Acct 415/515 Prof. Teresa Gordon

Accounting for Subsidiaries
that are not Wholly-Owned

Conceptual Issue: Proportional vs. Full Consolidation

Proportional Consolidation

The parent accounts includes only its ownership percentage of individual assets, liabilities, etc., in the consolidated financial statements

Rationale:

1. Consolidated statements are an extension of parent’s financial statements

2. In substance (although not legally) parent has a percentage interest in each of the sub’s assets, liabilities, revenues, etc.

3. Consolidated statements should be same whether parent purchases 75% of the assets or 75% of common stock.

Full Consolidation

Parent consolidates 100% of individual assets, liabilities, revenues, etc.

Rationale:

1. Legally parent does not have a separable percentage interest in the individual assets, etc.

2. The parent controls all the sub’s activities even though ownership is less than 100%.

3. The purpose of consolidated statements is to present operations as though a single company exists.

Conceptual Issue: Classification of Noncontrolling Interest

Parent Company Concept

/ Economic Unit Concept
Emphasis / Reporting on the parent’s financial position and results of operation to the parent’s stockholders / Reporting on the economic entity’s financial position and results of operation. The entity under common management is the focus, not the stockholders of either the controlling or noncontrolling interests.
Balance Sheet / Noncontrolling Interest is presented as either a liability or between liabilities and stockholders’ equity / Noncontrolling Interest is presented as a separate category within stockholders’ equity
Income Statement / Noncontrolling interest in earnings is presented as a deduction in arriving at net income. / Noncontrolling interest in subsidiary net income is shown as portion of total net income (similar to income to preferred stockholders)
Statement of changes in stockholders’ equity / Only portion of changes pertaining to the controlling interest / Retained earnings excludes amounts related to the noncontrolling interest

Illustration – Difference Between Approaches

Pox Inc. / Rox Inc. / Sox Inc.

Revenues

/ 2,000 / 1,000 / 300
Costs & expenses / -1,800 / -900 / -200
Net income / 200 / 100 / 100

Pox owns 51% of Sox

Rox owns 49% of Sox

Pox’s revenues EXCLUDE dividends from Rox and Sox and share of reported earnings of Rox and Sox (neither cost nor equity method adjustments)

Rox’s revenues EXCLUDE dividends from Sox and share of reported earnings of Sox (neither cost nor equity method adjustments)

Show FOUR possible presentations that Pox and Rox could make to their respective stockholders

Rox Inc. and Sox Inc.
Unconsolidated / Proportional / Full – PC / Full – EU
Revenues
Expenses
Equity in net income of sub
Less NCI in net income of sub
Net Income
Division of net income:
To CI
To NCI
Pox Inc. and Sox Inc.
Unconsolidated / Proportional / Full – PC / Full – EU
Revenues
Expenses
Equity in net income of sub
Less NCI in net income of sub
Net Income
Division of net income:
To CI
To NCI

Exercise

Parent Company’s Books:

Noncontrolling Interest – Created Subsidiary (old exam question)

Paxel created Saxel in 1982 by purchasing 8,000 shares of Saxel’s $5 par common stock. Another investor purchased 2,000 shares. All shares were issued at par value. For 2004, Saxel reported $60,000 of net income and declared dividends of $10,000. At the beginning of the year, Saxel’s balance sheet reported $800,000 in assets and $350,000 in liabilities.

Required:

a. What amounts will appear on Paxel’s financial statements at 12/31/04 related to its investment in Saxel?

Equity Method / Cost Method
Investment in Saxel
Revenue account on Income Statement
Title of account: / Title of account:

b. Compute the noncontrolling interest in Saxel’s earnings and net assets at 12/31/04:

Noncontrolling Interest in Net Assets / Noncontrolling Interest in Earnings

SOLUTION

Conceptual analysis (not required but probably helpful: Parent’s investment account at beginning of year = net assets * 80% or ($800,000 - $350,000) * 80% = $360,000. Cost of stock = 10,000 * $5 par = $50,000.

Noncontrolling Interest 20% / Controlling Interest 80% / Common Stock / Retained Earnings
Beginning of year / 90,000 / 360,000 / 50,000 / 400,000
Net Income / 12,000 / 48,000 / 60,000
Dividends / -2,000 / -8,000 / -10,000
End of year / 100,000 / 400,000 / 50,000 / 450,000
Equity Method / Cost Method
Investment in Saxel / 360,000 + 48,000 – 8,000 =
400,000 / 8,000 * 5 = $40,000
Revenue account / $60,000 * 80% = $48,000 / 80% * 10,000 = $8,000
Account title:
Equity in earnings of subsidiary / Accounting title:
Dividend Revenue
Noncontrolling Interest in Net Assets / Noncontrolling Interest in Earnings
(800,000-350,000)*20% = 90,000 + 12,000 share of NI – 2,000 dividends = $100,000 / 60,000 NI * 20% = 12,000

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