1. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 5 Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

2. 5-2 Learning Objective 1 Understand and explain how the consolidation process differs when the subsidiary is less-than-wholly owned and there is a differential. Understand and explain how the consolidation process differs when the subsidiary is less-than-wholly owned and there is a differential.

3. 5-3 Differences in Consolidation in Chapter 5 Wholly Owned Subsidiary Partially Owned Subsidiary Investment = Book Value Chapter 2Chapter 3 No Differential Investment > Book Value Chapter 4Chapter 5 Differential No NCI Shareholders NCI Shareholders

4. 5-4 Issue Should Parent revalue the land by the full $39,000 in consolidation or only its share of the excess value ($31,200)? Partial Ownership Example Assume Parent owns land with a book value of $400,000. Parent’s 80%-owned subsidiary also owns land. At the time of the acquisition, Sub’s land has a FMV of $100,000 and a book value of $61,000. Thus, the land has excess value of $39,000. Parent Sub 80% 20% NCI

5. 5-5 Partial Ownerships: Partial or Full Valuation?  We learned earlier that full consolidation is required, as opposed to partial consolidation. Thus, we consolidate 100% of the sub. This, however, refers to the BV of the subsidiary.  What about revaluation of assets to FMV? The extent of revaluation of undervalued assets and goodwill can vary. Parent Company Concept: Partial valuation Entity Concept: Full valuation

6. 5-6 Partial Ownership Example  Both were used in the past.  SFAS 141R requires the Entity Concept. Parent Sub 80% 20% NCI ParentSubDRCRConsolidated Land$400,000$61,000$31,200$492,200 ParentSubDRCRConsolidated Land$400,000$61,000$39,000$500,000 Parent Company Concept Economic Unit Concept

7. 5-7 Partial Ownership: Undervalued Assets & GW  How much to revalue the Subsidiary’s undervalued assets and goodwill? Parent company concept: < 100% of FMV Revalued only to the extent of the parent’s percent ownership Entity concept: 100% of FMV The offsetting credit for the additional valuation increases the NCI in net assets

8. 5-8 Practice Quiz Question #1 Under which concept is goodwill assigned to the noncontrolling interest for consolidated financial reporting purposes? a.The entity concept. b.The parent company concept. c.Both a and b. d.None of the above. Under which concept is goodwill assigned to the noncontrolling interest for consolidated financial reporting purposes? a.The entity concept. b.The parent company concept. c.Both a and b. d.None of the above.

9. 5-9 Practice Quiz Question #1 Solution Under which concept is goodwill assigned to the noncontrolling interest for consolidated financial reporting purposes? a.The entity concept. b.The parent company concept. c.Both a and b. d.None of the above. Under which concept is goodwill assigned to the noncontrolling interest for consolidated financial reporting purposes? a.The entity concept. b.The parent company concept. c.Both a and b. d.None of the above.

10. 5-10 Learning Objective 2 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when there is a complex positive differential. Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when there is a complex positive differential.

11. 5-11 Book value elementLife remaining Common Stock$130,000 Retained Earnings117,000 Under- or Over-valuation Inventory(6,500)2 months Land39,000Indefinite Equipment85,00010 years Covenant-not-to-compete52,0004 years Goodwill element 26,000Indefinite Total Cost$442,500 Group Exercise 1: 80% Acquisition Pepper Inc., a calendar-year reporting company, acquired 80% of Salt Inc.’s outstanding common stock for $354,000 on 12/31/X8 when the fair value of Salt’s net assets was $422,500. The following data summarize the fair value calculation:

12. 5-12 1.Prepare an analysis of the Investment account through 12/31/X8. 2.Prepare all consolidation entries as of 12/31/X8. 3.Prepare a consolidation worksheet at 12/31/X8. 4.What amount of income does Pepper report for 20X8? Group Exercise 1: 80% Acquisition

13. 5-13 Group Exercise 1: Solution Book Value Calculations: Salt’s Equity Accounts, BV NCI’s 20%Pepper’s 80%CommonRetained Share of BV Share of BV StockEarnings Balances, 12/31/X8 = The Basic Elimination Entry: Common Stock Retained Earnings Investment in Salt NCI in NA in Salt +

