 Hello, and welcome to the session in which we would learn on how to allocate consolidated net income to the parent and non-controlling interests. Consolidated net income is covered in advanced accounting course as well as the CPA exam. In addition to the consolidated income, we have to know how much of that income belongs to the parent, how much of it belongs to the non-controlling interests. And the reason we need to know more about the non-controlling interests because the non-controlling interests, it has its own account on the balance sheet. So you need to understand how do we start with non-controlling interests? What changes do we apply to non-controlling interests? Then what's the ending non-controlling interests? So non-controlling interests is a topic by itself that you need to be comfortable with when you sit for the CPA exam or if you are taking A in advanced accounting course. Whether you are an accounting student or trying to take your CPA exam, take a look at my website, farhatlectures.com. I provide additional resources in addition to your CPA review course. So I'm not asking you to say, you know what? Drop your CPA review course. I can help you pass the exam. Not at all. I am a useful addition. I can help you pass your course by helping you understand the material better in addition to your CPA review course. Once you understand the material better, you are ready for the exam. What is your risk? Your risk to try my supplemental resources is one month of subscription. Give it a try. If it feels it's helping you, you keep it. If not, you cancel and that's the end of the word. If you benefit, you pass. If you're on benefit, you lost one month of subscription. That's your risk-reward criteria. And if not for anything, take a look at my website to find out how well or not well your overall university doing on the CPA exam. If you are taking accounting courses, please take a look at my website as well. I do other resources for other accounting courses. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation like this recording, share it with other, connect with me on Instagram, Facebook, Twitter, and Reddit. So let's talk about how to allocate consolidated net income to parent and non-controlling interest. So we have consolidated net income and it's gonna have to be spread between the parent and the non-controlling interest. When do we have a non-controlling interest? That's the first thing we have to learn about. Actually, we learn about non-controlling interest in the prior session is when some of the shareholders of the company that you purchased, the company you have control of, don't want to sell their shares. For some reason they don't want to or you cannot afford to pay for those additional shares. So non-controlling interest exists when you own more than 50% of the company, more than 50% but less than 100. So you have control but you don't have 100% control. The subsidiaries will keep on operating their business as usual but they part of the profit that the subsidiary generate, technically belongs to the non-controlling interest. And this is why we have to figure out how much of the consolidated net income goes to the non-controlling interest. Now there is a formula we have to follow, we have to learn about and I'm gonna work three examples in this session, start with the simple one, changing the scenario a little bit, then working a third example. So the best way to learn this is to work an example but first I have to go through the steps. So if you wanna copy down the steps, that's not a bad idea. First, find the subsidiaries net income. The subsidiaries net income, all what we care about is the subsidiary itself because it's gonna be operating. And the subsidiaries net income, it's gonna be adjusted, usually deduction, it could be addition for access fair value. For example, when we buy the other company, they might have undervalued asset or overvalued asset or liabilities for that matter. Usually we deal with undervalued asset, that's why we have to have additional deduction but the point is you have to compute net income, then adjust it for any access fair value. Don't worry, we'll work an example. Then we're gonna take this number and multiply it by the non-controlling interest percentage. It could be 1%, it could be 49% or anywhere in between or 49.99. Simply put, what is the non-controlling interest? Usually 10, 20, 30, whatever that percentage is. And that's gonna give us, so you have to be careful with the terminology. Please be careful. That's gonna give us net income attributable to non-controlling interests. Then what are we gonna do next? Next, we are gonna compute consolidated net income. Now, how do we compute consolidated net income? Consolidated net income may need to be computed or might be given to you on the problem. So you have to read the problem carefully, carefully. That is 100% of the parent, 100% of the subsidiaries, then adjusted, just like adjusted here, adjusted usually a minus, a deduction, just the same thing as up there, but doesn't have to be for access acquisition, date, fair value over book value, amortization. So we might have some amortization we have to deduct. Then what we're gonna do, once consolidated net income is computed, consolidated net income is computed, then we deduct this amount, net income attributable to non-controlling interests. And what's left is the net income attributable to parent