CHP 8

Chapter 8
CONSOLIDATIONS CHANGES IN OWNERSHIP INTERESTS

Answers to Questions
1
Preacquisition earnings and dividends are the earnings and dividends applicable to an investment interest
prior to its acquisition during an accounting period. Assume that P purchases an 80 percent interest in S on
July 1, 2011 and that S has earnings of $100,000 between January 1 and July 1, 2011 and pays $50,000
dividends on May 1, 2011. In this case, preacquisition earnings and dividends are $100,000 and $40,000,
respectively. Historically, preacquisition earnings purchased were shown as a deduction on the income
statement to arrive at consolidated net income. Under current GAAP, this is no longer the case. Instead,
the consolidated income statement should only report revenues, expenses, gains and losses subsequent to
the acquisition. For example, in a March 31 acquisition, the consolidated income statement would only
include income of the subsidiary from April 1 through December 31. GAAP reasons that acquirers
purchase assets and assume liabilities, based on their fair values. Acquirers do not purchase
preacquisition earnings, although fair values of net assets should reflect earning power of the acquired
firm.
Preacquisition earnings are not recorded by a parent under the equity method because the investor only
recognizes income subsequent to acquisition on the interest acquired. Historically, preacquisition earnings
purchased were shown as a deduction on the income statement to arrive at consolidated net income. Under
current GAAP, this is no longer the case. Instead, the consolidated income statement should only report
revenues, expenses, gains and losses subsequent to the combination date. For example, in a March 31
acquisition, the consolidated income statement would only include income of the subsidiary from April 1
through December 31.
Noncontrolling stockholders of Sub Company held a 20 percent interest during the first half year and a 10
percent interest during the last half year and at year-end. But noncontrolling interest at year-end is
computed for the 10 percent interest held by noncontrolling stockholders at the end of the year.
Noncontrolling interest share for the year has two parts: (1) annual income x 50% x 10% plus (2) annual
income x 50% x 20%.
Preacquisition income is similar to noncontrolling interest share because it represents the income of a
subsidiary attributable to stockholders outside the consolidated entity. But preacquisition income is not
income of the noncontrolling stockholders at the date of the financial statements. In fact, preacquisition
income relates to a previous controlling stockholder group when the interest acquired exceeds 50 percent.
In such a case, it seems improper to report this as a deduction in the consolidated income statement. Rather,
the fair value of net assets acquired should reflect the acquirees earnings history.
Under GAAP, a gain or loss is only recorded when the sold interest results in deconsolidation of the
subsidiary, i.e., the parent no longer holds a controlling interest. The gain or loss on the sale of an equity
interest is the difference between the proceeds from the sale (the fair value) and the recorded book value of
the interest sold, provided that the investment is accounted for as a one-line consolidation. If another
method of accounting has been used, the investment account must be converted to the equity method so
that any gain or loss on sale is the same as if a one-line consolidation had been used previously.
When the parent maintains a controlling interest after the sale, the sale is treated as an equity transaction,
with no gain or loss recognition. The parent debits cash or other consideration received in the sale, credits
the investment account based on percent of carrying value sold, and records the difference as an adjustment
to other paid-in capital.
2011 Pearson Education, Inc. publishing as Prentice Hall

8-1
Consolidations Changes in Ownership Interests
8-2
Conceptually, the income applicable to an equity interest sold during an accounting period should be
included in investment income and consolidated net income. In this case, the gain or loss on sale is
computed on the basis of the book value of the interest at the time of sale, and income is assigned to the
increased noncontrolling interest only after the date of sale. As a practical expedient, a beginning-of-theperiod sale date can be used such that no income is recognized on the interest sold up to the time of sale,
and the gain or loss is computed on the book value at the beginning of the period. When this expedient is
used, income must be assigned to the increased noncontrolling interest for the entire year of sale. The
combined investment income and gain or loss on sale are the same under both approaches provided that the
assumptions (beginning of the year and time of sale) are followed consistently. As noted in question 5, gain
or loss on the sale of the equity interest is only recognized when the subsidiary is deconsolidated. Other
wise, the gain or loss is an adjustment to other paid-in capital.
Assuming that no gain or loss is recognized, no adjustment of the parents investment account is necessary
when the subsidiary sells additional shares to outside parties at book value because the parents share of
underlying book value does not change. If additional shares are sold above book values, the parents share
of the underlying equity of the subsidiary increases. This increase is recorded by the parent as follows:
Investment in subsidiary
Additional paid-in capital
XX
XX
If the subsidiary sells additional shares below book value, the parents interest is decreased and
the parent records decreases in its investment and additional paid-in capital accounts. In all three cases (at
book value, above book value, or below book value), the parents ownership percentage decreases from 80
percent (8,000 of 10,000 shares) to 66 23 percent (8,000 of 12,000 shares).
No gain or loss is recognized, the change in underlying book value, adjusted for one-sixth [(80%
66 23 %) 80%] of any unamortized cost book value differential is reported as adjustment to additional
paid-in capital, since the parent maintains its controlling interest. An alternative computation is to assume
that the parent sold one-sixth of its interest for 66 23 percent of the proceeds, the difference being the
amount of adjustment to additional paid-in capital.
8
The acquisition of the 2,000 shares directly from the subsidiary increases the parents percentage interest
from 80 percent (8,000 of 10,000 shares) to 5/6 (10,000 of 12,000 shares, or 83 1/3%). The change in the
interest held does not affect the way in which the parent records its additional investment. The parent in all
cases increases its investment account by the amount of cash paid or other consideration given for the
additional investment. It makes no difference if the purchase price is above or below book value. But, if
the purchase price is above the book value of equity acquired, then the excess is assigned to undervalued
assets or goodwill. If the purchase price is below the book value of equity acquired, then the excess should
be assigned to reduce overvalued identifiable assets or goodwill.
Treasury stock transactions by a subsidiary change the parents proportionate interest in the subsidiary.
Any changes in the parents share of the underlying book value of the subsidiary require adjustments in the
parents investment in subsidiary and additional paid-in capital accounts.
10
Gains and losses to a parent (or equity investor) do not result from the treasury stock transactions of its
subsidiaries (or equity investees). Although the parents investment interest may increase or decrease from
such transactions, the predominate view is that such changes are of a capital nature and should be
accounted for by additional paid-in capital adjustments rather than by recorded gains and losses.
11
Stock splits and stock dividends by a subsidiary do not affect the amounts that appear in the consolidated
financial statements. But stock dividends by a subsidiary result in capitalization of subsidiary retained
earnings and the amounts involved in eliminations for the subsidiarys stockholders equity accounts are
affected.
Chapter 8
8-3
SOLUTIONS TO EXERCISES
Solution E8-1
Allocation of Sets net income:
Controlling share of income
($100,000 70% 1/2 year) + ($100,000 90% 1/2 year)
$ 80,000
Noncontrolling interest share

