Chp11

© 2011 Pearson Education, Inc. publishing as Prentice Hall 11-1

Chapter 11

CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND CORPORATE JOINT VENTURES

Answers to Questions 1 Parent company theory views consolidated financial statements from the viewpoint of the parent and entity

theory views consolidated financial statements from the viewpoint of the business entity under which all resources are controlled by a single management team. By contrast, traditional theory sometimes reflects the parent viewpoint and at other times it reflects the viewpoint of the business entity. A detailed comparison of these theories is presented in Exhibit 11–1 of the text.

2 Only contemporary theory is changed by current pronouncements of the Financial Accounting Standards

Board. While such pronouncements can and do change the current accounting and reporting practices, they do not change the logic or the consistency of either parent company or entity theory.

3 The valuation of subsidiary assets on the basis of the price paid for the controlling interest seems justified

conceptually when substantially all of the subsidiary stock is acquired by the parent. But the conceptual support for this approach is less when only a slim majority of subsidiary stock is acquired. In addition, the valuation of the noncontrolling interest based on the price paid by the parent has practical limitations because noncontrolling interest does not represent equity ownership in the usual sense. The ability of noncontrolling stockholders to participate in management is limited and noncontrolling shares do not possess the usual marketability of equity securities.

4 Consolidated assets are equal to their fair values under entity theory only when the book values of parent

assets are equal to their fair values. Otherwise, consolidated assets are not equal to their fair values under either parent company or entity theories.

5 The valuation of the noncontrolling interest at book value might overstate the equity of noncontrolling

shareholders because of the limited marketability of shares held by noncontrolling stockholders and because of the limited ability of noncontrolling stockholders to share in management through their voting rights. Valuation of the noncontrolling interest at book value also overstates or understates the noncontrolling interest unless the subsidiary assets are recorded at fair values.

6 Consolidated net income under parent company theory and income to the controlling stockholders under

entity theory should be the same. This is illustrated in Exhibit 11–5, which shows different income statement amounts for cost of sales, operating expenses, and income allocated to noncontrolling stockholders, but the same income to controlling stockholders. Note that consolidated net income under parent company and traditional theories reflects income to controlling stockholders.

7 Income to the parent stockholders under the equity method of accounting is the same as income to the

controlling stockholders under entity theory. But income to controlling stockholders is not identified as consolidated net income as it would be under parent company or traditional theories.

8 Consolidated income statement amounts under entity theory are the same as under traditional theory when

subsidiary investments are made at book value because traditional theory follows entity theory in eliminating the effects of intercompany transactions from consolidated financial statements.

11-2 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

© 2011 Pearson Education, Inc. publishing as Prentice Hall

9 Traditional theory corresponds to entity theory in matters relating to unrealized and constructive gains and losses from intercompany transactions. In other words, unrealized and constructive gains and losses are allocated between controlling and noncontrolling interests in the same manner under these two theories.

10 Push-down accounting simplifies the consolidation process. The push-down adjustments are recorded in

the subsidiary’s separate books at the time of the business combination; thus, it is not necessary to allocate the unamortized fair values in the consolidation working papers.

11 A joint venture is an entity that is owned, operated, and jointly controlled by a small group of investor-

venturers to operate a business for the mutual benefit of the venturers. Some joint ventures are organized as corporations, while others are organized as partnerships or undivided interests. Each venturer typically participates in important decisions of a joint venture irrespective of ownership percentage.

12 Investors in corporate joint ventures use the equity method of accounting and reporting for their investment

earnings and investment balances as required by GAAP. The cost method would be used only if the investor could not exercise significant influence over the corporate joint venture. Alternatively, investors in unincorporated joint ventures use the equity method of accounting and reporting or proportional consolidation for undivided interests specified as a special industry practice.

SOLUTIONS TO EXERCISES Solution E11-1 1 A 5 B2 A 6 C 3 C 7 D 4 A Solution E11-2 1 B 4 D 2 B 5 C 3 D Solution E11-3 1 c Total value of Sit implied by purchase price

($1,440,000/.8) $1,800,000

Noncontrolling interest percentage 20% Noncontrolling interest $360,000 2 a

Only the parent’s percentage of unrealized profits from upstream sales is eliminated under parent company theory.

