Chapter 3 - 12thEDITION
Chapter 3 - 12thEDITION
Chapter 3 - 12thEDITION
A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a
controlling financial interest (generally over 50 percent) of its outstanding voting stock.
Amounts assigned to identifiable assets and liabilities in excess of recorded amounts on the books of the
subsidiary are not recorded separately by the parent. Instead, the parent records the fair value/purchase
price of the interest acquired in an investment account. The assignment to identifiable asset and liability
accounts is made through working paper entries when the parent and subsidiary financial statements are
consolidated.
The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the
purchase price of the subsidiary is greater than the book value of the subsidiarys net assets. If the parent
had acquired an 80 percent interest and the implied fair value of the subsidiary was greater than the book
value of the subsidiarys net assets, the land would still appear in the consolidated balance sheet at
$100,000. Under GAAP, the noncontrolling interest is also reported based on fair values at the acquisition
date.
Parent companya corporation that owns a controlling interest in the outstanding voting stock of another
corporation (its subsidiary).
Subsidiary companya corporation that is controlled by a parent that owns a controlling interest in its
outstanding voting stock, either directly or indirectly.
Affiliatescompanies that are controlled by a single management team through parent-subsidiary
relationships. (Although the term affiliate is a synonym for subsidiary, the parent is included in the total
affiliation structure.) In many annual reports, the term includes all investments accounted for by the equity
method.
Associatescompanies that are controlled through parent-subsidiary relationships or whose operations can
be significantly influenced through equity investments of 20 percent to 50 percent.
A noncontrolling interest is the equity interest in a subsidiary that is owned by stockholders outside of the
affiliation structure. In other words, it is the equity interest in a subsidiary (recorded at fair value) that is not
held by the parent or subsidiaries of the parent.
Under GAAP, a subsidiary will not be consolidated if control does not rest with the majority owner, such as
in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under severe
foreign exchange restrictions or other governmentally imposed uncertainties. Other conditions for not
consolidating a subsidiary are: (1) formation of joint ventures, (2) the acquisition of an asset or group of
assets that does not constitute a business, (3) combination between entities under common control and (4)
combination between not-for-profit entities or the acquisition of a for-profit business by a not-for-profit
entity.
Consolidated financial statements are intended primarily for the stockholders and creditors of the parent,
according to GAAP.
The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of
the outstanding capital stock of the parent.
Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or
consolidation accounted for as an acquisition. But goodwill from consolidation would not appear in the
general ledger of a parent or its subsidiary. Goodwill is entered in consolidation working papers when the
reciprocal investment and equity amounts are eliminated. Working paper entries affect consolidated
financial statements, but they are not entered in any general ledger.
10
The parents investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is
consolidated. It would appear in the parents separate balance sheet under the heading investments or
other assets. Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as
investments or other assets. They are accounted for under the equity method if the parent can exercise
significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost method.
11
Parents books:
Investment in subsidiary
Sales
Accounts receivable
Interest income
Dividends receivable
Advance to subsidiary
12
Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order to
show the financial position and results of operations of the total economic entity that is under the control of
a single management team. Sales by a parent to a subsidiary are internal transactions from the viewpoint of
the economic entity and the same is true of interest income and interest expense and rent income and rent
expense arising from intercompany transactions. Similarly, receivables from and payables to affiliates do
not represent assets and liabilities of the economic entity for which consolidated financial statements are
prepared.
13
The stockholders equity of a parent under the equity method is the same as the consolidated stockholders
equity of a parent and its subsidiaries except for the noncontrolling interest.
14
No. The amounts that appear in the parents statement of retained earnings under the equity method and the
amounts that appear in the consolidated statement of retained earnings are identical, assuming that the
noncontrolling interest is included as a separate component of stockholders equity.
15
Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total
income to the consolidated entity between controlling and noncontrolling stockholders. From the viewpoint
of the controlling interest (the stockholders of the parent), income attributable to noncontrolling interest has
the same effect on consolidated net income as an expense. This is because consolidated net income is
income to all stockholders. Alternatively, you can view total consolidated net income as being allocated to
the controlling and noncontrolling interests.
16
XX
XX
(XX)
(XX)
XX
XX
It is acceptable to consolidate the annual financial statements of a parent and a subsidiary with different
fiscal periods, provided that the dates of closing are not more than three months apart. Any significant
developments that occur in the intervening three-month period should be disclosed in notes to the financial
statements. In the situation described, it is acceptable to consolidate the financial statements of the
subsidiary with an October 31 closing date with the financial statements of the parent with a December 31
closing date.
18
The acquisition of shares from noncontrolling stockholders is not a business combination. It must be
accounted for as a treasury stock transaction if the acquirer is the controlling interest. It is not possible, by
definition, to acquire a controlling interest from noncontrolling stockholders.
SOLUTIONS TO EXERCISES
Solution E3-1
Solution E3-2
1
2
3
4
5
1
2
3
4
5
6
7
b
c
d
d
a
d
b
d
d
a
b
c
a
Pow accounts for Sap using the equity method, therefore,
consolidated retained earnings is equal to Pows retained earnings, or
$2,480,000.
