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Chapter 5 - CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES ACQUIRED AT
MORE THAN BOOK VALUE
CHAPTER 5
CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
ACQUIRED AT MORE THAN BOOK VALUE
IMPORTANT NOTE TO INSTRUCTORS
The 11th edition uses a building block approach to our coverage of consolidation in
chapters 2 through 5. Chapter 2 introduces our coverage of consolidation in the most basic
setting when the subsidiary is either created or purchased at an amount equal to the book value of
the subsidiary’s underlying net assets.
Chapter 3 explains how the basic consolidation process changes when the parent
company owns less than 100 percent of the subsidiary. Chapter 4 shows how the consolidation
process differs when the parent company acquires the subsidiary for an amount greater (or less)
than the book value of the subsidiary’s net assets. Finally, Chapter 5 presents the most complex
consolidation scenario (where the parent owns less than 100 percent of the subsidiary’s
outstanding voting stock and the acquisition price is not equal to the book value of the
subsidiary’s net assets). In order to facilitate this new approach, we emphasize that this edition
includes consolidation entries used to facilitate the elimination of the investment in a subsidiary
in two steps: (1) first the book value portion of the investment and income from the subsidiary
are eliminated and (2) then the differential portion of the investment and income from subsidiary
are eliminated with separate entries. We believe this approach is more intuitive for students.
Chapter 05 - CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5-2
OVERVIEW OF CHAPTER 5
Chapter 5 presents the preparation of consolidated financial statements for less-than-
wholly-owned subsidiaries. When a subsidiary is less than wholly owned, the general approach
to consolidation is the same as discussed in Chapter 4 for wholly owned subsidiaries, but the
consolidation procedures must be modified slightly to recognize the noncontrolling interest.
Also, the computation of consolidated net income and retained earnings must allow for the claim
of the noncontrolling interest.
The noncontrolling shareholders of a subsidiary have a claim on the income and assets of
that subsidiary. In simple cases, the income that accrues to the noncontrolling interest is the
noncontrolling stockholders’ proportionate share of the subsidiary’s net income, and their claim
on assets is equal to their proportionate share of the subsidiary’s net assets.
The chapter also illustrates the consolidation process and resulting financial statements
when other comprehensive income is reported by the subsidiary. It also presents journal entries
recorded by the parent and subsidiary. The subsidiary’s other comprehensive income items
should also be allocated between the controlling and noncontrolling interests.
When the subsidiary reports other comprehensive income, the worksheet can be prepared
in the standard manner, with one modification. The standard three-part consolidation worksheet
can be modified to provide an additional section that includes the other comprehensive income of
the subsidiary and the parent’s share of the subsidiary’s other comprehensive income.
The parent company includes income from the subsidiary in its income statement and
adjusts the balance in the investment account for the investment income recorded and dividends
received when it uses the equity method in accounting for its investment. If the cost method is
used, the parent records dividend income for its portion of dividends received from the
subsidiary and different consolidation entries are needed in preparing the consolidated financial
statements.
Appendix 5A discusses additional considerations including negative retained earnings of
subsidiary at acquisition; other stockholders’ equity accounts; and the subsidiary’s disposal of
differential-related assets.
LEARNING OBJECTIVES
When students finish studying this chapter, they should be able to:
LO 5-1 Understand and explain how the consolidation process differs when the subsidiary is
less-than-wholly owned and there is a differential.
LO 5-2 Make calculations and prepare consolidation entries for the consolidation of a
partially owned subsidiary when there is a complex positive differential.
LO 5-3 Understand and explain what happens when a parent company ceases to consolidate
a subsidiary.
LO 5-4 Make calculations and prepare consolidation entries for the consolidation of a
partially owned subsidiary when there is a complex positive differential and other
comprehensive income.
Chapter 05 - CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5-3
SYNOPSIS OF CHAPTER 5
Consolidation of Less-Than-Wholly-Owned Subsidiaries Acquired at
More than Book Value
Cisco Acquires a Controlling Interest in Nuova
LO 5-1 Understand and explain how the consolidation process differs when the subsidiary is
less- than-wholly owned and there is a differential
A Noncontrolling Interest in Conjunction with a Differential
Consolidated Balance Sheet with Majority-Owned Subsidiary
LO 5-2 Make calculations and prepare consolidation entries for the consolidation of a
partially owned subsidiary when there is a complex positive differential.
