Documente Academic
Documente Profesional
Documente Cultură
Answers to Questions
1 A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a
controlling financial interest (generally over 50 percent) of its outstanding voting stock.
2 Amounts assigned to identifiable assets and liabilities in excess of recorded amounts on the books of the
subsidiary are not recorded separately by the parent. Instead, the parent records the fair value/purchase
price of the interest acquired in an investment account. The assignment to identifiable asset and liability
accounts is made through working paper entries when the parent and subsidiary financial statements are
consolidated.
3 The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the
purchase price of the subsidiary is greater than the book value of the subsidiary’s net assets. If the parent
had acquired an 80 percent interest and the implied fair value of the subsidiary was greater than the book
value of the subsidiary’s net assets, the land would still appear in the consolidated balance sheet at
$100,000. Under GAAP, the noncontrolling interest is also reported based on fair values at the acquisition
date.
4 Parent company—a corporation that owns a controlling interest in the outstanding voting stock of another
corporation (its subsidiary).
Subsidiary company—a corporation that is controlled by a parent that owns a controlling interest in its
outstanding voting stock, either directly or indirectly.
Affiliates—companies that are controlled by a single management team through parent-subsidiary
relationships. (Although the term affiliate is a synonym for subsidiary, the parent is included in the total
affiliation structure.) In many annual reports, the term includes all investments accounted for by the
equity method.
Associates—companies that are controlled through parent-subsidiary relationships or whose operations
can be significantly influenced through equity investments of 20 percent to 50 percent.
5 A noncontrolling interest is the equity interest in a subsidiary that is owned by stockholders outside of the
affiliation structure. In other words, it is the equity interest in a subsidiary (recorded at fair value) that is
not held by the parent or subsidiaries of the parent.
6 Under GAAP, a subsidiary will not be consolidated if control does not rest with the majority owner, such
as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under
severe foreign exchange restrictions or other governmentally imposed uncertainties.
7 Consolidated financial statements are intended primarily for the stockholders and creditors of the parent,
according to GAAP.
8 The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of
the outstanding capital stock of the parent.
9 Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or a
consolidation accounted for as an acquisition. But goodwill from consolidation would not appear in the
general ledger of a parent or its subsidiary. Goodwill is entered in consolidation working papers when the
reciprocal investment and equity amounts are eliminated. Working paper entries affect consolidated
financial statements, but they are not entered in any general ledger.
10 The parent’s investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is
consolidated. It would appear in the parent’s separate balance sheet under the heading “investments” or
“other assets.” Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as
investments or other assets. They are accounted for under the equity method if the parent can exercise
significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost method.
12 Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order
to show the financial position and results of operations of the total economic entity that is under the
control of a single management team. Sales by a parent to a subsidiary are internal transactions from the
viewpoint of the economic entity and the same is true of interest income and interest expense and rent
income and rent expense arising from intercompany transactions. Similarly, receivables from and payables
to affiliates do not represent assets and liabilities of the economic entity for which consolidated financial
statements are prepared.
13 The stockholders’ equity of a parent under the equity method is the same as the consolidated stockholders’
equity of a parent except for noncontrolling interest. Consolidated balance sheets disclose noncontrolling
interest for subsidiaries that are not wholly owned.
14 No. The amounts that appear in the parent’s statement of retained earnings under the equity method and
the amounts that appear in the consolidated statement of retained earnings are identical, assuming that the
noncontrolling interest is included as a separate component of stockholders’ equity.
15 Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total
income to the consolidated entity between controlling and noncontrolling stockholders. From the
viewpoint of the controlling interest (the stockholders of the parent), income attributable to noncontrolling
interest has the same effect on consolidated net income as an expense. This is because consolidated net
income is income to all stockholders. Alternatively, you can view total consolidated net income as being
allocated to the controlling and noncontrolling interests.
17 It is acceptable to consolidate the annual financial statements of a parent and a subsidiary with different
fiscal periods, provided that the dates of closing are not more than three months apart. Any significant
developments that occur in the intervening three-month period should be disclosed in notes to the
financial statements. In the situation described, it is acceptable to consolidate the financial statements of
the subsidiary with an October 31 closing date with the financial statements of the parent with a
December 31 closing date.
18 The acquisition of shares from noncontrolling stockholders is not a business combination. It is not
possible, by definition, to acquire a controlling interest from noncontrolling stockholders. Increasing a
controlling interest is the same as making an additional investment. Acquisition of additional subsidiary
stock is recorded by increasing the investment account and reducing the noncontrolling interest account.
SOLUTIONS TO EXERCISES
Solution E3-1
Check:
Investment in Matt Inc. at January 1 $1,400,000
Add: controlling interest share $420,000
($600,000 x 70%)
Less: dividends declared ($300,000 70%) $210,000
Investment in Matt Inc. at December 31 $1,610,000
Solution E3-2
Solution E3-3
2 $1,320, equal to $1,200 dividends payable of Pam plus $120 (30% of $400)
dividends payable to noncontrolling interests of Sun.
