Sag

$130
$436
40
476
25%

119
$ 11

$ 90

$ 40
60
$100

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Chapter 8

8-5

Solution E8-4 (continued)
3

Investment in Sag December 31, 2011

Investment balance January 1
Book value of interest sold
Income from Sag
Dividends
Investment balance December 31, 2011

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 Set ($1,274 / 70%)
Book value ($1,480 January 1 balance
+ $100 income for 5 months - $60 dividends in
January and April)
Goodwill

1b

$1,274
$1,820
(1,520)
$ 300

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

1c

$

Investment in Set at December 31
Investment cost
Add: Income from Set
Deduct: Dividends ($60,000  70%)
Investment in Set December 31, 2011

2

98

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

Consolidation working paper entries:
a

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

b

1,000
Common stock, $10 par — Set
580
Retained earnings — Set
Goodwill
300
Investment in Set
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.

c Noncontrolling interest share 240,000 x 7/12 x 30%
Dividends 120,000 x 30%

42,000
36,000

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Consolidations — Changes in Ownership Interests

8-6

Noncontrolling interest

6,000

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Chapter 8

8-7

Solution E8-6
1

Investment in Sow (in thousands)
Investment balance December 31, 2011 ($9,000  80%)
Cost of new shares ($25  60,000 shares)
Investment in Sow after new investment

2

$ 7,200
1,500
$ 8,700

Goodwill from new investment

*

Sow’s stockholders’ equity after issuance
($9,000 + $1,500)
Pal’s ownership percentage
(480,000 + 60,000 shares)/660,000 shares
Pal’s book value after issuance
Less: Pal’s book value before issuance
Increase in book value from purchase
(book value acquired)

$ 1,391.1

Cost of 60,000 shares
Book value acquired
Goodwill from acquisition of new shares*

$ 1,500
(1,391.1)
$
108.9

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

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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Consolidations — Changes in Ownership Interests

8-8

Solution E8-8
Pam 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 Sat:
Sat’s underlying equity after sale
Pam’s interest
Book value of Pam’s investment in Sat
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 Sat
Additional paid-in capital

160,000
160,000

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Chapter 8

8-9

Solution E8-9
Preliminary computations of fair value — book value differentials:
April 1, 2011 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, 2012 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

$164,000
$410,000
$360,000
40,000
(10,000)
390,000
$ 20,000

Income from Sum
2011
Income from Sum for 2011 ($80,000  20%  3/4 year)

$ 12,000

2012 Income from Sum
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, 2012
(($420,000 book value + $20,000 goodwill) 40%)

$176,000

3

Preacquisition income does not appear in income statement.

4

Investment balance at December 31, 2012
Cost of 20% investment
Income from Sum for 2011
Cost of 40% investment
Income from Sum for 2012
Gain on revaluation of investment
Less: Dividends ($2,000 + $6,000)
Investment in Sum

$ 64,000
12,000
164,000

32,000
18,000
(8,000)
$282,000

Implied fair value of Sum ($164,000/0.4)

$410,000

Fair value of original investment($410,000 x 20%)
Less: Cost of original investment
Gain on revaluation of investment

82,000
(64,000)
$ 18,000

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Consolidations — Changes in Ownership Interests

8-10

Solution E8-10
Preliminary computations
Investment cost July 1, 2012

$675,000

Implied total fair value of Sad ($675,000 / 90%)
Less: Book value of Sad at acquisition:
Equity of Sad December 31, 2011
Add: Income for 1/2 year
Equity of Sad July 1, 2012
Excess (book value = underlying equity)

$750,000

1

$700,000
50,000
750,000
0

Investment income from Sad
Income from Sad — 2012 ($100,000  1/2 year  90%)
Income from Sad — 2013:
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 Sad
Cost July 1, 2012
Add: Income from Sad — 2012
Less: Dividends paid in December ($50,000  90%)

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

Investment balance December 31, 2012

675,000

Less: Book value of 1/9 interest sold on July 1, 2013a
Add: Income from Sad — 2013
Less: Dividends paid in December ($30,000  80%)
Investment balance December 31, 2013
a

(79,000)
68,000
(24,000)
$640,000

Sale of 10% interest July 1, 2013:
Equity of Sad December 31, 2011
Add: Income less dividends — 2012
Add: Income for 1/2 year — 2013
Equity of Sad July 1, 2013
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 Pit maintains a controlling interest, the gain is not
recorded, but shown as an adjustment to additional paid-in
capital.

