 Hello, and welcome to this session in which we would look at partial ownership consolidation. And what does that mean? It means we have to consolidate, but we have outside interests exist. In other words, we don't own 100% of the company. However, when we consolidate, we consolidate at 100%. So how do we have to reconcile the fact that we don't own 100%, but we consolidate at 100%. In the prior session, we talked about something called non-controlling interest. We learned how to compute non-controlling interest, how to allocate income to non-controlling interest. In this session, I'm going to work a consolidation problem showing you how to consolidate when you have NCI. So basically, so what's new? What we are adding is the idea of NCI. So we're going to have a beginning period NCI, non-controlling interest. We're going to add the net income attributed to that NCI. We're going to deduct the subsidiary dividend attributed to that NCI. Then we are going to compute the ending NCI. Now, this topic is important, whether you are a CPA candidate or an accounting student taken an advanced accounting course. I strongly suggest you take a look at my website, farhatlectures.com, as a supplementary material, if you are looking to learn this topic in depth. Keep your CPA review course. I explain NCI. I explain consolidation a little bit more in depth. In contrast to other courses that they assume you know consolidation. You may know consolidation. You may not know consolidation. You may have never took a consolidation course in your college, or if you took a course, you didn't really learn it. So I am here to help you understand this material better. Add me as a supplemental material and I can help you. Your risk is one month of subscription. Your potential gain is passing the exam. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. I do have a list of many accounting courses and my CPA supplemental resources are aligned with your CPA review course, whether you are taking Becker, Gleam, Wiley or Roger. So it's very easy to follow. If you haven't connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation. Like this recording, share it with others, connect with me on Instagram, Facebook, Twitter and Reddit. So the best way to illustrate this partial ownership consolidation is to actually look at an example. So we're going to work an example where Adam Company, the parent company, purchased 80% of Ryan's company. So notice here, we did not own 100%. And this is something new that we are doing in this course. So how do we have to deal with that? Ryan Company has 100,000 shares. It means we purchased 80,000 on January 1st, year X-Zero. For a total, for 975 per share, we end up paying 780,000. The stock were traded before and after the acquisition and 975. Therefore, we assume no premium. And the reason I use no premium, because on the CPA exam, they don't use no premium. In my courses, I don't use the premium. I just want to make sure you understand the basics. So let's take a look at how much is, how much the value of the NCI. We transferred 780,000 to the shareholders. We bought 80,000 shares at 975. This means if the NCI fair value, not fair value, the NCI fair value is 195,000. How did we notice that 20,000 remaining shares are traded at 975 per share, which is the fair value is 195. Therefore, you can say the beginning NCI, you can think of it as 975. A 195 and the Ryan's acquisition fair value is 975. Simply put, Ryan's company is worth 975,000. We purchased 80% of it, 780. The NCI fair value is 195. Now, let's take a look at the book value of Ryan's company. We take a look at their current assets, trademark, patent, equipment, long-term liabilities, their net asset is 7,740. Hold on a second. The net asset is 740, but we valued the company at 975, right? Because all of their net asset is 740, but we valued the company at 975. So there's an access between the fair value and the book value of 235. What do we do with this access? Well, the first thing we do with this access, fair value, is to determine whether we can allocate this access fair value to various assets, identifiable assets, and maybe there are unidentifiable assets that we can create, we can add to the balance sheet. So let's see what the fair value of the assets are. The current assets, they have the same value, trademark. The trademark are worth 320 rather than 260. So we have to allocate 60,000 to trademark, add 60,000 to the trademark account, the patent and technology. On the books, it's 480, it's worth 600. So we have to allocate 120 to patent and technology. Equipment is worthless. Therefore, we have to allocate 10,000 less to equipment. So the value of the equipment is worthless. Long-term liabilities is also worthless. 