Chapter 4 HW Solutions

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-1

CHAPTER 4 CONSOLIDATED FINANCIAL STATEMENTS

AND OUTSIDE OWNERSHIP

Answers to Questions

1. "Noncontrolling interest" refers to an equity interest that is held in a member of a business combination by an unrelated (outside) party.

2. a. Acquisition method = $220,000 (fair value)

b. Purchase method = $208,000 (all of the book value plus 80 percent of the $60,000 difference between fair value and book value)

3. A control premium is the portion of an acquisition price (above currently traded market values) paid by a parent company to induce shareholders to sell a sufficient number of shares to obtain control. The extra payment typically becomes part of the goodwill acquired in the acquisition attributable to the parent company.

4. In practice, noncontrolling interest figures will appear in various locations within consolidated financial statements. The end of year balance can be found in the liability section, in the stockholders' equity section, or between these two. The noncontrolling interest's share of net income can be shown as a reduction on either the income statement or the statement of retained earnings. Based on current practice, this textbook reports the ending balance between consolidated liabilities and stockholders' equity with the income allocation shown as a reduction on the income statement.

5. The ending noncontrolling interest can be determined on a consolidation worksheet by adding the components found in the noncontrolling interest column: the beginning balance plus allocation of current year net income less dividends paid to these outside owners. The ending balance can also be determined (at this point in the exploration of consolidated financial statements) by multiplying the outside ownership percentage by the subsidiary's ending book value. In subsequent chapters, this calculation must be altered because of various adjustments made within the consolidation process.

6. Allsports should remove the pre-acquisition revenues and expenses from the consolidated totals. These amounts have been earned (incurred) prior to ownership by Allsports and therefore should not be reported as earnings for the current parent company owners.

7. In previous years, Tree has appropriately utilized the market-value method in accounting for its investment in Limb. Now, following a second acquisition, consolidation has become applicable. These two methods are not considered to be comparable. Therefore, at the point in time that Tree begins to produce consolidated statements, all previous financial reports must be restated as if the equity method had been applied since the date of the first acquisition. This handling presents the reader of the financial statements with figures that are more comparable from year to year.

8. When a company sells a portion of an investment, a gain or loss is recognized based on the difference between the proceeds received and the book value of the investment (on

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 4-2 Solutions Manual

the portion sold). The correct book value is determined based upon the consistent application of the equity method. Thus, if either the Initial value method or the partial equity method has been used, Duke must first restate the account to the equity method before recording the sales transaction. This same method is also applied to the operations of the current period occurring prior to the time of sale.

9. Unless control is surrendered, the acquisition method views the sale of subsidiary's stock as a treasury stock transaction. Thus, no gain or loss can be recognized.

10. The accounting method choice for the remaining shares depends upon the current relationship between the two firms. If Duke retains control, consolidation is still required. However, if the parent now can only significantly influence the decision-making process, the equity method is applied. A third possibility is Duke may have lost the power to exercise even significant influence. The market-value method then is appropriate.


Answers to Problems

1. D The acquisition method consolidates assets at fair value at acquisition date regardless of the parent’s percentage ownership.

2. D In consolidating the subsidiary's figures, all intercompany balances must

be eliminated in their entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it.

3. C An asset acquired in a business combination is initially valued at 100%

acquisition-date fair value and subsequently amortized its useful life.

Patent fair value at January 1, 2009 ............................................... $45,000 Amortization for 2 years (10 year life) ............................................ (9,000) Patent reported amount December 31, 2010 ................................. $36,000 4. A Plaster building................................................................................ $510,000 Turner building acquisition-date fair value $300,000 Amortization for 3 years (10-year life) (90,000) 210,000 Consolidated buildings .................................................................. $720,000 -OR- Plaster building................................................................................ $510,000 Turner building 12/31/11 $182,000 Excess acquisition-date fair value allocation 40,000 Excess amortization for 3 years (10-year life) (12,000) 210,000 Consolidated buildings .................................................................. $720,000 5. C Hygille expense ............................................................................... $621,000 Nuyt expenses ................................................................................. 714,000 Excess fair value amortization (70,000 ÷ 10 yrs) .......................... 7,000 Consolidated expenses .................................................................. $1,342,000 6. B Combined revenues ........................................................................ $1,100,000 Combined expenses ........................................................................ (700,000) Excess acquisition-date fair value amortization ........................... (15,000) Consolidated net income ................................................................ $385,000 Less: noncontrolling interest ($85,000 × 40%).............................. (34,000) Consolidated net income to controlling interest .......................... $351,000 7. C 8. B


9. A Amie, Inc. Fair value at January 1, 2007:

30% previously owned fair value (30,000 shares × $5) ................ $150,000 60% new shares acquired (60,000 shares × $6) ............................ 360,000 10% NCI fair value (10,000 shares × $5) ......................................... 50,000 Acquisition-date fair value .............................................................. $560,000 Net assets' fair value ....................................................................... 500,000 Goodwill .......................................................................................... $60,000 10. C 11. A Fair value of noncontrolling interest on April 1 ............................ $165,000 30% of net income for 9 months (¾ year × $240,000 × 30%) ....... 54,000 Noncontrolling interest December 31 ............................................ $219,000 12. B Combined revenues ........................................................................ $1,300,000 Combined expenses ........................................................................ (800,000) Trademark amortization .................................................................. (6,000) Patented technology amortization ................................................. (8,000) Consolidated net income ................................................................ $486,000 13. C Subsidiary income ($100,000 – $14,000 excess amortizations) .. $86,000 Noncontrolling interest percentage ............................................... 40% Noncontrolling interest in subsidiary income............................... $34,400

Fair value of noncontrolling interest at acquisition date ............. $180,000 40% change in Scott book value since acquisition ...................... 52,000 Excess fair value amortization ($14,000 × 40%)............................ (5,600) 40% current year income ................................................................ 34,400 Noncontrolling interest at end of year ........................................... $260,800 14. A Michael trademark balance ............................................................. $260,000 Scott trademark balance ................................................................. 200,000 Excess fair value ............................................................................. 60,000 Two years amortization (10-year life) ............................................. (12,000) Consolidated trademarks ............................................................... $508,000


15. A Acquisition-date fair value ($60,000 ÷ 80%) .................................. $75,000 Strand's book value ........................................................................ (50,000) Fair value in excess of book value ................................................ $25,000

Excess assigned to inventory (60%) ................................ $15,000 Excess assigned to goodwill (40%) ................................. $10,000 Park current assets ......................................................................... $70,000 Strand current assets ...................................................................... 20,000 Excess inventory fair value ............................................................ 15,000 Consolidated current assets .......................................................... $105,000 16. D Park noncurrent assets ................................................................... $90,000 Strand noncurrent assets ............................................................... 40,000 Excess fair value to goodwill ......................................................... 10,000 Consolidated noncurrent assets .................................................... $140,000 17. B Add the two book values and include 10% (the $6,000 current portion) of

the loan taken out by Park to acquire Strand. 18. B Add the two book values and include 90% (the $54,000 noncurrent portion)

of the loan taken out by Polk to acquire Strand. 19. C Park stockholders' equity ............................................................... $80,000 Noncontrolling interest at fair value (20% × $75,000) ................... 15,000 Total stockholders' equity .............................................................. $95,000 20. (15 minutes) (Compute consolidated income and noncontrolling interests)

2009 2010 Harrison income ............................................................ $220,000 $260,000 Starr income .................................................................. 70,000 90,000 Excess fair value amortization ..................................... (8,000) (8,000) Consolidated net income .............................................. $282,000 $342,000 Starr fair value ................................................................................. $1,200,000 Fair value of consideration transferred ......................................... 1,125,000 Noncontrolling interest fair value .................................................. $75,000 Noncontrolling interest fair value January 1, 2009 (above) .......... $75,000 2009 income to NCI ([$70,000 – $8,000] × 10%) ................................ 6,200 2009 dividends to NCI .................................................................... (3,000) Noncontrolling interest reported value December 31, 2009 ........ 78,200 2010 income to NCI ([$90,000 – $8,000] × 10%) ................................ 8,200 2010 dividends to NCI .................................................................... (3,000) Noncontrolling interest reported value December 31, 2010 $83,400


21. (40 minutes) (Several valuation and income determination questions for a business combination involving a noncontrolling interest.) a. Business combinations are recorded generally at the fair value of the

consideration transferred by the acquiring firm plus the acquisition-date fair value of the noncontrolling interest.

