Topic 2 Parent Company s Investment in Subsidiary
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1 1 Parent Company s Investment in Subsidiary Company 2 Consolidated Balance Sheet - Heading Topic 2 Parent Company s Investment in Subsidiary Consolidated Balance Sheet 3 Parent Invests in Subsidiary 4 Consolidated Balance Sheet In this Chapter P buys stock S continues to exist How do you show S s net assets? When P has effective control of S Consolidated FS Usually > 50% of S s stock If P buys 100% of S Consolidated BS same result as Chapter 1 Get there differently 1
2 5 Recording Investment in Subsidiary on Parent s Books 6 Consolidation Worksheet - Heading When P buys stock of S P does not record S s assets & liabilities Just Investment in S as asset Journal entry on P s books: Consolidation Worksheet D. Investment in Subsidiary $500,000 Cr. Cash $500,000 7 Consolidation Worksheet #1 To get Consolidated BS Prepare Consolidation WS WS entries Done on WS Not done on P s or S s books 8 Consolidation Worksheet #2 Consolidation WS First two columns are trial balances of P & S So S s net assets recorded at BV Credit balances recorded with negative numbers Trial Balances Eliminations and Adjustments Consol. Balance Sheet Account Titles Parent Sub. D. Cr. NCI D. Cr. 2
3 9 EL Entry - Heading 10 Double Counting EL Entry Combining P s & S s trial balances with no adjustments t causes problems E.g., Can t just add all S s assets & liabilities to P s Double Counting 11 Double Counting E.g. - # Double Counting E.g. - # 102 E.g., Form P with $500K Cash Put Balance Sheet of P & S together: P buys stock of S with $500K Cash Parent Cash $500K CS $500K Sub Cash $500K CS $500K And You Get: Parent Inv in S $500K CS $500K Sub Cash $500K CS $500K Parent Inv in S $500K CS $500K Combined Inv in S $500K Cash $500K CS $1,000K 3
4 13 Combined You have 2 assets: Investment in Sub Sub s Cash Combined You have 2 equities that come from owning those assets w/o debt BUT there is really only 1 asset S s Cash There is really only one equity stemming from that asset Inv in S $500K Cash $500K Combined CS $1,000K 14 Elimination (EL) Entry - #1 You need Elimination Entry (EL) to avoid double counting Need to get rid of one asset & one equity Leave only the ultimate t asset t& ultimate t equity $500K Cash is real asset $500K Equity of P s stockholders is the real equity Get rid of intermediate equity and intermediate asset P s equity in sub is really owned by Parent s stockholders P s asset, Investment in Subsidiary is really the $500K Cash of the S 15 Elimination (EL) Entry - #2 16 Elimination (EL) Entry E.g. - # 101 EL entry: drops S s Equity drops P s Investment in S Amount = S s Equity Leaves only S s assets & liabilities (net assets) Combined Cash $500K CS $500K E.g., What if P has: Investment in Subsidiary What if S has: Cash $500, ,000 $500, ,000 4
5 17 Elimination (EL) E.g. - # EL D. (of Sub) $500,000 Cr. Investment in Subsidiary $500,000 Hard and fast rule Always debit part of S s equity accounts that P bought (100% in this case). Always credit Investment in S for the total of the debits. 19 Elimination (EL) Entry E.g. - # 103 Account Titles Assets: Trial Balance Eliminations & Adjustments Parent Sub. Debit Credit Bal. Sheet Cash 500K $500K Inv in Sub. $500K EL 500K Total Assets $500K $500K $500K Equity P s Com. Stk. (500K) ($500K) S s Com. Stk. (500K) EL 500K Total L&Eq $(500K) $(500K) ($500K) 20 The only equity you end up with in Consolidated d BS is Parent s equity accounts (and NCI). The S s equity accounts will disappear. 5
