[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.

[Lou]

What your missing is the overall concept of NCI.

When they own 100%, you eliminate all of the subsidiary's Equity to avoid double counting.

But in the second question, you only own 75% so you can't eliminate 100% because that wouldn't be an accurate representation of your ownership %. You have to include the NCI portion onto the balance sheet as an additional component of SE

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[Jakecpa]

Thanks Iblaker, maybe you can help me out since I'm still struggling. Let me give you two scenarios.

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!!!!

[Author]

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