3 b Subsidiary’s income of $400,000 10% noncontrolling

interest $ 40,000

Less: Patent amortization ($140,000/10 years 10%) (1,400) Noncontrolling interest share $ 38,600

Chapter 11 11-3


Solution E11-3 (continued) 4 a Implied fair value — $1,680,000 = patents at acquisition Book value of 100% of identifiable net assets $1,680,000 Add: Patents at acquisition ($108,000/90%) 120,000 Total implied value 1,800,000 Percent acquired 80% Purchase price under entity theory $1,440,000 5 b Purchase price — ($1,680,000 80%) = patents at acquisition Book value $1,680,000 80% = underlying equity $1,344,000 Add: Patents at acquisition ($108,000/90%) 120,000 Purchase price (traditional theory) $1,464,000 Solution E11-4 1 Goodwill Parent company theory Cost of investment in Sad $ 500,000 Fair value acquired ($400,000 80%) 320,000 Goodwill $ 180,000 Entity theory Implied value based on purchase price ($500,000/.8) $ 625,000 Fair value of Sad’s net assets 400,000 Goodwill $ 225,000 2 Noncontrolling interest Parent company theory Book value of Sad’s net assets $ 260,000 Noncontrolling interest percentage 20% Noncontrolling interest $ 52,000 Entity theory Total valuation of Sad $ 625,000 Noncontrolling interest percentage 20% Noncontrolling interest $ 125,000 3 Total assets Parent company theory Pod Sad Adjustment Total Current assets $520,000 $ 50,000 $ 40,000 80% $ 602,000 Plant assets — net 480,000 250,000 110,000 80% 818,000 Goodwill 180,000 $1,000,000 $300,000 $1,600,000 Entity theory Current assets $ 520,000 $ 50,000 $ 40,000 100% $ 610,000 Plant assets — net 480,000 250,000 110,000 100% 840,000 Goodwill 225,000 $1,000,000 $300,000 $1,675,000



Solution E11-5 Preliminary computations Parent company theory Cost of 80% interest $300,000Fair value acquired ($350,000 80%) 280,000 Goodwill $ 20,000 Entity theory Implied total value ($300,000 cost ÷ 80%) $375,000Fair value of Sal’s net identifiable assets 350,000 Goodwill $ 25,000 1 Consolidated net income and noncontrolling interest share for 2011: Entity Theory Combined separate incomes $550,000 Depreciation on excess allocated to

equipment:

$75,000 excess ÷ 5 years (15,000) Total consolidated income 535,000 Less: Noncontrolling interest share ($50,000 -15,000) 20% (7,000) Controlling interest share of NI(Income

Attributable to controlling stockholders) $528,000

Parent Company Theory

Combined separate incomes $550,000

Depreciation on excess allocated to equipment: ($75,000 excess x 80% acquired)/5 years

(12,000)

Less: Noncontrolling interest share ($50,000 x 20%)

(10,000)

Consolidated net income $528,000 2 Goodwill at December 31, 2011: $ 20,000 $ 25,000

Chapter 11 11-5


Solution E11-6 Preliminary computation Interest acquired in Sal: 72,000 shares 80,000 shares = 90% 1 Sal’s net assets under entity theory Implied value from purchase price: $1,800,000/90% interest $2,000,000 2 Goodwill

a Entity theory Implied value $2,000,000 Less: Fair value and book value of net assets 1,710,000 Goodwill $ 290,000

b Parent company theory Cost of 90% interest $1,800,000 Fair values of net assets acquired ($1,710,000 90%) 1,539,000 Goodwill $ 261,000 c Traditional theory (same as parent theory) $ 261,000 3 Investment income from Sal Income from Sal ($80,000 1/2 year 90% interest) $ 36,000 4 Noncontrolling interest under entity theory Implied value of Sal at July 1, 2011 $2,000,000 Add: Income for 1/2 year 40,000 2,040,000 Noncontrolling percentage 10% Noncontrolling interest $ 204,000

Alternatively, $200,000 noncontrolling interest at July 1, plus $4,000 share of reported income = $204,000



