Chapter 16 - Solution Manual

Noncontrolling interest would be valued at 120000 x

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Noncontrolling interest would be valued at $120,000 x 10% = $12,000. c. Because the net assets of the consolidated entity are viewed as belonging to the consolidated entity, any income generated by them belongs to the consolidated entity, not to any particular equity holder. The bottom line of an entity theorist’s consolidated income statement would be consolidated net income. Consolidated net income would include the revenues, expenses, gains and losses of the entity. In the entity theorist’s income statement, consolidated net income would not be allocated between the parent company and the noncontrolling interest. An allocation of the consolidated net income between the parent company and the noncontrolling interest could be separately shown so that the user could see how the parent company’s share of the consolidated net income impacts the parent company’s retained earnings and how the noncontrolling interest‘s share of the subsidiary income (that is included in consolidated net income) impacts the balance of the noncontrolling interest that is reported in the consolidated balance sheet.
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345 d. Because entity theory views the assets of the consolidated entity as belonging to the entity, rather than to its owners, both creditors and stockholders of the consolidated group are seen as providers of capital. A strict entity theorist, such as William Paton, would say that all capital providers should be listed on the right side of the balance sheet with no distinction being made for debt versus equity. However, the typical entity theorist would say that noncontrolling interest in the subsidiary is an equity interest and should be reported in stockholders’ equity along with the parent company’s equity in the consolidated entity. He/she would argue that noncontrolling interest does not meet the definition of a liability; rather, noncontrolling interest has all the characteristics of an equity interest just like the parent company’s interest in the consolidated entity has. The only difference is that the noncontrolling interest has an interest in only a part of the consolidated entity (the subsidiary), but nevertheless it is still an equity interest 16-9 a. Parent company theory views the assets and liabilities of the consolidated entity as belonging to the owners, not to the entity. In addition, parent company theorists believe that consolidated financial statements are constructed primarily for the parent company stockholders and that a noncontrolling interest is an outside interest. Thus, the parent company theory acquisition value for goodwill would be based only on the goodwill presumed to have been purchased by the parent company. If, for example, the parent company pays $108,000 for a 90% interest in the subsidiary, and the fair value of the subsidiary’s net assets is $100,000. The parent is presumed to have purchased 90% x $100,000 = $90,000 of the identifiable net assets of the subsidiary. The additional amount paid to purchase the parent’s company’s interest is deemed to be goodwill.
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