$

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Chapter 8

8-11

Solution E8-10 (continued)

2

Noncontrolling interest share
Noncontrolling interest share — 2012:
($100,000 income  10% interest x 1/2 year)

$ 5,000

Noncontrolling interest share — 2013:
($80,000  1/2 year  10%) + ($80,000  1/2 year  20%)

$ 12,000

Noncontrolling interest December 31, 2012
Equity of Sad January 1
Add: Income less dividends for 2012
Equity of Sad December 31
Noncontrolling interest percentage

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

Noncontrolling interest December 31

$ 75,000

Noncontrolling interest December 31, 2013
Equity of Sad January 1

Add: Income less dividends for 2013
Equity of Sad December 31
Noncontrolling interest percentage

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

Noncontrolling interest December 31

$160,000

Solution E8-11
Preliminary computations:
Investment cost January 1, 2012
Implied total fair value of Soy ($690,000 / 75%)
Book value of Soy
Excess fair value over book value = Goodwill
1

$
$

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

Underlying book value December 31, 2012
$1,000,000 equity  75%

2

690,000

$

750,000

$

690,000

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 Soy balance January 3, 2013
Investment cost January 1, 2012
Add: Share of Soy’s income less dividends
for 2012 ($200,000  75%)
Investment in Soy December 31, 2012
Add: Additional investment — January 3, 2013
(10,000 shares  $30)
Investment in Soy balance January 3, 2013

150,000

840,000
300,000
$1,140,000

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Consolidations — Changes in Ownership Interests

8-12

4

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

5

Investment in Soy balance January 3, 2013
Investment in Soy December 31, 2012
(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 Soy balance - January 3, 2013

$

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

$960,000
710,000
$250,000

January 2, 2012
Investment in Son

160,000
Cash
To record purchase of additional 2,000 shares of Son.

160,000

December 2012
Cash

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

December 31, 2012
Investment in Son
75,000
Income from Son
To record income from Son($90,000  10,000/12,000).

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Chapter 8

8-13

Solution E8-13
1

2

Investment in Sir (in thousands)
Cost
Add: 90% of $300 increase in equity since 2011
Investment in Sir January 1, 2013

$1,800
270
$2,070

Entry on Pat’s books (no gain or loss recognized)
Investment in Sir
180
Additional paid-in capital
180
To recognize change in book value of investment from Sir’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, 2011

$620

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

$775
(600)
$175

Cost of 10,000 shares January 1, 2012
Implied fair value of Sin [$162/(10/60)]
Fair value of original investment:
[$972 x (40/60)]
Less: Carrying value of original investment:
Gain on revaluation of investment
1

2

3

$162
$972
$648
620
$28

Investment in Sin — December 31, 2011
Investment cost
Add: Income from Sin- $100  1/2 year  80%
Less: Dividends ($50  80%)
Investment in Sin December 31, 2011

$620
40
(40)
$620

Income from Sin — 2012
Share of Sin’s income ($150  5/6)

$125

Investment in Sin — December 31, 2012
Investment balance December 31, 2011
Add: Additional investment
Add: Income from Sin — 2012
Add: Revaluation of original investment
Less: Dividends for 2012 ($60  5/6)
Investment in Sin December 31, 2012

$620
162
125
28
(50)

$885

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8-14

Consolidations — Changes in Ownership Interests

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Chapter 8

8-15

Solution P8-2
1

Investment in Sit (in thousands)
Underlying equity $26,000  80%
Goodwill (80%)
Investment in Sit January 1, 2013

$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 Sit
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 Saw
121,500
To record sale of 1/9 of investment in Saw. Book value of interest
sold is computed as follows:

Investment balance December 31, 2010
Add: Income from Saw for one-half year
($280,000  1/2 year  90%)
Less: Dividends ($80,000  90%)
Book value of investment on July 1, 2011
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, 2011
Cash
120,000
Additional paid-in capital
12,500
Investment in Saw
107,500
To record sale of 1/9 of investment in Saw. Book value of interest
sold is computed as follows:
Investment balance December 31, 2010
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, 2011
Add: Income from Saw
January 1 — July 1
July 1 — December 31
Less: Dividends
First half-year
Last half-year
Less: Book value of interest sold

