I will now go through an example where the acquiring firm doesn't have full ownership of the target firm but it has control. Firm A and Firm T balance sheets on January 1st, 2022, are presented in the next slide. Firm A acquires 80 shares of Firm T from $15 per share on January 1st, 2022. Firm T has 100 shares outstanding on January 1, 2022. Firm T's net assets' values approximate their fair values except plant, property, and equipment. Plant, property, and equipment fair value exceeds its book value by $300 and plant, property, and equipment has 5 years of remaining life. We are given Firm A and Firm T balance sheets before investment is recorded. Question number one asks to provide the accounting entry on (a) transaction worksheet on January 1st, 2022. We will start with calculating total investment. We know that (the) acquiring firm purchases 80 shares of the target firm from $15 each, meaning that the initial amount of investment is $1,200. In the transaction worksheet, cash goes down by $1,200 and investment is created as $1,200. If you look at the updated balance sheet of the acquiring firm, cash decreases from $2,500 to $1,300 and we create an investment account of $1,200. Question 2 asks to provide the consolidated balance sheet on January 1st, 2022. There is an important point here. Although Firm A owns 80% of Firm T, we will do a full consolidation as if Firm A owns all shares of Firm T, because Firm A controls entire operating and financial decisions of Firm T. We will calculate goodwill as if Firm A owns the entire Firm T. The total value of Firm T is 100 shares, times $15 each. It's going to be $1500. Therefore, book value of assets is $1,000, fair value adjustment is $300, and goodwill is $200. Please note that these are components of investment, if Firm A owned entire shares of Firm T. We can then start the consolidation process. Consolidated cash is $2,000, which is simply a summation of cash balances of Firm A and Firm T. Consolidated plant, property, and equipment includes plant, property, and equipment balances of Firm A and Firm T, as well as the an unamortized portion of fair value adjustment of $300. We remove equity investment and create goodwill of $200. Consolidated liabilities is $2,500, which is simply (the) summation of liabilities balances of Firm A and Firm T. Consolidated shareholder's equity is $4,500, which is the same as shareholder's equity of Firm A. After all these calculations, we run into a problem. (The) consolidated balance sheet doesn't balance. We create a new account called "non-controlling interests" with a balance of $300, to make the consolidated balance sheet balance. Conceptually, non-controlling interest is the investment of minority shareholders in the consolidated entity. One can view non-controlling interest as the shareholder's equity associated with (the) 20% ownership that Firm A doesn't own. Non-controlling interest is created because we do a full consolidation, rather than a proportional one.
