288 CHAPTER 8

9. When does a treasury stock transaction affect the investment account? How is the effect adjusted?
10. Can gains or losses to a parent/investor result from a subsidiary’s/investee’s treasury stock transactions?
Explain.
11. Do common stock dividends and stock splits by a subsidiary affect the amounts that appear in the consoli-
dated financial statements? Explain, indicating the items, if any, that would be affected.

ExERcISES
E 8-1
Allocate income and dividends to controlling, noncontrolling, and preacquisition
interests
On January 1, 2016, Pablo Corporation acquires a 60 percent interest in Sango Corporation. On July 1, 2016, Pablo
decides to increase its investment in Sango to 80 percent of interest. Sango’s net income for 2016 is $250,000, and it
declares $40,000 dividends on March 1 and September 1.

R E Q u I R E D : Show the allocation of Sango’s income and dividends among controlling interests, noncontrol-
ling interests, and preacquisition interests.

E 8-2
Piecemeal Acquisition
Information regarding the Victor HF acquisition of Edma HF’s common stock in 2014 is as follows:
■ On February 15, Victor HF purchased 5 percent of Edma HF’s common stock for $10,000.
■ On August 10, Victor HF purchased an additional 10 percent of Edma HF’s common stock for $21,000.
■ On September 30, Victor HF purchased an additional 45 percent of Edma HF’s common stock for $99,000.
Victor HF obtained control over Edma HF as the result of this transaction.
Assume that the net assets book value of Edma HF were equal to its fair value on September 30. Edma HF’s net
income for 2014 was $60,000, earned proportionately during the year. Edma HF declared no dividends during the year.

REQuIRED
1. Calculate any gain or loss to revaluate the investment in Edma HF.
2. Calculate income from Edma HF in 2014.
3. Calculate the amount of investment in Edma HF at the end of 2014.

E 8-3
Journal entries (sale of equity interest—actual sale date assumption)
Pare Corporation acquires a 90 percent interest in Siomay Corporation (360,000 shares) for $5,400,000 when its equity
is $5,000,000 and book value of net assets equals fair value. During 2016, Siomay reports net income of $750,000 and
pays $50,000 in dividends.
On April 1, 2016, Pare sells 60,000 shares of Siomay for $1,300,000.

R E Q u I R E D : Prepare the journal entries needed for Pare to account for its investment in Siomay for 2016.

E 8-4
Computation of gain or loss after deconsolidation
Ainun Corporation owns an 80 percent interest in Bahrun Corporation. At December 31, 2016, its Investment in Bahrun
account is $3,500,000 and consists of $3,000,000 in equity and the remaining as goodwill. On July 1, 2017, Ainun
decides to sell 70 percent of Bahrun’s interest for $3,000,000, resulting in a deconsolidation. For 2017, Bahrun’s net
income and dividend are $320,000 and $30,000, respectively.

R E Q u I R E D : Calculate the gain or loss resulting from the deconsolidation.

 Consolidations—Changes in Ownership Interests 289

E 8-5
Subsidiary issues additional shares
Pupuk Corporation paid $2,500,000 for an 80 percent interest (1,800,000 shares) in Soil Corporation on January 1, 2016.
The book value of Soil’s net assets equaled fair value, except undervalued equipment of $50,000 with a five-year remain-
ing useful life, and Soil’s common stock and retained earnings were $2,000,000 and $500,000, respectively. During
2016, Soil declared $25,000 dividends and reported $200,000 net income. On January 1, 2017, Pupuk directly purchased
60,000 shares of previously unissued common stock from Soil for $15 each. For 2017, Soil’s net income was $225,000
and dividend declared was $25,000.

REQuIRED:
Determine the following:
a. The balance of Pupuk’s Investment on Soil account at December 31, 2016
b. Goodwill amount that should appear on the consolidated balance sheet at December 31, 2017
c. Additional paid-in capital at December 31, 2017, if Soil sold the issued shares to a third party
d. Noncontrolling interest at December 31, 2017, if Soil sold the issued shares to a third party

E 8-6
Additional stock issued by subsidiary directly to parent
The stockholders’ equities of Huanh Corporation and its 90 percent-owned subsidiary, Ngon Corporation, on December
31, 2016, are as follows (in thousands):

Huanh Ngon
Common stock, $10 par $10,000 $2,000
Additional paid-in capital 500 150
Retained earnings 600 250
Total stockholders’ equity $11,100 $2,400

On January 1, 2017, Ngon issued previously unissued common stock of 100,000 shares directly to Huanh for $24
per share. The book value of Ngon’s net assets book is equal to fair value at the transaction date, except for land under-
valued by $10,000.

