Consolidation Ownership Issues

1. Baker / Lembke / King 9 Consolidation Ownership Issues Electronic Presentation by Douglas Cloud Pepperdine University

2. Consolidation Ownership Issues • Subsidiary Preferred Stock • Changes in Parent’s Ownership in Subsidiary due to: • Parent’s Purchase from Non affiliate • Parent’s Sale to Nonaffiliate • Subsidiary’s Sale to Nonaffiliate • Subsidiary’s Purchase from Nonaffiliate or Parents • Multiple Ownerships

3. Subsidiary Preferred Stock Outstanding PT Induk purchased 80 percent of the common stock of PT Anak on December 31, 20X0, at its book value of Rp240,000,000 and accounts for the investment using the basic equity method. PT Induk earns income from its own operations of Rp140,000,000 in 20X1 and declares dividends of Rp60,000,000. PT Anak reports net income of Rp50,000,000 in 20X1 and declares common dividends of Rp30,000,000. On January 1, 20X1, PT Anak issued Rp100,000,000 of 12 percent preferred stock at par value, none of which is purchased by PT Induk.

4. Subsidiary Preferred Stock Outstanding PT Induk’s Income from PT Anak PT Anak’ net income, 20X1 Rp50,000,000 Less: Preferred dividends (Rp100,000,000 x .12) (12,000,000) PT Anak’ income accruing to common shareholders Rp38,000,000 PT Induk’s proportionate share x .80 PT Induk’s income from PT Anak Rp30,400,000

5. Subsidiary Preferred Stock Outstanding Income to Noncontrolling Interest Preferred dividends of PT Anak Rp12,000,000 Income assigned to PT Anak’ noncontrolling common shareholders (Rp38,000,000 x .20) 7,600,000 Income to noncontrolling interest Rp19,600,000

6. Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated Income from Subsidiary 30,400 Dividends Declared-- Preferred (12,000) Common (60,000 (30,000) Investment in PT Anak 246,400 ) An entry is required to eliminate income from PT Anak.

7. Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated Income from Subsidiary 30,400 (1) 30,400 Dividends Declared— Preferred (12,000) Common (60,000 (30,000) (1) 24,000 Investment in PT Anak 246,400 (1) 6,400 )

8. Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated Income to Non- controlling Interest Dividends Declared-- Preferred (12,000) Common (60,000) (30,000)(1) 24,000 Noncontrolling Interest An entry is needed to assign income to noncontrolling interest.

9. Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated Income to Non- controlling Interest(2) 19,600 (19,600) Dividends Declared-- Preferred (12,000)(2) 12,000 Common (60,000) (30,000)(1) 24,000 (2) 6,000 (60,000) Noncontrolling Interest (2) 1,600

10. Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated Retained Earnings, Jan. 1 300,000 100,000 Investment in PT Anak 246,400 (1) 6,400 Common Stock 500,000 200,000 Noncontrolling Interest (2) 1,600 An entry is necessary to eliminate the beginning investment in common stock.

11. Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated Retained Earnings, Jan. 1 300,000 100,000 (3) 100,000300,000 Investment in PT Anak 246,400 (1) 6,400 (3)240,000 Common Stock 500,000 200,000 (3) 200,000500,000 Noncontrolling Interest (2) 1,600 (3) 60,000

12. Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated Preferred Stock 100,000 Noncontrolling Interest (2) 1,600 (3) 60,000 An entry is necessary to eliminate subsidiary preferred stock

13. Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated Preferred Stock 100,000(4) 100,000 Noncontrolling Interest (2) 1,600 (3) 60,000 (4) 100,000 161,600

14. Subsidiary Preferred Stock Held byParent PT Induk purchase 60% of PT Anak, Rp100,000,000 par value, 12 % Preferred Stock for Rp60,000,000. Dividends on P/S is Rp12,000,000. P/S Dividend recognized by PT Induk: Rp7,200,000 NCI : Rp4,800,000

15. Subsidiary Preferred Stock Held by Parent (Rp50,000,000 - Rp12,000,000) x .80 Elimination entry needed in the workpaper prepared at the end of 20X1. E(5) Income from Subsidiary 30,400,000 Dividends Declared--Common 24,000,000 Investment in PT Anak Common 6,400,000 Eliminate income from subsidiary.

16. Subsidiary Preferred Stock Held by Parent Rp12,000,000 x .60 Elimination entry needed in the workpaper prepared at the end of 20X1. E(6) Dividend Income--Preferred 7,200,000 Dividends Declared--Preferred 7,200,000 Eliminate dividend income from subsidiary preferred.

17. Subsidiary Preferred Stock Held by Parent Rp12,000,000 x .40 Rp4,800,000 + Rp7,600,000 Elimination entry needed in the workpaper prepared at the end of 20X1. E(7) Income to Noncontrolling Interest 12,400,000 Dividends Declared--Preferred 4,800,000 Dividends Declared--Common 6,000,000 Noncontrolling Interest 1,600,000 Assign income to noncontrolling interest.

