Chapter FIVE

Consolidation of Less than-Wholly-Owned Subsidiaries Acquired at More than Book

Value

Consolidated Balance Sheet with Majority-Owned Subsidiary

On January 1, 20X1, Peerless acquires 80 percent of the common stock of Special Foods for
$310,000. At that date, the fair value of the noncontrolling interest is estimated to be $77,500.

Peerless records the acquisition on its books with the following entry
Investment in Special Foods 310.000
Cash 310.000
Record purchase of Special Foods stock.

Balance Sheets of Peerless Products and Special Foods,

January 1, 20X1, Immediately after Combination

Peerless Special
Products Foods
Assets
Cash $40.000 $50.000
Accounts Receivable 75.000 50.000
Inventory 100.000 60.000
Land 175.000 40.000
Buildings and Equipment 800.000 600.000
Accumulated Depreciation -400.000 -300.000
Investment in Special Foods
Stock 310.000
Total Assets $1.100.000 $500.000
Liabilities and Stockholders’
Equity
Accounts Payable $100.000 $100.000
Bonds Payable 200.000 100.000
Common Stock 500.000 200.000
 Retained Earnings 300.000 100.000
Total Liabilities and Equity $1.100.000 $500.000

Values of Select Assets of Special Foods

Fair Value
Book Value Fair Value Increment
Inventory $60.000 $65.000 $5.000
Land 40.000 50.000 10.000
Buildings and
Equipment 300.000 360.000 60.000
$400.000 $475.000 $75.000
 Workpaper for Consolidated Balance Sheet,
January 1, 20X1, Date of Combination;
80 Percent Acquisition at More than Book Value
Peerless Special Elimination Entries
Consolidated
Products Foods DR CR
Balance Sheet
Cash 40.000 50.000 90.000
Account Receivable 75.000 50.000 125.000
Inventory 100.000 60.000 5.000 165.000
Investment in Special Food 310.000 240.000 0
70.000
Land 175.000 40.000 10.000 225.000
Building & Equipment 800.000 600.000 60.000 300.000 1.160.000
Less Accumulated
Depreciation (400.000) (300.000) 300.000 (400.000)
Goodwill 12.500 12.500
Total Assets 1.100.000 500.000 387.500 610.000 1.377.500
Account Payable 100.000 100.000 200.000
Bonds Payable 200.000 100.000 300.000
Common Stock 500.000 200.000 200.000 500.000
Retained Earnings 300.000 100.000 100.000 300.000
NCI in NA of Special Food 60.000 77.500
17.500
Total Liabilities & Equity 1.100.000 500.000 300.000 77.500 1.377.500

Consolidated Financial Statement with A Majority-Owned Subsidiary

Parent Company Entries
During 20X1, Peerless makes the usual equity-method entries to record income and dividends
from its subsidiary

Peerless
Products Special Foods
20X1:
Separate operating income, Peerless $ 140.000
Net Income, Special Foods $ 50.000
Dividends 60.000 30.000
20X2:
Separate operating income, Peerless 160.000
Net Income, Special Foods 75.000
Dividends 60.000 40.000

Peerless records the following entries during 20X1:

Investment in Special Foods 40.000

Income from Special Foods 40.000
 Cash 24.000
Investments in Special Foods 24.000

In addition, Peerless must write off a portion of the differential with the following entry:

Income from Special Foods 11.300

Investments in Special Foods 11.300

Book Value Calculations:

NCI 20% + Peerless 80%= Common Stock + Retained Earnings
Original Book Value 60.000 240.000 200.000 100.000
+ Net Income 10.000 40.000 50.000
- Dividends (6.000) (24.000) 30.000
Ending book Value 64.000 256.000 200.000 120.000

Basic Investment Account Elimination Entry:

Common Stock 200.000

Retained Earnings 100.000
Income from Special Foods 40.000
NCI in NI of Special Food 10.000
Dividends declared 30.000
Investment in Special Foods 256.000
NCI in NA of Special Foods 64.000

Excess Value (Differential Calculation

NCI 20% + Peerless 80% = Inventory + Land + Building + Acc. Depr. +Goodwill

Beginning Balance 17.500 70.000 5.000 10.000 60.000 0 12.500

Amortization (2,825) (11.300) (5.000) (6.000) (3.125)

Ending Balance 14.675 58.700 0 10.000 60.000 (6.000) 9,375

Amortized Excess Value Reclassification Entry:

Cost Of Goods Sold 5.000

Depreciation Expense 6.000
Goodwill Impairment Loss 3.125
Income from Special Foods 11.300
NCI in NI of Special Foods 2.825
Excess Value (Differential) Reclassification Entry:

Land 10.000
Building 60.000
Goodwill 9.375
Accumulated Depreciation 6.000
Investment in Special Foods 58.700
NCI in NA of Special Foods 14.675

Investment in Special Food Income from Special Food

310.000
40.000 40.000
24.000
11.300 11.300
314.700 28.700
256.000 40.000
58.700 11.300
0 0

