Chapter 09 - Consolidation Ownership Issues CHAPTER CONSOLIDATION OWNERSHIP ISSUES ANSWERS TO QUESTIONS Q9-1 Preferred stock of the subsidiary is eliminated in the consolidation process in a manner comparable to that used in eliminating the common stock of the subsidiary For those preferred shares held by the parent company, a proportionate share of subsidiary income and net assets assigned to the preferred shares is eliminated against the balance in the parent's investment account Subsidiary income and net assets assigned to preferred shares not held by the parent are included as a part of the noncontrolling interest along with the balances assigned to noncontrolling interest for common stock not held by the parent The claim of the preferred shareholders normally is computed before the common stock is eliminated so that any priority claim associated with the preferred stock can be properly recognized and assigned to the correct shareholder group Q9-2 All preferred shares held by the parent are eliminated against the balance in the investment account Those held by unrelated parties are included in the total assigned to the noncontrolling interest Q9-3 Preferred dividends normally are deducted in arriving at income available to common shareholders When preferred dividends are paid by the subsidiary to shareholders other than the parent, the income accruing to the common shares held by the parent company is reduced Therefore, they must be deducted to arrive at income available to the parent company shareholders No preferred dividends are deducted if the parent company owns all the shares or if no dividends are declared and the preferred stock is noncumulative Q9-4 In the event the preferred shares are redeemed, the subsidiary must pay the call premium and the net assets of the subsidiary will be reduced by the amount of the premium Because it is more conservative to assume the call premium will be paid, the amount of the premium normally is added to the claim of the preferred shareholders and deducted from the equity assigned to the common shareholders whenever consolidated statements are prepared Q9-5 The fair value of the net assets of the subsidiary is computed by deducting the fair value of the subsidiary's liabilities from the fair value of its assets When the subsidiary has preferred stock outstanding, the claims of the preferred shareholders, including dividends in arrears and participation rights held by preferred shareholders, must be taken into consideration in determining the fair value of net assets available to common shareholders These items, when deducted from the fair value of the identifiable assets of the acquired company, will reduce the amount of net assets assigned to common stock and potentially increase the amount reported as goodwill 9-1 Chapter 09 - Consolidation Ownership Issues Q9-6 The parent may record the difference between the carrying value and the sale price of the shares as either a gain on sale of investment or an adjustment to its additional paid-in capital No gain or loss on the sale of subsidiary shares should be reported in the consolidated statements If the parent records a gain on the sale, it should be eliminated in the consolidation process and treated as a part of additional paid-in capital of the consolidated entity Q9-7 All common shareholders should share equally in the net assets of a company When a subsidiary sells additional shares to a nonaffiliate at a price in excess of existing book value, the effect will be to increase the net book value of all shareholders Because it is a capital transaction, no gain or loss is recognized on the sale Q9-8 Each purchase of additional shares should be examined to determine the difference between the price paid and underlying book value When an amount greater than book value is paid directly to the subsidiary for the shares, the book value of the shares held by the noncontrolling interest will increase As a result, the increase in the parent’s claim on the net assets of the subsidiary will be less than the amount paid When consolidated statements are prepared, additional paid-in capital or retained earnings (if the parent has no additional paid-in capital) must be debited for the increase in the balance assigned to the noncontrolling interest, thereby reducing the amount reported in the consolidated balance sheet Q9-9 All the shares of the subsidiary are eliminated in preparing the consolidated statements Thus, treasury shares reported by the subsidiary are eliminated in the consolidation workpaper The effect of the retirement on the consolidated statements depends on the price paid and whether