Assessment 2: Consolidations

 

Complete two exercises in accounting for outside ownership (noncontrolling interest) and eliminating intercompany transactions, resulting in unrealized gains and losses.

Introduction

It is not necessary for a parent company to acquire all of a subsidiary’s stock in order to form a business combination. In fact, when one company acquires control of a subsidiary company, the ownership interest of the parent company is sometimes less than 100 percent. All that is required in a combination is control over the decision-making process; this is usually achieved by acquiring a majority of the voting shares.

Ownership of any subsidiary stock that is retained by outside, unrelated parties is called noncontrolling interest. A consolidation may become quite complex when there is noncontrolling interest. The involved subsidiary owners and their equity must be recognized by the parent company in its consolidated financial statements. The valuation of the subsidiary’s assets and liabilities may also be a challenge with there is noncontrolling interest and the acquisition method is followed. Clearly, noncontrolling interest issues are often present, and a central issue is how the financial statements are presented for both entities.

In Assessment 1, you analyzed the deferral and subsequent recognition of gains that were created by inventory transfers between two affiliated companies in connection with equity method accounting. In that case, intra-entity profits were not realized until the earning process culminated in a sale to an unrelated party. A similar process can be applied to transactions between companies within a business combination. Be mindful that sales within a single economic entity create neither profits nor losses.

The opportunity for direct acquisition of assets (e.g., inventory) is often a reason for the creation of the business combination. Because the transaction was not made with an outside, unrelated party, the sales and purchases created by the transfer must be accounted for by accountants with each entity. This is true regardless of the asset, be it inventory, land, or depreciable assets.

Preparation

The following resources are required to complete the assessment.

• Assessment 2 Problems [DOCX].
• Assessment 2 Problem Templates [DOCX].

Complete the problems in the Assessment 2 Problems document using the related template, both of which are linked in the Required Resources for this assessment. All financial information and applicable instructions are provided.

In these problems you will:

• Determine consolidated balances.
• Calculate intra-entity transfer account balances.

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:

• Competency 1: Consolidate financial statement information.

  Calculate intra-entity transfer account balances.

• Competency 2: Evaluate the influence of global money markets on financial statements.

  Determine consolidated balances.

• Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

  Communicate results from accounting calculations accurately and clearly.

Assessment 2 Problem Templates

Problem

1

Determine consolidated balances.

Acquisition date subsidiary fair value (given)
Book value of subsidiary (given)
Fair value in excess of book value
Allocations to specific accounts based on difference between fair value and book value:
Land
	Buildings and equipment
		Copyright
Notes payable :
Value
Allocations
	Total

Annual excess amortizations:

Buildings and equipment

Copyright

Total

Notes payable

Consolidated Totals:

· Revenues:

·

Cost of goods sold

:

·

Depreciation expense

:

·

Amortization expense

:

·

Interest expense

:

· Equity in income of Sun:

· Net income:

· Retained earnings, 1/1:

· Noncontrolling interest in income of subsidiary:

· Dividends paid:

· Retained earnings, 12/31:

· Current assets:

·

Investment in Sun

:

· Land:

· Buildings and equipment (net):

· Copyright:

· Total assets:

· Accounts payable:

· Notes payable:

· Noncontrolling interest in subsidiary:

· Common stock:

· Additional paidin capital:

· Retained earnings, 12/31:

· Total liabilities and equities:

Acquisition Method

Copyright

Accounts	Prather	Staffer	Consolidation Debit	Consolidation Credit	Noncontrolling Interest	Consolidated Totals
Revenues
Cost of goods sold
Depreciation expense
Amortization expense
Interest expense
Equity in income of Sun
Separate company net income
Consolidated net income
Noncontrolling interest in Sun’s income
Controlling interest in CNI
Retained earnings 1/1
Net income (above)
Dividends paid
Retained earnings 12/31
Current assets
Investment in Sun
Land
Buildings and equipment (net)
Total assets
Accounts payable
Notes payable
NCI in Sun 1/1
NCI in Sun 12/31
Common stock
Additional paid-in capital
Retained earnings 12/31(above) …
Total liability and stockholders’ equity

Answer the questions about Panther and Staffer here.

