Accounting for Specific Industries – Bank Accounting Pertemuan 11-12 Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan II Tahun : 2010 Accounting for Specific Industries – Bank Accounting Pertemuan 11-12

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.

Preacquisition Earnings 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

Preacquisition Earnings 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

Preacquisition Earnings 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

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

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

Consolidation Patter’s Investment 213,750 33,750 234,000 13,500 12/31/2006 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) $100 (50) $ 50 $ 35 50 (25) $ 60 a 33.75 c 5.00 b 11.25 b 35 $400 (250) (5) (11.25) Income Statement a 13.5 b 9.0 c 2.5

Working Papers December 31, 2006 Balance Sheet Adjustments/ Consol- Patter Sissy Eliminations idated Other assets Investment in Sissy Capital stock Retained earnings Minority interest $566 234 $800 $500 300 $260 $200 60 a 20.25 b 213.75 b 200 b 23.50 c 2.50 $826 500 300 26

Apply consolidation procedures to interim (midyear) acquisitions. Learning Objective 2 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.

Piecemeal Acquisitions 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

Piecemeal Acquisitions What is the initial goodwill from each of the three acquisitions? $125 × 20% = $25 $30 – $25 = $5 2003 2004 $160× 40% = $64 $74 – $64 = $10

Piecemeal Acquisitions $220 × 30% = $66 $81 – $66 = $15 2005 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

Working Paper Entries: 2005 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

Working Paper Entries: 2005 c Minority Interest Expense 4,000 Minority Interest 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.

Sale of Ownership Interests Did Pablo acquire goodwill? Yes! $300,000 × 90% = $270,000 $288,000 – $270,000 = $18,000

Sale of Ownership Interests 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 Dividends 12/31/2007 Cash Gain Income from S 40,000 16,000 8,000 28,800

Working Paper Entries: 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

Working Paper Entries: 2007 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

Working Paper Entries: 2007 c Minority Interest Expense 7,200 Dividends 4,000 Minority Interest 3,200 To enter minority interest share of subsidiary income and dividends

Working Papers December 31, 2007 Adjustments/ Consol- 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 (608.8) (7.2) Income Statement

Working Papers December 31, 2007 Balance Sheet Adjustments/ Consol- Pablo Sergio Eliminations idated Other assets Investment in Sergio Goodwill Liabilities Capital stock Retained earnings Minority interest $639.2 268.8 $908 $150 500 258 $350 $ 34 200 116 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

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

Sale of Interest During an 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.

Sale of Interest During an 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

Sale of Interest During an Accounting Period $36,000 × 1/4 year × 90% = $ 8,100 $36,000 × 3/4 year × 80% = 21,600 $29,700 Equity Income $29,700 – $16,000 = $13,700

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

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

Sale of Additional Shares by a Subsidiary Stroh’s equity January 1, 2007 Capital stock, $10 par $100,000 Additional paid-in capital 60,000 Retained earnings 40,000 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. January 1 before sale: 8,000 ÷ 10,000 = 80% January 2 after sale: 10,000 ÷ 12,000 = 831/3%

Subsidiary Sells Shares to Parent 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

Subsidiary Sells Shares to Parent 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

Subsidiary Sells Shares to Outside Entity Sale at $20 Sale at $35 Stroh’s stockholders’ equity $240,000 $270,000 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

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.

Treasury Stock Transactions 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.

Treasury Stock Transactions by a Subsidiary Shelly’s equity before purchase of 400 shares of treasury stock Capital stock, $10 par $100,000 Retained earnings 100,000 Total equity $200,000 Pointer’s share of Shelly’s book value (80%) $160,000

Treasury Stock Transactions by a Subsidiary 400 shares @$20 @$30 @$15 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