Chapter 3

The Reporting Entity and the

Consolidation of
Less-than-Wholly-Owned
Subsidiaries with No
Differential

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 3-1

Understand and explain the

usefulness and limitations of
consolidated
financial statements.

3-2
 Consolidation: The Concept

 Parent creates or gains control of the subsidiary.

 The result: a single reporting entity.

P
S
3-3
Review

How do we report the results of subsidiaries?

Parent
Company

80% 51% 21%

Sub A Sub B Sub C

Consolidation Equity Method

(plus the Equity Method)
3-4
 Consolidated Financial Statements

Consolidated financial statements present the

financial position and results of operations for
 a parent (controlling entity) and
 one or more subsidiaries (controlled entities)
 as if the individual entities actually were a single
company or entity.

3-5
 Benefits of Consolidated Financial Statements

 Presented primarily for those parties having a

long-run interest in the parent company:
 shareholders,
 long-term creditors, or
 other resource providers.
 Provide a means of obtaining a clear picture of the
total resources of the combined entity that are
under the parent's control.

3-6
 Limitations of Consolidated Financial Statements

 Results of individual companies not

disclosed (hides poor performance).
 Financial ratios are not necessarily
representative of any single company in the
consolidation.
 Similar accounts of different companies may
not be entirely comparable.
 Information is lost any time data sets are
aggregated.

3-7
 Subsidiary Financial Statements

 Creditors, preferred stockholders, and

noncontrolling common stockholders of subsidiaries
are most interested in the separate financial
statements of the subsidiaries in which they have an
interest.
 Because subsidiaries are legally separate from their
parents,
 the creditors and stockholders of a subsidiary generally
have no claim on the parent, and
 the stockholders of the subsidiary do not share in the
profits of the parent.

3-8
 Consolidated Financial Statements – Exception (Overview)

 An investment entity does not consolidate its

subsidiaries and does not apply IFRS 3 (PSAK 22)
Business Combinations when it obtains control of
an entity.
 Instead, an investment entity is required to measure
subsidiaries at fair value through profit or loss in
accordance with IFRS 9 (PSAK 55)

3-9
 Consolidated Financial Statements – Exception (Overview)

 An investment entity is an entity that:

 Obtains funds from one or more investors for the
purpose of providing those investor(s) with professional
investment management services;
 Commits to its investor(s) that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income or both; and
 Measures and evaluates the performance of
substantially all of its investments on a fair value basis

3-10
Learning Objective 3-3

Understand and explain

differences in the
consolidation process when
the subsidiary is not wholly
owned.

3-11
 Noncontrolling Interest
 Shareholders of the subsidiary other than the parent
are referred to as “noncontrolling” shareholders.
 Noncontrolling interest refers to the claim of these
shareholders on the income and net assets of the
subsidiary.

NCI Parent

<50% >50%

Sub
3-12
 Noncontrolling Interest (NCI)
 What is a noncontrolling interest (NCI)?
 Voting shares not owned by the parent company

Two Issues:
NCI Parent (1) Should 100% of the
financial statements
<50% >50% be consolidated?
(2) Where to report NCI
Sub in the financial
statements?

3-13
 Issue 1: Should 100% be Consolidated?

 Full consolidation is required

 This means two special accounts appear in
consolidated statements:
 NCI in Net Income of Sub
 Like an “expense” in the consolidated income
statement
 “Reported income that doesn’t belong to us.”
 NCI in Net Assets of Sub
 Equity of unrelated owners
 “Net assets on our balance sheet not belonging to us.”

3-14
Non-controlling Interest

Statement of Financial Position

Assets Liabilities
Current Assets A Current Liabilities
Fixed Assets B Non-current liabilities
Non-current assets C Total Liabilities X

Equity
Share Capital P
Share Premium Q
Retained Earnings R

Equity attributable to Parent Y=P+Q+R

Non-controlling Interest Z

Total Assets A+B+C Total Liabilities and Equity X+Y+Z

 Noncontrolling Interest

 Computation of income to the

noncontrolling interest
 In uncomplicated situations, it is a simple
proportionate share of the subsidiary’s net
income.
 Presentation
 the term “consolidated net income” be applied to the
income available to all stockholders,
 with the allocation of that income between the
controlling and noncontrolling stockholders shown.

