Professional Documents
Culture Documents
com
CHAPTER 4
CONSOLIDATED FINANCIAL STATEMENTS
AND OUTSIDE OWNERSHIP
Chapter Outline
I. Outside ownership may be present within any business combination
A. Complete ownership of a subsidiary is not a prerequisite for consolidationonly
enough voting shares need be owned so that the acquiring company has the ability
to control the decision-making process of the acquired company
B. Any ownership retained in a subsidiary corporation by a party unrelated to the
acquiring company is termed a noncontrolling interest
II. Valuation of subsidiary assets and liabilities poses a problem when a noncontrolling
interest is present follows the acquisition method (Economic Unit Concept) SFAS 141R
and SFAS 160
1. The accounting emphasis is placed on the entire entity that results from the
business combination as measured by the sum of the acquisition-date fair values
of the controlling and noncontrolling interests.
2. Valuation of subsidiary accounts is based on the acquisition-date fair value of the
company (frequently determined by the consideration transferred and the fair
value of the noncontrolling interest); specific subsidiary assets and liabilities are
consolidated at their fair values
3. The noncontrolling interest balance is reported as a component of stockholders'
equity
4. The end of year noncontrolling interest total is the summation of the three items
above and is reported (in this book) between consolidated liabilities and
stockholders' equity
Learning Objectives
Upon completion of Chapter Four, "Consolidated Financial Statements and Outside
Ownership," students should be able to fulfill each of the following learning objectives:
1. Realize that complete ownership is not a prerequisite for the formation of a business
combination.
2. Understand the meaning of the term "noncontrolling interest.
3. Explain the rationale underlying the acquisition method for accounting for the
noncontrolling interest.
4. Identify appropriate balance sheet placements for the components of the noncontrolling
interest in consolidated financial statements.
5. Identify and calculate the four noncontrolling interest figures that must be included within
the consolidation process and be able to enter each balance on a consolidation
worksheet.
Answers to Questions
1. "Noncontrolling interest" refers to an equity interest that is held in a member of a
business combination by an unrelated (outside) party.
3. A control premium is the portion of an acquisition price (above currently traded market
values) paid by a parent company to induce shareholders to sell a sufficient number of
shares to obtain control. The extra payment typically becomes part of the goodwill
acquired in the acquisition attributable to the parent company.
6. Allsports should remove the pre-acquisition revenues and expenses from the
consolidated totals. These amounts have been earned (incurred) prior to ownership by
Allsports and therefore should not be reported as earnings for the current parent
company owners.
7. In previous years, Tree has appropriately utilized the market-value method in accounting
for its investment in Limb. Now, following a second acquisition, consolidation has
become applicable. These two methods are not considered to be comparable.
Therefore, at the point in time that Tree begins to produce consolidated statements, all
previous financial reports must be restated as if the equity method had been applied
since the date of the first acquisition. This handling presents the reader of the financial
statements with figures that are more comparable from year to year.
9. Unless control is surrendered, the acquisition method views the sale of subsidiary's
stock as a treasury stock transaction. Thus, no gain or loss can be recognized.
10. The accounting method choice for the remaining shares depends upon the current
relationship between the two firms. If Duke retains control, consolidation is still required.
However, if the parent now can only significantly influence the decision-making process,
the equity method is applied. A third possibility is Duke may have lost the power to
exercise even significant influence. The market-value method then is appropriate.
Answers to Problems
-OR-
7. C
8. B
10. C
17. B Add the two book values and include 10% (the $6,000 current portion) of
the loan taken out by Park to acquire Strand.
18. B Add the two book values and include 90% (the $54,000 noncurrent portion)
of the loan taken out by Polk to acquire Strand.
2009 2010
Harrison income ............................................................ $220,000 $260,000
Starr income .................................................................. 70,000 90,000
Excess fair value amortization ..................................... (8,000) (8,000)
Consolidated net income .............................................. $282,000 $342,000
21. (40 minutes) (Several valuation and income determination questions for a
business combination involving a noncontrolling interest.)
