Solutions Manual for Advanced Financial Accounting 12th Edition. Theodore Christensen David Cottrell by welldoneassistant

Advanced Financial Accounting 12e Theodore Christensen David Cottrell Richard Baker (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) All Chapters Solutions Manual Supplement files download link at the end of this file. CHAPTER 1 INTERCORPORATE ACQUISITIONS AND INVESTMENTS IN OTHER ENTITIES ANSWERS TO QUESTIONS Q1-1 Complex organizational structures often result when companies do business in a complex business environment. New subsidiaries or other entities may be formed for purposes such as extending operations into foreign countries, seeking to protect existing assets from risks associated with entry into new product lines, separating activities that fall under regulatory controls, and reducing taxes by separating certain types of operations. Q1-2 The split-off and spin-off result in the same reduction of reported assets and liabilities. Only the stockholders’ equity accounts of the company are different. The number of shares outstanding remains unchanged in the case of a spin-off and retained earnings or paid-in capital is reduced. Shares of the parent are exchanged for shares of the subsidiary in a split-off, thereby reducing the outstanding shares of the parent company. Q1-3 Enron’s management used special-purpose entities to avoid reporting debt on its balance sheet and to create fictional transactions that resulted in reported income. It also transferred bad loans and investments to special-purpose entities to avoid recognizing losses in its income statement. Q1-4 (a) A statutory merger occurs when one company acquires another company and the assets and liabilities of the acquired company are transferred to the acquiring company; the acquired company is liquidated, and only the acquiring company remains. The acquiring company can give cash or other assets in addition to stock. (b) A statutory consolidation occurs when a new company is formed to acquire the assets and liabilities of two combining companies. The combining companies dissolve, and the new company is the only surviving entity. (c) A stock acquisition occurs when one company acquires a majority of the common stock of another company and the acquired company is not liquidated; both companies remain as separate but related corporations. Q1-5 A noncontrolling interest exists when the acquiring company gains control but does not own all the shares of the acquired company. The non-controlling interest is made up of the shares not owned by the acquiring company. Q1-6 Goodwill is the excess of the sum of (1) the fair value given by the acquiring company, (2) the fair value of any shares already owned by the parent and (3) the acquisition-date fair value of any noncontrolling interest over the acquisition-date fair value of the net identifiable assets acquired in the business combination. Q1-7 A differential is the total difference at the acquisition date between the sum of (1) the fair value given by the acquiring company, (2) the fair value of any shares already owned by the parent and (3) the acquisition-date fair value of any noncontrolling interest and the book value of the net identifiable assets acquired is referred to as the differential. 1-1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

Q1-8 The purchase of a company is viewed in the same way as any other purchase of assets. The acquired company is owned by the acquiring company only for the portion of the year subsequent to the combination. Therefore, earnings are accrued only from the date of purchase forward. Q1-9 None of the retained earnings of the subsidiary should be carried forward under the acquisition method. Thus, consolidated retained earnings immediately following an acquisition is limited to the balance reported by the acquiring company. Q1-10 Additional paid-in capital reported following a business combination is the amount previously reported on the acquiring company's books plus the excess of the fair value over the par or stated value of any shares issued by the acquiring company in completing the acquisition less any sock issue costs. Q1-11 When the acquisition method is used, all costs incurred in bringing about the combination are expensed as incurred. None are capitalized. However, costs associated with the issuance of stock are recorded as a reduction of additional paid-in capital. Q1-12 When the acquiring company issues shares of stock to complete a business combination, the excess of the fair value of the stock issued over its par value is recorded as additional paid-in capital. All costs incurred by the acquiring company in issuing the securities should be treated as a reduction in the additional paid-in capital. Items such as audit fees associated with the registration of the new securities, listing fees, and brokers' commissions should be treated as reductions of additional paid-in capital when stock is issued. Q1-13 If the fair value of a reporting unit acquired in a business combination exceeds its carrying amount, the goodwill of that reporting unit is considered unimpaired. On the other hand, if the carrying amount of the reporting unit exceeds its fair value, impairment of goodwill is implied. An impairment must be recognized if the carrying amount of the goodwill assigned to the reporting unit is greater than the implied value of the carrying unit’s goodwill. The implied value of the reporting unit’s goodwill is determined as the excess of the fair value of the reporting unit over the fair value of its net identifiable assets. Q1-14 A bargain purchase occurs when the fair value of the consideration given in a business combination, along with the fair value of any equity interest in the acquiree already held and the fair value of any noncontrolling interest in the acquiree, is less than the fair value of the acquiree’s net identifiable assets. Q1-15 The acquirer should record the clarification of the acquisition-date fair value of buildings as a reduction to buildings and addition to goodwill. . Q1-16 The acquirer must revalue the equity position to its fair value at the acquisition date and recognize a gain. A total of $250,000 ($25 x 10,000 shares) would be recognized in this case assuming that the $65 per share price is the appropriate fair value for all shares (i.e. there is no control premium for the new shares purchased).