Solution E11-7 1 Parent company theory Combined separate incomes of Pal and Sal $800,000 Less: Pal’s share of unrealized profits from upstream inventory sales ($30,000 80%) (24,000) Less: Noncontrolling interest share ($300,000 20%) (60,000) Consolidated net income $716,000 2 Entity theory Combined separate incomes $800,000 Less: Unrealized profits from upstream sales (30,000) Total consolidated income $770,000 Income allocated to controlling stockholders ($500,000 + [$270,000 80%]) $716,000 Income allocated to noncontrolling stockholders ($300,000 - $30,000) 20% $ 54,000 Solution E11-8 Parent Traditional Company Entity Theory Theory TheoryCombined separate incomes $180,000 $180,000 $180,000Less: Unrealized inventory profits from downstream sales ($60,000 - $30,000) 50% (15,000) (15,000) (15,000) Less: Unrealized profit on upstream sale of land ($96,000 - $70,000) 100% (26,000) (26,000)

($96,000 - $70,000) 80% (20,800)Less: Noncontrolling interest share ($60,000 - $26,000) 20% (6,800)

$60,000 20% (12,000)Consolidated net income $132,200 $132,200 Total consolidated income $139,000 Allocated to controlling stockholders $132,200 Allocated to noncontrolling Stockholders

($60,000 - $26,000) 20% $ 6,800

Chapter 11 11-7


Solution E11-9 [Push-down accounting] 1 Push down under parent company theory Retained earnings 800,000 Inventories 90,000 Land 450,000 Buildings — net 270,000 Goodwill 360,000 Equipment 180,000 Other liabilities 90,000 Push down equity 1,700,000

To record revaluation of 90% of the net assets and elimination of retained earnings as a result of a business combination with Pin Corporation. Push down equity = ($600,000 fair value/book value differential 90%) + $360,000 goodwill + $800,000 retained earnings.

2 Push down under entity theory Retained earnings 800,000 Inventories 100,000 Land 500,000 Buildings — net 300,000 Goodwill 400,000 Equipment — net 200,000 Other liabilities 100,000 Push down equity 1,800,000

To record revaluation of 100% of the net assets and elimination of retained earnings as a result of a business combination with Pin. Push down equity = $600,000 fair value/book value differential + $400,000 goodwill + $800,000 retained earnings.

Solution E11-10 Each of the investments should be accounted for by the equity method as a one-line consolidation because the joint venture agreement requires consent of each venturer for important decisions. Thus, each venturer is able to exercise significant influence over its joint venture investment irrespective of ownership interest. The 40 percent venturer: Income from Sun ($500,000 40%) $ 200,000

Investment in Sun ($8,500,000 40%) $3,400,000 The 15 percent venturer Income from Sun ($500,000 15%) $ 75,000

Investment in Sun ($8,500,000 15%) $1,275,000 Solution E11-11

In general, VIE accounting follows normal consolidation principles. Under that approach, the noncontrolling interest share would be 90% of VIE earnings, or $900,000. However, the intercompany fees must be allocated to the primary beneficiary, not to noncontrolling interests. Therefore, in this case, noncontrolling interest share would be 90% of $920,000, or $828,000.

Field Code Changed



Solution E11-12

As primary beneficiary, Pal must include Pot in its consolidated financial staements. Additionally, Pal must make the following disclosures: (a) the nature, purpose, size, and activities of the variable interest entity, (b) the carrying amount and classification of consolidated assets that are collateral for the variable interest entity’s obligations, and (c) lack of recourse if creditors (or beneficial interest holders) of a consolidated variable interest entity have no recourse to the general credit of the primary beneficiary. Den will not consolidate Pot, since they are not the primary beneficiary. As in traditional consolidations, only one firm consolidates a subsidiary. However, since Den has a significant interest in Pot, they must disclose: (a) the nature of its involvement with the variable interest entity and when that involvement began, (b) the nature, purpose, size, and activities of the variable interest entity, and (c) the enterprise’s maximum exposure to loss as a result of its involvement with the variable interest entity. Den accounts for the investment using the equity method. Solution E11-13

According to GAAP, if an enterprise absorbs a majority of a variable interest entity’s expected losses and another receives a majority of expected residual returns, the enterprise absorbing the losses is the primary beneficiary and if condition one is also met. Laura meets condition one, since as CEO, she had the power over economic decisions. Laura must consolidate the variable interest entity. The contractual arrangement makes Laura the primary beneficiary.

