Chapter 3 : The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential

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1 Types of Business expansion 1- Internal Expansion Through: establishment of New Subsidiary 2- External Expansion ( Business Combination ) Through: a. Statutory Merger P + S = P Note : S Company Dissolved b. Statutory Consolidation P + S = N Note : S Company Dissolved c. Stock Acquisition P + S = P & S Accounting for Stock Acquisition: No Significant Influence Significant Influence Less Than 20% Between 20% to 50% Control l More Than 50% Fair Value Method Equity Method Or Fair Value Option Equity Method And Consolidation (but cost method is also okay here) Overview of the Consolidation Process. Page 1 of 7

2 Problem: On January 1, 20X8, Gregory Corporation acquired 90 percent of Nova Company's voting stock, at underlying book value. The fair value of the non-controlling interest was equal to 10 percent of the book value of Nova at that date. Gregory uses the equity method in accounting for its ownership of Nova. On December 31, 20X8, the trial balances of the two companies are as follows: Required: 1- Provide all eliminating entries required as of December 31, 20X8, to prepare consolidated financial statements. 2- Prepare a three-part consolidation worksheet. Solution Steps: Page 2 of 7

3 Page 3 of 7

4 Sales 300, ,000 Less : Other expenses -100,000-60,000 Less : Depreciation -30,000-25,000 Add : Income from Nova 22,500 = Net Income 192,500 25,000 Less : NCI in Net Income = Controlling Interest in Net Income 192,500 25,000 Beginning Balance of R/E 120,000 65,000 Add : Net Income 192,500 25,000 Less : Divdends Decleared -30,000-10,000 Ending Balance of R/E 282,500 80,000 Current assets 200, ,000 Depreciable assets 300, ,000 Less : Accumulated depreciation -120,000-75,000 Investment in Nova 139,500 Total Assets 519, ,000 Current Liabilities 62,000 25,000 Long Term Debt 75,000 90,000 Common Stock 100,000 75,000 Retained Earnings 282,500 80,000 NCI in NA of Nova Total Liabilities and Equity 519, ,000 Page 4 of 7

5 Sales 300, ,000 Less : Other expenses -100,000-60,000 Less : Depreciation -30,000-25,000 Add : Income from Nova 22,500 22,500 = Net Income 192,500 25,000 Less : NCI in Net Income 2,500 = Controlling Interest in Net Income 192,500 25,000 Beginning Balance of R/E 120,000 65, Add : Net Income 192,500 25,000 Less : Divdends Decleared -30,000-10, Ending Balance of R/E 282,500 80,000 Current assets 200, ,000 Depreciable assets 300, ,000 Less : Accumulated depreciation -120,000-75,000 Investment in Nova 139, Total Assets 519, ,000 Current Liabilities 62,000 25,000 Long Term Debt 75,000 90,000 Common Stock 100,000 75, Retained Earnings 282,500 80,000 NCI in NA of Nova 15,500 Total Liabilities and Equity 519, , Page 5 of 7

6 Sales 300, , ,000 Less : Other expenses -100,000-60, ,000 Less : Depreciation -30,000-25,000-55,000 Add : Income from Nova 22,500 22,500 0 = Net Income 192,500 25, ,000 Less : NCI in Net Income 2, = Controlling Interest in Net Income 192,500 25, ,500 Beginning Balance of R/E 120,000 65, Add : Net Income 192,500 25, Less : Divdends Decleared -30,000-10, Ending Balance of R/E 282,500 80, ,500 Current assets 200, , ,000 Depreciable assets 300, , ,000 Less : Accumulated depreciation -120,000-75, ,000 Investment in Nova 139, Total Assets 519, , ,000 Current Liabilities 62,000 25,000 87,000 Long Term Debt 75,000 90, ,000 Common Stock 100,000 75, ,000 Retained Earnings 282,500 80, ,500 NCI in NA of Nova 15, Total Liabilities and Equity 519, , , Page 6 of 7

7 Multiple Choices: 1- On January 1, 20X8, Zeta Company acquired 85 percent of Theta Company's common stock for $100,000 cash. The fair value of the noncontrolling interest was determined to be 15 percent of the book value of Theta at that date. What portion of the retained earnings reported in the consolidated balance sheet prepared immediately after the business combination is assigned to the noncontrolling interest? a. None b. 15 % c. 100% d. Cannot be determined 2- On January 3, 20X9, Redding Company acquired 80 percent of Frazer Corporation's common stock for $344,000 in cash. At the acquisition date, the book values and fair values of Frazer's assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to 20 percent of the total book value of Frazer. The stockholders' equity accounts of the two companies at the acquisition date are: Noncontrolling interest was assigned income of $11,000 in Redding's consolidated income statement for 20X9. Based on the preceding information, what amount will be assigned to the noncontrolling interest on January 3, 20X9, in the consolidated balance sheet? a. $86,000 b. $44,000 c. $68,800 d. $50,000 Page 7 of 7