To noncontrolling interest:
Sorianos revenues ........................................................................ $1,400,000
Sorianos expenses ........................................................................ (600,000)
Total excess amortization expenses (above) ............................... (435,000)
Sorianos adjusted net income...................................................... $365,000
Noncontrolling interest percentage ownership ........................... 20%
Noncontrolling interest share of consolidated net income ......... $73,000
To controlling interest:
Consolidated net income ............................................................... $1,615,000
Noncontrolling interest share of consolidated net income ......... (73,000)
Controlling interest share of consolidated net income ............... $1,542,000
-OR-
The acquisition method requires that the subsidiary assets acquired and
liabilities assumed be recognized at their acquisition date fair values
regardless of the assessed fair value. Therefore, none of Sorianos identifiable
assets and liabilities would change as a result of the assessed fair value.
When a bargain purchase occurs, however, no goodwill is recognized.
26. (35 Minutes) (Consolidation entries and the effect of different investment
methods)
a. From the original fair value allocation, $30,000 is assigned based on the
fair value of the patent. With a 5-year life, excess amortization will be
$6,000 per year.
Because the equity method is in use, no Entry *C is required.
Entry S
Common Stock (Bandmor) ........................... 300,000
Retained Earnings, 1/1/11(Bandmor) ............ 268,000
Investment in Bandmor (70%) ................. 397,600
Noncontrolling Interest in Bandmor, 1/1/11 170,400
(To eliminate stockholders' equity accounts of subsidiary and
recognize outside ownership. Retained earnings figure includes 2009
and 2010 income and dividends.)
Entry A
Patent ............................................................. 18,000
Goodwill ......................................................... 190,000
Investment in Bandmor ............................ 145,600
Noncontrolling Interest in Bandmor (30%) 62,400
(To recognize unamortized portions of acquisition-date fair value
allocations. Patent has undergone two years amortization)
Entry I
Equity in Subsidiary Earnings ...................... 72,800
Investment in Bandmor ............................ 72,800
(To eliminate intercompany income balance. Equity accrual of
$72,800 [70% ($110,000 6,000 amortization)] has been recorded)
Entry D
Investment in Bandmor ................................. 42,000
Dividends Paid .......................................... 42,000
(To eliminate current intercompany dividend transfers70% of
$60,000)
Entry E
Amortization Expense .................................... 6,000
Patent ......................................................... 6,000
(To recognize amortization for current year)
Entry P
Accounts Payable .......................................... 22,000
Accounts Receivable ................................ 22,000
(To eliminate intercompany payable/receivable balance)
26. (continued)
b. If the initial value method had been applied, the parent would have
recorded only the dividends received as income rather than an equity
accrual. Therefore, Entry *C is needed to adjust the parent's beginning
retained earnings for 2011 to the equity method. During 2009 and 2010,
the subsidiary earned a total net income of $171,000 but paid dividends
of only $83,000. The parent's share of the difference is $61,600 (70% of
$88,000 [$171,000 - $83,000]). In addition, the parents 70% share of
excess amortization expense for two years must also be included
($8,400 = 2 years $6,000 per year 70%). The net amount to be
recognized is $53,200 ($61,600 - $8,400).
ENTRY *C
Investment in Bandmor ................................. 53,200
Retained Earnings, 1/1/11 ........................ 53,200
c. If the partial equity method had been applied, only the excess
amortization expenses for the previous two years would have been
omitted from the parent's retained earnings. As shown above, that
figure is $8,400 (2 years $6,000 per year 70%).
ENTRY *C
Retained Earnings, 1/1/11 ............................. 8,400
Investment in Bandmor ............................ 8,400
d. Noncontrolling interest in Bandmor's income2011
[($110,000 6,000) 30%] ............................. $31,200
27. (45 Minutes) (Asks about several consolidated balances and consolidation
process. Includes the different accounting methods to record investment.)