Optional Accumulated Depreciation Elimination Entry:

Accumulated Depreciation 300.000

Building and Equipment 300.000

Second Year of Ownership

Parent Company Entries

Investment in Special Foods 60.000

Income from Special Foods 60.000
Record Peerless’80% share of Special Foods’ 20X2

 Consolidated Net Income and Retained Earnings, 20X1: 80 Percent Acquisition at

More than Book Value

Consolidated net income, 20X1

Peerless' separate operating income $ 140.000
Special Foods net income 50.000
Write-off of differential related to inventory sold in 20X1 (5(000)
Amortization of differential related to buildings and equipment in 20X1 (6.000)
 Goodwill impairment loss (3.125)
Consolidated net income $ 175.875

Income to controling interest, 20X1

Consolidated net income $ 175.875
Income to noncontroling interest (7.175)
Income to controling interest $ 168.700

Consolidated retained earnings, December 31, 20X1

Peerless retained earnings on date of combination, Januari 20X1 $ 300.000
Income to controling interest, 20X1 168.700
Dividends declared by Peerless, 20X1 (60.000)
Consolidated retained earnings, December 31, 20X1 $ 408.700

Cash 32.000
Investments in Special Foods 32.000

Income from Special Foods 4.800

Investments in Special Foods 4.800

Chapter Seven
Intercompany Transfer of Noncurrent Assets and Services
All three transaction are completed in the same accounting period. The gain amounts reported
on the transaction;
Case A
Parent Company $5.000 ($15.000-$10.000)
Subsidiary Company $10.000 ($25.000-$5.000)
Consolidated Entity $15.000 ($25.000-$10.000)

Case B
Only transaction T1 is completed during the current period. The gain amounts reported are:

Parent Company $ -0-

Subsidiary
Corporation -0-
Consolidated Entity -0-

Case C
Only transactions T1 and T2 are completed during the current period. The gain amounts
reported are:

Parent Company $ $5,000 ($15,000 - $10,000)

Subsidiary Corporation -0-
Consolidated Entity -0-
Case D
Only transaction T3 is completed during the current period, T1 and T2 having occurred in a
prior period. The gain amounts reported are:

Parent Company $ -0-

Subsidiary Corporation 10,000 ($25,000 - $15,000)
Consolidated Entity 15,000 ($25,000 - $10,000)

Peerless Products Corporation acquires land for $20,000 on January 1, 20X1, and sells the land
to its subsidiary, Special Foods Incorporated, on July 1, 20X1, for $35,000, as follows:

Peerless records the purchase of the land and its sale:

January 1, 20X1
Land 20.000
Cash 20.000
Record purchase of land.

July 1, 20X1
Cash 35.000
Land 20.000
Gain on Sale of Land 15.000
Record sale of land to Special Foods.

Special Foods records the purchase:

July 1, 20X1
Land 35.000
Cash 35.000
Record purchase of land from Peerless.

The transfer causes the seller to recognize a $15,000 gain and the carrying value of the land to
increase by the same amount
 – The gain must be eliminated in the preparation of consolidated statements and the land
restated from the $35,000 recorded on Special Foods’ books to its original cost of
$20,000
– Eliminating entry in the consolidation workpaper prepared at the end of 20X1:
–
Gain on Sale of Land 15.000

Land 15.000

Eliminate unrealized gain on sale of land.

Intercompany Transfers of Land

Unrealized intercompany gains and losses are eliminated in consolidation in the following
ways:

Downstream Sale – Illustration

1. Peerless Products acquires 80 percent of Special Foods Inc.’s stock on December 31,
20X0, at the stock’s book value of $240,000. The fair value of Special Foods’
noncontrolling interest on that date is $60,000, the book value of those shares.
2. On July 1, 20X1, Peerless sells land to Special Foods for $35,000. It had originally
purchased the land on January 1, 20X1, for $20,000. Special Foods continues to hold
the land through 20X1 and subsequent years.
3. During 20X1, Peerless reports separate income of $155,000, consisting of income from
regular operations of $140,000 and a $15,000 gain on the sale of land; Peerless declares
dividends of $60,000. Special Foods reports net income of $50,000 and declares
dividends of $30,000.
4. Peerless accounts for its investment in Special using the basic equity method, under
which it records its share of Special Foods’ net income and dividends but does not
adjust for unrealized intercompany profits.

Basic equity-method entries—20X1

Cash 24.000
Investment in Special Foods Stock 24.000
Record dividends from Special Foods
 Investment in Special Foods Stock 40.000
Income from Subsidiary 40.000
Record equity-method income

On December 31, 20X1, the investment account on Peerless’s books appears as follows:

Eliminating Entries:

Income from Subsidiary 40.000

Dividends Declared 24.000
Investment in Special Foods Stock 16.000
Eliminate income from subsidiary.

