FR 3 - Consolidation Less than 100% Ownership

Pride, Inc. owns 80% of Simba, Inc.'s outstanding common stock. Simba, in turn, owns 10% of Pride's outstanding common stock. What percentage of the common stock cash dividends declared by the individual companies should be reported as dividends declared in the consolidated financial statements? Dividends declared by Pride/Dividends declared by Simba A) 90%/0% B) 90%/20% C) 100%/0% D) 100%/20%

A) 90%/0% --> Reason: This answer is correct because of the reciprocal ownership relationship that exists between the two companies. Pride (the acquirer) owns 80% of Simba (the acquiree), and Simba owns 10% of Pride. When Pride declares a cash dividend, 90% of it is distributed to outside parties and 10% goes to Simba. Because Simba is part of the consolidated entity, its 10% share is eliminated; thus, only 90% of dividends declared by Pride are reported in the consolidated statements. When Simba declares a dividend, 80% is distributed to Pride and 20% to outside parties. Pride's 80% share is eliminated as an intercompany transaction and the remaining 20% is also excluded because, from the acquirer's point of view, acquiree dividends do not represent dividends of the consolidated entity and must be eliminated.

On January 2, year 1, Pare Co. purchased 75% of Kidd Co.'s outstanding common stock. On that date, the fair value of the 25% noncontrolling interest was $35,000. During year 1, Kidd had net income of $20,000. Selected balance sheet data at December 31, year 1, is as follows: Pare Kidd Total assets $420,000 $180,000 Liabilities $120,000 $60,000 Common stock 100,000 50,000 Retained earnings 200,000 70,000 __________________________________________ $420,000 $180,000 During year 1 Pare and Kidd paid cash dividends of $25,000 and $5,000, respectively, to their shareholders. There were no other intercompany transactions. In its December 31, year 1 consolidated balance sheet, what amount should Pare report as common stock? A) $50,000 B) $100,000 C) $137,500 D) $150,000

B) $100,000 --> Reason: In the consolidated balance sheet, neither the parent company's investment account nor the subsidiary's stockholders' equity is reported. These amounts are eliminated in the same journal entry that records the excess of cost over book value. The portion of the subsidiary's stockholders' equity that is noteliminated is reported as noncontrolling interest. Therefore, the amount reported as common stock in the 12/31/Y1 consolidated balance sheet consists solely of Pare's common stock ($100,000). Kidd's common stock ($50,000) is eliminated along with the rest of its stockholders' equity.

On January 1, year 2, Ritt Corp. acquired 50,000 shares of Shaw Corp. stock which represented 80% of Shaw's $10 par common stock for $19.50 per share. On the date of acquisition, the fair value of the 12,500 shares representing the noncontrolling interest in Shaw was $18 per share. 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. For the year ended December 31, year 2, Shaw had net income of $190,000 and paid cash dividends totaling $125,000. In the December 31, year 2, consolidated balance sheet, noncontrolling interest should be reported at: A) $200,000 B) $225,000 C) $233,000 D) $238,000

D) $238,000 --> Reason: The percentage of the acquiree's stockholders' equity not owned by the acquirer company represents the noncontrolling interest. The acquisition date noncontrolling interest is valued based on the fair value of the shares, which is 12,500 (20% × 62,500) × $18 = $225,000. At 12/31/Y2 the noncontrolling interest is computed below 1/1/Y2 noncontrolling interest $225,000 Year 2 net income (20% × $190,000) 38,000 Year 2 dividends (20% × $125,000) (25,000) Noncontrolling interest at 12/31/Y2 $238,000

On January 1, year 1, 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. The fair value of the noncontrolling interest in Shaw on January 1, year 1, was $250,000. This value included the acquisition premium attributed to any goodwill. For the year ended December 31, year 1, Shaw had net income of $190,000 and paid cash dividends totaling $125,000. In the December 31, year 1 consolidated balance sheet, noncontrolling interest should be reported at A) $200,000 B) $213,000 C) $233,000 D) $263,000