Field Code Changed

Field Code Changed

Chapter 11 11-9


SOLUTION TO PROBLEMS Solution P11-1

Pin Corporation and Subsidiary Comparative Consolidated Balance Sheets

at December 31, 2012 (in thousands)

Parent Company Theory Entity TheoryAssets Cash $ 52 $ 52 Receivables — net 300 300Inventories 450 450Plant assets — neta 1,998 2,010 Patentsb 64 80 Total assets $2,864 $2,892 Liabilities Accounts payable $ 304 $ 304Other liabilities 500 500 Noncontrolling interestc 160 Total liabilities 964 804 Capital stock 1,000 1,000Retained earnings 900 900 Noncontrolling interestd 0 188 Total stockholders’ equity 1,900 2,088 Total liabilities and stockholders’ equity $2,864 $2,892 a Parent company theory: Combined plant assets of $1,950 + ($80 3/5 undepreciated

excess) Entity theory: Combined plant assets of $1,950 + ($100 3/5 undepreciated excess) b Parent company theory: $80 patents - $16 amortization Entity theory: $100 patents - $20 amortization c Parent company theory: Noncontrolling interest equals Son’s equity of $800 20% d Entity theory: [Son’s equity of $800 + ($60 undepreciated plant assets + $80

unamortized patents)] 20%



Solution P11-2 Preliminary computation Implied value of Sip based on purchase price ($320,000/.8) $400,000Book value 340,000 Excess to undervalued equipment $ 60,000 1 Par Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2011 Sales $1,200,000 Less: Cost of sales 760,000 Gross profit 440,000 Other expenses $ 160,000 Depreciationa 159,000 319,000 Total consolidated net income $ 121,000 Allocation of income to: Noncontrolling interestb $ 8,200 Controlling interest $ 112,800

a $150,000 depreciation - $1,000 piecemeal recognition of gain on equipment through depreciation + ($60,000 excess 6 years) excess depreciation

b ($60,000 reported income - $10,000 unrealized gain on equipment + $1,000 piecemeal recognition of gain on equipment - $10,000 excess depreciation) 20% interest

2 Par Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011 Assets Current assets $ 483,200 Plant and equipment — net

($1,190,000 - $399,000 + 50,000) 841,000

Total assets $1,324,200 Liabilities and equity Liabilities $ 300,000 Capital stock 600,000 Retained earningsa 340,000 Noncontrolling interestb 84,200 Total liabilities and stockholders’ equity $1,324,200

a Sip beginning retained earnings $327,200 + Sip net income $112,800 - Sip dividends of $100,000

b ($380,000 stockholders’ equity + $50,000 excess - $9,000 unrealized gain on equipment) 20%

Check: $80,000 beginning noncontrolling interest + $8,200 noncontrolling interest share - $4,000 noncontrolling interest dividends = $84,200

Chapter 11 11-11


Solution P11-3 Parent company theory 1a Income from Sin for 2011 ($90,000 70%) $ 63,000 1b Goodwill at December 31, 2011 $ 70,000 ($595,000 cost - $525,000 fair value) 1c Consolidated net income for 2011 Pal’s separate income $300,000 Add: Income from Sin 63,000 $363,000 1d Noncontrolling interest share for 2011 Net income of Sin of $90,000 30% $ 27,000 1e Noncontrolling interest December 31, 2011 Sin’s stockholders’ equity $790,000 30% $237,000 Entity theory 2a Income from Sin for 2011 ($90,000 70%) $ 63,000 2b Goodwill at December 31, 2011 Imputed value ($595,000/70%) $850,000 Fair value of Sin’s net assets 750,000 Goodwill $100,000 2c Total consolidated income for 2011 Income to controlling stockholders ($300,000 + $63,000) $363,000 Add: Noncontrolling interest share ($90,000 30%) 27,000 Total consolidated income $390,000 2d Noncontrolling interest share (computed in 2c above) $ 27,000 2e Noncontrolling interest at December 31, 2011 (Book equity $790,000 + $100,000 goodwill) 30% $267,000