14. 5-14 Group Exercise 1: Solution Worksheet Entries Book Value Calculations: Salt’s Equity Accounts, BV NCI’s 20%Pepper’s 80%CommonRetained Share of BV Share of BV StockEarnings Balances, 12/31/X849,400197,600130,000117,000 = The Basic Elimination Entry: Common Stock Retained Earnings Investment in Salt NCI in NA in Salt +

15. 5-15 Group Exercise 1: Solution Worksheet Entries Book Value Calculations: Salt’s Equity Accounts, BV NCI’s 20%Pepper’s 80%CommonRetained Share of BV Share of BV StockEarnings Balances, 12/31/X849,400197,600130,000117,000 = The Basic Elimination Entry: Common Stock130,000 Retained Earnings117,000 Investment in Salt 197,600 NCI in NA in Salt49,400 +

16. 5-16 Group Exercise 1: Solution Worksheet Entries The Excess Value Reclassification Entry: Land Building & Equipment Covenant N-T-C Goodwill Inventory Investment in Salt NCI in NA of Salt Accumulated Depreciation Building & Equipment The Accumulated Depreciation Elimination Entry: Excess Value Calculations: NCI’s 20%Pepper’s 80%Salt’s Under- or (Over-) Valuation of Net AssetsShare of Excess ValueExcess ValueInventoryLandEquipmentCovenantGoodwill Balances, 12/31/X8 =

17. 5-17 Group Exercise 1: Solution Worksheet Entries The Excess Value Reclassification Entry: Land Building & Equipment Covenant N-T-C Goodwill Inventory Investment in Salt NCI in NA of Salt Accumulated Depreciation Building & Equipment The Accumulated Depreciation Elimination Entry: Excess Value Calculations: NCI’s 20%Pepper’s 80%Salt’s Under- or (Over-) Valuation of Net AssetsShare of Excess ValueExcess ValueInventoryLandEquipmentCovenantGoodwill Balances, 12/31/X839,100156,400(6,500)39,00085,00052,00026,000 =

18. 5-18 Group Exercise 1: Solution Worksheet Entries The Excess Value Reclassification Entry: Land39,000 Building & Equipment85,000 Covenant N-T-C52,000 Goodwill26,000 Inventory6,500 Investment in Salt156,400 NCI in NA of Salt39,100 Accumulated Depreciation Building & Equipment The Accumulated Depreciation Elimination Entry: Excess Value Calculations: NCI’s 20%Pepper’s 80%Salt’s Under- or (Over-) Valuation of Net AssetsShare of Excess ValueExcess ValueInventoryLandEquipmentCovenantGoodwill Balances, 12/31/X839,100156,400(6,500)39,00085,00052,00026,000 =

19. 5-19 Group Exercise 1: Solution Worksheet Entries The Excess Value Reclassification Entry: Land39,000 Building & Equipment85,000 Covenant N-T-C52,000 Goodwill26,000 Inventory6,500 Investment in Salt156,400 NCI in NA of Salt39,100 Accumulated Depreciation57,200 Building & Equipment57,200 The Accumulated Depreciation Elimination Entry: Excess Value Calculations: NCI’s 20%Pepper’s 80%Salt’s Under- or (Over-) Valuation of Net AssetsShare of Excess ValueExcess ValueInventoryLandEquipmentCovenantGoodwill Balances, 12/31/X839,100156,400(6,500)39,00085,00052,00026,000 =

20. 5-20 Group Exercise 1: Completed Worksheet

21. 5-21 How Do the Elimination Entries Change? 1.The basic elimination entry: 2.The excess value reclassification entry: Asset 1XXX Asset 2XXX GoodwillXXX Investment in Sub% Excess NCI in NA of Sub% Excess Common Stock (S)XXX Additional Paid-in Capital (S)XXX Retained Earnings, Beginning Balance (S)XXX Income from Sub% NI NCI in NI of Sub% NI Dividends DeclaredXXX Investment in Sub% BV NCI in NA of Sub% BV

22. 5-22 How Do the Elimination Entries Change? 3.The amortized excess value reclassification entry: This entry reclassifies the equity method amortization of cost in excess of book from Income from Sub to the appropriate expense accounts where the costs would have been had the Sub used FMV instead of BV. 4.The accumulated depreciation elimination entry: Accumulated DepreciationXXX Building & EquipmentXXX Cost of SalesXXX Other ExpensesXXX Income from Sub% Adj. NCI in NI of Sub% Adj. Acquisition Date

23. 5-23 Group Exercise 2: 80% End of First Year Continuation of Exercise 1 1.Update the analysis of the Investment account through 12/31/X9. 2.Prepare the consolidation entries as of 12/31/X9. 3.Prepare a consolidation worksheet at 12/31/X9.