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

SOLUTIONS TO CASES C1-1 Assignment of Acquisition Costs MEMO To:

Vice-President of Finance Troy Company

From: Re:

, CPA Recording Acquisition Costs of Business Combination

Troy Company incurred a variety of costs in acquiring the ownership of Kline Company and transferring the assets and liabilities of Kline to Troy Company. I was asked to review the relevant accounting literature and provide my recommendations as to what was the appropriate treatment of the costs incurred in the Kline Company acquisition. Current accounting standards require that acquired companies be valued under ASC 805 at the fair value of the consideration given in the exchange, plus the fair value of any shares of the acquiree already held by the acquirer, plus the fair value of any noncontrolling interest in the acquiree at the combination date [ASC 805]. All other acquisition-related costs directly traceable to an acquisition should be accounted for as expenses in the period incurred [ASC 805]. The costs incurred in issuing common or preferred stock in a business combination are required to be treated as a reduction of the recorded amount of the securities (which would be a reduction to additonal paid-in capital if the stock has a par value or a reduction to common stock for no par stock). A total of $720,000 was paid in completing the Kline acquisition. Kline should record the $200,000 finders’ fee and $90,000 legal fees for transferring Kline’s assets and liabilities to Troy as acquisition expense in 20X7. The $60,000 payment for stock registration and audit fees should be recorded as a reduction of paid-in capital recorded when the Troy Company shares are issued to acquire the shares of Kline. The only cost potentially at issue is the $370,000 legal fees resulting from the litigation by the shareholders of Kline. If this cost is considered to be a direct acquisition cost, it should be included in acquisition expense. If, on the other hand, it is considered to be related to the issuance of the shares, it should be debited to paid-in capital. Primary citation ASC 805 C1-2 Evaluation of Merger a. AT&T had a vast cable customer base, but felt that TimeWarner’s content would greatly enhance the demand for its cable services. b. AT&T provided TimeWarner shareholders with AT&T stock and an equal value of cash. c. The cash portion of the merger was funded primarily with debt.

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

d. This would be a statutory merger since (1) the AT&T name survived through the merger and (2) the acquisition was formalized when AT&T gave both stock and cash. C1-3 Business Combinations It is very difficult to develop a single explanation for any series of events. Merger activity in the United States is impacted by events both within the U.S. economy and those around the world. As a result, there are many potential answers to the questions posed in this case. a. One factor that may have prompted the greater use of stock in business combinations in the middle and late 1990s is that many of the earlier combinations that had been effected through the use of debt had unraveled. In many cases, the debt burden was so heavy that the combined companies could not meet debt payments. Thus, this approach to financing mergers had somewhat fallen from favor by the mid-nineties. Further, with the spectacular rise in the stock market after 1994, many companies found that their stock was worth much more than previously. Accordingly, fewer shares were needed to acquire other companies. b. Two of major factors appear to have had a significant influence on the merger movement in the mid-2000s. First, interest rates were very low during that time, and a great amount of unemployed cash was available worldwide. Many business combinations were effected through significant borrowing. Second, private equity funds pooled money from various institutional investors and wealthy individuals and used much of it to acquire companies. Many of the acquisitions of this time period involved private equity funds or companies that acquired other companies with the goal of making quick changes and selling the companies for a profit. This differed from prior merger periods where acquiring companies were often looking for long-term acquisitions that would result in synergies. In late 2008, a mortgage crisis spilled over into the credit markets in general, and money for acquisitions became hard to get. This in turn caused many planned or possible mergers to be canceled. In addition, the economy in general faltered toward the end of 2008 and into 2009. Since that time, companies have turned their attention to global expansion. c. Establishing incentives for corporate mergers is a controversial issue. Many people in our society view mergers as not being in the best interests of society because they are seen as lessening competition and often result in many people losing their jobs. On the other hand, many mergers result in companies that are more efficient and can compete better in a global economy; this in turn may result in more jobs and lower prices. Even if corporate mergers are viewed favorably, however, the question arises as to whether the government, and ultimately the taxpayers, should be subsidizing those mergers through tax incentives. Many would argue that the desirability of individual corporate mergers, along with other types of investment opportunities, should be determined on the basis of the merits of the individual situations rather than through tax incentives. Perhaps the most obvious incentive is to lower capital gains tax rates. Businesses may be more likely to invest in other companies if they can sell their ownership interests when it is convenient and pay lesser tax rates. Another alternative would include exempting certain types of intercorporate income. Favorable tax status might be given to investment in foreign companies through changes in tax treaties. As an alternative, barriers might be raised to discourage foreign investment in United States, thereby increasing the opportunities for domestic firms to acquire ownership of other companies.