Patterson’s consideration transferred ($31.25 × 80,000 shares) ......... $2,500,000 Noncontrolling interest fair value ($30.00 × 20,000 shares) ................. $600,000 Soriano’s total fair value 1/1/09 ........................................................... $3,100,000

b. Each identifiable asset acquired and liability assumed in a business combination should initially be reported at its acquisition-date fair value.

c. In periods subsequent to acquisition, the subsidiary’s assets and liabilities are reported at their acquisition-date fair values adjusted for amortization and depreciation. Except for certain financial items, they are not continually adjusted for changing fair values.

d. Soriano’s total fair value 1/1/09 ........................................................... $3,100,000 Soriano’s net assets book value ......................................................... 1,290,000 Excess acquisition-date fair value over book value .......................... $1,810,000 Adjustments from book to fair values ................................................. Buildings and equipment .................................... (250,000) Trademarks ........................................................... 200,000 Patented technology ............................................ 1,060,000 Unpatented technology ....................................... 600,000 1,610,000 Goodwill .......................................................................................... $ 200,000

e. Combined revenues .............................................................................. $4,400,000 Combined expenses ............................................................................. (2,350,000) Building and equipment excess depreciation .................................... 50,000 Trademark excess amortization .......................................................... (20,000) Patented technology amortization ...................................................... (265,000) Unpatented technology amortization .................................................. (200,000) Consolidated net income ..................................................................... $1,615,000

To noncontrolling interest: Soriano’s revenues ......................................................................... $1,400,000 Soriano’s expenses ......................................................................... (600,000) Total excess amortization expenses (above) ................................ (435,000) Soriano’s adjusted net income ...................................................... $365,000 Noncontrolling interest percentage ownership ............................ 20% Noncontrolling interest share of consolidated net income ......... $73,000


To controlling interest: Consolidated net income ................................................................ $1,615,000 Noncontrolling interest share of consolidated net income ......... (73,000) Controlling interest share of consolidated net income................ $1,542,000 -OR- Patterson’s revenues ...................................................................... $3,000,000 Patterson’s expenses...................................................................... 1,750,000 Patterson’s separate net income ................................................... $1,250,000 Patterson’s share of Soriano’s adjusted net income (80% × $365,000) ................................................................... 292,000 Controlling interest share of consolidated net income................ $1,542,000 f. Fair value of noncontrolling interest January 1, 2009 ....................... $600,000 2009 income .......................................................................................... 73,000 Dividends (20% × $30,000) ................................................................... (6,000) Noncontrolling interest December 31, 2009 ....................................... $ 667,000

g. If Soriano’s acquisition-date total fair value was $2,250,000, then a bargain purchase has occurred.

Soriano’s total fair value 1/1/09 ........................................................... $2,250,000 Collective fair values of Soriano’s net assets .................................... $2,300,000 Bargain purchase ................................................................................. $50,000

The acquisition method requires that the subsidiary assets acquired and

liabilities assumed be recognized at their acquisition date fair values regardless of the assessed fair value. Therefore, none of Soriano’s identifiable assets and liabilities would change as a result of the assessed fair value. When a bargain purchase occurs, however, no goodwill is recognized.


22. (20 Minutes) (Determine consolidated income balances, includes a mid-year acquisition)

a. Acquisition-date total fair value .......................... $594,000 Book value of net assets ...................................... (400,000) Fair value in excess of book value ..................... $194,000 Annual Excess Excess fair value assigned to Life Amortizations Patent .......................................................... 140,000 5 years $28,000 Land .......................................................... 10,000 Buildings ......................................................... 30,000 10 years 3,000 Goodwill .......................................................... 14,000 Total .......................................................... -0- $31,000

Consolidated figures following January 1 acquisition date: Combined revenues ............................................................................. $1,500,000 Combined expenses ............................................................................. (1,031,000) Consolidated net income ..................................................................... 469,000 NCI in Sawyer’s income ([200,000 – 31,000] × 30%) .............................. (50,700) Controlling interest in consolidated net income ............................... $418,300

b. Consolidated figures following April 1 acquisition date:

Combined revenues (1) ......................................................................... $1,350,000 Combined expenses (2) ........................................................................ (923,250) Consolidated net income .................................................................... $426,750 Noncontrolling interest in subsidiary income (3) ............................... (38,025) Controlling interest in consolidated net income ............................... $388,725

(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues

(2) $600,000 Parker expenses plus $300,000 of post-acquisition Sawyer expenses plus $23,250 amortization expenses for 9 months

(3) ($200,000 – 31,000) adjusted subsidiary income × 30% × ¾ year


23. (15 minutes) Consolidated figures with noncontrolling interest Fair value of company (given) $60,000 Book value (10,000) Fair value in excess of book value 50,000 to machine ($50,000 – $10,000) 40,000 ÷ 10 = $4,000 per year to process trade secret $10,000 ÷ 4 = 2,500 per year $6,500 per year

Consolidated figures:

• Noncontrolling interest in subsidiary income

= 40% ×××× ($50,000 revenues less $26,500 expenses) = $9,400

• End-of-year noncontrolling interest:

Beginning balance (40% ×××× $60,000) $24,000 Income allocation 9,400 Dividend reduction (40% ×××× $5,000) (2,000) End-of-year noncontrolling interest $31,400

• Machine (net) = $45,000 ($9,000 book value plus $40,000 excess allocation less $4,000 excess depreciation for one year).

• Process trade secret (net) = $10,000 – $2,500 = $7,500 24. (20 Minutes) (Determine consolidated balances for a step acquisition).

a. Amsterdam fair value implied by price paid by Morey $560,000 ÷ 70% = $800,000

b. Revaluation gain 1/1 equity investment in Amsterdam (book value) $178,000 25% income for 1st 6 months 8,750 Investment book value at 6/30 186,750 Fair value of investment 200,000 Gain on revaluation to fair value $13,250

c. Goodwill at 12/31 Fair value of Amsterdam at 6/30 $800,000 Book value at 6/30 (700,000 + [70,000 ÷ 2]) 735,000 Excess fair value $65,000 Allocation to goodwill (no impairment) $65,000

d. Noncontrolling interest 5% fair value balance at 6/30 $40,000 5% Income from 6/30 to 12/31 1,750 5% dividends (1,000) Noncontrolling interest 12/31 $40,750


25. (30 Minutes) (Reporting the sale of a portion of an investment in a subsidiary.) a. The 1,000 shares sold are reported using the equity method for the

January 1, 2011 until October 1, 2011 period. This stock represents 10 percent of the outstanding shares of Santana. An accrual of $9,000 is recorded by Girardi (10% × $120,000 × ¾ year) reduced by $1,500 in amortization expense as computed below. Therefore, an "Equity Income from Sold Shares of Santana" in the amount of $7,500 will appear in the 2011 consolidated income statement. The consolidation will now include all of Santana's accounts with the 40% noncontrolling interest recognized.

Santana fair value 1/1/09 .......................................... $1,100,000 Santana book value .................................................. (1,030,000) Patent ......................................................................... $70,000 Life of patent .............................................................. 5 years Annual amortization .................................................. $14,000 9-months amortization for the 1,000 shares sold: Annual amortization .................................................. $14,000 Time period involved ................................................ ¾ year Amortization for nine months .................................. $10,500 Shares sold—1,000 out of 7,000 .............................. 1/7 Amortization relating to sold shares ....................... $1,500

b. As long as control is maintained, the acquisition method considers transactions in the stock of a subsidiary, whether purchases or sales, as transactions in the equity of the consolidated entity.

Investment Book Value 10/1/11 1/1/11 balance (given—equity method) ................... $1,085,000 Recognition of 1/1/11–10/1/11 period: Income accrual ($120,000 × 70% × ¾) ................ 63,000 Dividends ($40,000 × 70% × ¾) ........................... (21,000) Amortization ($14,000 × ¾) .................................. (10,500) Correct investment book value—10/1/11 ................. $1,116,500 Computation of Income Effect—Sales Transaction 10/1/11 book value (above) ....................................... $1,116,500 Portion of investment sold (1,000/7,000 shares) .... 1/7 Book value of investment sold ................................ $159,500

Proceeds .................................................................... 191,000 Credit to Girardi’s additional paid-in capital ........... $ 31,500 c. Because Girardi continues to hold 6,000 shares of Santana, control is

still maintained and consolidated financial statements would be appropriate with a noncontrolling interest of 40 percent.


26. (35 Minutes) (Consolidation entries and the effect of different investment methods)

a. From the original fair value allocation, $30,000 is assigned based on the

fair value of the patent. With a 5-year life, excess amortization will be $6,000 per year.

Because the equity method is in use, no Entry *C is required.

Entry S Common Stock (Bandmor) ........................... 300,000 Retained Earnings, 1/1/11(Bandmor) ........... 268,000 Investment in Bandmor (70%) ................. 397,600 Noncontrolling Interest in Bandmor, 1/1/11 170,400 (To eliminate stockholders' equity accounts of subsidiary and

recognize outside ownership. Retained earnings figure includes 2009 and 2010 income and dividends.)