Preliminary computation
Cost of Son stock (Fair value) $10,000
Fair value of Son’s identifiable net assets 8,000
Goodwill $ 2,000
Inventories 160
Land 400
Buildings — net 1,200
Equipment — net 640
Goodwill 2,000
Retained earnings 1,680
Note payable 80
Push-down capital 6,000
2 Son Corporation
Balance Sheet
January 1, 2016
(in thousands)
Assets
Cash $ 560
Accounts receivable 640
Inventories 800
Land 1,600
Buildings — net 4,000
Equipment — net 2,400
Goodwill 2,000
Total assets $12,000
Liabilities
Accounts payable $ 800
Note payable 1,200
Total liabilities 2,000
Stockholders’ equity
Capital stock $ 4,000
Push-down capital 6,000
Total stockholders’ equity 10,000
Total liabilities and stockholders’ equity $12,000
Solution E3-7
Supporting computations
1 Capital stock
Stockholders’ equity:
Capital stock, $10 par $1,200
Additional paid-in capital 200
Retained earnings 260
Equity of controlling stockholders 1,660
Noncontrolling interest 164
Total stockholders’ equity $1,824
Supporting computations
Computation of consolidated retained earnings:
Pam’s December 31, 2015 retained earnings $ 140
Add: Pam’s reported income for 2016 220
Less: Pam’s dividends (100)
Consolidated retained earnings December 31, 2016 $ 260
Solution E3-10
Supporting computations
Operating expenses:
Combined operating expenses of Pop and Son $1,100
Add: Depreciation on excess allocated to equipment
($40/4 years) 10
Consolidated operating expenses $1,110
SOLUTIONS TO PROBLEMS
Solution P3-1
2 Preliminary computations:
Liabilities and
Equity
Accounts payable $ 500 $ 80 c 100 $ 480
Dividends payable $ 100 $ 200 b 160 $ 140
Notes payable $1,000 $ 400 $1,400
Capital stock $2,000 $1,000 a 1000 $2,000
Retained earnings $4,180 $1,800 a 1800 $4,180
$7,780 $3,480
Noncontrolling
interest a 580 $ 580
Total liabilities and
stockholders' equity $8,780
Assets
Current assets:
Cash ($70 + $40) $110
Receivables — net ($160 + $60) 220
Inventories ($140 + $60 + $40) 240 $ 570
Stockholders’ equity:
Capital stock $1,000
Retained earnings 100
Equity of controlling stockholders 1,100
Noncontrolling interest * 150 1,250
Total liabilities and stockholders’ equity $1,690
Fair Value
- Book Allocation
Value
Current assets $2,000 $2,000
Equipment 4,000 4,000
Bargain purchase
gain* (2,500)
Excess fair value over book value $3,500
*After recognizing acquired assets and liabilities at fair values, we are left
with a negative excess of $2,500. Under GAAP, this difference is recorded as a
gain in the consolidated income statement in the year of acquisition. The gain
is attributable entirely to the controlling interest, and is recorded on the
parent’s books by a debit to the Investment account and a credit to a Gain
from bargain Purchase account. An alternative calculation of this amount takes
the difference between the fair values of the net assets ($16,000) and their
fair value implied by the acquisition price ($13,500), which equals $2,500.
Noncontrolling interest of $260 (fair value) plus $1,040 (fair value of Pam’s
investment) equals total fair value of $1,300. Therefore, Pam’s interest is
80% ($1,040 / $1,300), and noncontrolling interest is 20% ($260 / $1,300).
Excess allocated to
Solution P3-5
Supporting computations
Son’s net income ($3,200 - $2,400 - $400) $ 400
Less: Excess allocated to inventories that were sold in 2016 (160)
Less: Depreciation on excess allocated to plant
assets ($320 /4 years) (80)
Income from Son $ 160
Solution P3-6
Preliminary computations
Cost of 80% investment January 3, 2016 $1,120
Implied total fair value of Son ($1,120 / 80%) $1,400
Book value of Son (1,000)
Excess fair value over book value on January 3 = Goodwill $ 400
2 Current assets:
Combined current assets ($816 + $300) $1,116
Less: Dividends receivable ($40 80%) (32)
Current assets $1,084
Solution P3-9
Solution P3-10
Alternative solution:
Investment cost January 1, 2016 $1,792
Add: 80% of Sun’s increase since acquisition
($2,000 - $1,760) 80% 192
Investment in Sun December 31, 2020 $1,984
Amounts are equal to capital stock and retained earnings shown in the
consolidated balance sheet.
Solution P3-11
Solution P3-12
PR 3-1
ASC 805-10-20 Glossary: “Acquisition Date - The date on which
the acquirer obtains control of the acquiree.”
PR 3-2
ASC 810-10-50-1A:
A parent with one or more less-than-wholly-owned subsidiaries shall disclose
all of the following for each reporting period:
a. Separately, on the face of the consolidated financial statements, both
of the following:
2. Discontinued operations
1. Net income