Beams Aa13e SM 08

Chapter 8
CONSOLIDATIONS — CHANGES IN OWNERSHIP INTERESTS
Answers to Questions
1 Preacquisition earnings and dividends are the earnings and dividends applicable to an investment interest
prior to its acquisition during an accounting period. Assume that P purchases an 80 percent interest in S
on July 1, 2016 and that S has earnings of $100,000 between January 1 and July 1, 2016 and pays
$50,000 dividends on May 1, 2016. In this case, preacquisition earnings and dividends are $100,000 and
$40,000, respectively. Historically, preacquisition earnings purchased were shown as a deduction on the
income statement to arrive at consolidated net income. Under current GAAP, this is no longer the case.
Instead, the consolidated income statement should only report revenues, expenses, gains and losses
subsequent to the acquisition. For example, in a March 31 acquisition, the consolidated income statement
would only include income of the subsidiary from April 1 through December 31. GAAP reasons that
acquirers purchase assets and assume liabilities, based on their fair values. Acquirers do not “purchase”
preacquisition earnings, although fair values of net assets should reflect earning power of the acquired
firm.
2 Preacquisition earnings are not recorded by a parent under the equity method because the investor only
recognizes income subsequent to acquisition on the interest acquired. Historically, preacquisition
earnings purchased were shown as a deduction on the income statement to arrive at consolidated net
income. Under current GAAP, this is no longer the case. Instead, the consolidated income statement
should only report revenues, expenses, gains and losses subsequent to the combination date. For example,
in a March 31 acquisition, the consolidated income statement would only include income of the
subsidiary from April 1 through December 31.
3 Noncontrolling stockholders of Sub Company held a 20 percent interest during the first half year and a 10
percent interest during the last half year and at year-end. Since we have a controlling interest all year,
noncontrolling interest share for the year is computed as 20% of income for one-half of the year and 10%
of income for one-half of the year. Noncontrolling interest at year-end is computed for the 10 percent
interest held by noncontrolling stockholders at year end.
4 Preacquisition income is similar to noncontrolling interest share because it represents the income of a
subsidiary attributable to stockholders outside the consolidated entity. But preacquisition income is not
income of the noncontrolling stockholders at the date of the financial statements. In fact, preacquisition
income relates to a previous controlling stockholder group when the interest acquired exceeds 50 percent.
In such a case, it seems improper to report this as a deduction in the consolidated income statement.
Rather, the fair value of net assets acquired should reflect the acquiree’s earnings history.
5 Under GAAP, a gain or loss is only recorded when the sold interest results in deconsolidation of the
subsidiary, i.e., the parent no longer holds a controlling interest. The gain or loss on the sale of an equity
interest is the difference between the proceeds from the sale (the fair value) and the recorded book value
of the interest sold, provided that the investment is accounted for as a one-line consolidation. We must
determine the aggregate of (1) the fair value of consideration received, (2) the fair value of any retained
noncontrolling investment in the former subsidiary at the date the subsidiary is deconsolidated and (3) the
carrying amount of the noncontrolling interest in the former subsidiary at the date the subsidiary is
deconsolidated. The aggregate is compared to the carrying amount of the former subsidiary’s assets and
liabilities. If another method of accounting has been used, the investment account must be converted to
the equity method so that any gain or loss on sale is the same as if a one-line consolidation had been used
previously.
Copyright © 2018 Pearson Education Ltd.

8-1
8-2 Consolidations — Changes in Ownership Interests
When the parent maintains a controlling interest after the sale, the sale is treated as an equity transaction,
with no gain or loss recognition. The parent debits cash or other consideration received in the sale, credits
the investment account based on percent of carrying value sold, and records the difference as an
adjustment to other paid-in capital.
6 Conceptually, the income applicable to an equity interest sold during an accounting period should be
included in investment income and consolidated net income. In this case, the gain or loss on sale is
computed on the basis of the book value of the interest at the time of sale, and income is assigned to the
increased noncontrolling interest only after the date of sale. As a practical expedient, a beginning-of-the-
period sale date can be used such that no income is recognized on the interest sold up to the time of sale,
and the gain or loss is computed on the book value at the beginning of the period. When this expedient is
used, income must be assigned to the increased noncontrolling interest for the entire year of sale. The
combined investment income and gain or loss on sale are the same under both approaches provided that
the assumptions (beginning of the year and time of sale) are followed consistently. As noted in question
5, gain or loss on the sale of the equity interest is only recognized when the subsidiary is deconsolidated.
Other wise, the gain or loss is an adjustment to other paid-in capital.
7 Assuming that no gain or loss is recognized, no adjustment of the parent’s investment account is
necessary when the subsidiary sells additional shares to outside parties at book value because the parent’s
share of underlying book value does not change. If additional shares are sold above book values, the
parent’s share of the underlying equity of the subsidiary increases. This increase is recorded by the parent
as follows:
Investment in subsidiary XX
Additional paid-in capital XX
If the subsidiary sells additional shares below book value, the parent’s interest is decreased and
the parent records decreases in its investment and additional paid-in capital accounts. In all three cases (at
book value, above book value, or below book value), the parent’s ownership percentage decreases from
80 percent (8,000 of 10,000 shares) to percent (8,000 of 12,000 shares).
8 The acquisition of the 2,000 shares directly from the subsidiary increases the parent’s percentage interest
from 80 percent (8,000 of 10,000 shares) to 5/6 (10,000 of 12,000 shares, or 83 1/3%). The change in the
interest held does not affect the way in which the parent records its additional investment. The parent in
all cases increases its investment account by the amount of cash paid or other consideration given for the
additional investment. It makes no difference if the purchase price is above or below book value.
9 Treasury stock transactions by a subsidiary change the parent’s proportionate interest in the subsidiary.
Any changes in the parent’s share of the underlying book value of the subsidiary require adjustments in
the parent’s investment in subsidiary and additional paid-in capital accounts.
10 Gains and losses to a parent (or equity investor) do not result from the treasury stock transactions of its
subsidiaries (or equity investees). Although the parent’s investment interest may increase or decrease
from such transactions, the predominate view is that such changes are of a capital nature and should be
accounted for by additional paid-in capital adjustments rather than by recorded gains and losses.
11 Stock splits and stock dividends by a subsidiary do not affect the amounts that appear in the consolidated
financial statements. But stock dividends by a subsidiary result in capitalization of subsidiary retained
earnings and the amounts involved in eliminations for the subsidiary’s stockholders’ equity accounts are
affected.