(30% x $100,000 x year) + (10% x $100,000 x )
Preacquisition income
Note: This does not appear on the consolidated income statement.
$20,000
$
0
Allocation of Sets dividends:

Dividends to Pie ($30,000 70%) + ($30,000 90%)
$ 48,000
Noncontrolling interest ($30,000 x 30%) + ($30,000 x 10%)
$ 12,000
Preacquisition dividends
Solution E8-2
1
2.
Income from Sip for 2011:

40% interest x $240,000 x 8/12 year
60% interest $240,000 1/3 year
$64,000
$ 48,000
Total income from Sip

$112,000
Preacquisition income:
Under GAAP, no preacquisition income appears on the
consolidated income statement. The income statement only
includes income of the subsidiary earned after the parent
obtains its controlling interest. Control was established on
September 1, when Pins interest increased from 40% to 60%,
so the consolidated income statement includes Sip income of
$80,000 ($240,000 x 1/3 of year).
Noncontrolling interest share for 2011:
$80,000 40%
$ 32,000
8-4
Solution E8-3 (amounts in thousands)

Entry to record sale of 15% interest:
Cash
Investment in Sap
Other paid-in capital
To record sale of 15% interest in Sap.
No gain or loss on sale is recognized
since Pet maintains an 85% controlling
interest.
Entry to record investment income for 2011:
Investment in Sap($600 85%)
Income from Sap
To record income from Sap.
750
660
90
510
510
Check:
Investment balance January 1, 2011
Less: Book value of interest sold
Add: Income from Sap
Investment balance December 31, 2011
Underlying equity ($4,600 85%)
Add: 85% of Goodwill *
* Note that implied total goodwill is $400 ($340 / 85%).
$4,400
(660)
510
$4,250
$3,910
340
$4,250
Solution E8-4 (amounts in thousands)

1
Gain on sale of 20% interest: No gain or loss is recognized since Pal

maintains a 60% controlling interest.
Beginning of the period sale assumption
Selling price
$130
Book value of interest ($436 investment
109
account balance 20%/80%)
Adjustment to other paid-in capital
$ 21
Actual sale date assumption
Selling price
Book value of interest sold:
Beginning of the period balance
Add: Income ($150 1/3 year 80%)
Interest sold
Adjustment to increase additional paid-in capital
2
Income from Sag
Beginning of the period sale assumption
Income from Sag($150 60%)
Actual sale date assumption
January 1 to May 1:
Share of Sags income ($150 80% 1/3 year)
May 1 to December 31:
Share of Sags income ($150 60% 2/3 year)
Income from Sag
$130
$436
40
476
25%
119
$ 11
$ 90
$ 40
60
$100
Chapter 8
8-5
Solution E8-4 (continued)

3
Investment in Sag December 31, 2011
Investment balance January 1

Book value of interest sold
Income from Sag
Dividends
Beginning of
Period Sale
Assumption
$436
(109)
90
(48)
$369
Actual
Sale Date
Assumption
$436
(119)
100
(48)
$369
Solution E8-5
(amounts in thousands)
1a
Fair value book value differential

Cost
Implied fair value of Set ($1,274 / 70%)
Book value ($1,480 January 1 balance
+ $100 income for 5 months - $60 dividends in
January and April)
Goodwill
1b
$1,274
$1,820
(1,520)
$ 300
Income from Set (Note: Only include earnings subsequent to the

acquisition date).
Income from Set ($240,000 7/12 year 70%)
1c
Investment in Set at December 31

Investment cost
Add: Income from Set
Deduct: Dividends ($60,000 70%)
Investment in Set December 31, 2011
98
$1,274
98
(42)
$1,330
Consolidation working paper entries:

a
Income from Set

98
Investment in Set
56
Dividends
42
To eliminate income and dividends from Set and adjust
investment account to its cost on June 1.
1,000
Common stock, $10 par Set
580
Retained earnings Set
Goodwill
300
Investment in Set
1,274
Noncontrolling interest
564
Dividends
42
To eliminate reciprocal investment and equity balances,
record preacquisition income and beginning noncontrolling
interest, and eliminate preacquisition dividends.
c Noncontrolling interest share 240,000 x 7/12 x 30%

Dividends 120,000 x 30%
42,000
36,000
8-6
6,000
Chapter 8
8-7
Solution E8-6
1
Investment in Sow (in thousands)

Investment balance December 31, 2011 ($9,000 80%)
Cost of new shares ($25 60,000 shares)
Investment in Sow after new investment
$ 7,200
1,500
$ 8,700
Goodwill from new investment
Sows stockholders equity after issuance

($9,000 + $1,500)
Pals ownership percentage
(480,000 + 60,000 shares)/660,000 shares
Pals book value after issuance
Less: Pals book value before issuance
Increase in book value from purchase
(book value acquired)
$ 1,391.1
Cost of 60,000 shares

Book value acquired
Goodwill from acquisition of new shares*
$ 1,500
(1,391.1)
$
108.9
$10,500
.8182
8,591.1
(7,200)
This implies total goodwill is equal to $136,125.
Solution E8-7
1
Sod issues 30,000 shares to Pod at $20 per share

Pods ownership interest before issuance: 176,000/220,000 shares = 80%
Pods ownership interest after issuance: 206,000/250,000 shares = 82.4%
Sod sells 30,000 shares to the public at $20 per share

