75% VS 100% Acquisitions

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  • September 4, 2016 at 9:07 pm #829605
    Jakecpa
    Participant

    I’m missing a tiny piece of the puzzle. I understand that parent’s assets and liabilities need to be added together in the consolidated balance sheet. I also know how to calculate the ending Fair value of the noncontrolling interest. But I struggle with the concept of when (1) the parents equity equals consolidated equity and when it has to be (2) parents equity plus NonControlling interest. I also understand how to book the eliminating entry. In other words, I can make sense of all the other things that tie into this except for this little detail. Can someone provide me a brief explanation within the two scenarios I have below here?

    1) (Scenario 1 ) On Dec 31st Lacker Co. has equity of $100K and they bought 100% control of Raley Co. for $100,000

    2) (Scenario 2) On Dec 31st Hydro Co. has equity of $100K and they bought 75% control of Melwick Co. for $75,000

    What would be the consolidated equity of on each of those two scenarios. If you can help me out with an explanation on these, maybe it will click. Thanks!!!!

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  • September 4, 2016 at 11:24 pm #829628
    Fluffy
    Participant

    Okay… Well lets see if I can help.

    When the Parent has CONTROL (over 50%) of the subsidiary, they will use the Acquisition method, aka prepare consolidated financial statements.
    One of the few adjustments that the acquiring corporation has to do during a Consolidation is:
    -T0 GET RID OF ALL Subsidiary's Equity (Common Stock, APIC, & Retained Earnings)…
    So it just means you ONLY show the Parent's Equity (Common Stock, APIC, & Retained Earnings) in the Consolidated F/S.
    -When parent owns 100% of the subsidiary, parent acquires everything, so you show just the Parent's Equity.
    -HOWEVER, when the parent owns less than 100% but more than 50%, it still controls BUT does not Acquire all of the Subsidiary. YOU WILL STILL SHOW JUST THE PARENTS EQUITY, but, Since they didn't acquire ALL of it, they have to create a portion called Non-controlling Interest.
    SO if Parent owns 99%, you have to show the unacquired 1% as NCI. if 55%, the 45% of it as NCI.
    -NCI is reported in the equity section of the consolidated F/S, but separately from the parents equity.

    *NCI = Fair Value of subsidiary * un-acquired portion(%).

    ——————————————————-
    Scenario 1:
    The consolidated Balance Sheet will only show the Parent's Equity as sub's is eliminated.

    Scenario 2:
    The consolidated Balance Sheet will show the Parent's Equity as sub's is eliminated, and the Non-controlling interest.
    The 25% that it doesn't own is NCI %.
    We don't care about sub's equity. Eliminate it bye bye.
    We care about it's Fair Value. if FV is 100k, then (100 *.25) = 25k is NCI.
    IF FV is 120k then (125*.25) = 30k is NCI.

    Hope this helps! my first time explaining something.. sorry if its wordy haha.. might've made it more confusing

    September 4, 2016 at 11:56 pm #829633
    Jakecpa
    Participant

    Thanks fluffy,
    I guess what I can derive from your explanation and from what I went over in the book is that, the parents equity will always be the consolidated equity when the control is 100%. When it is less than 100 but more than 50, the consolidated equity will still be the parents equity but the statement ALSO has to show the NCI amount but separately. And all this will balance because even though you are adding all assets and liabilities of both you are also eliminating the investment and NCI and making fair value adjustments in the eliminating entry. Thanks

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