REQuIRED
1. Calculate the balance of Huanh’s Investment in Ngon account on January 2, 2017, after the new investment
is recorded.
2. Determine the goodwill, if any, from Huanh’s purchase of the 100,000 new shares.

E 8-7
Subsidiary sells share to outside entities
On January 1, 2014, Yasmeen BSC acquired 90,000 out of 100,000 outstanding common shares of Talal BSC for
$720,000. The total stockholders’ equity account of Talal BSC was $800,000 at this date. On January 2, 2014, Talal BSC
sold an additional 10,000 common shares to the public for $10 per share.
290 CHAPTER 8

REQuIRED
1. Calculate the ownership percentage of Yasmeen BSC in Talal BSC after the sale of additional shares.
2. Prepare a journal entry to adjust investment in Talal BSC account.
3. Calculate the amount of investment in Talal BSC after the transaction.

E 8-8
Subsidiary issues additional stock under different assumptions
Pam Corporation owns two-thirds (600,000 shares) of the outstanding $1 par common stock of Sun Company on January
1, 2016. In order to raise cash to finance an expansion program, Sun issues an additional 100,000 shares of its common
stock for $5 per share on January 3, 2016. Sun’s stockholders’ equity before and after the new stock issuance is as
follows (in thousands):

Before Issuance After Issuance

Common stock, $1 par $ 900 $1,000
Additional paid-in capital 600 1,000
Retained earnings 600 600
Total stockholders’ equity $2,100 $2,600

REQuIRED
1. Assume that Pam purchases all 100,000 shares of common stock directly from Sun.
a. What is Pam’s percentage ownership interest in Sun after the purchase?
b. Calculate goodwill from Pam’s acquisition of the 100,000 shares of Sun.
2. Assume that the 100,000 shares of common stock are sold to Van Company, one of Sun’s noncontrolling
stockholders.
a. What is Pam’s percentage ownership interest after the new shares are sold to Van?
b. Calculate the change in underlying book value of Pam’s investment after the sale.
c. Prepare the journal entry on Pam’s books to recognize the increase or decrease in underlying book value
computed in b above assuming that gain or loss is not recognized.

E 8-9
Midyear piecemeal acquisition with goodwill
The stockholder’s equity of Son Corporation at December 31, 2015, 2016, and 2017, is as follows (in thousands):

December 31,
2015 2016 2017
Capital stock, $10 par $200 $200 $200
Retained earnings 80 160 220
$280 $360 $420

Son reported income of $80,000 in 2016 and paid no dividends. In 2017, Son reported net income of $80,000 and
declared and paid dividends of $10,000 on May 1 and $10,000 on November 1. Income was earned evenly in both years.
Pop Corporation acquired 4,000 shares of Son common stock on April 1, 2016, for $64,000 cash and another 8,000
shares on July 1, 2017, for $164,000. Any fair value/book value differential is goodwill.

R E Q u I R E D : Determine the following:

1. Pop’s income from Son for 2016 and 2017
2. Noncontrolling interest at December 31, 2017
3. Preacquisition income in 2017
4. Balance of the Investment in Son account at December 31, 2017

E 8-10
Computations for sale of an interest
Pam Corporation acquired a 90 percent interest in Sun Corporation on July 1, 2017, for $675,000. The stockholders’
equity of Sun at December 31, 2016, was as follows (in thousands):
 Consolidations—Changes in Ownership Interests 291

Capital stock $500

Retained earnings 200
Total $700

During 2017 and 2018, Sun reported income and declared dividends as follows:

2017 2018
Net income $100,000 $80,000
Dividends (December) 50,000 30,000

On July 1, 2018, Pam sold a 10 percent interest (or one-ninth of its investment) in Sun for $85,000.