Solution P11-4 Preliminary computations Parent company theory Investment in Sam $224,000Fair value of 80% interest acquired ($240,000 80%) 192,000 Goodwill $ 32,000 Entity Theory Implied value of Sam ($224,000/.8) $280,000Fair value of identifiable net assets 240,000 Goodwill $ 40,000 Pit used an incomplete equity method in accounting for its investment in Sam. It ignored the intercompany upstream sales of inventory. Income from Sam on an equity basis would be: Share of Sam’s income ($50,000 .8) $ 40,000 Less: Unrealized profits in ending inventory from upstream sale ($8,000 50% 80%) (3,200) Income from Sam $ 36,800

Pit Corporation and Subsidiary Comparative Consolidated Income Statements

for the year ended December 31, 2012 Parent Traditional Company Entity Theory Theory Theory Sales $1,000,000 $1,000,000 $1,000,000Less: Cost of sales (575,000) (575,000) (575,000) Gross profit 425,000 425,000 425,000 Expenses (200,000) (200,000) (200,000) Less: Unrealized profit on upstream sale of inventory ($23,000 - $15,000) 50% 100% (4,000) (4,000)

($23,000 - $15,000) 50% 80% (3,200) Noncontrolling interest share ($50,000 - $4,000) 20% (9,200)

$50,000 20% (10,000) Consolidated net income $ 211,800 $ 211,800Total consolidated income $ 221,000 Allocated to controlling Stockholders $ 211,800 Allocated to noncontrolling Stockholders ($50,000 - $4,000) 20% $ 9,200

Chapter 11 11-13


Solution P11-4 (continued)

Pit Corporation and Subsidiary Comparative Statements of Retained Earnings

for the year ended December 31, 2012 Parent Traditional Company Entity Theory Theory Theory Retained earnings December 31, 2011 $360,000 $360,000 $ 360,000Add: Consolidated net income 211,800 211,800 Add: Net income to controlling stockholders

211,800

571,800 571,800 571,800Less: Dividends to controlling stockholders

(120,000) (120,000) (120,000)

Retained earnings December 31, 2012 $ 451,800 $ 451,800 $ 451,800

Pit Corporation and Subsidiary Comparative Consolidated Balance Sheets

at December 31, 2012 Parent Traditional Company Entity Theory Theory Theory Assets Cash $ 110,800 $ 110,800 $ 110,800Accounts receivable 120,000 120,000 120,000 Inventory 196,000 196,800 196,000Land 280,000 280,000 280,000 Buildings — net 840,000 840,000 840,000Goodwill 32,000 32,000 40,000 Total assets $1,578,800 $1,579,600 $1,586,800 Liabilities Accounts payable $ 275,800 $ 275,800 $ 275,800Noncontrolling interest 52,000 Total liabilities 275,800 327,800 275,800 Stockholders’ equity Capital stock 800,000 800,000 800,000 Retained earnings 451,800 451,800 451,800Noncontrolling interest 51,200 59,200 Total stockholders’ equity 1,303,000 1,251,800 1,311,000 Total equities $1,578,800 $1,579,600 $1,586,800



Solution P11-5

Pad Corporation and Subsidiary Comparative Balance Sheets

at December 31, 2012 Traditional Entity Theory Theory Assets Cash $ 70,000 $ 70,000 Receivables — net 110,000 110,000Inventories 120,000 120,000Plant assets — net 300,000 300,000 Goodwill 40,000 50,000 Total assets $640,000 $650,000 Liabilities Accounts payable $ 95,000 $ 95,000 Other liabilities 25,000 25,000 Total liabilities 120,000 120,000 Stockholders’ equity Capital stock 300,000 300,000Retained earnings 194,000 194,000 Noncontrolling interest ($150,000 - $20,000) 20% 26,000

($150,000 + $50,000 - $20,000) 20% 36,000 Total stockholders’ equity 520,000 530,000 Total equities $640,000 $650,000 Supporting computations Traditional Entity Theory Theory Cost or imputed value $128,000 $160,000Book value of 80% 88,000 Book value of 100% 110,000Goodwill $ 40,000 $ 50,000 Investment cost $128,000Add: 80% of retained earnings increase ($50,000 - $10,000) 80% 32,000Less: 80% of $20,000 unrealized profits (16,000)Investment balance $144,000

Chapter 11 11-15


Solution P11-6 [AICPA adapted] 1 P carries its investment in S on a cost basis. This is evidenced by the

appearance of dividend revenue in P Company’s income statement and by the absence of income from subsidiary.