Entry A Patent .............................................................. 18,000 Goodwill ......................................................... 190,000 Investment in Bandmor ............................ 145,600 Noncontrolling Interest in Bandmor (30%) 62,400 (To recognize unamortized portions of acquisition-date fair value

allocations. Patent has undergone two years amortization) Entry I Equity in Subsidiary Earnings ...................... 72,800 Investment in Bandmor ............................ 72,800 (To eliminate intercompany income balance. Equity accrual of

$72,800 [70% × ($110,000 – 6,000 amortization)] has been recorded) Entry D Investment in Bandmor ................................. 42,000 Dividends Paid .......................................... 42,000 (To eliminate current intercompany dividend transfers—70% of

$60,000) Entry E Amortization Expense .................................... 6,000 Patent ......................................................... 6,000 (To recognize amortization for current year)

Entry P Accounts Payable .......................................... 22,000 Accounts Receivable ............................... 22,000 (To eliminate intercompany payable/receivable balance)


26. (continued) b. If the initial value method had been applied, the parent would have

recorded only the dividends received as income rather than an equity accrual. Therefore, Entry *C is needed to adjust the parent's beginning retained earnings for 2011 to the equity method. During 2009 and 2010, the subsidiary earned a total net income of $171,000 but paid dividends of only $83,000. The parent's share of the difference is $61,600 (70% of $88,000 [$171,000 - $83,000]). In addition, the parent’s 70% share of excess amortization expense for two years must also be included ($8,400 = 2 years × $6,000 per year × 70%). The net amount to be recognized is $53,200 ($61,600 - $8,400).

ENTRY *C Investment in Bandmor ................................. 53,200 Retained Earnings, 1/1/11 ........................ 53,200 c. If the partial equity method had been applied, only the excess

amortization expenses for the previous two years would have been omitted from the parent's retained earnings. As shown above, that figure is $8,400 (2 years × $6,000 per year × 70%).

ENTRY *C Retained Earnings, 1/1/11 ............................. 8,400 Investment in Bandmor ............................ 8,400 d. Noncontrolling interest in Bandmor's income—2011 [($110,000 – 6,000) × 30%] ............................. $31,200 Noncontrolling interest fair value January 1, 2009 $210,000 Adjustments to original basis: 2009 Net Income to NCI...................................... $20,700 Dividends paid .......................................... (11,700) 9,000 2010 Net income to NCI ..................................... $27,000 Dividends paid .......................................... (13,200) 13,800 2011 Net income to NCI...................................... $31,200 Dividends paid .......................................... (18,000) 13,200 Noncontrolling interest in Bandmor 12/31/11 .... $246,000 –OR– Worksheet adjustment S .................................................... $170,400 Worksheet adjustment A .................................................... $62,400 2009 income to noncontrolling interest ........................... 31,200 2009 dividends to noncontrolling interest ....................... (18,000) Noncontrolling interest in Bandmor 12/31/11 ................... $246,000


27. (45 Minutes) (Asks about several consolidated balances and consolidation process. Includes the different accounting methods to record investment.)

a. Schedule 1—Fair Value Allocation and Excess Amortizations Consideration transferred by Miller ......... $664,000 Noncontrolling interest fair value ............. 166,000 Taylor’s fair value ....................................... $830,000 Taylor’s book value .................................... (600,000) Fair value in excess of book value .......... 230,000 Annual Excess Life Amortizations Excess fair value assigned to buildings 80,000

20 years $4,000 Goodwill ..................................................... $150,000 indefinite -0- Total ....................................................... $4,000 b. $150,000 (see schedule 1 above) c. Entry (S) Common Stock (Taylor) ...................................... 300,000 Additional Paid-in Capital (Taylor) ..................... 90,000 Retained Earnings (Taylor) ................................. 210,000 Investment in Taylor Company (80%) .......... 480,000 Noncontrolling interest in Taylor (20%) ....... 120,000 Entry (A) Buildings .............................................................. 80,000 Goodwill ............................................................... 150,000 Investment in Taylor Company (80%) .......... 184,000 Noncontrolling interest in Taylor (20%) ....... 46,000 d. (1) Equity Method Income accrual (80%) .................................... $56,000 Excess amortization expense ....................... (3,200) Investment income ................................... $52,800 (2) Partial Equity Method Income accrual (80%) .................................... $56,000 (3) Initial Value Method Dividends received (80%) .............................. $8,000 e. Equity Method Initial fair value paid ............................................. $664,000 Income accrual 2009–2011 ($260,000 × 80%) ... 208,000 Dividends 2009–2011 ($45,000 × 80%) .............. (36,000) Excess Amortizations 2009–2011 ($3,200 × 3) . (9,600) Investment in Taylor—12/31/11 .................... $826,400


27. (continued) Partial Equity Method Investment in Taylor—12/31/11 = $836,000 (initial value paid plus income

accrual of $208,000 less dividends of $36,000 [no excess amortizations]) Initial Value Method Investment in Taylor—12/31/11 = $664,000 (original value paid)

f. Using the acquisition method, the allocation will be the total difference ($80,000) between the buildings' book value and fair value. Based on a 20 year life, annual excess amortization is $4,000.

Miller book value—buildings .............................. $800,000 Taylor book value—buildings ............................ 300,000 Allocation ............................................................. 80,000 Excess Amortizations for 2009–2010 ($4,000 × 2) (8,000) Consolidated buildings account ............. $1,172,000

g. Acquisition-date fair value allocated to goodwill (see schedule 1 above) ................................. $150,000

h. If the parent has been applying the equity method, the stockholders'

equity accounts on its books will already represent consolidated totals. The common stock and additional paid-in capital figures to be reported are the parent balances only. As to retained earnings, the equity method will properly record all subsidiary income and amortization so that the parent balance is also a reflection of the consolidated total.


28. (20 Minutes) (A variety of consolidated balances-midyear acquisition) Book value of Reckers, 1/1 (stockholders' equity accounts) .............. $1,400,000 Increase in book value: Net Income (revenues less cost of goods sold and expenses) .................. $120,000 Dividends .............................................. (20,000) Change during year ................................... $100,000 Change during first six months of year 50,000 Book value of Reckers, 7/1 (acquisition date) $1,450,000 Consideration transferred by Kaplan ........... $1,360,000 Noncontrolling interest fair value ................. 300,000 Reckers’ fair value (given) .............................. $1,630,000 Book value of Reckers .................................... (1,450,000) Fair value in excess of book value................. $180,000 Annual Excess Excess fair value assigned Life Amortizations Trademarks .................................................. 150,000 5 years $30,000 Goodwill ....................................................... $60,000 indefinite -0- Total .......................................................... $30,000 CONSOLIDATION TOTALS:

� Sales (1) $1,050,000

� Cost of goods sold (2) 540,000

� Operating expenses (3) 265,000

� Net Income $245,000

� Noncontrolling Interest in sub. Income (4) $9,000

(1) $800,000 Kaplan revenues plus $250,000 (post-acquisition subsidiary revenue)

(2) $400,000 Kaplan COGS plus $140,000 (post-acquisition subsidiary COGS)

(3) $200,000 Kaplan operating expenses plus $50,000 (post-acquisition subsidiary operating expenses) plus ½ year excess amortization of $15,000

(4) 20% of post-acquisition subsidiary income less excess fair value amortization [20% × (120,000 – 30,000) × ½ year] = $9,000

� Retained Earnings, 1/1 = $1,400,000 (the parent’s balance because the

subsidiary was acquired during the current year)

� Trademark = $935,000 (add the two book values and the excess fair value allocation after taking one-half year excess amortization)

� Goodwill = $60,000 (the original allocation)


29. (25 Minutes) (A variety of consolidated questions and balances)

a. Nascent applies the initial value method because the original price of $414,000 is still in the Investment in Sea-Breeze account. In addition, the Investment Income account is equal to 60 percent of the dividends paid by the subsidiary during the year.

b. Consideration transferred in acquisition . $414,000 Noncontrolling interest fair value ............. 276,000 Sea-Breeze fair value 1/1/09 ..................... $690,000 Sea-Breeze book value 1/1/09 550,000 Excess fair value over book value $140,000 Excess fair assignments: Annual Excess

Life Amortizations Buildings ............................................... 60,000 6 years $10,000 Equipment ............................................. (20,000) 4 years (5,000) Patent ..................................................... 100,000 10 years 10,000 Total ..................................................... -0- $15,000

c. If the equity method had been applied, the Investment Income account

would show the basic equity accrual less amortization: 60% of (the subsidiary's income of $90,000 less $15,000 excess fair value amortization) = $45,000.

d. The initial value method recognizes neither the increase in the

subsidiary's book value nor the excess amortization expenses for prior years. At the acquisition date, the subsidiary’s book value was $550,000 as indicated by the assets less liabilities. At the beginning of the current year, the book value of the subsidiary is $780,000 as indicated by beginning stockholders' equity balances.

