ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-1 Irwin/McGraw-Hill 4 C H A P T E R Consolidated...

ฉ The McGraw-Hill Companies, Inc., 1998

Slide 4-1

Irwin/McGraw-Hill

4

C H A P T E R

Consolidated Financial

Statements and Outside

Ownership


Slide 4-2

Irwin/McGraw-Hill

In a purchase, the amount of the acquired company’s stock that is not acquired by the parent.

The interests of the noncontrolling (non-parent) stockholders must be reflected in the consolidated financial statements.

In a purchase, the amount of the acquired company’s stock that is not acquired by the parent.

The interests of the noncontrolling (non-parent) stockholders must be reflected in the consolidated financial statements.

?

Noncontrolling InterestNoncontrolling Interest


Slide 4-3

Irwin/McGraw-Hill

Consolidation requires the incorporation of 100% of the sub’s net assets into the parent’s financial statement. Even if parent’s ownership < 100%

3 approaches are outlined by the FASB Economic Unit Concept Proportionate Consolidation Concept Parent Company Concept

Consolidation requires the incorporation of 100% of the sub’s net assets into the parent’s financial statement. Even if parent’s ownership < 100%

3 approaches are outlined by the FASB Economic Unit Concept Proportionate Consolidation Concept Parent Company Concept

?

Noncontrolling InterestNoncontrolling Interest


Slide 4-4

Irwin/McGraw-Hill

Accounting for Noncontrolling Interest


On the Balance Sheet:

A credit balance account called Noncontrolling Interest is set up to

recognize the noncontrolling

stockholders’ investment in the subsidiary.

The account appears in the equity section.

On the Balance Sheet:

A credit balance account called Noncontrolling Interest is set up to

recognize the noncontrolling

stockholders’ investment in the subsidiary.

The account appears in the equity section.


Slide 4-5

Irwin/McGraw-Hill



On the Income Statement:

An account called Noncontolling Equity in

Subsidiary Net Income is set up to recognize the

noncontrolling shareholders’ share of the

sub’s net income.

The account appears on the Income Statement.

On the Income Statement:

An account called Noncontolling Equity in

Subsidiary Net Income is set up to recognize the

noncontrolling shareholders’ share of the

sub’s net income.

The account appears on the Income Statement.


Slide 4-6

Irwin/McGraw-Hill

Recommended by the FASB.Recommended by the FASB.

Noncontrolling Interest is a % of the sub’s implied value.

Noncontrolling Interest is a % of the sub’s implied value.

Noncontrolling Interest in Sub Net Income is a % of the sub’s net income less amortization of FMV adjustments

and Goodwill.

Noncontrolling Interest in Sub Net Income is a % of the sub’s net income less amortization of FMV adjustments

and Goodwill.

The sub is viewed as an indivisible unit within the business combination.

The sub is viewed as an indivisible unit within the business combination.

Economic Unit ConceptEconomic Unit Concept


Slide 4-7

Irwin/McGraw-Hill

Proportionate Consolidation Concept

Proportionate Consolidation Concept

Little evidence exists to suggest widespread use of this method.

Little evidence exists to suggest widespread use of this method.

Only the portion of the sub’s assets that are acquired by the parent are

consolidated.

Only the portion of the sub’s assets that are acquired by the parent are

consolidated.

Noncontrolling Interest is not reported under this method.

Noncontrolling Interest is not reported under this method.

This method has been used where control exists, but less than 50% of the

sub has been acquired.

This method has been used where control exists, but less than 50% of the

sub has been acquired.


Slide 4-8

Irwin/McGraw-Hill

Considered to be the most common method in practice.

Considered to be the most common method in practice.

Noncontrolling Interest is a % of the sub’s book value at the balance sheet

date.

Noncontrolling Interest is a % of the sub’s book value at the balance sheet

date.

Noncontrolling Interest in Sub Net Income is a % of the sub’s net income.

Noncontrolling Interest in Sub Net Income is a % of the sub’s net income.

