CHAPTER 4

CONSOLIDATED FINANCIAL STATEMENTS

AND OUTSIDE OWNERSHIP
Chapter Outline
I. Outside ownership may be present within any consolidated entity.
A. Complete ownership of a subsidiary is not a prerequisite for consolidationonly
enough voting shares need be owned so that the acquiring company has the ability to
control the decision-making process of the acquired company.
B. Any ownership interest in a subsidiary company by a party unrelated to the acquiring
company is termed a noncontrolling interest.

II. Valuation of subsidiary assets and liabilities poses a challenge when a noncontrolling
interest is present.
A. The accounting emphasis (economic unit concept) is placed on the entire entity that
results from the business combination when control has been obtained. The parent
company that controls its subsidiary must consolidate 100% of subsidiary assets,
liabilities, revenues, and expense are consolidated even when its ownership is less
than 100%.
B. The consolidated valuation basis for a newly acquired subsidiary is the acquisition-
date fair value of the company (most frequently determined by the consideration
transferred and the fair value of the noncontrolling interest); specific subsidiary assets
and liabilities are measured at their acquisition-date fair values.
C. The noncontrolling interest balance is reported in the parents consolidated financial
statements as a component of stockholders' equity.

III. Consolidations involving a noncontrolling interestsubsequent to the date of acquisition

A. Four noncontrolling interest figures are determined for reporting purposes
1. Beginning of year balance sheet amount
2. Net income attributable to noncontrolling interest
3. Dividends declared by subsidiary during the period attributable to the
noncontrolling interest
4. End of year balance sheet amount
B. Noncontrolling interest balances are accumulated in a separate column in the
consolidation worksheet
1. The beginning of year figure is entered on the worksheet as a component of
Entries S and A
2. The net income attributable to the noncontrolling interest is established by a
columnar entry that simultaneously reports the balance in both the consolidated
income statement and the noncontrolling interest column
3. Dividends declared to these outside owners are reflected by extending the
subsidiary's Dividends declared balance (after eliminating intra-entity transfers)
into the noncontrolling interest column as a reduction
4. The end of year noncontrolling interest total is the summation of the three items
above and is reported in stockholders' equity.

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IV. Step acquisitions
A. An acquiring company may make several different purchases of a subsidiary's stock
in order to gain control
B. Upon attaining control, all of the parents previous investments in the subsidiary are
adjusted to fair value and a gain or loss recognized as appropriate
C. Upon attaining control, the valuation basis for the subsidiary is established at its total
fair value (the sum of the fair values of the controlling and noncontrolling interests)
D. Post-control subsidiary stock acquisitions by the parent are considered transactions
with current owners of the consolidated entity. Thus such post-control stock
acquisitions neither result in gains or losses nor provide a basis for subsidiary asset
remeasurement to fair value. The difference between the sale proceeds and the
carrying value of the shares sold (equity method) is recorded as an adjustment to the
parents additional paid in capital.

V. Sales of subsidiary stock

A. The proper book value must be established within the parent's Investment account so
that the sales transaction can be correctly recorded
B. The investment balance is adjusted as if the equity method had been applied during
the entire period of ownership
C. If only a portion of the shares are being sold, the book value of the investment
account is reduced using either a FIFO or a weighted-average cost flow assumption
D. If the parent maintains control, any difference between the proceeds of the sale and
the equity-adjusted book value of the share sold is recognized as an adjustment to
additional paid-in capital.
E. If the parent loses control with the sale of the subsidiary shares, the difference
between the proceeds of the sale and the equity-adjusted book value of the share
sold is recognized as a gain or loss.
F. Any interest retained by the parent company should be accounted for by either
consolidation, the equity method, or the fair value method depending on the influence
remaining after the sale.

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27. (15 minutes) Consolidated figures with noncontrolling interest

Fair value of company (given) $60,000

Book value (10,000)
Fair value in excess of book value 50,000
to machine ($50,000 $10,000) 40,000 10 = $4,000 per year
to process trade secret $10,000 4 = 2,500 per year
$6,500 per year
Consolidated figures:
Net income attributable to noncontrolling interest
= 40% ($50,000 revenues less $26,500 expenses) = $9,400
End-of-year noncontrolling interest:
Beginning balance (40% $60,000) $24,000
Net income allocation (from above) 9,400
Dividend reduction (40% $5,000) (2,000)
End-of-year noncontrolling interest $31,400
Machine (net) = $45,000 ($9,000 book value plus $40,000 excess
allocation less $4,000 excess depreciation for one year).
Process trade secret (net) = $10,000 $2,500 = $7,500

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28. (40 minutes) (Worksheet preparation, parent uses equity method, 20% noncontrolling
interest, no control premium, first year subsequent to acquisition).

