Ch08 Beams 12ge SM - manual solution 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, 2011 and that S has earnings of $100,000 between January 1 and July 1, 2011 and pays $50,000 dividends on May 1, 2011. In this case, preacquisition earnings and dividends are $100,000and $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

In a piecemeal acquisition, the previously held investment should be remeasured at fair value when the control of the subsidiary is gained. The fair value itself is gathered from the cost to acquire interest in which the control over the subsidiary is obtained.

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

The amount of the gain or loss of sale of interest resulting in deconsolidation can be determined by the difference between: a.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 3.The carrying amount of the noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated b.The carrying amount of the former subsidiary’s assets and liabilities. 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 the investment account based on percent of carrying value sold, and records the difference as an adjustment to other paid-in capital. Copyright © 2015 Pearson Education Limited

Consolidations — Changes in Ownership Interests

8-2

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 23 percent (8,000 of 12,000 shares). No gain or loss is recognized, the change in underlying book value, adjusted for one-sixth [(80% – 66 23 %) ¸ 80%] of any unamortized cost book value differential is reported as adjustment to additional paid-in capital, since the parent maintains its controlling interest. An alternative computation is to assume that the parent sold one-sixth of its interest for 66 23 percent of the proceeds, the difference being the amount of adjustment to additional paid-in capital. 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

8-3

SOLUTIONS TO EXERCISES Solution E8-1 Allocation of Set’s net income: Controlling share of income ($100,000 ´ 70% ´ 1 year) + ($100,000 ´ 20% ´ 1/2 year)

$80,000

Noncontrolling interest share ($100,000 x 30% x 6/12) + ($100,000 x 10% x 6/12)

$20,000

Preacquisition income

$0

Allocation of Set’s dividends: Dividends to Pie ($30,000 ´ 70%) + ($30,000 ´ 90%)

$48,000

Noncontrolling interest ($30,000 x 30%) + ($30,000 x 10%) Preacquisition interest

$12,000 $0

Solution E8-2 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 x 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 $ 2,000

2. Income from Edma HF in 2014 ($60,000 x 60% x 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

Solution E8-3 (amounts in thousands) Entry to record sale of 15% interest: Cash Investment in Sap Copyright © 2015 Pearson Education Limited

750 660

Consolidations — Changes in Ownership Interests

8-4

Other paid-in capital To record sale of 15% interest in Sap. No gain or loss on sale is recognized since Pet maintains an 85% controlling interest. Entry to record investment income for 2011: Investment in Sap($600 ´ 85%) Income from Sap To record income from Sap. Check: Investment balance January 1, 2011 Less: Book value of interest sold Add: Income from Sap Investment balance December 31, 2011 Underlying equity ($4,600 ´ 85%) Add: 85% of Goodwill* Investment balance December 31, 2011 *Note that implied total goodwill is $400 ($340 / 85%).

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90

510 510

$4,400 (660) 510 $4,250 $3,910 340 $4,250

Chapter 8

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Solution E8-4 (amounts in thousands) 1

Gain on sale of 20% interest: No gain or loss is recognized since Pal maintains a 60% controlling interest. Beginning of the period sale assumption Selling price $130 Book value of interest ($436 investment account balance ´ 20%/80%) 109 Adjustment to other paid-in capital $ 21 Actual sale date assumption Selling price Book value of interest sold: Beginning of the period balance Add: Income ($150 ´ 1/3 year ´ 80%)

$130

Interest sold Adjustment to increase additional paid-in capital

$436 40 476 25%

2 Income from Sag Beginning of the period sale assumption Income from Sag($150 ´ 60%) Actual sale date assumption January 1 to May 1: Share of Sag’s income ($150 ´ 80% ´ 1/3 year) May 1 to December 31: Share of Sag’s income ($150 ´ 60% ´ 2/3 year) Income from Sag 3

119 $ 11

$ 90 $ 40 60 $100

Investment in Sag December 31, 2011

Investment balance January 1 Book value of interest sold Income from Sag Dividends Investment balance December 31, 2011

Beginning of Period Sale Assumption $436 (109) 90 (48) $369

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Actual Sale Date Assumption $436 (119) 100 (48) $369

Consolidations — Changes in Ownership Interests

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Solution E8-5 (amounts in thousands) 1a

1b

1c

2

Fair value — book value differential Cost Implied fair value of Set ($1,274 / 70%) Book value ($1,480 January 1 balance + $100 income for 5 months - $60 dividends in January and April) Goodwill

$1,274 $1,820 (1,520) $ 300

Income from Set (Note: Only include earnings subsequent to the acquisition date). Income from Set ($240,000 ´ 7/12 year ´ 70%) $ Investment in Set at December 31 Investment cost Add: Income from Set Deduct: Dividends ($60,000 ´ 70%) Investment in Set December 31, 2011