Chapter 8 8-3
SOLUTIONS TO EXERCISES
Solution E8-1
1 Cost to obtain control over Edma HF $99,000
Implied fair value of Edma HF ($99,000/45%) $220,000
The fair value of 15% interest ($220,000  15%) $33,000

Cost to obtain 30% of Edma HF’s interest $31,000
($10,000 + $21,000)
Gain from revaluation of investment in Edma HF $2,000
2 Income from Edma HF in 2014 $9,000

($60,000  60%  3 /12)
3 Cost to purchase 5% interest $10,000

Cost to purchase 10% interest $21,000
Cost to purchase 45% interest $99,000
Gain on revaluation of investment $2,000
Income from Edma HF in 2014 $9,000
Investment in Edma HF at the end of 2014 $141,000
Solution E8-2
1 Percentage ownership of Yasmeen BSC in Talal BSC 81,82%

(90,000/110,000)
2 Talal BSC equity after issuance of additional shares $900,000

($800,000 + (10,000 x $10)
Yasmeen BSC’s equity in Talal BSC after issuance $736,364

($900,000  81.82%)
Yasemeen BSC’s equity in Talal BSC before issuance $800,000
Decrease in Yasemeen BSC’s equity in Talal BSC ($63,636)
January 2
Additional paid-in capital (-SE) 63,636
Investment in Talal BSC (-A) 63,636
To adjust investment in Talal BSC after issuance of additional shares
3 January 1, 2014 balance $800,000

Less: adjustment due to issuance of new shares ($63,636)
Investment in Talal BSC after the issuance $736,364

Solution E8-3
1 Number of shares owned by Nora NYRT (70%  9,000) 6,300
Percentage ownership of Nora NYRT in Bence NYRT 78.75%

(6,300/8,000)
2 Bence NYRT’s equity before treasury stock transaction $450,000

Cost of reasury stock ($60  1,000) ($60,000)
Bence NYRT’s equity after treasury stock transaction $390,000
Nora NYRT’s equity in Bence NYRT after the transaction $307,125

($390,000  78.75%)
Nora NYRT’s equity in Bence NYRT before the transaction $315,000
($450,000 x 70%)
Decrease in Nora NYRT’s equity in Bence NYRT ($7,875)
January 4
Additional paid-in capital 7,875
Investment in Bence NYRT 7,875
3 January 3, 2014 balance $350,000

Less: adjustment due to treasury stock transaction
($7,875)
Investment in Bence NYRT after the transaction $342,125
Solution E8-4
Implied fair value of investment ($3,500,000 / 80%) $4,375,000
Carrying value of shares sold ($4,375,000  70%) $3,062,500

Selling value 3,000,000
Loss from the deconsolidation $ 62,500

Chapter 8 8-5
Solution E8-5 (amounts in thousands)
1a Fair value — book value differential

Cost $2,548
Implied fair value of Son ($2,548 / 70%) $3,640
Book value ($2,960 January 1 balance
+ $200 income for 5 months - $120 dividends in
January and April) (3,040)
Goodwill $ 600
1b Income from Son (Note: Only include earnings subsequent to the

acquisition date).
Income from Son ($480,000 ´ 7/12 year ´ 70%) $ 196
1c Investment in Son at December 31

Investment cost $2,548
Add: Income from Son 196
Deduct: Dividends ($120,000 ´ 70%) (84)
Investment in Son December 31, 2016 $2,660
2 Consolidation working paper entries:
a Income from Son 196

Investment in Son 112
Dividends 84
To eliminate income and dividends from Son and adjust
investment account to its cost on June 1.
b Common stock, $10 par — Son 2,000

Retained earnings — Son 1,160
Goodwill 600
Investment in Son 2,548
Noncontrolling interest 1,128
Dividends 84
To eliminate reciprocal investment and equity balances,
record preacquisition income and beginning noncontrolling
interest, and eliminate preacquisition dividends.
c Noncontrolling interest share

($480,000 x 7/12 x 30%) 84,000
Dividends($240,000 x 30%) 72,000

Solution E8-6
1 Investment in Ngon (in thousands)
Investment balance December 31, 2016 ($2,400,000  90%) $ 2,160,000

Cost of new shares ($24  100,000 shares) 2,400,000
Investment in Ngon after new investment $ 4,560,000
2 Goodwill from new investment
Ngon’s stockholders’ equity after issuance $ 4,800,000

($2,400,000 + $2,400,000)
Huanh’s ownership percentage
(180,000 + 100,000 shares)/300,000 shares 0.93333
Huanh’s book value after issuance 4,480,000
Less: Huanh’s book value before issuance (2,160,000)
Increase in book value from purchase
(book value acquired) $ 2,320,000
Cost of 100,000 shares $ 2,400,000

Book value acquired (2,320,000)
Less: Undervalued Land ($10,000  0.9333) (9,333)
Goodwill from acquisition of new shares $ 70,667
Total Goodwill ($70,667/0.9333) $75,717.347
Solution E8-7
1 Son issues 30,000 shares to Pop at $20 per share

Pop’s ownership interest before issuance: 176,000/220,000 shares = 80%
Pop’s ownership interest after issuance: 206,000/250,000 shares = 82.4%
2 Son sells 30,000 shares to the public at $20 per share

Pop’s ownership interest after issuance: 176,000/250,000 shares = 70.4%
3 Son sells 30,000 shares to the public; no gain or loss recognized:
Investment in Son 115,200

To record increase in investment in Son computed as follows:
Book value before issuance ($3,200,000 ´ 80%) $2,560,000

Book value after issuance ($3,800,000 ´ 70.4%) 2,675,200
Additional paid-in capital $ 115,200

Chapter 8 8-7
Solution E8-8
Pam buys shares
1a Percentage ownership after additional investment:
700,000/1,000,000 = 70%
1b Goodwill from additional investment (in thousands):
Book value of interest after sale

$2,600 ´ 70% $1,820
Book value of interest before sale
$2,100 ´ 2/3 1,400
Book value of interest acquired 420
Cost of interest 500
Goodwill from additional investment* $ 80
*This implies total goodwill is now equal to $114,286.
Outsiders buy shares
2a Percentage ownership after sale:
600,000/1,000,000 = 60%
2b Change in underlying book value of investment in Sun:
Sun’s underlying equity after sale $2,600,000

Pam’s interest 60%
Book value of Pam’s investment in Sun
after the sale 1,560,000
Less: Book value before the sale 1,400,000
Increase in book value of investment $ 160,000
2c Entry to adjust investment account:
Investment in Sun 160,000


Solution E8-9
Preliminary computations of fair value — book value differentials:

April 1, 2016 acquisition
Cost of 4,000 shares (20% interest) $ 64,000
Implied total fair value of Son ($64,000 / 20%) $320,000
Book value of Son on april 1 acquisition date:
Beginning stockholders’ equity $280,000
Add: Income for 3 months ($80,000 ´ ¼ year) 20,000
Stockholders’ equity April 1 300,000
Goodwill $ 20,000
July 1, 2017 acquisition

Cost of 8,000 shares (40% interest) $164,000
Book value on July 1 acquisition date:
Beginning stockholders’ equity $360,000
Add: Income for 6 months ($80,000 ´ 1/2 year) 40,000
Less: Dividends May 1 (10,000)
Stockholders’ equity July 1 390,000
Goodwill (amount is unchanged by this transaction) $ 20,000
1 Income from Son
2016
Income from Son for 2016 ($80,000 ´ 20% ´ 3/4 year) $ 12,000
2017 Income from Son