4
d
On the consolidated balance sheet, intercompany receivables
should
be zero.
Solution E3-4 (in thousands)
1
$4,000
(3,600)
$ 400
120
$ 280
$ 280
$1,960
(36)
$1,924
$36
1,924
$1,960
$5,000
4,000
$1,000
80
200
600
320
1,000
840
40
3,000
Sli Corporation
Balance Sheet
January 1, 2011
(in thousands)
Assets
Cash
Accounts receivable
Inventories
Land
Buildings net
Equipment net
Goodwill
Total assets
Liabilities
Accounts payable
Note payable
Total liabilities
Stockholders equity
Capital stock
Push-down capital
Total stockholders equity
Total liabilities and stockholders equity
280
320
400
800
2,000
1,200
1,000
$6,000
$
400
600
1,000
$2,000
3,000
5,000
$6,000
Solution E3-7
1
$5,600
(3,200)
Gross profit
Less: Depreciation expense ($200 + $160)
Other expenses ($796 + $360)
2,400
(360)
(1,156)
$5,600
(3,200)
Gross profit
Less: Depreciation expense ($200 + $160 - $24)
Other expenses ($796 + $360)
2,400
(336)
(1,156)
884
(84)
800
908
(91.2)
816.8
Capital stock
The capital stock appearing in the consolidated balance sheet at
December 31, 2011 is $7,200, the capital stock of Pob,the parent
company.
$3,200
1,200
(720)
$3,680
$1,100
$2,800
$3,500
(2,400)
$2,400
360
(200)
2,560
20%
$ 512
220
$ 732
$ 360
20
$ 380
$1,200
200
260
1,660
164
$1,824
Supporting computations
Computation of consolidated retained earnings:
Pass December 31, 2010 retained earnings
Add: Pass reported income for 2011
Less: Pass dividends
Consolidated retained earnings December 31, 2011
$ 140
220
(100)
$ 260
$800
20
820
20%
$164
Solution E3-10
Pek Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2013
(in thousands)
Sales
Cost of goods sold
Gross profit
Deduct: Operating expenses
Consolidated net income
Deduct: Noncontrolling interest share
Controlling interest share
$8,400
4,400
4,000
2,220
1,780
58
$1,722
Supporting computations
Investment cost January 1, 2011 (90% interest)
Implied total fair value of Slo ($3,240 / 90%)
Slos Book value acquired (100%)
Excess of fair value over book value
Excess allocated to:
Inventories (sold in 2011)
Equipment (4 years remaining useful life)
Goodwill
Excess of fair value over book value
Operating expenses:
Combined operating expenses of Pek and Slo
Add: Depreciation on excess allocated to equipment
($80/4 years)
Consolidated operating expenses
$ 3,240
$ 3,600
(2,800)
$
800
$
$
120
80
600
800
$2,200
20
$2,220
SOLUTIONS TO PROBLEMS
Solution P3-1
1
200
296
796
2,220
$3,512
272
1,840
1,200
200
$3,512
680
288
968
72
$1,040
680
360
1,040
72
$ 968
$ 700
$1,000
(440)
$ 560
Allocation
$ 80
40
80
(40)
40
200
360
$560
$220
440
480
$640
800
440
680
200
$2,000
200
2,200
300
$1,140
1,880
360
$3,380
880
2,500
$3,380
$10,800
$13,500
10,000
$ 3,500
Current assets
Equipment
Fair Value
- Book Value
$2,000
4,000
Allocation
$2,000
4,000
Bargain purchase
gain*
Excess fair value over book value
(2,500)
$3,500
$1,300
(1,040)
$ 260
Excess allocated to
Plant assets net
Goodwill
Total
Fair Value
$840
Book Value
$800
$
$
40
220
260
Solution P3-5
Pal Corporation and Subsidiary
Consolidated Balance Sheet
at December 31, 2011
(in thousands)
Assets
Current assets
Plant assets
Goodwill
Equities
Liabilities
Capital stock
Retained earnings
Supporting computations
Sors net income ($1,600 - $1,200 - $200)
Less: Excess allocated to inventories that were sold in 2011
Less: Depreciation on excess allocated to plant
assets ($160 /4 years)
Income from Sor
$1,360
3,320
800
$5,480
$2,640
1,200
1,640
$5,480
$
200
(80)
(40)
80
$3,320
$1,360
400
80
(200)
$1,640
Solution P3-6
Per Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2011
(in thousands)
Cash
Receivables net
Inventories
Land
Per
per books
$ 168
200
Sim
per books
$
80
520
Equipment net
Investment in Sim
Goodwill
Total assets
1,400
600
2,400
200
800
400
1,836
______
$6,604
______
$2,000
Accounts payable
Dividends payable
Capital stock
Retained earnings
Noncontrolling interest
Total equities
$1,640
240
4,000
724
______
$6,604
a
b
Adjustments and
Eliminations
b
36
Consolidated
Balance Sheet
$ 248
684
1,600
1,400
2,800
a 1,836
320
40
1,200
440
______
$2,000
400
400
$7,132
b
36
a 1,200
a
440
_______
2,076
204
2,076
$1,960
244
4,000
724
204
$7,132
To eliminate reciprocal investment and equity accounts, record goodwill ($400), and
enter noncontrolling interest [($1,640 equity + $400 goodwill) 10%)].
