Consolidation Less than 100% Ownership

Assume that in acquiring a subsidiary, the parent determined that several depreciable assets had a fair value greater than book value. If the parent accounts for its investment in the subsidiary using the equity method, what effect will the amortization of the excess fair value over the book value of the subsidiary's assets have on the following parent's accounts? Investment in Subsidiary Equity Revenue from Subsidiary Increase Increase Increase Decrease Decrease Increase Decrease Decrease

Decrease Decrease When the fair value of a subsidiary's assets is greater than book value, it is as though the parent paid more for the assets than the subsidiary paid for those assets. Using the equity method of accounting for the investment, the parent must depreciate the excess of fair value over book value. That equity entry would be: DR: Equity Revenue - to reduce it by the amount of depreciation on the excess of fair value over book value, and CR: Investment in Subsidiary - to offset a portion of the net income (or increase the amount of net loss) recognized from the subsidiary. Thus, both accounts would be decreased.

If Company P owns 90% of Company S voting stock and Company S has a trade account payable to Company P of $100,000, the amount to be eliminated is $90,000. True False

False

If a parent uses the equity method on its books to carry its investment in a subsidiary, no investment eliminating entry is required on the consolidating worksheet. True False

False

If goodwill is recognized as part of the investment eliminating entry, amortization expense for goodwill must be recognized on the consolidating worksheet. True False

False

Assume that in acquiring a subsidiary, the parent determined there were several depreciable assets of the subsidiary that had a fair value greater than book value. What effect will the excess fair value over book value of the subsidiary's assets have on the following accounts in the preparation of consolidated statements? Depreciable Assets Depreciation Expense Increase Increase Increase Decrease Decrease Increase Decrease Decrease

Increase Increase The investment eliminating entry on the consolidating worksheet will write up (increasing on the worksheet) the value of depreciable asset, from book value to fair value on the date of the combination. The additional depreciable asset value recognized on the worksheet will then be depreciated on the worksheet, resulting in additional (increasing) depreciation expense.

Any difference between the fair value of a subsidiary's asset and the book value of that asset is recognized on the books of the parent. True False

True

If a parent carries an investment in a subsidiary on its books using the equity method, the investment account on the parent's books will be adjusted to reflect changes in the subsidiary's retained earnings for each fiscal period. True False

True

If a parent carries an investment in a subsidiary using the equity method, the parent will recognize its share of the subsidiary's net income when it is reported by the subsidiary. True False

True

If a parent carries an investment in a subsidiary using the equity method, the parent will recognize on its books amortization of the excess of fair value over the book value of depreciable/amortizable assets. True False

True

If the parent does not own 100% of a subsidiary, a noncontrolling interest will show on the consolidated balance sheet. True False

True

If, on a consolidating worksheet, depreciation expense is taken on the excess of fair value over book value of a subsidiary's depreciable assets, the corresponding credit on the consolidating worksheet is to accumulated depreciation. True False

True

The entries made on its books during a fiscal period by a parent company using the equity method must be reversed on the consolidating worksheet at the end of the fiscal period. True False

True

The fair value of the noncontrolling interest at the date of a business combination enters into the determination of any goodwill. True False

True

The noncontrolling interest on a consolidated balance sheet prepared immediately after a business combination would be measured at the fair value of the noncontrolling interest's percentage claim to the consolidated net assets attributable to the subsidiary. True False

True

If a parent uses the equity method on its books to account for its investment in a subsidiary, which one of the following will result in an increase in the investment account on the parent's books? Subsidiary Reports Income Subsidiary Declares Dividend Yes Yes Yes No No Yes No No

Yes No nder the equity method, when a subsidiary reports income, the parent recognizes its share as: DR: Investment and CR: Equity Income. Therefore, the subsidiary's reported income increases the investment account. In addition, when a subsidiary declares a dividend, the parent recognizes its share as: DR: Dividends Receivable/Cash and CR: Investment. Therefore, the subsidiary's dividends do not increase the investment account but rather decrease the investment account.