company, that's a lot. Don't worry, we're gonna work three examples. But if you want to, just kind of to summarize what we did. In the first step, really what we computed, net income attributable to non-controlling interests. You have to know how to do this. You might have to know how to compute consolidated net income. Then this number, consolidated net income minus this number will give you what's left to the parent. So from the consolidated, we're gonna give some to the non-controlling interests and anything left, it's gonna go to the parent. Again, the best way is to work an example. So let's take a look at this example. The parent acquires 90% of sub. It means we have an non-controlling interest at 10%. Assume that the current consolidated net income equal to 300,000, including 10,000 of annual acquisition date access fair value amortization. In this example, I'm giving you a lot. I'm telling you the consolidated net income is 300,000. I'm telling you the annual acquisition date access fair value is 10,000. So I'm giving you a lot. The sub reports 380,000 of revenues and 260,000 of expenses. Now we need to compute this number. That's called that I highlighted in yellow earlier, the net income at readable to the non-controlling interests. How do we compute this number? Let's go ahead and compute this number. Well, how do we compute this number? We're gonna take. Now we're dealing with the sub alone. We don't care about the parent. Revenue minus expenses gives us net income. Then this net income will have to be adjusted for the access fair value amortization. We have already that number is giving 10,000. So subsidiaries net income adjusted for access, amortization is 110. Here we apply the percentage. We're gonna take 110 times 10%. And this is gonna give us the non-controlling interest here to adjusted subsidiaries net income. This is the yellow highlighted number that I computed earlier. So first you have to compute it this way. Okay? Now I'm gonna tell you that the, I already told you the consolidated net income is 300,000, including 10,000 of annual access amortization already factored. So it's 300,000. Then we're gonna subtract out of it this. You remember this number that's highlighted in yellow. So I'm gonna go back. So if you are looking at figures, this is the yellow highlighted figure from the previous slide. So 300,000 minus 11,000, the net income attributable to non-controlling interest. What's left is 289. That's the income that attributable to the parent company, which is the controlling interest. So again, this example is pretty straightforward. Let's work another example. That's a little bit more that would require us to do a little bit more of computation. On January 1st, 2022, the parent company, the parent company pays 388,000 to purchase 60% in sub. So here again, we have a non-controlling interest of how much? You guessed it, 40%. Annual access fair value amortization is 15,000. Well, that's good. That's also given to us because it may not be giving to you. So here it's also giving to you. On December 31st, 2022, sub reported 400 of revenues and 300 of expenses. The parent report 700,000 of revenues and 400 of expenses. The parent figure contains no income from the subsidiaries. What is the consolidated net income attributable to the parent company? So now we want the net income, consolidated net income that's attributable to the parent company. It means we have to take out any net income that belongs to who to the non-controlling interest. What do we have to do first? Well, we have to find out the net income attributable attributed to the non-controlling interest. How do we find this out? Well, let's find out the net income that belongs to the subsidiary first. Let's do this computation. They have revenues of 100,000, expenses of 300,000. So let's start there. So we have 400,000 minus 300,000. That's gonna give us 100,000 net income for the subsidiaries, but that's not adjusted for any excess fair value deduction. Again, most of them it's gonna be a deduction. It doesn't have to. Annual access fair value amortization is 15,000. Again, don't forget to compute this. This is 15,000. That's gonna give us 85,000. At this point, we apply the 40% and that's gonna give us, let me get my calculator out and we'll compute this number and that's 85,000 times 0.4. That's 34,000. Let's keep the calculator up here. That's 34,000. Now we need to compute consolidated net income adjusted, then subtract from it 34,000 because this is the net income attributable to the non-controlling interest that the minority interests. Now, what is the income that's, what's the net income that we're looking for attributable to the parent company? Well, they have revenues of 388, parent revenue plus the sub revenue of 400,000. Let's find revenues first. 