To eliminate reciprocal dividends receivable (included in receivables net) and
dividends payable amounts ($40 dividends 90%).
$1,120
$1,400
(1,000)
$ 400
$ 40
Current assets:
Combined current assets ($816 + $300)
Less: Dividends receivable ($40 80%)
Current assets
$1,116
(32)
$1,084
$400
$ 2,400
(1,480)
(320)
$
600
(40)
$
560
10
808
560
(240)
$1,128
$1,200
200
(100)
1,300
20%
$ 260
80
$ 340
Saw
Sun
448,000
672,000
960,000
280,000
480,000
280,000
480,000
448,000
448,000
672,000
672,000
To record acquisition of 4,200 shares of
Sun common stock at $160 per share.
b. During 2011 Dividends from subsidiaries
Cash
51,200
Investment in Saw (80%)
51,200
To record dividends received from Saw ($64,000 80%).
Cash
25,200
Investment in Sun (70%)
25,200
To record dividends received from Sun ($36,000 70%).
c. December 31, 2011 Share of income or loss
Investment in Saw (80%)
115,200
Income from Saw
115,200
To record investment income from Saw ($144,000 80%).
Loss from Sun
33,600
Investment in Sun (70%)
33,600
To record investment loss from Sun ($48,000 70%).
Saw
$200,000
160,000
360,000
20%
$ 72,000
Sun
$240,000
80,000
76,000
396,000
30%
$118,800
56,000
$128,000
144,000
$262,800
Saw
$448,000
Sun
$672,000
115,200
(51,200)
$512,000
(33,600)
(25,200)
$613,200
Solution P3-9
Preliminary computations (in thousands)
Cost of 90% investment January 1, 2011
Implied total fair value of Son ($14,400 / 90%)
Book value of Son
Excess fair value over book value on January 1
Allocation to equipment
Remainder is Goodwill
Additional annual depreciation on equipment ($3,200 / 8 years)
$14,400
$16,000
(10,800)
$ 5,200
$ 3,200
$ 2,000
$
400
Cash
Receivables net
Dividends receivable
Inventory
Land
Buildings net
Equipment net
Investment in Son
Goodwill
Total assets
Pan
$ 1,200
2,400
360
2,800
2,400
8,000
2,400
2,800
4,000
6,000
3,200
15,120
_______
$38,280
Accounts payable
$ 1,200
Dividends payable
2,000
Capital stock
28,000
Retained earnings
7,080
Noncontrolling interest _______
Total equities
a
b
90%
Son
800
1,600
$38,280
Adjustments and
Eliminations
Consolidated
Balance Sheet
$ 2,000
4,000
360
5,200
5,200
12,000
2,800
12,000
a 15,120
________
$ 14,800
2,400
400
8,000
4,000
________
2,000
2,000
$42,400
$ 14,800
b
a
a
360
8,000
4,000
_______
17,160
1,680
$ 3,600
2,040
28,000
7,080
1,680
17,160
$42,400
Solution P3-10
1
240
$1,120
880
$896
96
$992
896
Solution P3-11
Preliminary computations (in thousands)
Cost of 70% investment in Stu
Implied fair of Stu($2,800 / 70%)
Book value of Stu (100%)
Excess
Excess allocated:
Inventories
Plant assets
Goodwill
Excess
$2,800
$4,000
3,200
$ 800
$
$
80
320
400
800
$2,800
168
(56)
(28)
$2,884
$1,032
120
84
$1,236
Pop
$
240
1,760
70%
Stu
80
800
Adjustments and
Eliminations
40
28
2,000
400
2,800
1,280
600
1,400
2,884
______
$10,112
______
$ 4,200
280
400
b
c
40
28
40
28
Consolidated
Balance Sheet
$
320
2,560
3,280
1,000
4,480
a 2,884
400
$12,040
$ 1,200
40
160
2,400
4,000
2,312
320
_______
_______
_______
a 1,236
1,236
$10,112
$ 4,200
4,188
4,188
$12,040
40
400
2,000
1,440
$ 1,520
172
2,800
4,000
2,312
a 2,000
a 1,440
Solution P3-12
Preliminary computations (in thousands)
80% Investment in Sam at cost January 1, 2011
Implied total fair value of Sam ($3,040 / 80%)
Sam book value
Excess fair value over book value recorded as goodwill
2011
2012
2013
Sam
Dividends
$160
200
240
$600
Sam
Net Income
$ 320
400
480
$1,200
$ 3,040
$ 3,800
3,600
$
200
80% of
Net Income
$256
320
384
$960
200
400
200
480
20%
96
$3,600
1,200
(600)
4,200
200
$4,400
20%
$ 880
$1,120
384
$1,504
$1,120
480
$1,600
96
$1,504