Christensen 12e Chap09 SM PDF

Preview

Summary

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent9-CHAPTER 9CONSOLIDATION OWNERSHIP ISSUESANSWERS TO QUESTIONSQ9-1 Preferred stock of the subsidiary is eliminated in the consolidation process in a manner comparable to that ...

Description

Chapter 9 - Consolidation Ownership Issues

CHAPTER 9 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 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. Shares 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 parent will record the difference between the carrying value and the sale price of the shares as 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. Q9-6 All common shareholders 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. Q9-7 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. 9-1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 9 - Consolidation Ownership Issues

Q9-8 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 worksheet. 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. Q9-9 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 (Company D) are held by one or more companies (Companies B and C) that are, in turn, under the control of another company (Company A). By exercising its control over those companies (Companies B and C) the parent (Company A) can exercise control of the company indirectly owned (Company D). Q9-10 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. Q9-11 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. Q9-12 Consolidated net income will be reduced by $100,000. Income assigned to the controlling interest will be reduced by $72,000 ($100,000 x 0.90 x 0.80) 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 0.10) and $18,000 is a reduction of the income assigned to noncontrolling shareholders of Subsidiary Company ($100,000 x 0.90 x 0.20). Q9-13 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. Q9-14 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 worksheet. Q9-15 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 Consolidation entries is the relative amount debited to each of the three individual stockholders' equity accounts of the subsidiary.

9-2 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 9 - Consolidation Ownership Issues

Q9-16 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.

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: 1. The number of preferred shares outstanding and the number owned by the parent and other affiliates. 2. The annual preferred dividend rate per share and whether the dividends are cumulative or noncumulative. 3. 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 ASC 810-10-55-4H, 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). ASC 480-10-25 gives specific guidance on whether or not to treat preferred stock as a liability. Consequently, Occidental's subsidiary preferred stock should be reported as part of the noncontrolling interest. 9-3 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 9 - 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

The FASB’s recent issuance of ASC 810-10-55-4H 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 0.60), 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: ASC 810-10-55-4H

9-4 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 9 - 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 do not change. Therefore, there should be no change in the reported equity of the consolidated entity. 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: 1. Are the excess funds held by Thorson available only temporarily or are they not likely to be needed in the foreseeable future? 2. Will there be any regulatory or taxation problems associated with one or more of the alternatives? 3. 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? 4. Is it desirable to acquire more shares of either subsidiary since controlling ownership already is in the hands of Strong Manufacturing? 5. 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 price-earnings ratio.

9-5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 9 - Consolidation Ownership Issues

C9-6 Complex Organizational Structures a. Atlas America is a corporation. Its operations involve the development, production, and distribution of natural gas, and to a lesser extent, oil. It also offers tax-advantaged investment programs for gas and oil investors. b. The subsidiaries of Atlas America include corporations, limited liability companies (LLCs), and both general and limited partnerships. The company fully consolidates its subsidiaries. In accordance with industry practice, the company reflects its interests in energy partnerships in its consolidated statements using pro rata consolidation. c. Atlas Pipeline Holdings is a subsidiary of Atlas America. It has complete ownership of Atlas Pipeline Partners GP, LLC, a limited liability company that is the general partner of Atlas Pipeline Partners, L.P. The only cash generating assets of Atlas Pipeline Holdings are its indirect interests in Atlas Pipeline Partners, L.P. d. Atlas Pipeline Partners, L.P. is a partnership, specifically a publicly-traded limited partnership. A limited partnership must have at least one general partner with unlimited liability, and it may have numerous limited partners whose liability is limited and may not participate in the management of the partnership. Atlas Pipeline Partners, L.P. has a number of subsidiaries, including general and limited partnerships, corporations, and limited liability companies. Limited liability companies, in general, have the advantages of corporations with less of the formalities. They often have certain tax advantages over corporations. Atlas Pipeline Partners, L.P. is managed by its general partner, Atlas Pipeline Partners GP, LLC. The executives responsible for Atlas Pipeline’s management are employees of Atlas America, as indicated in Atlas Pipeline’s Form 10-K, in the item entitled Directors and Executive Officers of the Registrant. These employees not only manage Atlas Pipeline Partners, L.P., but also Atlas America and its other affiliates. e. Atlas Pipeline Partners, L.P. presents consolidated financial statements in which it consolidates all of its wholly-owned and majority-owned subsidiaries. NOARK Pipeline System is a limited partnership that is 100 percent owned by Atlas Pipeline Partners. Prior to 2006, Atlas Pipeline Partners owned 75 percent of NOARK. Atlas consolidates 100 percent of NOARK, and previously also consolidated 100 percent of NOARK even though it was only 75 percent owned.

9-6 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 9 - Consolidation Ownership Issues

SOLUTIONS TO EXERCISES E9-1 Multiple-Choice Questions on Preferred Stock Ownership 1. d –

$50,000 = $20,000 + $30,000

2. c –

$29,000 = $20,000 + 0.30($30,000)

3. b –

Only the retained earnings of the parent company is included.

4. 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 1. b –

$188,000 = $100,000 + 0.80[$80,000 + (0.60 x $50,000)]

2. b –

$20,000 = 0.40 x $50,000

3. c –

$22,000 = 0.20 x [$80,000 + (0.60 x $50,000)]

4. c –

$42,000 = (0.40 x $50,000) + {0.20 x [$80,000 + (0.60 x $50,000)]}

5. b –

$2,400 = 0.80 x {0.60 x [($150,000 + $100,000 - $200,000) / 10 years)]}

E9-3 Acquisition of Preferred Shares Basic Consolidation Entry: Preferred Stock

100,000

Common Stock

50,000

Retained Earnings

150,000

Investment in Separate CS

140,000

Investment in Separate PS

60,000

NCI in NA of Separate

100,000

9-7 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 9 - 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 intercompany payment to an affiliate and must be eliminated in the consolidation process.

E9-5 Subsidiary with Preferred Stock Outstanding Basic Consolidation Entry: Preferred Stock...