Pods ownership interest after issuance: 176,000/250,000 shares = 70.4%
Sod sells 30,000 shares to the public; no gain or loss recognized:

Investment in Sod
115,200
115,200
To record increase in investment in Sod computed as follows:
Book value before issuance ($3,200,000 80%)
Book value after issuance ($3,800,000 70.4%)
$2,560,000
2,675,200
$ 115,200
8-8
Solution E8-8
Pam buys shares
1a
Percentage ownership after additional investment:

700,000/1,000,000 = 70%
1b
Goodwill from additional investment (in thousands):

Book value of interest after sale
$2,600 70%
Book value of interest before sale
$2,100 2/3
Book value of interest acquired
Cost of interest
Goodwill from additional investment *
*
$1,820
1,400
420
500
$
80
This implies total goodwill is now equal to $114,286.
Outsiders buy shares

2a
Percentage ownership after sale:

600,000/1,000,000 = 60%
2b
Change in underlying book value of investment in Sat:

Sats underlying equity after sale
Pams interest
Book value of Pams investment in Sat
after the sale
Less: Book value before the sale
Increase in book value of investment
2c
$2,600,000
60%
1,560,000
1,400,000
$ 160,000
Entry to adjust investment account:

Investment in Sat
160,000
160,000
Chapter 8
8-9
Solution E8-9
Preliminary computations of fair value book value differentials:
April 1, 2011 acquisition
Cost of 4,000 shares (20% interest)
$ 64,000
Implied total fair value of Sum ($64,000 / 20%)
$320,000
Book value of Sum on april 1 acquisition date:
Beginning stockholders equity
$280,000
20,000
Add: Income for 3 months ($80,000 year)
Stockholders equity April 1
300,000
Goodwill
$ 20,000
July 1, 2012 acquisition
Cost of 8,000 shares (40% interest)
Implied total fair value of Sum ($164,000 / 40%)
Book value on July 1 acquisition date:
Beginning stockholders equity
Add: Income for 6 months ($80,000 1/2 year)
Less: Dividends May 1
Stockholders equity July 1
Goodwill (amount is unchanged by this transaction)
1
$164,000
$410,000
$360,000
40,000
(10,000)
390,000
$ 20,000
Income from Sum

2011
Income from Sum for 2011 ($80,000 20% 3/4 year)
$ 12,000
2012 Income from Sum

20% share of reported income ($80,000 20%)
40% share of reported income ($80,000 40% 1/2 year)
Income from Sum
$ 16,000
16,000
$ 32,000
Noncontrolling interest December 31, 2012

(($420,000 book value + $20,000 goodwill) 40%)
$176,000
Preacquisition income does not appear in income statement.
Investment balance at December 31, 2012

Cost of 20% investment
Income from Sum for 2011
Cost of 40% investment
Income from Sum for 2012
Gain on revaluation of investment
Less: Dividends ($2,000 + $6,000)
Investment in Sum
$ 64,000
12,000
164,000
32,000
18,000
(8,000)
$282,000
Implied fair value of Sum ($164,000/0.4)
$410,000
Fair value of original investment($410,000 x 20%)

Less: Cost of original investment
82,000
(64,000)
$ 18,000
8-10
Solution E8-10
Preliminary computations
Investment cost July 1, 2012
$675,000
Implied total fair value of Sad ($675,000 / 90%)

Less: Book value of Sad at acquisition:
Equity of Sad December 31, 2011
Add: Income for 1/2 year
Equity of Sad July 1, 2012
Excess (book value = underlying equity)
$750,000
$700,000
50,000
750,000
0
Investment income from Sad

Income from Sad 2012 ($100,000 1/2 year 90%)
Income from Sad 2013:
January 1 to July 1 ($80,000 1/2 year 90%)
July 1 to December 31 ($80,000 1/2 year 80%)
$ 45,000
$ 36,000
32,000
$ 68,000
Investment in Sad
Cost July 1, 2012
Add: Income from Sad 2012
Less: Dividends paid in December ($50,000 90%)
$675,000
45,000
(45,000)
675,000
Less: Book value of 1/9 interest sold on July 1, 2013a

Add: Income from Sad 2013
Less: Dividends paid in December ($30,000 80%)
a
(79,000)
68,000
(24,000)
$640,000
Sale of 10% interest July 1, 2013:

Equity of Sad December 31, 2011
Add: Income less dividends 2012
Add: Income for 1/2 year 2013
Equity of Sad July 1, 2013
Interest sold
$700,000
50,000
40,000
790,000
10%
Underlying equity of interest sold
$ 79,000
Gain on sale of 1/9 interest ($85,000 proceeds - $79,000)

Since Pit maintains a controlling interest, the gain is not
recorded, but shown as an adjustment to additional paid-in
capital.
6,000
Chapter 8
8-11
Solution E8-10 (continued)

2

Noncontrolling interest share 2012:
($100,000 income 10% interest x 1/2 year)
$ 5,000
Noncontrolling interest share 2013:

($80,000 1/2 year 10%) + ($80,000 1/2 year 20%)
$ 12,000

Equity of Sad January 1
Add: Income less dividends for 2012
Equity of Sad December 31
Noncontrolling interest percentage
$700,000
50,000
750,000
10%
Noncontrolling interest December 31
$ 75,000

Equity of Sad January 1
Add: Income less dividends for 2013
Equity of Sad December 31
$750,000
50,000
800,000
20%
$160,000
Solution E8-11
Preliminary computations:
Investment cost January 1, 2012
Implied total fair value of Soy ($690,000 / 75%)
Book value of Soy
Excess fair value over book value = Goodwill
1
$
$
920,000
(800,000)
$ 120,000
Underlying book value December 31, 2012

$1,000,000 equity 75%
690,000
750,000
690,000
Percentage ownership before purchase of additional shares

30,000 shares owned/40,000 shares outstanding = 75% interest
Percentage ownership after purchase of additional shares
Investment in Soy balance January 3, 2013

Add: Share of Soys income less dividends
for 2012 ($200,000 75%)
Investment in Soy December 31, 2012
Add: Additional investment January 3, 2013
(10,000 shares $30)
150,000
840,000
300,000
$1,140,000
8-12
Percentage ownership if shares sold to outside entities