Increase in book value during prior years

($780,000 – $550,000) .......................................................... $230,000 Less excess amortization ......................................................... (45,000) Net increase in book value ........................................................ $185,000 Ownership ................................................................................. 60% Increase required in parent's retained earnings, 1/1/12 ........ $111,000 Parent's retained earnings, 1/1/12 as reported ....................... 700,000 Parent’s share of consolidated retained earnings, 1/1/12 ...... $811,000

e. Consolidated net income and allocation

� Revenues (add book values) $900,000 � Expenses (add book values and excess amortization) (635,000) � Consolidated net Income $265,000 � Noncontrolling interest in consolidated net income ($90,000 – 15,000) × 40% 30,000 � Controlling interest in consolidated net income $235,000


29. (continued)

f. Consolidated buildings, 1/1/09 (subsidiary): Book value ............................................................................. $300,000 Acquisition-date fair-value allocation ................................ 60,000 Consolidation figure ............................................................ $360,000

g. Consolidated buildings, 12/31/12: Parent's book value ............................................................. $700,000 Subsidiary's book value ...................................................... 200,000 Original allocation ............................................................... 60,000 Amortization ($10,000 × 4 years) ........................................ (40,000) Consolidated balance .......................................................... $920,000


30. Acquisition Method Consolidated Balances Adjustments

December 31, 2010 Pierson Steele & Eliminations NCI Consolidated

Revenues (1,843,000) (675,000) (2,518,000)

Cost of goods sold 1,100,000 322,000 1,422,000

Depreciation expense 125,000 120,000 245,000

Amortization expense 275,000 11,000 (E) 80,000 366,000

Interest expense 27,500 7,000 34,500

Equity in Steele Income (121,500) (I)121,500 -0-

Separate company net income (437,000) (215,000)

Consolidated net income (450,500)

NCI in Steele Income (13,500) (13,500)

Controlling interest in CNI (437,000)

Retained Earnings 1/1 (2,625,000) (395,000) (S)395,000 (2,625,000)

Net Income (437,000) (215,000) (437,000)

Dividends paid 350,000 25,000 (D) 22,500 2,500 350,000

Retained Earnings 12/31 (2,712,000) (585,000) (2,712,000)

Current Assets 1,204,000 430,000 1,634,000

Investment in Steele 1,854,000 (D) 22,500 (S)769,500

(A)985,500 -0-

(I) 121,500

Customer base -0- -0- (A)720,000 (E) 80,000 640,000

Buildings and Equipment 931,000 863,000 1,794,000

Copyrights 950,000 107,000 1,057,000

Goodwill (A)375,000 375,000

Total Assets 4,939,000 1,400,000 5,500,000

Accounts Payable (485,000) (200,000) (685,000)

Notes Payable (542,000) (155,000) (697,000)

NCI in Steele (S) 85,500

(A)109,500 (195,000)

(206,000) (206,000)

Common Stock (900,000) (400,000) (S)400,000 (900,000)

Additional Paid-In Capital (300,000) (60,000) (S) 60,000 (300,000)

Retained Earnings 12/31 (2,712,000) (585,000) (2,712,000)

Total Liab. and SE (4,939,000) (1,400,000) (5,500,000)

Fair value of Steele Company (1,710,000 ÷ 90%) $1,900,000 Carrying amount acquired 725,000 Excess fair value 1,175,000 to customer base 800,000 to goodwill $375,000


30. (Continued) Controlling Noncontrolling Interest Interest Fair value at acquisition date $1,710,000 $190,000 Relative fair values of identifiable net assets

90% and 10% of $1,525,000 (acquisition date recorded fair value plus customer base) 1,372,500 152,500

Goodwill $337,500 $37,500

b. If the fair value of the noncontrolling interest was $152,500, both goodwill and the noncontrolling interest balance would be reduced equally by $37,500 as follows:

Fair value of Steele Company (1,710,000 + 152,500) $1,862,500 Carrying amount acquired 725,000 Excess fair value 1,137,500 to customer base 800,000 to goodwill $337,500 Noncontrolling interest balance beginning of year $(157,500) Noncontrolling interest in consolidated net income (13,500) Dividends paid to noncontrolling interest 2,500 Noncontrolling interest end of year $168,500 Controlling Noncontrolling Interest Interest Fair value at acquisition date $1,710,000 $152,500 Relative fair values of identifiable net assets

90% and 10% of $1,525,000 (acquisition date recorded fair value plus customer base) 1,372,500 152,500

Goodwill $337,500 -0-


31. (60 Minutes) (Consolidation worksheet and income statement with parent using initial value method. Also consolidated balances with a control premium paid by parent.)

a. Fair Value Allocation and Amortization Consideration transferred by Krause ............ $504,000 Noncontrolling interest fair value .................. 126,000 Leahy total fair value 1/1/09 ............................ $630,000 Leahy book value 1/1/09 ................................. (380,000) Fair value in excess of book value ................ $250,000 Annual Excess Life Amortizations Excess price allocated to undervalued Building ................................................. 45,000 5 years $9,000 Trademark ........................................... 60,000 10 years 6,000 Goodwill ...................................................... $145,000 $15,000

Explanation of Consolidation Entries Found on Worksheet

Entry *C: Convert the parent’s 1/1/10 retained earnings balance from the cash basis to the accrual basis.

Entry S: Eliminates stockholders' equity accounts of subsidiary while

recognizing noncontrolling interest balance (20%) as of the beginning of the current year.

Entry A: Recognizes acquisition-date fair value allocations less 1 year

amortization for building and trademark and increases beginning balance of the noncontrolling interest for it’s share.

Entry I: Eliminates Intercompany dividend payments recorded as income

by parent.

Entry E: Recognizes amortization expense for current year.

Columnar Entry—Recognizes noncontrolling interest's share of subsidiary's net income ($90,000 – 15,000) × 20%).


31. a. (continued) KRAUSE CORPORATION AND LEAHY, INC. Consolidation Worksheet

For Year Ending December 31, 2010 Krause Leahy Consolidation Entries Noncontrolling Consolidated Accounts Corporation Inc. Debit Credit Interest Totals

Sales (584,000) (250,000) (834,000) Cost of goods sold 194,000 95,000 289,000 Operating expenses 246,000 65,000 (E) 15,000 326,000 Dividend income (16,000) ______ (I) 16,000 -0- Separate company net income (160,000) (90,000) Consolidated net income 219,000 NCI in Leahy's income (15,000) 15,000 Krause’s interest in consolidated income (204,000) Retained earnings, 1/1 (700,000) (350,000) (S)350,000 (*C) 44,000 (744,000) Net income (above) (160,000) (90,000) (204,000) Dividends paid 70,000 20,000 (I) 16,000 4,000 70,000 Retained earnings, 12/31 (790,000) (420,000) (878,000) Current assets 296,000 191,000 487,000 Investment in Leahy 504,000 (*C) 44,000 (S)360,000 -0- (A)188,000 Buildings and equipment (net) 680,000 390,000 (A) 36,000 (E) 9,000 1,097,000 Trademarks 100,000 144,000 (A) 54,000 (E) 6,000 292,000 Goodwill 0 0 (A)145,000 145,000 Total assets 1,580,000 725,000 2,021,000 Liabilities (470,000) (205,000) (675,000) Common stock (320,000) (100,000) (S)100,000 (320,000) Retained earnings, 12/31 (above) (790,000) (420,000) (878,000) NCI in Leahy, 1/1 (S) 90,000 (A) 47,000 (137,000) NCI in Leahy, 12/31 148,000 (148,000) Total liabilities and equities (1,580,000) (725,000) (2,021,000)


31. (continued) b. KRAUSE CORPORATION AND LEAHY, INC.