the shares were purchased from the parent or from a nonaffiliate Q9-10 Indirect ownership is a general term used whenever one company owns shares of another company and that company holds ownership in a third company Indirect control occurs when a majority of the shares of a particular company are held by one or more companies that are, in turn, under the control of another company By exercising its control over those companies the parent can exercise control of the company indirectly owned Q9-11 A reciprocal relationship exists if Subsidiary A and Subsidiary B hold ownership in each other If Subsidiary A records investment income based on the reported net income of Subsidiary B and Subsidiary B records investment income based on the reported net income of Subsidiary A, the sum of the reported net income totals for the two companies may be substantially greater than the sum of the reported operating income totals for the two companies Parent company net income will be overstated if the impact of the reciprocal relationship is ignored when the parent company records investment income on its ownership in the two subsidiaries Q9-12 Under the treasury stock method the parent company shares that have been purchased by a subsidiary are reported as treasury stock in the consolidated balance sheet The carrying value of the shares is the amount paid by the subsidiary when they were purchased 9-2 Chapter 09 - Consolidation Ownership Issues Q9-13 Consolidated net income will be reduced by $100,000 Income assigned to the controlling interest will be reduced by $72,000 ($100,000 x 90 x 80) when the unrealized profit of Tiny Corporation is eliminated A total of $10,000 is treated as a reduction to the income assigned to noncontrolling shareholders of Tiny Corporation ($100,000 x 10) and $18,000 is a reduction of the income assigned to noncontrolling shareholders of Subsidiary Company ($100,000 x 90 x 20) Q9-14 All three companies should be included in the consolidated financial statements Slide Company should be consolidated with Bit Company because Bit holds majority ownership of Slide Bit Company, in turn, should be consolidated with Snapper Corporation because Snapper holds majority ownership of Bit Q9-15 A subsidiary's stock dividend results in the capitalization of some portion of its retained earnings Such an action will have no effect on the consolidated financial statements since the entire stockholders' equity section of the subsidiary is eliminated in preparing the consolidation workpaper Q9-16 A 15 percent stock dividend is a small stock dividend and must be recorded by capitalizing retained earnings equal to the market price per share of the stock times the number of shares actually issued As a result, retained earnings will decrease and the par value of stock outstanding and additional paid-in capital will increase on the subsidiary's books There should be no change in the investment account balance reported by the parent Thus, the only change in the eliminating entries is the relative amount debited to each of the three individual stockholders' equity accounts of the subsidiary Q9-17 When the parent or other affiliates own all the shares of all companies included in the consolidation, the order in which the consolidation is completed may not be particularly critical On the other hand, when less than 100 percent ownership is held there is a much greater chance of error in apportioning unrealized profits or other adjustments between noncontrolling ownership and consolidated net income when some other sequence is used By starting the consolidation with the company furthest away from the parent, the computation of income assigned to noncontrolling interest at each level can be most easily accomplished 9-3 Chapter 09 - Consolidation Ownership Issues SOLUTIONS TO CASES C9-1 Effect of Subsidiary Preferred Stock When a parent company does not own all the shares of a subsidiary, income assigned to the noncontrolling interest includes (1) a portion of subsidiary preferred dividends and (2) a portion of earnings available to common shareholders To determine the amount of income to assign to preferred and common shareholders of the subsidiary, the controller needs to have the following information about the preferred stock: The number of preferred shares outstanding and the number owned by the parent and other affiliates The annual preferred dividend rate per share and whether the dividends are cumulative or noncumulative If the dividends are noncumulative, the amount of preferred dividends declared during the period, if any In this particular case the parent does not appear to own any of the