20% share of reported income ($80,000 ´ 20%) $ 16,000
40% share of reported income ($80,000 ´ 40% ´ 1/2 year) 16,000
Income from Son $ 32,000
2 Noncontrolling interest December 31, 2017

(($420,000 book value + $20,000 goodwill)´ 40%) $176,000
3 Preacquisition income (does not appear in income statement)
4 Investment balance at December 31, 2017
Cost of 20% investment $ 64,000

Income from Son for 2016 12,000
Cost of 40% investment 164,000
Income from Son for 2017 32,000
Less: Dividends ($2,000 + $6,000) (8,000)
Investment in Son $264,000
Check:
Share of Son’s December 31, 2017 equity ($420,000 ´ 60%) $252,000
Add: 60% of $20,000 Goodwill 12,000
Investment in Son $264,000

Chapter 8 8-9
Solution E8-10
Preliminary computations
Investment cost July 1, 2017 $675,000
Implied total fair value of Sun ($675,000 / 90%) $750,000

Less: Book value of Sun at acquisition:
Equity of Sun December 31, 2016 $700,000
Add: Income for 1/2 year 50,000
Equity of Sun July 1, 2017 750,000
Excess (book value = underlying equity) 0
1 Investment income from Sun
Income from Sun — 2017 ($100,000 ´ 1/2 year ´ 90%) $ 45,000
Income from Sun — 2018:

January 1 to July 1 ($80,000 ´ 1/2 year ´ 90%) $ 36,000
July 1 to December 31 ($80,000 ´ 1/2 year ´ 80%) 32,000
$ 68,000
Investment in Sun
Cost July 1, 2017 $675,000
Add: Income from Sun — 2017 45,000
Less: Dividends paid in December ($50,000 ´ 90%) (45,000)
Investment balance December 31, 2017 675,000
Less: Book value of 1/9 interest sold on July 1, 2018a (79,000)

Add: Income from Sun — 2018 68,000
Less: Dividends paid in December ($30,000 ´ 80%) (24,000)
Investment balance December 31, 2018 $640,000

a
Sale of 10% interest July 1, 2018:
Equity of Sun December 31, 2016 $700,000
Add: Income less dividends — 2017 50,000
Add: Income for 1/2 year — 2018 40,000
Equity of Sun July 1, 2018 790,000
Interest sold 10%
Underlying equity of interest sold $ 79,000
Gain on sale of 1/9 interest ($85,000 proceeds - $79,000) $ 6,000

Since Pam maintains a controlling interest, the gain is not
recorded, but shown as an adjustment to additional paid-in
capital.

Solution E8-10 (continued)
2 Noncontrolling interest share
Noncontrolling interest share — 2017:

($100,000 income ´ 10% interest x 1/2) $ 5,000
Noncontrolling interest share — 2018:

($80,000 ´ 1/2 year ´ 10%) + ($80,000 ´ 1/2 year ´ 20%) $ 12,000
Noncontrolling interest December 31, 2017

Equity of Sun January 1 $700,000
Add: Income less dividends for 2017 50,000
Equity of Sun December 31 750,000
Noncontrolling interest percentage 10%
Noncontrolling interest December 31 $ 75,000
Noncontrolling interest December 31, 2018

Equity of Sun January 1 $750,000
Add: Income less dividends for 2018 50,000
Equity of Sun December 31 800,000
Noncontrolling interest December 31 $160,000

Chapter 8 8-11
Solution E8-11
Preliminary computations:
Investment cost January 1, 2017 $ 690,000
Implied total fair value of Son ($690,000 / 75%) $ 920,000

Book value of Son (800,000)
Excess fair value over book value = Goodwill $ 120,000
1 Underlying book value December 31, 2017
$1,000,000 equity ´ 75% $ 750,000
2 Percentage ownership before purchase of additional shares
30,000 shares owned/40,000 shares outstanding = 75% interest
Percentage ownership after purchase of additional shares
3 Investment in Son balance January 3, 2018
Investment cost January 1, 2017 $ 690,000

Add: Share of Son’s income less dividends
for 2017 ($200,000 ´ 75%) 150,000
Investment in Son December 31, 2017 840,000
Add: Additional investment — January 3, 2018
(10,000 shares ´ $30) 300,000
Investment in Son balance January 3, 2018 $1,140,000
4 Percentage ownership if shares sold to outside entities
5 Investment in Son balance January 3, 2018
Investment in Son December 31, 2017

(see 3 above) $ 840,000
Add: Increase in book value from change in
ownership interest:
Book value after additional 10,000 shares
were issued ($1,300,000 equity ´ 60%) $780,000
Book value before additional 10,000 shares
were issued ($1,000,000 equity ´ 75%) (750,000) 30,000
Investment in Son balance - January 3, 2018 $ 870,000

Solution E8-12
Cost of additional investment (2,000 shares ´ $80) $160,000
Implied total fair value of Sun

$160,000 / (2,000/12,000) $960,000
Less: Book value of Sun after issuance 710,000
Excess fair value over book value $250,000
January 2, 2017
Cash 160,000
To record purchase of additional 2,000 shares of Sun.
December 2017
Cash 50,000
To record receipt of dividends ($60,000 ´ 10,000/12,000 shares).
December 31, 2017

Income from Sun 75,000
To record income from Sun($90,000 ´ 10,000/12,000).
Solution E8-13
1 Investment in Son (in thousands)

Cost $1,800
Add: 90% of $300 increase in equity since 2016 270
Investment in Son January 1, 2018 $2,070
2 Entry on Pop’s books (no gain or loss recognized)

Additional paid-in capital 180
To recognize change in book value of investment from Son’s sale of
additional shares, computed as follows:
Underlying equity after issuance ($2,400 ´ 75%) $1,800
Underlying equity before issuance ($1,800 ´ 90%) (1,620)
$ 180

Chapter 8 8-13
SOLUTIONS TO PROBLEMS
Solution P8-1
Price to acquire 75% percent interest of Rayan SAL $3,750,000
Implied fair value of Rayan SAL ($3,750,000/75%) $5,000,000
Rayan SAL’s stockholders’ equity at July 1 $4,850,000
Excess of fair value over book value $150,000
Excess allocated to:

Overvalued inventory ($100,000)
Goodwill $250,000c
75% of Rayan SAL’s net income for half year $487,500

(75%  ($4,800,000 - $2,700,000 + $150,000
– $950,000)/2)
Amortization of overvalued inventory $75,000
(75%  $100,000)
Unrealized gain on sale of land ($112,500)
(75%  $150,000)
Income from Rayan SAL’s $450,000a
25% of Rayan SAL’s net income $162,500
(25%  ($4,800,000 - $2,700,000 + $150,000
– $950,000)/2)
Amortization of overvalued inventory $25,000
(25%  $100,000)
Unrealized gain on sale of land ($37,500)
(25%  $150,000)
Noncontrolling interest share: $150,000b
Investment in Rayan SAL before adjustment $3,637,500