98

$1,274 98 (42) $1,330

Consolidation working paper entries: a

Income from Set 98 Investment in Set 56 Dividends 42 To eliminate income and dividends from Set and adjust investment account to its cost on June 1.

b

1,000 Common stock, $10 par — Set 580 Retained earnings — Set Goodwill 300 Investment in Set 1,274 Noncontrolling interest 564 Dividends 42 To eliminate reciprocal investment and equity balances, record preacquisition income and beginning noncontrolling interest, and eliminate preacquisition dividends.

c

Noncontrolling interest share($240,000 x 7/12 x 30%) Dividends($120,000 x 30%) Noncontrolling interest

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42,000 36,000 6,000

Chapter 8

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Solution E8-6 1

Investment in Sow (in thousands) Investment balance December 31, 2011 ($9,000 ´ 80%) Cost of new shares ($25 ´ 60,000 shares) Investment in Sow after new investment

2

$ 7,200 1,500 $ 8,700

Goodwill from new investment Sow’s stockholders’ equity after issuance ($9,000 + $1,500) Pal’s ownership percentage (480,000 + 60,000 shares)/660,000 shares Pal’s book value after issuance Less: Pal’s book value before issuance Increase in book value from purchase (book value acquired) Cost of 60,000 shares Book value acquired Goodwill from acquisition of new shares* *

$10,500 .8182 8,591.1 (7,200) $ 1,391.1 $ 1,500 (1,391.1) $ 108.9

This implies total goodwill is equal to $133,097.

Solution E8-7 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 x 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

8-8

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

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160,000 160,000

Chapter 8

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Solution E8-9 Preliminary computations of fair value — book value differentials: April 1, 2011 acquisition Cost of 4,000 shares (20% interest) $ 64,000 Implied total fair value of Sum ($64,000 / 20%) $320,000 Book value of Sum 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, 2012 acquisition Cost of 8,000 shares (40% interest) Implied total fair value of Sum ($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 Sum 2011 Income from Sum for 2011 ($80,000 ´ 20% ´ 3/4 year)

$ 12,000

2012 Income from Sum 20% share of reported income ($80,000 ´ 20%) 40% share of reported income ($80,000 ´ 40% ´ 1/2 year) Income from Sum

$ 16,000 16,000 $ 32,000

Noncontrolling interest December 31, 2012 (($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, 2012 Cost of 20% investment Income from Sum for 2011 Cost of 40% investment Income from Sum for 2012 Less: Dividends ($2,000 + $6,000) Investment in Sum

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

Check: Share of Sum’s December 31, 2012 equity ($420,000 ´ 60%) Add: 60% of $20,000 Goodwill Investment in Sum

$252,000 12,000 $264,000

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Consolidations — Changes in Ownership Interests

8-10

Solution E8-10 Preliminary computations Investment cost July 1, 2012

$675,000

Implied total fair value of Sad ($675,000 / 90%) Less: Book value of Sad at acquisition: Equity of Sad December 31, 2011 Add: Income for 1/2 year Equity of Sad July 1, 2012 Excess (book value = underlying equity)

$750,000

1

$700,000 50,000 750,000 0

Investment income from Sad Income from Sad — 2012 ($100,000 ´ 1/2 year ´ 90%) Income from Sad — 2013: 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 Sad Cost July 1, 2012 Add: Income from Sad — 2012 Less: Dividends paid in December ($50,000 ´ 90%)

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

Investment balance December 31, 2012

675,000 (79,000) 68,000 (24,000)

Less: Book value of 1/9 interest sold on July 1, 2013a Add: Income from Sad — 2013 Less: Dividends paid in December ($30,000 ´ 80%) Investment balance December 31, 2013 a Sale of 10% interest July 1, 2013: Equity of Sad December 31, 2011 Add: Income less dividends — 2012 Add: Income for 1/2 year — 2013 Equity of Sad July 1, 2013 Interest sold Underlying equity of interest sold Gain on sale of 1/9 interest ($85,000 proceeds - $79,000) Since Pit maintains a controlling interest, the gain is not recorded, but shown as an adjustment to additional paid-in capital.

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$640,000 $700,000 50,000 40,000 790,000 10 % $ 79,000 $

6,000

Chapter 8

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Solution E8-10 (continued) 2

Noncontrolling interest share Noncontrolling interest share — 2012: ($100,000 income ´ 10% interest x 1/2)

$ 5,000

Noncontrolling interest share — 2013: ($80,000 ´ 1/2 year ´ 10%) + ($80,000 ´ 1/2 year ´ 20%)

$ 12,000

Noncontrolling interest December 31, 2012 Equity of Sad January 1 Add: Income less dividends for 2012 Equity of Sad December 31 Noncontrolling interest percentage

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