3-16
Non-Controlling Interest

Profit or Loss Statement

Revenues
COGS
Gross Margin
Operating Expenses
Operating Income
Interest income/(expenses)
Share of results of associated companies
Profit Before Tax
Income Tax
Profit for the Year Z

Shareholders of the Company X

Non controlling Interest Y
X+Y=Z
 Noncontrolling Interest

PSAK 22 par 19 (IFRS 3) allows NCI to be measured in either of two ways

Non-controlling interests

Measured at Fair value Measured as a proportion

at acquisition date of the recognized amounts
(include goodwill) of the identifiable assets as
at acquisition date
“ Fair value basis”

Tan, Lim & Lee Chapter 4 © 2015

3-18
 Noncontrolling Interest
• Under the fair value basis:
– FV is determined by either the active market prices of subsidiary’s
equity share at acquisition date or other valuation techniques
– FV per share of NCI may differ from parent because of control
premium paid by parent (e.g. 20% premium over market price to
gain control)
– NCI comprises of 3 items:

Non – controlling
interests

Share of
Share of book value unamortized Share of
of net assets FV adjustment unimpaired goodwill
(FV - BV)

Tan, Lim & Lee Chapter 4 © 2015

3-19
 Noncontrolling Interest
• Under the 2nd option:
– NCI is a proportion of the acquiree’s identifiable net assets (i.e. not
full fair value)
– NCI comprises of 2 items:

Non – controlling
interests

Share of
Share of book value unamortized
of identifiable net assets of FV adjustments
(FV- BV)

Tan, Lim & Lee Chapter 4 © 2015

3-20
 Noncontrolling Interest
NCI measured as a
NCI measured at FV proportion of the
acquiree’s identifiable
net assets

Book value of net assets

Fair value – Book value of

net assets

Goodwill

Tan, Lim & Lee Chapter 4 © 2015

3-21
 Noncontrolling Interest
The FV of NCI that owned 10% of Subsidiary A as at 31 Dec
20x1(Acquisition date) was $25,000. The financial statements
of Subsidiary A as at acquisition date are as shown below.
Subsidiary A had unrecognized intangible assets with fair
value of $40,000. Tax rate is 20%. Determine NCI’s good will
as at acquisition date.
Subsidiary A’s Statement of Financial Position as at 31 December 20x1:

Net assets 160,000

Equity 140,000
Share Capital 20,000
Retained Earnings 160,000

Tan, Lim & Lee Chapter 4 © 2015

3-22
 Noncontrolling Interest

Fair value of NCI 25,000

Fair value of identifiable net assets
Book value of equity 160,000
Fair value of intangible assets 40,000
Deferred tax on intangible assets (8,000) 192,000

NCI's share of FV of identifiable net assets (10%) 19,200

NCI's goodwill (25,000 - 19,200) 5,800

Under alternative basis where NCI are measured as a proportion of the recognized
amounts of the identifiable assets as at acquisition date:
 NCI’s goodwill is zero
 Amount to be recognized as NCI is $19,200 only

Tan, Lim & Lee Chapter 4 © 2015

3-23
 Consolidation Process
Legal entities Economic entity

Parent’s Subsidiaries' Consolidation adjustments Consolidated

Financial + Financial +/- and eliminations = financial
Statements Statements statements

• Consolidation is the process of preparing and presenting the

financial statements of a group as an economic entity
• No ledgers for group entity
• Consolidation worksheets are prepared to:
– Combine parent’s and subsidiaries financial statements
– Adjust or eliminate effects of intra-group transactions and balances
– Allocate profit to non-controlling interests

Tan, Lim & Lee Chapter 3 © 2015 24

Practice Quiz Question #6

The noncontrolling interest in a

corporation can best be describe as
a. a group of disinterested shareholders
who rarely vote on company issues.
b. all employees below the manager level.
c. all shareholders other than the parent
company.
d. a group of investors who plan to sell
their stock within the next twelve
months .
e. none of the above.