Investment in Soy December 31, 2012
(see 3 above)
Add: Increase in book value from change in
ownership interest:
Book value after additional 10,000 shares
were issued ($1,300,000 equity 60%)
Book value before additional 10,000 shares
were issued ($1,000,000 equity 75%)
Investment in Soy balance - January 3, 2013
840,000
30,000
870,000
$780,000
(750,000)
Solution E8-12
Cost of additional investment (2,000 shares $80)
$160,000
Implied total fair value of Son

$160,000 / (2,000/12,000)
Less: Book value of Son after issuance
Excess fair value over book value
$960,000
710,000
$250,000
January 2, 2012
Investment in Son
160,000
Cash
To record purchase of additional 2,000 shares of Son.
160,000
December 2012
Cash
50,000
Investment in Son
50,000
To record receipt of dividends ($60,000 10,000/12,000 shares).
December 31, 2012

Investment in Son
75,000
Income from Son
To record income from Son($90,000 10,000/12,000).
75,000
Chapter 8
8-13
Solution E8-13
1
Investment in Sir (in thousands)

Cost
Add: 90% of $300 increase in equity since 2011
Investment in Sir January 1, 2013
$1,800
270
$2,070
Entry on Pats books (no gain or loss recognized)

Investment in Sir
180
180
To recognize change in book value of investment from Sirs sale of
additional shares, computed as follows:
$1,800
Underlying equity after issuance ($2,400 75%)
(1,620)
Underlying equity before issuance ($1,800 90%)
$ 180
SOLUTIONS TO PROBLEMS
Solution P8-1
Preliminary computations (in thousands):
Cost of 40,000 shares July 1, 2011
$620
Implied total fair value of Sin ($620 / 80%)

Book value of Sin ($550 + $50 income)
Excess fair value over book value
$775
(600)
$175
Cost of 10,000 shares January 1, 2012

Implied fair value of Sin [$162/(10/60)]
Fair value of original investment:
[$972 x (40/60)]
Less: Carrying value of original investment:
1
$162
$972
$648
620
$28
Investment in Sin December 31, 2011

Investment cost
Add: Income from Sin- $100 1/2 year 80%
Less: Dividends ($50 80%)
$620
40
(40)
$620
Income from Sin 2012

Share of Sins income ($150 5/6)
$125

Add: Additional investment
Add: Income from Sin 2012
Add: Revaluation of original investment
Less: Dividends for 2012 ($60 5/6)
$620
162
125
28
(50)
$885
8-14
Chapter 8
8-15
Solution P8-2
1
Investment in Sit (in thousands)

Underlying equity $26,000 80%
Goodwill (80%)
Investment in Sit January 1, 2013
$20,800
2,000
$22,800
Percentage interest after stock issuance

Shares owned 960,000/1,600,000 outstanding shares = 60% interest
No gain or loss recognized on issuance of additional shares

Investment in Sit
2,000
Other paid-in capital
2,000
To recognize change in ownership interest computed as: Underlying
equity after sale ($38,000 60%) less underlying equity before
sale of additional shares ($26,000 80%).
Solution P8-3
1
Journal entry to record sale as of actual sale date

Cash
120,000
1,500
Investment in Saw
121,500
To record sale of 1/9 of investment in Saw. Book value of interest
sold is computed as follows:
Add: Income from Saw for one-half year
($280,000 1/2 year 90%)
Less: Dividends ($80,000 90%)
Book value of investment on July 1, 2011
Book value of interest sold ($1,093,500/9)
126,000
(72,000)
$1,093,500
$ 121,500
Journal entry to record sale as of January 1, 2011

Cash
120,000
12,500
Investment in Saw
107,500
To record sale of 1/9 of investment in Saw. Book value of interest
sold is computed as follows:
Less: Dividends
Book value adjusted for dividends
Book value of interest sold ($967,500/9)
$1,039,500
$1,039,500
(72,000)
$ 967,500
$ 107,500
Reconciliation
Balance January 1, 2011

Add: Income from Saw
January 1 July 1
July 1 December 31
Less: Dividends
First half-year
Last half-year
Less: Book value of interest sold
Investment in
Saw
Actual Sale Date
$1,039,500
Investment in
Saw
Beginning of Year
Sale Date
$1,039,500
126,000
112,000
112,000
1l2,000
(72,000)
(64,000)
(121,500)
(72,000)
(64,000)
(107,500)
8-16
Balance December 31, 2011
$1,020,000
$1,020,000
Solution P8-4
(in thousands)
Entries on Pans books to reflect the change in ownership interest:
Option 1 Pan sells 30,000 shares of Son
Cash
1,500
Investment in Son
870
630
To record sale of 30,000 shares at $50 per share. No gain or loss is
recognized since Pan maintains a controlling interest.
Option 2 Son issues and sells 40,000 shares to the public

Investment in Son
630
630
To record adjustment in ownership computed as follows:

Book value after sale of 40,000 shares
($12,440 75%)
Book value before sale of 40,000 shares
($10,440 5/6)
Increase in book value of investment from sale
$9,330
(8,700)
$ 630
Option 3 Son reissues 40,000 shares of treasury stock

Investment in Son
630
630
To record adjustment in ownership computed the same as 2 above.
Consolidated Stockholders Equity

at January 1, 2012
Common stock
Retained earnings
Noncontrolling interesta
Total stockholders equity
a
Option 1
Option 2
Option 3
$10,000
3,630
7,000
2,610
$23,240
$10,000
3,630
7,000
3,110
$23,740
$10,000
3,630
7,000
3,110
$23,740
Noncontrolling interest under option 1: $10,440 25%

Noncontrolling interest under options 2 and 3: $12,440 25%
Chapter 8
8-17
Solution P8-5
Cost of 9,000 shares (90% interest) January 1, 2011
Implied total fair value of Sal ($810,000 / 90%)
Book value of Sal ($500,000 + $300,000)
Excess fair value over book value = Goodwill
1
$
$
900,000
(800,000)
$ 100,000

Cost January 1, 2011 (9,000 shares $90)
Add: Share of Sals 2011 income ($50,000 90%)
Investment in Sal December 31
2
$
$
100,000
105,000
Additional paid-in capital (outsider purchased additional shares)