24. 5-24 Group Exercise 2: 80% End of First Year Book Value Calculations: NCI’sPepper’sSalt’s Equity Accounts, BV 20% Share80% ShareCommonRetained of BVof BVStockEarnings Balances, 1/1/X9 Add: NI from Salt Less Dividends Balances, 12/31/X9 The Basic Elimination Entry: Common Stock Retained Earnings, 1/1/X9 Income from Salt NCI in NI of Salt Dividends Declared Investment in Salt NCI in NA of Salt + =

25. 5-25 Group Exercise 2: 80% End of First Year Book Value Calculations: NCI’sPepper’sSalt’s Equity Accounts, BV 20% Share80% ShareCommonRetained of BVof BVStockEarnings Balances, 1/1/X949,400197,600130,000117,000 Add: NI from Salt15,600 62,40078,000 Less Dividends(9,100)( 36,400)( 45,500) Balances, 12/31/X955,900223,600130,000149,500 The Basic Elimination Entry: Common Stock Retained Earnings, 1/1/X9 Income from Salt NCI in NI of Salt Dividends Declared Investment in Salt NCI in NA of Salt + =

26. 5-26 Group Exercise 2: 80% End of First Year Book Value Calculations: NCI’sPepper’sSalt’s Equity Accounts, BV 20% Share80% ShareCommonRetained of BVof BVStockEarnings Balances, 1/1/X949,400197,600130,000117,000 Add: NI from Salt15,600 62,40078,000 Less Dividends(9,100)( 36,400)( 45,500) Balances, 12/31/X955,900223,600130,000149,500 The Basic Elimination Entry: Common Stock130,000 Retained Earnings, 1/1/X9117,000 Income from Salt62,400 NCI in NI of Salt15,600 Dividends Declared45,500 Investment in Salt223,600 NCI in NA of Salt55,900 + =

27. 5-27 Group Exercise 2: 80% End of First Year Excess Value Calculations: NCI’sPepper’s 20% 80% Salt’s Under- or (Over-) Valuation of Net Assets Element Share ofShare of InventoryLandEquipmentAcc DepCovenantGoodwill Remaining Life Excess Value Excess Value2 monthsIndefinite10 years4 years Balances, 1/1/X9 Less: Amortization Balances, 12/31/X9 = The Excess Value Reclassification Entry: Land Building & Equipment Covenant N-T-C Goodwill Accumulated Depreciation Investment in Salt NCI in NA of Salt Accumulated Depreciation Building & Equipment The Accumulated Depreciation Elimination Entry: The Amortized Excess Value Reclassification Entry: Depreciation Expense S&A Expense Cost of Sales Income from Salt NCI in NI of Salt

28. 5-28 Group Exercise 2: 80% End of First Year Excess Value Calculations: NCI’sPepper’s 20% 80% Salt’s Under- or (Over-) Valuation of Net Assets Element Share ofShare of InventoryLandEquipmentAcc DepCovenantGoodwill Remaining Life Excess Value Excess Value2 monthsIndefinite10 years4 years Balances, 1/1/X939,100156,400(6,500)39,00085,00052,00026,000 Less: Amortization( 3,000)( 12,000)6,5000(8,500)(13,000) Balances, 12/31/X936,100144,400039,00085,000(8,500)39,00026,000 = The Excess Value Reclassification Entry: Land Building & Equipment Covenant N-T-C Goodwill Accumulated Depreciation Investment in Salt NCI in NA of Salt Accumulated Depreciation Building & Equipment The Accumulated Depreciation Elimination Entry: The Amortized Excess Value Reclassification Entry: Depreciation Expense S&A Expense Cost of Sales Income from Salt NCI in NI of Salt

