Chapter 05 – CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5–10
P5-20
LO 5-1
10 min.
E
Acquisition Price
Students must determine the acquisition price given two separate situations.
Additionally, students are required to determine the amount assigned to the
noncontrolling interest at the date of acquisition.
P5-21
LO 5-1
15 min.
M
Multiple-Choice Questions on Applying the Equity Method
[AICPA Adapted] Four multiple-choice questions are included. Primary
emphasis is placed on the computation of investment income and the appropriate
account balances under equity-method reporting.
P5-22
LO 5-1
15 min.
M
Amortization of Differential
Journal entries made by an investor during the year are required assuming the
equity method of accounting for the investment.
P5-23
LO 5-1
15 min.
M
Computation of Account Balances
Students must calculate investment income and investment account balances
assuming (a) the equity method is used and (b) the cost method is used. Goodwill
is included.
P5-24
LO 5-1,
LO 5-2
20 min.
H
Complex Differential
The amount of investment income and the balance in the investment account is
required assuming the equity method is used in accounting for the investment.
Amortization of inventory, buildings and equipment, and patents included.
P5-25
LO 5-1
20 min.
M
Equity Entries with Differential
The entry to record a purchase using an exchange of common stock and entries
for two years under equity-method reporting are required. The ending investment
account balance also must be computed. The differential is assigned to buildings
and equipment and goodwill.
P5-26
LO 5-1
15 min.
M
Equity Entries with Differential
Equity-method journal entries must be prepared and the carrying value of the
investment computed following a purchase of shares. The differential is assigned
to inventory, buildings and equipment, and goodwill.
P5-27
LO 5-1
30 min.
M
Additional Ownership Level
Net income must be calculated and all journal entries made for investments
involving three entities.
P5-28
LO 5-1
15 min.
M
Correction of Error
An investor incorrectly applies the equity method. An entry is necessary to
correct the accounts involved.
Chapter 05 – CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5–11
P5-29
LO 5-2
45 min.
M
Majority-Owned Subsidiary Acquired at More than Book Value
Students must provide the consolidation entries needed to prepare a consolidated
balance sheet immediately following a business combination in which the
subsidiary is acquired at an amount greater than book value. A consolidated
balance sheet worksheet and a consolidated balance sheet must also be prepared.
An intercompany receivable/payable is involved.
P5-30
LO 5-2
30 min.
M
Balance Sheet Consolidation of Majority-Owned Subsidiary
Students must provide the entry to record the business combination on the books
of the parent. Consolidation entries, a consolidated balance sheet worksheet, and
a consolidated balance sheet must also be prepared.
P5-31
LO 5-1,
LO 5-2
40 min.
M
Incomplete Data
Students must interpret and derive amounts and relationships between a parent
company and its subsidiary, based on incomplete and missing data.
P5-32
LO 5-2
10 min.
E
Income and Retained Earnings
Information on operating income and dividend payments is given for the parent
and subsidiary. Net income and retained earnings reported by the parent and
subsidiary, consolidated net income, and consolidated retained earnings must be
computed.
P5-33
LO 5-2
40 min.
M
Wp
Consolidation Worksheet at End of First Year of Ownership
Trial balance information is given for the parent and majority owned subsidiary
at the end of the first year of ownership. The differential is assigned to buildings
and equipment and goodwill. Consolidation entries and completion of a three-
part worksheet are required.
P5-34
LO 5-2
40 min.
M
Consolidation Worksheet at End of Second Year of Ownership
Trial balance information is given for the parent and majority owned subsidiary
at the end of the second year of ownership. The differential is assigned to
buildings and equipment and goodwill. Consolidation entries, a three-part
consolidation worksheet, and a balance sheet, income statement, and retained
earnings statement are required.
P5-35
LO 5-2
50 min.
H
Comprehensive Problem: Differential Apportionment
Parent company entries, consolidation entries, and a consolidation worksheet are
required at the end of the first year of ownership for a majority-held subsidiary.
The differential is assigned to buildings and equipment and to goodwill.
P5-36
LO 5-2
55 min.
M
Comprehensive Problem: Differential Apportionment in Subsequent Period
Students must prepare equity method journal entries made by the parent during
second year after acquisition of a partially owned subsidiary involving a
differential. A three-part consolidation work paper and consolidation entries for
the end of the year are also required.