2 P holds 1,400 shares of S. P Company’s percentage ownership is 70%, as

determined by the relationship of P Company’s dividend revenues and S Company’s dividends paid ($11,200/$16,000). S has 2,000 outstanding shares ($200,000/$100) and P holds 70% of these, or 1,400 shares.

3 S Company’s retained earnings at acquisition were $100,000. Imputed value of S ($245,000 cost/70%) $ 350,000 Less: Patents (applicable to 100%) (50,000) Book value and fair value of S’s identifiable net assets 300,000 Less: Capital stock (200,000) Retained earnings $ 100,000 4 The nonrecurring loss is a constructive loss on the purchase of P bonds

by S Company. Working paper entry: Mortgage bonds payable (5%) 100,000 Loss on retirement of P bonds 3,000 P bonds owned 103,000

To eliminate intercompany bond investment and bonds payable and to recognize a loss on the constructive retirement of P bonds.

5 Intercompany sales P to S are $240,000 computed as follows: Combined sales ($600,000 + $400,000) $1,000,000 Less: Consolidated sales 760,000 Intercompany sales $ 240,000 6 Yes, there are other intercompany debts: Intercompany Combined Consolidated Balances Cash and receivables $143,000 $97,400 $ 45,600 Current payables 93,000 53,000 40,000 Dividends payable 18,000 12,400 5,600

S Company owes P Company $40,000 on intercompany purchases and P Company owes S Company $5,600 dividends.



Solution P11-6 (continued) 7 Adjustment to determine consolidated cost of goods sold:

Consolidated Cost of Goods Sold Combined cost of goods

Sold $640,000 $240,000 Intercompany purchases

Unrealized profit in ending inventory

8,000

5,000

Unrealized profit in beginning inventory

403,000 To balance $648,000 $648,000 Consolidated cost of goods sold $403,000

Unrealized profit in ending inventory is equal to the combined less consolidated inventories ($130,000 - $122,000). Unrealized profit in beginning inventory is plugged as follows: ($640,000 + $8,000) - ($240,000 + $403,000) = $5,000

8 Noncontrolling interest share of $8,700 is computed as follows: Net income of S $ 34,000 Less: Patent amortization ($50,000/10 years) 5,000 Adjusted income of S 29,000 Noncontrolling interest percentage 30% Noncontrolling interest share $ 8,700 9 Noncontrolling interest of $117,000 at the balance sheet date is computed: Stockholders’ equity of S Company $360,000 Add: Unamortized patents 30,000 Equity of S plus unamortized patents 390,000 Noncontrolling interest percentage 30% Noncontrolling interest on balance sheet date $117,000 10 Consolidated retained earnings Retained earnings of P at end of year $200,000 Add: P’s share of increase in S’s retained earnings since acquisition ($160,000 - $100,000) 70% 42,000 Less: Unrealized profit in S’s ending inventory (8,000) Less: P’s patent amortization since acquisition $20,000 70% (14,000) Less: Loss on constructive retirement of P’s bonds (3,000) Consolidated retained earnings — end of year $217,000

Chapter 11 11-17


Solution P11-7 1 Entry on Sap’s books at acquisition Inventories 20,000 Land 25,000 Buildings — net 90,000 Other liabilities 10,000 Goodwill 70,000 Retained earnings 80,000 Equipment — net 15,000 Push-down capital 280,000

To push down fair value — book value differentials. 2 Sap Corporation Balance Sheet at January 1, 2012 Assets Cash $ 30,000 Accounts receivable — net 70,000 Inventories 80,000 Total current assets $180,000 Land $ 75,000 Buildings — net 190,000 Equipment — net 75,000 Total plant assets 340,000 Goodwill 70,000 Total assets $590,000 Liabilities And Stockholders’ Equity Accounts payable $ 50,000 Other liabilities 60,000 Total liabilities $110,000 Capital stock $200,000 Push-down capital 280,000 Total stockholders’ equity 480,000 Total liabilities and stockholders’

Equity

$590,000 3 If Sap reports net income of $90,000 under the new push-down system for

the calendar year 2012, Pay’s income from Sap will also be $90,000 under a one-line consolidation.