3-25
Practice Quiz Question #6 Solution

The noncontrolling interest in a

corporation can best be describe as
a. a group of disinterested shareholders
who rarely vote on company issues.
b. all employees below the manager level.
c. all shareholders other than the parent
company.
d. a group of investors who plan to sell
their stock within the next twelve
months .
e. none of the above.

3-26
Learning Objective 3-4

Make calculations and

prepare basic elimination
entries for the consolidation
of a less-than-wholly-owned
subsidiary.

3-27
 Summary of differences in consolidation

Wholly Owned Partially Owned

Subsidiary Subsidiary

Investment = No
Book Value Chapter 2 Chapter 3 Differential

Investment >
Book Value Chapter 4 Chapter 5 Differential

No NCI NCI
Shareholders Shareholders

3-28
 Illustration of consolidated net income and
consolidated retained earnings

Push Corporation acquires 80 percent of the stock of Shove Company for an

amount equal to 80 percent of Shove’s total book value. During 20X1, Shove
reports net income of $25,000, while Push reports net income of $120,000,
including equity-method income from Shove of $20,000 ($25,000 x .80).
Consolidated net income for 20X1 is computed and allocated as follows:

Push’s net income $120,000

Less: Equity-method income from Shove (20,000)
Shove’s net income 25,000
Consolidated net income $125,000
Income attributable to noncontrolling interest (5,000)
Income attributable to controlling interest $120,000

4-29
 Illustration of consolidated net income and
consolidated retained earnings
Net income and dividends during the two years following acquisition are:
Push Shove
Retained earnings, January 1, 20X1 $400,000 $250,000
Net income, 20X1 120,000 25,000
Dividends, 20X1 (30,000) (10,000)
Retained earnings December 31, 20X1 $490,000 $265,000
Net income, 20X2 148,000 35,000
Dividends, 20X2 (30,000) (10,000)
Retained earnings, December 31, 20X2 $608,000 $290,000

Consolidated retained earnings at December 31, 20X2, two years after the
date of combination, is computed as follows, assuming no differential:

Push’s retained earnings, December 31, 20X2 $608,000

Equity accrual from Shove since acquisition
($25,000 + $35,000) x .80 (48,000)
Push’s retained earnings from its own operations,
December 31, 20X2 $560,000
Push’s share of Shove’s net income since acquisition
$60,000 x .8 48,000
Consolidated retained earnings, December 31, 20X2 $608,000
4-30
 Group Exercise 1: Basic Elimination Entry
The following information is given:
1) Photo acquires 70% of Snap for $182,000 on Jan 1, 20X4
2) Snap’s net income for 20X4 is $160,000
3) Photo’s net income for 20X4 from its own separate operations is
$500,000.
4) Snap’s declares dividends of $12,000 during 20X4.
5) Snap has 10,000 shares of $4 par stock outstanding that were
originally issued at $14 per share.
6) Snap’s beginning balance in Retained Earnings for 20X4 is $120,000.
Book Value Calculations
Investment Additional
Account Common Paid-in Retained =
NCI (30%) (70%) Stock Capital Earnings
Beginning Balance $78,000 $182,000 $40,000 $100,000 $120,000
+ Net Income
- Dividends
Ending Balance
3-31
 Group Exercise 1: Basic Elimination Entry
The following information is given:
1) Photo acquires 70% of Snap for $182,000 on Jan 1, 20X4
2) Snap’s net income for 20X4 is $160,000
3) Photo’s net income for 20X4 from its own separate operations is
$500,000.
4) Snap’s declares dividends of $12,000 during 20X4.
5) Snap has 10,000 shares of $4 par stock outstanding that were
originally issued at $14 per share.
6) Snap’s beginning balance in Retained Earnings for 20X4 is $120,000.
Book Value Calculations
Investment Additional
Account Common Paid-in Retained =
NCI (30%) (70%) Stock Capital Earnings
Beginning Balance $78,000 $182,000 $40,000 $100,000 $120,000
+ Net Income 48,000 112,000 160,000
- Dividends
Ending Balance
3-32
 Group Exercise 1: Basic Elimination Entry
The following information is given:
1) Photo acquires 70% of Snap for $182,000 on Jan 1, 20X4
2) Snap’s net income for 20X4 is $160,000
3) Photo’s net income for 20X4 from its own separate operations is
$500,000.
4) Snap’s declares dividends of $12,000 during 20X4.
5) Snap has 10,000 shares of $4 par stock outstanding that were
originally issued at $14 per share.
6) Snap’s beginning balance in Retained Earnings for 20X4 is $120,000.
Book Value Calculations
Investment Additional
Account Common Paid-in Retained =
NCI (30%) (70%) Stock Capital Earnings
Beginning Balance $78,000 $182,000 $40,000 $100,000 $120,000
+ Net Income 48,000 112,000 160,000
- Dividends (3,600) (8,400)
(12,000)