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

d. In an ideal environment, the accounting and reporting for economic events would be accurate and timely and would not influence the economic decisions being reported. Any change in reporting requirements that would increase or decrease management's ability to "manage" earnings could impact management's willingness to enter new or risky business fields and affect the level of business combinations. Greater flexibility in determining which subsidiaries are to be consolidated, the way in which intercorporate income is calculated, the elimination of profits on intercompany transfers, or the process used in calculating earnings per share could impact such decisions. The processes used in translating foreign investment into United States dollars also may impact management's willingness to invest in domestic versus international alternatives. C1-4 Determination of Goodwill Impairment MEMO TO: Chief Accountant Plush Corporation From:

, CPA

Re:

Determining Impairment of Goodwill

Once goodwill is recorded in a business combination, it must be accounted for in accordance with current accounting literature. Goodwill is carried forward at the original amount without amortization, unless it becomes impaired. The amount determined to be goodwill in a business combination must be assigned to the reporting units of the acquiring entity that are expected to benefit from the synergies of the combination. [ASC 350-20-35-41] This means the total amount assigned to goodwill may be divided among a number of reporting units. Goodwill assigned to each reporting unit must be tested for impairment annually and between the annual tests in the event circumstances arise that would lead to a possible decrease in the fair value of the reporting unit below its carrying amount [ASC 350-20-35-30, ASU 201704]. As long as the fair value of the reporting unit is greater than its carrying value, goodwill is not considered to be impaired. If the fair value is less than the carrying value, an impairment loss must be reported for the amount by which the carrying amount of reporting unit exceeds its fair value. However, the impairment cannot exceed the amount of goodwill originally recognized for that reporting unit [ASC 350-20-35-11, ASU 2017-04] At the date of acquisition, Plush Corporation recognized goodwill of $20,000 ($450,000 $430,000) and assigned it to a single reporting unit. Even though the fair value of the reporting unit increased to $485,000 at December 31, 20X5, Plush Corporation must test for impairment of goodwill if the carrying value of Plush’s investment in the reporting unit is above that amount. That would be the case if the carrying value were determined to be $500,000. If the carrying value of the reporting unit’s net assets exceeds the fair value of the reporting unit’s net assets, an impairment is recorded for the amount by which the carrying amount exceeds the fair value (but the impairment is limited to the amount of goodwill reported by that unit). If the carrying amount were $500,000 and the fair value of the reporting unit were $485,000, The impairment would be $15,000 ($500,000 - $485,000). On the other hand, if the fair value were greater than the carrying value, there would be no goodwill impairment. For example, if the carrying value of the reporting unit were determined to be $470,000, there would be no impairment. 1-5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

With the information provided, we do not know if there has been an impairment of the goodwill involved in the purchase of Common Corporation. However, Plush must follow the procedures outlined here in testing for impairment at December 31, 20X5. Primary citations ASC 350-20-35-11 ASC 350-20-35-30 ASC 350-20-35-41 ASU 2017-04 C1-5 Risks Associated with Acquisitions Alphabet discloses on pages 9-10 of its 2016 Form 10-K that acquisitions, investments, and divestitures are an important part of its corporate strategy. The company goes on to discuss relevant risks associated with these activities. The specific risk areas identified include: • • • • • • • • • • • • •

The use of management time on acquisitions-related activities may temporarily divert management’s time and focus from normal operations. After acquiring companies, there is a risk that Alphabet may not successfully develop the business and technologies of the acquired firms. It can be difficult to implement controls, procedures, and policies appropriate for a public company that were not already in place in the acquired company. Integrating the accounting, management information, human resources, and other administrative systems can be challenging. The company sometimes encounters difficulties in transitioning operations, users, and customers into Alphabet’s existing platforms. Government “red tape” in obtaining necessary approvals can reduce the potential strategic benefits of acquisitions. There are many difficulties associated with foreign acquisitions due to differences in culture, language, economics, currencies, politic, and regulation. Since corporate cultures can vary significantly, there are potential difficulties in integrating the employees of an acquired company into the Google organization. It can be difficult to retain employees who worked for companies that Alphabet acquires. There may be legal liabilities for activities of acquired companies. Litigation of claims against acquired companies or as a result of acquisitions can be problematic. Anticipated benefits of acquisitions may not materialize. Acquisitions through equity issuances can result in dilution to existing shareholders. Similarly, the issuance of debt can result in other costs. Impairments, restructuring charges, and other unfavorable results can result.

