Beams aa13e sm 08 - Solution mamual ch 8 PDF

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Chapter 8CONSOLIDATIONS — CHANGES IN OWNERSHIP INTERESTSAnswers to Questions1 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,...

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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, 2016 and that S has earnings of $100,000 between January 1 and July 1, 2016 and pays $50,000 dividends on May 1, 2016. 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. Since we have a controlling interest all year, noncontrolling interest share for the year is computed as 20% of income for one-half of the year and 10% of income for one-half of the year. Noncontrolling interest at year-end is computed for the 10 percent interest held by noncontrolling stockholders at year end.

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. We must determine the aggregate of (1) the fair value of consideration received, (2) the fair value of any retained noncontrolling investment in the former subsidiary at the date the subsidiary is deconsolidated and (3) the carrying amount of the noncontrolling interest in the former subsidiary at the date the subsidiary is deconsolidated. The aggregate is compared to the carrying amount of the former subsidiary’s assets and liabilities. 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 Copyright © 2018 Pearson Education Ltd. 8-1

Consolidations — Changes in Ownership Interests

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the investment account based on percent of carrying value sold, and records the difference as an adjustment to other paid-in capital. 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 32 percent (8,000 of 12,000 shares). 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.

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

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SOLUTIONS TO EXERCISES Solution E8-1 1

Cost to obtain control over Edma HF

$99,000

Implied fair value of Edma HF ($99,000/45%)

$220,000

The fair value of 15% interest ($220,000  15%) Cost to obtain 30% of Edma HF’s interest ($10,000 + $21,000) Gain from revaluation of investment in Edma HF

$33,000 $31,000

2

Income from Edma HF in 2014 ($60,000  60%  3 /12)

$9,000

3

Cost to purchase 5% interest Cost to purchase 10% interest Cost to purchase 45% interest Gain on revaluation of investment Income from Edma HF in 2014 Investment in Edma HF at the end of 2014

$10,000 $21,000 $99,000 $2,000 $9,000 $141,000

$2,000

Solution E8-2 1

Percentage ownership of Yasmeen BSC in Talal BSC (90,000/110,000)

81,82%

2

Talal BSC equity after issuance of additional shares ($800,000 + (10,000 x $10)

$900,000

Yasmeen BSC’s equity in Talal BSC after issuance ($900,000  81.82%) Yasemeen BSC’s equity in Talal BSC before issuance Decrease in Yasemeen BSC’s equity in Talal BSC

$736,364 $800,000 ($63,636)

January 2 Additional paid-in capital (-SE) 63,636 Investment in Talal BSC (-A) 63,636 To adjust investment in Talal BSC after issuance of additional shares 3

January 1, 2014 balance Less: adjustment due to issuance of new shares Investment in Talal BSC after the issuance

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$800,000 ($63,636) $736,364

Consolidations — Changes in Ownership Interests

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Solution E8-3 1

2

Number of shares owned by Nora NYRT (70%  9,000)

6,300

Percentage ownership of Nora NYRT in Bence NYRT (6,300/8,000)

78.75%

Bence NYRT’s equity before treasury stock transaction Cost of reasury stock ($60  1,000) Bence NYRT’s equity after treasury stock transaction

$450,000 ($60,000) $390,000

Nora NYRT’s equity in Bence NYRT after the transaction ($390,000  78.75%) Nora NYRT’s equity in Bence NYRT before the transaction ($450,000 x 70%) Decrease in Nora NYRT’s equity in Bence NYRT

$307,125

January 4 Additional paid-in capital Investment in Bence NYRT 3

January 3, 2014 balance Less: adjustment due to treasury stock transaction ($7,875) Investment in Bence NYRT after the transaction

$315,000 ($7,875) 7,875 7,875 $350,000 $342,125

Solution E8-4 Implied fair value of investment ($3,500,000 / 80%)

$4,375,000

Carrying value of shares sold ($4,375,000  70%) Selling value Loss from the deconsolidation

$3,062,500 3,000,000 $ 62,500

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Chapter 8

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Solution E8-5 (amounts in thousands) 1a

Fair value — book value differential Cost Implied fair value of Son ($2,548 / 70%) Book value ($2,960 January 1 balance + $200 income for 5 months - $120 dividends in January and April) Goodwill

$2,548 $3,640 (3,040) $ 600

1b

Income from Son (Note: Only include earnings subsequent to the acquisition date). Income from Son ($480,000  7/12 year  70%) $ 196

1c

Investment in Son at December 31 Investment cost Add: Income from Son Deduct: Dividends ($120,000  70%) Investment in Son December 31, 2016

2

$2,548 196 (84) $2,660

Consolidation working paper entries: a

Income from Son 196 Investment in Son 112 Dividends 84 To eliminate income and dividends from Son and adjust investment account to its cost on June 1.

b

2,000 Common stock, $10 par — Son 1,160 Retained earnings — Son Goodwill 600 Investment in Son 2,548 Noncontrolling interest 1,128 Dividends 84 To eliminate reciprocal investment and equity balances, record preacquisition income and beginning noncontrolling interest, and eliminate preacquisition dividends.

c

Noncontrolling interest share ($480,000 x 7/12 x 30%) Dividends($240,000 x 30%) Noncontrolling interest