Plaza Stanford Consolidation Entries NCI

Consolidated
Revenues (1,400,000) (825,000) (2,225,000)
Cost of goods sold 774,000 395,750 1,169,750
Depreciation expense 328,000 36,250 E 5,000 369,250
Amortization expense -0- 28,000 E 10,000 38,000
Equity in income of
Stanford (280,000) -0- I 280,000 -0-
Net income (578,000) (365,000)
Consolidated net income (648,000)
NCI share of CNI (70,000) 70,000
Plaza share of CNI (578,000)

Retained earnings 1/1 (1,275,000) (530,000) S 530,000 (1,275,000)

Net income (578,000) (365,000) (578,000)
Dividends declared 300,000 50,000 D 40,000 10,000 300,000
Retained earnings 12/31 (1,553,000) (845,000) (1,553,000)

Current assets 860,000 432,250 1,292,250

Investment in Stanford 1,140,000 -0- D 40,000 S 552,000 -0-
I 280,000
A 348,000
Tradenames 240,000 360,000 A 23,000 623,000
Property and equipment 1,030,000 253,750 A 40,000 E 5,000 1,318,750
Patents -0- 104,000 A 140,000 E 10,000 234,000
Goodwill A 232,000 232,000
Total assets 3,270,000 1,150,000 3,700,000

Accounts payable (142,000) (145,000) (287,000)

Common stock (300,000) (120,000) S 120,000 (300,000)
Additional paid-in capital (1,275,000) (40,000) S 40,000 (1,275,000)
Noncontrolling interest S 138,000
A 87,000 (225,000) (285,000)
Retained earnings 12/31 (1,553,000) (845,000) (1,553,000)
Total liabilities and equities (3,270,000) (1,150,000) 1,460,000 1,460,000 (3,700,000)

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29. (45 minutes) Noncontrolling interest in the presence of a control premium.

a. Goodwill allocation: Parflex NCI

Acquisition-date fair value $344,000 $36,000
Share of identifiable net assets ($324,000 + $18,000) 307,800 34,200
Goodwill allocation $36,200 $1,800

b. Investment in Eagle
Initial value $344,000
Change in Eagles RE 90%
($341,000 $174,000) 90% 150,300
Excess amortization (3 years) 90% (5,400)
Investment in Eagle 12/31/18 $488,900

-OR-

Investment in Eagle
Initial value $344,000
2016-2017 change in Eagles RE 90%
($278,000 $174,000) 90% 93,600
Excess fair value amortization (3,600)
Equity income 2018 (below) 79,200
Eagle 2018 dividends 90% (24,300)
Investment in Eagle 12/31/18 $488,900

Equity in Eagles earnings:

Eagles reported 2018 net income $90,000
Excess equipment amortization (2,000)
Adjusted net income $88,000
Parflex ownership share 90%
Equity in Eagles earnings $79,200

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 29. continued

c. December 31, 2018 Parflex Eagle Adjustments NCI Consolidated

Sales (862,000) (366,000) (1,228,000)
Cost of goods sold 515,000 209,000 724,000

Depreciation expense 191,200 67,000 E 2,000 260,200

Equity in Eagle's earnings (79,200) 0 I 79,200 0
Separate company net
income (235,000) (90,000)
Consolidated net income (243,800)
to noncontrolling interest (8,800) 8,800
to Parflex Corporation (235,000)

Retained earnings, 1/1 (500,000) (278,000) S 278,000 (500,000)

Net income (above) (235,000) (90,000) (235,000)
Dividends declared 130,000 27,000 24,300 D 2,700 130,000
Retained earnings, 12/31 (605,000) (341,000) (605,000)

Cash and receivables 135,000 82,000 217,000

Inventory 255,000 136,000 391,000
Investment in Eagle 488,900 0 D 24,300 385,200 S -0-
12,600 A1
36,200 A2
79,200 I
Property & equipment (net) 964,000 328,000 A1 14,000 2,000 E 1,304,000
Goodwill A2 38,000 38,000
Total assets 1,842,900 546,000 1,950,000

Liabilities (722,900) (55,000) (777,900)

Common stock (515,000) (150,000) S 150,000 (515,000)
NCI 1/1 42,800 S
1,400 A1
1,800 A2 (46,000)
NCI 12/31 (52,100) (52,100)
Retained earnings, 12/31 (605,000) (341,000) (605,000)
Total liabilities and equities (1,842,900) (546,000) 585,500 585,500 (1,950,000)

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30. (45 minutes) Noncontrolling interest in the presence of a control premium.