550, the fair value, we can pay it off for 510. Therefore, what we're going to do, we're going to take this 235 and allocate it to those three accounts. We're going to take 235 allocated to trademark, patent technology, and long-term liability and equipment. Notice the equipment we add because it's less. And what's remaining that we cannot allocate of the 235 is 25,000. Anything that we cannot allocate, we call it goodwill. Therefore, we know our goodwill is 25,000. Now, since we have these additional assets, more trademark, more patent and technology, less equipment, and less that, what do we have to do? We have to compute the amortization expense. So we have to determine their life. The trademark will have an indefinite life. Therefore, we don't amortize the trademark. The patent and technology, we said it's going to last us 20 years, this additional 120,000. Therefore, we're going to chip away, amortize it at $6,000 per year. The equipment, it's worth less. It's going to reduce our depreciation expense by 1,000. And we're going to chip away of that asset 1,000 per year. Long-term liabilities, access of 4,000. So the access amortization, we have to amortize it over five years, will be 5,000. And the goodwill, obviously, the goodwill is not amortized. The goodwill, remember, is not amortized. It does not have a, it has an indefinite life. It's subject to impairment, as we saw. Now, because of this access annual amortization per year, we are going to have, every year, we're going to have to make this journal entry. Debit amortization expense for the 6,000. Credit depreciation expense for 1,000 and debit equipment for 1,000, because we need to go back and add the equipment because we need to go back and have it at 110. And debit interest expense at 5,000 and credit long-term liability. We have to reduce our liabilities for 5,000, which is good. It means we are recording an expense by increasing our liability, okay? So all in all, this is the journal entry. So here's what's gonna happen every year, going forward. We're going to debit amortization expense 6,000. Why? Because we have to amortize this additional 120,000 and every year it's gonna be reduced by 120. So simply put, at the beginning, it's gonna be 120. Every year we're gonna chip away 6,000. Therefore, a year later, this patented equal to 114, then the following year we'll take out six, someone and so forth, until we chip away all of this excess amount. Same, the equipment is the reverse, which basically it's gonna reduce our expenses. It's gonna reduce our expenses and increase our asset because it has less value. Long-term liabilities, the fair value is 510. We're gonna add, we're gonna record an additional 5,000 in interest expense. However, we're gonna reduce our total liabilities by 5,000 because they're worthless and we're gonna be amortized over five years. What do we do with goodwill? Nothing, we're gonna, it's subject to impairment and the trademark is also, it has an indefinite life. We don't have to do anything about it. All in all, every year, copy this number down. We have an annual excess amortization of 10,000. Why 10,000? Take a look at this, well, 10,000. Six plus five equal to 11 minus one. So six plus five minus one equal to 10,000. Those are the expenses because we reduced our depreciation. That's why I deducted one, okay? So every year we're gonna have excess amortization when we do the consolidation between the two companies of 10,000. So keep that in mind. This is an important figure. Why it's an important figure? Because we need it when we do the consolidation. So you need to understand where it's coming from. So let's keep going. And I want to compute the investment account two years after acquisition. So this is what we have. This is January 1st, X zero. We paid 780,000. We established beginning NCI at 195. So for year, this is January 1st. So for year one, for year one it means after a year. So year X zero by the end of the year retained earning net increase by 70,000. What do we have to do with this 70,000 if retained earning increased? Well, you have to know how the investment account work if not go to the prior chapters. Well, it means you have to increase your investment. You have to increase your investment in Ryan company because you purchased Ryan company and they earned over all 70,000. Well, we're gonna increase of this amount of the 70,000, 56,000. And you might be asking, how did we come up with this 56,000? Well, if 70,000 times we own 0.8, so if you take 70,000 times 0.8, it's gonna be 56,000. Now, is this the only thing we have to do? Not at all. Remember because we invested in Ryan company we have an additional 10,000 of amortization. But remember this 10,000 only 80% as ours. Therefore, we're gonna reduce our investment account by 8,000. Why 8,000? It's the access amortization times 0.8. Now we could compute Ryan's investment at the end of X zero. This is the balance at the end of 1231 X zero by the end of the year. Now, what we're gonna have to do, we're gonna have to do the same thing for the NCI. The NCI remember we have 70,000 of this amount of the 70,000, we're gonna have to give them 20%, which is 14,000. So that's gonna increase NCI. Then remember they're gonna have to absorb 2,000 of the 10,000 because they own 20% of this access amortization. Therefore NCI at the end of year one, which is X zero at the end of year zero, it's 207,000. Now, year X one, the end of year X one, so this is X one, this is a year later, the company generated net income of 90,000 