Question

Q1. Does a non-controlling shareholder have access to any information other than the consolidatedfinancial statements to determine how well the subsidiary is doing? Explain.

Q2 Acquisition with Differential:

Road Corporation acquired all of Conger Corporation’s voting shares on January 1, 20X2, for $470,000. At that time Conger reported common stock outstanding of $80,000 and retained earnings of $130,000. The book values of Conger’s assets and liabilities approximated fair values, except for land, which had a book value of $80,000 and a fair value of $100,000, and buildings, which had a book value of $220,000 and a fair value of $400,000. Land and buildings are the only noncurrent assets that Conger holds.

Required   

a. Compute the amount of goodwill at the date of acquisition.

   b. Give the eliminating entry or entries required immediately following the acquisition to prepare a consolidated balance sheet.    

3. Pass Journal Entry under the following conditions where: “Parent No Longer Holds an Equity Interest” And “Parent Maintains an Equity Interest”

1. On December 31, 20X9, P Ltd Investments in Q Ltd account has a balance of $75,000. P Ltd’s 80% interest in Q Ltd has a fair value of $110,000. On January 1, 20X0, P Ltd sells all of its Q Ltd shares for $90,000. How should P Ltd account for this transaction?

2. And if P Ltd sells half (remaining 40%) of Q Ltd’s shares for $50,000. How should P Ltd account for this transaction?

Q4. Assume that a Parent Co. owns 100% of Sub Co. and had the following intercompany transactions during the year:

1. Parent loaned $500 to Sub there is no interest revenue or interest expense associated with this loan.
2. Parent made a sale to Sub for $400 cash. The inventory had originally cost Parent $220. Sub then sold that same inventory to an outsider for $500.
3. Parent made a sale to Sub for $300 cash. The inventory had originally cost Parent $180. Sub has not yet sold that same inventory to an outsider. (Don’t forget equity method entry!)

What consolidation worksheet entries would be made?

Q5. Explain the considerations to be made in the following conditions:

1. Negative retained earnings of subsidiary at acquisition
2. Subsidiary’s disposal of differential-related assets
3. Inventory-related differential
4. Fixed Assets-related differential

Answer 1

1. A  non controlling interest is the ownership interest in a subsidiary company, which is not owned by the parent company but the outside investors. In general circumstances, a minority interest in a subsidiary company owns below 50% of the total number of outstanding shares.

The parent company reports the financial results of the subsidiary company in its consolidated balance sheet to present a claim on assets by minority shareholders or in its consolidated income statement as a percentage of profits belonging to minority shareholders. Minority interest shareholders have less or which we can say minimal influence on a firm’s management and policies, and restricted voting rights, but they offer significant growth for the firm with their experience and capital.

There are several different rules for consolidating subsidiaries based on ownership percentage and influence. A minority shareholder might still have considerable influence in corporate decisions even though he doesn’t own a majority of the stock but the chances of this are very low and due to the changes in corporate structure this seems a possible target now.

2.a.

Book value of Conger's net assets:

Common stock outstanding$ 100,000

Retained earnings $130,000

$ 230,000

Fair value increment:Land ($120,000 – $100,000) $200,000

Buildings ($408,000 – $222,000)186,000 $206,000

Fair value of net assets $ 436,000

Fair value of consideration given ($487,000)

Goodwill$51,000

b.Common stock $100,000

Retained earnings $130,000

Investment in Conger Corporation $230,000

Land $20,000

Buildings $186,000

Goodwill $51,000

Investment in Conger Corporation$ $257,000

3.a.  “Parent No Longer Holds an Equity Interest”

Sale proceeds $90,000   

Less: Carrying value of the investment $ (50,000)

Gain on sale $40,000   

Cash $90,000   

Investment in Sub $50,000

Gain on sale $40,000

Parent Maintains an Equity Interest”

80% with OCI Investments

PARENT

Investment in Sub –

OCI from Sub

Unrealized Gain on Investments

Elimination Entry

OCI from Sub

Investment in Sub

OCI to NCI

NCI in NA in Sub

4.a. b. and c.

To eliminate intercompany loans:

Loan Payable $500

Loan Receivable $500

To eliminate sale from Parent to Sub to Outsider:

Sales $400

Cost of Goods Sold $400

To eliminate sale from Parent to Sub, not yet to Outsider:

Sales $300

Cost of Goods Sold $200

Inventory $100

5.a.Rather than debiting retained earnings in the entry to eliminate the stockholders' equity balances of the subsidiary, the amount must be credited.

b.When a subsidiary disposes of an asset, it recognizes a gain or loss on the disposal equal to the difference between the proceeds received and the book value of the asset given up. If the asset is one to which a differential is assigned in the consolidation, both equity-method income recorded by the parent and consolidated net income is affected.The unamortized portion of a positive purchase differential that applies to the asset sold or written off must be treated under the equity method as a reduction of both the parent’s income from the subsidiary and the investment account. • In consolidation, the unamortized part of the purchase differential must be recognized as an adjustment to the gain or loss on the disposal of the asset.

c.Any inventory-related differential is assigned to inventory for as long as the inventory units are held by the subsidiary. In the period in which the inventory units are sold, the inventory-related differential is assigned to cost of goods sold.

d. A purchase differential related to land held by a subsidiary is added to the land balance in the consolidation each time a consolidated balance sheet is prepared.If the subsidiary sells the land to which the differential relates, the differential is treated in the consolidation, as an adjustment to the gain or loss on the sale of the land in the period of the sale.