C1-6 Leveraged Buyouts a. A leveraged buyout (LBO) involves acquiring a company in a transaction or series of planned transactions that include using a very high proportion of debt, often secured by the assets of the target company. Normally, the investors acquire all of the stock or assets of the target company. A management buyout (MBO) occurs when the existing management of a company acquires all or most of the stock or assets of the company. Frequently, the investors in LBOs include management, and thus an LBO may also be an MBO 1-6 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

b. The FASB has not dealt with leveraged buyouts in either current pronouncements or exposure drafts of proposed standards. The Emerging Issues Task Force has addressed limited aspects of accounting for LBOs. In EITF 84-23, “Leveraged Buyout Holding Company Debt,” the Task Force did not reach a consensus. In EITF 88-16, “Basis in Leveraged Buyout Transactions,” the Task Force did provide guidance as to the proper basis that should be recognized for an acquiring company’s interest in a target company acquired through a leveraged buyout. c. Whether an LBO is a type of business combination is not clear and probably depends on the structure of the buyout. The FASB has not taken a position on whether an LBO is a type of business combination. The EITF indicated that LBOs of the type it was considering are similar to business combinations. Most LBOs are effected by establishing a holding company for the purpose of acquiring the assets or stock of the target company. Such a holding company has no substantive operations. Some would argue that a business combination can occur only if the acquiring company has substantive operations. However, neither the FASB nor EITF has established such a requirement. Thus, the question of whether an LBO is a business combination is unresolved. d. The primary issue in deciding the proper basis for an interest in a company acquired in an LBO, as determined by EITF 88-16, is whether the transaction has resulted in a change in control of the target company (a new controlling shareholder group has been established). If a change in control has not occurred, the transaction is treated as a recapitalization or restructuring, and a change in basis is not appropriate (the previous basis carries over). If a change in control has occurred, a new basis of accounting may be appropriate.

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

SOLUTIONS TO EXERCISES E1-1 Multiple-Choice Questions on Complex Organizations 1. b – As companies grow in size and respond to their unique business environment, they often develop complex organizational and ownership structures. (a) Incorrect. The need to avoid legal liability is not a direct result of increased complexity. (c) Incorrect. Part of the reason the business environment is complex is due to the increased number and type of divisions and product lines in companies. (d) Incorrect. This statement is false. There has been an impact on organizational structure and management. 2. d – A transfer of product to a subsidiary does not constitute a sale for income purposes and as such would not increase profit for the parent. (a) Incorrect. Shifting risk is a common reason for establishing a subsidiary. (b) Incorrect. Corporations often establish subsidiaries in other regulatory environments so that the parent company is not explicitly affected by the regulatory control. (c) Incorrect. Corporations will often establish subsidiaries to take advantage of tax benefits that exist in different regions. 3. a – When a merger occurs, all the assets and liabilities are transferred to the purchasing company and any excess of the purchase price over the fair value of the net assets is recorded as goodwill on the purchaser’s books. (b) Incorrect. This combination results in a parent-subsidiary relationship in which an investment in Penn would be recorded. In the event that goodwill were present in this transaction, it would be reported on the consolidated books and not Randolph’s books. (c) Incorrect. In a spin-off, no change to net assets occurs, and consequently no goodwill is recorded. (d) Incorrect. In a split-off, no change to net assets occurs, and consequently no goodwill is recorded. 4. b – In an internal expansion in which the existing company creates a new subsidiary, the assets and liabilities are recorded at the carrying values of the original company. (a) Incorrect. This is not in accordance with GAAP; assets are transferred at the parent’s book (carrying) value. (c) Incorrect. Not in accordance with US GAAP; no gain or loss is permitted because the assets are transferred at the parent’s book value. (d) Incorrect. Not in accordance with US GAAP – Goodwill is not created when a company creates a subsidiary through internal expansion. 5. d – This is the proper impairment test required under US GAAP, according to FASB 142/ASC 350. (a) Incorrect. This is not the proper test for impairment under US GAAP. (b) Incorrect. This is not the proper test for impairment under US GAAP. (c) Incorrect. This is not the proper test for impairment under US GAAP.

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

E1-2 Multiple-Choice Questions on Recording Business Combinations [AICPA Adapted] 1. a – Goodwill equals the excess sum of the consideration given over the sum of the fair value of identifiable assets less liabilities. (b) Incorrect. Assets considered only need be identifiable, not just tangible. For example, patents would be identifiable, but not tangible. (c) Incorrect. Assets considered only have to be identifiable. This includes both tangible and intangible identifiable assets. (d) Incorrect. The calculation of goodwill requires a remeasurement of the assets and liabilities at fair value, not book value. 2. c – “Costs of issuing equity securities used to acquire the acquire are treated in the same manner as stock issue costs are normally treated, as a reduction in the paid-in capital associated with the securities” A reduction to the paid-in capital account results in a reduction in the fair value of the securities issued. (a) Incorrect. Stock issue costs are not expensed but are charged as a reduction in paidin capital. (b) Incorrect. Stock issue costs result in a reduction of stockholder’s equity, not an increase. (d) Incorrect. Stock issue costs result in a reduction of equity, and are not capitalized. They are not added to goodwill. 3. d – When a new company is acquired, the assets and liabilities are recorded at fair value. (a) Incorrect. Historical cost is not always reflective of actual value, thus fair values are used. (b) Incorrect. Book value is often different than fair value, thus fair value is the appropriate basis. (c) Incorrect. This method is also unacceptable. Fair value is the appropriate basis. 4. d – This combination would result in a bargain purchase. (a) Incorrect. Deferred credits do not arise as a result of fair value of identifiable assets exceeding fair value of the consideration. (b) Incorrect. The fair value is not reduced, and deferred credits do not arise in this situation. (c) Incorrect. The fair value is not reduced, and deferred credits do not arise in this situation. 5. c – $875,000 – $800,000 = $75,000. Total consideration given – FV of net assets = Goodwill