REQuIRED
1. Determine Pam’s investment income for 2017 and 2018, and its investment balance on December 31, 2017
and 2018.
2. Determine noncontrolling interest share for 2017 and 2018, and the total of noncontrolling interest on
December 31, 2017 and 2018.

E 8-11
Treasury stock by subsidiary
Bence NYRT was a 70 percent subsidiary of Nora NYRT. On January 3, 2014, the balance of investment account in Bence
NYRT was $350,000 while the total equity of Bence NYRT was $450,000. On January 4, 2014, Bence NYRT purchased
1000 of its own outstanding stocks from the noncontrolling interest for $60 per share. Before the treasury stock transac-
tion, Bence NYRT had 9,000 outstanding stocks.

REQuIRED
1. Calculate the ownership percentage of Nora NYRT in Bence NYRT after the treasury stock transaction.
2. Prepare a journal entry to adjust investment in Bence NYRT account.
3. Calculate the amount of investment in Bence NYRT after the transaction.

E 8-12
Journal entries when subsidiary issues additional shares directly to parent
Pam Corporation’s Investment in Sun Company account had a balance of $475,000 at December 31, 2016. This balance
consisted of goodwill of $35,000 and 80 percent of Sun’s $550,000 stockholders’ equity.
On January 2, 2017, Sun increased its outstanding shares from 10,000 to 12,000 shares by selling 2,000 additional
shares directly to Pam at $80 per share. Sun’s net income for 2017 was $90,000, and in December 2017 it paid $60,000
dividends.

R E Q u I R E D : Prepare all journal entries other than closing entries to account for Pam’s investment in Sun
during 2017. Any difference between fair value and book value is goodwill.

E 8-13
Computations and entries (subsidiary issues additional shares to outside entities)
Pop Corporation paid $1,800,000 for 90,000 shares of Son Company’s 100,000 outstanding shares on January 1, 2016,
when Son’s equity consisted of $1,000,000 of $10 par common stock and $500,000 retained earnings. The excess fair
292 CHAPTER 8

value over book value was goodwill. On January 2, 2018, Son sold an additional 20,000 shares to the public for $600,000,
and its equity before and after issuance of the additional 20,000 shares was as follows (in thousands):

January 1, 2018 January 2, 2018

(Before Issuance) (After Issuance)
$10 par common stock $1,000 $1,200
Additional paid-in capital — 400
Retained earnings 800 800
Total stockholders’ equity $1,800 $2,400

REQuIRED
1. Determine Pop’s Investment in Son account balance on January 1, 2018.
2. Prepare the entry on Pop’s books to account for its decreased ownership interest if gain or loss is not
recognized.

pROBLEMS

P8-1
Mid year acquisition, overvalued inventory, upstream sale of land
On July 1, 2014, Adnan SAL acquired 75 percent of Rayan SAL for $3,750,000. Rayan SAL stockhold-
ers’ equity on July 1, 2014 was $4,850,000. The trial balance for both companies for the year ended
December 31, 2014 is as follows (in thousands):

Debits Adnan SAL Rayan SAL

Cash $ 1,200 $900
Accounts receivable 2,000 1,100
Dividend receivable 112.5 0
Inventory 300 1,300
Land 1,200 2,400
Equipment 3,000 350
Investment in Rayan SAL 3,637.5
Cost of sales 3,900 2,700
Other expenses 1,100 950
Dividends 0 250
Total $16,450 $ 9,950
Credits
Accounts payable $2,200 $550
Dividend payable 0 150
Common stock 5,000 3,000
Retained Earnings 1,850 1,300
Sales 7,400 4,800
Gain on sale of land 0 150
Total $16,450 $9,950

A D D I T I O N A L I N F O R M AT I O N
1. The book value of Rayan SAL’s net identifiable assets at the acquisition date was equal to the fair value,
except for inventory that was overvalued by $100,000. The inventory was sold in 2014.
2. On August 1, 2014, Rayan SAL sold land to Adnan SAL with a gain of $150,000. Rayan SAL sold the land
to an outside party in 2016.
3. Rayan SAL declared dividends of $100,000 and $150,000 on March 1, 2014, and December 31, 2014,
respectively
4. Rayan SAL’s income and expenses occurred proportionately during the year.
 Consolidations—Changes in Ownership Interests 293

R E Q u I R E D : Prepare a workpaper to consolidate the financial statement of Adnan SAL and subsidiary for
the year ended December 31, 2014.