Consolidated Financial Statements with a Majority-Owned Subsidiary
Initial Year of Ownership
Second Year of Ownership
LO 5-3 Understand and explain what happens when a parent company ceases to consolidate
a subsidiary.
Discontinuance of Consolidation
LO 5-4 Make calculations and prepare consolidation entries for the consolidation of a
partially owned subsidiary when there is a complex positive differential and other
comprehensive income.
Treatment of Other Comprehensive Income
Modification of the Consolidation Worksheet
Adjusting Entry Recorded by Subsidiary
Adjusting Entry Recorded by Parent Company
Consolidation Worksheet—Second Year following Combination
Consolidation Procedures
Consolidation Worksheet—Comprehensive Income in Subsequent Years
Appendix 5A
Additional Consolidations Details
Negative Retained Earnings of a Subsidiary at Acquisition
Other Stockholders’ Equity Accounts
Subsidiary’s Disposal of Differential Related Assets
Chapter 05 - CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5-4
NOTES ON POWERPOINT SLIDES
We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since
instructors often have different styles and preferences, we have attempted to include slides that
will accommodate different approaches and that can be adapted to classes with different levels of
preparation. For example, some instructors prefer to introduce the material before students have
read the chapter. We have tried to facilitate these types of introductory discussions by including
slides that replicate key points from the chapter. Other instructors expect students to have read
the chapter and attempted homework problems before coming to class. As a result, they may not
find it useful to review all of the topics in the chapter or to include slides that simply review
many of the details they expect students to study before class. However, instructors following
this approach often like to use sample exercises and problems built into the slides that allow
them to have extended discussions or to facilitate group interaction in class.
If instructors elect to spend two class periods on the same subject, they might find a combination
of both styles to be useful by first introducing foundational material before students have read
the chapter and studied the topic, followed by an extended discussion the next class period after
students have read the chapter and attempted homework problems.
We have tried to develop slides that can facilitate a flexible approach to allow instructors to
select the slides that best match their objectives and style for class discussions. This is the reason
we are including over 100 slides for some chapters in the text. We do not expect all instructors
to use all slides, but the slide files should help support different teaching approaches and allow
instructors to select the subset of slides that best matches their specific discussion objectives.
The slides are organized by learning objective. We have included a slide at the beginning of
each learning objective to show where the new material begins. Instructors may or may not want
to use these learning objective slides in class. We provide them primarily as a way of organizing
the material. We also include short multiple choice questions at the end of most learning
objectives. Some instructors find it useful to pause periodically during class to assess students’
level of understanding. For this reason, we include several “practice quiz questions” that can be
used throughout class discussions to engage students, help them focus on key points, or to
facilitate group interaction. Finally, we provide longer exercises and problems that many
instructors find useful in assessing understanding and encouraging group learning.
LO 5-1 Understand and explain how the consolidation process differs when the subsidiary is
less-than-wholly owned and there is a differential.
• Slides 3-4 briefly summarize how consolidation procedures differ when the
subsidiary is less-than-wholly owned.
• Slides 5-12 illustrate an example of the consolidation procedure for a less-than –
wholly owned subsidiary. Since the investment in Sub is acquired on the balance
sheet date, no income has been earned. Thus, there is no need for a consolidated
income statement or statement of retained earnings. We find that the preparation
of a consolidated balance sheet allows students to understand one aspect of the
differential (the balance sheet side) before getting too deep in the income
statement effects. We find it useful to provide full-page handouts (or an Excel
Chapter 05 - CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5-5
Template) for slides 5, 7 and 8 so that students can walk through the analyses in
small groups. We often go through slides 5-11 slowly, pausing to allow students
to work one step at a time before showing them correct answers. We then have
them complete the worksheet (slide 12) while working in a small group. If we are
short on time, we opt to quickly go through this worksheet with the entire class
and save “group time” for the “full-blown” worksheet later in this set of slides.
• Slides 13-16 include a second illustration of the basic calculations for a less-than-
wholly owned subsidiary.
LO 5-2 Make calculations and prepare consolidation entries for the consolidation of a
partially owned subsidiary when there is a complex positive differential.
• Slides 20-31 walk students through the consolidation process during the first year
following acquisition.
• Slides 32-43 walk students through the consolidation process during the second year
following acquisition.
• Slides 44-56 are a group exercise which allows students to practice the consolidation
process for a less-than-wholly-owned subsidiary at the date of acquisition.
• Slides 57-58 summarize the differences in the consolidation entries that are unique to
the less-than-wholly-owned subsidiary consolidation as a quick reminder for students
and preparation for Group Exercise 2.