subsidiary's preferred shares Once the controller determines the portion of subsidiary income assignable to common shareholders, consolidated net income attributable to the controlling interest is computed by adding the parent's pro rata share of this amount to the parent's income from its own operations C9-2 Consolidated Stockholders’ Equity: Theory vs Practice a Upon the sale of stock of a subsidiary, Xerox used to recognize a gain or loss in the consolidated income statement equal to the company’s proportionate share of the corresponding increase or decrease in that subsidiary’s equity Under FASB 160, the sale of subsidiary shares is viewed as an equity transaction and does not affect income Instead, the difference between the fair value of the consideration received and the change in the amount of the noncontrolling interest is recognized as an adjustment to stockholders’ equity (usually additional paid-in capital) b Occidental Petroleum has generally treated subsidiary preferred stock as a liability (the amount is small) It should be reported as part of the noncontrolling interest 9-4 Chapter 09 - Consolidation Ownership Issues C9-3 Sale of Subsidiary Shares MEMO To: Robert Reader Vice President of Finance Book Corporation From: Re: , CPA Recognition of Gain on Sale of Subsidiary Shares Previous accounting standards did not specifically address the issue of how to treat a sale of subsidiary shares when the parent retained controlling ownership However, a common practice was to recognize a gain or loss on the sale of shares The FASB’s recent issuance of FASB 160 makes clear that, from a consolidated perspective, a parent’s sale of subsidiary shares while maintaining control is an equity transaction Accordingly, no gain or loss on the sale should be reported in the consolidated income statement Instead, equity should be adjusted by the difference between the consideration received and the change in the parent’s subsidiary interest In the current situation, Book’s interest in Lance prior to its sale of Lance shares was $360,000, an amount equal to 90 percent of Lance’s $400,000 book value Immediately following the sale of Lance shares, Book’s remaining 60 percent interest in Lance is $240,000 ($400,000 x 60), a decrease of $120,000 ($360,000 - $240,000) The difference between the proceeds received and the change in the book value of Book’s interest in Lance is as follows: Proceeds received ($5.60 x 30,000 shares) Change in book value of interest ($360,000 - $240,000) Required adjustment to equity $168,000 120,000 $ 48,000 This $48,000 difference should be reported within equity in the consolidated balance sheet Although alternatives exist in terms of how to meet the FASB’s reporting requirement, the following entry to record the sale of shares on Book’s books would be consistent with the FASB’s requirement and probably the most efficient approach: Cash Investment in Lance Company Stock Additional Paid-In Capital 168,000 120,000 48,000 The additional paid-in capital recorded on Book’s books would carry over to the consolidated balance sheet and would be included in consolidated equity If Book elected to record a $48,000 gain on the sale of Lance shares instead of recognizing additional paid-in capital as shown in the entry, that gain would have to be transferred to additional paid-in capital in the preparation of consolidated financial statements Primary citation: FASB 160 ARB 51 (as amended by FASB 160), Par 33 9-5 Chapter 09 - Consolidation Ownership Issues 9-6 Chapter 09 - Consolidation Ownership Issues C9-4 Sale of Subsidiary Shares (a) With a sale of shares to a nonaffiliate, net resources have been brought into the consolidated entity and the noncontrolling shareholders have an additional claim The excess of the proceeds received from the sale over the change in the parent’s interest in the subsidiary increases the amount of additional paid-in capital reported in the consolidated balance sheet A sale of subsidiary shares to a nonaffiliate also changes the amount of income assigned to the noncontrolling interest in the consolidated income statement and the amount of net assets assigned to the noncontrolling interest in the consolidated balance sheet (b) When a parent sells shares of one subsidiary to another subsidiary, net resources to the consolidated entity not change Any gain recorded by the parent must be eliminated when the investment balance reported by the subsidiary is eliminated in preparing consolidated financial statements A change in the claim of the noncontrolling interest is likely to occur if the subsidiary that purchases the shares is not wholly owned As a