29. 5-29 Group Exercise 2: 80% End of First Year Excess Value Calculations: NCI’sPepper’s 20% 80% Salt’s Under- or (Over-) Valuation of Net Assets Element Share ofShare of InventoryLandEquipmentAcc DepCovenantGoodwill Remaining Life Excess Value Excess Value2 monthsIndefinite10 years4 years Balances, 1/1/X939,100156,400(6,500)39,00085,00052,00026,000 Less: Amortization( 3,000)( 12,000)6,5000(8,500)(13,000) Balances, 12/31/X936,100144,400039,00085,000(8,500)39,00026,000 = The Excess Value Reclassification Entry: Land39,000 Building & Equipment85,000 Covenant N-T-C39,000 Goodwill26,000 Accumulated Depreciation8,500 Investment in Salt144,400 NCI in NA of Salt36,100 Accumulated Depreciation Building & Equipment The Accumulated Depreciation Elimination Entry: The Amortized Excess Value Reclassification Entry: Depreciation Expense S&A Expense Cost of Sales Income from Salt NCI in NI of Salt

30. 5-30 Group Exercise 2: 80% End of First Year Excess Value Calculations: NCI’sPepper’s 20% 80% Salt’s Under- or (Over-) Valuation of Net Assets Element Share ofShare of InventoryLandEquipmentAcc DepCovenantGoodwill Remaining Life Excess Value Excess Value2 monthsIndefinite10 years4 years Balances, 1/1/X939,100156,400(6,500)39,00085,00052,00026,000 Less: Amortization( 3,000)( 12,000)6,5000(8,500)(13,000) Balances, 12/31/X936,100144,400039,00085,000(8,500)39,00026,000 = The Excess Value Reclassification Entry: Land39,000 Building & Equipment85,000 Covenant N-T-C39,000 Goodwill26,000 Accumulated Depreciation8,500 Investment in Salt144,400 NCI in NA of Salt36,100 Accumulated Depreciation Building & Equipment The Accumulated Depreciation Elimination Entry: The Amortized Excess Value Reclassification Entry: Depreciation Expense8,500 S&A Expense13,000 Cost of Sales6,500 Income from Salt12,000 NCI in NI of Salt3,000

31. 5-31 Group Exercise 2: 80% End of First Year Excess Value Calculations: NCI’sPepper’s 20% 80% Salt’s Under- or (Over-) Valuation of Net Assets Element Share ofShare of InventoryLandEquipmentAcc DepCovenantGoodwill Remaining Life Excess Value Excess Value2 monthsIndefinite10 years4 years Balances, 1/1/X939,100156,400(6,500)39,00085,00052,00026,000 Less: Amortization( 3,000)( 12,000)6,5000(8,500)(13,000) Balances, 12/31/X936,100144,400039,00085,000(8,500)39,00026,000 = The Excess Value Reclassification Entry: Land39,000 Building & Equipment85,000 Covenant N-T-C39,000 Goodwill26,000 Accumulated Depreciation8,500 Investment in Salt144,400 NCI in NA of Salt36,100 Accumulated Depreciation57,200 Building & Equipment57,200 The Accumulated Depreciation Elimination Entry: The Amortized Excess Value Reclassification Entry: Depreciation Expense8,500 S&A Expense13,000 Cost of Sales6,500 Income from Salt12,000 NCI in NI of Salt3,000

32. 5-32 Book value = 197,600 Identifiable Excess = 135,600 Group Exercise 2: 80% End of First Year BB 354,000 Investment in Salt Goodwill = 20,800 Book value = 223,600 Identifiable Excess = 123,600 Goodwill = 20,800 NI 62,400 36,400 Dividend 12,000 Excess Amort. EB 368,000 Beginning Balance: Ending Balance:

33. 5-33 Group Exercise 3: Solution Investment in SaltIncome from Salt Notice how the worksheet entries “eliminate” Pepper’s equity method accounts: BB 354,000 NI 62,400 36,400Dividend 12,000Excess Amort. 12,000 EB 368,000 62,400 NI 223,600Basic 62,400 144,400Excess Reclass. 0 0 50,400 Adj. Balance Excess Amort. 12,000

34. 5-34 Group Exercise 2: 80% End of First Year

35. 5-35 Learning Objective 3 Understand and explain what happens when a parent company ceases to consolidate a subsidiary. Understand and explain what happens when a parent company ceases to consolidate a subsidiary.

36. 5-36 Discontinuance of Consolidation  A parent should stop consolidating a subsidiary if it can no longer exercise control.  Two possible scenarios: The parent loses control of a subsidiary and no longer holds an equity interest. The parent loses control but still holds an equity interest.