6 21 D Entry - Heading 22 Distribution (D) Entry - #1 D Entry Chapter 1 Purchased assets recorded at FMV Chapter 2 S s assets will be recorded at same values determined in Chapter 1 Done in two parts Distribution (D) Entry E.g. - # 101 Part 1 WS starts t with S s assets at S s BV Part 2 D entry changes S s assets from BV to FMV D entry creates GW, if any D entry records gain, if any What if P has: Investment in Subsidiary $700, , P paid $700,000 for S s common stock What if S has: Equipment $500, ,000 FMV of S s assets is $500,000 6
7 25 Distribution (D) Entry E.g. - # Distribution (D) Entry E.g. - # 103 EL entry eliminates S s equity purchased by P D entry creates GW: EL D. (of Sub) $500,000 EL Cr. Investment in Subsidiary $500,000 D D. Goodwill $200,000 D Cr. Investment in Subsidiary $200, After you are done with D entry, there is nothing left in Investment t in S. 28 Distribution (D) Entry E.g. - #3 Account Titles Trial Balance Elim & Adjs Parent Sub. Debit Credit Bal. Sheet Assets: Equipment 500K $500K Inv in Sub. $700K EL 500K D 200K Goodwill D 200K 200K $700K $500K $700K Equity P s Com. Stk. -700K ($700K) S s Com. Stk. -500K EL 500K Total ($700K) ($500K) ($700K) 7
8 29 Non-Controlling Interest - Heading 30 Non-Controlling Interest Non-Controlling Interest What if P buys part of S As long as P owns > 50%, P&S still consolidate You do the same as before EL Entry Eliminate the Sub s Equity that P bought Investment in Sub is Plug Number DE Entry Write Everything to FMV & Create GW Give NCI its % of Adjustments (Including GW) Investment in Sub is Plug Number 31 Non-Controlling Interest E.g. - #1 What if P has: Investment in Subsidiary $600, ,000 P paid $600,000 for 80% of S s common stock What if S has: Equipment $500, ,000 FMV of S s equipment is $700, We need to figure out the GW. There are two ways to do this: P bought 80% of S for $600,000 FMV of S s Assets is $700,000 FMV of 80% of S is $560, P overpaid by $40,000 ($600K - $560K) P s share of GW is $40,000 P s share of GW is 80% of Total GW Total GW x 80% = $40,000 Total GW = $40,000/.80 Total GW = $50,000 NCI s share of GW is the other 20%: NCI s share: 20% of $50K = $10K 8
9 33 Second way to calculate GW: P bought 80% of S for $600,000 We can use this to figure out the total value of S and the GW FMV of S x 80% = $600K FMV of S = $600K/80% = $750K S is worth $750K & its only asset is worth $700K The Total GW is $50,000 P s share of GW is 80% x $50K = $40K NCI s share of GW is 20% x $50K = $10K 34 Non-Controlling Interest E.g. - #2 EL entry eliminates portion of S equity that P bought (80%) EL D. $400,000 Cr. Investment in Subsidiary $400, Non-Controlling Interest E.g. - #3 D entry adds $200,000 to Equipment s BV of $500,000 (=700K FMV of Equip.) D entry also creates $50,000 of GW D entry (labeled NCI) increases NCI by 20% of increase in Equipment ($200,000) and GW ($50,000) NCI s share of Equipment increase: $200K x.2 = $40K NCI s share of GW increase: $50K x.2 = $10K NCI increases by $50K [.2 x ($200K+$50K)] NCI increase added to S s RE D D Equipment $200K D Goodwill 50K D Cr Investment in Subsidiary $200K NCI Retained Earnings Subsidiary [.2x($200K+$50K)] 50K 36 Non-Controlling Interest E.g. - #4 Accounts Assets: Trial Balance Elim & Adjs Parent Sub Debit Credit NCI Bal. Sheet Equipment 500K D 200K $700K Inv in Sub. $600K EL 400K D 200K Goodwill D 50K 50K $600K $500K $750K Equity P s C. Stk. (600K) ($600K) S s C. Stk. (500K) EL 400K -100K S RE NCI 50K -50K NCI (150K) Total $600K $500K -$750K 9
10 37 NCI s Share of GW 38 NCI s Share of Goodwill NCI s Share of Goodwill Parent may have paid more than the FMV of the S because it paid a premium because it got control of the S If true the premium portion of the overpayment (GW) does not apply to NCI If true NCI will not increase by its share of that premium. This won t be on a test. 39 NCI s Share of GW 40 Non-Controlling Interest Bargain Purchase & NCI What if there is a Bargain Purchase with NCI You do the same as before EL Entry Eliminate the Sub s Equity that P bought Investment in Sub is Plug Number D Entry Write Everything to FMV Give NCI its % of Adjustments (NOT Gain) Calculate Gain P s share of Net Assets not paid for. Investment in Sub is Plug Number 10