result, there may be some change in consolidated income and the balance sheet totals assigned to noncontrolling interest C9-5 Reciprocal Ownership A great many factors beyond the immediate impact on reported earnings may be important in deciding on the use of the funds Items such as the following should be considered: Are the excess funds held by Thorson available only temporarily or are they not likely to be needed in the foreseeable future? Will there be any regulatory or taxation problems associated with one or more of the alternatives? Can shares of the companies be purchased in the desired quantities and at existing market prices or are there potential difficulties associated with one or more alternatives? Is it desirable to acquire more shares of either subsidiary since controlling ownership already is in the hands of Strong Manufacturing? Have the noncontrolling shareholders of either subsidiary been troublesome or caused the parent to refrain from actions that it might otherwise have taken? With the information given, it is difficult to determine which action will have the most favorable impact on consolidated net income The earnings of each company, the number of shares outstanding, and the relative market prices of the shares each will have an effect In general, reported income is maximized by purchasing the shares with the lowest priceearnings ratio 9-7 Chapter 09 - Consolidation Ownership Issues SOLUTIONS TO EXERCISES E9-1 Multiple-Choice Questions on Preferred Stock Ownership d $50,000 = $20,000 + $30,000 c $29,000 = $20,000 + 30($30,000) b Only the retained earnings of the acquiring company is included a The portion held by the parent is eliminated when the preferred investment is eliminated, and the portion held by nonaffiliates is eliminated and included with the balance reported as noncontrolling interest in the consolidated balance sheet E9-2 Multiple-Choice Questions on Multilevel Ownership b $188,000 = $100,000 + 80[$80,000 + 60($50,000)] b $20,000 = 40($50,000) c $22,000 = 20[$80,000 + 60($50,000)] c $42,000 = 40($50,000) + 20[$80,000 + 60($50,000)] b $2,400 = 80 x 60[($150,000 + $100,000 - $200,000) / 10 years) E9-3 Acquisition of Preferred Shares Eliminating entries: E(1) E(2) Common Stock — Separate Company Retained Earnings Investment in Separate Company Common Stock Noncontrolling Interest Eliminate investment in common stock 50,000 150,000 Preferred Stock — Separate Company Investment in Separate Company Preferred Stock Noncontrolling Interest Eliminate subsidiary preferred stock 100,000 9-8 140,000 60,000 60,000 40,000 Chapter 09 - Consolidation Ownership Issues E9-4 Reciprocal Ownership [AICPA Adapted] a None of Simba's dividends is reported in the consolidated statements All of Simba's dividends are eliminated in the consolidation process b Only 90 percent of Pride's dividends are included in the consolidated retained earnings statement The dividend payment on the 10 percent owned by Simba is an intercorporate payment to an affiliate and must be eliminated in the consolidation process E9-5 Subsidiary with Preferred Stock Outstanding Eliminating entries: E(1) E(2) Common Stock — Topple Company Retained Earnings Investment in Topple Common Stock Noncontrolling Interest Eliminate investment in common stock 150,000 210,000 Preferred Stock — Topple Company Investment in Topple Preferred Stock Noncontrolling Interest Eliminate subsidiary preferred stock 200,000 270,000 90,000 80,000 120,000 E9-6 Subsidiary with Preferred Stock Outstanding a Entries recorded by Clayton Corporation: (1) Investment in Topple Common Stock Investment in Topple Preferred Stock Cash Record purchase of Topple stock 270,000 80,000 (2) Cash Investment in Topple Common Stock Record dividends from Topple: $25,500 = ($50,000 - $16,000) x 75 (3) Cash Dividend Income Record dividends on preferred stock from Topple: $16,000 x 40 6,400 (4) Investment in Topple Common Stock Income from Subsidiary Record equity-method income: $40,500 = ($70,000 - $16,000) x 75 40,500 9-9 25,500 350,000 25,500 6,400 40,500 Chapter 09 - Consolidation Ownership Issues E9-6 (continued) b Eliminating entries: E(1) Income from Subsidiary Dividends Declared — Common Stock Investment in Topple Common Stock Eliminate income from subsidiary E(2) Dividend Income — Preferred Dividends Declared — Preferred Eliminate dividend income from subsidiary preferred E(3) Income to Noncontrolling Interest Dividends Declared — Preferred Stock Dividends Declared — Common Stock Noncontrolling Interest Assign income to noncontrolling interest: $23,100 = [($70,000 - $16,000) x 25] + ($16,000 x 60) $9,600 = $16,000 x 60 $8,500 = ($50,000 - $16,000) x 25 $5,000 = $13,500 - $8,500 23,100 E(4) Common Stock — Topple Company Retained Earnings, January Investment in Topple Common Stock Noncontrolling Interest Eliminate beginning investment balance 150,000 210,000 Preferred Stock — Topple Company Investment in Topple Preferred Stock Noncontrolling Interest Eliminate subsidiary preferred stock 200,000 E(5) 9-10 40,500 6,400 25,500 15,000 6,400 9,600 8,500 5,000 270,000 90,000 80,000 120,000 Chapter 09 - Consolidation Ownership Issues P9-20 Subsidiary Preferred Stock Outstanding a b Eliminating entries, January 1, 20X5: Preferred Stock — Pert Company Retained Earnings Investment in Pert Preferred Stock Noncontrolling Interest Eliminate preferred stock: $32,000 = ($200,000 x 08) x years 200,000 32,000 Common Stock — Pert Company Retained Earnings Investment in Pert Common Stock Noncontrolling Interest Eliminate common stock: $168,000 = $200,000 - $32,000 150,000 168,000 Consolidated net income and income to controlling interest: Operating income of Emerald Corporation Net income of Pert Consolidated net income Income to noncontrolling interest: Income from preferred stock of Pert Company ($16,000 x 60) Income from common stock of Pert Company [($34,000 - $16,000) x 30] Income to noncontrolling interest Income to controlling interest Alternate computation of income to controlling interest Operating income of Emerald Corporation Income from preferred stock of Pert Company ($16,000 x 40) Income from common stock of Pert Company [($34,000 - $16,000) x 70] Income to controlling interest 9-29 92,800 139,200 222,600 95,400 $ 80,000 34,000 $114,000 $ 9,600 5,400 (15,000) $ 99,000 $80,000 6,400 12,600 $99,000 Chapter 09 - Consolidation Ownership Issues P9-21 Ownership of Subsidiary Preferred Stock a Preferred stockholders' claim on net assets of Jacobs: Liquidation value of preferred stock ($101 per share) 20X6 dividends in arrears ($200,000 x 10) Total preferred stockholder claim, December 31, 20X6 b Book value of Jacobs common shares acquired by Presley: Total Jacobs stockholders' equity, December 31, 20X6 Claim of preferred stockholders Book value of Jacobs common stock Portion acquired by Presley Book value of common shares acquired by Presley c $1,800,000 1,200,000 $3,000,000 (2,933,000) $ 67,000 Income to noncontrolling interest, 20X7: Jacobs net income Less: impairment of goodwill Less: 20X7 preferred dividends ($200,000 x 10) Income accruing to common shareholders Noncontrolling common shareholders' interest Income to noncontrolling common shareholders Preferred dividends to noncontrolling shareholders ($20,000 x 80) Total income to noncontrolling shareholders e $3,155,000 (222,000) $2,933,000 x 60 $1,759,800 Goodwill associated with acquisition of common shares: Consideration given by Presley to acquire shares Fair value of noncontrolling interest in common shares Total fair value Book value of common shares Goodwill d $202,000 20,000 $222,000 $280,000 (26,000) (20,000) $234,000 x 40 $ 93,600 16,000 $109,600 Presley's income from investment in subsidiary common stock: Jacobs net income Less: 20X7 preferred dividends ($200,000 x 10) Income accruing to common shareholders Presley's proportionate share Presley's share of income to common shareholders Note: Basic equity method does not include adjustment for Impairment of goodwill 9-30 $280,000 (20,000) $260,000 x 60 $156,000 Chapter 09 - Consolidation Ownership Issues P9-21 (continued) f Noncontrolling interest, December 31, 20X7: Total amount assigned to noncontrolling interest: Noncontrolling interest - common Noncontrolling interest - preferred Total noncontrolling interest $1,289,600 161,600 $1,451,200 Assigned to noncontrolling interest - common Jacobs stockholders' equity, January 1, 20X7 20X7 net income Less: Preferred dividends Less: Common dividends Total Jacobs stockholders' equity, December 31, 20X7 Claim of preferred stockholders Book value of Jacobs' common stock Unimpaired goodwill at December 31, 20X7 ($67,000 - $26,000) Total basis for common shareholders Noncontrolling stockholders' interest Noncontrolling interest — common $3,155,000 280,000 (40,000) (10,000) $3,385,000 (202,000) $3,183,000 41,000 $3,224,000 x 40 $1,289,600 Assigned to noncontrolling interest - preferred Total Jacobs preferred stockholders' equity, January 1, 20X7 Less: Dividends in arrears paid during 20X7 Jacobs preferred stockholders' equity, December 31, 20X7 Noncontrolling stockholders' interest Noncontrolling interest — preferred 9-31 $222,000 (20,000) $202,000 x 80 $161,600 Chapter 09 - Consolidation Ownership Issues P9-21 (continued) g Eliminating entries: E(1) Income from Subsidiary