Acquisition Accounting Implied Value Equals Book Value Wholly Owned Subsidiary Date of Acquisition ILLUSTRATION 3-2 Consolidated Balance Sheet Workpaper P Company and Subsidiary January 1, 2013 Eliminations Consolidated P Company S Company Dr. Cr Balances Cash 20,000 20,000 40,000 Other Current Assets 140,000 50,000 190,000 Plant and Equipment 120,000 40,000 160,000 Land 40,000 20,000 60,000 Investment in S Company 80,000 (1) 80,000 Total Assets $400,000 $130,000 $450,000 Liabilities Common Stock 60,000 50,000 110,000 P Company 200,000 200,000 S Company 50,000 (1) 50,000 Other Contributed Capital P Company 40,000 40,000 S Company 10,000 (1) 10,000 Retained Earnings P Company 100,000 100,000 S Company 20,000 (1) 20,000 Total Liabilities and Equity $400,000 $130,000 $80,000 $80,000 $450,000 (1) To eliminate investment in S Company. Note the following on the workpaper: 1. The investment account and related subsidiary's stockholders' equity have been eliminated, and the subsidiary company's net assets substituted for the invest- ment account. 2. Consolidated assets and liabilities consist of the sum of the parent and subsidiary assets and liabilities in each classification. 3. Consolidated stockholders' equity is the same as the parent company's equity. This is as it should be, since the subsidiary company's stockholders' equity has been eliminated against the parent company's investment account. The consoli dated balance sheet is that of the economic entity, and the only ownership inter- est is that represented by P Company's stockholders; that is, P Company owns all of S Company's stock. 0:-7 ADVANCED_ACCOUNTING-... 9) > 132 1074 Case 190 Imet Value of Subsidiary is Equals Value of Subsidiary Company's Stock Ownership Less Than 100% of Subsidiary Stock L 0 0:-7 ADVANCED_ACCOUNTING-... 9) > Value of Bubsidiary Company's Stock V-ev- Ownership Less Than L BB Acquisition Accounting Implied Value Equals Book Value Wholly Owned Subsidiary Date of Action ILLUSTRATION 3-2 Consolidated Balance Sheet Workpaper P Company and Subsidiary January 1, 2013 Eliminations P Company S Company De G Consolidated Balances Cash 20,000 20,000 40,000 Other Current Assets 140,000 50,000 Plant and Equipment 120,000 40,000 Land 40,000 20,000 Investment in S Company 80,000 Total Assets Liabilities Common Stock $400,000 $130,000 60,000 50,000 P Company 200,000 190,000 160,000 60,000 (1) 80,000 $450,000 110,000 200,000 S Company 50,000 (1) 50,000 Other Contributed Capital P Company 40,000 40,000 S Company 10,000 (1) 10,000 Retained Earnings P Company 100,000 100,000 S Company 20,000 Total Liabilities and Equity $400,000 $130,000 (1) 20,000 $80,000 $80,000 $450,000 (1) To eliminate investment in S Company Note the following on the workpaper: 1. The investment account and related subsidiary's stockholders' equity have been eliminated, and the subsidiary company's net assets substituted for the invest- ment account. 2. Consolidated assets and liabilities consist of the sum of the parent and subsidiary assets and liabilities in each classification. 3. Consolidated stockholders' equity is the same as the parent company's equity. This is as it should be, since the subsidiary company's stockholders' equity has been eliminated against the parent company's investment account. The consoli- dated balance sheet is that of the economic entity, and the only ownership inter- est is that represented by P Company's stockholders; that is, P Company owns all of S Company's stock. Case 1 (b): Implied Value of Subsidiary Is Equal to Book Value of Subsidiary Company's Stock (IV=BV)-Partial Ownership (Less Than 100% of Subsidiary Stock Acquired) Next we introduce a noncontrolling interest. In this situation, the consolidated bal- ance sheet will nonetheless reflect the combined assets and liabilities of parent and subsidiary in their entirety. To balance, the equity interests will then be separated into the noncontrolling interest's equity in net assets and the usual controlling interest equity accounts. Assume that on January 1, 2013, P Company acquired 90% (4,500 shares) of the stock of S Company for $72,000. Since P Company owns less than 100% of S Company's stock, consideration must be given to the existence of a non- controlling interest (minority interest) in the net assets of S Company. The purchase price of $72,000 for 90% of S Company implies a total valuation for S Company of $72,000/90%, or $80,000. The noncontrolling interest is, thus, implied to be valued at 10% x $80,000 or $8,000. In this illustration the implied and book values are equal, both for the controlling and noncontrolling inter- ests. A Computation and Allocation of Difference (CAD) Schedule would appear as follows: Computation and Allocation of Difference between Implied and Book Values) Schedule Parent Share Noncontrolling Share Total Value Purchase price and implied value $72,000 8,000 80,000 Lew: Book value of subsidiary equity: Common stock 45,000 5,000 50,000 Other contributed capital 9,000 1,000 10,000 Retained earnings 18,000 2,000 20,000 Total book value 72.000 8.000 80,000 Difference between implied and book value Note that the amounts in bold in the CAD Schedule provide the entries in the following workpaper investment elimination entry: (1) Common Stock-S Company Other Contributed Capital- Company Retained Earnings Company Investment in S Company Noncontrolling Interest in Equity 50,000 10,000 20,000 72,000 8,000 The entire 100% of S Company's equity is eliminated, 90% against the invest- ment account with the remaining 10% of S Company's equity constituting the non- controlling interest. The purpose of the consolidated balance sheet is to report the net resources under the control of a single management, and the management of P Company effectively controls all S Company's resources. Thus, all S Company's assets and liabilities are combined with those of P Company on the consolidated bal- ance sheet, and the noncontrolling interest representing the noncontrolling share- holders' interest in the net assets is a separate component of stockholders' equity. A workpaper for the preparation of a consolidated balance sheet at the date of ac- quisition in this situation is presented in Illustration 3-3. A separate column is added to the workpaper in this illustration between the eliminations columns and the consoli dated balances to compute the noncontrolling interest in equity. The total in this col- umn represents the percentage of equity of S Company not acquired by P Company and recorded at the fair value implied by P Company's acquisition price. The total non- controlling interest is transferred to the consolidated balance sheet column. Although it is listed last on the workpaper, the noncontrolling interest on the actual consolidated balance sheet should appear as the first component of stockholders' equity (because it is the nearest, from the perspective of the controlling interest, to a liability)