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

E1-3 Multiple-Choice Questions on Reported Balances [AICPA Adapted] 1. d – $2,900,000. New APIC Balance = existing APIC on Poe’s books + APIC from new stock issuance. (200,000*($18-$10) + $1,300,000 = $2,900,000) 2. d – $600,000. The total balance in the investment account is equal to the total consideration given in the combination. (10,000 *$60 per share = $600,000) 3. c – $150,000. Goodwill = Consideration given – FV of net assets acquired. FV of Net Assets: $80,000 + $190,000 + $560,000 - $180,000 = $650,000. (800,000 – 650,000 = 150,000) 4. c – $4,000,000. The increase in net assets is solely attributable to the FV of the consideration given, the nonvoting preferred stock. (a) Incorrect. This answer only reflects the book value of Master’s net assets. (b) Incorrect. This answer only reflects the fair value of Master’s net assets. (d) Incorrect. The additional stock related to the finder’s fee is not capitalized, but rather expensed. E1-4 Multiple-Choice Questions Involving Account Balances 1. c – When the parent creates the subsidiary, the equipment is transferred at cost with the accompanying accumulated depreciation (which in effect is the book value). ($100,000/10 = $10,000 per year * 4 = $40,000.) (a) Incorrect. When a subsidiary is created internally, the assets are transferred as they were on the parent’s books (carrying value). Fair value is not considered. (b) Incorrect. This is the proper carrying value of the asset, but it should be recorded at cost with the accompanying accumulated depreciation. (d) Incorrect. When a subsidiary is created internally, the assets are transferred as they were on the parent’s books (carrying value). 2. c – The assets are transferred at the carrying value on Pead’s books, and thus no change in reported net assets occurs. (a) Incorrect. No change occurs. (b) Incorrect. No change occurs. (d) Incorrect. No change occurs. 3. b – APIC = $140,000 (BV) – 7,000 * $8 = $84,000. 4. b – $35,000. Since the carrying value of the reporting unit ($330,000) is lower than the fair value of the reporting unit’s net assets ($350,000), the goodwill of the reporting unit is not impaired and will remain at its carrying value of $35,000 5. c – $15,000. The carrying value of the reporting unit’s net assets ($575,000) exceeds the estimated fair value of the reporting unit ($560,000). The goodwill should be impaired by the amount by which the carrying value of the unit’s net assets exceeds the estimated fair value of the reporting unit, $15,000 ($575,000 - $560,000).

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

E1-5 Asset Transfer to Subsidiary a. Journal entry recorded by Pale Company for transfer of assets to Sight Company: Investment in Sight Company Common Stock Accumulated Depreciation – Buildings Accumulated Depreciation – Equipment Cash Inventory Land Buildings Equipment

408,000 24,000 36,000 21,000 37,000 80,000 240,000 90,000

b. Journal entry recorded by Sight Company for receipt of assets from Pale Company: Cash Inventory Land Buildings Equipment Accumulated Depreciation – Buildings Accumulated Depreciation – Equipment Common Stock Additional Paid-In Capital

21,000 37,000 80,000 240,000 90,000 24,000 36,000 60,000 348,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

E1-6 Creation of New Subsidiary a. Journal entry recorded by Pester Company for transfer of assets to Shumby Corporation: Investment in Shumby Corporation Common Stock Allowance for Uncollectible Accounts Receivable Accumulated Depreciation – Buildings Accumulated Depreciation – Equipment Cash Accounts Receivable Inventory Land Buildings Equipment

498,000 7,000 35,000 60,000 40,000 75,000 50,000 35,000 160,000 240,000

b. Journal entry recorded by Shumby Corporation for receipt of assets from Pester Company: Cash Accounts Receivable Inventory Land Buildings Equipment Allowance for Uncollectible Accounts Receivable Accumulated Depreciation – Buildings Accumulated Depreciation – Equipment Common Stock Additional Paid-In Capital

40,000 75,000 50,000 35,000 160,000 240,000 7,000 35,000 60,000 120,000 378,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