388, now we're computing the consolidated net income plus 400,000. That's 788,000. Now we're gonna deduct the parent, the parent expenses which are, actually no, they did not pay 388, sorry, 388 is how much they paid. Let's recompute the revenue for the consolidated revenue for the parent. The sub revenue is 400 and the parent revenue is 700. So it's 400 for the sub, 700 for the parent in total, total revenue is 1,100,000. Expenses are 300,000 for the sub, 400,000 for the subsidiary minus 700,000. That's easy. That's gonna take us back to 400,000. Again, are we done yet? No, we have to adjust this number. We have to deduct the access fair value. And the access fair value is, amortization access fair value which is 15,000. That's gonna give us 385. Now if you are being asked, consolidate compute, consolidated net income, if that's what you are being asked, you got the answer. This is consolidated net income. That's not what they're asking. They're asking what is the consolidated net income attributable to the parent company? Well, this is everything. Consolidated net 385 includes everything. So what we have to do, we have to deduct, let me highlight this number in yellow since I've been highlighting it in yellow the whole time. We have to deduct now 34,000 from this number. Let me highlight it in yellow. And what's left? It's gonna be the income attributable to the parent company and that's what they're asking. So 385, 385 minus 34, and that's 351. The answer is two or B. So the answer is 351. So that's the answer, 351,000. Can you see something like this on the exam day? Sure, you might see something like this on the exam day. So be careful if they're asking us about the consolidated net income, it's 385. They're asking us about the consolidated and income attributable to the parent company, 351. They could also ask us about net income attributable to the non-controlling interest, and that's the 34,000. Let's take a look at one more example. Let's keep the calculator out. We're gonna need it. What is the, oh, here, the question is what is the consolidated net income? So here they're asking us about the consolidated net income. On January 1st, the parent company purchased 90% of the outstanding voting shares of SUB for 540,000. The acquisition date, fair value for the non-controlling interest was 60,000. On January 1st, the SUB's net asset has a total carrying value of 420. Okay, so basically what's the fair value of the company that we are buying? Well, the fair value is what we paid for for the controlling and the non-controlling, which is 600,000, so simply put, this is how much the value of the company, we valued the company at fair value, the net asset is 420, so we have an access of 180,000, okay? Let's see what are we gonna do with this amount, 180,000. We have an equipment, 80 remaining life was undervalued on the SUB by 80,000. So we're gonna allocate 80,000 to the equipment. So we're gonna allocate of this amount minus 80,000 to the equipment, and we are told this equipment has an eight year life, so let's divide by 10, divide by 10 and get 10K of access amortization. We're left with 100,000, let's see. Any remaining fair value over book value was attributable to a customer list developed by the SUB. What's left is 100,000, and that's gonna be the customer list. It has a remaining life of four years, four years divided by four. We're gonna have an access amortization of 25,000, but not recorded on the books. The SUB reported net income of 70,000 in 2019, we don't care about this because the question is about 2021, 80,000 in 2020. Each year since the acquisition, the SUB has declared dividend of 20,000. At January 1st, the parent retained earnings to 50, they're asking us about the consolidated net income. That's the question. What's the consolidated net income? It's the revenues minus expenses for the parent as well as for the SUB. So we're gonna start with the parent. So we're gonna take 498 plus 285. 498 plus 285, that's gonna give us total revenue for both, 783. And expenses is 350 plus 195 for the SUB, 545. Let's find out that 783 minus 545, that's equal to 238. Now be careful here. One of the answers is 238, but that's not the right answer. Why not? Because consolidated net income will have to be adjusted to that additional amortization. And we have an additional amortization of, I already computed for you, 35,000. Therefore what I have to do to get to consolidated net income, I have to deduct 35,000 minus 35, and that's gonna give us 203. Therefore, consolidated net income is 203, okay? Now they could also ask you, could you compute the net income attributed to the parent company or net income attributed to the non-controlling interest? Let's find out the net income attributed to the non-controlling interest. What I do is I look at the SUB. The SUB has 285 of revenues, 195 of expenses. Let me compute the net income first. 285 minus 195, that's equal to 90,000. Then I'm gonna have to deduct the access amortization minus 35, minus 35. And that's gonna give me 55,000. Here I apply my percentage times 10% times 0.1, that's equal to, so net income attributable to the non-controlling interest is 5,500. So what's the net income attributed to the parent? Well, if I have the consolidated 203, and I deduct 5,500 from it, let's do 203 minus 5,500, that's 197,500. And notice 197,500 is one of the answers, but I'm not being asked that question. I am being asked what is consolidated net income? It's 203. What is the amount of net income that belongs to the parent, 197,500? What is the net income attributed to the minority interest, 5,500? Three things, consolidated net income, net income attributed to the parent company, net income attributed to the non-controlling interest, access amortization. So they can ask you different questions about this problem. At the end of this recording, what I'm gonna do again, I'm gonna invite you to take a look at my website, farhatlectures.com. I can help you, I can help you pass the exam. How? 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