Dividends Declared — Common Investment in Jacobs Common Stock Eliminate income from subsidiary E(2) Dividend Income — Preferred Dividends Declared — Preferred Eliminate dividend income from subsidiary preferred stock: $40,000 x 20 E(3) Income to Noncontrolling Interest Dividends Declared — Common Dividends Declared — Preferred Noncontrolling Interest Assign income to noncontrolling interest: $4,000 = $10,000 x 40 $32,000 = $40,000 x 80 E(4) Common Stock — Jacobs Jacuzzi Additional Paid-In Capital — Common Premium on Preferred Stock Retained Earnings, January Goodwill Investment in Jacobs Common Stock Noncontrolling Interest Eliminate beginning investment in common stock: $3,000 = $5,000 - $2,000 $1,630,000 = $1,650,000 - $20,000 156,000 8,000 109,600 500,000 800,000 3,000 * 1,630,000 ** 67,000 *Portion accruing to common shareholders **Portion accruing to common shareholders after deducting preferred dividends in arrears 9-32 6,000 150,000 8,000 4,000 32,000 73,600 1,800,000 1,200,000 Chapter 09 - Consolidation Ownership Issues P9-21 (continued) E(5) Goodwill Impairment Loss Goodwill Recognize goodwill impairment loss E(6) Preferred Stock — Jacobs Jacuzzi Premium on Preferred Stock Retained Earnings, January Investment in Jacobs Preferred Stock Additional Paid-In Capital — Retirement of Preferred Stock Noncontrolling Interest Eliminate subsidiary preferred stock: $2,000 = $5,000 - $3,000 $20,000 = $200,000 x 10 $2,400 = ($222,000 x 20) - $42,000 $177,600 = $222,000 x 26,000 200,000 2,000 * 20,000 ** 26,000 42,000 2,400 177,600 *Portion representing call premium **Portion relating to preferred dividends in arrears P9-22 Consolidation Workpaper with Subsidiary Preferred Stock a Eliminating entries: E(1) Income from Subsidiary Dividends Declared — Common Stock Investment in White Common Stock 58,500 E(2) Dividend Income Dividends Declared — Preferred Stock 9,000 E(3) Income to Noncontrolling Interest Dividends Declared — Preferred Stock Dividends Declared — Common Stock Noncontrolling Interest 12,500 E(4) Common Stock — White Corporation Retained Earnings, January Investment in White Common Stock Noncontrolling Interest 100,000 250,000 E(5) Preferred Stock — White Corporation Investment in White Preferred Stock Noncontrolling Interest 200,000 E(6) Dividends Payable Dividends Receivable 9,000 9-33 9,000 49,500 9,000 6,000 1,000 5,500 315,000 35,000 120,000 80,000 9,000 Chapter 09 - Consolidation Ownership Issues P9-22 (continued) b Brown Company and White Corporation Consolidation Workpaper December 31, 20X6 Brown Item Sales Dividend Income Income from Subsidiary Credits Cost of Goods Sold Deprec and Amort Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Retained Earnings, Jan Income, from above Dividends Declared Preferred Stock Common Stock Ret Earnings, Dec 31, carry forward Cash Accounts Receivable Dividends Receivable Inventory Bldgs and Equip (net) Investment in White Corp.: Preferred Stock Common Stock Debits Accounts Payable Dividends Payable Bonds Payable Preferred Stock Common Stock Ret Earnings, from above Noncontrolling Interest Credits Company White Corporatio n 500,000 300,000 9,000 58,500 567,500 300,000 280,000 170,000 40,000 30,000 131,000 20,000 (451,000) (220,000) 116,500 80,000 435,000 116,500 551,500 250,000 80,000 330,000 Eliminations Debit (10,000) 491,500 305,000 58,000 80,000 9,000 100,000 360,000 100,000 120,000 100,000 70,000 15,000 300,000 800,000 450,000 70,000 151,000 (671,000) 129,000 (4) 250,000 80,000 435,000 116,500 551,500 (2) (3) (1) (3) 330,000 (6) 9,000 6,000 9,000 1,000 (60,000) 25,000 491,500 9,000 (5) 120,000 (1) 49,500 (4) 315,000 (6) 200,000 100,000 305,000 (5) 200,000 (4) 100,000 330,000 1,091,500 690,000 639,000 158,000 200,000 300,000 630,000 1,288,000 170,000 6,000 300,000 9,000 200,000 491,500 9-34 800,000 (12,500) 116,500 120,000 364,500 690,000 idated (3) 12,500 80,000 200,000 270,000 1,091,500 Credit (2) 9,000 (1) 58,500 (15,000) (60,000) Consol- 25,000 (3) 5,500 (4) 35,000 (5) 80,000 639,000 200,000 491,500 120,500 1,288,000 Chapter 09 - Consolidation Ownership Issues P9-23 Subsidiary Stock Transactions a (1) (2) Book value of Beta Company stock outstanding Cost of treasury shares repurchased Book value of remaining shares outstanding Proportion of remaining shares held by noncontrolling Interest (1,500 / 9,000) Adjusted book value of shares held Book value of shares held before treasury stock repurchase by Beta Company ($500,000 x 25) Reduction of noncontrolling interest Consideration given by Beta Company Decrease in equity attributable to parent b Income from Subsidiary Investment in Beta Company Stock $45,000 x 833 E(2) Income