Noncontrolling Interest may appear in the equity section or between the equity

section and the liability section.

Noncontrolling Interest may appear in the equity section or between the equity

section and the liability section.

Parent Company ConceptParent Company Concept


Slide 4-9

Irwin/McGraw-Hill

Noncontrolling InterestExample


Let’s look at an example using

the Parent Company Concept.


Slide 4-10

Irwin/McGraw-Hill



On 1/1/98, Jumbo

purchases 80% of Li’l

Bit for $800,000

cash.

On 1/1/98, Jumbo

purchases 80% of Li’l

Bit for $800,000

cash.


Slide 4-11

Irwin/McGraw-Hill

Record the initial investment on Jumbo’s books.

Record the initial investment on Jumbo’s books.




Slide 4-12

Irwin/McGraw-Hill

Goodwill computation:

This computation will be needed again when the consolidation is

done in years subsequent to the year of acquisition

.




Slide 4-13

Irwin/McGraw-Hill

As of the date of acquisition, the balances

for each company are

entered into the worksheet.

As of the date of acquisition, the balances

for each company are

entered into the worksheet.

Enter the consolidation entries on the

worksheet.

Enter the consolidation entries on the

worksheet.


Slide 4-14

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Slide 4-15

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Slide 4-16

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Slide 4-17

Irwin/McGraw-Hill



Let’s do the consolidation at the end of

1998.


Slide 4-18

Irwin/McGraw-Hill

First, update Jumbo’s numbers for the

equity method entries.

First, update Jumbo’s numbers for the

equity method entries.


Slide 4-19

Irwin/McGraw-Hill

Li'l Bit's Net Income for 1998 30.00$ % of Li'l Bit owned by Jumbo 80%Equity Adjustment 24.00$

Li'l Bit's Net Income for 1998 30.00$ % of Li'l Bit owned by Jumbo 80%Equity Adjustment 24.00$




Slide 4-20

Irwin/McGraw-Hill

$60,000 dividends were paid to Jumbo by Li’l Bit during

the year.

$60,000 dividends were paid to Jumbo by Li’l Bit during

the year.




Slide 4-21

Irwin/McGraw-Hill

Goodwill & FMV adjustment amortization is computed as follows:

Goodwill & FMV adjustment amortization is computed as follows:




Slide 4-22

Irwin/McGraw-Hill

Assume that the building has a

remaining useful life of 10 years

and the equipment has a remaining useful

life of 4 years.

Goodwill is amortized over

10 years.



Amortization computation:


Slide 4-23

Irwin/McGraw-Hill

Amortization computation:




Slide 4-24

Irwin/McGraw-Hill

Note Jumbo’s updated

numbers.Post

consolidation entries to the worksheet.

Note Jumbo’s updated

numbers.Post

consolidation entries to the worksheet.


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Slide 4-31

Irwin/McGraw-Hill

Companies often acquire controlling interest in other companies a piece at a time; i.e. “in steps”.

Under the Parent Company Concept, each investment is viewed as a separate purchase, with its own cost allocations and amortization.

Companies often acquire controlling interest in other companies a piece at a time; i.e. “in steps”.

Under the Parent Company Concept, each investment is viewed as a separate purchase, with its own cost allocations and amortization.

Step AcquisitionsStep Acquisitions


Slide 4-32

Irwin/McGraw-Hill

When control of a subsidiary is acquired at a time subsequent to the beginning of

the sub’s fiscal year, the income statement accounts are consolidated as

if the acquisition was made at the beginning of the period.

A line-item is included in the income statement for the sub’s income prior to

the date of acquisition.

Preacquisition IncomePreacquisition Income


Slide 4-33

Irwin/McGraw-Hill

End of Chapter 4End of Chapter 4

Ten cups of Ten cups of this stuff this stuff and I still and I still

don’t get itdon’t get it!!

ฉ The McGraw-Hill Companies, Inc., 1998 Slide 4-1 Irwin/McGraw-Hill 4 C H A P T E R Consolidated...

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