Book value after issuance ($1,350,000 60%)
Book value before issuance ($850,000 90%)
Additional paid-in capital (gain is not recognized)
810,000
45,000
855,000
Goodwill at December 31, 2012(Pal purchased additional shares)

Goodwill from January 1, 2011 purchase
$
Goodwill from January 1, 2012 purchase:
Book value before purchase($850,000 x 90%)
$ 765,000
Book value after purchase($1,350,000 x 931/3%) (1,260,000)
Book value acquired
(495,000)
Cost of additional 5,000 shares
500,000
Goodwill from January 1, 2012
$
5,000
Goodwill at December 31, 2012
$
810,000
810,000
(765,000)
$
45,000
Noncontrolling interest December 31, 2012 (outsider purchased shares)
Subsidiary equity January 1, 2011

Increase for 2011
Increase for 2012
Sale of additional shares
Book value
Goodwill
Fair value of Sal equity December 31, 2012
800,000
50,000
70,000
500,000
$1,420,000
100,000
$1,520,000
Noncontrolling interest percentage 6,000/15,000 shares

40%
608,000
8-18
Solution P8-6
1
Investment in Sod December 31, 2012

Investment in Sod January 2, 2011
$ 98,000
Increase for 2011 ($30,000 retained earnings increase 70%) 21,000
Purchase of additional 20% interest June 30, 2012
37,000
Increase for income for 2012:
24,000
($30,000 1/2 year 70%) + ($30,000 1/2 year 90%)
(9,000)
Dividends 2012: ($10,000 90%)
Investment in Sod December 31, 2012
$171,000
Goodwill December 31, 2012

January 2, 2011 purchase:
Cost of 70% interest
Implied fair value of Sod ($98,000 / 70%)
Less: Book value of Sod
Goodwill
June 30, 2012 purchase:
Cost of 20% interest
Implied fair value of Sod ($37,000 / 20%)
Less: Book value of Sod
Goodwill - December 31, 2012
$ 98,000
$140,000
120,000
$ 20,000
$ 37,000
$185,000
165,000
$ 20,000
Consolidated net income

Sales
Cost of sales
Expenses
Noncontrolling interest share *
Controlling share of net income
$600,000
(400,000)
(70,000)
130,000
6,000
$124,000
Noncontrolling share is 10% for full year plus

20% for year.
Alternative:
Pots reported income = Controlling share of net income
$124,000
Consolidated retained earnings December 31, 2012

Beginning retained earnings
Add: Controlling share of Consolidated net income 2012
Less: Dividends
Consolidated retained earnings ending
Alternative solution:
Pots reported ending retained earnings = Consolidated
retained earnings ending
Equity of Sod December 31, 2012
Goodwill
Fair value of Sod
$200,000
124,000
(64,000)
$260,000
$260,000
$170,000
20,000
$190,000
10%
$ 19,000
Chapter 8
8-19
Solution P8-7
1
Pod Corporation and Subsidiary

Consolidated Income Statement
for the year ended December 31, 2012
(in thousands)
Sales
Cost of sales
Gross profit
Depreciation expense
Other expenses
Noncontrolling interest share ($150,000 20%) +
($150,000 1/4 year 10%)
Controlling share of Consolidated net income
$3,200
(1,900)
1,300
(700)
(150)
450
(33.75)
$
416.25
Note:
Should also add Gain on revaluation of investment of $66,750 to Consolidated
income statement.
Calculation:
Implied fair value of Subsidiary $95,000/0.1 = $950,000
Fair value of original investment $950,000 x 70% = $665,000
Less: Carrying value of original investment
598,250
$66,750
Carrying value of original investment= $600,000 + ($150,000 x 3/12 x 70%)
($40,000 x 70%) = $598,250
2
Schedule to allocate Saws income and dividends
Saws income:
Controlling share:
($150,000 x 70% x 3/12) + ($150,000 x 80% x 9/12) = 116,250
Noncontrolling share:
($150,000 x 30% x 3/12) + ($150,000 x 20% x 9/12) = 33,750
Saws dividends:
Controlling share:
($40,000 x 70%) + ($40,000 x 80%) = $60,000
Noncontrolling share:
($40,000 x 30%) + ($40,000 x 20%) = $20,000
8-20
Solution P8-8
Preliminary computations
Cost October 1, 2011
Implied fair value of Sat ($82,400 / 80%)
Book value on October 1 acquisition date:
Book value on January 1, 2011
Add: Income January 1 to October 1
($24,000 3/4 year)
Deduct: Dividends March 15
Book value October 1
Goodwill
$ 82,400
$103,000
$70,000
18,000
(5,000)
83,000
$ 20,000
Income from Sat for 2011

Share of Sats net income ($24,000 1/4 year 80%)
Less: Unrealized profit in Sats ending inventory
Income from Sat
$ 4,800
(1,000)
$ 3,800
* Preacquisition income ($24,000 3/4 year 100%)
$18,000
* Preacquisition dividends ($5,000 80%)
$ 4,000
* Noncontrolling interest share ($6,000 20%)
$ 1,200
* Under GAAP, preacquisition earnings are not shown as a

reduction of consolidated net income. Rather, we only
include earnings and dividends subsequent to the acquisition
date. Preacquistion amounts are disclosed in required proforma disclosures for acquisitions. The worksheet on the
following page reflects these adjustments.
Chapter 8
8-21
Solution P8-8 (continued)

Pop Corporation and Subsidiary
Consolidation Working Papers
Pop
Income Statement
Sales
112,000
Income from Sat

Cost of sales
3,800
60,000*
Operating expenses
Noncontrolling int. share
25,100*
Controlling share of NI $
30,700
Retained Earnings
Retained earnings Pop
30,000
Balance Sheet
Cash
Accounts receivable
Note receivable
Inventories
50,000
a 12,000
c 37,500
b 3,800
20,000* d 1,000
6,000*
f
Retained earnings Sat