Add: Income from Rayan SAL $450,000
Adjusted investment in Rayan SAL $4,087,500

Solution P8-1 (continued)
RAYAN SAL AND SUBSIDIARY CONSOLIDATION WORKPAPER FOR THE YEAR ENDED DECEMBER 31, 2014 (IN THOUSANDS)
Adjustments and
Eliminations Consolidated
Adnan SAL Rayan SAL Debits Credits Statements
Income Statement
Sales $ 7,400 $ 4,800 c. 2.400 $ 9,800
Income from Rayan SAL $ 450 a. 450
Gain on sale of land $ 150 d. 150
Cost of sales -$ 3,900 -$ 2,700 c. 1,350 -$ 5,150
c. 100
Other expenses -$ 1,100 -$ 950 c. 400 -$ 1,650
Noncontrolling interest share b. 150 -$ 150
Controlling share of net income $ 2,850 $ 1,300 $ 2,850
Retained Earnings Statement
Retained earnings - Adnan SAL $ 1,850 $ 1,850
Retained earnings - Rayan SAL $ 1,300 c. 1,300
Dividends $ 0 -$ 250 a. 112.5 $ 0
b. 62.5
c. 75
Retained earnings - December 31 $ 4,700 $ 2,350 $ 4,700

Balance Sheet
Cash $ 1,200 $ 900 $ 2,100
Accounts receivable $ 2,000 $ 1,100 $ 3,100
Dividend receivable $ 112.5 e. 112.5
Inventory $ 300 $ 1,300 $ 1,600
Land $ 1,200 $ 2,400 d. 150 $ 3,450
Equipment $ 3,000 $ 350 $ 3,350
Investment in Rayan SAL $ 4,087.5 a. 337.5
c. 3750
Goodwill c. 250 $ 250
Total Assets $ 11,900 $ 6,050 $ 13,850

Accounts payable $ 2,200 $ 550 $ 2,750
Dividend payable $ 150 e. 112.5 $ 37.50
Common stock $ 5,000 $ 3,000 c. 3,000 $ 5,000
Retained earnings $ 4,700 $ 2,350 $ 4,700
$ 11,900 $ 6,050
Noncontrolling interest January 1 c. 1,275
Noncontrolling interest December 31 b. 87.5 $ 1,362.5
Total liabilities and equities $ 13,850

Chapter 8 8-15
Solution P8-2
Price to acquire 90% percent interest of Piero SAA $3,600,000
Implied fair value of Piero SAA ($3,600,000/90%) $4,000,000
Piero SAA’s stockholders’ equity at January 1 $3,800,000
Goodwill $200,000c
Income from Piero SAA’s for the first quarter $225,000
(90%  ($4,500,000 - $2,800,000 - $700,000)  3/12)
Income from Piero SAA’s for the last three quarters $525,000
(70%  ($4,500,000 - $2,800,000 - $700,000)  9/12)
Income from Piero SAA for 2014 ($225,000 + $525,000) $750,000a
Noncontrolling interest share for the first quarter: $25,000
(10%  ($4,500,000 - $2,800,000 - $700,000)  3/12)
Noncontrolling interest share for the last three quarters: $225,000
(30%  ($4,500,000 - $2,800,000 - $700,000)  9/12)
Noncontrolling interest share for 2014 $250,000b
Investment in Piero SAA before adjustment $2,835,000
Add: Income from Piero SAA for the las three quarters $525,000
Adjusted investment in Piero SAA $3,360,000
Noncontrolling interest January 1:

10% of Implied fair value of Piero SAA at January 1 $400,000c
Noncontrolling interest March 31
20% of implied fair value of Piero SAA at March 31 $850,000c
(20%  ($4,000,000 + $250,000))

PIERO SAA AND SUBSIDIARY CONSOLIDATION WORKPAPER FOR THE YEAR ENDED DECEMBER 31, 2014
(IN THOUSANDS)
Adjustments and
Isac Piero Eliminations Consolidated
SAA SAA Debits Credits Statements
Income Statement
Sales $ 7,400 $ 4,500 $ 11,900
Income from Piero SAA $ 750 a. 750
-$ -$
Cost of sales
5,800 2,800 -$ 8,600
Other expenses -$ 400 -$ 700 -$ 1,100
Noncontrolling interest share b. 250 -$ 250
Retained Earnings Statement
Retained earnings - Isac SAA $ 2,500 $ 2,500
Retained earnings - Piero SAA $ 1,800 c. 1800
Dividends -$ 200 -$ 200 a. 140 -$ 200
b. 60

Retained earnings - December 31 $ 4,250 $ 2,600 $ 4,250

Balance Sheet
Cash $ 900 $ 400 $ 1,300
Accounts receivable $ 200 $ 700 $ 900
Inventory $ 1,640 $ 700 $ 2,340
Land $ 2,100 $ 2,800 $ 4,900
Equipment $ 3,000 $ 1,400 $ 4,400
$
Investment in Piero SAA
3,360.0 a. 610
c.

2,750
Goodwill c. 200 $ 200
$
Total Assets
11,200 $ 6,000 $ 14,040

Accounts payable $ 1,900 $ 1,400 $ 3,300
Common stock $ 5,000 $ 2,000 c. 2000 $ 5,000
Additional-paid in capital $ 50 $ 50
Retained earnings $ 4,250 $ 2,600 $ 4,250
$

11,200 $ 6,000
Noncontrolling interest January 1 c. 400
Noncontrolling interest March 31 c. 850
Noncontrolling interest December 31 b. 190 $ 1,440.0
Total liabilities and equities $ 14,040

Chapter 8 8-17
Solution P8-3
1 Journal entry to record sale as of actual sale date

Cash 120,000
To record sale of 1/9 of investment in Sun.
Book value of interest sold is computed as follows:
Investment balance December 31, 2015 $1,039,500

Add: Income from Sun for one-half year
($280,000 ´ 1/2 year ´ 90%) 126,000
Less: Dividends ($80,000 ´ 90%) (72,000)
Book value of investment on July 1, 2016 $1,093,500
Book value of interest sold ($1,093,500/9) $ 121,500
2 Journal entry to record sale as of January 1, 2016

Cash 120,000
To record sale of 1/9 of investment in Sun.
Book value of interest sold is computed as follows:
Investment balance December 31, 2015 $1,039,500

Less: Dividends (72,000)
Book value adjusted for dividends $ 967,500
Book value of interest sold ($967,500/9) $ 107,500
3 Reconciliation
Investment in
Investment in Sun
Sun Beginning of Year
Actual Sale Date Sale Date
Balance January 1, 2016 $1,039,500 $1,039,500
Add: Income from Sun
January 1 — July 1 126,000 112,000
July 1 — December 31 112,000 1l2,000
Less: Dividends
First half-year (72,000) (72,000)
Last half-year (64,000) (64,000)
Less: Book value of interest sold (121,500) (107,500)
Balance December 31, 2016 $1,020,000 $1,020,000