P8-2
Computations and entries (subsidiary issues additional shares to public)
Pop Corporation purchased 480,000 shares of Son Corporation’s common stock (an 80 percent interest)
for $10,600,000 on January 1, 2016. The $1,000,000 excess of investment fair value over book value
acquired was attributed to goodwill.
On January 1, 2018, Son sold 200,000 previously unissued shares of common stock to the public
for $30 per share. Son’s stockholders’ equity on January 1, 2016, when Pop acquired its interest,
and on January 1, 2018, immediately before and after the issuance of additional shares, was as fol-
lows (in thousands):
January 1, 2018 January 1, 2018
January 1, 2016 Before Issuance After Issuance
Common stock, $10 par $ 6,000 $ 6,000 $ 8,000
Other paid-in capital 2,000 2,000 6,000
Retained earnings 4,000 5,000 5,000
Total $12,000 $13,000 $19,000

REQuIRED
1. Calculate the balance of Pop’s Investment in Son account on January 1, 2018, before the additional stock
issuance.
2. Determine Pop’s percentage interest in Son on January 1, 2018, immediately after the additional stock
issuance.
3. Prepare a journal entry on Pop’s books to adjust for the additional share issuance on January 1, 2018, if
gain or loss is not recognized.

P8-3
Sale of an interest during accounting period, upstream building sale
Piero SAA was a 90 percent-owned subsidiary of Isac SAA acquired for $3,600,000 on January 1, 2014.
The total net assets for Piero SAA at the acquisition date were $3,800,000. The book value identifiable
assets and liabilities of Piero SAA is the same with the fair value. The trial balance of both companies for
the year ended 2014 is as follows (in thousands):

Debits Isac SAA Piero SAA

Cash $900 $400
Accounts receivable 200 700
Inventory 1,640 700
Land 2,100 2,800
Equipment 3,000 1,400
Investment in Piero SAA 2,835 0
Cost of sales 5,800 2,800
Other expenses 400 700
Dividends 200 200
Total $ 17,075 $ 9,700
Credits
Accounts payable $1,900 $1,400
Common stock 5,000 2,000
Additional-paid in capital 50 0
Retained Earnings 2,500 1,800
Sales 7,400 4,500
Income from Piero SAA 225 0
Total $ 17,075 $ 9,700
294 CHAPTER 8

A D D I T I O N A L I N F O R M AT I O N
1. On March 31, 2014, Isac SAA sold its 20 percent of ownership in Piero SAA for $900,000.
2. On July 1, 2013, Piero SAA sold equipment to Isac SAA with a profit of $500,000. The equipment has a
remaining useful life of 5 years and the only dividend declared during the year by Piero SAA was on August
1, 2014.
3. Piero SAA income and expenses occurred proportionately during the year.

R E Q u I R E D : Prepare a workpaper to consolidate the financial statement of Isac SAA and Subsidiary for the
year ended December 31, 2014.

P8-4
Reduction of interest owned under three options
Pop Corporation owns 300,000 of 360,000 outstanding shares of Son Corporation, and its $8,700,000
Investment in Son account balance on December 31, 2016, is equal to the underlying equity interest in
Son. Son’s stockholders’ equity at December 31, 2016, is as follows (in thousands):
Common stock, $10 par, 500,000 shares authorized,
400,000 shares issued, of which 40,000 are treasury shares $ 4,000
Additional paid-in capital 2,500
Retained earnings 5,500
12,000
Less: Treasury shares at cost 1,560
Total stockholder’s equity $10,440

Because of a cash shortage, Pop decided to reduce its ownership interest in Son from a 5/6
interest to a 3/4 interest and is considering the following options:
Option 1. Sell 30,000 of the 300,000 shares held in Son.
Option 2. Instruct Son to issue 40,000 shares of previously unissued stock to the public.
Option 3. Instruct Son to reissue the 40,000 shares of treasury stock to the public.