E1-7 Balance Sheet Totals of Parent Company a. Journal entry recorded by Phoster Corporation for transfer of assets and accounts payable to Skine Company: Investment in Skine Company Common Stock Accumulated Depreciation Accounts Payable Cash Accounts Receivable Inventory Land Depreciable Assets

66,000 28,000 22,000 15,000 24,000 9,000 3,000 65,000

b. Journal entry recorded by Skine Company for receipt of assets and accounts payable from Phoster Corporation: Cash Accounts Receivable Inventory Land Depreciable Assets Accumulated Depreciation Accounts Payable Common Stock Additional Paid-In Capital

15,000 24,000 9,000 3,000 65,000 28,000 22,000 48,000 18,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

E1-8 Acquisition of Net Assets Pun Corporation will record the following journal entries: (1)

(2)

Assets Goodwill Liabilities Cash

71,000 9,000

Merger Expense Cash

4,000

20,000 60,000 4,000

E1-9 Reporting Goodwill a. Goodwill: $120,000 = $310,000 - $190,000 Investment: $310,000 b. Goodwill: $6,000 = $196,000 - $190,000 Investment: $196,000 c. Goodwill: $0; no goodwill is recorded when the purchase price is below the fair value of the net identifiable assets. Investment: $190,000; recorded at the fair value of the net identifiable assets. E1-10 Stock Acquisition Journal entry to record the purchase of Sippy Inc., shares: Investment in Sippy Inc., Common Stock Common Stock Additional Paid-In Capital

986,000 425,000 561,000

$986,000 = $58 x 17,000 shares $425,000 = $25 x 17,000 shares $561,000 = ($58 - $25) x 17,000 shares

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

E1-11 Balances Reported Following Combination a. Stock Outstanding: $200,000 + ($10 x 8,000 shares)

$280,000

b. Cash and Receivables: $150,000 + $40,000

190,000

185,000

Land: $100,000 + $85,000

d. Buildings and Equipment (net): $300,000 + $230,000

530,000

e. Goodwill: ($50 x 8,000) - $355,000

45,000

Additional Paid-In Capital: $20,000 + [($50 - $10) x 8,000]

340,000

g. Retained Earnings

330,000

E1-12 Goodwill Recognition Journal entry to record acquisition of Spur Corporation net assets: Cash and Receivables Inventory Land Plant and Equipment Patent Goodwill Accounts Payable Cash

40,000 150,000 30,000 350,000 130,000 55,000 85,000 670,000

Computation of goodwill Fair value of consideration given Fair value of assets acquired Fair value of liabilities assumed Fair value of net assets acquired Goodwill

$670,000 $700,000 (85,000) 615,000 $ 55,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

E1-15 Goodwill Impairment a. Goodwill of $80,000 will be reported. The fair value of the reporting unit ($340,000) is greater than the carrying amount of the reporting unit ($290,000). As a result, no impairment loss will be recorded. b. An impairment loss of $10,000 ($290,000 - $280,000) will be recognized. Therefore, goodwill of $70,000 will be reported (80,000 – 10,000 impairment loss). c. An impairment loss of $30,000 ($290,000 - $260,000) will be recognized. Therefore, goodwill of $50,000 will be reported (80,000 – 30,000 impairment loss). E1-16 Goodwill Impairment a. No impairment loss will be recognized. The estimated fair value of the reporting unit ($530,000) is greater than the carrying value of the reporting unit’s net assets ($500,000). b. A goodwill impairment of $15,000 will be recognized ($500,000 - $485,000). c. A goodwill impairment of $50,000 will be recognized ($500,000 - $450,000). E1-17 Goodwill Assigned to Reporting Units Goodwill of $146,000 ($50,000 + $48,000 + $8,000 + $40,000) should be reported, computed as follows: Reporting Unit A: A goodwill impairment of $10,000 should be recognized ($700,000 $690,000). Thus, goodwill of $50,000 ($60,000 - $10,000 impairment) should be reported on December 31, 20X7.. Reporting Unit B: There is no goodwill impairment because the fair value of the reporting unit exceeds the carrying value. Goodwill of $48,000 should be reported on December 31, 20X7. Reporting Unit C: A goodwill impairment of $20,000 should be recognized ($380,000 $370,000). Thus, goodwill of $8,000 ($28,000 - $20,000 impairment) should be reported on December 31, 20X7. Reporting Unit D: There is no goodwill impairment because the fair value of the reporting unit exceeds the carrying value. Goodwill of $40,000 should be reported.