a. Schedule 1Fair Value Allocation and Excess Amortizations
Consideration transferred by Miller ........ $664,000
Noncontrolling interest fair value ............ 166,000
Taylors fair value...................................... $830,000
Taylors book value................................... (600,000)
Fair value in excess of book value ......... 230,000 Annual Excess
Life Amortizations
Excess fair value assigned to buildings 80,000
20 years $4,000
Goodwill ................................................... $150,000 indefinite -0-
Total ...................................................... $4,000
b. $150,000 (see schedule 1 above)
c. Entry (S)
Common Stock (Taylor) ...................................... 300,000
Additional Paid-in Capital (Taylor) ..................... 90,000
Retained Earnings (Taylor) ................................. 210,000
Investment in Taylor Company (80%) ........... 480,000
Noncontrolling interest in Taylor (20%) ....... 120,000
Entry (A)
Buildings ............................................................. 80,000
Goodwill .............................................................. 150,000
Investment in Taylor Company (80%) ........... 184,000
Noncontrolling interest in Taylor (20%) ....... 46,000
27. (continued)
f. Using the acquisition method, the allocation will be the total difference
($80,000) between the buildings' book value and fair value. Based on a
20 year life, annual excess amortization is $4,000.
Miller book valuebuildings ............................. $800,000
Taylor book valuebuildings ............................ 300,000
Allocation ............................................................ 80,000
Excess Amortizations for 20092010 ($4,000 2) (8,000)
Consolidated buildings account ............. $1,172,000
g. Acquisition-date fair value allocated to goodwill
(see schedule 1 above) .................................. $150,000
h. If the parent has been applying the equity method, the stockholders'
equity accounts on its books will already represent consolidated totals.
The common stock and additional paid-in capital figures to be reported
are the parent balances only. As to retained earnings, the equity method
will properly record all subsidiary income and amortization so that the
parent balance is also a reflection of the consolidated total.
29. (continued)
Adjustments
December 31, 2010 Pierson Steele & Eliminations NCI Consolidated
Revenues (1,843,000) (675,000) (2,518,000)
Cost of goods sold 1,100,000 322,000 1,422,000
Depreciation expense 125,000 120,000 245,000
Amortization expense 275,000 11,000 (E) 80,000 366,000
Interest expense 27,500 7,000 34,500
Equity in Steele Income (121,500) (I)121,500 -0-
Separate company
net income (437,000) (215,000)
Consolidated net income (450,500)
NCI in Steele Income (13,500) (13,500)
Controlling interest in CNI (437,000)
30. (Continued)
Controlling Noncontrolling
Interest Interest
Fair value at acquisition date $1,710,000 $190,000
Relative fair values of identifiable net assets
90% and 10% of $1,525,000 (acquisition date
recorded fair value plus customer base) 1,372,500 152,500
Goodwill $337,500 $37,500
b. If the fair value of the noncontrolling interest was $152,500, both goodwill and
the noncontrolling interest balance would be reduced equally by $37,500 as
follows:
Controlling Noncontrolling
Interest Interest
Fair value at acquisition date $1,710,000 $152,500
Relative fair values of identifiable net assets
90% and 10% of $1,525,000 (acquisition date
recorded fair value plus customer base) 1,372,500 152,500
Goodwill $337,500 -0-
31. (60 Minutes) (Consolidation worksheet and income statement with parent
using initial value method. Also consolidated balances with a control
premium paid by parent.)
31. (continued)
b. KRAUSE CORPORATION AND LEAHY, INC.