• Slides 59-76 return to the previous example to slowly walk students through the
consolidation during the first year of acquisition. This is a critical example for helping
students to understand all of the detail for a positive differential and partial
ownership. We tend to have students work one step ahead of the slides and reveal one
portion of the solution at a time to make sure they stay on track. After working
through all of the foundational steps, we have students complete the consolidation
worksheet in their groups (and sometimes have them turn in their solution as a “group
quiz”). Note that the book value calculations on slide 63 lead directly to the basic
consolidation entry. The bottom row of the excess value calculations on slide 65 leads
to the excess value reclassification entry and the middle row of the excess value
calculations leads to the amortized excess value reclassification entry.
LO 5-3 Understand and explain what happens when a parent company ceases to consolidate
a subsidiary.
• Slides 78-84 explain and illustrate the accounting for situations in which the parent
ceases to consolidate a subsidiary.
LO 5-4 Make calculations and prepare consolidation entries for the consolidation of a
partially owned subsidiary when there is a complex positive differential and other
comprehensive income.
• Slides 93-97 explain and briefly illustrate how the consolidation differs when the
subsidiary has other comprehensive income.
Appendix 5A Additional Consolidations Details
Chapter 05 - CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5-6
• Slides 99-103 briefly cover the additional considerations: subsidiary valuation,
negative retained earnings, other stockholders’ equity accounts and the disposal of
differential-related assets.
TEACHING IDEAS
1. Students could be asked to "prove" the amounts provided in their Fortune 100 company's
annual report for noncontrolling interest on the consolidated balance sheet and on the
consolidated income statement. Reconciliation of these amounts is usually possible by
reading the information available in the footnotes. Some students may find that these
amounts cannot be reconciled from the information presented. If that is the case, student
should suggest additional disclosures that would make the calculation of the non-
controlling interest amounts possible.
2. Each student could be asked to determine the percentage of ownership of the subsidiaries
for a Fortune 100 company. This can be determined by access to Moody's and is
sometimes disclosed in the company's annual report. An indirect method to determine the
extent of the parent company's ownership percentage of the subsidiaries could be used to
determine the magnitude of the noncontrolling interest on the consolidated balance sheet.
Students could be asked the question: Why do most parent companies acquire 100
percent ownership of the subsidiary when 51 percent would grant them economic
control? What are the economic reasons supporting more than a 51 percent ownership
level?
Chapter 05 - CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5-7
DESCRIPTIONS OF CASES, EXERCISES, AND PROBLEMS
C5-1
LO 5-2
15 min.
M
Consolidation Worksheet Preparation
This case requires a basic understanding of the way in which four of the pieces of
information included in the consolidation worksheet are developed and used.
C5-2
LO 5-2
25 min.
M
Consolidated Income Presentation
Students must prepare a memorandum explaining how consolidated net income is
computed and the procedures used to allocate income to the parent company and
noncontrolling shareholders. Authoritative reference need to be included. In
addition, students must prepare an analysis showing the income statement
amounts actually reported for two years.
C5-3
LO 5-1
25 min.
M
Pro-Rata Consolidation
Students must research the authoritative literature to determine whether the
company should account for its joint venture investment using the equity method
or a pro rata consolidation. A memorandum that reports findings and provides the
necessary supporting references is required.
C5-4
LO 5-1
15 min.
M
Consolidation Procedures
Five questions are presented in this case. The questions focus on why
consolidation entries are needed, which balances must be eliminated, and the
ways in which particular consolidated balances are computed.
C5-5
LO 5-1
25 min.
M
Changing Accounting Standards: Monsanto Company
Students have to determine how Monsanto Company reported its subsidiary
noncontrolling interest in its 2007 consolidated financial statements, and
comment on the company’s treatment of its subsidiary noncontrolling interest
They also have to identify various aspects of the company’s special purpose or
variable interest entities.
E5-1
LO 5-1,
LO 5-2
15 min.
E
Multiple-Choice Questions on Consolidation Process
Four multiple-choice questions are used to cover basic issues dealing with the
preparation of consolidated statements subsequent to the date of combination.
E5-2
LO 5-1,
LO 5-2
15 min.
E
Multiple-Choice Questions on Consolidation
[AICPA Adapted] Five multiple-choice questions are used to cover additional
issues associated with the preparation of consolidated statements subsequent to
the date of combination.
Chapter 05 - CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5-8
E5-3
LO 5-2
10 min.