Investment in
Saw
Actual Sale Date
$1,039,500

Investment in
Saw
Beginning of Year
Sale Date
$1,039,500

126,000

112,000

112,000
1l2,000

(72,000)
(64,000)
(121,500)

(72,000)
(64,000)
(107,500)

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Consolidations — Changes in Ownership Interests

8-16

Balance December 31, 2011

$1,020,000

$1,020,000

Solution P8-4
(in thousands)

Entries on Pan’s books to reflect the change in ownership interest:
Option 1 Pan sells 30,000 shares of Son
Cash

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

Option 2 Son issues and sells 40,000 shares to the public
Investment in Son
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 Son reissues 40,000 shares of treasury stock
Investment in Son
630
Additional paid-in capital
630
To record adjustment in ownership computed the same as 2 above.

Consolidated Stockholders’ Equity
at January 1, 2012

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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Chapter 8

8-17

Solution P8-5
Preliminary computations:
Cost of 9,000 shares (90% interest) January 1, 2011
Implied total fair value of Sal ($810,000 / 90%)
Book value of Sal ($500,000 + $300,000)
Excess fair value over book value = Goodwill
1

$
$

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

Investment balance December 31, 2011
Cost January 1, 2011 (9,000 shares  $90)
Add: Share of Sal’s 2011 income ($50,000  90%)
Investment in Sal December 31
2

$
$

100,000

105,000

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, 2012(Pal purchased additional shares)
Goodwill from January 1, 2011 purchase
$
Goodwill from January 1, 2012 purchase:
Book value before purchase($850,000 x 90%)
$ 765,000
Book value after purchase($1,350,000 x 931/3%) (1,260,000)
Book value acquired
(495,000)
Cost of additional 5,000 shares
500,000
Goodwill from January 1, 2012
$
5,000
Goodwill at December 31, 2012
$

3

810,000

$

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

Noncontrolling interest December 31, 2012 (outsider purchased shares)

Subsidiary equity January 1, 2011
Increase for 2011
Increase for 2012
Sale of additional shares
Book value
Goodwill
Fair value of Sal equity December 31, 2012

$

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

Noncontrolling interest percentage 6,000/15,000 shares
Noncontrolling interest December 31, 2012

$

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40%
608,000

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Consolidations — Changes in Ownership Interests

8-18

Solution P8-6
1

Investment in Sod December 31, 2012
Investment in Sod January 2, 2011
$ 98,000
Increase for 2011 ($30,000 retained earnings increase  70%) 21,000
Purchase of additional 20% interest June 30, 2012
37,000
Increase for income for 2012:
24,000
($30,000  1/2 year  70%) + ($30,000  1/2 year  90%)
(9,000)
Dividends 2012: ($10,000  90%)
Investment in Sod December 31, 2012
$171,000

2

Goodwill December 31, 2012
January 2, 2011 purchase:
Cost of 70% interest
Implied fair value of Sod ($98,000 / 70%)

Less: Book value of Sod
Goodwill
June 30, 2012 purchase:
Cost of 20% interest
Implied fair value of Sod ($37,000 / 20%)
Less: Book value of Sod
Goodwill - December 31, 2012

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:
Pot’s reported income = Controlling share of net income

$124,000

Consolidated retained earnings December 31, 2012
Beginning retained earnings
Add: Controlling share of Consolidated net income — 2012
Less: Dividends
Consolidated retained earnings — ending
Alternative solution:
Pot’s reported ending retained earnings = Consolidated
retained earnings — ending
Noncontrolling interest December 31, 2012
Equity of Sod December 31, 2012
Goodwill
Fair value of Sod
Noncontrolling interest percentage

Noncontrolling interest December 31, 2012

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

$260,000

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

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Chapter 8

8-19

Solution P8-7
1

Pod Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2012

(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

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

416.25

Note:
Should also add Gain on revaluation of investment of $66,750 to Consolidated
income statement.
Calculation:
Implied fair value of Subsidiary $95,000/0.1 = $950,000
Fair value of original investment $950,000 x 70% = $665,000
Less: Carrying value of original investment
598,250

Gain on revaluation of investment
$66,750
Carrying value of original investment= $600,000 + ($150,000 x 3/12 x 70%) –
($40,000 x 70%) = $598,250
2