Solution P11-8 1 Parent company theory Preliminary computation: Cost of 80% interest in Son $3,000,000 Book value acquired ($2,000,000 80%) 1,600,000 Excess cost over book value acquired $1,400,000 Excess allocated to: Inventories $1,600,000 80% $1,280,000 Equipment — net $(500,000) 80% (400,000) Goodwill for the remainder 520,000 Excess fair value over book value acquired $1,400,000 Entry on Son’s books to reflect 80% push down: Inventories 1,280,000 Goodwill 520,000 Retained earnings 1,200,000 Equipment — net 400,000 Push-down capital 2,600,000 2 Entity theory Preliminary computation: Implied value of net assets ($3,000,000/.8) $3,750,000 Book value of net assets 2,000,000 Total excess $1,750,000 Excess allocated to: Inventories $1,600,000 Equipment — net (500,000) Goodwill for remainder 650,000 Total excess $1,750,000 Entry on Son’s books to reflect 100% push down: Inventories 1,600,000 Goodwill 650,000 Retained earnings 1,200,000 Equipment 500,000 Push-down capital 2,950,000 3 Noncontrolling interest (Parent company theory) Son’s stockholders’ equity $2,000,000 20% $ 400,000 4 Noncontrolling interest (Entity theory) Capital stock $ 800,000 Push-down capital 2,950,000 Stockholders’ equity 3,750,000 Noncontrolling interest percentage 20% Noncontrolling interest $ 750,000

Chapter 11 11-19


Solution P11-9 1 Push down under parent company theory Buildings — net 18,000 Equipment — net 27,000 Goodwill 36,000 Retained earnings 20,000 Inventories 9,000 Push-down capital 92,000

To record revaluation of 90% of net assets and elimination of retained earnings as a result of a business combination with Paw Corporation.

2 Push down under entity theory Buildings — net 20,000 Equipment — net 30,000 Goodwill 40,000 Retained earnings 20,000 Inventories 10,000 Push-down capital 100,000

To record revaluation of net assets imputed from purchase price of 90% interest acquired by Paw Corporation and eliminate retained earnings.

3 Sun Corporation Comparative Balance Sheets at January 1, 2012 Parent Company Theory Entity Theory Assets Cash $ 20,000 $ 20,000 Accounts receivable — net 50,000 50,000 Inventories 31,000 30,000 Land 15,000 15,000 Buildings — net 48,000 50,000 Equipment — net 97,000 100,000 Goodwill 36,000 40,000 Total assets $297,000 $305,000 Liabilities and stockholders’ equity Accounts payable $ 45,000 $ 45,000 Other liabilities 60,000 60,000 Capital stock 100,000 100,000 Push-down capital 92,000 100,000 Retained earnings 0 0 Total equities $297,000 $305,000



Solution P11-10 a Paw Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2012 Push down 90% — parent company theory

Power 90%Sun

Adjustments andEliminations

ConsolidatedStatements

Income Statement Sales

$ 310,800

$ 110,000

$ 420,800

Income from Sun 37,800 b 37,800 Cost of sales 140,000* 33,000* 173,000* Depreciation expense 29,000* 24,200* 53,200* Other operating

expenses 45,000*

11,000*

56,000*

Consolidated NI $ 138,600 Noncontrolling share e 4,000 4,000* Controlling share of NI $ 134,600 $ 41,800 $ 134,600

Retained Earnings

Retained earnings — Paw

$ 147,000

$ 147,000

Retained earnings — Sun $ 0

Controlling share of NI 134,600 41,800 134,600

Dividends 60,000* 10,000* b 9,000e 1,000

60,000*

Retained earnings December 31

$ 221,600

$ 31,800

$ 221,600

Balance Sheet Cash

$ 63,800

$ 27,000

a 8,000

$ 98,800

Accounts receivable — net 90,000 40,000 a 8,000 122,000

Dividends receivable 9,000 d 9,000 Inventories 20,000 35,000 55,000 Land 40,000 15,000 55,000 Buildings — net 140,000 43,200 183,200

