Chapter 16 - Solution Manual

Goodwill 108000 90000 18000 b because parent company

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Goodwill = $108,000 - $90,000 = $18,000. b. Because parent company theory views the assets and liabilities of the consolidated entity as belonging to the owners of parent company shares, when a parent company acquires less than a 100% ownership interest in a subsidiary, the assets and liabilities are valued at historical cost from the perspective of the parent company. Thus, the value of the net assets of an acquired subsidiary are initially valued at 100% of their respective book values plus the parent company’s share of the adjustment of those assets and liabilities to fair value. In addition purchased goodwill is added to the subsidiary’s assets. The result is that the value of noncontrolling interest is not affected by the consolidation process. It will be equal to the noncontrolling interest’s ownership percentage multiplied times the book value of the subsidiary’s equity. In the above example, if the book value of the identifiable net assets of the subsidiary on the acquisition date is equal to $94,000, the difference between their fair value and book value would be ($100,000 - $94,000) = $6,000. On the acquisition date, the balance sheet of the consolidated entity would include subsidiary net assets valued at $94,000 + 90% x 6,000 plus goodwill of $18,000. It would also report noncontrolling interest equal to 10% x $94,000 = $9,400. c. Because the parent company theorist views the financial statements of the consolidated entity as being provided solely for the parent company shareholders and thus views the noncontrolling interest as an outside interest, the noncontrolling interest’s share of the subsidiary’s net income is subtracted from the consolidated entity’s net income to arrive at parent company net income. Some parent company theorists would show the noncontrolling interest income as an expense others would show it as a subtraction to arrive at parent company net income.
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346 d. Because the parent company theorist views the financial statements of the consolidated entity as being provided solely for the parent company shareholders and thus views the noncontrolling interest as an outside interest, only the parent company shareholders are viewed as an equity interest. Even though the noncontrolling interest represents a shareholder interest in the subsidiary, the parent company theorist would not place noncontrolling interest in stockholders’ equity. It would be reported either in the liability section of the balance sheet or between liabilities and stockholders’ equity. 16-10 Current practice values the net assets of a consolidated entity at 100% of their fair value, regardless of the percentage ownership that the parent company has in its subsidiary. Because entity theory views the assets and liabilities of the consolidated entity as belonging to the entity, not to its owners, when a parent company acquires less than a 100% ownership interest in a subsidiary, the assets and liabilities are valued at 100% of their respective fair values.
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