3-33
 Group Exercise 1: Basic Elimination Entry
The following information is given:
1) Photo acquires 70% of Snap for $182,000 on Jan 1, 20X4
2) Snap’s net income for 20X4 is $160,000
3) Photo’s net income for 20X4 from its own separate operations is
$500,000.
4) Snap’s declares dividends of $12,000 during 20X4.
5) Snap has 10,000 shares of $4 par stock outstanding that were
originally issued at $14 per share.
6) Snap’s beginning balance in Retained Earnings for 20X4 is $120,000.
Book Value Calculations
Investment Additional
Account Common Paid-in Retained =
NCI (30%) (70%) Stock Capital Earnings
Beginning Balance $78,000 $182,000 $40,000 $100,000 $120,000
+ Net Income 48,000 112,000 160,000
- Dividends (3,600) (8,400)
(12,000)

Ending Balance $122,400 $285,600 $40,000 $100,000 $268,0003-34

 Group Exercise 1: Basic Elimination Entry
Book Value Calculations
Investment Additional
Account Common Paid-in Retained =
NCI (30%) (70%) Stock Capital Earnings
Beginning Balance $78,000 $182,000 $40,000 $100,000 $120,000
+ Net Income 48,000 112,000 160,000
Dividends (3,600) (8,400) (12,000)
Ending Balance $122,400 $285,600 $40,000 $100,000 $268,000

Basic Elimination Entry

Common Stock
Investment in Snap Add PIC – CS
Beg. Bal. Retained Earnings, BB
70% Div. Income from Snap
182,000 NCI in Net Income
70% NI 8,400 Dividends Declared
Investment in Snap
112,000 NCI in Net Assets
End. Bal. 3-35
 Group Exercise 1: Basic Elimination Entry
Book Value Calculations
Investment Additional
Account Common Paid-in Retained =
NCI (30%) (70%) Stock Capital Earnings
Beginning Balance $78,000 $182,000 $40,000 $100,000 $120,000
+ Net Income 48,000 112,000 160,000
Dividends (3,600) (8,400) (12,000)
Ending Balance $122,400 $285,600 $40,000 $100,000 $268,000

Basic Elimination Entry

Common Stock
Investment in Snap Add PIC – CS
Beg. Bal. Retained Earnings, BB
70% Div. Income from Snap
182,000 NCI in Net Income
70% NI 8,400 Dividends Declared
Investment in Snap
112,000 NCI in Net Assets
End. Bal. 3-36
 Group Exercise 1: Basic Elimination Entry
Book Value Calculations
Investment Additional
Account Common Paid-in Retained =
NCI (30%) (70%) Stock Capital Earnings
Beginning Balance $78,000 $182,000 $40,000 $100,000 $120,000
+ Net Income 48,000 112,000 160,000
Dividends (3,600) (8,400) (12,000)
Ending Balance $122,400 $285,600 $40,000 $100,000 $268,000

Basic Elimination Entry

Common Stock 40,000
Investment in Snap Add PIC – CS 100,000
Beg. Bal. Retained Earnings, BB 120,000
70% Div. Income from Snap 112,000
182,000 NCI in Net Income 48,000
70% NI 8,400 Dividends Declared 12,000
Investment in Snap 285,600
112,000 NCI in Net Assets 122,400
End. Bal. 3-37
Learning Objective 3-5

Prepare a consolidation
worksheet for a less-than-
wholly-owned
consolidation.

