Bclaa8e ab.az.chapter 08

8 - 13 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidations – Changes in
Ownership Interests
Chapter 8

Learning Objective 1
Prepare consolidated statements
when parent company’s ownership
percentage increases or decreases
during the reporting period.

Preacquisition Earnings
Preacquisition earnings or purchased income
is income that was earned by the subsidiary
(in the accounting period of the acquisition)
prior to the acquisition.
Patter Corporation purchases a 90% interest in
Sissy Company on April 1, 2006, for $213,750.

Income 1/1-4/1 4/1-12/31 1/1-12/31
Sales $25,000 $75,000 $100,000
Cost of sales and expenses 12,500 37,500 50,000
Net income $12,500 $37,500 $ 50,000
Dividends $10,000 $15,000 $ 25,000

Stockholders’ Equity Jan. 1 April 1 Dec. 31
Capital stock $200,000 $200,000 $200,000
Retained earnings 35,000 37,500 60,000
Stockholders’ equity $235,000 $237,500 $260,000
What is the book value acquired by Patter?
$237,500 × 90% = $213,750 purchase price

Sales (last three quarters of 2006) $75,000
Expenses (last three quarters) (37,500)
Minority interest (last three quarters) (3,750)
Effect on consolidated net income $33,750

Sales (full year) $100,000
Expenses (full year) (50,000)
Preacquisition income (11,250)
Minority interest (5,000)
Effect on consolidated net income $ 33,750

Preacquisition dividends are eliminated
in the consolidation process.
$10,000 $15,000
$25,000
Preacquisition Dividends

Preacquisition Dividends
Cash 13,500
Investment in Sissy 13,500
To record dividends received
Cash 13,500
Investment in Sissy 13,500
To record dividends received
$15,000 × 90% = 13,500$15,000 × 90% = 13,500

Consolidation
Patter’s Investment
213,750
33,750
234,000
13,50012/31/2006 Dividends

Working Papers December 31,
2006
Adjustments/ Consol-
Patter Sissy Eliminations idated
Sales
Income from Sissy
Expenses
Minority interest expense
($50,000 × 10%)
Preacquisition income
Net income
Retained earnings – Patter
Retained earnings – Sissy
Add: Net income
Dividends
Retained earnings 12/31/06
$300
33.75
(200)
$133.75
$266.25
133.75
(100)
$300
$100
(50)
$ 50
$ 35
50
(25)
$ 60
a 33.75
c 5.00
b 11.25
b 35
$400
(250)
(5)
(11.25)
$133.75
$266.25
133.75
(100)
$300
Income Statement
a 13.5
b 9.0
c 2.5

2006
Other assets
Investment in Sissy
Capital stock
Retained earnings
Minority interest
$566
234
$800
$500
300
$800
$260
$260
$200
60
$260
a 20.25
b 213.75
b 200
b 23.50
c 2.50
$826
$826
500
300
26
$826
Balance Sheet
Patter Sissy Eliminations idated

Apply consolidation procedures to
interim (midyear) acquisitions.

Piecemeal Acquisitions
Poca Corporation acquires a 90% interest in Sark
Corporation in a series of separate stock purchases
between July1, 2003, and October 1, 2005.
Poca Corporation acquires a 90% interest in Sark
Corporation in a series of separate stock purchases
between July1, 2003, and October 1, 2005.

Date 7/1/03 4/1/04 10/1/05
Interest acquired 20% 40% 30%
Investment cost $ 30 $ 74 $ 81
Equity January 1 100 150 190
Income for year 50 40 40
Equity at acquisition 125 160 220
Equity December 31 150 190 230

What is the initial goodwill from
each of the three acquisitions?
$125 × 20% = $25
$30 – $25 = $5
$160× 40% = $64
$74 – $64 = $10

$220 × 30% = $66
$81 – $66 = $15
At December 31, 2005, Poca’s investment
in Sark account balance is $237,000.
This consists of $185,000 total
cost plus income of $52,000.