and paid dividend of 50,000. Now what do we have to do? Again, this is basically just the kind of, the company means Ryan, Ryan company because we bought Ryan and this is what they did. They generated net income of 90, paid dividend of 50. Let's keep track of our investment account. What do we have to do with our investment account? Well, if they generated income of 90,000, how much is our share 80%? Well, 80% if we take 90,000 times 80%, that's gonna give us 72,000. Then we're gonna have to reduce, remember, because we purchased the company, we have more assets, we have more expenses, we're gonna have to reduce our investment by this 8,000. Same thing, because this happens every year. Okay, this entry happens every year, there's an access amortization. Then also, since the company paid dividend of 50,000, we're gonna have to reduce our investment by 80%, which is 40,000. Then we reduce our investment account by 40,000. Again, this is all review from the prior session. If I'm just going over this a little bit in detail. So simply put, if you don't know what I'm doing, if you have an investment account, earnings will bring investment account up when the company report net income and dividend brings it down. Now also we have access amortization, which will bring it down, which will bring the investment account down. Then we have the ending investment account of 852. Now why am I doing this? Because I'm gonna go ahead and prepare the consolidation between Ryan and Adam's company. And I don't want you to be lost of where did this number coming from, 852. So now you know where the 852 is coming from. We also have to do the same thing for the non-controlling interest. The company earned 90,000. Of this amount, we have to deduct 10,000 in access amortization. In access amortization, that means it's only 80,000. Because remember, the access amortization is coming from their company. We multiply this by 0.8 and that's gonna give us 16,000. Therefore, we're gonna increase their NCI by 16,000. Also, what we have to do is reduce their NCI, but by this 2,000 allocation. Remember of this 10,000, I said that happens every year. 2,000 of this 10,000 belongs to the NCI. Therefore, we have to reduce NCI by 2,000. So all in all, the NCI ending total should be 213,000. And usually on the CPA exam, that's what they usually ask about. Can you compute the NCI? And this is again, this is the NCI, the end of year X1. So we computed the balances of X0, the year that we purchased it. And this is X1. Simply put, we are two years into this consolidation. What I'm gonna do next is go to the Excel sheet and actually prepare the consolidation between those two companies using a full consolidation figures. Once again, you have to understand how we came up with the investment account, how we came up with the NCI. Now, you're gonna see in the consolidation, we're gonna start with 852. We're gonna see where this number coming from 213 and 852. But you have to understand how the whole picture fits together. So I'm gonna switch to an Excel sheet. So this is the Excel sheet we're gonna be working with. These are the figures for Adam Company and Ryan Company as of December 31st, X1. X1 means a year late, simply put, we remember we bought the company at the beginning of X0. So X0 is done, now we're at the end of X1. So we are two years into this process. Now, we have to consolidate the companies. Now, hopefully you know where this 852 coming from. And this equity in subsidiary, this is equity, it means this is under the income statement, 64,000. Also, I wanna point out how we came up with this figure, how we came up with this figure, it's important. This 64,000 is, remember, Ryan Company earned 90,000. There's an excess amortization of 10,000 as a result of the transaction. What's left is 80,000. Of that 80,000, the parent company is gonna get 80%. So if we take 80,000 times 80%, and that's our share of income, our share of revenue, 64,000, our share of revenue. Okay, so just so you know, this is intercompany revenue. Obviously, we're gonna have to eliminate this. Now we're gonna start the elimination process. Again, this should be a review, but again, it's good to go through the whole process to see what's gonna happen at the end. It's very important to see the whole process. What do we do first? First thing we do is we're gonna eliminate, I mean, again, I have the entries here, but I'm gonna do it step by step. We're gonna have to eliminate the book value of the subsidiary. So simply put, we have to eliminate the equity book value, which is we have to eliminate common stock. We have to eliminate the 230, we have to eliminate beginning retained earnings. So we're gonna debit. We're gonna debit retained earnings, beginning retained earnings. We're starting the journal entries. We're gonna debit common stock. And what do we credit? Well, if we don't have any non-controlling interest, if you remember, we credit investment. You remember when we, what we do is we eliminate the, the what, what do we call these? The equity, the book value equity of the subsidiaries because they cannot exist on the consolidated figures. We