Slide AKT 307 AKL 1 9

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Consolidation

Ownership

Issues

_{Electronic Presentation by}

9

Douglas Cloud

Pepperdine University

(2)

Consolidation Ownership Issues

• Subsidiary Preferred Stock

• Changes in Parent’s Ownership in Subsidiary

due to:

– Parent’s Purchase from Non affiliate – Parent’s Sale to Nonaffiliate

– Subsidiary’s Sale to Nonaffiliate

(3)

Subsidiary Preferred Stock Outstanding

PT Induk purchased 80 percent of the common stock of PT Anak on December 31, 20X0, at its book value of Rp240,000,000 and

accounts for the investment using the basic equity method.

PT Induk purchased 80 percent of the common stock of PT Anak on December 31, 20X0, at its book value of Rp240,000,000 and

accounts for the investment using the basic equity method.

PT Induk earns income from its own operations of

Rp140,000,000 in 20X1 and declares dividends of Rp60,000,000. PT Induk earns income from its own operations of

Rp140,000,000 in 20X1 and declares dividends of Rp60,000,000.

PT Anak reports net income of Rp50,000,000 in 20X1 and declares common dividends of Rp30,000,000.

On January 1, 20X1, PT Anak issued Rp100,000,000 of 12 percent preferred stock at par value, none of

which is purchased by PT Induk.

On January 1, 20X1, PT Anak issued Rp100,000,000 of 12 percent preferred stock at par value, none of

(4)

PT Anak’ net income, 20X1 Rp50,000,000 Less: Preferred dividends

(Rp100,000,000 x .12) (12,000,000) PT Anak’ income accruing to

common shareholders Rp38,000,000 PT Induk’s proportionate share x .80 PT Induk’s income from PT Anak Rp30,400,000

PT Induk’s Income from PT Anak PT Induk’s Income from PT Anak

Subsidiary Preferred Stock Outstanding

(5)

Preferred dividends of PT Anak Rp12,000,000 Income assigned to PT Anak’

noncontrolling common shareholders

(Rp38,000,000 x .20) 7,600,000 Income to noncontrolling interest Rp19,600,000

Income to Noncontrolling Interest Income to Noncontrolling Interest

Subsidiary Preferred Stock Outstanding

(6)

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated Income from

Subsidiary 30,400

Dividends

An entry is required to eliminate

income from PT Anak.

An entry is required to eliminate

income from PT Anak.

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

(7)

Income from

Subsidiary 30,400 (1) 30,400

Dividends Declared—

Preferred (12,000)

Common (60,000 (30,000) (1) 24,000

Investment in

PT Anak 246,400 (1) 6,400

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

)

(8)

Income to

Non-An entry is needed to assign income

An entry is needed to assign income

to noncontrolling interest.

An entry is needed to assign income

to noncontrolling interest.

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

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Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

(10)

Retained

Earnings, Jan. 1 300,000 100,000

Investment in

PT Anak 246,400 (1) 6,400

Common Stock 500,000 200,000

Noncontrolling

Interest (2) 1,600

An entry is necessary to eliminate the

beginning investment in common stock.

beginning investment in common stock. An entry is necessary to eliminate the

An entry is necessary to eliminate the

beginning investment in common stock.

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

(11)

Retained

Earnings, Jan. 1 300,000 100,000 (3) 100,000 300,000

Investment in

PT Anak 246,400 (1) 6,400 (3)240,000

Common Stock 500,000 200,000 (3) 200,000 500,000

Noncontrolling

Interest (2) 1,600 (3) 60,000

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

(12)

Preferred Stock 100,000

Noncontrolling

Interest (2) 1,600 (3) 60,000

An entry is necessary to eliminate

subsidiary preferred stock

An entry is necessary to eliminate

subsidiary preferred stock

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

(13)

Preferred Stock 100,000 (4) 100,000

Noncontrolling

Interest (2) 1,600 (3) 60,000

(4) 100,000 161,600

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

(14)

PT Induk purchase 60% of PT Anak,

Rp100,000,000 par value, 12 % Preferred

Stock for Rp60,000,000.

Dividends on P/S is Rp12,000,000.

P/S Dividend recognized by

PT Induk

: Rp7,200,000

NCI

: Rp4,800,000

Subsidiary Preferred Stock Held by

(15)

Subsidiary Preferred Stock Held by Parent

Elimination entry needed in the workpaper prepared at the end of 20X1.