Consolidated Income Statement For Year Ending December 31, 2010

Sales $834,000 Cost of goods sold $289,000 Operating expenses 326,000 Total expenses 615,000 Consolidated net income $219,000

To 20% noncontrolling interest $15,000 To controlling interest $204,000 Consolidated Net income $219,000 c. Consideration transferred by Krause for 80% of Leahy $504,000 Noncontrolling interest fair value ($4.85 × 20,000 shares) 97,000 Leahy fair value $601,000 Fair value of Leahy’s underlying net assets 485,000 Goodwill $116,000 If the noncontrolling interest fair value was $4.85 per share at the acquisition date, then goodwill declines to $116,000 and the noncontrolling interest total would also decline from $149,000 to 120,000). Worksheet entries (S) and (A) assuming a $4.85 noncontrolling interest acquisition-date fair value: (S) Common stock-Leahy 100,000 Retained earnings- Leahy 1/1 350,000 Investment in Leahy 360,000 Noncontrolling interest 90,000 (A) Buildings and equipment (net) 36,000 Trademarks 54,000 Investment in Leahy 72,000 Noncontrolling interest 18,000

Goodwill 116,000 Investment in Leahy 116,000 Controlling Noncontrolling Interest Interest Fair value at acquisition date $504,000 $97,000 Relative fair values of identifiable net assets

80% and 20% of $485,000 (acquisition date fair value of net identifiable assets) 388,000 97,000

Goodwill $116,000 -0-


32. (40 Minutes) (Determine consolidated balances.) Acquisition-date subsidiary fair value (given) ... $850,000 Book value of subsidiary (given) ........................ (600,000) Fair value in excess of book value ..................... $250,000 Allocations to specific accounts based on difference

between fair value and book value Land ................................................................ $165,000 Buildings and equipment .............................. (25,000) Copyright ........................................................ 100,000 Notes payable ................................................. 10,000 250,000 Total ....................................................... -0- Annual excess amortizations: Buildings and equipment [$(25,000) ÷ 10 years] $(2,500) Copyright ($100,000 ÷ 20 years) 5,000 Notes payable ($10,000 ÷ 8 years) 1,250 Total $3,750 Consolidated Totals:

� Revenues = $1,900,000 (add the two book values)

� Cost of goods sold = $1,085,000 (add the two book values)

� Depreciation expense = $267,500 (add the two book values less $2,500 excess adjustment)

� Amortization expense = $10,000 (add the two book values plus $5,000 excess adjustment)

� Interest expense = $50,250 (add the two book values plus $1,250 excess adjustment)

� Equity in income of Sam = -0- (eliminated so that the individual revenues and expenses of the subsidiary can be included in the consolidated figures)

� Net income = $487,250 (revenues less expenses)

� Retained earnings, 1/1 = $1,265,000 (parent company balance; subsidiary's operations prior to acquisition do not affect consolidated figures)

� Noncontrolling interest in income of subsidiary = $26,250 ($135,000 reported income of the subsidiary less $3,750 amortization expense multiplied by 20 percent outside ownership)

� Dividends paid = $260,000 (parent company balance; subsidiary's payments to parent are intercompany, payments to outside owners decrease noncontrolling interest balance)


32. (continued)

� Retained earnings, 12/31 = $1,466,000 (consolidated balance on 1/1/09 plus consolidated net income less noncontrolling interest in subsidiary's income less consolidated dividends)

� Current assets = $1,493,000 (add the two book values)

� Investment in Sam = -0- (eliminated so that the individual assets and liabilities of the subsidiary can be included in the consolidated figures)

� Land = $517,000 (add the book values plus the $165,000 excess allocation)

� Buildings and equipment (net) = $1,119,500 (add the book values less the $25,000 allocation [asset was overvalued] plus the excess amortization)

� Copyright = $190,000 (book value + $100,000 excess allocation less amortization for the year)

� Total assets = $3,319,500

� Accounts payable = $339,000 (add book values)

� Notes payable = $581,250 (add the book values less $10,000 excess allocation plus amortization)

� Noncontrolling interest in subsidiary = $183,250 (20% of fair value as of 1/1/09 [$170,000] plus noncontrolling interest in income of subsidiary [$26,250] less dividends paid to outside owners [$13,000])

� Common stock = $300,000 (parent company balance)

� Additional paid-in capital = 450,000 (parent company balance)

� Retained earnings, 12/31 = $1,466,000 (computed above)

� Total liabilities and equities = $3,319,500


32. (continued) Acquisition Method Consolidation Entries Noncontrolling Consolidated Accounts Father Sam Debit Credit Interest Totals

Revenues ........................................ (1,360,000) (540,000) (1,900,000) Cost of goods sold ......................... 700,000 385,000 1,085,000 Depreciation expense .................... 260,000 10,000 (E) 2,500 267,500 Amortization expense .................... -0- 5,000 (E) 5,000 10,000 Interest expense ............................. 44,000 5,000 (E) 1,250 50,250

Equity in income of Sam ............... (105,000) -0- (I) 105,000 -0- Separate company net income ...... (461,000) (135,000)

Consolidated net income ............... (487,250) Noncontrolling interest in Sam's income (26,250) 26,250 Controlling interest in CNI ............ (461,000)

Retained earnings 1/1 ................... (1,265,000) (440,000) (S) 440,000 (1,265,000) Net income (above) ....................... (461,000) (135,000) (461,000) Dividends paid ............................... 260,000 65,000 (D) 52,000 13,000 260,000 Retained earnings 12/31 .......... (1,466,000) (510,000) (1,466,000)

Current assets ............................... 965,000 528,000 1,493,000 Investment in Sam ......................... 733,000 (D) 52,000 (S) 480,000 (I) 105,000 (A) 200,000 -0- Land ............................................... 292,000 60,000 (A) 165,000 517,000 Buildings and equipment (net) ...... 877,000 265,000 (E) 2,500 (A) 25,000 1,119,500 Copyright ....................................... -0- 95,000 (A) 100,000 (E) 5,000 190,000 Total assets .............................. 2,867,000 948,000 3,319,500

Accounts payable .......................... (191,000) (148,000) (339,000) Notes payable ................................ (460,000) (130,000) (A) 10,000 (E) 1,250 (581,250) NCI in Sam 1/1 ................................ (S) 120,000 NCI in Sam 12/31 (A) 50,000 (170,000) ................................................... (183,250) (183,250) Common stock .............................. (300,000) (100,000) (S) 100,000 (300,000) Additional paid-in capital ............... (450,000) (60,000) (S) 60,000 (450,000) Retained earnings 12/31 … (above) (1,466,000) (510,000) (1,466,000) Total liab. and stockholders' equity (2,867,000) (948,000) (3,319,500)


33. (55 Minutes) (Consolidated worksheet) a. Consideration transferred by Adams $603,000 Noncontrolling interest fair value 67,000 Acquisition-date total fair value $670,000 Book value of Barstow (CS + RE 12/31/09) (460,000) Excess fair value over book value $210,000

Annual Excess Life Amortizations Land $30,000 — — Buildings (20,000) 10 years ($2,000) Equipment 40,000 5 years 8,000 Patents 50,000 10 years 5,000 Notes payable 20,000 5 years 4,000 120,000 Goodwill $90,000 indefinite -0- Total $15,000

b. Because investment income is exactly 90 percent of Barstow's reported earnings, Adams apparently is applying the partial equity method.

Explanation of Consolidation Entries Found on Worksheet

Entry *C—Converts Adams's financial records from the partial equity method to the equity method by recognizing amortization for 2010. Total expense was $15,000 but only 90 percent (or $13,500) applied to the parent.

Entry S—Eliminates subsidiary's stockholders' equity while recording noncontrolling interest balance as of January 1, 2011.

Entry A—Records unamortized allocation balances as of January 1, 2011. The acquisition method attributes 10 percent of these amounts to the non-controlling interest.

Entry I—Eliminates intercompany income accrual for 2011.

Entry D—Eliminates intercompany dividend transfers.

Entry E—Records amortization expense for current year.

Columnar Entry—Recognizes noncontrolling interest's share of Barstow's net income as follows:

Noncontrolling Interest in Barstow's Income (Columnar Entry) Barstow reported income .............................................................. $120,000 Excess amortization expenses 2011 ............................................. (15,000) Adjusted income of Barstow .................................................... $105,000 Noncontrolling interest ownership ............................................... 10% Noncontrolling interest in Barstow's income ......................... $10,500


33. b. (continued) ADAMS CORPORATION AND BARSTOW, INC. Consolidation Worksheet-Acquisition Method For Year Ending December 31, 2011 Noncontrolling Consolidated

Adams Corp. Barstow Inc. Debit Credit Interest Totals

Revenues (940,000) (280,000) (1,220,000) Cost of goods sold 480,000 90,000 570,000 Depreciation expense 100,000 55,000 (E) 6,000 161,000 Amortization expense (E) 5,000 5,000 Interest expense 40,000 15,000 (E) 4,000 59,000 Investment income (108,000) (I) 108,000 -0- Separate company net income (428,000) (120,000) Consolidated net income (425,000) Income to noncontrolling interest (10,500) 10,500 Income to controlling interest (414,500)

Retained earnings, 1/1 (1,367,000) (340,000) (C*) 13,500 (1,353,500) (S) 340,000 Net income (428,000) (120,000) (414,500) Dividends paid 110,000 70,000 (D) 63,000 7,000 110,000 Retained earnings, 12/31 (1,685,000) (390,000) (1,658,000)

Current assets 610,000 250,000 860,000 Investment in Barstow 702,000 (D) 63,000 (*C) 13,500 -0- (S) 468,000 (A) 175,500 (I) 108,000 Land 380,000 150,000 (A) 30,000 560,000 Buildings 490,000 250,000 (E) 2,000 (A) 18,000 724,000 Equipment 873,000 150,000 (A) 32,000 (E) 8,000 1,047,000 Patents (A) 45,000 (E) 5,000 40,000 Goodwill (A) 90,000 90,000 Total assets 3,055,000 800,000 3,321,000