Solution P8-4 (in thousands)
Entries on Pop’s books to reflect the change in ownership interest:
Option 1 Pop sells 30,000 shares of Son
Cash 1,500
To record sale of 30,000 shares at $50 per share. No gain or loss is
recognized since Pop maintains a controlling interest.
Option 2 Son issues and sells 40,000 shares to the public

To record adjustment in ownership computed as follows:

Book value after sale of 40,000 shares
($12,440 ´ 75%) $9,330
Book value before sale of 40,000 shares
($10,440 ´ 5/6) (8,700)
Increase in book value of investment from sale $ 630
Option 3 Son reissues 40,000 shares of treasury stock

To record adjustment in ownership computed the same as 2 above.
Consolidated Stockholders’ Equity

at January 1, 2017
Option 1 Option 2 Option 3
Common stock $10,000 $10,000 $10,000

Additional paid-in capital 3,630 3,630 3,630
Retained earnings 7,000 7,000 7,000
Noncontrolling interesta 2,610 3,110 3,110
Total stockholders’ equity $23,240 $23,740 $23,740
a
Noncontrolling interest under option 1: $10,440 ´ 25%
Noncontrolling interest under options 2 and 3: $12,440 ´ 25%

Chapter 8 8-19
Solution P8-5
Cost of 1,800,000 shares (80% interest) January 1, 2016 $ 2,500,000
Implied total fair value of 2016 ($2,500,000 / 80%) $ 3,125,000

Book value of Soil ($2,000,000 + $500,000) (2,500,000)
Undervalued equipment ($50,000  80%) (40,000)
Excess fair value over book value = Goodwill $ 585,000
1 Investment balance December 31, 2016
Cost January 1, 2016 $ 2,500,000

Add: Share of Soil’s 2016 income ($200,000  80%) 160,000
Less: Dividends Received ($25,000  80%) (20,000)
Investment in Soil December 31 $ 2,640,000
2 Goodwill at December 31, 2017 (Pupuk purchased additional shares)
Goodwill from January 1, 2016 purchase $ 585,000

Goodwill from January 1, 2017 purchase:
Book value before purchase $2,500,000
Book value after purchase (3,400,000)
Book value acquired (900,000)
Cost of additional 60,000 shares 900,000
Goodwill from January 1, 2017 $ 0
Goodwill at December 31, 2017 $ 585,000
3 Additional paid-in capital (outsider purchased additional shares)
Book value after issuance ($3,400,000 ´ 78%) $2,652,000

Book value before issuance ($2,675,000 ´ 80%) (2,140,000)
Additional paid-in capital (gain is not recognized) $ 512,000
4 Noncontrolling interest December 31, 2017 (outsider purchased shares)
Subsidiary equity January 1, 2016 $2,500,000

Increase for 2016 200,000
Decrease for 2016 (25,000)
Increase for 2017 225,000
Decrease for 2017 (25,000)
Sale of additional shares 900,000

Book value $1,275,000
Goodwill 585,000
Fair value of Sal equity December 31, 2017 $1,860,000
Noncontrolling interest percentage 510,00/2,310,000 shares 22%

Noncontrolling interest December 31, 2017 $ 409,200

Solution P8-6
1 Investment in Son December 31, 2017

Investment in Son January 2, 2016 $ 98,000
Increase for 2016 ($30,000 retained earnings increase ´ 70%) 21,000
Purchase of additional 20% interest June 30, 2017 37,000
Increase 2017:
($30,000 ´ 1/2 year ´ 70%) + ($30,000 ´ 1/2 year ´ 90%) 24,000
Dividends 2017: ($10,000 ´ 90%) (9,000)
Investment in Son December 31, 2017 $171,000
2 Goodwill December 31, 2017

January 2, 2016 purchase:
Cost of 70% interest $ 98,000

Less: Book value of Son 120,000
Goodwill $ 20,000
June 30, 2017 purchase:

Cost of 20% interest $ 37,000

Less: Book value of Son 165,000
Goodwill - December 31, 2017 $ 20,000
3 Consolidated net income

Sales $600,000
Cost of sales (400,000)
Expenses (70,000)
Consolidated net income 130,000
Noncontrolling interest share* 6,000
Controlling share of net income $124,000
* Noncontrolling share is 10% for full year plus

20% for ½ year.
Alternative:
Pop’s reported income = Controlling share of net income $124,000
4 Consolidated retained earnings December 31, 2017

Beginning retained earnings $200,000
Add: Controlling share of Consolidated net income — 2017 124,000
Less: Dividends (64,000)
Consolidated retained earnings — ending $260,000
Alternative solution:
Pop’s reported ending retained earnings = Consolidated
retained earnings — ending $260,000

Chapter 8 8-21
5 Noncontrolling interest December 31, 2017

Equity of Son December 31, 2017 $170,000
Goodwill 20,000
Fair value of Son $190,000
Noncontrolling interest December 31, 2017 $ 19,000

Solution P8-7
1 Pam Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2017
(in thousands)
Sales $3,200.00
Cost of sales (1,900.00)
Gross profit 1,300.00
Depreciation expense (700.00)
Other expenses (150.00)
Consolidated net income 450.00
Noncontrolling interest share ($150,000 ´ 20%) + (33.75)
($150,000 ´ 1/4 year ´ 10%)
Controlling share of Consolidated net income $ 416.25
2 Schedule to allocate Sun’s income and dividends

Control. Noncontrol. Total
Sun’s income $150,000 x 70% x $26,250 $150,000 - $33,750 $60,000

3/12 $116,250
$150,000 x 80% x
9/12 90,000 90,000
Allocation $116,250 $33,750 $150,000
Dividends $40,000 x 70% $ 28,000 $40,000 x 30% $12,000 $40,000
$40,000 x 80% 32,000 $40,000 x 20% 8,000 40,000

Allocation $ 60,000 $20,000 $80,000

Chapter 8 8-23
Solution P8-8
Preliminary computations
Cost October 1, 2016 $ 82,400

Book value on October 1 acquisition date:
Book value on January 1, 2016 $70,000
Add: Income January 1 to October 1
($24,000 ´ 3/4 year) 18,000
Deduct: Dividends March 15 (5,000)
Book value October 1 83,000
Goodwill $ 20,000
Income from Son for 2016

Share of Son’s net income ($24,000 ´ 1/4 year ´ 80%) $ 4,800
Less: Unrealized profit in Son’s ending inventory (1,000)
Income from Son $ 3,800
* Preacquisition income ($24,000 ´ 3/4 year ´ 100%) $18,000
* Preacquisition dividends ($5,000 ´ 80%) $ 4,000
* Noncontrolling interest share ($6,000 ´ 20%) $ 1,200
* Under GAAP, preacquisition earnings are not shown as a

reduction of consolidated net income. Rather, we only
include earnings and dividends subsequent to the
acquisition date. Preacquistion amounts are disclosed in
required pro-forma disclosures for acquisitions. The
worksheet on the following page reflects these
adjustments.

