Chapter 09 – CONSOLIDATION OWNERSHIP ISSUES
CHAPTER 9
CONSOLIDATION OWNERSHIP ISSUES
OVERVIEW OF CHAPTER
The illustrations and discussions in Chapter 9 are intended to provide students with a
basic understanding of some of the consolidation issues and problems arising from complex
ownership situations commonly encountered in practice. The chapter discusses the following
ownership issues that relate to the preparation of consolidated financial statements:
1. Subsidiary preferred stock outstanding
2. Changes in the parent’s ownership interest in the subsidiary
3. Multiple ownership levels
4. Reciprocal or mutual ownership
5. Subsidiary stock dividends
In discussing subsidiary preferred stock, the chapter shows the deduction of preferred
dividends to arrive at the income that is divided between the controlling and noncontrolling
common shareholders. The computation of the claim of the preferred stockholders on the income
and the net assets of the subsidiary is illustrated in a simple case and also where there are special
features of the preferred stock, such as a call premium or cumulative dividends in arrears. The
treatment of subsidiary preferred stock held by the parent is also discussed.
Changes in the parent company ownership of a subsidiary are discussed and illustrated
with respect to each of the possible types of changes. Special emphasis is placed upon computing
the resulting percentage ownership held by the parent and the change in the underlying book
value of the subsidiary shares held by the parent. Alternatives with respect to the recognition of
gains or losses on transactions involving subsidiary stock are delineated.
Two types of complex ownership structures are discussed and illustrated: multilevel and
reciprocal ownership. The computation of consolidated net income and the income assigned to
noncontrolling interests when there are multiple levels of a complex ownership arrangement is
explained. The consolidation entries also are discussed, as is the treatment of unrealized
intercompany profits in a multilevel organization. The treasury stock method for dealing with
reciprocal ownership situations is discussed and illustrated. The chapter also presents a brief
discussion of the impact of subsidiary stock dividends on subsequent consolidation procedures.
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LEARNING OBJECTIVES
When students finish studying this chapter, they should be able to:
LO 9-1 Understand and explain how the consolidation process differs when the subsidiary
has preferred stock outstanding.
LO 9-2 Make calculations and prepare consolidation entries for a partially owned subsidiary
when the subsidiary has preferred stock outstanding.
LO 9-3 Make calculations and explain how consolidation procedures differ when the
parent’s ownership interest changes during the accounting period.
LO 9-4 Make calculations and prepare consolidation entries for a partially owned subsidiary
when the subsidiary has a complex ownership structure.
LO 9-5 Understand and explain how consolidation procedures differ when the subsidiary
pays stock dividends.
SYNOPSIS OF CHAPTER 9
Consolidation Ownership Issues
Berkshire Hathaway’s Varied Investments
LO 9-1 Understand and explain how the consolidation process differs when the subsidiary
has preferred stock outstanding.
Subsidiary Preferred Stock Outstanding
Consolidation with Subsidiary Preferred Stock Outstanding
LO 9-2 Make calculations and prepare consolidation entries for a partially owned
subsidiary when the subsidiary has preferred stock outstanding.
Subsidiary Preferred Stock Held by Parent
Subsidiary Preferred Stock with Special Provisions
Illustration of Subsidiary Preferred Stock with Special Features
LO 9-3 Make calculations and explain how consolidation procedures differ when the
parent’s ownership interest changes during the accounting period.
Changes in Parent Company Ownership
Parent’s Purchase of Additional Shares from Nonaffiliate
Parent’s Sale of Subsidiary Shares to Nonaffiliate
Subsidiary’s Sale of Additional Shares to Nonaffiliate
Subsidiary’s Sale of Additional Shares to Parent
Subsidiary’s Purchase of Shares from Nonaffiliate
Subsidiary’s Purchase of Shares from Parent
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LO 9-4 Make calculations and prepare consolidation entries for a partially owned
subsidiary when the subsidiary has a complex ownership structure.
Complex Ownership Structures
Multilevel Ownership and Control
Reciprocal or Mutual Ownership
LO 9-5 Understand and explain how consolidation procedures differ when the subsidiary
pays stock dividends.
Subsidiary Stock Dividends
Illustration of Subsidiary Stock Dividends
Impact on Subsequent Periods
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’
Chapter 09 – CONSOLIDATION OWNERSHIP ISSUES
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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 9-1 Understand and explain how the consolidation process differs when the subsidiary
has preferred stock outstanding.
• This chapter generally explains how consolidation procedures differ with varying
changes in ownership. Slide 2 provides a general overview of the various topics
discussed in the chapter.