Assume that the shares can be sold at the current market price of $50 per share under each of
the three options and that any tax consequences can be ignored. Pop’s stockholders’ equity at Decem-
ber 31, 2016, consists of $10,000,000 par value of common stock, $3,000,000 additional paid-in
capital, and $7,000,000 retained earnings.

R E Q u I R E D : Compare the consolidated stockholders’ equity on January 1, 2017, under each of the three
options. (Hint: Prepare journal entries on Pop’s books as an initial step to your solution.)

P8-5
Subsidiary issues additional shares
Pam Corporation purchased 9,000 shares of Sun Corporation’s $50 par common stock at $90 per share
on January 1, 2016, when Sun had capital stock of $500,000 and retained earnings of $300,000. During
2016, Sun Corporation had net income of $50,000 but declared no dividends.
On January 1, 2017, Sun Corporation sold an additional 5,000 shares of stock at $100 per share.
Sun’s net income for 2017 was $70,000, and no dividends were declared.

R E Q u I R E D : Determine each of the following:

1. The balance of Pam Corporation’s Investment in Sun account on December 31, 2016
2. The goodwill that should appear in the consolidated balance sheet at December 31, 2017, assuming that
Pam Corporation purchased the 5,000 shares issued on January 1, 2017
3. Additional paid-in capital from consolidation at December 31, 2017, assuming that Sun sold the 5,000
shares issued on January 1, 2017, to outside entities
4. Noncontrolling interest at December 31, 2017, assuming that Sun sold the 5,000 shares issued on January
1, 2017, to outsiders
 Consolidations—Changes in Ownership Interests 295

P8-6
Midyear purchase of additional interest, preacquisition income
Pop Corporation purchased a 70 percent interest in Son Corporation on January 2, 2016, for $98,000,
when Son had capital stock of $100,000 and retained earnings of $20,000. On June 30, 2017, Pop pur-
chased an additional 20 percent interest for $37,000.
Comparative financial statements for Pop and Son Corporations at and for the year ended
December 31, 2017, are as follows (in thousands):
Pop Son
Combined Income and Retained Earnings
Statement for the Year Ended December 31
Sales $400 $200
Income from Son 24 —
Cost of sales (250) (150)
Expenses (50) (20)
Net income 124 30
Add: Beginning retained earnings 200 50
Less: Dividends, December 1 (64) (10)
Retained earnings, December 31 $260 $ 70
Balance Sheet at December 31
Other assets $429 $200
Investment in Son 171 —
Total assets $600 $200
Liabilities $ 40 $30
Common stock 300 100
Retained earnings 260 70
Total equities $600 $200

REQuIRED
1. Prepare a schedule explaining the $171,000 balance in Pop’s Investment in Son account at December 31, 2017.
2. Compute goodwill that will appear in the December 31, 2017, consolidated balance sheet.
3. Prepare a schedule computing consolidated net income for 2017.
4. Compute consolidated retained earnings on December 31, 2017.
5. Compute noncontrolling interest on December 31, 2017.

P8-7
Consolidated income statement (midyear purchase of additional interest)
Comparative separate-company and consolidated balance sheets for Pam Corporation and its 70
percent–owned subsidiary, Sun Corporation, at year-end 2016, were as follows (in thousands):

Pam Sun Consolidated

Cash $ 100 $ 70 $ 170
Inventories 800 100 900
Other current assets 500 130 630
Plant assets—net 3,500 800 4,300
Investment in Sun 600 — —
Goodwill — — 40
Total assets $5,500 $1,100 $6,040
Current liabilities $ 500 $ 300 $ 800
Capital stock, $10 par 3,000 500 3,000
Other paid-in capital 1,000 100 1,000
Retained earnings 1,000 200 1,000
Noncontrolling interest — — 240
Total equities $5,500 $1,100 $6,040
296 CHAPTER 8

Sun’s net income for 2017 was $150,000, and its dividends for the year were $80,000 ($40,000
on March 1, and $40,000 on September 1). On April 1, 2017, Pam increased its interest in Sun to
80 percent by purchasing 5,000 shares in the market at $19 per share.
Separate incomes of Pam and Sun for 2017 are computed as follows:

Pam Sun
Sales $2,000 $1,200
Cost of sales (1,200) (700)
Gross profit 800 500
Depreciation expense (400) (300)
Other expenses (100) (50)
Separate incomes $ 300 $ 150

REQuIRED
1. Prepare a consolidated income statement for the year ended December 31, 2017.
2. Prepare a schedule to show how Sun’s net income and dividends for 2017 are allocated among noncontrol-
ling interests and controlling interests.