37. 5-37 Parent No Longer Holds an Equity Interest  If a parent loses control of a subsidiary and no longer holds an equity interest in the former subsidiary, Parent recognizes a gain or loss for the difference between any proceeds received from the event leading to loss of control, and the carrying amount of the parent’s equity interest.

38. 5-38 Example: Parent No Longer Holds an Equity Interest Assume that on December 31, 20X9, Pepper’s Investment in Salt account has a balance of $368,000. Also assume that Pepper’s 80% interest in Salt has a fair value of $410,000. On January 1, 20X0, Pepper sells all of its Salt shares for $400,000. How should Pepper account for this transaction? Sale proceeds$400,000 Less: Carrying value of the investment(368,000) Gain on sale$32,000 Cash400,000 Investment in Salt368,000 Gain on sale32,000

39. 5-39 Parent Maintains an Equity Interest  If the parent loses control but maintains a noncontrolling equity interest in the former subsidiary, Parent must recognize a gain or loss for the difference, at the date control is lost, between: the sum of any proceeds received by the parent and the fair value of its remaining equity interest in the former subsidiary, and the carrying amount of the parent’s total interest in the subsidiary.

40. 5-40 Example: Parent Maintains an Equity Interest Cash200,000 Investment in Salt163,000 Gain on Sale37,000 Assume that on December 31, 20X9, Pepper’s Investment in Salt account has a balance of $368,000. Also assume that Pepper’s 80% interest in Salt has a fair value of $410,000. On January 1, 20X0, Pepper sells half (remaining 40%) of Salt’s shares for $200,000. How should Pepper account for this transaction? 368,000 Investment in Salt 205,000 163,000 Remaining interest revalued at fair value Sale proceeds$200,000 Plus: Fair value of remaining investment205,000 $405,000 Less: Entire carrying value of investment(368,000) Gain on Sale$37,000

41. 5-41 Practice Quiz Question #2 Paul Corp. owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells all of its Sam Inc. shares for $200,000 and records a gain of a.$30,000. b.$50,000. c.$70,000. d.$170,000. Paul Corp. owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells all of its Sam Inc. shares for $200,000 and records a gain of a.$30,000. b.$50,000. c.$70,000. d.$170,000.

42. 5-42 Practice Quiz Question #2 Solution Paul Corp. owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells all of its Sam Inc. shares for $200,000 and records a gain of a.$30,000 ($200,000 - $170,000). b.$50,000. c.$70,000. d.$170,000. Paul Corp. owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells all of its Sam Inc. shares for $200,000 and records a gain of a.$30,000 ($200,000 - $170,000). b.$50,000. c.$70,000. d.$170,000.

43. 5-43 Practice Quiz Question #3 Paul Corp. owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000 and records a gain of a.$30,000. b.$50,000. c.$85,000. d.$170,000. Paul Corp. owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000 and records a gain of a.$30,000. b.$50,000. c.$85,000. d.$170,000.

44. 5-44 Practice Quiz Question #3 Solution Paul Corp. owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000 and records a gain of a.$30,000. b.$50,000. c.$85,000. d.$170,000. Paul Corp. owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000 and records a gain of a.$30,000. b.$50,000. c.$85,000. d.$170,000.

45. 5-45 Practice Quiz Question #4 Paul Corp. owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000. What is the carrying amount of the remaining shares? a.$85,000 b.$125,000 c.$170,000 d.$250,000 Paul Corp. owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000. What is the carrying amount of the remaining shares? a.$85,000 b.$125,000 c.$170,000 d.$250,000

46. 5-46 Paul Corp. owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000. What is the carrying amount of the remaining shares? a.$85,000 b.$125,000 c.$170,000 d.$250,000 Paul Corp. owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000 and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000. What is the carrying amount of the remaining shares? a.$85,000 b.$125,000 c.$170,000 d.$250,000 Practice Quiz Question #4 Solution

47. 5-47 Practice Quiz Question #s 3-4 Solutions 170,000 Investment in Sam 125,000 Cash130,000 Investment in Sam45,000 Gain on Sale85,000 Paul Corp. Owns 90% of Sam Inc.’s outstanding common stock. The carrying value of the investment in Sam is $170,000, and the fair value of this investment is $250,000. Paul sells half of its Sam Inc. shares for $130,000. 45,000 Remaining interest revalued at fair value Sale proceeds$130,000 Plus: Fair value of remaining investment125,000 $255,000 Less: Entire carrying value of investment(170,000) Gain on Sale$85,000

48. 5-48 Learning Objective 4 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when there is a complex positive differential and other comprehensive income. Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when there is a complex positive differential and other comprehensive income.