Income to Noncontrolling Interest 10.000

Dividends Declared 6.000
Noncontrolling Interest 4.000
Assign income to noncontrolling interest.
$10,000 = $50,000 x .20
$6,000 = $30,000 x .20

Common Stock—Special Foods 200.000

Retained Earnings, January 1 100.000
Investment in Special Foods Stock 240.000
Noncontrolling Interest 60.000
Eliminate beginning investment balance.

Gain on sale of Land 15.000

Land 15.000
Eliminate unrealized gain on downstream sale of land.

The consolidation workpaper used in preparing consolidated financial statements for 20X1 is
shown in Figure 7–2 in the text.
• Consolidated net income for 20X1
  Noncontrolling interest

Upstream Sale
Use the same example used to illustrate a downstream sale. In this case, Special Foods
recognizes a $15,000 gain from selling the land to Peerless in addition to the $50,000 of income
earned from its regular operations; thus, Special Foods’ net income for 20X1 is $65,000.
Peerless’s separate income is $140,000 and comes entirely from its normal operations

Basic equity-method entries—20X1

Cash 24.000
Investment in Special Foods Stock 24.000
Record dividends from Special Foods

Investment in Special Foods Stock 52.000

Income from Subsidiary 52.000
Record equity-method income

The investment account on Peerless’s books at the end of 20X1:

Eliminating Entries:

Income from Subsidiary 52.000

Dividends Declared 24.000
Investment in Special Foods Stock 28.000
 Eliminate income from subsidiary.

Income to Noncontrolling Interest 10.000

Dividends Declared 6.000
Noncontrolling Interest 4.000
Assign income to noncontrolling interest:
$10,000 = ($65,000 - $15,000) x .20
$6,000 = $30,000 x .20

Common Stock—Special Foods 200.000

Retained Earnings, January 1 100.000
Investment in Special Foods Stock 240.000
Noncontrolling Interest 60.000
Eliminate beginning investment balance.

Gain on Sale of Land 15.000

Land 15.000
Eliminate unrealized gain on upstream sale of land.

The consolidation workpaper prepared at the end of 20X1 appears in Figure 7–3 in the text.

• Consolidated net income for 20X1

• Noncontrolling interest

• Noncontrolling interest
• Eliminating unrealized profits after the first year
In a downstream sale, the following eliminating entry is needed in the consolidation
workpaper each year after the year of the downstream sale of the land, for as long as
the subsidiary holds the land:
Retained Earnings, January 1 15.000
Land 15.000
Eliminate unrealized gain on prior-period downstream
sale of land.

In the upstream case, in the consolidation workpaper prepared in years subsequent to

the intercompany transfer while the land is held by the parent, the unrealized
intercompany gain is eliminated from the reported balance of the land and
proportionately from the subsidiary ownership interests with the following entry:
Retained Earnings, January 1 12.000
Noncontrolling Interest 3.000
Land 15.000
Eliminate unrealized gain on prior-period upstream
sale of land.
Subsequent Disposition of Asset
Unrealized profits on intercompany sales of assets are viewed as being realized at the
time the assets are resold to external parties
– The gain or loss recognized by the affiliate selling to the external party must be
adjusted for consolidated reporting by the amount of the previously unrealized
intercompany gain or loss
– While the seller’s reported profit on the external sale is based on that affiliate’s
cost, the gain or loss reported by the consolidated entity is based on the cost of
the asset to the consolidated entity
– The effects of the profit elimination process must be reversed

Assume that Peerless purchases land from an outside party for $20,000 on January 1,
20X1, and sells the land to Special Foods on July 1, 20X1, for $35,000. Special Foods
subsequently sells the land to an outside party on March 1, 20X5, for $45,000, as
follows:
 Special Foods recognizes a gain on the sale to the outside party of $10,000
– From a consolidated viewpoint, the gain is $25,000 ($45,000 - $20,000)
– Eliminating entry made in the consolidation workpaper prepared at the end of
20X5:

Retained Earnings, January 1 15.000

Gain on Sale of Land 15.000
Adjust for previously unrealized intercompany
gain on sale of land.

Downstream Sale
Peerless sells equipment to Special Foods on December 31, 20X1, for $7,000. The
equipment originally cost Peerless $9,000 when purchased three years before, and is
being depreciated over a total life of 10 years using straight-line depreciation with no
residual value. The book value of the equipment immediately before the sale is $6,300.
The gain recognized by Peerless on the intercompany sale is $700 ($7,000 - $6,300).

Separate-company entries—20X1
– Special Foods
December 31, 20X1
Equipment 7.000
Cash 7.000
Record purchase of equipment.
 – Peerless:
December 31, 20X1 900
Depreciation Expense 900
Accumulated Depreciation
Record 20X1 depreciation expense on equipment sold.

December 31, 20X1

Cash 7.000
Accumulated Depreciation 2.700
Equipment 9.000
Gain on Sale of Equipment 700
Record sale of equipment.