• Slides 4-5 explain how consolidation procedures change when the subsidiary has
preferred stock outstanding.
LO 9-2 Make calculations and prepare consolidation entries for a partially owned subsidiary
when the subsidiary has preferred stock outstanding.
• Slides 9-14 provide a comprehensive example to illustrate how the basic
consolidation entry changes and how the worksheet is prepared when the preferred
stock is owned by nonaffiliated shareholders.
• Slide 15 explains how the situation changes when the preferred stock is owned by the
parent company.
• Slides 16-17 provide an example to illustrate how the procedures differ from the
previous example when the preferred stock is owned by the parent company.
• Slide 18 explains how procedures can differ when the preferred stock contains
various special provisions (cumulative dividends, noncumulative dividends,
participation features, and when the preferred stock is callable).
• Slides 19-23 provide an example in which the preferred stock has multiple special
provisions. The example show how the consolidation procedures differ with these
special provisions.
LO 9-3 Make calculations and explain how consolidation procedures differ when the
parents’ ownership interest changes during the accounting period.
• Slides 25-32 provide a detailed example illustrating how consolidation procedures
differ when the parent buys additional shares over time from nonaffiliates. The parent
first achieves significant influence and then gains control.
• Slides 33-41 both explain and provide an example to illustrate the accounting for a
situation where the parent company sells some of its shares to a nonaffiliate while
maintaining control of the subsidiary. Essentially, the parent’s percentage ownership
changes while still continuing to consolidate.
• Slides 42-44 explain important concepts related to a situation where the subsidiary
issues new shares to the parent company when the parent does not own 100% of the
subsidiary’s stock (i.e., there is a noncontrolling interest). The key concept instructors
need to explain to students is that a change in the relative ownership percentages of
the parent and NCI will affect the parent’s investment account and the NCI in Net
Assets differently depending on whether the shares are issued at an amount greater or
less than the book value of common equity. The chapter will need to be clarified in
future editions to better explain this concept. Essentially, the size of the pie changes,
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but the respective relative shares of the pie can change at the same time. Slide 44
explains the punch line:
o If the shares are sold at an amount equal to the book value of common equity, the
value of the NCI in net assets will not change.
o If the shares are sold at an amount greater than the book value of common equity,
the value of the NCI in net assets will increase.
o If the shares are sold at an amount less than the book value of common equity, the
value of the NCI in net assets will decrease.
• The example in the book (pp. 466-468) only illustrated a scenario where the
additional shares are issued to the parent at an amount greater than the book value of
common equity. Slides 45-49 provide a simple example in which the parent purchases
additional no par shares from the subsidiary at an amount greater than book value. In
this scenario, the NCI’s relative share of the pie increases and part of the parent’s new
investment in common stock shifts to the NCI. We then modify the same example in
slides 50-54 to show how the scenario changes when the shares are purchased at an
amount less than the book value of common equity. In this modified scenario, the
NCI’s relative share of the pie decreases (and the parent’s relative share of the pie
increases). Thus, the parent’s investment increases by more than the cost of the
additional shares purchased.
• Slide 55 explains what happens when the subsidiary repurchases shares from a
nonaffiliate, thus changing the parent’s percentage ownership.
• Slides 56-60 provide an example of a situation where the subsidiary repurchases
shares from a nonaffiliate.
• Slide 61 explains how to deal with a situation where the subsidiary repurchases shares
from the parent company while the parent maintains majority ownership.
• Slides 62-66 illustrate the scenario in which the subsidiary repurchases shares from
the parent company.
LO 9-4 Make calculations and prepare consolidation entries for a partially owned subsidiary
when the subsidiary has a complex ownership structure.
• Slides 70-75 explain various complex ownership structures and how consolidation
procedures differ in these situations.
LO 9-5 Understand and explain how consolidation procedures differ when the subsidiary
pays stock dividends.
• Slides 79-80 explain how consolidation procedures are modified when the subsidiary
pays stock dividends.
• Slides 81-82 illustrate a stock dividend example.
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TEACHING IDEAS
1. Students could be asked to prepare a written memo discussing the advantages and
disadvantages of owning another company’s preferred stock rather than its common
stock. What ownership rights are gained by holding preferred that are not available to
common shareholders? In addition, if a parent company already owns a controlling
interest of its subsidiary’s common stock, why would it make any purchases of the
subsidiary’s preferred stock?
2. Students could be asked to choose a large consolidated company with a complex
ownership structure. A memo should be prepared by the students outlining the
intercompany relationships and ownership structure.