D) $263,000 --> Reason: The percentage of the subsidiary's stockholders' equity not owned by the parent represents the noncontrolling interest's share of the fair value of net assets of the subsidiary. The fair value of the noncontrolling interest is measured at the acquisition date, and adjusted in future periods for the portion of the acquiree's income and dividends attributable to the noncontrolling interest. Therefore, the noncontrolling interest at 12/31/Y1 is calculated as follows: Fair value of noncontrolling interests --> $250,000 Plus: Share of net income ($190,000 × 20%) --> 38,000 Less: Share of dividends ($125,000 × 20%) --> (25,000) Noncontrolling interest 12/31/Y1 $263,000

On January 2, year 1, Pare Co. purchased 75% of Kidd Co.'s outstanding common stock. On that date, the fair value of the 25% noncontrolling interest was $35,000. During year 1, Kidd had net income of $20,000. Selected balance sheet data at December 31, year 1, is as follows: Pare Kidd Total assets $420,000 $180,000 Liabilities $120,000 $60,000 Common stock 100,000 50,000 Retained earnings 200,000 70,000 $420,000 $180,000 During year 1 Pare and Kidd paid cash dividends of $25,000 and $5,000, respectively, to their shareholders. There were no other intercompany transactions. In its December 31, year 1 consolidated statement of retained earnings, what amount should Pare report as dividends paid? A) $5,000 B) $25,000 C) $26,250 D) $30,000

B) $25,000 --> Reason: Pare paid cash dividends of $25,000 and Kidd, the 75%-owned subsidiary, paid cash dividends of $5,000. The dividends paid by Pare are all payments to owners of the consolidated company and are reported as dividends paid in the consolidated statement of retained earnings. The $5,000 dividend paid by Kidd is paid 75% to Pare, and 25% to outside parties (the noncontrolling interest in Kidd's stock). The 75% share to Pare is eliminated when determining consolidated dividends declared because it is an intracompany transaction. The remaining 25% to the noncontrolling interest is likewise not included in consolidated dividends declared because, from the parent company's point of view, subsidiary dividends do not represent dividends of the consolidated entity.

A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and noncontrolling interest equity reported on the consolidated balance sheet? A) No effect on either retained earnings or noncontrolling interest. B) No effect on retained earnings and a decrease in noncontrolling interest. C) Decrease in both retained earnings and noncontrolling interest. D) A decrease in retained earnings and no effect on noncontrolling interest.

B) No effect on retained earnings and a decrease in noncontrolling interest. --> Reason: Retained earnings reported on the consolidated balance sheet would equal only the parent's retained earnings balance at year-end. Thus, even though declaration and payment of a dividend by the subsidiary would decrease the subsidiary's retained earnings, there would be no effect on consolidated retained earnings. Noncontrolling interest equity is increased by the noncontrolling interests percentage of income of the subsidiary, and decreased by the noncontrolling interest's share of the dividend of subsidiary. This balance would include subsidiary retained earnings which would have been decreased by the declaration and payment of dividends. Thus, noncontrolling interest would also have decreased and this answer is correct.

On January 1, year 1, Palm, Inc. purchased 80% of the stock of Stone Corp. for $4,000,000 cash. Prior to the acquisition, Stone had 100,000 shares of stock outstanding. On the date of acquisition, Stone's stock had a fair value of $52 per share. During the year Stone reported $280,000 in net income and paid dividends of $50,000. What is the balance in the noncontrolling interest account on Palm's balance sheet on December 31, year 1? A) $1,000,000 B) $1,040,000 C) $1,086,000 D) $1,096,000

