Ch 4 AA CONSOLIDATED FINANCIAL STATEMENTS AND OUTSIDE OWNERSHIP: Questions

1. What does the term noncontrolling interest mean?

1. "Noncontrolling interest" refers to an equity interest that is held in a member of a business combination by an unrelated (outside) party.

10. In question (8), how would Duke account for the remainder of its investment subsequent to the sale of this partial interest?

10. The accounting method choice for the remaining shares depends upon the current relationship between the two firms. If Duke retains control, consolidation is still required. However, if the parent now can only significantly influence the decision making process, the equity method is applied. A third possibility is Duke may have lost the power to exercise even significant influence. The fair value method then is appropriate.

8. Duke Corporation owns a 70 percent equity interest in Salem Company, a subsidiary corporation. During the current year, a portion of this stock is sold to an outside party. Before recording this transaction, Duke adjusts the book value of its investment account. What is the purpose of this adjustment?

8. When a company sells a portion of an investment, it must remove the carrying value of that portion from its investment account. The carrying value is based upon application of the equity method. Thus, if either the initial value method or the partial equity method has been used, Duke must first restate the account to the equity method before recording the sales transaction. The same method is applied to the operations of the current period occurring prior to the time of sale.

9. In question (8), how would the parent record the sales transaction?

9. Unless control is surrendered, the acquisition method views the sale of subsidiary's stock as a transaction with its owners. Thus, no gain or loss is recognized. The difference between the sale proceeds and the carrying value of the shares sold (equity method) is accounted for as an adjustment to the parent's additional paid in capital.

2. Atwater Company acquires 80 percent of the outstanding voting stock of Belwood Company. On that date, Belwood possesses a building with a $160,000 book value but a $220,000 fair value. At what value would this building be consolidated?

2. Acquisition method = $220,000 (fair value)

3. What is a control premium and how does it affect consolidated financial statements?

3. A control premium is the portion of an acquisition price (above currently traded market values) paid by a parent company to induce shareholders to sell a sufficient number of shares to obtain control. The extra payment typically becomes part of the goodwill acquired in the acquisition attributable to the parent company.

4. Where should the noncontrolling interest's claims be reported in a set of consolidated financial statements?

4. Current accounting standards require the noncontrolling interest to appear in the stockholders' equity section. The noncontrolling interest's share of the subsidiary's net income is shown as an allocated component of consolidated net income.

5. How is the noncontrolling interest in a subsidiary company calculated as of the end of a reporting period?

5. The ending noncontrolling interest is determined on a consolidation worksheet by adding the four components found in the noncontrolling interest column: (1) the beginning balance of the subsidiary's book value, (2) the noncontrolling interest share of the adusted acquisition-date excess fair over book value allocation, (3) its share of current year net income, (4) less dividends declared to these outside owners.

6. December 31 consolidated financial statements are being prepared for Allsports Company and its new subsidiary acquired on July 1 of the current year. Should Allsports adjust its consolidated balances for the preacquisition subsidiary revenues and expenses?

6. Allsports should remove the pre-acquisition revenues and expenses from the consolidated totals. These amounts were earned (incurred) prior to ownership by Allsports and therefore should are not earnings for the current parent company owners.

7. Tree, Inc., has held a 10 percent interest in the stock of Limb Company for several years. Because of the level of ownership, this investment has been accounted for using the fair-value method. At the beginning of the current year, Tree acquires an additional 70 percent interest, which provides the company with control over Limb. In preparing consolidated financial statements for this business combination, how does Tree account for the previous 10 percent ownership interest?

7. Following the second acquisition, consolidation is appropriate. Once Tree gains control, the 10% previous ownership is included at fair value as part of the total consideration transferred by Tree in the acquisition.