Chapter 05 – CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5–12
P5-37
LO 5-4
45 min
H
Subsidiary with Other Comprehensive Income in Year of Acquisition
The subsidiary reports other comprehensive income during the first year of
ownership. Consolidation entries, a three-part consolidation worksheet, and a
consolidated balance sheet, income statement, and statement of comprehensive
income must be prepared.
P5-38
LO 5-4
45 min.
H
Subsidiary with Other Comprehensive Income in Year Following
Acquisition
The subsidiary reports other comprehensive income in the first and second years
of ownership. Consolidation entries and a three-part consolidation worksheet
must be prepared at the end of the second year.
P5-39
LO 5-2
50 min.
M
Comprehensive Problem: Majority-Owned Subsidiary
Parent company entries, consolidation entries, and a consolidation worksheet are
required at the end of the fifth year of ownership. Majority ownership is held and
the differential is assigned to buildings and equipment.
Chapter 05 – CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5–13
OTHER RESOURCES
EXERCISES NO. 1 and 2 BASICS OF CONSOLIDATION
1. On January 1, 20X9, Parent Corporation acquired 90 percent of Small Corporation’s stock for
$324,000 cash. At that date, the noncontrolling interest had a fair value of $36,000. At that date
Small had $150,000 of stock outstanding and reported retained earnings of $140,000. The fair
values of all of Small’s assets approximated their fair values except one of its buildings whose
fair value exceeded its book value by $50,000. The remaining economic life for all Small’s
depreciable assets was ten years on the date of combination. The amount of the differential
assigned to goodwill is not impaired. Small reported net income of $56,000 in 20X9 and
declared no dividends.
Required
a. Give the consolidation entries needed to prepare a consolidated balance sheet immediately
after Parent acquired Small Corporation stock.
b. Give all consolidation entries needed to prepare a full set of consolidated financial statements
for 20X9.
a. Consolidation entries, January 1, 20X9:
Book Value Calculations:
NCI
10%
+
Parent Corp.
90%
=
Common
Stock
+
Retained
Earnings
Ending Book Value
29,000
261,000
150,000
140,000
Basic consolidation entry:
Common Stock
150,000
Retained Earnings
140,000
Investment in Small Corp.
261,000
NCI in NA of Small Corp.
29,000
Excess Value (Differential) Calculations:
NCI
10%
+
Parent Corp.
90%
=
Buildings
+
Goodwill
Beginning balance
7,000
63,000
50,000
20,000
Excess value (differential) reclassification entry:
Buildings
50,000
Goodwill
20,000
Investment in Small Corp.
63,000
NCI in NA of Small Corp.
7,000
Chapter 05 – CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5–14
b. Consolidation entries, December 31, 20X9:
Book Value Calculations:
NCI
10%
+
Parent Corp.
90%
=
Common
Stock
+
Retained
Earnings
Beginning Book
Value
29,000
261,000
150,000
140,000
+ Net Income
5,600
50,400
56,000
Ending Book Value
34,600
311,400
150,000
196,000
Basic consolidation entry:
Common Stock
150,000
Retained Earnings
140,000
Income from Small Corp.
50,400
NCI in NI of Small Corp.
5,600
Investment in Small Corp.
311,400
NCI in NA of Small Corp.
34,600
Excess Value (Differential) Calculations:
NCI
10%
+
Parent
Corp.
90%
=
Buildings
+
Accumulated
Depreciation
+
Goodwill
Beginning balance
7,000
63,000
50,000
0
20,000
Changes
(500)
(4,500)
(5,000)
Ending balance
6,500
58,500
50,000
(5,000)
20,000
Amortized excess value reclassification entry:
Depreciation Expense
5,000
Income from Small Corp.
4,500
NCI in NI of Small Corp.
500
Excess value (differential) reclassification entry:
Buildings
50,000
Goodwill
20,000
Accumulated Depreciation
5,000
Investment in Small Corp.
58,500
NCI in NA of Small Corp.
6,500
Chapter 05 – CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5–15
2. Parent Corporation acquired 75 percent of Signature Company’s voting stock on January 1,
20X9, at underlying book value. The fair value of the noncontrolling interest was equal to 20
percent of the book value of Signature at that date. Parent uses the fully adjusted equity method
in accounting for its ownership of Signature during 20X9. On December 31, 20X9, the trial
balances of the two companies are as follows:
Required:
a. Give all consolidation entries required as of December 31, 20X9, to prepare consolidated
financial statements.
b. Prepare a three-part consolidation worksheet.
c. Prepare a consolidated balance sheet, income statement, and retained earnings statement for
20X9.