P8-8
Workpaper (midyear acquisition of 80% interest, downstream inventory sales)
Pop Corporation acquired an 80 percent interest in Son Corporation on October 1, 2016, for $82,400,
equal to 80 percent of the underlying equity of Son on that date plus $16,000 goodwill (total goodwill
is $20,000). Financial statements for Pop and Son Corporations for 2016 are as follows (in
thousands):
Pop Son
Combined Income and Retained Earnings
Statement for the Year Ended December 31
Sales $112 $ 50
Income from Son 3.8 —
Cost of sales (60) (20)
Operating expenses (25.1) (6)
Net income 30.7 24
Retained earnings January 1 30 20
Dividends (20) (10)
Retained earnings December 31 $ 40.7 $ 34
Balance Sheet at December 31
Cash $ 5.1 $ 7
Accounts receivable 10.4 17
Note receivable 5 10
Inventories 30 16
Plant assets—net 88 60
Investment in Son 82.2 —
Total assets $220.7 $110
Accounts payable $ 15 $ 16
Notes payable 25 10
Capital stock 140 50
Retained earnings 40.7 34
Total equities $220.7 $110

A D D I T I O N A L I N F O R M AT I O N
1. In November 2016, Pop sold inventory items to Son for $12,000 at a gross profit of $3,000. One-third of
these items remained in Son’s inventory at December 31, 2016, and $6,000 remained unpaid.
2. Son’s dividends were declared in equal amounts on March 15 and November 15, and its income was earned
in proportionate amounts throughout each quarter of the year.
3. Pop applies the equity method such that its net income is equal to the controlling share of consolidated net
income.
 Consolidations—Changes in Ownership Interests 297

R E Q u I R E D : Prepare a workpaper to consolidate the financial statements of Pop Corporation and Subsidiary
for the year ended December 31, 2016.

P8-9
Workpaper (noncontrolling interest, preacquisition income, downstream sale of
equipment, upstream sale of land, subsidiary holds parent’s bonds)
Pam Corporation paid $175,000 for a 70 percent interest in Sun Corporation’s outstanding stock on
April 1, 2016. Sun’s stockholders’ equity on January 1, 2016, consisted of $200,000 capital stock
and $50,000 retained earnings.
Accounts and balances at and for the year ended December 31, 2016, follow (in thousands):
Pam Sun
Combined Income and Retained Earnings
Statement for the Year Ended December 31
Sales $287.1 $150
Income from Sun 12.3 —
Gain 12 2
Interest income — 5.85
Expenses (includes cost of goods sold) (200) (117.85)
Interest expense (11.4) —
Net income 100 40
Add: Beginning retained earnings 250 50
Less: Dividends (50) (20)
Retained earnings December 31 $300 $ 70
Balance Sheet at December 31
Cash $ 17 $ 4
Interest receivable — 6
Inventories 140 60
Other current assets 110 20
Plant assets—net 502.7 107.3
Investment in Sun common 180.3 —
Investment in Pam bonds — 102.7
Total assets $950 $300
Interest payable $ 6 $ —
Other current liabilities 38.6 30
12% bonds payable 105.4 —
Common stock 500 200
Retained earnings 300 70
Total equities $950 $300

A D D I T I O N A L I N F O R M AT I O N
1. Sun Corporation paid $102,850 for all of Pam’s outstanding bonds on July 1, 2016. These bonds were
issued on January 1, 2016, bear interest at 12 percent, have interest payment dates of July 1 and January
1, and mature 10 years from the date of issue. The $6,000 premium on the issue is being amortized under
the straight-line method.
2. Other current liabilities of Sun Corporation on December 31, 2016, include $10,000 dividends declared on
December 15 and unpaid at year-end. Sun also declared $10,000 dividends on March 15, 2016.
3. Pam Corporation sold equipment to Sun on July 1, 2016, for $30,000. This equipment was purchased by
Pam on July 1, 2013, for $36,000 and is being depreciated over a six-year period using the straight-line
method (no salvage value). Sun still owns the equipment.
4. Sun sold land that cost $8,000 to Pam for $10,000 on October 15, 2016. Pam still owns the land.
5. Pam uses the equity method for its 70 percent interest in Sun.

