Acquired Subsidiaries with Noncontrolling Interest



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Acct 415/515 Prof. Teresa Gordon

Acquired Subsidiaries with Noncontrolling Interest

There are several conceptual issues to resolve:


Parent can use cost method or equity method to account for the investment (but only equity method acceptable for publicly-issued parent-company only financial statements)
Presentation: Currently a choice between parent company and economic unit perspectives (see table below)
Measurement: Full or partial revaluation of acquired assets and liabilities currently acceptable. Goodwill (under current GAAP) is only recognized to the extent that is has been acquired by the parent company but FASB’s current thinking will be the pure economic unit approach.





Parent Company Concept


Economic Unit Concept

Emphasis

Reporting on the parent’s financial position and results of operation to the parent’s stockholders

Reporting on the economic entity’s financial position and results of operation. The entity under common management is the focus, not the stockholders of either the controlling or noncontrolling interests.

Balance Sheet

Noncontrolling Interest is presented as either a liability or between liabilities and stockholders’ equity

Noncontrolling Interest is presented as a separate category within stockholders’ equity

Income Statement

Noncontrolling interest in earnings is presented as a deduction in arriving at net income.

Noncontrolling interest in subsidiary net income is shown as portion of total net income (similar to income to preferred stockholders)

Statement of changes in stockholders’ equity

Only portion of changes pertaining to the controlling interest

Retained earnings excludes amounts related to the noncontrolling interest

Revaluation of assets and liabilities

Only parent’s portion of excess value (over book value) of identifiable acquired assets and liabilities is recognized in consolidation.

Only acquired goodwill (parent’s share) is recognized in consolidation.



100% of excess over book value is recognized for acquired assets and liabilities. Goodwill

Pure Economic Unit approach recognizes 100% of implied goodwill. Economic unit approach that is currently GAAP recognizes only parent’s share of goodwill.



Partial of Full Revaluation of ACQUIRED
Subsidiary’s Assets & Liabilities


Partial revaluation

Only parent’s share of assets and liabilities are revalued. The noncontrolling interest’s share stays at book value

This is consistent with the Parent Company Concept.

Full revaluation

Assets and liabilities are revalued at their market or fair values at acquisition date.

This is consistent with the Economic Unit Concept.
Example:

Parent acquires an 80% interest in the common stock of the subsidiary for $85,000. The subsidiary’s plant assets are worth $10,000 more than book value. The related assets are being amortized over a remaining useful life of 10 years. The book value of the net assets of the subsidiary is $90,000.

Partial Revaluation:
Full Revaluation:

Goodwill – a separate issue under GAAP as it currently exists (2003)



Parent Company’s Books:

Nonconrolling Interest – Created Subsidiary (old exam question)
Paxel created Saxel in 1982 by purchasing 8,000 shares of Saxel’s $5 par common stock. Another investor purchased 2,000 shares. All shares were issued at par value. For 2004, Saxel reported $60,000 of net income and declared dividends of $10,000. At the beginning of the year, Saxel’s balance sheet reported $800,000 in assets and $350,000 in liabilities.

Required:


a. What amounts will appear on Paxel’s financial statements at 12/31/04 related to its investment in Saxel?





Equity Method

Cost Method

Investment in Saxel






Revenue account on Income Statement






Title of account:

Title of account:

b. Compute the noncontrolling interest in Saxel’s earnings and net assets:




Noncontrolling Interest in Net Assets

Noncontrolling Interest in Earnings







Exercises

Parent Company’s Books:



Noncontrolling Interest – Acquired Subsidiary (old exam question)
Compete the matrix provided for the following facts. Show your computations.

On 1/1/04, Patz acquired 70% of Satz’s outstanding common stock for $500,000 cash. For 2004, Satz reported $100,000 of net income and declared dividends of $30,000 for the year.


a. What amount appears in Patz’s December 31, 2004 balance sheet if it accounts for its investment in Satz using the cost method?
b. What amount appears in Patz’s 2004 income statement if it accounts for its investment in Satz using the cost method? (Show the title of the account)
Under the equity method, assume that in 2004, Patz recorded $10,000 of amortization of cost in excess of book value in its general ledger.
c. What amount appears in Patz’s December 31, 2004 balance sheet if it accounts for its investment in Satz using the equity method?
d. What amount appears in Patz’s 2004 income statement if it accounts for its investment in Satz using the equity method? (Show the title of the account).





Cost Method

Equity Method

Investment in Satz
(Balance Sheet Account)


a.

c.

Revenue account

b.

d.




Account title:

Account title:





Parent Company vs. Economic Unit Concepts (old exam question)

On 7/1/04, Pane acquired 60% of Sill’s outstanding common stock for $480,000 cash. The book value of Sill’s net assets is $500,000. Sill’s only over-or undervalued asset or liability is a building that has a book value of $700,000 and a current value of $900,000. The building has a remaining life of 10 years.


a. Goodwill = $_______________________ (Parent Company or GAAP Economic Unit Concept)

b. Under the parent company concept, at what amount would the noncontrolling interest be reported in the consolidated balance sheet at acquisition (7/1/04)?

c. Under the GAAP economic unit concept, at what amount would the noncontrolling interest be reported in the consolidated balance sheet at acquisition (7/1/04)?

Assume that Sill reported $200,000 in net income for the year ended 6/30/05 and declared $30,000 in dividends. The building is being depreciated over 20 years.


d. Under the parent company concept, at what amount would the noncontrolling interest be reported in the consolidated balance sheet one year after acquisition (6/30/05)?

e. Under the GAAP economic unit concept, at what amount would the noncontrolling interest be reported in the consolidated balance sheet one year after acquisition (6/30/05)?





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