84,000

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72,000 12,000

Consolidations — Changes in Ownership Interests

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Solution E8-6 1

Investment in Ngon

(in thousands)

Investment balance December 31, 2016 ($2,400,000  90%) Cost of new shares ($24  100,000 shares) Investment in Ngon after new investment 2

$ 2,160,000 2,400,000 $ 4,560,000

Goodwill from new investment Ngon’s stockholders’ equity after issuance ($2,400,000 + $2,400,000) Huanh’s ownership percentage (180,000 + 100,000 shares)/300,000 shares Huanh’s book value after issuance Less: Huanh’s book value before issuance Increase in book value from purchase (book value acquired) Cost of 100,000 shares Book value acquired Less: Undervalued Land ($10,000  0.9333) Goodwill from acquisition of new shares Total Goodwill ($70,667/0.9333)

$ 4,800,000

0.93333 4,480,000 (2,160,000) $ 2,320,000 $ 2,400,000 (2,320,000) (9,333) $ 70,667 $75,717.347

Solution E8-7 1

Son issues 30,000 shares to Pop at $20 per share Pop’s ownership interest before issuance: 176,000/220,000 shares = 80% Pop’s ownership interest after issuance: 206,000/250,000 shares = 82.4%

2

Son sells 30,000 shares to the public at $20 per share Pop’s ownership interest after issuance: 176,000/250,000 shares = 70.4%

3

Son sells 30,000 shares to the public; no gain or loss recognized: Investment in Son 115,200 Additional paid-in capital 115,200 To record increase in investment in Son computed as follows: Book value before issuance ($3,200,000  80%) Book value after issuance ($3,800,000  70.4%) Additional paid-in capital

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$2,560,000 2,675,200 $ 115,200

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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 Sun: Sun’s underlying equity after sale Pam’s interest Book value of Pam’s investment in Sun 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 Sun Additional paid-in capital

160,000

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160,000

Consolidations — Changes in Ownership Interests

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Solution E8-9 Preliminary computations of fair value — book value differentials: April 1, 2016 acquisition Cost of 4,000 shares (20% interest) $ 64,000 Implied total fair value of Son ($64,000 / 20%) $320,000 Book value of Son on april 1 acquisition date: Beginning stockholders’ equity $280,000 Add: Income for 3 months ($80,000  ¼ year) 20,000 Stockholders’ equity April 1 300,000 Goodwill $ 20,000 July 1, 2017 acquisition Cost of 8,000 shares (40% interest) Implied total fair value of Son ($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 Son 2016 Income from Son for 2016 ($80,000  20%  3/4 year)

$ 12,000

2017 Income from Son 20% share of reported income ($80,000  20%) 40% share of reported income ($80,000  40%  1/2 year) Income from Son

$ 16,000 16,000 $ 32,000

Noncontrolling interest December 31, 2017 (($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, 2017 Cost of 20% investment Income from Son for 2016 Cost of 40% investment Income from Son for 2017 Less: Dividends ($2,000 + $6,000) Investment in Son

$ 64,000 12,000 164,000 32,000 (8,000) $264,000

Check: Share of Son’s December 31, 2017 equity ($420,000  60%) Add: 60% of $20,000 Goodwill Investment in Son

$252,000 12,000 $264,000

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Chapter 8

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Solution E8-10 Preliminary computations Investment cost July 1, 2017

$675,000

Implied total fair value of Sun ($675,000 / 90%) Less: Book value of Sun at acquisition: Equity of Sun December 31, 2016 Add: Income for 1/2 year Equity of Sun July 1, 2017 Excess (book value = underlying equity)

$750,000

1

$700,000 50,000 750,000 0

Investment income from Sun Income from Sun — 2017 ($100,000  1/2 year  90%) Income from Sun — 2018: 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 Sun Cost July 1, 2017 Add: Income from Sun — 2017 Less: Dividends paid in December ($50,000  90%)

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

Investment balance December 31, 2017

675,000

Less: Book value of 1/9 interest sold on July 1, 2018a Add: Income from Sun — 2018 Less: Dividends paid in December ($30,000  80%) Investment balance December 31, 2018

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

a Sale of 10% interest July 1, 2018: Equity of Sun December 31, 2016 Add: Income less dividends — 2017 Add: Income for 1/2 year — 2018 Equity of Sun July 1, 2018 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 Pam maintains a controlling interest, the gain is not recorded, but shown as an adjustment to additional paid-in capital.

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$

6,000

Consolidations — Changes in Ownership Interests

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Solution E8-10 (continued) 2

Noncontrolling interest share Noncontrolling interest share — 2017: ($100,000 income  10% interest x 1/2)

$ 5,000

Noncontrolling interest share — 2018: ($80,000  1/2 year  10%) + ($80,000  1/2 year  20%)

$ 12,000

Noncontrolling interest December 31, 2017 Equity of Sun January 1 Add: Income less dividends for 2017 Equity of Sun December 31 Noncontrolling interest percentage

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

Noncontrolling interest December 31 Noncontrolling interest December 31, 2018 Equity of Sun January 1 Add: Income less dividends for 2018 Equity of Sun December 31 Noncontrolling interest percentage Noncontrolling interest December 31

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