Notes payable (860,000) (230,000) (A) 16,000 (E) 4,000 (1,078,000) Common stock (510,000) (180,000) (S) 180,000 (510,000) Retained earnings, 12/31 (1,685,000) (390,000) (1,658,000) (S) 52,000 Noncontrolling interest (A) 19,500 (71,500) (75,000) (75,000) Total liabilities and stockholders' equity (3,055,000) (800,000) (3,321,000)


34. (25 minutes) (Consolidated balances after a mid-year acquisition) a. Investment account balance indicates the initial value method. Consideration transferred ........................ $526,000 Noncontrolling interest fair value ............ 300,000 Duncan acquisition-date fair value .......... 826,000 Book value of Duncan (below) .................. (765,000) Fair value in excess of book value .......... $61,000 Excess assigned Annual Excess based on fair value: Life Amortizations Equipment ........................................ (30,000) 5 years $(6,000) Goodwill .......................................... $91,000 indefinite -0- Total ...................................................... $(6,000) Amortization for 9 months .................. $(4,500)

Acquisition-Date Subsidiary Book Value Book value of Duncan, 1/1/09 (CS + 1/1 RE) ........... $740,000 Increase in book value-net income (dividends were paid after acquisition) ................................ $100,000 Time prior to purchase (3 months) .......................... × ¼ 25,000 Book value of Duncan, 4/1/09 (acquisition date) .... $765,000

Consolidated Income Statement:

Revenues (1) $825,000 Cost of goods sold (2) $405,000 Operating expenses (3) 214,500 619,500 Consolidated net income 205,500 Noncontrolling interest in CNI (4) 28,200 Controlling interest in CNI $177,300

(1) $900,000 combined revenues less $75,000 (preacquisition subsidiary revenue)

(2) $440,000 combined COGS less $35,000 (preacquisition subsidiary COGS)

(3) $234,000 combined operating expenses less $15,000 (preacquisition subsidiary operating expenses) less nine month excess overvalued equipment depreciation reduction of $4,500

(4) 40% of post-acquisition subsidiary income less excess amortization

b. Goodwill = $91,000 (original allocation) Equipment = $774,500 (add the two book values less $30,000 reduction to fair value plus $4,500 nine months excess amortization) Common Stock = $630,000 (parent company balance only) Buildings = $1,124,000 (add the two book values) Dividends Paid = $80,000 (parent company balance only)


35. (40 minutes) Determine consolidated balance for a mid-year acquisition. a. Consideration transferred by Truman .......... $720,000 Noncontrolling interest fair value ................. 290,000 Atlanta’s acquisition-date total fair value ...... $1,010,000 Book value of Atlanta ...................................... (840,000) Fair value in excess of book value................. $170,000 Annual Excess Excess fair value assigned Life Amortizations Patent ......................................................... 100,000 5 years $20,000 Goodwill ....................................................... $70,000 indefinite -0- Total .......................................................... $20,000 b. Controlling Noncontrolling Interest Interest Fair values at acquisition date $720,000 $290,000 Relative fair values of identifiable net assets

70% and 30% of $940,000 (acquisition date book value plus patent = net asset fair value) 658,000 282,000

Goodwill $62,000 $8,000 c. Initial value at acquisition date $720,000 Truman’s share of Atlanta’s income for half year ([$120,000 – 20,000 amortization × ½ year] × 70%) 35,000 Dividends 2009 ($80,000 × ½ year × 70%) (28,000) Investment account balance 12/31/09 $727,000


35. (continued) d. Consolidated Worksheet

Truman Atlanta Adjustments & Eliminations NCI Cons.

Revenues (670,000) (400,000) (S)200,000 (870,000)

Operating Expenses 402,000 280,000 (E) 10,000 (S)140,000 552,000

Income of subsidiary (35,000) (I) 35,000 0

Separate company net income (303,000) (120,000)

Consolidated net income (318,000)

NCI in Atlanta's income (15,000) 15,000

Controlling interest in CNI (303,000)

Retained earnings, 1/1 (823,000) (500,000) (S) 500,000 (823,000)

Net income (above) (303,000) (120,000) (303,000)

Dividends paid 145,000 80,000 (S) 40,000 12,000

(D) 28,000 145,000

Retained earnings, 12/31 (981,000) (540,000) (981,000)

Current assets 481,000 390,000 871,000

Investment in Atlanta 727,000 (D) 28,000 (S)588,000 0

(I) 35,000

(A)132,000

Land 388,000 200,000 588,000

Buildings 701,000 630,000 1,331,000

Patent (A) 100,000 (E) 10,000 90,000

Goodwill (A) 70,000 70,000

Total assets 2,297,000 1,220,000 2,950,000

Liabilities (816,000) (360,000) (1,176,000)

Common stock (95,000) (300,000) (S) 300,000 (95,000)

Additional paid-in capital (405,000) (20,000) (S) 20,000 (405,000)

Retained earnings, 12/31 (981,000) (540,000) (981,000)

Noncontrolling interest, 7/1 (A) 38,000 (S)252,000 (290,000)

Noncontrolling interest, 12/31 293,000 (293,000) Total liabilities and stockholders' equity (2,297,000) (1,220,000) 1,263,000 1,263,000 (2,950,000)


36. (60 minutes) (Consolidated statements for a step acquisition) a. Fair value of Sysinger 1/1/10 (given) $1,750,000 Book value of Sysinger 1/1/10 (CS + APIC + RE) 1,300,000 Excess fair value over book value 450,000 To customer contract (4 year life) 400,000 To goodwill $50,000

b. Equity in earnings of Sysinger 2010 income (150,000 × 95%) $142,500 Amortization (100,000 × 95%) (95,000) Equity in earnings of Sysinger $47,500 Revaluation of 15% block to fair value

Consideration transferred $184,500 2009 Income (100,000 × 15%) 15,000 2009 dividends (30,000 × 15%) (4,500) Book value at 1/1/10 195,000 Fair value at 1/1/10 262,500 Gain on revaluation $67,500

Investment account balance 12/31/10

Fair value at 1/1/10 (15% block) $262,500 Consideration transferred 1/1/10 (80% block) 1,400,000 Equity earnings 2010 2010 income (95% × 150,000) 142,500 Customer contract amortization (95,000) 47,500 Dividends 2010 (40,000 × 95%) (38,000) Investment in Sysinger 12/31/10 $1,672,000


36. (Continued) c. Allan and Sysinger Consolidation Worksheet

For Year Ending December 31, 2010 Allan Sysinger Consolidation Entries Noncontrolling Consolidated Accounts Company Company Debit Credit Interest Totals Revenues (931,000) (380,000) (1,311,000) Operating expenses 615,000 230,000 (E)100,000 945,000 Equity earnings of Sysinger (47,500) -0- (I) 47,500 -0- Gain on revaluation (67,500) -0- (67,500) Separate company net income (431,000) (150,000) Consolidated net income (433,500) NCI in Sysinger’s income (2,500) 2,500 Allan’s share of CNI (431,000)

Retained earnings, 1/1 (965,000) (600,000) (S) 600,000 (965,000) Net income (431,000) (150,000) (431,000) Dividends paid 140,000 40,000 (D) 38,000 2,000 140,000 Retained earnings 12/31 (1,256,000) (710,000) (1,256,000)

Current assets 288,000 540,000 828,000 Investment in Sysinger 1,672,000 -0- (D) 38,000 (S)1,235,000 -0- (I) 47,500 (A) 427,500 Property, plant, and equipment 826,000 590,000 1,416,000 Patented technology 850,000 370,000 1,220,000 Customer contract -0- -0- (A) 400,000 (E) 100,000 300,000 Goodwill -0- (A) 50,000 50,000 Total assets 3,636,000 1,500,000 3,814,000

Liabilities (1,300,000) (90,000) (1,390,000) Common stock (900,000) (500,000) (S) 500,000 (900,000) Additional paid-in capital (180,000) (200,000) (S) 200,000 (180,000)) Retained earnings 12/31 (1,256,000) (710,000) (1,256,000) NCI in Sysinger, 1/1 -0- -0- (S) 65,000 (A) 22,500 (87,500) NCI in Sysinger, 12/31 -0- -0- (88,000) (88,000) Total liab. and stockholders' equity (3,636,000) (1,500,000) 1,935,500 1,935,500 (3,814,000)


37. (60 minutes) (Step acquisition—control previously acquired.)