If a parent uses the equity method on its books to carry its investment in a subsidiary, which one of the following current year entries (made by the parent) must be reversed on the consolidating worksheet? Income from Subsidiary Dividends from Subsidiary Yes Yes Yes No No Yes No No

Yes Yes When a parent uses the equity method to account for its investment in a subsidiary, the parent will recognize on its books during the year its share of the subsidiary's income (or loss) and its share of dividends declared by the subsidiary. Therefore, in the consolidating process, those entries (and any other equity-based entries made by the parent) must be reversed so that the elements that make up those entries (revenues, expenses, etc.) can be individually recognized on the consolidating worksheet and the consolidated financial statements.

Parco owns 100% of its subsidiary, Subco, which it acquired at book value. It carries its investment in Subco on its books using the equity method of accounting. At the beginning of its 2009 fiscal year, the investment in Subco account was $552,000. During 2009, Subco reported the following: Net Income $42,000 Dividends Declared/Paid 12,000 There were no other transactions between the firms in 2009. In preparing its 2009 fiscal year consolidated statements, which one of the following is the amount of the investment eliminating entry that Parco will make as a result of its ownership of Subco? A. $552,000 B. $582,000 C. $594,000 D. $606,000

A. $552,000 The amount of an investment eliminating entry is the balance in the investment account as of the beginning of the period being consolidated. In this case, that was $552,000. If the parent uses the equity method to account for its investment in the subsidiary, the entries it makes during the year are reversed so that the investment account has its beginning of the year balance.

On January 1, 20x6 Ritt Corp. purchased 80% of Shaw Corp.'s $10 par common stock for $975,000. On this date, the carrying amount of Shaw's net assets was $1,000,000. The fair values of Shaw's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net) which were $100,000 in excess of the carrying amount. Those plant assets had a 10-year remaining life, depreciated on a straight-line basis. The fair value of the 20% noncontrolling interest in Shaw was properly determined to be $200,000 at that time. For the year ended December 31, 20x6, Shaw had net income of $190,000 and paid cash dividends totaling $125,000. Which one of the following is the amount of goodwill that should be recognized as a result of the business combination? A. $ 43,000 B. $ 75,000 C. $ 95,000 D. $175,000

B. $ 75,000 Goodwill is determined as the excess of investment value over the fair value of the subsidiary's net assets. Investment value is the sum of the parent's investment (which is the fair value of consideration paid) + the fair value of any noncontrolling interest, which in this question is $975,000 + $200,000 = $1,175,000. The fair value of Shaw's identifiable net assets is book value $1,000,000 + write up in plant assets $100,000 = $1,100,000. Therefore, goodwill is investment value $1,175,000 - fair value of identifiable assets $1,100,000 = $75,000, the correct answer.

On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will Peace report as dividends declared and paid in its current year's consolidated statement of retained earnings? A. $8,000 B. $15,000 C. $21,000 D. $23,000

B. $15,000 This is the amount ($15,000) that Peace will report as dividends in its consolidated statement of retained earnings. Only Peace's (the parent's) dividends paid of $15,000 are shown on the Peace/Surge consolidated statement of retained earnings. The dividend paid by Surge to Peace ($8,000 x .75 = $6,000) will not show on the consolidated statement of retained earnings, because it will be eliminated as intercompany dividend (you can't pay a dividend to yourself!). The balance of Surge's dividend ($8,000 x .25 = $2,000) goes to the 25% minority shareholders in Surge and reduces their claim to Surge's retained earnings, not Peace's consolidated retained earnings.

Parco owns 100% of its subsidiary, Subco, which it acquired at book value. It carries its investment in Subco on its books using the equity method of accounting. At the beginning of its 2009 fiscal year, the investment in Subco account was $552,000. During 2009, Subco reported the following: Net Income $42,000 Dividends Declared/Paid 12,000 There were no other transactions between the firms in 2009. In preparing its 2009 fiscal year consolidated statements, which one of the following is the amount of investment that Parco will have to reverse for 2009 as a result of its ownership of Subco? A. $12,000 B. $30,000 C. $42,000 D. $54,000

B. $30,000 During 2009 Parco would recognize Subco's reported net income of $42,000 as equity revenue; the entry would be: DR: Investment in Subco and CR: Equity Revenue. The $12,000 dividends would not be recognized as equity revenue but rather as a liquidation of part of Parco's investment in Subco; the entry would be: DR: Dividends Receivable/Cash and CR: Investment in Subco. Therefore, the net amount of investment to be reversed would be $30,000, computed as +$42,000 - $12,000 = $30,000.

