Beams9eSM_ch08 - Chapter 8 CONSOLIDATIONS - CHANGES IN...

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Chapter 8 CONSOLIDATIONS — CHANGES IN OWNERSHIP INTERESTS Answers to Questions 1 Preacquisition earnings and dividends are the earnings and dividends applicable to an investment interest prior to its acquisition during an accounting period. Assume that P purchases an 80 percent interest in S on July 1, 2006 and that S has earnings of $100,000 between January 1 and July 1, 2006 and pays $50,000 dividends on May 1, 2006. In this case, preacquisition earnings and dividends are $80,000 and $40,000, respectively. 2 Preacquisition earnings are not recorded by a parent company under the equity method because the investor only recognizes income subsequent to acquisition on the interest acquired. Preacquisition earnings appear as a deduction in the consolidated income statement in the period that an interest is acquired because the revenues and expenses of the subsidiary are consolidated for the entire year of acquisition in order to provide the most informative disclosure. 3 Noncontrolling stockholders of Sub Company held a 20 percent interest during the first half year and a 10 percent interest during the last half year and at year-end. But noncontrolling interest income for the year and total noncontrolling interest at year-end are computed for the 10 percent interest held by noncontrolling stockholders throughout the year. Income applicable to the 10 percent interest acquired during the year is reported in the consolidated income statement as preacquisition income. 4 Preacquisition income is similar to noncontrolling interest expense because it represents the income of a subsidiary attributable to stockholders outside the consolidated entity. But preacquisition income is not income of the noncontrolling stockholder group at the date of the financial statements. In fact, preacquisition income relates to a previous majority stockholder group when the interest acquired exceeds 50 percent. In such a case, it seems improper to report the deduction as noncontrolling interest expense in the consolidated income statement. With proper description and disclosure, however, there should be no serious objection to combining preacquisition income and noncontrolling interest expense in the consolidated income statement. 5 The gain or loss on the sale of an equity interest is the difference between the proceeds from the sale and the recorded book value of the interest sold, provided that the investment is accounted for as a one-line consolidation. If another method of accounting has been used, the investment account must be converted to the equity method so that any gain or loss on sale is the same as if a one-line consolidation had been used previously. 6 Conceptually, the income applicable to an equity interest sold during an accounting period should be included in investment income and consolidated net income. In this case, the gain or loss on sale is computed on the basis of the book value of the interest at the time of sale, and income is assigned to the increased noncontrolling interest only after the date of sale. As a practical expedient, a beginning-of-the-
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This note was uploaded on 01/29/2009 for the course BA 459 taught by Professor Slattery during the Spring '09 term at Southern Oregon.

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Beams9eSM_ch08 - Chapter 8 CONSOLIDATIONS - CHANGES IN...

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