Schedule to allocate Saw’s income and dividends

Saw’s income:
Controlling share:
($150,000 x 70% x 3/12) + ($150,000 x 80% x 9/12) = 116,250
Noncontrolling share:
($150,000 x 30% x 3/12) + ($150,000 x 20% x 9/12) = 33,750
Saw’s dividends:
Controlling share:
($40,000 x 70%) + ($40,000 x 80%) = $60,000
Noncontrolling share:
($40,000 x 30%) + ($40,000 x 20%) = $20,000

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Consolidations — Changes in Ownership Interests

8-20

Solution P8-8
Preliminary computations

Cost October 1, 2011
Implied fair value of Sat ($82,400 / 80%)
Book value on October 1 acquisition date:
Book value on January 1, 2011
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 2011
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  100%)

$18,000

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

$ 4,000

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

$ 1,200

* Under GAAP, 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 proforma disclosures for acquisitions. The worksheet on the
following page reflects these adjustments.

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Chapter 8

8-21

Solution P8-8 (continued)
Pop Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2011
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

30,000

Balance Sheet
Cash
Accounts receivable

Note receivable
Inventories

$

50,000

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

$

$

$

Retained earnings — Sat
Net income
Dividends

Retained earnings
December 31

Adjustments and
Eliminations

Sat 80%

30,700
20,000*

40,700

$

34,000

$

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

$

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

82,200

112,500

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

54,000*

$

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

$

30,000

1,200

e 20,000
30,700

24,000
10,000*

$

Plant assets — net
Investment in Sat

$

24,000

20,000

Consolidated
Statements

b
c
f

b

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
Retained earnings

$

220,700

$

15,000 $

25,000
140,000
40,700
220,700 $

$

Noncontrolling interest — beginning
Noncontrolling interest December 31

$

110,000

$

16,000 g 6,000
10,000
50,000 e 50,000
34,000
110,000

$

c 13,000
e 7,600
f
200
$

*

20,000
261,500
25,000
35,000
140,000
40,700

20,800
261,500

Deduct

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Consolidations — Changes in Ownership Interests

8-22

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
Pal company ($40,000  3/4 year  70%)
Preacquisition income ($40,000  1/4 year  100%)
Noncontrolling interest share ($40,000  1 year  30%x 3/4)
Sid’s net income

$ 21,000
10,000
9,000
$ 40,000

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

$ 21,000

Constructive gain on Pal’s bonds
Note that bonds payable has a book value of $105,400 on December
31, 2011. A half-year of premium amortization ($300) yields a book
value of $105,700 at July 1, 2011
( $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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Chapter 8

8-23

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

b

c

d

e

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 plant assets
12,000
Plant assets
Eliminate intercompany gain on sale of equipment.
Gain on plant assets
2,000
Plant assets
Eliminate intercompany gain on sale of land.
Interest income
5,850
Interest expense
Gain on bond retirement
Investment in Pal bonds

f

g

h

i

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.
Plant 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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Consolidations — Changes in Ownership Interests

8-24

Solution P8-9 (continued)
Pal Corporation and Subsidiary
Consolidation Working Papers

for the year ended December 31, 2011
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

100,000
50,000*

Dividends

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

$
$

$

950,000

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

30,000

2,850

2,850

e
b
i

5,700
27,500
2,000

5,700*
288,350*
108,400
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

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

70,000
$

399,600

e

300,000

200,000

300,000

$

50,000

102,700
$

Consolidated
Statements

8,400

40,000
20,000*

$

140,000
110,000
502,700

($268,000  30%)

37,500
12,300

h

Retained earnings — Sid
Net income

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%

300,000
b

75,000

h

5,400

80,400
$

942,000

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Chapter 8

8-25

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, 2012
Add: Income for 1/2 year
Less: June dividends
Book value at July 1, 2012
Goodwill (unchanged)

$675,000

Investment in Sam account:
Investment cost January 1, 2011
Add: 2011 share of retained earnings
increase ($50,000  70%)
Less: Unrealized profit in ending inventory
Less: Unrealized gain on land
Investment balance December 31, 2011
Add: Investment cost of 10% interest
Add: Income from Sam for 2012

$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, 2012

$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)

38,000

4,000

(37,500)
$510,000

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