a. Consideration transferred by Holland ($8.00 60,000 shares) $480,000

Fair value of the noncontrolling interest ($6.50 40,000 shares) 260,000
Total Zeeland fair value at January 1, 2017 $740,000
Zeeland book value at January 1, 2017 260,000
Excess acquisition-date fair over book value $480,000
To equipment (5-year remaining life) $ 55,000
To patent (10-year remaining life) 285,000 340,000
Goodwill $140,000

Goodwill allocation: Holland NCI

Acquisition-date fair value $480,000 $260,000
Share (60% and 40%) of identifiable net assets* 360,000 240,000
Goodwill allocation $120,000 $ 20,000
*Zeeland identifiable net assets at acquisition-date fair value:
Current assets $ 14,000
Property and equipment ($268,000 + $55,000) 323,000
Patents ($190,000 + $285,000) 475,000
Liabilities (212,000)
Total fair value of net identifiable assets $600,000

b. Investment in Zeeland
Initial value $480,000
Change in Zeelands RE 60%
($376,500 $160,000) 60% 129,900
Excess amortization ($39,500 60% 2 yrs.) (47,400)
Investment in Zeeland 12/31/18 $562,500
-OR-
Investment in Zeeland
Initial value $480,000
2017 change in Zeelands RE 60%
($296,500 $160,000) 60% 81,900
2017 excess amortization ($39,500 60%) (23,700)
Investment in Zeeland 12/31/17 $538,200
Equity income 2018 (below) 42,300
Zeeland 2018 dividends 60% (18,000)
Investment in Zeeland 12/31/18 $562,500

Equity in Zeelands earnings:

Zeelands reported 2018 net income $110,000
Excess fair value amortizations (39,500)
Adjusted net income $70,500
Holland ownership share 60%
Equity in Zeelands earnings $42,300

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30. continued

c. December 31, 2018 Holland Zeeland Adjustments NCI Consolidated

Sales (640,500) (428,500) (1,069,000)

Cost of goods sold 325,000 200,000 525,000
Depreciation expense 80,000 34,000 E 11,000 125,000
Amortization expense 14,000 21,000 E 28,500 63,500
Other operating expenses 52,000 63,500 115,500
Equity income (42,300) 0 I 42,300 0
Separate company net income (211,800) (110,000)
Consolidated net income (240,000)
Noncontrolling interest in CNI (28,200) 28,200
Controlling interest net income (211,800)

Retained earnings, 1/1/18 (820,200) (296,500) S 296,500 (820,200)

Net income (above) (211,800) (110,000) (211,800)
Dividends declared 50,000 30,000 D 18,000 12,000 50,000
Retained earnings, 12/31 (982,000) (376,500) (982,000)

Current assets 125,000 81,500 206,500

Investment in Zeeland, Inc 562,500 0 D 18,000 S 237,900
A1 180,300 0
A2 120,000
I 42,300
Property and equipment (net) 837,000 259,000 A1 44,000 E 11,000 1,129,000
Patents 149,000 147,500 A1 256,500 E 28,500 524,500
Goodwill 0 0 A2 140,000 140,000
Total assets 1,673,500 488,000 2,000,000

Liabilities (371,500) (11,500) (383,000)

Common stock (320,000) (100,000) S 100,000 (320,000)
S 158,600
A1 120,200
Noncontrolling interest A2 20,000 (298,800) (315,000)
Retained earnings, 12/31 (982,000) (376,500) (982,000)
Total liabilities and equities (1,673,500) (488,000) 936,800 936,800 (2,000,000)

Consolidated net income attributable to noncontrolling interest:

2018 Zeeland net income $110,000

Less: excess depreciation (11,000)
excess amortization (28,500)
Adjusted net income $ 70,500
NCI percentage ownership 40%
CNI attributable to NCI $ 28,200

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31. (25 Minutes) (Determine consolidated balances for a step acquisition).

a. Amsterdam fair value implied by price paid by Morey

$560,000 70% = $800,000
b. Revaluation gain:
1/1 equity investment in Amsterdam (book value) $178,000
25% net income for 1st 6 months 8,750
Investment book value at 6/30 186,750
Fair value of investment at 6/30 (25% $800,000) 200,000
Gain on revaluation to fair value $ 13,250
c. Goodwill at 12/31:
Fair value of Amsterdam at 6/30 $800,000
Book value at 6/30 (700,000 + [70,000 2]) 735,000
Excess fair value $ 65,000
Allocation to goodwill (no impairment) $ 65,000
d. Noncontrolling interest:
5% fair value balance at 6/30 $40,000
5% subsidiary net income from 6/30 to 12/31 1,750
5% subsidiary dividends (1,000)
Noncontrolling interest 12/31 $40,750

$ 10,800,000

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