R E Q u I R E D : Prepare a consolidation workpaper for the year ended December 31, 2016.
298 CHAPTER 8

P8-10
Workpaper (midyear purchase of 10% interest, downstream sales)
Pop Corporation acquired a 70 percent interest in Son Corporation on January 1, 2016, for $420,000
cash, when Son’s equity consisted of $300,000 capital stock and $200,000 retained earnings. On
July 1, 2017, Pop acquired an additional 10 percent interest in Son for $67,500, to bring its interest
in Son to 80 percent. The financial statements of Pop and Son Corporations at and for the year ended
December 31, 2017, are as follows (in thousands):
Pop Son
Combined Income and Retained Earnings
Statement for the Year Ended December 31
Sales $ 900 $500
Income from Son 38 —
Gain on machinery 40 —
Cost of sales (400) (300)
Depreciation expense (90) (60)
Other expenses (160) (40)
Net income 328 100
Add: Beginning retained earnings 155 250
Less: Dividends (200) (50)
Retained earnings December 31 $ 283 $300
Balance Sheet at December 31
Cash $ 20 $ 80
Accounts receivable 130 30
Dividends receivable 20 —
Inventories 90 70
Other current items 20 80
Land 50 40
Buildings—net 60 105
Machinery—net 100 320
Investment in Son 510 —
Total assets $1,000 $725
Accounts payable $ 177 $ 40
Dividends payable 100 25
Other liabilities 140 60
Capital stock, $10 par 300 300
Retained earnings 283 300
Total equities $1,000 $725

A D D I T I O N A L I N F O R M AT I O N
1. The fair value/book value differential from Pop’s two purchases of Son was goodwill.
2. Pop Corporation sold inventory items to Son during 2016 for $60,000, at a gross profit of $10,000. During
2017, Pop’s sales to Son were $48,000, at a gross profit of $8,000. Half of the 2016 intercompany sales
were inventoried by Son at year-end 2016, and three-fourths of the 2017 sales remained unsold by Son at
year-end 2017. Son owes Pop $25,000 from 2017 purchases.
3. At year-end 2016, Son purchased land from Pop for $20,000. The cost of this land to Pop was $12,000.
4. Pop sold machinery with a book value of $40,000 to Son for $80,000 on July 8, 2017. The machinery had
a five-year useful life at that time. Son uses straight-line depreciation without considering salvage value on
the machinery.
5. Pop uses a one-line consolidation in accounting for Son. Both Pop and Son Corporations declared dividends
for 2017 in equal amounts in June and December.

R E Q u I R E D : Prepare a workpaper to consolidate the financial statements of Pop Corporation and Subsidiary
for the year ended December 31, 2017.
 Consolidations—Changes in Ownership Interests 299

P8-11
Workpaper (midyear acquisition, preacquisition income and dividends, upstream sale
of inventory, downstream sale of inventory item used by subsidiary as plant asset)
Pam Corporation acquired an 85 percent interest in Sun Corporation on August 1, 2016, for $522,750,
equal to 85 percent of the underlying equity of Sun on that date.
In August 2016, Sun sold inventory items to Pam for $60,000 at a gross profit of $15,000. One-
third of these items remained in Pam’s inventory at December 31, 2016.
On September 30, 2016, Pam sold an inventory item (equipment) to Sun for $50,000 at a gross
profit to Pam of $10,000. When this equipment was placed in service by Sun, it had a five-year
remaining useful life and no expected salvage value.
Sun’s dividends were declared in equal amounts on June 15 and December 15, and its income
was earned in relatively equal amounts throughout each quarter of the year. Pam applies the equity
method, such that its net income is equal to the controlling share of consolidated net income. Finan-
cial statements for Pam and Sun are as follows (in thousands):
Pam Sun
Combined Income and Retained Earnings
Statement for the Year Ended December 31, 2016
Sales $ 910 $400
Income from Sun 7.5 —
Cost of sales (500) (250)
Operating expenses (200) (90)
Net income 217.5 60
Add: Beginning retained earnings 192.5 100
Deduct: Dividends (100) (40)
Retained earnings December 31 $ 310 $120
Balance Sheet at December 31, 2016
Cash $ 33.75 $10
Dividends receivable 17 —
Accounts receivable—net 120 70
Inventories 300 150
Plant assets—net 880 500
Investment in Sun—85% 513.25 —
Total assets $1,864 $730
Accounts payable $ 154 $ 90
Dividends payable — 20
Capital stock 1,400 500
Retained earnings 310 120
Total equities $1,864 $730

