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Subject Topic: Acquisitions: Statement of R/E (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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Kookie
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Posted: 25 Oct 2010 at 11:34 | IP Logged  

cpa-05920

On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000.  The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years.  Peace used the equity method in accounting for its investment in Surge.  Surge reported net income of $20,000 and paid dividends of $8,000 during the current year.  Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year.  What amount will Peace report as dividends declared and paid in its current year's consolidated statements of retained earnings? 

ANSWER:  When the financial statements of Peace and Surge are consolidated, the equity of Surge--including Surge's retained earnings will be eliminated.  The consolidated statement of retained earnings will include only the $15,000 dividend paid by Peach during the current year.

MY CONFUSION:
I understand that the Sub's entire equity is eliminated and the consolidated statements are combined line by line.  However...this consolidation is not 100% owned.  There actually is a Non-Controlling Interest (NCI) here.  NCI=25%.  So then...wouldn't 25% of the sub's dividends STILL be recorded (as a decrease) to the Non-Contrlling Interest account???  NCI doesn't get eliminated.  So then...25% of the the Sub's dividends should ALSO be recorded in the consolidated statement of retained earnings...right??? 

I think I've officially confused myself at this point.  Please help.  :-/



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Zeratul
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Posted: 25 Oct 2010 at 12:28 | IP Logged  

You should review the treatment of NCI in your study materials.

On acquisition date, NCI is given its own S/E account on the parent's books. The basis for valuation is fair value as of acquisition date. It is adjusted in subsequent periods for dividend payments and its share of sub profits/loss.
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Kookie
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Posted: 25 Oct 2010 at 12:40 | IP Logged  

Yeah...I'm reviewing NCI study materials now...but stiill coming up with questions.  I appreciate all of your help here!! 

If I comprehend correctly...NCI sits as 1 total in SHE -- which includes it's FMV %...NI%....& DIV%.  And that's it.  The rest of the Sub's Capital and Retained Earnings are completely eliminated.  You are only concerned with the Parent's Capital and Retained Earnings (which includes dividends).  Correct?

I think the more I study this...the more I confuse myself.  But I **think** I got it.

Thanks again Zeratul!

__________________
AUD 79, 80
BEC 77
REG 73, 67, 80
FAR 63, 71, 67, 70, 80
PRAISE GOD--I'M DONE!!! :-)
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Zeratul
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Posted: 25 Oct 2010 at 15:43 | IP Logged  

Yes. Changes in NCI do not flow through the statement of retained earnings.
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