to Noncontrolling Interest Noncontrolling Interest $45,000 x 167 E(3) Common Stock — Beta Company Additional Paid-In Capital Retained Earnings, January Treasury Stock Investment in Beta Company Stock Noncontrolling Interest (2) (125,000) $ 53,000 (68,000) $ (15,000) 15,000 15,000 Eliminating entries: E(1) (1) x 1667 $ 72,000 Journal entry recorded by Apex Corporation: Retained Earnings Investment in Beta Company Stock (3) $500,000 (68,000) $432,000 37,500 37,500 7,500 100,000 80,000 320,000 Book value of Beta Company stock outstanding Cost of treasury shares repurchased Book value of remaining shares outstanding Proportion of remaining shares held by noncontrolling Interest (2,500 / 9,000) Adjusted book value of shares held by noncontrolling Interest Book value of shares held before treasury stock repurchase by Beta Company ($500,000 x 25) Increase in equity attributable to parent 7,500 68,000 360,000 72,000 $500,000 (68,000) $432,000 x 2778 $120,000 (125,000) $ 5,000 Journal entry recorded by Apex Corporation: Cash Investment in Beta Company Stock Additional Paid-In Capital 9-35 68,000 63,000 5,000 Chapter 09 - Consolidation Ownership Issues P9-23 (continued) (3) Eliminating entries: E(1) Income from Subsidiary Investment in Beta Company Stock $45,000 x 722 32,500 E(2) Income to Noncontrolling Interest Noncontrolling Interest $45,000 x 278 12,500 E(3) Common Stock — Beta Company Additional Paid-In Capital Retained Earnings, January Treasury Stock Investment in Beta Company Stock Noncontrolling Interest 100,000 80,000 320,000 32,500 12,500 68,000 312,000 120,000 P9-24 Sale of Subsidiary Shares a Eliminating entries: E(1) Gain on Sale of ENC Company Stock Additional Paid-In Capital Eliminate gain on sale of ENC shares: $60,000 - ($250,000 x 20) 10,000 E(2) Income from Subsidiary Dividends Declared Investment in ENC Company Stock Eliminate income from subsidiary: $18,000 = 60($170,000 - $140,000) 18,000 E(3) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $12,000 = 40($170,000 - $140,000) 12,000 E(4) Common Stock — ENC Company Additional Paid-In Capital Retained Earnings, January Investment in ENC Company Stock Noncontrolling Interest Eliminate investment in common stock 9-36 100,000 20,000 130,000 10,000 6,000 12,000 4,000 8,000 150,000 100,000 Chapter 09 - Consolidation Ownership Issues P9-24 (continued) b Penn Corporation and ENC Company Consolidation Workpaper December 31, 20X4 Item Sales Gain on Sale of ENC Company Stock Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense Other Expenses Debits Consolidated net income Income to Noncontrolling Interest Income, carry forward Penn Corp 280,000 ENC Company 170,000 10,000 18,000 _ 308,000 170,000 210,000 100,000 20,000 15,000 21,000 25,000 (251,000) (140,000) 320,000 47,000 367,000 362,000 150,000 170,000 30,000 70,000 120,000 35,000 50,000 100,000 65,000 120,000 220,000 650,000 230,000 880,000 Ret Earnings, Dec 31, carry forward Credits 450,000 310,000 35,000 46,000 (391,000) 59,000 (4)130,000 40,000 Dividends Declared Accum Depreciation Accounts Payable Bonds Payable Common Stock Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest (1) 10,000 (2) 18,000 130,000 30,000 160,000 (10,000) 320,000 57,000 377,000 (15,000) Debits 450,000 (12,000) 47,000 30,000 Cash Accounts Receivable Inventory Buildings and Equipment Investment in ENC Company Stock Consolidated (3) 12,000 40,000 57,000 Retained Earnings, January Income, from above Eliminations Debit Credit (2) (3) 162,000 6,000 4,000 10,000 (2) 12,000 (4) 150,000 (15,000) 352,000 1,032,000 415,000 170,000 50,000 200,000 200,000 95,000 20,000 30,000 100,000 (4)100,000 50,000 20,000 (4) 20,000 (1) 10,000 60,000 362,000 150,000 170,000 352,000 1,032,000 415,000 290,000 10,000 (3) 8,000 (4)100,000 290,000 9-37 1,285,000 265,000 70,000 230,000 200,000 108,000 1,285,000 Chapter 09 - Consolidation Ownership Issues P9-25 Sale of Shares by Subsidiary to Nonaffiliate a E(1) Common Stock — Delta Corporation 240,000 Additional Paid-In Capital 190,000 Retained Earnings 350,000 Investment in Delta Corporation Stock Noncontrolling Interest Eliminate investment in common stock: $240,000 = $200,000 + ($10 x 4,000 shares) $190,000 = $50,000 + [($45 - $10) x 4,000 shares] $520,000 = $780,000 x (16,000 shares / 24,000 shares) $260,000 = $780,000 x (8,000 shares / 24,000 shares) 520,000 260,000 Journal entry recorded by Craft Corporation: Investment in Delta Corporation Stock Additional Paid-In Capital Book value of shares held by Craft: After sale $780,000 x (16,000 / 24,000) Before sale $600,000 x (16,000 / 20,000) Increase in book value b 40,000 40,000 $520,000 (480,000) $ 40,000 Craft