Consolidated Income Statement
For Year Ending December 31, 2010
Sales $834,000
Cost of goods sold $289,000
Operating expenses 326,000
Total expenses 615,000
Consolidated net income $219,000
To 20% noncontrolling interest $15,000
To controlling interest $204,000
Consolidated Net income $219,000
If the noncontrolling interest fair value was $4.85 per share at the acquisition
date, then goodwill declines to $116,000 and the noncontrolling interest total
would also decline from $149,000 to 120,000). Worksheet entries (S) and (A)
assuming a $4.85 noncontrolling interest acquisition-date fair value:
Controlling Noncontrolling
Interest Interest
Fair value at acquisition date $504,000 $97,000
Relative fair values of identifiable net assets
80% and 20% of $485,000 (acquisition date
fair value of net identifiable assets) 388,000 97,000
Goodwill $116,000 -0-
Consolidated Totals:
Revenues = $1,900,000 (add the two book values)
Cost of goods sold = $1,085,000 (add the two book values)
Depreciation expense = $267,500 (add the two book values less $2,500
excess adjustment)
Amortization expense = $10,000 (add the two book values plus $5,000
excess adjustment)
Interest expense = $50,250 (add the two book values plus $1,250 excess
adjustment)
Equity in income of Sam = -0- (eliminated so that the individual revenues
and expenses of the subsidiary can be included in the consolidated
figures)
Net income = $487,250 (revenues less expenses)
Retained earnings, 1/1 = $1,265,000 (parent company balance; subsidiary's
operations prior to acquisition do not affect consolidated figures)
Noncontrolling interest in income of subsidiary = $26,250 ($135,000
reported income of the subsidiary less $3,750 amortization expense
multiplied by 20 percent outside ownership)
Dividends paid = $260,000 (parent company balance; subsidiary's
payments to parent are intercompany, payments to outside owners
decrease noncontrolling interest balance)
32. (continued)
Retained earnings, 12/31 = $1,466,000 (consolidated balance on 1/1/09 plus
consolidated net income less noncontrolling interest in subsidiary's
income less consolidated dividends)
Current assets = $1,493,000 (add the two book values)
Investment in Sam = -0- (eliminated so that the individual assets and
liabilities of the subsidiary can be included in the consolidated figures)
Land = $517,000 (add the book values plus the $165,000 excess allocation)
Buildings and equipment (net) = $1,119,500 (add the book values less the
$25,000 allocation [asset was overvalued] plus the excess amortization)
Copyright = $190,000 (book value + $100,000 excess allocation less
amortization for the year)
Total assets = $3,319,500
Accounts payable = $339,000 (add book values)
Notes payable = $581,250 (add the book values less $10,000 excess
allocation plus amortization)
Noncontrolling interest in subsidiary = $183,250 (20% of fair value as of
1/1/09 [$170,000] plus noncontrolling interest in income of subsidiary
[$26,250] less dividends paid to outside owners [$13,000])
Common stock = $300,000 (parent company balance)
Additional paid-in capital = 450,000 (parent company balance)
Retained earnings, 12/31 = $1,466,000 (computed above)
Total liabilities and equities = $3,319,500
b. Controlling Noncontrolling
Interest Interest
Fair values at acquisition date $720,000 $290,000
Relative fair values of identifiable net assets
70% and 30% of $940,000 (acquisition date
book value plus patent = net asset fair value) 658,000 282,000
Goodwill $62,000 $8,000
35. (continued)
d. Consolidated Worksheet
Adjustments &
Truman Atlanta Eliminations NCI Cons.
(S)
Retained earnings, 1/1 (823,000) (500,000) 500,000 (823,000)
Net income (above) (303,000) (120,000) (303,000)
Dividends paid 145,000 80,000 (S) 40,000 12,000
(D) 28,000 145,000
Retained earnings, 12/31 (981,000) (540,000) (981,000)
38. (30 Minutes) (Determine consolidated balances when parent uses equity
method. Includes sale of a portion of the investment)
Purchase Price Allocation and Excess Amortizations
Purchase price ......................................... $250,000
Book value acquired
($230,000 70%) ................................. 161,000
Price in excess of book value ................. $89,000 Annual Excess
Allocation based on fair value ................. Life Amortizations
Land ($10,000 70%) $7,000
Equipment ($68,000 70%) 47,600 14 yrs. $3,400
Liabilities ($20,000 70%) 14,000 10 yrs. 1,400
68,600
Goodwill ................................................... $20,400 indefinite -0-
Total ......................................................... $4,800
The parent uses the equity method: Investment income of $44,200 =
$49,000 (70% $70,000) less $4,800 amortization expense.
Adjustments &
Bon Air Creedmoor Eliminations NCI Consolidated
Revenues (694,800) (250,000) (944,800)
Operating expenses 630,000 180,000 (E) 4,800 814,800
Investment income (44,200) -0- (I) 44,200 -0-
Noncontrolling int(E)erest in
Creedmoor income (21,000) 21,000
Net income (109,000) (70,000) (109,000)
Revenues $920,000
Operating expenses 695,600
Combined entity net income 224,400
Noncontrolling interest in Houston income 28,000
Consolidated net income $196,400
Remaining
f. Excess Amortizations Allocations
Allocations (see a) for 4 years 12/31/09
Equipment (18,000) (7,200) (10,800)
Buildings 93,000 24,800 68,200
Bonds payable 12,000 4,800 7,200
Goodwill 31,000 -0- 31,000
39. (continued)
h. Watson Corporation
Consolidated Balance Sheet
December 31, 2009
40. (40 Minutes) (Determine consolidated balances, parent has applied the cost
method)
40. (continued)
Consolidated figures can also be determined through a worksheet as follows:
Consolidation Entries
Entry *C
Investment in Morning ........................................ 152,800
Retained Earnings, 1/1/09 Good ................... 152,800
(To recognize Good's share of Morning's increase in book value during the
2006-2008 period as well as the amortization expense for that same period.