E
Consolidation Entries with Differential
A basic set of balance sheet consolidation entries must be prepared. Assignment
of a differential is required.
E5-4
LO 5-2
15 min.
E
Computation of Consolidated Balances
Students must calculate the appropriate amounts to be included in the
consolidated balance sheet immediately following the acquisition for six items,
including goodwill.
E5-5
LO 5-2
15 min.
E
Balance Sheet Worksheet
Based on the balance sheets of the two companies immediately after the
acquisition, students should prepare and complete a consolidated balance sheet
worksheet.
E5-6
LO 5-2
30 min.
M
Majority-Owned Subsidiary Acquired at Higher than Book Value
The consolidation entries, a consolidated balance sheet worksheet and
consolidated balance sheet are required. Intercompany receivable/payable
adjustment is required.
E5-7
LO 5-2
15 min.
E
Consolidation with Noncontrolling Interest
Consolidation entries needed to prepare a consolidated balance sheet immediately
following the business combination are required. Differential is assigned to
inventory, buildings, and goodwill.
E5-8
LO 5-2
20 min.
M
Multiple-Choice Questions on Balance Sheet Consolidation
Given the balance sheets of the parent and subsidiary at the date of acquisition,
seven multiple-choice questions cover the computation of various consolidated
balances. The parent holds majority ownership in the subsidiary.
E5-9
LO 5-2
20 min.
M
Majority Owned Subsidiary with Differential
Students must prepare the equity method journal entries made during the year by
the parent and also the consolidation entries necessary to prepare the consolidated
financial statements given a differential between cost and book values of the
underlying net assets.
E5-10
LO 5-1,
LO 5-2
20 min.
E
Differential Assigned to Amortizable Asset
The investment account balance at the end of the first period of ownership must
be calculated. Students should also prepare the consolidation entries needed to
prepare consolidated financial statements at the end of the first year of
ownership. The differential is assigned to an intangible asset.
E5-11
LO 5-2
25 min.
M
Consolidation after One Year of Ownership
Consolidation entries to prepare a consolidated balance sheet worksheet at the
date of acquisition and to prepare a full set of consolidated statements at the end
of the first year of ownership are required. The subsidiary is majority-owned and
the differential is assigned to buildings and equipment and goodwill.
Chapter 05 - CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5-9
E5-12
LO 5-1,
LO 5-2
25 min.
M
Consolidation Following Three Years of Ownership
Information on subsidiary net income and dividends is presented for a three year
period. The differential is assigned to land, equipment, and patents. Students have
to calculate the increase in value of patents. The consolidation entries to prepare
a consolidated balance sheet at the date of acquisition, the investment account
balance at the end of the second year 2, equity-method entries recorded by the
parent in the third year, and the consolidation entries needed at the end of the
third year to prepare a three-part consolidation worksheet are also required.
E5-13
LO 5-2
40 min.
H
Consolidation Worksheet for Majority-Owned Subsidiary
A consolidation worksheet and consolidated statements are required for a
majority-owned subsidiary. No differential is involved.
E5-14
LO 5-2
40 min.
M
Consolidation Worksheet for Majority-Owned Subsidiary for Second Year
Consolidation journal entries and a three-part work paper must be prepared for a
wholly-owned subsidiary for the second year after acquisition.
E5-15
LO 5-4
20 min
M
Preparation of Stockholders’ Equity Section with Other Comprehensive
Income
Subsidiary net income, other comprehensive income, and dividends paid are
given for two years. Parent company operating income and dividends are also
given. Consolidated net income and comprehensive income must be computed
for each year and the stockholders’ equity section of the consolidated balance
sheet prepared at the end of the second year.
E5-16
LO 5-4
20 min.
M
Consolidation Entries for Subsidiary with Other Comprehensive Income
Subsidiary net income, comprehensive income, and dividends are given. Equity-
method entries recorded by the parent and consolidation entries needed to prepare
a complete set of financial statements at the end of the year are required.
E5-17A
15 min.
E
Consolidation of Subsidiary with Negative Retained Earnings
Students must prepare the consolidation entry immediate after acquisition of an
80% interest in a subsidiary with a negative retained earnings balance.
E5-18A
30 min.
M
Complex Assignment of Differential
Parent company entries under the equity method and the consolidation entries
involving a differential allocation to several current and long-term assets as well
as notes payable are required.
P5-19
LO 5-1
10 min.
E
Reported Balances
Students compute the reported balances immediately following the acquisition.