Pop Corporation and Subsidiary
Consolidation Working Papers
Adjustments and Consolidated
Pop Son 80% Eliminations Statements
Income Statement
Sales $ 112,000 $ 50,000 a 12,000 $ 112,500
c 37,500
Income from Son 3,800 b 3,800
Cost of sales 60,000 * 20,000 * d 1,000 a 12,000 54,000 *
c 15,000
Operating expenses 25,100 * 6,000 * c 4,500 26,600 *
Noncontrolling int. share f 1,200 1,200 *
Controlling share of NI $ 30,700 $ 24,000 $ 30,700
Retained Earnings
Retained earnings — Pop $ 30,000 $ 30,000
Retained earnings — Son $ 20,000 c 20,000
Net income 30,700ü 24,000ü 30,700
Dividends 20,000 * 10,000 * b 4,000
c 4,000
f 2,000 20,000 *
Retained earnings
December 31 $ 40,700 $ 34,000 $ 40,700
Balance Sheet
Cash $ 5,100 $ 7,000 $ 12,100
Accounts receivable 10,400 17,000 g 6,000 21,400
Note receivable 5,000 10,000 15,000
Inventories 30,000 16,000 d 1,000 45,000
Plant assets — net 88,000 60,000 148,000
Investment in Son 82,200 b 200
c 82,400
Goodwill __________ __________ c 20,000 20,000
$ 220,700 $ 110,000 $ 261,500
Accounts payable $ 15,000 $ 16,000 g 6,000 $ 25,000

Notes payable 25,000 10,000 35,000
Capital stock 140,000 50,000 c 50,000 140,000
Retained earnings 40,700 ü 34,000 ü 40,700
$ 220,700 $ 110,000
Noncontrolling interest — beginning c 21,600
Noncontrolling interest December 31 f 800 20,800

__________ __________
*Deduct 152,500 152,500 $ 261,500

Chapter 8 8-25

Solution P8-9
Supporting computations:
Fair value — book value differential
Investment cost $175,000
Implied total fair value of Sun ($175,000 / 70%) $250,000

Less: Book value of Sun ($250,000 equity on January 1 plus
$10,000 net income (1/4 year) less $10,000 dividends) 250,000
Fair value — book value differential 0
Allocation of Sun’s reported net income
Pam company ($40,000 ´ 3/4 year ´ 70%) $ 21,000

Preacquisition income ($40,000 ´ 1/4 year ´ 100%) 10,000
Noncontrolling interest share ($40,000 ´ 1 year ´ 30% x 3/4) 9,000
Sun’s net income $ 40,000
Pam’s income from Sun
Equity in Sun’s income $ 21,000
Constructive gain on Pam’s bonds

Note that bonds payable has a book value of $105,400 on December
31, 2016. A half-year of premium amortization ($300) yields a book
value of $105,700 at July 1, 2016
( $105,700 book value on July 1 less $102,850 on December 31) 2,850
Recognition of constructive gain on separate books

($2,850 ´ 6/114 months) (150)
Gain on intercompany sale of equipment — downstream

[$30,000 - ($36,000/2)] (12,000)
Piecemeal recognition of gain on equipment — downstream

($12,000/3 years ´ 1/2 year) 2,000
Gain on intercompany sale of land — upstream

($10,000 - $8,000 cost) ´ 70% (1,400)
Income from Sun $ 12,300

Chapter 8 8-27
Worksheet entries in journal form
a Income from Sun 12,300

Dividends – Sun 7,000
Investment in Sun common 5,300
Eliminate intercompany post-acquisition earnings and
dividends and return Investment to beginning
balance.
b Sales* 37,500
Retained earnings – Sun 50,000
Common stock – Sun 200,000
Expenses* 27,500
Dividends – Sun* 7,000
Investment in Sun - common 175,000
Eliminate preacquisition earnings and dividends.
Eliminate Sun’s equity accounts, the investment
account and establish beginning noncontrolling
interest.
c Gain on plant assets 12,000
Plant assets 12,000
Eliminate intercompany gain on sale of equipment.
d Gain on plant assets 2,000
Plant assets 2,000
Eliminate intercompany gain on sale of land.
e Interest income 5,850
Bonds payable 105,400
Interest expense 5,700
Gain on bond retirement 2,850
Investment in Pam bonds 102,700
Record constructive retirement of bonds payable.
f Interest payable 6,000
Interest receivable 6,000
Eliminate reciprocal interest accounts.
g Other current liabilities 7,000
Other current assets 7,000
Eliminate reciprocal for unpaid intercompany
dividends.
h Noncontrolling interest share 8,400
Dividends – Sun 6,000
Record noncontrolling interest share of earnings and
post-acquisition dividends.
i Plant assets | 2,000
Expenses | 2,000
Eliminate excess depreciation on equipment.
*Sales 37,500 = $150,000 x 3/12

*Expenses 27,500 = $110,000 x 3/12
*Dividends 7,000 = $10,000 x 0.70

Pam Corporation and Subsidiary
Pam Sun 70% Eliminations Statements
Income Statement
Sales $ 287,100 $ 150,000 b 37,500 $ 399,600
Income from Sun 12,300 a 12,300
Gain on bonds e 2,850 2,850
Gain on plant assets 12,000 2,000 c 12,000
d 2,000
Interest income 5,850 e 5,850
Interest expense 11,400* e 5,700 5,700*
Expenses — includes cost of b 27,500
goods sold 200,000* 117,850* i 2,000 288,350*
Consolidated NI 108,400
Noncontrolling int. share h 8,400 8,400*
Controlling share of Net Inc. $ 100,000 $ 40,000 $ 100,000
Retained Earnings
Retained earnings — Pam $ 250,000 $ 250,000
Retained earnings — Sun $ 50,000 b 50,000
Controlling share of Net Inc. 100,000ü 40,000ü 100,000
Dividends 50,000* 20,000* a 7,000
b 7,000
h 6,000 50,000*
Retained earnings
December 31 $ 300,000 $ 70,000 $ 300,000
Balance Sheet
Cash $ 17,000 $ 4,000 $ 21,000
Interest receivable 6,000 f 6,000
Inventories 140,000 60,000 200,000
Other current assets 110,000 20,000 g 7,000 123,000
Plant assets — net 502,700 107,300 i 2,000 c 12,000
d 2,000 598,000
Investment — Sun common 180,300 a 5,300
b 175,000
Investment — Pam bonds 102,700 e 102,700 __________
$ 950,000 $ 300,000 $ 942,000
Interest payable $ 6,000 f 6,000
Other current liabilities 38,600 $ 30,000 g 7,000 $ 61,600
12% bonds payable 105,400 e 105,400
Common stock 500,000 200,000 b 200,000 500,000
Retained earnings 300,000ü 70,000ü 300,000
$ 950,000 $ 300,000
Noncontrolling interest b 78,000
Noncontrolling interest December 31
($268,000 ´ 30%) _________ h 2,400 80,400
448,450 448,450 $ 942,000
*Deduct