Because the original $1,400,000 is still the balance in the investment in
Morning account, the parent is applying the cost method. Thus, 80% of
Morning's $380,000 increase in book value [$304,000] must be accrued.
Excess amortizations of $151,200 [$50,400 per year for these three years] is
also recorded leaving a net adjustment of $152,800.)
Entry S
Common Stock (Morning) .................................. 460,000
Additional Paid-in Capital (Morning) ................. 40,000
Retained Earnings, 1/1/09 (Morning) ................. 1,000,000
Investment in Morning (80%) ........................ 1,200,000
Noncontrolling Interest in Morning (20%) .... 300,000
(To eliminate subsidiary's stockholders' equity accounts while recording the
January 1, 2009 balance of the noncontrolling interest.)
Entry A
Buildings .............................................................. 44,800
Unpatented technology ...................................... 308,000
Investment in Morning .................................. 352,800
(To recognize unamortized amounts paid in connection with acquisition of
Morning. Original allocations have undergone three previous years of excess
amortizations.)
Entry I
Dividend Income ................................................. 96,000
Dividends Paid ............................................... 96,000
(To eliminate intercompany income accounts.)
Entry E
Operating Expenses ........................................... 50,400
Buildings ........................................................ 6,400
Unpatented technology .................................. 44,000
(To recognize amortization expenses for current year.)
Entry P
Liabilities ............................................................. 100,000
Receivables .................................................... 100,000
(To eliminate intercompany debt.)
What criteria did the FASB use to evaluate the desirability of each alternative?
The FASB evaluated whether the classifications conformed to current definitions of
financial statement elements (assets, liabilities, or equity) as articulated in FASB Concept
Statement No. 6.
In what specific ways did FASB Concept Statement 6 affect the FASBs evaluation of
these alternatives?
From SFAS 160 paragraphs 32-34
If it required that the noncontrolling interest be reported in the mezzanine, the
Board would have had to create a new elementnoncontrolling interest in
subsidiariesspecifically for consolidated financial statements. The Board
concluded that no compelling reason exists to create a new element
specifically for consolidated financial statements to report the interests in a
subsidiary held by owners other than the parent. The Board believes that using
the existing elements of financial statements along with appropriate labeling
and disclosure provides financial information in the consolidated financial
statements that is representationally faithful, understandable, and relevant to
the entitys owners, creditors, and other resource providers.
Memorandum
To: CFO, Allied Telecom Corporation
Re: Surefire Cell Corporation Noncontrolling Interest Valuation
You are correct in observing that the newly created 10 percent noncontrolling
interest in your recent acquisition, Surefire Cell, must be valued for presentation in
your consolidated financial statements. The acquisition-date fair value is the
required valuation basis for the noncontrolling interestusually provided by
market trading data. However, because the 10 percent shares do not appear to
be actively traded, a valuation alternative will need to be selected
According to SFAS 157, Fair Value Measurements, three main techniques are
available for the noncontrolling interest valuation: the market approach, the
income approach, and the cost approach.
The market approach involves obtaining fair values for similar assets or
businesses that are comparable to Surefire Cell. This valuation technique is
appropriate when such comparable firms with observable market values are
available.
The income approach values a firm by discounting the best available measures of
future benefits, typically cash flows or earnings. Often the income approach
requires both supportable assumptions and a sufficient number of inputs to create
an accurate forecasting model.
The cost approach looks to the replacement cost of the firms net assets (in
current condition) to value the firm. This approach requires ready market prices
for the firms assets and does not rely on estimates of future cash flows or
earnings. As such it is often the least accurate valuation method.