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

E1-18 Goodwill Measurement a. The fair value of the reporting unit ($580,000) is greater than the carrying value of the investment ($550,000). Thus, goodwill is not impaired Goodwill of $150,000 will be reported. b. The carrying value of the reporting unit ($550,000) exceeds the fair value of the reporting unit ($540,000). Thus, an impairment of goodwill of $10,000 ($550,000 - $540,000) must be recognized. Goodwill of $140,000 will be reported. c. The carrying value of the reporting unit ($550,000) exceeds the fair value of the reporting unit ($500,000). Thus, an impairment loss of $50,000 ($550,000 - $500,000) must be recognized. Goodwill of $100,000 will be reported. d. The carrying value of the reporting unit ($550,000) exceeds the fair value of the reporting unit ($460,000). Thus, an impairment loss of $90,000 ($550,000 - $460,000) must be recognized. Goodwill of $60,000 will be reported. E1-19 Computation of Fair Value Amount paid Book value of assets Book value of liabilities Book value of net assets Adjustment for research and development costs Adjusted book value Fair value of patent rights Goodwill recorded Fair value increment of buildings and equipment Book value of buildings and equipment Fair value of buildings and equipment

$517,000 $624,000 (356,000) $268,000 (40,000) $228,000 120,000 93,000

(441,000) $ 76,000 341,000 $417,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

E1-20 Computation of Shares Issued and Goodwill a. 15,600 shares were issued, computed as follows: Par value of shares outstanding following merger Paid-in capital following merger Total par value and paid-in capital Par value of shares outstanding before merger Paid-in capital before merger

$327,600 650,800 $978,400 $218,400 370,000 (588,400) $390,000 ÷ $25 15,600

Increase in par value and paid-in capital Divide by price per share Number of shares issued b. The par value is $7, computed as follows: Increase in par value of shares outstanding ($327,600 - $218,400) Divide by number of shares issued Par value

$109,200 ÷ 15,600 $ 7.00

c. Goodwill of $34,000 was recorded, computed as follows: Increase in par value and paid-in capital Fair value of net assets ($476,000 - $120,000) Goodwill

$390,000 (356,000) $ 34,000

E1-21 Combined Balance Sheet Pam Corporation and Slest Company Combined Balance Sheet January 1, 20X2 Cash and Receivables Inventory Buildings and Equipment Less: Accumulated Depreciation Goodwill

$ 240,000 460,000 840,000 (250,000) 75,000 $1,365,000

Accounts Payable Notes Payable Common Stock Additional Paid-In Capital Retained Earnings

$ 125,000 235,000 244,000 556,000 205,000 $1,365,000

Computation of goodwill Fair value of compensation given Fair value of net identifiable assets ($490,000 - $85,000) Goodwill

$480,000 (405,000) $ 75,000

Computation of APIC Fair value of compensation given ($60 x 8,000 shares) Less par value of shares issued ($8 x 8,000) Plus existing APIC from Pam’s books

$480,000 (64,000) 140,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

Additional Paid-In Capital

$ 556,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

E1-22 Recording a Business Combination Merger Expense Deferred Stock Issue Costs Cash

54,000 29,000

Cash Accounts Receivable Inventory Land Buildings and Equipment Goodwill (1) Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital (2) Deferred Stock Issue Costs

70,000 110,000 200,000 100,000 350,000 30,000

83,000

195,000 100,000 5,000 320,000 211,000 29,000

Computation of goodwill Fair value of consideration given (40,000 x $14) Fair value of assets acquired Fair value of liabilities assumed Fair value of net assets acquired Goodwill

$560,000 $830,000 (300,000) (530,000) $ 30,000

Computation of additional paid-in capital Number of shares issued Issue price in excess of par value ($14 - $8) Total Less: Deferred stock issue costs Increase in additional paid-in capital

40,000 x $6 $240,000 (29,000) $211,000

E1-23 Reporting Income 20X2:

Net income Earnings per share

= =

$6,028,000 [$2,500,000 + $3,528,000] $5.48 [$6,028,000 / (1,000,000 + 100,000*)]

20X1:

Net income Earnings per share

= =

$4,460,000 [previously reported] $4.46 [$4,460,000 / 1,000,000]

* 100,000 = 200,000 shares x ½ year

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

SOLUTIONS TO PROBLEMS P1-24 Assets and Accounts Payable Transferred to Subsidiary a. Journal entry recorded by Pab Corporation for its transfer of assets and accounts payable to Sollon Company: Investment in Sollon Company Common Stock Accounts Payable Accumulated Depreciation – Buildings Accumulated Depreciation – Equipment Cash Inventory Land Buildings Equipment

320,000 45,000 40,000 10,000 25,000 70,000 60,000 170,000 90,000

b. Journal entry recorded by Sollon Company for receipt of assets and accounts payable from Pab Corporation: Cash Inventory Land Buildings Equipment Accounts Payable Accumulated Depreciation – Buildings Accumulated Depreciation – Equipment Common Stock Additional Paid-In Capital

25,000 70,000 60,000 170,000 90,000 45,000 40,000 10,000 180,000 140,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