Net income
Dividends
Retained earnings
December 31
Adjustments and
Eliminations
Sat 80%
30,700
20,000*
40,700
34,000
5,100
10,400
5,000
30,000
88,000
7,000
17,000
10,000
16,000
60,000
82,200
112,500
a 12,000
c 15,000
c 4,500
54,000*
26,600*
31,900
1,200*
30,700
30,000
1,200
e 20,000
30,700
24,000
10,000*
Plant assets net

Investment in Sat
24,000
20,000
Consolidated
Statements
b
c
f
4,000
5,000
1,000
6,000
1,000
20,000*
$
40,700
12,100
21,400
15,000
45,000
148,000
200
e 82,400
Goodwill
e 20,000
Accounts payable
Notes payable
Capital stock
Retained earnings
220,700
15,000 $
25,000
140,000
40,700
220,700 $
Noncontrolling interest beginning

110,000
16,000 g 6,000
10,000
50,000 e 50,000
34,000
110,000
c 13,000
e 7,600
f
200
$
20,000
261,500
25,000
35,000
140,000
40,700
20,800
261,500
Deduct
8-22
Solution P8-9
Supporting computations:
Investment cost
$175,000
Implied total fair value of Sid ($175,000 / 70%)

Less: Book value of Sid ($250,000 equity on January 1 plus
$10,000 net income (1/4 year) less $10,000 dividends)
$250,000
250,000
0
Allocation of Sids reported net income

Pal company ($40,000 3/4 year 70%)
Preacquisition income ($40,000 1/4 year 100%)
Noncontrolling interest share ($40,000 1 year 30%x 3/4)
Sids net income
$ 21,000
10,000
9,000
$ 40,000
Pals income from Sid

Equity in Sids income
$ 21,000
Constructive gain on Pals bonds

Note that bonds payable has a book value of $105,400 on December
31, 2011. A half-year of premium amortization ($300) yields a book
value of $105,700 at July 1, 2011
( $105,700 book value on July 1 less $102,850 on December 31)
2,850
Recognition of constructive gain on separate books

($2,850 6/114 months)
Gain on intercompany sale of equipment downstream
[$30,000 - ($36,000/2)]
(150)
(12,000)
Piecemeal recognition of gain on equipment downstream

($12,000/3 years 1/2 year)
Gain on intercompany sale of land upstream
($10,000 - $8,000 cost) 70%
Income from Sid
2,000
(1,400)
$ 12,300
Chapter 8
8-23

Worksheet entries in journal form
a
Income from Sid

12,300
Dividends - Sid
Investment in Sid common
Eliminate intercompany post-acquisition earnings and
dividends and return Investment to beginning
balance.
Sales *
37,500
Cost of sales *
Dividends Sid*
Retained earnings - Sid
50,000
Common stock - Sid
200,000
Investment in Sid - common
Eliminate preacquisition earnings and dividends.
Eliminate Sids equity accounts, the investment
account and establish beginning noncontrolling
interest.
Gain on plant assets
12,000
Plant assets
Eliminate intercompany gain on sale of equipment.
2,000
Plant assets
Eliminate intercompany gain on sale of land.
Interest income
5,850
Interest expense
Gain on bond retirement
Investment in Pal bonds
Bonds payable
100,000
Premium on bonds
5,400
Record constructive retirement of bonds payable.
Interest payable
6,000
Interest receivable
Eliminate reciprocal interest accounts.
Other current liabilities
7,000
Other current assets
Eliminate reciprocal for unpaid intercompany
dividends.
8,400
Dividends - Sid
Record noncontrolling interest share of earnings and
post-acquisition dividends.
Plant assets
2,000
Expenses
Eliminate excess depreciation on equipment.
7,000
5,300
27,500
10,000
175,000
75,000
12,000
2,000
5,700
2,850
102,700
6,000
7,000
3,000
5,400
2,000
8-24

Pal Corporation and Subsidiary
Pal
Income Statement
Sales
Income from Sid
Gain on bonds
287,100
12,300
200,000*
100,000
Retained Earnings
Retained earnings Pal
250,000
2,000
c
d
e
12,000
2,000
5,850
117,850*
40,000
50,000
100,000
50,000*
Dividends
300,000
70,000
17,000
4,000
6,000
60,000
20,000
107,300
Plant assets net

Investment Sid common
180,300
Investment Pal bonds

950,000
6,000
38,600
100,000
5,400
500,000
$
$
950,000
Noncontrolling interest ($250,000 30%)

30,000
2,850
2,850
e
b
i
5,700
27,500
2,000
5,700*
288,350*
108,400
8,400*
$
100,000
250,000
100,000
a
b
h
2,000
7,000
10,000
3,000
50,000*
$
300,000
21,000
6,000
200,000
123,000
g
7,000
c 12,000
d
2,000
a
5,300
b 175,000
e 102,700
f
6,000
g
7,000
e 100,000
e
5,400
b 200,000
598,000
942,000
61,600
500,000
300,000
70,000
$
399,600
300,000
200,000
300,000
50,000
102,700
$
Consolidated
Statements
8,400
40,000
20,000*
140,000
110,000
502,700
($268,000 30%)
37,500
12,300
Retained earnings Sid

Net income
Interest payable
Other current liabilities
12% bonds payable
Premium on bonds
Common stock
Retained earnings
b
a
5,850
Balance Sheet
Cash
Interest receivable
Inventories
Other current assets
150,000
11,400*
Consolidated NI
Controlling share of NI
Retained earnings
December 31
12,000
Interest income
Interest expense
Expenses includes cost of
goods sold
Adjustments and
Eliminations
Sid 70%
300,000
b
75,000
5,400
80,400
$
942,000
Chapter 8
8-25
Solution P8-10
Supporting computations:
Investment cost of 70% interest
$420,000
Implied total fair value of Sam ($420,000 / 70%)

Book value of Sam
Goodwill
$600,000
500,000
$100,000
Investment cost of 10% interest
$ 67,500
Implied total fair value of Sam ($67,500 / 10%)

Book value of Sam:
Beginning equity January 1, 2012
Add: Income for 1/2 year
Less: June dividends
Book value at July 1, 2012
Goodwill (unchanged)
$675,000
Investment in Sam account:

Add: 2011 share of retained earnings
increase ($50,000 70%)
Less: Unrealized profit in ending inventory
Less: Unrealized gain on land
Add: Investment cost of 10% interest
Add: Income from Sam for 2012
$100,000 70% interest 1 year
$100,000 10% interest 1/2 year
Add: Beginning inventory profits
Less: Ending inventory profits
Less: Gain: intercompany sale machinery
Add: Piecemeal recognition of gain
($40,000/5 1/2 year)
Less: Dividends from Sam
($25,000 70%) + ($25,000 80%)
$550,000
50,000
(25,000)
575,000
$100,000
$420,000
$ 35,000
(5,000)
(8,000)
22,000
$442,000
67,500
$ 70,000
5,000
5,000
(6,000)
(40,000)
38,000
4,000
(37,500)
$510,000
8-26

Pam Corporation and Subsidiary
(in thousands)
80%
Sam
Pam
Income Statement
Sales
Income from Sam
Gain on machinery
Cost of sales
900
38
40
400*
Other expenses
328
Retained Earnings
Retained earnings Pam
155
500
300*
90*
160*
250
300
80
30
Buildings net
20
130
20
90
20
50
60
Machinery net
Investment in Sam
510
b
5
e
8
g 100
1,000
725
177
100
140
300
40
25
60
300
283
$1,000
Noncontrolling interest, January 1

Noncontrolling interest, December 31
*
328
155
37.5
10
2.5
i
j
c
25
20
6
36
200*
$
283
100
135
154
100
82
165
384
g 522.5
f
.5
100
$1,220
i
j
25
20
g 300
300
$
653*
146*
200*
353
25*
328
f
h
g
320
Goodwill
48
5
4
g 250
70
80
40
105
100
a
b
d
25
100
50*
283
Consolidated
Statements
$1,352
100
Accounts payable
Dividends payable
Other liabilities
Capital stock, $10 par
Retained earnings
48
38
40
6
60*
40*
328
200*
Dividends
Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories
Other current items
Land
a
f
d
c
Retained earnings Sam

Retained earnings
December 31
Adjustments and
Eliminations
192
105
200
300
283
725
g 125
h 15
140
$1,220
Deduct
Chapter 8
8-27
Solution P8-11
Investment cost of 85% of Sly August 1, 2011
$522,750
Implied fair value of Sly ($522,750 / 85%)

Book value August 1, 2011:
Capital stock
Retained earnings
Add: Income for 7 months
Less: Dividends for 1/2 year
Stockholders equity August 1, 2011
$615,000
$500,000
100,000
35,000
(20,000)
615,000
$
0
Investment cost August 1, 2011

Equity in income $60,000 5/12 year 85%
Less: Deferred inventory profit from
upstream sale $5,000 85%
Less: Deferred profit from sale of
equipment $10,000 profit - ($2,000 1/4 year)
Income from Sly 2011
Less: Dividends from Sly $20,000 85%
Investment in Sly December 31, 2011
$522,750
$ 21,250
(4,250)
(9,500)
7,500
(17,000)
$513,250
Noncontrolling interest share of post-acquisition income, adjusted for the
inventory profit: ($25,000 - $5,000) 15% = $3,000

Preacquisition earnings ($35,000 100%) = $35,000
Working paper entries:
a
Sales
60,000
Cost of sales
To eliminate intercompany sales.
Cost of sales
Inventories
To defer unrealized inventory profits.
60,000
5,000
5,000
Sales
50,000
Cost of sales
40,000
10,000
Plant assets net
To eliminate intercompany sale of inventory item to be used as
equipment.
500
Plant assets net
Operating expense
500
To record depreciation for 1/4 year on intercompany gain on plant
asset.
8-28
P8-11 (continued)
E
Income from Sly

7,500
Investment in Sly
9,500
Dividends
17,000
To eliminate income and dividends and return investment account to
its beginning-of-the-period balance.
Capital stock
500,000
Retained earnings
100,000
Investment in Sly
522,750
92,250
Sales *
233,333
Cost of sales *
145,833
Operating expenses *
52,500
Dividends *
20,000
To eliminate reciprocal equity and investment balances, and enter
beginning noncontrolling interest (* adjusted for preacquisition
earnings and dividends).
Dividends payable
17,000
17,000
To eliminate reciprocal dividends receivable and payable amounts.
Noncontrolling Interest Share

3,000
Dividends
3,000
To enter Noncontrolling Interest share of subsidiary postacquisition income and dividends.
Alternative to entry c:
Sales
Cost of sales
Cost of sales
Plant assets net
50,000
50,000
10,000
10,000
Chapter 8
8-29

Pan Corporation and Subsidiary
Pan
Income Statement
Sales
910,000
Income from Sly

Cost of sales
7,500
500,000*
Operating expense
200,000*

217,500
Retained Earnings
Retained earnings Pan
192,500
Balance Sheet
Cash
Accounts receivable
Inventories
Plant assets net
Investment in Sly
Accounts payable
Dividends payable
Capital stock
Retained earnings
a 60,000
c 50,000
f 233,333
e
7,500
250,000* b
5,000 a 60,000
c 40,000
f 145,833
90,000*
d
500
f 52,500
$
217,500
100,000*
Consolidated
Statements
400,000
Retained earnings Sly

Net income
Dividends
Retained earnings
December 31
Adjustments and
Eliminations
Sly 85%
310,000
120,000
33,750
17,000
120,000
300,000
880,000
10,000
70,000
150,000
500,000
220,500*
3,000*
217,500
192,500
f 100,000
217,500
60,000
40,000*
966,667
509,167*
237,000*
3,000
60,000
100,000
e
f
h
17,000
b
500 c
5,000
10,000
100,000*
$
310,000
43,750
190,000
445,000
1,370,500
513,250
$1,864,000
730,000
$2,049,250
90,000
20,000 g 17,000
500,000 f 500,000
120,000
730,000
154,000
17,000
20,000
3,000
1,400,000
310,000
$1,864,000 $
Noncontrolling interest January 1

