minority interest and acquisition method

1.why is minority interest added on the balance sheet, but subtracted on the income statement?

  1. Schweser reading 19, concept checker 13 says that minority interest is increased by minority share of subsidiary income and decreased by minority share of dividends, but why are we only taking the share, when the acquisition method takes the entire amount, even if not 100% ownership?

In explanation of 1 and 2. Assume a Parent Company owns 80% of a Subsidiary

1) Reason for Income statement:

Let say Parent Company (“P”) has 80% investment in a Company (Subsidiary “S” ). Under acquisition method P is consolidating Income statement but 20% relates to Minority that’s why minority interest will be taken out. In simple words you P is adding everything to its income statement but at the end of consolidated income statement will show to its users that 20% is related to Minority interest of Subsidiary.

2) Reason for Balance Sheet:

Using Acquisition method Parent Company consolidated 100% of the Subsidiary in its balance sheet. However, if company owns only 80%, to reflect 20% non controlling interest Parent Company shows in its balance sheet Minority Interest in form of liability. Minority Interest is calculated by multiplying Subsidiary equity (Common Stock and Retained Earnings) not owned by parent.

Q# 13 explanation:

Q#13 is talking about balance sheet calculation of Minority Interest. In this example Parent owns 80%. So 20% is related to Minority. As Net profit from income statement is taken to equity. If subsidiary is transferring its net income of the year to retained earnings. Then if we are taking out 20% of the net income from net income same amount then same amount should be taken out of retained earnings as well to reflect this impact. If you are taking Minority share from income statement you will add this share to balance sheet liability.,

So in this question we have calculated minority interest (liability in P balance sheet) which is 30,000. Then minority interest increased by net income share related to Minority it will be added here and dividend will be deducted which is representing reduction in retained earnings. Because dividend is paid through using retained earnings.

thanks for that

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