Working Paper Entries: 2005
a Income from Sark 27,000
Investment in Sark 27,000
To eliminate investment income and return
investment account to its beginning-of-the-
period balance plus the $81,000 new investment

b Preacquisition Income 9,000
Retained Earnings – Sark 90,000
Capital Stock – Sark 100,000
Goodwill 30,000
Investment in Sark 210,000
Minority Interest 19,000
To eliminate investment in Sark and Sark’s equity
balances, and enter preacquisition income, goodwill,
and beginning-of-the-period minority interest

c Minority Interest Expense 4,000
To record minority interest in Sark’s net income

Sale of Ownership Interests
Sergio Corporation is a 90%-owned
subsidiary of Pablo Corporation.
January 1, 2007: Pablo’s investment
in Sergio equals $288,000.
Sergio’s stockholders’ equity on this
date consists of $200,000 capital stock
and $100,000 retained earnings.

Did Pablo acquire goodwill?
$300,000 × 90% = $270,000
$288,000 – $270,000 = $18,000

During 2007, Sergio reports income of $36,000.
Sergio pays dividends of $20,000 on July 1.

Sale of Interest at the Beginning
of the Period
Pablo sells a 10% interest in Sergio
(one-ninth of its holdings) on
January 1, 2007 for $40,000.
$288,000 ÷ 9 = $32,000 $18,000 ÷ 9 = $2,000

Sale of Interest at the Beginning
of the Period
Pablo’s Investment
288,000
28,800
268,800
32,000
16,000
Cash
40,000
16,000
Gain
8,000
Income from S
28,800
Dividends
12/31/2007

a Income from Sergio 28,800
Dividends – Sergio 16,000
Investment in Sergio 12,800
To eliminate income and dividends from
Sergio and return the investment account
to its beginning-of-the-period balance
after the sale of the 10% interest

b Capital Stock – Sergio 200,000
Retained Earnings – Sergio 100,000
Goodwill 16,000
Investment in Sergio 256,000
Minority Interest (20%) 60,000
To eliminate reciprocal investment and equity
balances, and to record goodwill and
beginning minority interest

c Minority Interest Expense 7,200
Dividends 4,000
To enter minority interest share of subsidiary
income and dividends

2007
Pablo Sergio Eliminations idated
Sales
Income from Sergio
Gain on sale
Expenses
Minority interest expense
($36,000 × 10%)
Net income
Retained earnings – Pablo
Retained earnings – Sergio
Add: Net income
Dividends
Retained earnings 12/31/07
$600
28.8
8
(508.8)
$128
$210
128
(80)
$258
$136
(100)
$ 36
$100
36
(20)
$116
a 28.8
c 7.2
b 100
a 16
c 4
$736
8
(608.8)
(7.2)
$128
$210
128
(80)
$258
Income Statement

2007
Other assets
Investment in Sergio
Goodwill
Liabilities
Capital stock
Retained earnings
Minority interest
$639.2
268.8
$908
$150
500
258
$908
$350
$350
$ 34
200
116
$350
a 12.8
b 256
b 16
b 200
b 60
c 3.2
$ 989.2
16
$1,005.2
$ 184
500
258
63.2
$1,005.2
Balance Sheet
Pablo Sergio Eliminations idated

Sale of Interest During an
Accounting Period
Obtain proper book value for shares sold.
Calculate the remainder for unamortized
components of the investment account.
Main issues

Accounting Period
Pablo sells the 10% interest in Sergio
on April 1, 2007, for $40,000.
The sale may be recorded as of April 1
or, as an expedient, as of January 1.

Accounting Period
Assume the sale is recorded on April 1, 2007.
Selling price of 10% interest $40,000
Less: Book value of interest sold:
Investment balance January 1 $288,000
Equity in income
$36,000 × 1/4 year × 90% 8,100
Portion of investment sold $296,100
× 1/9 32,900
Gain $ 7,100

Accounting Period
$29,700 – $16,000 = $13,700
$36,000 × 1/4 year × 90% = $ 8,100
$36,000 × 3/4 year × 80% = 21,600
$29,700

Accounting Period
Pablo’s Investment
288,000
8,100
21,600
268,800
32,900
16,000
12/31/2007
Dividends
Cash
40,000
16,000
Gain
7,100
Income from S
8,100
21,600

Changes in Ownership Interests
from
Subsidiary Stock Transactions
Subsidiary stock issuances provide
a means of expanding operations
through external financing.