Parent Corporation Signature Company
Item Debit Credit Debit Credit
Current Assets 125,250 75,000
Depreciable Assets 250,000 180,000
Investment in Signature Co. Stock 71,250
Depreciation Expense 35,000 18,000
Other Expenses 90,000 60,000
Dividends Declared 30,000 12,000
Accumulated Depreciation 75,000 60,000
Current Liabilities 75,000 25,000
Long-Term Debt 50,000 75,000
Common Stock 100,000 50,000
Retained Earnings 135,000 35,000
Sales 150,000 100,000
Income from Subsidiary 16,500
601,500 601,500 345,000 345,000
Chapter 05 – CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5–16
a)
Book Value Calculations:
NCI
25%
+
Parent Corp.
75%
=
Common
Stock
+
Retained
Earnings
Beginning Book
Value
21,250
63,750
50,000
35,000
+ Net Income
5,500
16,500
22,000
– Dividends
(3,000)
(9,000)
(12,000)
Ending Book Value
23,750
71,250
50,000
45,000
Basic consolidation entry:
Common Stock
50,000
Retained Earnings
35,000
Income from Signature Co.
16,500
NCI in NI of Signature Co.
5,500
Dividends declared
12,000
Investment in Signature Co.
71,250
NCI in NA of Signature Co.
23,750
Optional accumulated depreciation consolidation
entry:
Accumulated Depreciation
42,000
Depreciable Assets
42,000
Chapter 05 – CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5–17
b)
Parent
Corp.
Signature
Co.
Consolidation
Entries
DR
CR
Consolidated
Income Statement
Sales
150,000
100,000
250,000
Less: Depreciation Expense
(35,000)
(18,000)
(53,000)
Less: Other Expenses
(90,000)
(60,000)
(150,000)
Income from Signature Co.
16,500
0
16,500
0
Consolidated Net Income
41,500
22,000
16,500
0
47,000
NCI in Net Income
5,500
(5,500)
Controlling Interest in Net
Income
41,500
22,000
22,000
0
41,500
Statement of Retained Earnings
Beginning Balance
135,000
35,000
35,000
135,000
Net Income
41,500
22,000
22,000
0
41,500
Less: Dividends Declared
(30,000)
(12,000)
12,000
(30,000)
Ending Balance
146,500
45,000
57,000
12,000
146,500
Balance Sheet
Current Assets
125,250
75,000
200,250
Depreciable Assets
250,000
180,000
42,000
388,000
Less: Accumulated Depreciation
(75,000)
(60,000)
42,000
(93,000)
Investment in Signature Co.
71,250
0
71,250
0
Total Assets
371,500
195,000
18,000
89,250
495,250
Current Liabilities
75,000
25,000
100,000
Long-Term Debt
50,000
75,000
125,000
Common Stock
100,000
50,000
50,000
100,000
Retained Earnings
146,500
45,000
57,000
12,000
146,500
NCI in NA of Signature Co.
23,750
23,750
Total Liabilities & Equity
371,500
195,000
107,000
35,750
495,250
Chapter 05 – CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES
5–18
c)
Parent Corporation and Subsidiary
Consolidated Balance Sheet
December 31, 20X9
Current Assets
$200,250
Depreciable Assets
$388,000
Less: Accumulated Depreciation
(93,000)
295,000
Total Assets
$495,250
Current Liabilities
$100,000
Long-Term Debt
125,000
Stockholders’ Equity
Controlling Interest
Common Stock
$100,000
Retained Earnings
146,500
Total Controlling Interest
$246,500
Noncontrolling Interest
23,750
Total Stockholders’ Equity
270,250
Total Liabilities and Stockholders’ Equity
$495,250
Sales $250,000
Depreciation $53,000
Other Expenses 150,000
Total Expenses (203,000)
Consolidated Net Income $47,000
Income to Noncontrolling Interest (5,500)
Income to Controlling Interest $41,500
Parent Corporation and Subsidiary
Consolidated Income Statement
Year Ended December 31, 20X9
Retained Earnings, January 1, 20X9 $135,000
Income to Controlling Interest, 20X9 41,500
$176,500
Dividends Declared, 20X9 (30,000)
Retained Earnings, December 31, 20X9 $146,500
Proud Corporation and Subsidiary
Consolidated Retained Earnings Statement
Year Ended December 31, 20X9