a. According to the acquisition method, the valuation basis for a subsidiary is established on the date control is obtained, in this case January 1, 2009. Subsequent acquisitions are valued consistent with this initial value after adjusting the investment for subsidiary income and other changes. Because subsequent acquisitions are considered as transactions in the parent’s own equity, no gains or losses are recorded. Differences in cash paid and the underlying value are recorded as adjustments to APIC. Fair value of Keane Company 1/1/09 ($573,000 ÷ 60%) $955,000 Keane income 2009 150,000 Excess fair value amortization for copyright (20,000)* Keane dividends 2009 (80,000) Initial fair value adjusted to 1/1/10 $1,005,000 Percent acquired in step acquisition 30% Value assigned to 30% acquisition 301,500 Cash paid for the 30% acquisition 300,000 Credit to APIC from 30% step acquisition $1,500 *Fair value of Keane Company 1/1/09 ($573,000 ÷ 60%) $955,000 Book value of Keane Company 1/1/09 (given) 810,000 Excess fair value over book value 145,000 To copyright (6 year life) 120,000 To goodwill $25,000 Entry to record 30% additional investment in Keane: 1/1/10 Investment in Keane 301,500 Cash 300,000 APIC from step acquisition 1,500 b. Investment in Keane Company 1/1/09 $573,000 2009 Equity earnings [60% × (150,000 – 20,000)] 78,000 2009 Dividends received (60% × $80,000) (48,000) Additional acquisition of 30% interest 301,500 2010 Equity earnings [90% × (180,000 – 20,000)] 144,000 2010 Dividends received (90% × $60,000) (54,000) Investment in Keane Company 12/31/10 $994,500


37. (continued) part c. BRETZ, INC. AND KEANE COMPANY Consolidation Worksheet

Year Ending December 31, 2010

Consolidation Entries Noncontrolling Consolidated Accounts Bretz, Inc. Keane Co. Debit Credit Interest Totals Revenues (402,000) (300,000) (702,000) Operating expenses 200,000 120,000 (E) 20,000 340,000 Equity in Keane’s income (144,000) (I) 144,000 Separate company net income (346,000) (180,000 Consolidated net income (362,000) NCI in Keane’s income (16,000) 16,000 Bretz’s share of CNI (346,000)

Retained earnings, 1/1 (797,000) (500,000) (S) 500,000 (797,000) Net income (above) (346,000) (180,000) (346,000) Dividends paid 143,000 60,000 (D) 54,000 6,000 143,000 Retained earnings, 12/31 (1,000,000) (620,000) (1,000,000)

Current assets 224,000 190,000 414,000 Investment in Keane Company 994,500 (S) 792,000 0 (D)54,000 (A) 112,500 (I) 144,000 Trademarks 106,000 600,000 706,000 Copyrights 210,000 300,000 (A)100,000 (E) 20,000 590,000 Equipment (net) 380,000 110,000 490,000 Goodwill (A) 25,000 25,000 Total assets 1,914,500 1,200,000 2,225,000

Liabilities (453,000) (200,000) (653,000) Common stock (400,000) (300,000) (S)300,000 (400,000) Additional paid-in capital (60,000) (80,000) (S) 80,000 (60,000) APIC-step acquisition (1,500) (1,500) Retained earnings,12/31 (1,000,000) (620,000) (1,000,000) (A) 12,500 (100,500) Non-controlling interest 12/31 (S) 88,000 110,500 (110,500) Total liabilities and equities (1,914,500) (1,200,000) 1,223,000 1,223,000 (2,225,000)


38. (30 Minutes) (Determine consolidated balances when parent uses equity method. Includes sale of a portion of the investment)

Purchase Price Allocation and Excess Amortizations

Purchase price .......................................... $250,000 Book value acquired ($230,000 × 70%) .................................. 161,000 Price in excess of book value .................. $89,000 Annual Excess Allocation based on fair value .................. Life Amortizations Land ($10,000 × 70%) $7,000 Equipment ($68,000 × 70%) 47,600 14 yrs. $3,400 Liabilities ($20,000 × 70%) 14,000 10 yrs. 1,400 68,600 Goodwill ..................................................... $20,400 indefinite -0- Total .......................................................... $4,800

The parent uses the equity method: Investment income of $44,200 =

$49,000 (70% × $70,000) less $4,800 amortization expense.

Bon Air Creedmoor Adjustments & Eliminations NCI Consolidated

Revenues (694,800) (250,000) (944,800)

Operating expenses 630,000 180,000 (E) 4,800 814,800

Investment income (44,200) -0- (I) 44,200 -0- Noncontrolling int(E)erest in Creedmoor income (21,000) 21,000

Net income (109,000) (70,000) (109,000)

Retained earnings, 1/1/09 (760,000) (260,000) (S)260,000 (760,000)

Net income (109,000) (70,000) (109,000)

Dividends paid 68,000 10,000 (D) 7,000 3,000 68,000

Retained earnings, 12/31/09 (801,000) (320,000) (801,000)

Current assets 72,000 120,000 192,000

Investment in Creedmoor 321,800 -0- (D) 7,000 (S)210,000

(I) 44,200 -0-

(A)74,600

Land 241,000 50,000 (A) 7,000 298,000

Buildings (net) 289,000 200,000 489,000

Equipment (net) 165,200 40,000 (A)37,400 3,400 239,200

Goodwill -0- -0- (A)20,400 20,400

Total assets 1,089,000 410,000 1,238,600

Liabilities (180,000) (50,000) (A) 9,800 (E) 1,400 (221,600)

Common stock (50,000) (40,000) (S) 40,000 (50,000)

Additional paid-in capital (58,000) -0- (58,000)

Noncontrolling interest 1/1/09 (S)90,000 (90,000)

Noncontrolling interest 12/31/09 108,000 (108,000)

Retained earnings, 12/31/09 (801,000) (320,000) (801,000)

Total liabilities and equities (1,089,000) (410,000) 430,600 430,600 (1,238,600)


39. (50 Minutes) (A variety of questions and consolidated balances for combination where parent applies equity method)

a. Equity accrual (60% × $70,000) .............................................. $42,000 Excess amortizations (below) ................................................ (5,600) Equity income (parent uses equity method) .................... $36,400 Purchase Price Allocation and Excess Amortizations Purchase price .......................................... $400,000 Book value acquired (60% of $470,000 [assets minus liabilities]) .... 282,000 Price in excess of book value .................. $118,000 Excess price assigned to specific ............ Annual Excess accounts based on fair value .................... Life Amortizations Equipment (overvalued) ([$30,000] × 60%) .................................. (18,000) 10 yrs. $(1,800) Buildings ($155,000 × 60%) ................. 93,000 15 yrs. 6,200 Bonds payable ($20,000 × 60%) ........... 12,000 10 yrs. 1,200 Goodwill ..................................................... $31,000 indefinite -0- Total ...................................................... $5,600

b. No adjustment to the parent's retained earnings is needed because the company is applying the equity method.

c. $5,600—see a. d. $28,000—40% of $70,000 reported income figure e. Watson Corporation Consolidated Income Statement For the Year Ended December 31, 2009 Revenues $920,000 Operating expenses 695,600 Combined entity net income 224,400 Noncontrolling interest in Houston income 28,000 Consolidated net income $196,400 Remaining f. Excess Amortizations Allocations Allocations (see a) for 4 years 12/31/09 Equipment (18,000) (7,200) (10,800) Buildings 93,000 24,800 68,200 Bonds payable 12,000 4,800 7,200 Goodwill 31,000 -0- 31,000


39. (continued) g. Noncontrolling interest, 1/1/08 (40% of book value of $630,000) $252,000 Noncontrolling interest in subsidiary's income (see e) ........... 28,000 Noncontrolling interest in subsidiary's dividends .................... (16,000) (40% × $40,000) Noncontrolling interest in subsidiary, 12/31/09 ........................ $264,000

h. Watson Corporation Consolidated Balance Sheet December 31, 2009 Current assets $475,000 Current liabilities $560,000

Bonds Payable 462,800 Equipment (net) 909,200 Noncontrolling interest 264,000 Buildings (net) 1,001,200 Common stock 310,000 Goodwill 31,000 Retained earnings 819,600 Total assets $2,416,400 Total liabilities and equity $2,416,400

40. (40 Minutes) (Determine consolidated balances, parent has applied the cost method) Acquisition price ............................................ $1,400,000 Book value acquired (see Schedule 1) ($1,120,000 × 80%) .......................................... 896,000 Cost in excess of book value ........................ $504,000 Annual Excess Excess cost allocated to buildings based Life Amortizations on fair value ($80,000 × 80%) ......................... 64,000 10 years $6,400 Unpatented technology ($550,000 × 80%) .... 440,000 10 years 44,000 Total .......................................................... $ -0- $50,400 Schedule 1—Book Value of Morning (January 1, 2006) Book value, January 1, 2009 (stockholders' equity accounts) .............. $1,500,000 2008 Increase in book value .......................... $200,000 2007 Increase in book value .......................... 100,000 2006 Increase in book value .......................... 80,000 380,000 Book value, January 1, 2006 .......................... $1,120,000