C) $1,086,000 --> Reason: The fair value of the 20,000 (100,000 × 20%) shares of noncontrolling interest in Stone on the date of acquisition is $1,040,000 (20,000 shares × $52 per share). This amount is adjusted for the noncontrolling interest's share of net income and dividends received as calculated below. Fair value of noncontrolling interest, acquisition date --> $1,040,000 Plus: Share of net income (20% × $280,000) --> 56,000 Less: Share of dividends (20% × 50,000) --> (10,000) Noncontrolling interest 12/31/Y1 $ 1,086,000

Bard Co. owned several subsidiaries at December 31. The following table shows each subsidiary's total liabilities, excluding intercompany transactions, and percentage of stock owned by Bard: Subsidiary Total liabilities % owned Brock Co. $4,000,000 70 Harlson Co. 2,000,000 48 Porter Co. 7,000,000 80 Nortin Co. 5,000,000 100 What amount should Bard include as liabilities in its consolidated balance sheet at December 31? A) $5,000,000 B) $12,000,000 C) $16,000,000 D) $18,000,000

C) $16,000,000 --> Reason: Bard would consolidate 100% of the liabilities for which controlling interest exists (absent additional information, ownership of more than 50% of the outstanding voting stock). Therefore, Bard would consolidate Brock Co., Porter Co., and Norton, Co. ($4,000,000 + $7,000,000 + $5,000,000 = $16,000,000).

On January 2, year 1, Pare Co. purchased 75% of Kidd Co.'s outstanding common stock. On that date, the fair value of the 25% noncontrolling interest was $35,000. During year 1, Kidd had net income of $20,000. Selected balance sheet data at December 31, year 1, is as follows: Pare Kidd Total assets $420,000 $180,000 Liabilities $120,000 $60,000 Common stock 100,000 50,000 Retained earnings 200,000 70,000 _________________________________________________ $420,000 $180,000 During year 1 Pare and Kidd paid cash dividends of $25,000 and $5,000, respectively, to their shareholders. There were no other intercompany transactions. In Pare's December 31, year 1 consolidated balance sheet, what amount should be reported as noncontrolling interest in net assets? A) $30,000 B) $35,000 C) $38,750 D) $40,000

C) $38,750 --> Reason: The percentage of the subsidiary's stockholders' equity not owned by the parent represents the noncontrolling interest's share of the fair value of net assets of the subsidiary. The fair value of the noncontrolling interest is measured at the acquisition date, and adjusted in future periods for the portion of the acquiree's income and dividends attributable to the noncontrolling interest. Therefore, the noncontrolling interest at 12/31/Y1 is calculated as follows: Fair value of noncontrolling interest --> $35,000 Plus: Share of net income (25% × 20,000) --> 5,000 Less: Share of dividends (25% × $5,000) --> (1,250) Noncontrolling interest 12/31/Y1 $38,750

On January 1, Year 1, Polk Corp. and Strass Corp. had condensed balance sheets as follows: Polk Strass Current assets $70,000 $20,000 Noncurrent assets 90,000 40,000 Total assets $160,000 $60,000 Current liabilities $30,000 $10,000 Long-term debt 50,000 -- Stockholders' equity 80,000 50,000 _________________________________________ Total liabilities and stockholders' equity $160,000 $60,000 On January 2, Year 1, Polk borrowed $60,000 and used the proceeds to purchase 90% of the outstanding common shares of Strass. This debt is payable in ten equal annual principal payments, plus interest, beginning December 30, Year 1. The excess cost of the investment over Strass' book value of acquired net assets should be allocated 60% to inventory and 40% to goodwill. On January 1, Year 1, the fair value of Strass shares held by noncontrolling parties was $10,000. On January 2, Year 1, stockholders' equity including noncontrolling interests should be: A) $80,000 B) $85,000 C) $90,000 D) $130,000

C) $90,000 --> Reason: This response is correct because after the acquisition, the stockholders' equity of Polk will include the noncontrolling interest. The problem states that on the date of the acquisition, the fair value of the noncontrolling interest is $10,000. Therefore, Polk's stockholders equity on January 2, Year 1 is $90,000 ($80,000 + $10,000).