9,500 f 522,750
244,000
3,000
1,400,000
310,000
92,250
92,250
$2,049,250
8-30
Solution P8-12
Indirect Method
Consolidated Statement of Cash Flows
Cash Flows from Operating Activities
Consolidated net income controlling share
Adjustments to reconcile net income to cash
provided by operating activities:
Decrease in accounts receivable
Decrease in prepaid expenses
Decrease in accounts payable
Increase in inventories
Gain on sale of 10% interest *
$300,000
22,000
528,000
2,500
20,000
(203,500)
(130,000)
(5,700)
Net cash flows from operating activities

Cash Flows from Investing Activities
Purchase of equipment
Sale of 10% interest in subsidiary
533,300
$(100,000)
72,700
Net cash flows from investing activities

Cash Flows from Financing Activities
Cash paid on long-term note
Payment of cash dividends controlling
Payment of cash dividends noncontrolling
Net cash flows from financing activities
233,300
(27,300)
$(300,000)
(200,000)
(10,000)
(510,000)
Decrease in cash for 2012

Cash on hand January 1, 2012
Cash on hand December 31, 2012
(4,000)
50,500
$ 46,500
* Note: Since Pop maintains a controlling interest in Sat, no gain or loss

should have been recognized on sale of the 10% interest. Rather, this amount
should appear as an increase in other paid-in capital. The net effect on the
statement of cash flows is the same.
Chapter 8
8-31

Working Paper for the Statement of Cash Flows (Indirect Method)
Reconciling Items
Years
Change
Asset Changes
Cash
Accounts
receivable net
Inventories
Prepaid expenses
Equipment
Accumulated
depreciation
Land and buildings
Accumulated
depreciation
Total asset
changes
Changes in Equities
Accounts payable
Dividends payable
Long-term note
payable
Common stock
Retained earnings
Noncontrol. int. 20%
Debit
Credit
Cash Flows Cash Flows

from
Investing
Operations Activities
Cash Flows
Financing
Activities
(4,000)
(2,500)
130,000
(20,000)
90,000
(498,000)
2,500
k 130,000
l 20,000
h 10,000 g 100,000
f 500,000 h
2,000
0
(28,000) f
28,000
(332,500)
(203,500)
0
(300,000)
0
100,000
71,000
i 203,500
j 300,000
a 300,000 c 200,000
b 22,000 d 10,000
h 59,000
Changes in
equities
(332,500)
Controlling int.share
a 300,000
b 22,000
Purchase of equipment
g 100,000
Depreciation equipment
and buildings
Gain - sale of 10% subsidiary
Interest
Decrease in accounts receivable
Increase in inventories
Decrease in prepaid expenses
Decrease in accounts payable
Cash paid on long-term note
Paid dividends controlling
Paid dividends noncontrol.
Sale of 10% interest in
Subsidiary
f 528,000
h
5,700
e
k 130,000
l
i 203,500
j 300,000
c 200,000
d
300,000
22,000
(100,000)
528,000
(5,700)
2,500
(130,000)
20,000
20,000
(203,500)
2,500
(300,000)
(200,000)
10,000
(10,000)
h 72,700
1,890,700 1,890,700
72,700
533,300
(27,300)
(510,000)
Cash decrease for 2012 = $533,300 - $27,300 - $510,000 = $(4,000).

* Note: Since Pop maintains a controlling interest in Sat, no gain or loss
should have been recognized on sale of the 10% interest. Rather, this amount
8-32
should appear as an increase in other paid-in capital. The net effect on the
statement of cash flows is the same.

CHP 8

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Chapter 8

CONSOLIDATIONS CHANGES IN OWNERSHIP INTERESTS

2011 Pearson Education, Inc. publishing as Prentice Hall

Consolidations Changes in Ownership Interests

Noncontrolling interest share

Allocation of Sets dividends:

Noncontrolling interest ($30,000 x 30%) + ($30,000 x 10%)

Income from Sip for 2011:

Total income from Sip

2011 Pearson Education, Inc. publishing as Prentice Hall

Consolidations Changes in Ownership Interests

Solution E8-3 (amounts in thousands)

Solution E8-4 (amounts in thousands)

Gain on sale of 20% interest: No gain or loss is recognized since Pal

2011 Pearson Education, Inc. publishing as Prentice Hall

Solution E8-4 (continued)

Investment in Sag December 31, 2011

Investment balance January 1

Fair value book value differential

Income from Set (Note: Only include earnings subsequent to the

Investment in Set at December 31

Consolidation working paper entries:

Income from Set

c Noncontrolling interest share 240,000 x 7/12 x 30%

2011 Pearson Education, Inc. publishing as Prentice Hall

Consolidations Changes in Ownership Interests

2011 Pearson Education, Inc. publishing as Prentice Hall

Investment in Sow (in thousands)

Goodwill from new investment

Sows stockholders equity after issuance

Cost of 60,000 shares

This implies total goodwill is equal to $136,125.

Sod issues 30,000 shares to Pod at $20 per share

Sod sells 30,000 shares to the public at $20 per share

Sod sells 30,000 shares to the public; no gain or loss recognized:

2011 Pearson Education, Inc. publishing as Prentice Hall

Consolidations Changes in Ownership Interests

Percentage ownership after additional investment:

Goodwill from additional investment (in thousands):

This implies total goodwill is now equal to $114,286.

Outsiders buy shares

Percentage ownership after sale:

Change in underlying book value of investment in Sat:

Entry to adjust investment account:

2011 Pearson Education, Inc. publishing as Prentice Hall

Income from Sum

2012 Income from Sum

Noncontrolling interest December 31, 2012

Preacquisition income does not appear in income statement.

Investment balance at December 31, 2012

Implied fair value of Sum ($164,000/0.4)

Fair value of original investment($410,000 x 20%)

2011 Pearson Education, Inc. publishing as Prentice Hall

Consolidations Changes in Ownership Interests

Implied total fair value of Sad ($675,000 / 90%)

Investment income from Sad

Investment balance December 31, 2012

Less: Book value of 1/9 interest sold on July 1, 2013a

Sale of 10% interest July 1, 2013:

Underlying equity of interest sold

Gain on sale of 1/9 interest ($85,000 proceeds - $79,000)

2011 Pearson Education, Inc. publishing as Prentice Hall

Solution E8-10 (continued)