18. Subsidiary Preferred Stock Held by Parent Elimination entry needed in the workpaper prepared at the end of 20X1. E(8) Common Stock--PT Anak 200,000,000 Retained Earnings, January 1 00,000,000 Investment in PT Anak Common 240,000,000 Noncontrolling Interest 60,000,000 Eliminate beginning investment in common stock.

19. Subsidiary Preferred Stock Held by Parent Elimination entry needed in the workpaper prepared at the end of 20X1. E(9) Preferred Stock--PT Anak 100,000,000 Investment in PT Anak Preferred 60,000,000 Noncontrolling Interest 40,000,000 Eliminate subsidiary preferred stock.

20. PT Anak Points About the Eliminating Entries • PT Induk’s 60 percent share of PT Anak’ preferred stock is eliminated against the preferred stock investment account. The remaining preferred stock is included in the noncontrolling interest account. • PT Induk’s dividend income from its investment in PT Anak’ preferred stock is eliminated against its share of PT Anak’ dividends declared. Continued

21. PT Anak Points About the Eliminating Entries • The income assigned to the noncontrolling interest includes income of PT Anak accruing to both preferred and common shareholders other than PT Induk. Similarly, the total noncontrolling interest includes PT Anak’ stockholders’ equity amounts accruing to both preferred and common stockholders other than PT Induk.

22. Period Net Income Dividends Ending Book Value 20X0 Rp40,000,000 -0- Rp300,000,000 20X1 50,000,000 Rp30,000,000 320,000,000 20X2 75,000,000 40,000,000 355,000,000 Parent’s Purchase of Additional Shares On January 1, 20X0, PT Anak has Rp200,000,000 of common stock outstanding and retained earnings of Rp60,000,000. The following data relates to PT Anak: PT Induk purchases its 80 percent interest in PT Anak in several blocks.

23. Ownership Purchase Percentage Book Date Purchased Cost Value Differential 1/1/X0 20 Rp 56,000,000 Rp 52,000,000 Rp 4,000,000 12/31/X0 10 35,000,000 30,000,000 5,000,000 1/1/X2 50185,000,000160,000,00025,000,000 80 Rp276,000,000 Rp242,000,000 Rp34,000,000 Note that PT Induk does not gain control until January 1, 20X2. Parent’s Purchase of Additional Shares

24. Investment in PT Anak Stock 20X0 Balance 99,000,000 Parent’s Purchase of Additional Shares 1/1 Purchase shares 56,000,000 12/31 Equity-method income (20%) 8,000,000 12/31 Purchase shares 35,000,000

25. Investment in PT Anak Stock 20X1 20X1 12/31 Dividends received 9,000,000 Balance 105,000,000 Parent’s Purchase of Additional Shares Balance 99,000,000 12/31 Equity-method income (30%) 15,000,000

26. Investment in PT Anak Stock 20X2 20X2 12/31 Dividends received 32,000,000 Balance 318,000,000 Parent’s Purchase of Additional Shares Balance 105,000,000 1/1 Purchase shares 185,000,000 12/31 Equity-method income (80%) 60,000,000

27. Parent’s Purchase of Additional Shares The consolidation workpaper prepared at the end of the year includes: E(12) Income from Subsidiary 60,000,000 Dividends Declared 32,000,000 Investment in PT Anak Stock 28,000,000 Eliminate income from subsidiary.

28. Parent’s Purchase of Additional Shares The consolidation workpaper prepared at the end of the year includes: E(14) Income to Noncontrolling Interest 15,000,000 Dividends Declared 8,000,000 Noncontrolling Interest 7,000,000 Assign income to noncontrolling interest. Rp40,000,000 x .20 Rp15,000,000 - Rp8,000,000

29. Parent’s Purchase of Additional Shares The consolidation workpaper prepared at the end of the year includes: E(14) Common Stock--PT Anak 200,000,000 Retained Earnings, January 120,000,000 Land 34,000,000 Investment in PT Anak 290,000,000 Noncontrolling Interest 64,000,000 Eliminate beginning investment balance. Rp105,000,000 + Rp185,000,000 Rp320,000,000 x .20

30. Parent’s Sale of Subsidiary Shares to Nonaffiliate • On Dec 31, 20X0, PT Anak has 20,000,000 common Shares outstanding with par value of Rp200,000,000 and R/E of Rp100,000,000. • PT Induk acquired 80%, buying 16,000,000 C/S at book value of Rp240,000,000. • 20X1: PT Anak Net Income of Rp50,000,000; dividends of Rp30,000,000 • Jan 1, 20X2: PT Induk sells 1,000,000 shares of PT Anak to non-affiliate for Rp19,000,000.