11 41 Non-Controlling Interest E.g. - #1 What if P has: Investment in Subsidiary $500, ,000 P paid $500,000 for 80% of S s common stock 42 In this situation: P bought 80% of S for $500,000 FMV of S s Assets is $700,000 FMV of 80% of S is $560,000 P under paid by $60,000 ($500K - $560K) P s Gain is $60,000 What if S has: Equipment $500, ,000 FMV of S s equipment is $700, Non-Controlling Interest E.g. - #2 44 Non-Controlling Interest E.g. - #3 EL entry eliminates portion of S equity that P bought (80%) EL D. $400,000 Cr. Investment in Subsidiary $400,000 D entry adds $200,000 to Equipment s BV of $500,000 (=700K FMV of Equip.) D entry (labeled NCI) increases NCI by 20% of increase in Equipment ($200,000) 000) NCI s share of Equipment increase: $200K x.2 = $40K NCI increase added to S s RE D D Equipment $200K D Cr Investment in Subsidiary $100K D Gain $60K NCI Retained Earnings Subsidiary [.2x($200K)] 40K 11
12 45 Non-Controlling Interest E.g. - #4 Accounts Assets: Trial Balance Elim & Adjs Parent Sub Debit Credit NCI Bal. Sheet Equipment 500K D 200K $700K Inv in Sub. $500K EL 400K D 100K 46 Preexisting Goodwill on Subsidiary s Books - Heading Preexisting Goodwill on Subsidiary s Books $500K $500K $700K Equity P s C. Stk. (500K) ($500K) S s C. Stk. (500K) EL 400K -100K S RE NCI 40K -40K P s Gain D 60K 60K NCI (140K) Total $500K $500K -$700K 47 Goodwill on Subsidiary s Books 48 Non-Controlling Interest E.g. - #1 If S has pre-existing GW on its BS S s old GW Not included in allocation of purchase price among net assets Not included in determining whether GW exists Once determined that GW exists Adjust S s old GW amount to new amount What if P has: Investment in Subsidiary $600, ,000 P paid $600,000 for 80% of S s common stock What if S has: Equipment $500, GW 40, ,000 FMV of S s equipment is $700,000 12
13 49 In this situation: P bought 80% of S for $600,000 FMV of S s Assets is $700,000 FMV of 80% of S is $560,000 P overpaid by $40,000 ($600K - $560K) P s share of GW is $40,000 P s share of GW is 80% of Total GW Total GW x 80% = $40,000 Total GW = $40,000/.80 Total GW = $50, Second way to calculate GW: P bought 80% of S for $600,000 We can use this to figure out the total value of S and the GW FMV of S x 80% = $600K FMV of S = $600K/80% = $750K S is worth $750K & its only asset is worth $700K The Total GW is $50, Non-Controlling Interest E.g. - #2 EL entry eliminates portion of S equity that P bought (80%) EL D. $432,000 Cr. Investment in Subsidiary $432, Non-Controlling Interest E.g. - #3 D entry adds $200,000 to Equipment s BV of $500,000 (=700K FMV of Equip.) D entry also creates $50,000 of GW D entry (labeled NCI) increases NCI by 20% of increase in Equipment ($200,000) and GW ($50,000) NCI s share of Equipment increase: $200K x.2 = $40K NCI s share of GW increase: $50K x.2 = $10K NCI increases by $50K [.2 x ($200K+$50K)] NCI increase added to S s RE D D Equipment $200K D Goodwill 10K D Cr Investment in Subsidiary $168K NCI Retained Earnings Subsidiary [.2x($200K+$10K)] 42K 13
14 53 Non-Controlling Interest E.g. - #4 Accounts Assets: Trial Balance Elim & Adjs Parent Sub Debit Credit NCI Bal. Sheet Equipment 500K D 200K $700K Inv in Sub. $600K EL 432K D 168K Goodwill 40K D 10K 50K 54 Push Down Accounting - Heading Push Down Accounting $600K $540K $750K Equity P s C. Stk. (600K) ($600K) S s C. Stk. (540K) EL 432K -108K S RE NCI 42K -42K NCI (150K) Total $600K $540K -$750K 14
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