Noncontrolling Interest (NCI)

Question 1

Assume that in acquiring a subsidiary, the parent determined there were several depreciable assets of the subsidiary that had a fair value greater than book value. What effect will the excess fair value over book value of the subsidiary’s assets have on the following accounts in the preparation of consolidated statements?

Depreciable Assets
Depreciation Expense

Answer 1

Depreciable Assets - Increase
Depreciation Expense - Increase

The investment eliminating entry on the consolidating worksheet will write up (increasing on the worksheet) the value of depreciable asset, from book value to fair value on the date of the combination. The additional depreciable asset value recognized on the worksheet will then be depreciated on the worksheet, resulting in additional (increasing) depreciation expense.

Question 2

Assume that in acquiring a subsidiary, the parent determined that several depreciable assets had a fair value greater than book value. If the parent accounts for its investment in the subsidiary using the equity method, what effect will the amortization of the excess fair value over the book value of the subsidiary’s assets have on the following parent’s accounts?

Investment in Subsidiary
Equity Revenue from Subsidiary

Answer 2

Investment in Subsidiary - Decrease
Equity Revenue from Subsidiary - Decrease

When the fair value of a subsidiary’s assets is greater than book value, it is as though the parent paid more for the assets than the subsidiary paid for those assets. Using the equity method of accounting for the investment, the parent must depreciate the excess of fair value over book value. That equity entry would be: DR: Equity Revenue ‐ to reduce it by the amount of depreciation on the excess of fair value over book value, and CR: Investment in Subsidiary ‐ to offset a portion of the net income (or increase the amount of net loss) recognized from the subsidiary. Thus, both accounts would be decreased.