Chapter 03 – THE REPORTING ENTITY AND CONSOLIDATED FINANCIAL STATEMENTS
3–10
E3-7
20 min.
LO 3-5
M
Subsidiary Acquired for Cash
A simple consolidated balance sheet is prepared following an acquisition of
subsidiary shares using cash.
E3-8
20 min.
LO 3-5
M
Subsidiary Acquired with Bonds
A simple consolidated balance sheet is prepared following the acquisition of
subsidiary shares by issuing parent company bonds.
E3-9
20 min.
LO 3-5
M
Subsidiary Acquired By Issuing Preferred Stock
A consolidated balance sheet is prepared following the acquisition of subsidiary
shares by issuing preferred stock of the parent company.
E3-10
20 min.
LO 3-4,
LO 3-7
M
Reporting for a Variable Interest Entity
A balance sheet must be prepared immediately following the construction of a
casino by a variable interest entity.
E3-11
15 min.
LO 3-4,
LO 3-7
E
Consolidation of a Variable Interest Entity
A condensed balance sheet must be prepared for the primary beneficiary of a
variable interest entity.
E3-12
5 min.
LO 3-3
E
Computation of Subsidiary Net Income
Income assigned to noncontrolling interest in the consolidated income statement
is used to compute the reported net income of the subsidiary.
E3-13
20 min.
LO 3-3,
LO 3-4
H
Incomplete Consolidation
A partially-completed consolidated balance sheet is presented. The proportion of
ownership held by the parent and the amounts to be reported in the consolidated
balance sheet for accounts payable, bonds payable, and the stockholders’ equity
accounts must be determined.
E3-14
10 min.
LO 3-3,
LO 3-4
E
Noncontrolling Interest
Stockholders’ equity balances are given for the parent and subsidiary. The
amount assigned to the noncontrolling interest in the consolidated balance sheet
must be computed and the stockholders’ equity section of the consolidated
balance sheet prepared.
E3-15
15 min.
LO 3-3,
LO 3-4
M
Computation of Consolidated Net Income
An entity utilized the cost method in accounting for its 75% ownership in another
entity. Students must calculate the investor’s income from its investment under
the equity method, income to the noncontrolling interest, and consolidated
income. Students must also explain why the investor should not simply add the
investee’s reported income to its own reported income.
Chapter 03 – THE REPORTING ENTITY AND CONSOLIDATED FINANCIAL STATEMENTS
3–11
E3-16
15 min.
LO 3-4
M
Computation of Subsidiary Balances
Students must calculate the amount of net income reported by the subsidiary
based on income assigned to noncontrolling interest and prepare the
stockholders’ equity section of the subsidiary’s balance sheet.
E3-17
10 min.
LO 3-4,
LO 3-5
E
Subsidiary Acquired at Net Book Value
Balance sheet information for the parent and subsidiary is provided prior to the
acquisition of all subsidiary common shares at net book value. A consolidated
balance sheet must be prepared.
E3-18
15 min.
LO 3-4
E
Acquisition of Majority Ownership
Students must compute amounts to be reported for net identifiable assets,
goodwill and noncontrolling interest after a combination of companies under
current accounting practice.
P3-19
15 min.
LO 3-4,
LO 3-6
E
Multiple-Choice Questions on Consolidated and Combined Financial
Statements [AICPA Adapted]
Four multiple-choice questions require a more advanced understanding of the
consolidation process.
P3-20
15 min.
LO 3-4
M
Determining Net Income of Parent Company
Given consolidated income and income of minority owners, students must
calculate parent’s income from its own operations.
Chapter 03 – THE REPORTING ENTITY AND CONSOLIDATED FINANCIAL STATEMENTS
3–12
P3-21
20 min.
LO 3-7
M
Consolidation of a Variable Interest Entity
Students must prepare a consolidated balance sheet for an entity that is the
primary beneficiary of a partnership.
P3-22
20 min.
LO 3-7
M
Reporting for Variable Interest Entities
A balance sheet must be prepared for the entity that is the primary beneficiary of
a variable interest entity.
P3-23
25 min.
LO 3-4
M
Parent Company and Consolidated Amounts
A trial balance for the investee company and information regarding the parent’s
income are provided. Students must calculate the cost of the investment, income
of minority shareholders, and consolidated net income given two separate
scenarios.
P3-24
20 min.
LO 3-4
M
Parent Company and Consolidated Balances
Students must calculate amount of the excess of investment cost over book value,
the amount by which building and equipment and associated accumulated
depreciation will be increased on the consolidated balance sheet, and the amount
reported for the minority shareholders.
P3-25
25 min.
LO 3-2,
LO 3-4
H
Indirect Ownership
Consolidated net income must be computed. The student’s understanding of the
definition of consolidated net income is tested by increasing the number of
companies involved and including both subsidiaries and nonsubsidiaries.
NOTE: This problem is not covered directly in the chapter material.
P3-26
25 min.
LO 3-4,
LO 3-5
M
Ws
Consolidated Worksheet at and Balance Sheet on the Acquisition Date
(Equity Method)
Students are asked to prepare journal entries on a parent company’s books at the
time of an acquisition and then to prepare a consolidation worksheet and balance
sheet on the acquisition date.
P3-27
30 min.
LO 3-4,
LO 3-5
M
Consolidated Worksheet at End of the First Year of Ownership (Equity
Method) As a continuation of P3-34, students are asked to prepare equity method
journal entries on a parent company’s books related to the subsidiary and then to
prepare a consolidation worksheet at the end of the first year.
P3-28
30 min.
