In module 7, we will discuss how to account for a change in the percentage of ownership in the subsidiary, and also other related topics to business combinations and consolidated financial statements. In lesson 1, we will discuss the situations in which the business combination was achieved in stages, the step-by-step acquisition. Previously, we discussed situation which the parent acquires the majority of voting interest in the subsidiary only in one transaction. But sometimes the control of the subsidy may be achieved in several transactions. For example, in 2017, Company P acquired 25 percentages of Company S, and only in 2019, Company P acquired additional 45 percentages of Company S. In this case, the control of the subsidiary was achieved in stages, it was step-by-step acquisition. So in a business combination achieved in stages, the acquirer must measure its previously held equity interests in the acquiree at its acquisition-date fair value and also recognize the resulting gain or loss if any, in earnings. The fair value of previously held equity interest in the acquiree is included in the calculation of goodwill. Now, we finally covered all the components of the goodwill equation. The full goodwill equation is fair value of consideration transferred plus fair value of non-controlling interest plus fair value of previously held equity interests in the acquiree minus the fair value of identifiable net assets acquired. A positive difference is recognized as goodwill. A negative difference will be recognized as gain from bargain purchase. Let's see the following example about the step-by-step acquisition. On January 1 of 2018, Company P paid $45,000 to acquire 15,000 out a total of 100,000 outstanding shares of common stock of Company S. In 2018, Company S reported net income of $50,000 and declared and paid dividends of $40,000. Company S is a publicly traded company and its market price per share at the end of 2018 and on January 1 of 2019 was $7 per share. On January 1 of 2019, Company P acquired all of the remaining shares of common stock of Company S for $620,000. So January 1 of 2019 is the business combination date. On that date, the fair value of Company S identifiable assets was $900,000, and the fair value of liabilities was $250,000. First of all, we need to determine the accounting method for the investment income of stock of Company S. The accounting is based on the influence that the investors offer the investee, and influence is determined based on the percentage of ownership held. We noted Company P acquired 15,000 shares out of total of 100,000 outstanding shares of common stock of Company S. So it is 15 percentage of ownership. Because it's less than 20 percentages, the presumed influence is either very little or no influence at all. When the presumed influence is no influence, or very little influence, the accounting method is fair value through net income. Through net income is the accounting method. On the acquisition date on January 1 of 2018, the following journal entry is recorded. We will debit the investment in shares of Company S for $45,000, and since we paid cash for this investment, we will credit cash for $45,000 as well. Now, while journal entry should be recorded the end, we know that under fair value through net income method, the investment is measured at fair value each balance sheet date. Changes in the fair value are recognized directly in the income statement. So at the end of the year, the fair value of the investment is $105,000, because Company P holds 15,000 shares of Company S, and the market price per share is $7. So it's 105,000. This is the fair value in the end of the year. Currently, the investment is reported at $45,000. So the investment's currently reported at $45,000. So we must increase the investment by $60,000. So we will debit the investment in shares of Company S for $60,000, investment in shares of Company S for $60,000, and we will credit gain on fair value adjustment. Gain on fair value adjustment for $60,000 as well. Also in 2018, Company S declared and paid $40,000 of dividends. Company P share of dividends is 15 percentages. So Company P received $6000 of cash. So we'll debit cash and we will credit dividend income. January 1 of 2018 is the business combination date. On this date, Company P acquired all the remaining shares of common stock of Company S. So on January 1 of 2018, the control of Company S was achieved. We know that the previously held equity interests in Company S, the investment in the 15,000 shares of Company S, this investment is already reported at fair value. So basically, no additional adjustments are needed. You can directly calculate goodwill using the goodwill equation, and record the consolidation journal entry. Goodwill equation. Fair value of consideration transfer was $620,000, plus the fair value of the previously held equity interests in Company S. Fair value of previously held equity interest in Company S, and we know that this fair value is $105,000 minus the fair value of identifiable net assets acquired. The fair value of the identifiable assets acquired was $900,000, and the fair value of the liabilities assumed was 250. So the fair value of identifiable net assets was 650,000. The difference is a positive difference of $75,000, so a goodwill of $75,000 must be recognized on the business combination date. The next step, we will recall the consolidation journal entry. We will debit the identifiable assets acquired. The indefinable assets acquired are debited for $900,000, the goodwill that was recognized on the business combination date is also debited for $75,000. Now, we transferred cash of $620,000 to acquire all the remaining shares of common stock of Company S. We also must remove the investment in the equity securities of Company S, because we know that no investment in subsidiary account should be reported in the consolidated financial statements. So you must remove the investment in shares of Company S. So we will credit it for $105,000, and we must recall also the liabilities assumed in this transaction. Liabilities assumed are credited for 250,000.