B. Woods Chapter 8 - Chapter 8 CONSOLIDATIONS - CHANGES IN...

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241 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, 2001 and that S has earnings of $100,000 between January 1 and July 1, 2001 and pays $50,000 dividends on May 1, 2001. 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 Minority 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 minority interest income for the year and total minority interest at year-end are computed for the 10 percent interest held by minority 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 minority 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 minority 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 minority interest expense in the consolidated income statement. With proper description and disclosure, however, there should be no serious objection to combining preacquisition income and minority interest expense in the consolidated income statement. 5 Intercompany transactions for pooled companies must be eliminated for all periods in which financial statements are presented. Thus, the effect of any gain or loss from Pam's purchase of plant assets in January 2008 must be eliminated in the preparation of consolidated financial statements of the pooled entity for 2008. 6 The gain or loss on the sale of an equity interest is the difference between the proceeds from the
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242 Consolidations - Changes in Ownership Interests 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. 7
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B. Woods Chapter 8 - Chapter 8 CONSOLIDATIONS - CHANGES IN...

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