49. 5-49 Treatment of Other Comprehensive Income  FASB 130 requires that companies separately report other comprehensive income. Includes revenues, expenses, gains, and losses that under GAAP are excluded from net income. Other comprehensive income accounts are temporary accounts that are closed at the end of each period to a special stockholders’ equity account, Accumulated Other Comprehensive Income. The consolidation worksheet normally includes an additional section at the bottom for other comprehensive income.

50. 5-50 Group Exercise 3: 80% with OCI Assume that during 20X9, Salt purchases $10,000 of investments classified as available-for-sale. By December 31, 20X9, the fair value of the securities increases to $30,000. Other than the effects of accounting for Salt’s investment in securities, the financial information reported at December 31, 20X9, is identical to that presented in the previous examples. Investment in Available-for-Sale Securities20,000 Unrealized Gain on Investments (OCI)20,000 Adjusting entry recorded by Salt: Adjusting entry recorded by Pepper: Investment in Salt16,000 Other Comprehensive Income from Salt— Unrealized Gain on Investments (OCI)16,000

51. 5-51 Group Exercise 3: 80% with OCI Other comprehensive income entry: OCI from Salt16,000 OCI to NCI4,000 Investment in Salt16,000 NCI in NA of Salt4,000

52. 5-52 Group Exercise 2: 80% End of First Year

53. 5-53 Learning Objective 5 Understand and explain additional considerations associated with consolidation.

54. 5-54 Additional Considerations  Subsidiary valuation accounts at acquisition FASB 141R indicates that all assets and liabilities acquired in a business combination should be valued at their acquisition-date fair values and no valuation accounts are to be carried over. Its application in consolidation following a stock acquisition is less clear.

55. 5-55 Additional Considerations—Deficit in RE  Negative retained earnings of subsidiary at acquisition A parent company may acquire a subsidiary with a negative in its retained earnings account. The basic elimination entry will have a credit rather than a debit to Retained Earnings.

56. 5-56 Additional Considerations—Deficit in RE The basic elimination entry: Common Stock (S)XXX Additional Paid-in Capital (S)XXX Income from Sub% NI NCI in NI of Sub% NI Retained Earnings, Beginning Balance (S)XXX Dividends DeclaredXXX Investment in Sub% BV NCI in NA of Sub% BV

57. 5-57 Additional Considerations  Other stockholders’ equity accounts In general, all stockholders’ equity accounts accruing to the common shareholders receive the same treatment as common stock and are eliminated at the time common stock is eliminated.

58. 5-58 Additional Considerations  Subsidiary’s disposal of differential-related assets Both the parent’s equity-method income and consolidated net income are affected. Parent’s books: The portion of the differential included in the subsidiary investment account that relates to the asset sold must be written off by the parent under the equity method as a reduction in both the income from the subsidiary and the investment account. In consolidation, the portion of the differential related to the asset sold is treated as an adjustment to consolidated income.

59. 5-59 Additional Considerations  Inventory Any inventory-related differential is assigned to inventory for as long as the subsidiary holds the units. In the period in which the inventory units are sold, the inventory-related differential is assigned to Cost of Goods Sold. The inventory costing method used by the subsidiary determines the period in which the differential cost of goods sold is recognized. FIFO: The inventory units on hand on the date of combination are viewed as being the first units sold after the combination. LIFO: The inventory units on the date of combination are viewed as remaining in the subsidiary’s inventory.

60. 5-60 Additional Considerations  Fixed Assets A differential related to land held by a subsidiary is added to the Land balance in the consolidation workpaper each time a consolidated balance sheet is prepared. If the subsidiary sells the land to which the differential relates, the differential is treated in the consolidation workpaper as an adjustment to the gain or loss on the sale of the land in the period of the sale. The sale of differential-related equipment is treated in the same manner as land except that the amortization for the current and previous periods must be considered.

61. Conclusion The End 5-61