31. Parent’s Sale of Subsidiary Shares to Nonaffiliate Investment Balance per Dec 31, 20X1: Rp240,000,000 + Rp40,000,000 – Rp24,000,000 = Rp256,000,000. Journal of Selling Shares: Cash 19,000,000 Investment in SF Stock 16,000,000* Gain of Sale 3,000,000 *(256,000,000 x 1/16)

32. Parent’s Sale of Subsidiary Shares to Nonaffiliate Eliminating entries at Dec 31, 20X2 Gain on Sale of Investment Rp3,000,000 APIC Rp3,000,000 Subsequent Eliminating entries Retained Earnings Rp3,000,000 APIC Rp3,000,000

33. Subsidiary’s Sale of Additional Shares to Nonaffiliate • On Jan 1, 20X2, PT Anak issued 5,000,000 additional shares at Rp20,000 per share, totaling Rp100,000,000. • PT Induk proportion down to 64%, yet BV of investment increase to Rp268,800,000. • The increase is recorded as Investment in PT Anak Stock Rp12,800,000 APIC Rp12,800,000 • If less than book value?

34. Subsidiary’s Sale of Additional Shares to Nonaffiliate • If the 5,000,000 additional PT Anak shares were all bought by PT Induk • Total investment in PT Anak now is Rp356,000,000 • PT Induk proportion share increase by 84%, BV increase by Rp352,800,000. • Yet, the price paid and increase in book value differs by Rp100,000,000 – (Rp352,800,000 – 256,000,000) = Rp3,200,000.

35. Subsidiary’s Purchase of Shares from Nonaffiliate • Purchasing treasury shares • On 1 Jan 20X2, PT Anak purchase 1,000,000 T/S from nonaffiliate for Rp20,000. • PT Induk interest in PT Anak: (16,000,000/19,000,000) – 84,21%. • PT Induk’ investment BV in PT Anak : 84,21% x Rp300,000,000 = Rp252,630,000 • Different of BV: Rp256,000,000 - Rp252,630,000 = Rp3,370,000

36. Subsidiary’s Purchase of Shares from Nonaffiliate • Journal to record the BV decrease R/E Jan 1 3,370,000 Investment in PT Anak Stock 3,370,000 • Eliminating entries C/S – SF 200,000,000 R/E, Jan 1 120,000,000 T/S 20,000,000 Investment in PT Anak Stock 252,630,000 NCI 47,370,000

37. Subsidiary’s Purchase of Shares from Parents • On 1 Jan 20X2, PT Anak repurchase 4,000,000 T/S from parents for Rp20,000. • PT Induk interest in PT Anak : (12,000,000/16,000,000) = 75%. • PT Induk’ investment BV in PT Anak : 75% x Rp240,000,000 = Rp180,000,000 • Decrease of Investment BV: Rp256,000,000 - Rp180,000,000 = Rp76,000,000 • Gain of Sale of investment: Rp80,000,000 – Rp76,000,000= Rp4,000,000 • Eliminating entries?

38. Subsidiary’s Purchase of Shares from Parents • Eliminating entries Gain on Sale of Investment 4,000,000 APIC 4,000,000 C/S – SF 200,000,000 R/E, Jan 1 120,000,000 T/S 80,000,000 Investment in PT Anak Stock 180,000,000 NCI 60,000,000

39. B Company C Company Alternative Ownership Structures A Company (a) Direct Ownership

40. B Company C Company Alternative Ownership Structures A Company (b) Multilevel Ownership

41. B Company Alternative Ownership Structures A Company (c) Reciprocal Ownership

42. Multilevel Ownership and Control • This means that when consolidated statements are prepared, the statements will include companies in which the parent has only an indirect investment along with those in which direct ownership is held.

43. Multilevel Ownership and Control • The amount of income and net assets to be assigned to the controlling and noncontrolling shareholders, and the amount of unrealized profits and losses to be eliminated, must be determined at each level of ownership.

44. Multilevel Ownership and Control • Consolidation proceeds from the lowest level to the highest in these cases. In a relatively few cases, a subsidiary may own common shares of its parent. Usually those common shares are treated as treasury stock in consolidated financial statements.

45. Subsidiary Stock Dividends • Subsidiary dividends payable in shares of subsidiary’s common stock require slight changes in the elimination entries used in preparing consolidated financial statements. • Because stock dividends are issued proportionally to all common stockholders, the relative interests of the controlling and noncontrolling stockholders do not change as a result of the stock dividend.

46. Subsidiary Stock Dividends • While the carrying amount of the investment on the books of the parent also is unaffected by a stock dividend, the stockholders’ equity accounts of the subsidiary do change, although total stockholders’ equity does not. • The stock dividend represents a permanent capitalization of retained earnings, thus decreasing retained earnings and increasing capital stock and, perhaps, additional paid-in capital.

47. Subsidiary Stock Dividends • In the preparation of consolidated financial statements for the period in which a stock dividend is declared by the subsidiary, the stock dividend declaration must be eliminated along with the increased common stock and increased additional paid-in capital, if any. • The stock dividend declared cannot appear in the consolidated retained earnings statement because only the parent’s dividends are viewed as dividends of the consolidated entity.

48. Chapter Ten The End