3-38
 Consolidation of < Wholly Owned Subs

 The worksheet is modified when the parent

owns less than 100% of the subsidiary.
 The total “Net Income” is divided between:
 the noncontrolling interest (NCI shareholders) and
 the controlling interest (the parent company)
Elimination Entries
Pinkett, Inc. Smith, Inc. DR CR Consolidated
Income Statement
Sales $ 840,000 $ 300,000
Less: COGS (516,000) (156,000)
Less: Depreciation Expense (12,000) (10,000)
Less: Other Expenses (192,000) (98,000)
Income from Smith, Inc. 32,400 32,400
Net Income $ 152,400 $ 36,000 32,400
NCI in Net Income 3,600
CI In Net Income $ 152,400 $ 36,000 36,000
3-39
Practice Quiz Question #9

The primary difference in the

worksheet when consolidating a less
than wholly owned subsidiary is
a. only the parent’s % is consolidated.
b. extra columns are added to split the
subsidiary into two or more pieces.
c. extra rows are added to divide the net
income and net assets of the sub
between the parent and NCI
shareholders.
d. There is no difference.

3-40
Practice Quiz Question #9 Solution

The primary difference in the

worksheet when consolidating a less
than wholly owned subsidiary is
a. only the parent’s % is consolidated.
b. extra columns are added to split the
subsidiary into two or more pieces.
c. extra rows are added to divide the net
income and net assets of the sub
between the parent and NCI
shareholders.
d. There is no difference.

3-41
 Group Exercise 2: Consolidation < 100%
Elimination Entries
Pinkett, Inc. Smith, Inc. DR CR Consolidated
Income Statement
Sales $ 840,000 $ 300,000
Less: COGS (516,000) (156,000)
Less: Depreciation expense (12,000) (10,000)
Less: Other Expenses (192,000) (98,000)
Income from Smith, Inc. 32,400
Net Income $ 152,400 $ 36,000
NCI in Net Income Assume Pinkett purchases 90%
CI in Net Income $ 152,400 $ 36,000
of Smith at $118,800 at 1/1/X8
Statement of Retained Earnings
Balances, 1/1/X8 $ 124,800 $ 72,000
Add: Net Income 152,400 36,000 REQUIRED
Less: Dividends (108,000) (12,000)
Balances, 12/31/X8 $ 169,200 $ 96,000
• Prepare an analysis of the
Balance Sheet
Cash $ 58,800 $ 48,000 investment for 20X8.
Accounts Receivable 114,000 66,000
Inventory 204,000 90,000 • Prepare all consolidation
Investment in Sub 140,400
Property & Equipment 336,000 210,000 entries as of 12/31/X8.
Accumulated Depreciation (144,000) (30,000)
Total Assets $ 709,200 $ 384,000 • Prepare a consolidation
Payables & Accruals $ 168,000 84,000
worksheet at 12/31/X8.
Long-term Debt 360,000 144,000
Common Stock 12,000 60,000
Retained Earnings 169,200 96,000
NCI in Net Assets
Total Liabilities & Equity $ 709,200 384,000
3-42
 Group Exercise 2: Solution
Book Value Calculations
Parent’s Subsidiary’s Equity Accounts
NCI Investment Common Retained =
(10%) Account (90%) Stock Earnings
NCI (10%) (90%) Stock Earnings
Balances, 1/1/X8
+ Net Income
 Dividends
Balances, 12/31/X8

3-43
 Group Exercise 2: Solution
Book Value Calculations
Parent’s Subsidiary’s Equity Accounts
NCI Investment Common Retained =
(10%) Account (90%) Stock Earnings
NCI (10%) (90%) Stock Earnings
Balances, 1/1/X8 13,200 118,800 60,000 72,000
+ Net Income 3,600 32,400 36,000
 Dividends (1,200) (10,800) (12,000)
Balances, 12/31/X8 15,600 140,400 60,000 96,000

Basic Elimination Entry

Common Stock
Retained Earnings, BB
Income from Smith
NCI in Net Income
Dividends Declared
Investment in Smith
NCI in Net Assets