Equipment — net 165,000 77,600 242,600

Investment in Sun 208,800 b 28,800c 180,000

Goodwill 36,000 36,000 $ 736,600 $ 273,800 $ 792,600

Accounts payable $ 125,000 $ 20,000 $ 145,000 Dividends payable 15,000 10,000 d 9,000 16,000 Other liabilities 75,000 20,000 95,000 Capital stock 300,000 100,000 c 100,000 300,000 Push-down capital 92,000 c 92,000 Retained earnings 221,600 31,800 221,600

$ 736,600 $ 273,800

Noncontrolling interest January 1 c 12,000 Noncontrolling interest December 31 e 3,000 15,000 $ 792,600

Chapter 11 11-21


* Deduct



Solution P11-10 (continued) b Paw Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2012 Push down 100% — entity theory

Paw 90%Sun

Adjustments andEliminations

ConsolidatedStatements


$ 310,800

$ 110,000

$ 420,800

Income from Sun 37,800 b 37,800 Cost of sales 140,000* 32,000* 172,000* Depreciation expense 29,000* 25,000* 54,000* Other operating

expenses 45,000*

11,000*

56,000*

Consolidated NI $ 138,800 Noncontrolling share e 4,200 4,200* Controlling share of NI $ 134,600 $ 42,000 $ 134,600

Retained Earnings

Retained earnings — Paw

$ 147,000

$ 147,000

Retained earnings — Sun $ 0

Controlling share of NI 134,600 42,000 134,600

Dividends 60,000* 10,000* b 9,000e 1,000

60,000*

Retained earnings December 31

$ 221,600

$ 32,000

$ 221,600

Balance Sheet Cash

$ 63,800

$ 27,000

a 8,000

$ 98,800

Accounts receivable — net 90,000 40,000 a 8,000 122,000

Dividends receivable 9,000 d 9,000 Inventories 20,000 35,000 55,000 Land 40,000 15,000 55,000 Buildings — net 140,000 45,000 185,000

Equipment — net 165,000 80,000 245,000

Investment in Sun 208,800 b 28,800c 180,000

Goodwill 40,000 40,000 $ 736,600 $ 282,000 $ 800,800

Accounts payable $ 125,000 $ 20,000 $ 145,000 Dividends payable 15,000 10,000 d 9,000 16,000 Other liabilities 75,000 20,000 95,000 Capital stock 300,000 100,000 c 100,000 300,000 Push-down capital 100,000 c 100,000 Retained earnings 221,600 32,000 221,600

$ 736,600 $ 282,000

Noncontrolling interest January 1 c 20,000 Noncontrolling interest December 31 e 3,200 23,200 $ 800,800

* Deduct

Chapter 11 11-23


Solution P11-11

Pep Corporation and Subsidiary Proportionate Consolidation Working Papers

for the year ended December 31, 2011

Pep Jay 40% Adjustments andEliminations

Consolidated Statements


$ 800,000

$ 300,000

b 180,000

$ 920,000

Income from Jay 20,000 a 20,000 Cost of sales 400,000* 150,000* b 90,000 460,000* Depreciation expense 100,000* 40,000* b 24,000 116,000* Other expenses 120,000* 60,000* b 36,000 144,000* Net income $ 200,000 $ 50,000 $ 200,000

Retained Earnings

Retained earnings — Pep

$ 300,000

$ 300,000

Venture equity — Jay $ 250,000 b 250,000

Net income 200,000 50,000 200,000

Dividends 100,000* 100,000* Retained earnings/ Venture equity

$ 400,000

$ 300,000

$ 400,000

Balance Sheet Cash

$ 100,000

$ 50,000

b 30,000

$ 120,000

Receivables — net 130,000 30,000 b 18,000 142,000

Inventories 110,000 40,000 b 24,000 126,000 Land 140,000 60,000 b 36,000 164,000

Buildings — net 200,000 100,000 b 60,000 240,000

Equipment — net 300,000 180,000 b 108,000 372,000

Investment in Jay 120,000 a 20,000 b 100,000

$1,100,000 $ 460,000 $1,164,000

Accounts payable $ 120,000 $ 100,000 b 60,000 $ 160,000 Other liabilities 80,000 60,000 b 36,000 104,000 Common stock, $10 par 500,000 500,000 Retained earnings 400,000 400,000

Venture equity — Jay 300,000

$1,100,000 $ 460,000 $1,164,000 * Deduct

Chp11

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