E(5) Income from Subsidiary 30,400,000

Dividends Declared--Common 24,000,000 Investment in PT Anak

Common 6,400,000 Eliminate income from subsidiary.

(16)

Subsidiary Preferred Stock Held by Parent

Elimination entry needed in the

workpaper prepared at the end of 20X1. Elimination entry needed in the

workpaper prepared at the end of 20X1.

E(6) Dividend Income--Preferred 7,200,000

Dividends Declared--Preferred 7,200,000 Eliminate dividend income from

subsidiary preferred.

(17)

Subsidiary Preferred Stock Held by Parent

E(7) Income to Noncontrolling

Interest 12,400,000

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E(8) Common Stock--PT Anak 200,000,000 Retained Earnings, January 100,000,000

Investment in PT Anak

Common 240,000,000

Noncontrolling Interest 60,000,000 Eliminate beginning investment in

common stock.

Subsidiary Preferred Stock Held by Parent

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E(9) Preferred Stock--PT Anak 100,000,000 Investment in PT Anak

Preferred 60,000,000 Noncontrolling Interest 40,000,000 Eliminate subsidiary preferred stock.

workpaper prepared at the end of 20X1.

Subsidiary Preferred Stock Held by Parent

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PT Anak Points About the Eliminating Entries



PT Induk’s 60 percent share of PT Anak’

preferred stock is eliminated against the

preferred stock investment account. The

remaining preferred stock is included in the

noncontrolling interest account.



PT Induk’s dividend income from its

investment in PT Anak’ preferred stock is

eliminated against its share of PT Anak’

dividends declared.

Continued

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PT Anak Points About the Eliminating Entries



The income assigned to the noncontrolling

interest includes income of PT Anak accruing

to both preferred and common shareholders

other than PT Induk. Similarly, the total

noncontrolling interest includes PT Anak’

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On January 1, 20X0, PT Anak has Rp200,000,000 of common stock outstanding and retained earnings of Rp60,000,000. The following data relates to PT Anak:

Period Net Income Dividends Ending Book Value

20X0 Rp40,000,000 -0- Rp300,000,000 20X1 50,000,000 Rp30,000,000 320,000,000 20X2 75,000,000 40,000,000 355,000,000

PT Induk purchases its 80 percent interest in PT Anak in several blocks.

Parent’s Purchase of Additional Shares

(23)

Ownership

Purchase Percentage Book

Date Purchased Cost Value Differential

1/1/X0 20 Rp 56,000,000 Rp 52,000,000 Rp 4,000,000 12/31/X0 10 35,000,000 30,000,000 5,000,000 1/1/X2 50 185,000,000 160,000,000 25,000,000 80 Rp276,000,000 Rp242,000,000 Rp34,000,000

Note that PT Induk does not gain control until January 1, 20X2. Note that PT Induk does not gain

control until January 1, 20X2.

Parent’s Purchase of Additional Shares

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Investment in PT Anak Stock

20X0

1/1 Purchase shares 56,000,000 12/31 Equity-method

income (20%) 8,000,000 12/31 Purchase shares 35,000,000

Balance 99,000,000

Parent’s Purchase of Additional Shares

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20X1

Balance 99,000,000 12/31 Dividends

received 9,000,000

20X1

12/31 Equity-method

income (30%) 15,000,000

Parent’s Purchase of Additional Shares

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20X2

Balance 105,000,000 12/31 Dividends

received 32,000,000

20X2

1/1 Purchase shares185,000,000 12/31 Equity-method

income (80%) 60,000,000

Parent’s Purchase of Additional Shares

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Parent’s Purchase of Additional Shares

E(12) Income from Subsidiary 60,000,000

Dividends Declared 32,000,000 Investment in PT Anak

Stock 28,000,000 Eliminate income from subsidiary.

The consolidation workpaper prepared at the end of the year includes:

(28)

Parent’s Purchase of Additional Shares

E(14) Income to Noncontrolling

(29)

Parent’s Purchase of Additional Shares

E(14) Common Stock--PT Anak 200,000,000 Retained Earnings, January 120,000,000

(30)

• On Dec 31, 20X0, PT Anak has 20,000,000

common Shares outstanding with par value of

Rp200,000,000 and R/E of Rp100,000,000.