3-44
 Group Exercise 2: Solution
Book Value Calculations
Parent’s Subsidiary’s Equity Accounts
NCI Investment Common Retained =
(10%) Account (90%) Stock Earnings
Balances, 1/1/X8 13,200 118,800 60,000 72,000
+ Net Income 3,600 32,400 36,000
 Dividends (1,200) (10,800) (12,000)
Balances, 12/31/X8 15,600 140,400 60,000 96,000

Basic Elimination Entry

Common Stock
Retained Earnings, BB
Income from Smith
NCI in Net Income
Dividends Declared
Investment in Smith
NCI in Net Assets

3-45
 Group Exercise 2: Solution
Book Value Calculations
Parent’s Subsidiary’s Equity Accounts
NCI Investment Common Retained =
(10%) Account (90%) Stock Earnings
Balances, 1/1/X8 13,200 118,800 60,000 72,000
+ Net Income 3,600 32,400 36,000
 Dividends (1,200) (10,800) (12,000)
Balances, 12/31/X8 15,600 140,400 60,000 96,000

Basic Elimination Entry

Common Stock 60,000
Retained Earnings, BB 72,000
Income from Smith 32,400
NCI in Net Income 3,600
Dividends Declared 12,000
Investment in Smith 140,400
NCI in Net Assets 15,600

3-46
 Group Exercise 2: Solution
Don’t forget the accumulated depreciation elimination entry:

Accumulated Depreciation 20,000

Buildings and Equipment 20,000

Property, Plant & Equipment Accumulated Depreciation

20,000
210,000

3-47
 Group Exercise 2: Solution
Don’t forget the accumulated depreciation elimination entry:

Accumulated Depreciation 20,000

Buildings and Equipment 20,000

Property, Plant & Equipment Accumulated Depreciation

20,000
210,000

20,000 20,000
0

190,000

Shows the Buildings and Equipment “as if” they have been
recorded on the Sub’s books as new assets at book value.
3-48
 Group Exercise 2: Solution
Elimination Entries
Pinkett, Inc. Smith, Inc. DR CR Consolidated
Income Statement
Sales $ 840,000 $ 300,000
Less: COGS (516,000) (156,000)
Less: Depreciation expense (12,000) (10,000)
Less: Other Expenses (192,000) (98,000)
Income from Smith, Inc. 32,400
Net Income $ 152,400 $ 36,000
NCI in Net Income
CI in Net Income $ 152,400 $ 36,000

Statement of Retained Earnings

Balances, 1/1/X8 $ 124,800 $ 72,000
Add: Net Income 152,400 36,000
Less: Dividends (108,000) (12,000)
Balances, 12/31/X8 $ 169,200 $ 96,000

Balance Sheet
Cash $ 58,800 $ 48,000
Accounts Receivable 114,000 66,000
Inventory 204,000 90,000
Investment in Sub 140,400
Property & Equipment 336,000 210,000
Accumulated Depreciation (144,000) (30,000)
Total Assets $ 709,200 $ 384,000

Payables & Accruals $ 168,000 84,000

Long-term Debt 360,000 144,000
Common Stock 12,000 60,000
Retained Earnings 169,200 96,000
NCI in Net Assets
Total Liabilities & Equity $ 709,200 384,000

3-49
 Group Exercise 2: Solution
Elimination Entries
Pinkett, Inc. Smith, Inc. DR CR Consolidated
Income Statement
Sales $ 840,000 $ 300,000
Less: COGS (516,000) (156,000)
Less: Depreciation Expense (12,000) (10,000)
Less: Other Expenses (192,000) (98,000)
Income from Smith, Inc. 32,400 32,400
Net Income $ 152,400 $ 36,000 32,400 0
NCI in Net Income 3,600
CI in Net Income $ 152,400 $ 36,000 36,000 0

Statement of Retained Earnings

Balances, 1/1/X8 $ 124,800 $ 72,000 72,000
Add: Net Income 152,400 36,000 36,000 0
Less: Dividends (108,000) (12,000) 12,000
Balances, 12/31/X8 $ 169,200 $ 96,000 108,000 12,000

Balance Sheet
Cash $ 58,800 $ 48,000
Accounts Receivable 114,000 66,000
Inventory 204,000 90,000
Investment in Sub 140,400 140,400
Property & Equipment 336,000 210,000 20,000
Accumulated Depreciation (144,000) (30,000) 20,000
Total Assets $ 709,200 $ 384,000 20,000 160,400