R E Q u I R E D : Prepare a consolidation workpaper for the year ended December 31, 2016.
300 CHAPTER 8

P8-12
Consolidated statement of cash flows–indirect method (sale of an interest)
Comparative consolidated financial statements for Pop Corporation and its subsidiary, Son Corporation,
at and for the years ended December 31, 2017 and 2016 follow (in thousands).
Pop Corporation and Subsidiary Comparative Consolidated Financial
Statements At and For the Years Ended December 31, 2017 and 2016
Year’s Change
Year 2017 Year 2016 2017–2016
Income Statement
Sales $3,050.0 $2,850.0 $ 200.0
Gain on 10% interest 5.7 — 5.7
Cost of sales (1,750.7) (1,690.0) 60.7
Depreciation expense (528.0) (508.0) 20.0
Other expenses (455.0) (392.0) 63.0
Noncontrolling interest share (22.0) (10.0) 12.0
Net income $ 300.0 $250.0 $ 50.0
Retained Earnings Statement
Retained earnings—beginning $1,000.0 $ 950.0 $50.0
Net income 300.0 250.0 50.0
Dividends (200.0) (200.0) —
Retained earnings—ending $1,100.0 $1,000.0 $ 100.0
Balance Sheet
Cash $ 46.5 $50.5 $(4.0)
Accounts receivable—net 87.5 90.0 (2.5)
Inventories 377.5 247.5 130.0
Prepaid expenses 68.0 88.0 (20.0)
Equipment 2,970.0 2,880.0 90.0
Accumulated depreciation (1,542.0) (1,044.0) 498.0
Land and buildings 960.0 960.0 —
Accumulated depreciation (300.0) (272.0) 28.0
Total assets $2,667.5 $3,000.0 $(332.5)
Accounts payable $ 140.0 $ 343.5 $(203.5)
Dividends payable 52.5 52.5 —
Long-term notes payable 245.0 545.0 (300.0)
Capital stock, $10 par 1,000.0 1,000.0 —
Retained earnings 1,100.0 1,000.0 100.0
Noncontrolling interest 130.0 59.0 71.0
Total equities $2,667.5 $3,000.0 $(332.5)

R E Q u I R E D : Prepare a consolidated statement of cash flows for the year ended December 31, 2017. The
changes in equipment are due to a $100,000 equipment acquisition for cash, current depreciation, and the sale
of one-ninth of the fair value/book value differential allocated to equipment ($10,000) and related accumulated
depreciation ($2,000). This reduction in the unamortized fair value/book value differential results from selling
a 10 percent interest in Son for $72,700 and thereby reducing its interest from 90 percent to 80 percent. Son’s
net income and dividends for 2017 were $110,000 and $50,000, respectively. Dividends were declared and paid
on December 31. Use the indirect method.

PROFESSIONAL RESEARCH ASSIGNMENTS

Answer the following questions by reference to the FASB Codification of Accounting Standards.
Include the appropriate reference in your response.

PR 8-1 Pop Corporation has owned a 30 percent interest in Son Corporation for ten
years, and has properly recorded this investment using the equity method of ac-
counting. On July 1 of the current year Pop purchased an additional 40 percent
interest in Son. Is it permissible for Pop to include all current year earnings of
Son in the consolidated income statement for the current year?
PR 8-2 Again, consider the facts presented in PR 8-1 above. Is it acceptable for Pop to
continue to account for its investment in Son for the current year, using the equity
method of accounting and delaying consolidation until the following year?