[Jakecpa]

I’m having issues deciphering the concept of Equity after an acquisition. I’m sure its a simple rule misunderstanding of mine, Here’s what I get confused,

(1) Consolidated Equity = Parent’s Equity + Fair Value of NonControlling Interest
AND
(2) Consolidated Equity = Parent’s Equity

I know that in the consolidate balance sheet, the total assets and liabilities will be the Parent’s assets plus the subsidiaries assets (100%). Same thing for the liabilities. But I came across the two questions below, where one tells me that the consolidated Equity is the parent’s plus NCI and the other question tells me that its just the parents because the sub’s equity gets eliminated in the CAR IN BIG entry. Can someone let me know where I’m getting twisted??? The two questions are shown below.

Beni Corp. purchased 100% of Carr Corp.’s outstanding capital stock for $430,000 cash. Immediately before the acquisition, the balance sheets of both corporations reported the following:
Beni Carr

Assets $ 2,000,000 $ 750,000

Liabilities 750,000 400,000

Common stock 1,000,000 310,000

Retained earnings 250,000 40,000

Liabilities and stockholders’ equity $ 2,000,000 $ 750,000

At the date of purchase, the fair value of Carr’s assets was $50,000 more than the aggregate carrying amounts. In the consolidated balance sheet prepared immediately after the acquisition, the consolidated stockholders’ equity should amount to:
a.

$1,250,000
b.

$1,600,000
c.

$1,680,000
d.

$1,650,000
Explanation

Choice “a” is correct, $1,250,000 consolidated stockholders’ equity (the same as the parent company).

Rule: At date of acquisition, the consolidated equity will be equal to the parent company’s equity plus the fair value of any noncontrolling interest. The subsidiary company’s equity accounts are eliminated.

On January 2, Year 1, Pare Co. purchased 75% of Kidd Co.’s outstanding common stock. Selected balance sheet data at December 31, Year 1, is as follows:
Pare Kidd

Total assets $ 420,000 $ 180,000

Liabilities 120,000 60,000

Common stock 100,000 50,000

Retained earnings 200,000 70,000

$ 420,000 $ 180,000

During Year 1, Pare and Kidd paid cash dividends of $25,000 and $5,000, respectively, to their shareholders. There were no other intercompany transactions.

In its December 31, Year 1, consolidated balance sheet, what amount should Pare report as common stock?
a.

$50,000
b.

$150,000
c.

$100,000
d.

$137,500
Explanation

Choice “c” is correct, $100,000 consolidated common stock at 12/31/Year 1 (same as parent).

Rule: 100% of a purchased subsidiary’s shareholders’ equity (including common stock) as of the date of acquisition is eliminated in consolidation.

On January 1, Year 1, Dallas, Inc. acquired 80% of Style, Inc.’s outstanding common stock for $120,000. On that date, the carrying amounts of Style’s assets and liabilities approximated their fair values. During Year 1, Style paid $5,000 cash dividends to its stockholders. Summarized balance sheet information for the two companies follows:

Dallas
Style

12/31/Year 1
12/31/Year 1
1/1/Year 1

Investment in Style (equity method)

$132,000

Other assets

138,000

$115,000

$100,000

$270,000

$115,000

$100,000

Common stock

$50,000

$20,000

$20,000

Additional paid-in capital

80,250

44,000

44,000

Retained earnings

139,750

51,000

36,000

$270,000

$115,000

$100,000

What amount of total stockholders’ equity should be reported in Dallas’ December 31, Year 1, consolidated balance sheet?
a.

$303,000
b.

$270,000
c.

$385,000
d.

$286,000
Explanation

Choice “a” is correct, $303,000 total consolidated stockholders’ equity. Dallas’ consolidated stockholders’ equity will be the parent company stockholders’ equity plus the noncontrolling interest on December 31, Year 1:

Common stock $ 50,000

Additional paid-in capital 80,250

Noncontrolling interest 33,000

Retained earnings 139,750

$ 303,000

The December 31, Year 1 noncontrolling interest of $33,000 is calculated as follows:

Noncontrolling interest, 1/1 $ 30,000*

+ NCI share of net income 4,000**

– NCI share of dividends (1,000) $ = $5,000 x 20%

Noncontrolling interest, 12/31 $ 33,000

* The noncontrolling interest on 1/1 is calculated as follows:

$120,000 acquisition cost = FV of Style x 80%
FV of Style = $150,000
Noncontrolling interest = $150,000 x 20% = $30,000

** The noncontrolling shareholders’ share of Style’s net income is calculated as follows:

Style RE, 1/1 $ 36,000

+ Net income 20,000 $ (plug)

– Dividends (5,000)

Style RE, 12/31 $ 51,000

Noncontrolling share of Style’s net income = $20,000 x 20% = $4,000

[GiniC]

JakeCPA – I had the same problem but looking at the two questions you posted together I think I see the answer. When the acquisition is 100%, parent's equity is just parent's equity after consolidation, but when the acquisition is less than 100%, parent's equity adds the NonControlling interest. I don't quite understand WHY, but it seems to fit.

Anybody else out there understand this?

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