Chapter 8 8-29
Solution P8-10
Supporting computations:
Investment cost of 70% interest $420,000

Book value of Son 500,000
Goodwill $100,000
Investment cost of 10% interest $ 67,500

Book value of Son:
Beginning equity January 1, 2017 $550,000
Add: Income for 1/2 year 50,000
Less: June dividends (25,000)
Book value at July 1, 2017 575,000
Goodwill (unchanged) $100,000
Investment in Son account:

Investment cost January 1, 2016 $420,000
Add: 2016 share of retained earnings
increase ($50,000 ´ 70%) $ 35,000
Less: Unrealized profit in ending inventory (5,000)
Less: Unrealized gain on land (8,000) 22,000
Add: Investment cost of 10% interest 67,500
Add: Income from Son for 2017
$100,000 ´ 70% interest ´ 1 year $ 70,000
$100,000 ´ 10% interest ´ 1/2 year 5,000
Add: Beginning inventory profits 5,000
Less: Ending inventory profits (6,000)
Less: Gain: intercompany sale machinery (40,000)
Add: Piecemeal recognition of gain
($40,000/5 ´ 1/2 year) 4,000 38,000
Less: Dividends from Son
($25,000 ´ 70%) + ($25,000 ´ 80%) (37,500)

(in thousands)
80% Adjustments and Consolidated
Pop Son Eliminations Statements
Income Statement
Sales $ 900 $ 500 a 48 $1,352
Income from Son 38 f 38
Gain on machinery 40 d 40
Cost of sales 400* 300* c 6 a 48
b 5 653*
Depreciation expense 90* 60* d 4 146*
Other expenses 160* 40* 200*
Consolidated net income 353
Noncontrolling int. share h 25 25*
Controlling share of NI $ 328 $ 100 $ 328
Retained Earnings
Retained earnings — Pop $ 155 $ 155
Retained earnings — Son $ 250 g 250
Controlling share of NI 328ü 100ü 328
Dividends 200* 50* f 37.5
h 12.5 200*
Retained earnings
December 31 $ 283 $ 300 $ 283
Balance Sheet
Cash $ 20 $ 80 $ 100
Accounts receivable 130 30 i 25 135
Dividends receivable 20 j 20
Inventories 90 70 c 6 154
Other current items 20 80 100
Land 50 40 e 8 82
Buildings — net 60 105 165
Machinery — net 100 320 d 36 384
Investment in Son 510 b 5 g 522.5
e 8 f .5
Goodwill ______ ______ g 100 100
1,000 $ 725 $1,220
Accounts payable $ 177 $ 40 i 25 $ 192

Dividends payable 100 25 j 20 105
Other liabilities 140 60 200
Capital stock, $10 par 300 300 g 300 300
Retained earnings 283ü 300ü 283
$1,000 $ 725
Noncontrolling interest, January 1 g 127.5
Noncontrolling interest, December 31 ______ h 12.5 140
865 865 $1,220
*Deduct

Chapter 8 8-31
Solution P8-11
Investment cost of 85% of Sun August 1, 2016 $522,750
Implied fair value of Sun ($522,750 / 85%) $615,000

Book value August 1, 2016:
Capital stock $500,000
Retained earnings 100,000
Add: Income for 7 months 35,000
Less: Dividends for 1/2 year (20,000)
Stockholders’ equity August 1, 2016 615,000
Fair value – book value differential $ 0
Investment cost August 1, 2016 $522,750
Equity in income $60,000 ´ 5/12 year ´ 85% $ 21,250

Less: Deferred inventory profit from
upstream sale $5,000 ´ 85% (4,250)
Less: Deferred profit from sale of
equipment $10,000 profit - ($2,000 ´ 1/4 year) (9,500)
Income from Sun 2016 7,500
Less: Dividends from Sun $20,000 ´ 85% (17,000)
Investment in Sun December 31, 2016 $513,250
Noncontrolling interest share of post-acquisition income, adjusted for the

inventory profit: ($25,000 - $5,000) ´ 15% = $3,000
Preacquisition earnings ($35,000 ´ 100%) = $35,000

Under GAAP, pre-acquisition earnings and dividends are closed to retained
earnings, and the consolidated income statement reports only post-acquisition
earnings.
Working paper entries:
a Sales 60,000
Cost of sales 60,000
To eliminate intercompany sales.
b Cost of sales 5,000

Inventories 5,000
To defer unrealized inventory profits.
c Sales 50,000
Plant assets — net 10,000
To eliminate intercompany sale of inventory item to be used as
equipment.
d Plant assets — net 500

Operating expense 500
To record depreciation for 1/4 year on intercompany gain on plant
asset.

e Income from Sun 7,500

Dividends 17,000
To eliminate income and dividends and return investment account to
its beginning-of-the-period balance.
f Capital stock 500,000

Retained earnings 100,000
Sales 233,333
Operating expenses 52,500
Dividends 17,000
To eliminate reciprocal equity and investment balances, and enter
beginning noncontrolling interest (* adjusted for preacquisition
earnings and dividends).
g Dividends payable 17,000

Dividends receivable 17,000
To eliminate reciprocal dividends receivable and payable amounts.
h Noncontrolling Interest Share 3,000

Dividends 6,000
To enter Noncontrolling Interest share of subsidiary post-
acquisition income and dividends.
Alternative to entry c:
Sales 50,000

Plant assets — net 10,000

Chapter 8 8-33
Pam Corporation and Subsidiary


Pam Sun 85% Eliminations Statements
Income Statement
Sales $ 910,000 $ 400,000 a 60,000
c 50,000
f 233,333 $ 966,667
Income from Sun 7,500 e 7,500
Cost of sales 500,000* 250,000* b 5,000 a 60,000
c 40,000
f 145,833 509,167*
Operating expense 200,000 * 90,000 * d 500
f 52,500 237,000 *
Noncontrolling int. share h 3,000 3,000 *
Controlling share of NI $ 217,500 $ 60,000 $ 217,500
Retained Earnings
Retained earnings — Pam $ 192,500 $ 192,500
Retained earnings — Sun $ 100,000 f 100,000
Net income 217,500ü 60,000ü 217,500
Dividends 100,000 * 40,000 * e 17,000
f 17,000
h 6,000 100,000 *
Retained earnings
December 31 $ 310,000 $ 120,000 $ 310,000
Balance Sheet
Cash $ 33,750 $ 10,000 $ 43,750
Dividends receivable 17,000 g 17,000
Accounts receivable 120,000 70,000 190,000
Inventories 300,000 150,000 b 5,000 445,000
Plant assets — net 880,000 500,000 d 500 c 10,000 1,370,500
Investment in Sun 513,250 __________ e 9,500 f 522,750 __________
$1,864,000 $ 730,000 $2,049,250
Accounts payable $ 154,000 $ 90,000 $ 244,000