have to eliminate them. So we're gonna debit them because those are equity accounts. The figures in parentheses are accredited. So not equity, they are equity and they are accredited indeed. So we have to debit them. So we're gonna debit these accounts. Generally speaking, would have debited in the investment and Ryan company. Now we do debit the investment and Ryan company, but we have to be careful how much we debit the investment and Ryan company. Remember, we only own in this company 80%, 80%. Therefore, the total of these debits is how much? If we take 230 plus 580, 230 plus 580, that's equal to 810. In other words, we're gonna allocate 80% to the investment account and 20% we're gonna give it to the non-controlling interest because the non-controlling interest still own 20%. So what does that mean? It means I'm going to credit 648. It's right here in the Excel sheet. And the reason I have the investment account already showing because there's multiple entries in the investment account. But anyway, maybe I can do the investment account step by step. So what I'm gonna do, I'm gonna credit the investment account 648, that's what I'm gonna do. Credit the account 648 and the remaining, I'm gonna start to establish my non-controlling interest. I'm gonna start to establish my non-controlling interest which is 162, 162. I'm gonna put it here, 162, 162, okay. Actually, it's a credit, not debit. So the non-controlling interest NCI is 162. So I'm done with, I basically eliminated the subsidiary's equity accounts. The next thing I'm gonna do, I'm gonna put, I'm gonna put the trademark, the patent, the liabilities, the goodwill, reduce the equipment and allocate the remainder to the investment and the non-controlling interest. So you guys remember that I have to write up my assets. So I'm gonna debit my trademark. How much would I debit my trademark? Well, I'll have to debit my trademark 60,000, okay? Because the trademark, we had a difference in value of 60,000. I'm gonna have to debit my patent technology, hold on a second, 114. Why 114? Why am I debiting this account 114 rather than 120? Remember the difference was 120, what happened? Well, remember this is, we are at the end of year two. What happened is it was 120, year one, we chipped away 14,000. Now what's left, I'm sorry, not 14, we chipped away 6,000. What we're left is 114. And this year we're gonna chip away another 6,000, but wait until we get to that entry, okay? So that's why we only have to add 114 to the patent and technology. We have to reduce our liabilities by 4,000. Therefore we debit liabilities, I'm sorry, we have to reduce our liabilities by 35,000. Why 35,000? Wasn't the balance supposed to reduce our liabilities by 40? Yes, it was 40 initially for year one, which is, we don't see now, we already chipped away five, but we're still chipping away as five. We have to put the Goodwill on the books for 25,000. Nothing happened to Goodwill, it was not impaired or anything. Therefore we have to debit Goodwill on the books. We have to reduce our equipment. Remember the equipment account was overvalued, but why 10,000? Why not 10,000? Well, it was overvalued by 10,000, that was year one, but now we chipped away 1,000. Now it's only overvalued by nine. Therefore we have to credit the equipment only 9,000. Now what we have to do is the remainder, the remainder entry, usually it will be the investment entry, the investment account. This is what you learned in the prior chapters. But now since we have NCI for the balance, we have to split the remainder, which is what's left is whatever's left, the debit and the credit. It'll have to be split 80 to 60. And what's, so what do we have to do is 180 plus 162 is, okay. So 342, what is 342? It's those balances here, those balances here. We have to do an entry that's gonna eliminate, I'm sorry, not, non-controlling interest is not that much. It's only 45, sorry, 45. Now we have to prepare a journal entry for those, which is all of them altogether. They add up to 225. If you do the computation, if you go through them, they'll add up to 225. And if you're interested, go ahead and do it, take 60,000 plus 114 plus 35,000 plus 25,000 minus 9,000, what's left is we have to allocate 225. Usually it goes to the investment since we have a non-controlling interest, 20% goes to the non-controlling interest, 80% go to the investment. Therefore, I'm gonna credit the investment in additional 180,000. And I'm gonna credit the non-controlling interest, I'm gonna credit the non-controlling interest 45,000, okay? And let's say credit 45,000. I'm done with this. What else I need to do? Well, I have this revenue equity and revenue and subsidiaries. This is the revenue from the subsidiaries. Well, that's not really, that's inter-company revenue. I have to eliminate this. How do I eliminate this? I'm gonna debit my revenue from the subsidiary, 64,000. This is gonna be eliminated. This is gonna be zero. This account here will be zero. The consolidated amount. And I am going to credit my investment. Again, I reduced it against my investment. So again, an additional 64,000 I'm crediting investment. Then