Corporation and Delta Corporation Consolidated Balance Sheet Workpaper January 1, 20X3 Item Cash Accounts Receivable Inventory Buildings & Equipment Investment in Delta Corporation Total Debits Accumulated Depreciation Accounts Payable Taxes Payable Mortgages Payable Common Stock Additional Paid-In Capital Retained Earnings, Noncontrolling Interest Total Credits Craft Corp Delta Corp 50,000 90,000 180,000 700,000 230,000 120,000 200,000 600,000 Eliminations Debit Credit 280,000 210,000 380,000 1,300,000 520,000 1,540,000 1,150,000 200,000 70,000 Consolidated (1)520,000 240,000 (1)240,000 420,000 140,000 80,000 250,000 300,000 190,000 350,000 (1)190,000 (1)350,000 220,000 500,000 1,540,000 1,150,000 780,000 250,000 300,000 220,000 500,000 220,000 70,000 80,000 2,170,000 9-38 (1)260,000 780,000 260,000 2,170,000 Chapter 09 - Consolidation Ownership Issues 9-39 Chapter 09 - Consolidation Ownership Issues P9-25 (continued) c Craft Corporation and Subsidiary Consolidated Balance Sheet January 1, 20X3 Current Assets: Cash Accounts Receivable Inventory Noncurrent Assets: Buildings and Equipment Less: Accumulated Depreciation Total Assets $ 280,000 210,000 380,000 $1,300,000 (420,000) Current Liabilities: Accounts Payable Taxes Payable Mortgages Payable Stockholders’ Equity: Controlling Interest: Common Stock Additional Paid-In Capital Retained Earnings Total Controlling Interest Noncontrolling Interest Total Stockholders’ Equity Total Liabilities and Stockholders' Equity $ 140,000 80,000 $ 300,000 220,000 500,000 $1,020,000 260,000 9-40 $ 870,000 880,000 $1,750,000 $ 220,000 250,000 1,280,000 $1,750,000 Chapter 09 - Consolidation Ownership Issues P9-26 Sale of Additional Shares to Parent a Eliminating entry: E(1) Common Stock — Tin Corporation Additional Paid-In Capital Retained Earnings Investment in Tin Corporation Noncontrolling Interest Eliminate investment balance: $125,000 = $100,000 + (2,500 x $10) $187,500 = computed below Computation of debit to Additional Paid-In Capital Balance reported by Tin Corporation prior to sale of additional shares Increase in paid-in capital from sale of shares [$150,000 – (2,500 x $10)] Noncontrolling interest after sale of shares ($500,000 x 20) Noncontrolling interest before sale of shares ($350,000 x 25) Increase in book value of noncontrolling interest Debit to additional paid-in capital 125,000 187,500 200,000 412,500 100,000 $ 50,000 125,000 $100,000 (87,500) 12,500 $187,500 Journal entry recorded by Tin Corporation: Cash Common Stock Additional Paid-In Capital 150,000 25,000 125,000 Journal entry recorded by Lane Manufacturing: Investment in Tin Corporation Stock Cash 9-41 150,000 150,000 Chapter 09 - Consolidation Ownership Issues P9-26 (continued) b Lane Manufacturing Company and Tin Corporation Consolidation Workpaper January 2, 20X1 Item Cash Accounts Receivable Inventory Buildings and Equipment Investment in Tin Corporation Stock Debits Accum Depreciation Accounts Payable Bonds Payable Common Stock Additional Paid-In Capital Retained Earnings, Noncontrolling Interest Total Credits Lane Corp Tin Corp Eliminations Debit Credit Consolidated 77,500 60,000 100,000 210,000 100,000 180,000 287,500 160,000 280,000 600,000 600,000 1,200,000 412,500 1,250,000 1,090,000 (1)412,500 1,927,500 150,000 50,000 400,000 200,000 240,000 50,000 300,000 125,000 (1)125,000 390,000 100,000 700,000 200,000 50,000 400,000 175,000 200,000 (1)187,500 (1)200,000 37,500 400,000 1,250,000 1,090,000 512,500 9-42 (1)100,000 512,500 100,000 1,927,500 Chapter 09 - Consolidation Ownership Issues P9-27 Complex Ownership Structure The overall ownership structure can be diagrammed as follows: Consolidated net income of $98,800 First is reported: Boston Operating income of First Boston Operating income of Gulfside Operating income of.80 Paddock Total earnings available Income to noncontrolling interests: Paddock 40[$50,000 + 10($30,000)] Gulfside Gulfside 20[$34,000 + 60($10,000)] 60 Consolidated net income 9-43 $ 44,000 34,000 50,000 $128,000 10 $21,200 Paddoc 8,000 k (29,200) $ 98,800 ... entity not change Any gain recorded by the parent must be eliminated when the investment balance reported by the subsidiary is eliminated in preparing consolidated financial statements A change in... Subsidiary Shares by Parent a Investment in Acme Concrete, January 1, 20X5: Purchase price Acme net income in 20X3 and 20X4 Dividends paid by Acme in 20X3 and 20X4 Proportion of stock held by Stable... Ownership Issues Q9-13 Consolidated net income will be reduced by $100,000 Income assigned to the controlling interest will be reduced by $72,000 ($100,000 x 90 x 80) when the unrealized profit of