Dividends payable 20,000 g 17,000 3,000
Capital stock 1,400,000 500,000 f 500,000 1,400,000
Retained earnings 310,000 ü 120,000 ü 310,000
$1,864,000 $ 730,000
Noncontrolling interest January 1 f 95,250

Noncontrolling interest December 31 h 3,000 _________ 92,250

988,833 988,833 $2,049,250

*Deduct
Solution P8-12
Indirect Method

Consolidated Statement of Cash Flows
Cash Flows from Operating Activities

Controlling share of consolidated net income $300,000
Adjustments to reconcile controlling share of

consolidated net income to net cash
provided by operating activities:
Noncontrolling interest share $ 22,000
Depreciation expense 528,000
Decrease in accounts receivable 2,500
Decrease in prepaid expenses 20,000
Decrease in accounts payable (203,500)
Increase in inventories (130,000)
Gain on sale of 10% interest* (5,700) 233,300
Net cash flows from operating activities 533,300
Cash Flows from Investing Activities

Purchase of equipment $(100,000)
Sale of 10% interest in subsidiary 72,700
Net cash flows from investing activities (27,300)
Cash Flows from Financing Activities

Cash paid on long-term note $(300,000)
Payment of cash dividends — controlling (200,000)
Payment of cash dividends — noncontrolling (10,000)
Net cash flows from financing activities (510,000)
Decrease in cash for 2017 (4,000)

Cash on hand January 1, 2017 50,500
Cash on hand December 31, 2017 $ 46,500
*Note: Since Pop maintains a controlling interest in Son, no gain or loss

should have been recognized on sale of the 10% interest. Rather, this amount
should appear as an increase in other paid-in capital. The net effect on the
statement of cash flows is the same.

Chapter 8 8-35
Working Paper for the Statement of Cash Flows (Indirect Method)
Reconciling Items Cash Flows Cash Flows Cash Flows
Year’s from Investing Financing
Change Debit Credit Operations Activities Activities
Asset Changes
Cash (4,000)
Accounts
receivable — net (2,500) e 2,500
Inventories 130,000 k 130,000
Prepaid expenses (20,000) l 20,000
Equipment 90,000 h 10,000 g 100,000
Accumulated (498,000) f 500,000 h 2,000
depreciation
Land and buildings 0
Accum. depreciation (28,000) f 28,000
Total asset changes (332,500)
Changes in Equities
Accounts payable (203,500) i 203,500
Dividends payable 0
Long-term note (300,000) j 300,000
payable
Common stock 0
Retained earnings 100,000 a 300,000 c 200,000
Noncontrol. int. 20% 71,000 b 22,000 d 10,000
h 59,000
Changes in
equities (332,500)
Controlling Share of a 300,000 300,000
Consolidated net income
Noncontrolling int. share b 22,000 22,000
Purchase of equipment g 100,000 (100,000)
Depreciation — equipment
and buildings f 528,000 528,000
Gain - sale of 10% subsidiary
Interest h 5,700 (5,700)
Decrease in accounts e 2,500 2,500
receivable
Increase in inventories k 130,000 (130,000)
Decrease in prepaid expenses l 20,000 20,000
Decrease in accounts payable i 203,500 (203,500)
Cash paid on long-term note j 300,000 (300,000)
Paid dividends — controlling c 200,000 (200,000)
Paid dividends —noncontrol. d 10,000 (10,000)
Sale of 10% interest in
Subsidiary h 72,700 72,700
1,890,700 1,890,700
533,300 (27,300) (510,000)

Cash decrease for 2017 = $533,300 - $27,300 - $510,000 = $(4,000).
*Note: Since Pop maintains a controlling interest in Son, no gain or loss
should have been recognized on sale of the 10% interest. Rather, this amount
should appear as an increase in other paid-in capital. The net effect on the
statement of cash flows is the same.
Solution PR 8-1
No (ASC 810-45-10-4) indicates that earnings may only be included from the
date of initial consolidation, which would be July 1. Pop would recognize its
30 percent share of pre-July 1 earnings under the equity method.
Solution PR 8-2
NO (ASC 323-10-35-2) is clear that the equity method is not an acceptable
substitute for consolidation.

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Chapter 8

CONSOLIDATIONS — CHANGES IN OWNERSHIP INTERESTS

Copyright © 2018 Pearson Education Ltd.

Copyright © 2018 Pearson Education Ltd.

1 Cost to obtain control over Edma HF $99,000

Implied fair value of Edma HF ($99,000/45%) $220,000

The fair value of 15% interest ($220,000  15%) $33,000

2 Income from Edma HF in 2014 $9,000

3 Cost to purchase 5% interest $10,000

1 Percentage ownership of Yasmeen BSC in Talal BSC 81,82%

2 Talal BSC equity after issuance of additional shares $900,000

Yasmeen BSC’s equity in Talal BSC after issuance $736,364

3 January 1, 2014 balance $800,000

Copyright © 2018 Pearson Education Ltd.

1 Number of shares owned by Nora NYRT (70%  9,000) 6,300

Percentage ownership of Nora NYRT in Bence NYRT 78.75%

2 Bence NYRT’s equity before treasury stock transaction $450,000

Nora NYRT’s equity in Bence NYRT after the transaction $307,125

3 January 3, 2014 balance $350,000

Implied fair value of investment ($3,500,000 / 80%) $4,375,000

Carrying value of shares sold ($4,375,000  70%) $3,062,500

Copyright © 2018 Pearson Education Ltd.

1a Fair value — book value differential

1b Income from Son (Note: Only include earnings subsequent to the

1c Investment in Son at December 31

2 Consolidation working paper entries:

a Income from Son 196

b Common stock, $10 par — Son 2,000

c Noncontrolling interest share

Copyright © 2018 Pearson Education Ltd.

1 Investment in Ngon (in thousands)

Investment balance December 31, 2016 ($2,400,000  90%) $ 2,160,000

2 Goodwill from new investment

Ngon’s stockholders’ equity after issuance $ 4,800,000

Cost of 100,000 shares $ 2,400,000

1 Son issues 30,000 shares to Pop at $20 per share

2 Son sells 30,000 shares to the public at $20 per share

3 Son sells 30,000 shares to the public; no gain or loss recognized:

Investment in Son 115,200

Book value before issuance ($3,200,000 ´ 80%) $2,560,000

Copyright © 2018 Pearson Education Ltd.

Pam buys shares

1a Percentage ownership after additional investment:

1b Goodwill from additional investment (in thousands):

Book value of interest after sale

*This implies total goodwill is now equal to $114,286.

Outsiders buy shares

2a Percentage ownership after sale:

2b Change in underlying book value of investment in Sun:

Sun’s underlying equity after sale $2,600,000

2c Entry to adjust investment account:

Investment in Sun 160,000

Copyright © 2018 Pearson Education Ltd.

Preliminary computations of fair value — book value differentials:

July 1, 2017 acquisition

1 Income from Son

2017 Income from Son

2 Noncontrolling interest December 31, 2017

3 Preacquisition income (does not appear in income statement)