I have to also remove the dividend. How much is dividend do I have from my subsidiaries? The company paid 50,000. Ryan company's paid 50,000. How much of it is my dividend? Well, my dividend portion is 40,000. Therefore, I have to credit my dividend 40,000. Again, why am I crediting dividend 40,000? Why am I crediting dividend? Because they paid 50, I get 40 of them. This is basically inter-company transaction. And I'm gonna have to remove it against investment. Therefore, I debit investment. And let's see what happened to the investment account now. Let's start with the investment account. Cause we're done with the investment account. If I say my investment account, my starting investment account is 852. So let me just go ahead and do the math. If my investment account is 852, and I debited this account, which is I reduced the account by, I'm sorry, I debited, I increased the account by 40. Then I reduced it by all the credits. Notice my investment account is down to zero. And it should supposed to be zero. When I consolidate the investment account should be zero. I'm not done. Let's do one more entry. I remember this entry will we have to do every year. We have to increase amortization expense by 6,000. So I have to debit amortization expense by 6,000. Because I had that additional asset I had to put on the book, the patented technology. Remember now the patent and technology next year. Next year it's gonna be 114. I chipped away another 6,000 of it. So it's gonna be 108 for the following year. So next year it will be starting with 108. So I chipped away 6,000. I have to add, I have to add to my interest expense 5,000. Why? Because my liabilities were lower. So I'm gonna be debiting interest expense and reducing my liabilities, which is where my liabilities right here. I'm gonna be reducing my, I'm sorry, increasing my liabilities, but it's not, I'm not paying the cash. I'm debiting interest expense, credit, long-term liability. I'm not paying cash. My equipment, I'm gonna have to reduce my depreciation expense by 1,000. Why? Because when I brought those equipment they're worth less on my books. Therefore my depreciation expense is worth less. And I have to add 1,000 to my equipment account. Every year I'll add 1,000. The patent and technology again, I have to chip away 6,000. I already showed you this. So let me just chip away from the patent and technology is 6,000. And from the long-term liabilities I have to chip 5,000, which is already did that, okay? So now I'm ready to consolidate, ready to consolidate. Basically, let me just go ahead and do this. Okay, so for revenues, I'm gonna take my Adam's Revenue plus Ryan's Revenue. That's gonna be the consolidated revenue. There's no adjustment. Cost of goods sold, I'm gonna take Adam's cost of goods sold plus Ryan's cost of goods sold. It's gonna be 5,44. Depreciation expense, I'm gonna take Adam's depreciation expense plus Ryan's depreciation expense minus the $1,000 of access depreciation. Why minus? Because my, when I brought in the equipment they were worth $10,000 less. As a result, every year I'm gonna have to reduce my depreciation by 1,000. Amortization expense, it's Adam's amortization plus Ryan plus an additional 6,000 because I have additional assets that resulted in additional amortization. The liabilities, I'm gonna, interest expense, not liabilities, my interest expense, I'm gonna take my interest expense plus the Ryan's interest expense plus 5,000 which was increased by the liabilities to offset this. But remember, we did not really pay an additional 5,000 in interest expense. What we did is we reduced our liabilities overall. Income from the subsidiaries, equity subsidiaries, they should be zero because we eliminate this. Simply put, the revenue is part of the investment. Now we know what is our revenue. In other words, let me just, net income, let me just reveal this number here. Now we have consolidated net income. Now this is consolidated net income. We have to figure out what net income goes to NCI. Remember from the prior session how we compute NCI. How do we compute the NCI net income? Okay, remember, you don't take, the mistake is to do this. The mistake is to take 416 multiplied by 0.2. This is not how we compute non-controlling interest net income. What we do is we take 90,000, Ryan's income minus the access amortization will give us 80,000 and this amount times 0.2. So 80,000 times 0.2, it's gonna give us this non-controlling net income to non-controlling interest. So this is net income to non-controlling interest. Now once we know the net income to non-controlling interest, we know the net income to the controlling interest, which is 400,000. Let's keep going with the consolidation retained earning. The beginning is 860, Ryan's 580, then we have to eliminate Ryan. What's left is the parent company. This is the only retained earning it should stay on the consolidated financial statement. Net income is net income from above, which is 400,000. Dividend declared. Remember, we started the company declared 50. 