Revenues = $1,384,000 (add the two book values) Expenses = $550,400 (add the two book values and then include $50,400

excess amortization expenses for the year as computed above) Noncontrolling interest in subsidiary's net income = $80,000 (20% of

subsidiary's reported income of $400,000)


40. (continued)

Net Income = $753,600 (consolidated revenues less both consolidated expenses and the noncontrolling interest's share of net income)

Retained earnings, 1/1/09 = $1,952,800 (the cost method is in use because the original purchase price is still in the Investment account. Thus, the $380,000 increase in book value for the three previous years [income of $680,000 less dividends paid of $300,000] multiplied by the 80 percent ownership gives an equity accrual of $304,000. Excess amortization for these same three years totals $151,200 ($50,400× 3). Therefore, the parent's retained earnings must be increased by the net amount [$152,800 or $304,000 – $151,200])

Dividends paid = $380,000 (the parent company balance only)

Retained earnings, 12/31/09 = $2,326,400 (beginning balance plus net income less dividends paid)

Cash = $500,000 (add book values)

Receivables = $1,000,000 (add book values after removing $100,000 intercompany balance)

Inventory = $900,000 (add book values)

Investment in Morning = -0- (balance is removed so that subsidiary's assets and liabilities can be included in the consolidated figures)

Land = $1,300,000 (add book values)

Buildings = $1,038,400 (add book values plus $64,000 allocation less four years of $6,400 annual excess amortization)

Unpatented technology = $264,000 ($440,000 original allocation less four years of $44,000 annual amortization)

Total assets = $5,002,400

Liabilities = $720,000 (add book values after removing $100,000 intercompany balance)

Noncontrolling Interest in subsidiary, 12/31/09 = $356,000 (20% of subsidiary's beginning book value [$1,500,000] plus interest in subsidiary income [$80,000 as computed above] less 20% of subsidiary's dividends [$120,000])

Common stock = $1,000,000 (parent company balance)

Additional paid-in capital = $600,000 (parent company balance)

Retained earnings, 12/31/09 = $2,326,400 (computed above)

Total liabilities and equities = $5,002,400


40. (continued) Consolidated figures can also be determined through a worksheet as follows:

Consolidation Entries

Entry *C Investment in Morning ........................................ 152,800 Retained Earnings, 1/1/09 Good ................... 152,800

(To recognize Good's share of Morning's increase in book value during the 2006-2008 period as well as the amortization expense for that same period. Because the original $1,400,000 is still the balance in the investment in Morning account, the parent is applying the cost method. Thus, 80% of Morning's $380,000 increase in book value [$304,000] must be accrued. Excess amortizations of $151,200 [$50,400 per year for these three years] is also recorded leaving a net adjustment of $152,800.)

Entry S Common Stock (Morning) .................................. 460,000 Additional Paid-in Capital (Morning) ................. 40,000 Retained Earnings, 1/1/09 (Morning) ................. 1,000,000 Investment in Morning (80%) ........................ 1,200,000 Noncontrolling Interest in Morning (20%) .... 300,000

(To eliminate subsidiary's stockholders' equity accounts while recording the January 1, 2009 balance of the noncontrolling interest.)

Entry A Buildings ............................................................... 44,800 Unpatented technology ...................................... 308,000 Investment in Morning ................................... 352,800

(To recognize unamortized amounts paid in connection with acquisition of Morning. Original allocations have undergone three previous years of excess amortizations.)

Entry I Dividend Income ................................................. 96,000 Dividends Paid ............................................... 96,000

(To eliminate intercompany income accounts.)

Entry E Operating Expenses ........................................... 50,400 Buildings ........................................................ 6,400 Unpatented technology .................................. 44,000

(To recognize amortization expenses for current year.)

Entry P Liabilities ............................................................. 100,000 Receivables .................................................... 100,000

(To eliminate intercompany debt.)


40. (continued) GOOD AND MORNING Consolidation Worksheet

For Year Ending December 31, 2009

Consolidation Entries Noncontrolling Consolidated Accounts Good Morning Debit Credit Interest Totals

Revenues (884,000) (500,000) (1,384,000) Operating Expenses 400,000 100,000 (E) 50,400 550,400 Dividend Income (96,000) -0- (I) 96,000 -0- NCI in Morning's income (20% × 400,000) -0- -0- (80,000) 80,000 Net Income (580,000) (400,000) (753,600)

Retained earnings, 1/1 Good (1,800,000) (*C) 152,800 (1,952,800) Morning (1,000,000) (S)1,000,000 -0- Net income (above) (580,000) (400,000) (753,600) Dividends paid 380,000 120,000 (I) 96,000 24,000 380,000 Retained earnings, 12/31 (2,000,000) (1,280,000) (2,326,400)

Cash 300,000 200,000 500,000 Receivables 700,000 400,000 (P) 100,000 1,000,000 Inventory 400,000 500,000 900,000 Investment in Morning 1,400,000 -0- (*C) 152,800 (S)1,200,000 (A) 352,800 -0- Land 700,000 600,000 1,300,000 Buildings 300,000 700,000 (A) 44,800 (E) 6,400 1,038,400 Unpatented Technology -0- -0- (A) 308,000 (E) 44,000 264,000 Total assets 3,800,000 2,400,000 5,002,400 Liabilities (200,000) (620,000) (P) 100,000 (720,000) Common stock (1,000,000) (460,000) (S) 460,000 (1,000,000) Additional paid-in capital (600,000) (40,000) (S) 40,000 (600,000) Retained earnings, 12/31 (above) (2,000,000) (1,280,000) (2,326,400) NCI in Morning, 1/1 -0- -0- (S) 300,000 (300,000) NCI in Morning, 12/31 -0- -0- (356,000) (356,000) Total liabilities and stockholders' equity (3,800,000) (2,400,000) (5,002,400)


Accounting Theory Research Case: Noncontrolling Interest In deliberations prior to the issuance of SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements,” the FASB consider three alternatives for displaying the noncontrolling interest in the consolidated statement of financial position. What were these three alternatives?

1. As a liability 2. As equity 3. In the “mezzanine” area between liabilities and owners’ equity

What criteria did the FASB use to evaluate the desirability of each alternative? The FASB evaluated whether the classifications conformed to current definitions of financial statement elements (assets, liabilities, or equity) as articulated in FASB Concept Statement No. 6. In what specific ways did FASB Concept Statement 6 affect the FASB’s evaluation of these alternatives? From SFAS 160 paragraphs 32-34

If it required that the noncontrolling interest be reported in the mezzanine, the Board would have had to create a new element—noncontrolling interest in subsidiaries—specifically for consolidated financial statements. The Board concluded that no compelling reason exists to create a new element specifically for consolidated financial statements to report the interests in a subsidiary held by owners other than the parent. The Board believes that using the existing elements of financial statements along with appropriate labeling and disclosure provides financial information in the consolidated financial statements that is representationally faithful, understandable, and relevant to the entity’s owners, creditors, and other resource providers. The Board concluded that a noncontrolling interest in a subsidiary does not meet the definition of a liability in the Board’s conceptual framework. Paragraph 35 of Concepts Statement 6 defines liabilities as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events” The Board concluded that a noncontrolling interest represents the residual interest in the net assets of a subsidiary within the consolidated group held by owners other than the parent. The noncontrolling interest, therefore, meets the definition of equity in Concepts Statement 6. Paragraph 49 of Concepts Statement 6 defines equity (or net assets) as “the residual interest in the assets of an entity that remains after deducting its liabilities.”


Research and Communication Case

Memorandum To: CFO, Allied Telecom Corporation Re: Surefire Cell Corporation Noncontrolling Interest Valuation You are correct in observing that the newly created 10 percent noncontrolling interest in your recent acquisition, Surefire Cell, must be valued for presentation in your consolidated financial statements. The acquisition-date fair value is the required valuation basis for the noncontrolling interest—usually provided by market trading data. However, because the 10 percent shares do not appear to be actively traded, a valuation alternative will need to be selected According to SFAS 157, “Fair Value Measurements,” three main techniques are available for the noncontrolling interest valuation: the market approach, the income approach, and the cost approach. The market approach involves obtaining fair values for similar assets or businesses that are comparable to Surefire Cell. This valuation technique is appropriate when such comparable firms with observable market values are available. The income approach values a firm by discounting the best available measures of future benefits, typically cash flows or earnings. Often the income approach requires both supportable assumptions and a sufficient number of inputs to create an accurate forecasting model. The cost approach looks to the replacement cost of the firm’s net assets (in current condition) to value the firm. This approach requires ready market prices for the firm’s assets and does not rely on estimates of future cash flows or earnings. As such it is often the least accurate valuation method.

Chapter 4 HW Solutions

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