1

Baker / Lembke / King

9
Consolidation
Ownership
Issues

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Companies,
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Inc., 1999
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Subsidiary Preferred Stock Outstanding
Peerless Products purchased 80 percent of the common
stock of Special Foods on December 31, 19X0, at its
underlying book value of $240,000 and accounts for the
investment using the basic equity method.

Peerless Products earns income from its own operations of

$140,000 in 19X1 and declares dividends of $60,000.

Special Foods reports net income of $50,000 in 19X1 and

declares common dividends of $30,000.

Special Foods issued $100,000 of 12 percent preferred stock

at par value, none of which is purchased by Peerless.

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Subsidiary Preferred Stock Outstanding
Peerless’s Income from Special Foods

Special Foods’ net income $50,000

Less: Preferred dividends ($100,000
x .12) (12,000)
Special Foods’ income accruing to
common shareholders $38,000
Peerless’s proportionate share x .80
Peerless’s income from Special Foods $30,400

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Outstanding
19X1 Peerless Special Eliminations
Item Products Foods Debits Credits Consolidated
Income from
Subsidiary 30,400

Dividends
Declared--Com. (60,000) (30,000)

Investment in
Special Foods 246,400

An entry is required to eliminate

income from Special Foods.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Outstanding
19X1 Peerless Special Eliminations
Item Products Foods Debits Credits Consolidated
Income from
Subsidiary 30,400 30,400

Dividends
Declared--Com. (60,000) (30,000) 24,000

Investment in
Special Foods 246,400 6,400

An entry is required to eliminate

income from Special Foods.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Outstanding

Income to Noncontrolling Interest--19X1

Preferred dividends of Special Foods $12,000

Income assigned to Special Foods’
noncontrolling common shareholders
($38,000 x .20) 7,600
Income to noncontrolling interest $19,600

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Outstanding
19X1 Peerless Special Eliminations
Item Products Foods Debits Credits Consolidated
Income to Non-
controlling
Interest

Dividends
Declared--Pref. (12,000)
--Common (60,000) (30,000) 24,000

Noncontrolling
Interest

An entry is needed to assign income to

noncontrolling interest.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Outstanding
19X1 Peerless Special Eliminations
Item Products Foods Debits Credits Consolidated
Income to Non-
controlling
Interest 19,600

Dividends
Declared--Pref. (12,000) 12,000
--Common (60,000) (30,000) 24,000
6,000 (60,000)
Noncontrolling
Interest 1,600

An entry is needed to assign income to

noncontrolling interest.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Outstanding
19X1 Peerless Special Eliminations
Item Products Foods Debits Credits Consolidated
Retained
Earnings, Jan. 1 300,000 100,000

Investment in
Special Foods 246,400 6,400

Common Stock 500,000 200,000

Noncontrolling
Interest 1,600

An entry is necessary to eliminate

beginning investment in common stock.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Outstanding
19X1 Peerless Special Eliminations
Item Products Foods Debits Credits Consolidated
Retained
Earnings, Jan. 1 300,000 100,000 100,000 300,000

Investment in
Special Foods 246,400 6,400
240,000
Common Stock 500,000 200,000 200,000 500,000

Noncontrolling
Interest 1,600
60,000
An entry is necessary to eliminate
beginning investment in common stock.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Outstanding
19X1 Peerless Special Eliminations
Item Products Foods Debits Credits Consolidated
Preferred Stock 100,000

Noncontrolling
Interest 1,600
60,000

An entry is necessary to eliminate

subsidiary preferred stock

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Outstanding
19X1 Peerless Special Eliminations
Item Products Foods Debits Credits Consolidated
Preferred Stock 100,000 100,000

Noncontrolling
Interest 1,600
60,000
100,000 161,600

An entry is necessary to eliminate

subsidiary preferred stock

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Held by Parent

Peerless Products purchases 60 percent of Special

Foods’ $100,000 par value, 12 percent preferred stock
for $60,000 when issued on January 1, 19X1.

During 19X1, dividends of $12,000 are declared on

the preferred stock. Peerless recognizes $7,200
($12,000 x .60) of dividend income from its
investment in Special Foods’ preferred stock, and the
remaining $4,800 ($12,000 x .40) is paid to the
holders of the other preferred shares.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Held by Parent

Elimination entry needed in the

workpaper prepared at the end of 19X1.

Income from Subsidiary 30,400

Dividends Declared--Common 24,000
Investment in Special Foods Common 6,400

To eliminate income
from subsidiary.

($50,000 -
$12,000) x .80
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
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Subsidiary Preferred Stock Held by Parent

Elimination entry needed in the

workpaper prepared at the end of 19X1.

Dividend Income--Preferred 7,200

Dividends Declared--Preferred 7,200

To eliminate dividend
income from subsidiary
preferred

$12,000 x .60

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Held by Parent

Elimination entry needed in the

workpaper prepared at the end of 19X1.

Income to Noncontrolling Interest 12,400

Dividends Declared--Preferred 4,800
Dividends Declared--Common 6,000
Noncontrolling Interest 1,600

To assign income to
noncontrolling interest

$4,800 + $7,600
$12,000 x .40
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
 17
Subsidiary Preferred Stock Held by Parent

Elimination entry needed in the

workpaper prepared at the end of 19X1.

Common Stock--Special Foods 200,000

Retained Earnings, January 1 100,000
Investment in Special Foods Common 240,000
Noncontrolling Interest 60,000

To eliminate the
beginning investment in
common stock.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock Held by Parent

Elimination entry needed in the

workpaper prepared at the end of 19X1.

Preferred Stock--Special Foods 100,000

Investment in Special Foods Preferred 60,000
Noncontrolling Interest 40,000

To eliminate subsidiary
preferred stock

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock/Special Features

Special Foods issues 100,000 par value, 12 percent

preferred stock on January 1, 19X0, and the stock is
cumulative, nonparticipating, and callable at 105.

On December 31, 19X0, Peerless Products purchases 80

percent of the common stock of Special Foods for
$240,000, and on January 1, 19X1, Peerless purchases 60
percent of the preferred stock for $61,000.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock/Special Features

Par value of Special Foods’ preferred stock

$100,000
Call premium 5,000
Dividends in arrears for 19X0 12,000
Total preferred stock interest,
January 1, 19X1 $117,000

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock/Special Features

Elimination entry needed in the workpaper

prepared as of January 1, 19X1.

Common Stock--Special Foods 200,000

Retained Earnings 83,000
Differential 13,600
Investment in Special Foods Common 240,000
Noncontrolling Interest 56,600
$240,000 -
($283,000 x .80)
$283,000 x .20

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock/Special Features
Only the $83,000 portion of Special
Foods’ retained earnings relating to
the common stock interest is
eliminated in this entry, with the rest
eliminated in the next entry.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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Subsidiary Preferred Stock/Special Features
Because Peerless’s share of
Special Foods’ common stock
interest is $226,400 and the cost of
the investment was $240,000…a
$13,600 differential arises in
consolidation.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

 24
Subsidiary Preferred Stock/Special Features

Elimination entry needed in the workpaper

prepared as of January 1, 19X1.

Preferred Stock--Special Foods 100,000

Retained Earnings 17,000
Investment in Special Foods Preferred 61,000
Additional Paid-In Capital 9,200
Noncontrolling Interest 46,800

($117,000 x .60)
- $61,000
$117,000 x .40

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Chapter Nine

The
End

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999