40,000 is for us and guess what? The remaining 10,000 goes to the non-controlling interest. Therefore, we have to allocate 10,000 to the non-controlling interest. And as a result, if we have 50, we credited dividend 10 and we allocated 10 to the not, we credited dividend 40, we allocated 10 to the non-controlling interest, which what's left is only the parent company non-dividend. And that's the only thing that should remain when you consolidate. The only thing that should remain is the parent company equity, those figures here in which they, indeed that's what remained. And you know this from prior session. Now we're gonna consolidate the balance sheet account. Current assets, you know, Ryan's plus Adams. Trademark, Ryan plus Adam, plus an additional 6,000. And that's gonna give us minus, oh yes, the, we had to chip away too for this, that we, no, we didn't have to do anything. Oh, trademark is had an indefinite life. So it has an indefinite life. The trademark has an indefinite life. So 659, the patented technology, Adams plus Ryan, plus the additional value minus the chip in a way every year of 6,000. So yes, because we, the patented technology is amortized. Equipment, it's gonna be Ryan plus Adam. We're gonna add 1,000 every year and we're gonna reduce it by 9,000 as well. So every year, so it's gonna be 1,000, the following year will be 8, 1,000, the following year seven, so on and so forth. The investment account we already discussed, it should be zero, goodwill. There we're not amortizing, we're not amortizing the goodwill and there is no impairment for goodwill. Therefore, the amount is 25,000. Now we can add up all our assets and they will add up to 3,952. We'll do the same thing for liabilities. Adams liabilities plus Ryan's liabilities reduce it by 50,000, not 50, reduce it by 35,000, then adding 5,000 to the interest expense, that's gonna give us a total of liabilities of 1,642, common stock. The only thing that should stay is the parent common stock 870. Now let's take a look at the non-controlling interest. We keep track of the non-controlling interest on these consolidated worksheets, which is what the non-controlling interest, it's 45 plus 162, which is 207. You remember it was 207 and the 207, and we're gonna add to it, should be negative basically to reflect. Well, you're negative 207 because it's non-controlling as a credit balance, but it doesn't really matter. 207, now we're gonna add to it 6,000 because 207 plus and at income minus the dividend, the retained earnings, now retained earnings, the NCI ending balance will be 213, negative 213 or 213. Okay, this is the ending NCI, 1231 NCI. Again, what's gonna happen with the retained earnings, the only retained earnings that will appear is the on the consolidated balance sheet is the parent company retained earnings. Now we add liabilities plus equities and add up to 3,925, so total assets equal to liabilities plus stockholders' equity. Now this is the consolidation. Let's see the consolidated financial statement, each one separately. This is the work papers. So the consolidated financial statement, so this is what's gonna happen. We're gonna show revenues, all the expenses, consolidated net income, less the income to the non-controlling interest. Simply put, it's what we did here. It's what we did here, okay? So overall, the net income to add up company to the controlling interest is 400,000, okay? So the non-controlling interest basically is a minus. We deduct this amount. It's being deducted from the 416, okay? Then the statement of retained earnings or stockholders' equity, we have beginning retained earnings plus net income which is coming from here minus the dividend and this is 1.2 million. Common stock did not change. And the non-controlling interest, the same thing, we have to keep track of that. It started at 207 and I showed you earlier what that number coming from, plus net income minus dividend came up to 213. Last but not least is our balance sheet on the balance sheet. Notice you will see no investment account, no investment account. Then under liabilities, you have the liabilities, you have the common stock only of Adam company. The non-controlling interest in Ryan's company, 213 and the retained earnings of the parent company which is those, simply put, it's those three figures here. The equity section is right here. And this is the balance sheet. Total assets, equal liabilities and stockholders' equity. Once again, I don't expect you, I don't expect the CPA exam to be testing you at this level. In other words, I don't expect the CPA exam to be asking you all these questions. That's not how it works on the CPA exam. However, if you have, if you are enrolled in an advanced accounting course, once you know this much, once you know this much, then you will be able to understand the remainder. Again, at the end of this recording, as usual, I'm gonna invite you to visit my website. Take a look at my material. I can help you understand consolidation much, much more in depth than any other CPA review course because that's not what they do. They review it with you. And if you're an advanced accounting student, it's worth it. Take a look, good luck, study hard and of course, stay safe.