Sale of Additional Shares
by a Subsidiary
Purdy Corporation owns an 80% interest
in Stroh Corporation.
Purdy Corporation owns an 80% interest
in Stroh Corporation.
Purdy’s investment in Stroh is $180,000 on
January 1, 2007, equal to 80% of Stroh’s $200,000
stockholders’ equity plus $20,000 goodwill.
Purdy’s investment in Stroh is $180,000 on
January 1, 2007, equal to 80% of Stroh’s $200,000
stockholders’ equity plus $20,000 goodwill.

by a Subsidiary
$200,000 × 80% = $160,000$200,000 × 80% = $160,000
$160,000 ÷ $20 = 8,000 shares$160,000 ÷ $20 = 8,000 shares

by a Subsidiary
Capital stock, $10 par $100,000
Additional paid-in capital 60,000
Retained earnings 40,000
Total shareholders’ equity $200,000
Additional paid-in capital 60,000
Total shareholders’ equity $200,000

Subsidiary Sells Shares to Parent
Stroh sells an additional 2,000 shares to Purdy at
book value of $20 per share on January 2, 2007.
Stroh sells an additional 2,000 shares to Purdy at
book value of $20 per share on January 2, 2007.
January 1 before sale: 8,000 ÷ 10,000 = 80%January 1 before sale: 8,000 ÷ 10,000 = 80%
January 2 after sale: 10,000 ÷ 12,000 = 831/3%January 2 after sale: 10,000 ÷ 12,000 = 831/3%

January 1 January 2
Before Sale After Sale
Stroh’s stockholders’ equity $200,000 $240,000
Purdy’s interest 80% 831/3%
Purdy’s equity in Stroh $160,000 $200,000
Goodwill 20,000 20,000
Investment in Stroh balance $180,000 $220,000
Purdy’s interest 80% 831/3%
Purdy’s equity in Stroh $160,000 $200,000
Goodwill 20,000 20,000
Investment in Stroh balance $180,000 $220,000

If Stroh sells the additional shares at $35 per share.If Stroh sells the additional shares at $35 per share.
Price paid by Purdy (2,000 × $35) $70,000
Book value acquired:
Underlying book value after purchase
($200,000 + $70,000) × 831/3% $225,000
Underlying book value before purchase
($200,000 × 80%) 160,000
Book value acquired 65,000
Excess cost over book value $ 5,000
Price paid by Purdy (2,000 × $35) $70,000
Book value acquired:
Underlying book value after purchase
($200,000 + $70,000) × 831/3% $225,000
Underlying book value before purchase
($200,000 × 80%) 160,000
Book value acquired 65,000
Excess cost over book value $ 5,000

Subsidiary Sells Shares
to Outside Entity
Sale at $20 Sale at $35
Purdy’s interest 662/3% 662/3%
Purdy’s equity in Stroh
after issuance $160,000 $180,000
before issuance 160,000 160,000
Increase in Purdy’s
equity in Stroh 0 $ 20,000
Purdy’s interest 662/3% 662/3%
after issuance $160,000 $180,000
before issuance 160,000 160,000
Increase in Purdy’s
equity in Stroh 0 $ 20,000

Record subsidiary/investee stock
issuances and treasury
stock transactions.

Treasury Stock Transactions
by a Subsidiary
The acquisition of treasury stock by a
subsidiary decreases subsidiary equity
and subsidiary shares outstanding.
If the subsidiary acquires treasury stock
from minority shareholders at book
value, no change in the parent’s share
in the subsidiary equity results.

by a Subsidiary
Shelly is an 80% subsidiary of Pointer Corporation.
Shelly has 10,000 shares of common stock
outstanding at December 31, 2007.
On January 1, 2008, Shelly purchased 400
shares of its own stock from minority stockholders.

by a Subsidiary
Total equity $200,000
Pointer’s share of Shelly’s
book value (80%) $160,000
Total equity $200,000
Pointer’s share of Shelly’s
book value (80%) $160,000
Shelly’s equity before purchase
of 400 shares of treasury stock

Capital stock $100,000 $100,000 $100,000
Retained earnings 100,000 100,000 100,000
Total $200,000 $200,000 $200,000
Less: Treasury stock 8,000 12,000 6,000
Total equity $192,000 $188,000 $194,000
Pointer’s interest 5/6 5/6 5/6
Pointer’s share of
Shelly’s book value $160,000 $156,667 $161,667
@$20 @$30 @$15400 shares
by a Subsidiary

End of Chapter 8

Bclaa8e ab.az.chapter 08

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