• PT Induk acquired 80%, buying 16,000,000

C/S at book value of Rp240,000,000.

• 20X1: PT Anak Net Income of

Rp50,000,000; dividends of Rp30,000,000

(31)

Investment Balance per Dec 31, 20X1:

Rp240,000,000 + Rp40,000,000 – Rp24,000,000

= Rp256,000,000.

Journal of Selling Shares:

Cash 19,000,000

Investment in SF Stock

16,000,000*

Gain of Sale

3,000,000

(32)

Eliminating entries at Dec 31, 20X2

Gain on Sale of Investment Rp3,000,000

APIC Rp3,000,000

Subsequent Eliminating entries

Retained Earnings Rp3,000,000

(33)

• On Jan 1, 20X2, PT Anak issued 5,000,000 additional shares at Rp20,000 per share, totaling Rp100,000,000. • PT Induk proportion down to 64%, yet BV of investment

increase to Rp268,800,000. • The increase is recorded as

Investment in PT Anak

Stock Rp12,800,000

APIC Rp12,800,000

• If less than book value?

Nonaffiliate

(34)

• If the 5,000,000 additional PT Anak shares

were all bought by PT Induk

• Total investment in PT Anak now is

Rp356,000,000

• PT Induk proportion share increase by 84%,

BV increase by Rp352,800,000.

• Yet, the price paid and increase in book value

differs by Rp100,000,000 – (Rp352,800,000 –

256,000,000) = Rp3,200,000.

Nonaffiliate

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• Purchasing treasury shares

• On 1 Jan 20X2, PT Anak purchase 1,000,000

T/S from nonaffiliate for Rp20,000.

• PT Induk interest in PT Anak:

(16,000,000/19,000,000) – 84,21%.

• PT Induk’ investment BV in PT Anak :

84,21% x Rp300,000,000 = Rp252,630,000

• Different of BV: Rp256,000,000 -

(36)

• Journal to record the BV decrease

R/E Jan 1 3,370,000

Investment in PT Anak Stock 3,370,000 • Eliminating entries

C/S – SF 200,000,000 R/E, Jan 1 120,000,000

T/S 20,000,000

Investment in PT Anak Stock 252,630,000

(37)

• On 1 Jan 20X2, PT Anak repurchase 4,000,000 T/S from parents for Rp20,000.

• PT Induk interest in PT Anak : (12,000,000/16,000,000) = 75%.

• PT Induk’ investment BV in PT Anak : 75% x Rp240,000,000 = Rp180,000,000

• Decrease of Investment BV: Rp256,000,000 - Rp180,000,000 = Rp76,000,000

• Gain of Sale of investment: Rp80,000,000 – Rp76,000,000= Rp4,000,000

• Eliminating entries?

(38)

• Eliminating entries

Gain on Sale of Investment 4,000,000

APIC 4,000,000 C/S – SF 200,000,000

R/E, Jan 1 120,000,000

(39)

Alternative Ownership Structures

A Company

B Company C Company

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Alternative Ownership Structures

A Company

(b) Multilevel Ownership

B Company

(41)

Alternative Ownership Structures

A Company

(c) Reciprocal Ownership

(42)

• This means that when consolidated

statements are prepared, the statements will

include companies in which the parent has

only an indirect investment along with

(43)

• The amount of income and net assets to be

assigned to the controlling and

noncontrolling shareholders, and the

amount of unrealized profits and losses to

be eliminated, must be determined at each

level of ownership.

(44)

Multilevel Ownership and Control

• Consolidation proceeds from the lowest

level to the highest in these cases. In a

(45)

Subsidiary Stock Dividends

• Subsidiary dividends payable in shares of

subsidiary’s common stock require slight changes in the elimination entries used in preparing

consolidated financial statements. • Because stock dividends are issued

proportionally to all common stockholders, the relative interests of the controlling and

(46)

• While the carrying amount of the investment on the books of the parent also is unaffected by a

stock dividend, the stockholders’ equity accounts of the subsidiary do change, although total

stockholders’ equity does not.

• The stock dividend represents a permanent

capitalization of retained earnings, thus decreasing retained earnings and increasing capital stock and, perhaps, additional paid-in capital.