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Assessment

2

: Consolidations

Prather, Inc., buys 80 percent of the outstanding common stock of Sun Corporation on January

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, 2018, for $1,496,000 cash. At the acquisition date, Sun’s total fair value, including the noncontrolling interest, was assessed at $1,870,000 although Sun’s book value was only $1,320,000. Also, several individual items on Sun’s financial records had fair values that differed from their book values as follows. Note: Credits are indicated by parentheses.

			Book Value	Fair Value
	Land	$ 132,000	$495,000
Buildings and equipment (10-year remaining life)	605,000	550,000
Copyright (20-year life)	220,000	440,000
Notes payable (due in 8 years)		(286,000)	(264,000)

For internal reporting purposes, Prather, Inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31, 2018, for both companies. Using the acquisition method, determine consolidated balances for this business combination (through either individual computations or the use of a worksheet).

11,000

–0–

572,000

–0–

Land

–0–

(286,000)

Prather	Sun
Revenues	$(2,992,000)	$(1,188,000)
	Cost of goods sold	1,540,000	847,000
Depreciation expense		572,000	22,000
Amortization expense					–0–		11,000
Interest expense	96,800
Equity in income of Sam	(231,000)
Net income	$ (1,014,200)	$ (297,000)
Retained earnings, 1/1/18.	$(2,783,000)	$(968,000)
Net income (above)	(1,014,200)	(297,000)
Dividends paid	143,000
Retained earnings, 12/31/18	$ (3,225,200)	$ (1,122,000)
Current assets	$ 2,123,000	$1,161,600
Investment in Sam	1,612,600
642,400	132,000
Buildings and equipment (net)	1,929,400	583,000
Copyright	209,000
Total assets	$6,307,400	$2,085,600
Accounts payable	$(420,200)	$(325,600)
Notes payable	(1,012,000)
Common stock	(660,000)	(220,000)
Additional paid-in capital	(990,000)	(132,000)
Retained earnings (above)	(3,225,200)	(1,122,000)
Total liabilities and equities	$(6,307,400)	$(2,085,600)

Panther Corporation acquired 80 percent of the outstanding voting stock of Staffer Company on January 1, 2018, for $924,000 in cash and other consideration. At the acquisition date, Panther assessed Staffer’s identifiable assets and liabilities at a collective net fair value of $1,155,000 and the fair value of the 20 percent noncontrolling interest was $231,000. No excess fair value over book value amortization accompanied the acquisition.

The following selected account balances are from the individual financial records of these

two companies as of December 31, 2019:

Cost of goods sold

–0–

Panther	Staffer
Sales .	$1,408,000	$792,000
638,000	433,400
Operating expenses	330,000	231,000
Retained earnings, 1/1/19	1,628,000	396,000
Inventory	761,200	242,000
Buildings (net)	787,600	345,400
Investment income	Not given

Each of the following problems is an independent situation:

a. Assume that Panther sells Staffer inventory at a markup equal to 40 percent of cost. Intra-entity transfers were $198,000 in 2018 and $242,000 in 2019. Of this inventory, Staffer retained and then sold $61,600 of the 2018 transfers in 2019 and held $84,000 of the 2019 transfers until 2020. On consolidated financial statements for 2019, determine the balances that would appear for the following accounts:

· Cost of Goods Sold

· Inventory

· Noncontrolling Interest in Subsidiary’s Net Income

b. Assume that Staffer sells inventory to Panther at a markup equal to 40 percent of cost. Intra-entity transfers were $110,000 in 2018 and $176,000 in 2019. Of this inventory, $46,200 of the 2018 transfers were retained and then sold by Panther in 2019, whereas $77,000 of the 2019 transfers were held until 2020. On consolidated financial statements for 2019, determine the balances that would appear for the following accounts:

· Cost of Goods Sold
· Inventory
· Noncontrolling Interest in Subsidiary’s Net Income

c. Panther sells Staffer a building on January 1, 2018, for $176,000, although its book value was only $110,000 on this date. The building had a five-year remaining life and was to be depreciated using the straight-line method with no salvage value. Determine the balances that would appear on consolidated financial statements for 2019 for the following accounts:

· Buildings (net)

· Operating Expenses

· Noncontrolling Interest in Subsidiary’s Net Income
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