Payables & Accruals $ 168,000 84,000

Long-term Debt 360,000 144,000
Common Stock 12,000 60,000 60,000
Retained Earnings 169,200 96,000 108,000 12,000
NCI in Net Assets 15,600
Total Liabilities & Equity $ 709,200 384,000 168,000 27,600

3-50
 Group Exercise 2: Solution
Elimination Entries
Pinkett, Inc. Smith, Inc. DR CR Consolidated
Income Statement
Sales $ 840,000 $ 300,000 $ 1,140,000
Less: COGS (516,000) (156,000) (672,000)
Less: Depreciation Expense (12,000) (10,000) (22,000)
Less: Other Expenses (192,000) (98,000) (290,000)
Income from Smith, Inc. 32,400 32,400
Net Income $ 152,400 $ 36,000 32,400 0 $ 156,000
NCI in Net Income 3,600 (3,600)
CI in Net Income $ 152,400 $ 36,000 36,000 0 $ 152,400

Statement of Retained Earnings

Balances, 1/1/X8 $ 124,800 $ 72,000 72,000 $ 124,800
Add: Net Income 152,400 36,000 36,000 0 152,400
Less: Dividends (108,000) (12,000) 12,000 (108,000)
Balances, 12/31/X8 $ 169,200 $ 96,000 108,000 12,000 $ 169,200

Balance Sheet
Cash $ 58,800 $ 48,000 $ 106,800
Accounts Receivable 114,000 66,000 180,000
Inventory 204,000 90,000 294,000
Investment in Sub 140,400 140,400
Property & Equipment 336,000 210,000 20,000 526,000
Accumulated Depreciation (144,000) (30,000) 20,000 (154,000)
Total Assets $ 709,200 $ 384,000 140,400 $ 952,800

Payables & Accruals $ 168,000 84,000 $ 252,000

Long-term Debt 360,000 144,000 504,000
Common Stock 12,000 60,000 60,000 12,000
Retained Earnings 169,200 96,000 108,000 12,000 169,200
NCI in Net Assets 15,600 15,600
Total Liabilities & Equity $ 709,200 384,000 168,000 27,600 $ 952,800

3-51
Appendix 3B

Understand and explain the

differences in theories of
consolidation.

3-52
 Different Approaches to Consolidation

 Theories that might serve as a basis for

preparing consolidated financial statements:
 Proprietary theory
 Parent company theory
 Entity theory
 With the issuance of ASC 805, the FASB’s
approach to consolidation now focuses on the
entity theory.

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 Proprietary Theory

 Views the firm as an extension of its

owners.
 Assets and liabilities of the firm are
considered to be those of the owners.
 Results in a pro rata consolidation where
the parent consolidates only its
proportionate share of a less-than-wholly
owned subsidiary’s assets, liabilities,
revenues, and expenses.

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 Parent Company Theory

 Recognizes that although the parent does not

have direct ownership or responsibility, it
has the ability to exercise effective control
over all of the subsidiary’s assets and
liabilities, not simply a proportionate share.
 Separate recognition is given, in the
consolidated financial statements, to the
noncontrolling interest’s claim on the net
assets and earnings of the subsidiary.

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 Entity Theory

 Focuses on the firm as a separate economic

entity rather than on the ownership rights
of the shareholders.
 Emphasis is on the consolidated entity itself,
with the controlling and noncontrolling
shareholders viewed as two separate
groups, each having an equity in the
consolidated entity.

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Recognition of Subsidiary Income

3-57
 Entity Theory

 All of the assets, liabilities, revenues, and

expenses of a less-than-wholly owned
subsidiary are included in the consolidated
financial statements, with no special
treatment accorded either the controlling or
noncontrolling interest.

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Reporting Net Assets of the Subsidiary

3-59
 Current Practice

 IFRS 3 consolidation follows largely an entity-

theory approach.