On January 1, 20x6, Ritt Corp. purchased 80% of Shaw Corp.'s $10 par common stock for $975,000, which included a control premium. On this date, the fair value of the noncontrolling interest was $200,000, giving Shaw a full fair value of $1,175,000. On the acquisition date the carrying amount of Shaw's net assets was $1,000,000. The fair values of Shaw's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount. Those plant assets had a 10-year remaining life, depreciated on a straight-line basis. Shaw had a net income of $190,000 and paid cash dividends totaling $125,000. Which one of the following is the amount of noncontrolling interest that should be reported in a consolidated balance sheet prepared December 31, 20x6? A. $213,000 B. $235,000 C. $246,000 D. $248,000

C. $246,000 The noncontrolling interest on December 31, 20x6, is the noncontrolling interest (NCI) as of the acquisition date, plus the NCI share of Shaw's net income, less the NCI share of Shaw's dividends, less the NCI share of the depreciation of the plant asset revaluation. The consolidated net assets attributable to Shaw on January 1, 20x6, would include the book value of the net assets on the date of the combination ($1,000,000), plus the write up of the plant assets to fair value ($100,000), plus the goodwill at acquisition ($75,000) or $1,175,000 × 20% = $235,000. January 1, 20x6 NCI would be adjusted for Shaw's net operating results for 20x6 ($190,000), less 20% of the worksheet depreciation taken on the write up of plant assets ($100,000/10 years =) $10,000 less the dividends paid by Shaw during 20x6 ($125,000). January 1, 20x6 NCI equity $235,000 + 20x6 Net Income (190,000 × .2) 38,000 − 20x6 Dividends (125,000 × .2) (25,000) − 20x6 Depreciation of plant assets (10,000 × .2) ( 2,000) December 31, 20x6 NCI equity $246,000

On January 1, 20x1 Ritt Corp. purchased 80% of Shaw Corp.'s $10 par common stock for $975,000. Ritt's cost reflects an appropriate fair value measure for all of Shaw's outstanding common stock. The original cost to the noncontrolling investors for the 20% of Shaw's common stock not acquired by Ritt was $200,000. At the date of Ritt's purchase, the carrying amount of Shaw's net assets was $1,000,000. The fair values of Shaw's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net) which were $100,000 in excess of the carrying amount. Which one of the following is the amount of noncontrolling interest that should be reported in a consolidated balance sheet prepared immediately following the business combination? A. $125,000 B. $200,000 C. $220,000 D. $243,750

D. $243,750 Noncontrolling interest at the date of the business combination should be the noncontrolling interest proportionate share of total fair value at that date, including goodwill. The total fair value of Shaw (including goodwill) at the date Ritt acquired 80% of Shaw's common stock would be $1,218,750 ($975,000/.80). The noncontrolling interest would be .20 x $1,218,750 = $243,750, the correct answer. The investment eliminating entry made immediately following the business combination would be: DR: (Various) Identifiable Net Assets $1,100,000 Goodwill 118,750 CR: Investment in Shaw $975,000 Noncontrolling Interest (in Shaw) 243,750

Assume that in acquiring a subsidiary, the parent determined there were several depreciable assets of the subsidiary that had a fair value less than book value. What effect will this fair value less than book value of the subsidiary's assets have on the following accounts in the preparation of consolidated statements? Depreciable Assets Depreciation Expense Increase Increase Increase Decrease Decrease Increase Decrease Decrease

Decrease Decrease

Assume that in acquiring a subsidiary, the parent determined there were several depreciable assets of the subsidiary that had a fair value less than book value. What effect will this fair value less than book value of the subsidiary's assets have on the following accounts in the preparation of consolidated statements? Depreciable Assets Depreciation Expense Increase Increase Increase Decrease Decrease Increase Decrease Decrease

Decrease Decrease Both accounts will be decreased. The investment eliminating entry on the consolidating worksheet will write down (decreasing on the worksheet) the value of depreciable asset, from book value to the lower fair value on the date of the combination. The decrease in depreciable asset value recognized on the worksheet will mean that the depreciation expense on the worksheet, brought on by the subsidiary, will overstate depreciation expense to the parent, resulting in a reduction (decreasing) depreciation expense for consolidated statement purposes.