LO 3-4,
LO 3-5
M
Consolidated Worksheet at End of the Second Year of Ownership (Equity
Method) As a continuation of P3-35, students are asked to prepare equity method
journal entries on a parent company’s books related to the subsidiary and then to
prepare a consolidation worksheet at the end of the second year.
Chapter 03 – THE REPORTING ENTITY AND CONSOLIDATED FINANCIAL STATEMENTS
3–13
P3-29
25 min.
LO 3-4,
LO 3-5
M
Consolidated Worksheet and Balance Sheet on the Acquisition Date (Equity
Method)
Students are asked to prepare journal entries on a parent company’s books at the
time of an acquisition and then to prepare a consolidation worksheet and balance
sheet on the acquisition date.
P3-30
35 min.
LO 3-4,
LO 3-5
M
Consolidated Worksheet at End of the First Year of Ownership (Equity
Method) As a continuation of P3-37, students are asked to prepare equity method
journal entries on a parent company’s books related to the subsidiary and then to
prepare a consolidation worksheet at the end of the first year.
P3-31
35 min.
LO 3-4,
LO 3-5
M
Consolidated Worksheet at End of the Second Year of Ownership (Equity
Method) As a continuation of P3-38, students are asked to prepare equity method
journal entries on a parent company’s books related to the subsidiary and then to
prepare a consolidation worksheet at the end of the second year.
Chapter 03 – THE REPORTING ENTITY AND CONSOLIDATED FINANCIAL STATEMENTS
3–14
OTHER RESOURCES
Chapter 3
Circumstances Which
Indicate Control Exists1
The following circumstances make the presence of effective control highly probable:
1. Ownership of a large majority voting interest (approximately 40 percent or more) in the
absence of another party or organized group of parties with a significant interest
(approximately 20 percent or more).
2. An ability to demonstrate by a recent election to dominate the process of nominating
candidates and to cast a majority of the votes cast in an election of board members.
3. A unilateral ability to obtain a majority voting interest without significant additional cash
outlay, for example, through ownership of securities that may be converted into a
majority voting interest at the option of the holder.
4. Provisions in a corporation’s charter or bylaws that cannot be changed by entities other
than its creator (or through legal due process) and that limit the corporation activities that
can be initiated or where scheduled by the creating entity are designed primarily to
provide future net cash inflows or other future economic benefits to its creator.
1Gisele Dion, “Consolidation Policy,” Financial Accounting Standards Board, September 28, 1994, p. 5.
Chapter 03 – THE REPORTING ENTITY AND CONSOLIDATED FINANCIAL STATEMENTS
3–15
Chapter 3
Circumstances Which May
Indicate Control Exists2
Indicators that identify circumstances often associated with control but do not lead to a
presumption of control:
1. An ability to cast a majority of the votes in an election of directors.
2. An ability to use the resources of a corporation to control the process of nominating
members of an entity’s governing board and to solicit proxies from other shareholders.
3. An ability to appoint members of a corporation’s governing board to fill vacancies until
the next election.
4. A right to a majority of the net assets of a corporation in the event of liquidation or to a
majority of net assets in a distribution other than liquidation.
5. A business or charitable purpose of one corporation that is integrated with the business or
charitable purpose of another entity, for example, an organization formed for the primary
purpose of (1) holding and investing assets to generate income from another entity, (2)
holding assets to pay the debts of another entity, or (3) raising contributions for a specific
charitable organization (the lack of integrated businesses or charitable purposes does not
necessarily indicate lack of control).
6. Retention of a minority voting interest in an entity after previously holding a majority
voting interest (if the level of voting interest is approximately 40 percent or more, a
presumption of control may apply).
7. Beneficial contractual relationships with an entity that continue after previously holding a
majority voting interest.
8. A continuing ability to appoint some members of the governing board of a corporation
for which majority appointment or election powers previously existed.
9. Ownership of an option to acquire a majority or large minority voting interest that
requires the outlay of a significant amount of additional cash.
2Gisele Dion, “Consolidation Policy,” Financial Accounting Standards Board, September 28, 1994, p. 5.
Chapter 03 – THE REPORTING ENTITY AND CONSOLIDATED FINANCIAL STATEMENTS
3–16
Chapter 3
Example on Theories of Consolidation
On January 1, 20X9, Pat Company acquired 75 percent of the common stock of Small Company
for $330,000. At that date, Small Company reported the balance shown below. During 20X9,
Small reported sales of $100,000. Building and equipment is depreciated over 20 years and
goodwill is amortized over 5 years.
Small Company
Balance Sheet
January 1, 20X9
Book Value
Fair Value
Land
$ 100,000
$ 160,000
Buildings and Equipment
200,000
$ 320,000
Assets
$ 300,000
$ 480,000
Accounts Payable
$ 80,000
$ 80,000
Common Stock
100,000
Retained Earnings
120,000
Liab. & Equity
$ 300,000
$ 80,000
Chapter 03 – THE REPORTING ENTITY AND CONSOLIDATED FINANCIAL STATEMENTS
3–17
The dollar amounts reported in the consolidated financial statements following the acquisition will be:
Proprietary
Theory
Parent
Company
Entity
Theory
Land
$ 120,000
$ 145,000
$ 160,000
Buildings and Equipment
240,000
290,000
320,000
Accounts Payable
60,000
80,000
80,000
Goodwill
30,000
30,000
40,000
Noncontrolling Interest
-0-
55,000
110,000
Sales
75,000
100,000
100,000
Depreciation Expense
12,000
14,500
16,000
Amortization Expense
6,000
6,000
8,000
(on Goodwill)