3-60
 Practice Quiz Question #1
 On January 3, 20X9, Redding Company acquired 80 percent of Frazer
Corporation's common stock for $344,000 in cash. At the acquisition date,
the book values and fair values of Frazer's assets and liabilities were
equal, and the fair value of the NCI was equal to 20 percent of the total
book value of Frazer. The stockholders' equity accounts of the two
companies at the acquisition date are:

 NCI was assigned income of $11,000 in Redding's consolidated income

statement for 20X9. What amount will be assigned to the NCI on January
3, 20X9, in the consolidated balance sheet?
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 Practice Quiz Question #1
 On January 3, 20X9, Redding Company acquired 80 percent of Frazer
Corporation's common stock for $344,000 in cash. At the acquisition date,
the book values and fair values of Frazer's assets and liabilities were
equal, and the fair value of the NCI was equal to 20 percent of the total
book value of Frazer. The stockholders' equity accounts of the two
companies at the acquisition date are:

 NCI was assigned income of $11,000 in Redding's consolidated income

statement for 20X9. What amount will be assigned to the NCI on January
3, 20X9, in the consolidated balance sheet? $86,000
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 Practice Quiz Question #2
 On January 3, 20X9, Redding Company acquired 80 percent of Frazer
Corporation's common stock for $344,000 in cash. At the acquisition date,
the book values and fair values of Frazer's assets and liabilities were
equal, and the fair value of the NCI was equal to 20 percent of the total
book value of Frazer. The stockholders' equity accounts of the two
companies at the acquisition date are:

 What will be the amount of net income reported by Frazer Corporation in

20X9? 

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 Practice Quiz Question #2
 On January 3, 20X9, Redding Company acquired 80 percent of Frazer
Corporation's common stock for $344,000 in cash. At the acquisition date,
the book values and fair values of Frazer's assets and liabilities were
equal, and the fair value of the NCI was equal to 20 percent of the total
book value of Frazer. The stockholders' equity accounts of the two
companies at the acquisition date are:

 What will be the amount of net income reported by Frazer Corporation in

20X9? $55,000

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 Practice Quiz Question #3
On Jan 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's
voting stock, at underlying book value. The fair value of the noncontrolling
interest was equal to 10 percent of the book value of Kaiser at that date.
Wilhelm uses the equity method in accounting for its ownership of Kaiser. On
Dec 31, 20X9, the trial balances of the two companies are as follows:

what amount would be reported as total assets in the consolidated balance sheet at Dec 31, 20X9? 
 Practice Quiz Question #3
On Jan 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's
voting stock, at underlying book value. The fair value of the noncontrolling
interest was equal to 10 percent of the book value of Kaiser at that date.
Wilhelm uses the equity method in accounting for its ownership of Kaiser. On
Dec 31, 20X9, the trial balances of the two companies are as follows:

what amount would be reported as total liabilities in the consolidated balance sheet at Dec 31,
20X9? 
 Practice Quiz Question #3
On Jan 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's
voting stock, at underlying book value. The fair value of the noncontrolling
interest was equal to 10 percent of the book value of Kaiser at that date.
Wilhelm uses the equity method in accounting for its ownership of Kaiser. On
Dec 31, 20X9, the trial balances of the two companies are as follows:

what amount would be reported as retained earnings in the consolidated balance sheet at Dec 31,
20X9? 
 Practice Quiz Question #3

Sub Parent
110,000 250000
10,000 27000
60,000 95000
Parent Sub console
40,000 128,000
200,000 140,000 340,000
350,000 250,000 600,000
CS 50,000 (118,000) (80,000) (198,000)
RE 100,000 162,000
income to NCI 36,000
594,000   310,000   742,000
income fr sub 4,000
dividend 10,000 100,000 80,000 180,000
NCI 18,000 100,000 50,000 150,000
investment 162,000 100,000 50,000 100,000
294,000 130,000 294,000
18,000
594,000   310,000   742,000
 Practice Quiz Question #3
On Jan 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's
voting stock, at underlying book value. The fair value of the noncontrolling
interest was equal to 10 percent of the book value of Kaiser at that date.
Wilhelm uses the equity method in accounting for its ownership of Kaiser. On
Dec 31, 20X9, the trial balances of the two companies are as follows:

what amount would be reported as NCI in the consolidated balance sheet at Dec 31, 20X9?