P1-25 Creation of New Subsidiary a. Journal entry recorded by Pagle Corporation for transfer of assets and accounts payable to Sand Corporation: Investment in Sand Corporation Common Stock Allowance for Uncollectible Accounts Receivable Accumulated Depreciation Accounts Payable Cash Accounts Receivable Inventory Land Buildings and Equipment

400,000 5,000 40,000 10,000 30,000 45,000 60,000 20,000 300,000

b. Journal entry recorded by Sand Corporation for receipt of assets and accounts payable from Pagle Corporation: Cash Accounts Receivable Inventory Land Buildings and Equipment Allowance for Uncollectible Accounts Receivable Accumulated Depreciation Accounts Payable Common Stock Additional Paid-In Capital

30,000 45,000 60,000 20,000 300,000 5,000 40,000 10,000 50,000 350,000

P1-26 Incomplete Data on Creation of Subsidiary a. The book value of assets transferred was $152,000 ($3,000 + $16,000 + $27,000 + $9,000 + $70,000 + $60,000 - $21,000 - $12,000). b. Plumb Company would report its investment in Stew Company equal to the book value of net assets transferred of $138,000 ($152,000 - $14,000). c. 8,000 shares ($40,000/$5). d. Total assets declined by $14,000 (book value of assets transferred of $152,000 - investment in Stew Company of $138,000). e. No effect. The shares outstanding reported by Plumb Company are not affected by the creation of Stew Company.

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

P1-27 Acquisition in Multiple Steps Peal Corporation will record the following entries: (1)

(2)

Investment in Seed Company Stock Common Stock - $10 Par Value Additional Paid-In Capital

85,000

Merger Expense Additional Paid-In Capital Cash

3,500 2,000

40,000 45,000

5,500

P1-28 Journal Entries to Record a Business Combination Journal entries to record acquisition of SKK net assets: (1) Merger Expense Cash Record payment of legal fees.

14,000

(2) Deferred Stock Issue Costs Cash Record costs of issuing stock.

28,000

(3) Cash and Receivables Inventory Buildings and Equipment Goodwill Accounts Payable Notes Payable Common Stock Additional Paid-In Capital Deferred Stock Issue Costs Record purchase of SKK Corporation.

28,000 122,000 470,000 12,000

14,000

28,000

41,000 63,000 96,000 404,000 28,000

Computation of goodwill Fair value of consideration given (24,000 x $22) Fair value of net assets acquired ($620,000 - $104,000) Goodwill

$528,000 (516,000) $ 12,000

Computation of additional paid-in capital Number of shares issued Issue price in excess of par value ($22 - $4) Total Less: Deferred stock issue costs Increase in additional paid-in capital

24,000 x $18 $432,000 (28,000) $404,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

P1-29 Recording Business Combinations Merger Expense Deferred Stock Issue Costs Cash

38,000 22,000

Cash and Equivalents Accounts Receivable Inventory Land Buildings Equipment Goodwill Accounts Payable Short-Term Notes Payable Bonds Payable Common Stock $2 Par Additional Paid-In Capital Deferred Stock Issue Costs

41,000 73,000 144,000 200,000 1,500,000 300,000 127,000

60,000

35,000 50,000 500,000 900,000 878,000 22,000

Computation of goodwill Fair value of consideration given (450,000 x $4) Fair value of net assets acquired ($41,000 + $73,000 + $144,000 + $200,000 + $1,500,000 + $300,000 - $35,000 - $50,000 - $500,000) Goodwill

$1,800,000

(1,673,000) $ 127,000

Computation of additional paid-in capital Number of shares issued Issue price in excess of par value ($4 - $2) Total Less: Deferred stock issue costs Increase in additional paid-in capital

450,000 x $2 $900,000 (22,000) $878,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

P1-30 Business Combination with Goodwill a. Journal entry to record acquisition of Sink Company net assets: Cash Accounts Receivable Inventory Patents Buildings and Equipment Goodwill Accounts Payable Notes Payable Cash

20,000 35,000 50,000 60,000 150,000 38,000 55,000 120,000 178,000

b. Balance sheet immediately following acquisition: Pancor Corporation and Sink Company Combined Balance Sheet February 1, 20X3 Cash Accounts Receivable Inventory Patents Buildings and Equipment Less: Accumulated Depreciation Goodwill

$ 82,000 175,000 220,000 140,000 530,000

Accounts Payable Notes Payable Common Stock Additional Paid-In Capital Retained Earnings

$140,000 270,000 200,000 160,000 225,000

(190,000) 38,000 $995,000

$995,000

c. Journal entry to record acquisition of Sink Company stock: Investment in Sink Company Common Stock Cash

178,000 178,000

Computation of goodwill Fair value of consideration given Fair value of net assets acquired ($20,000 + $35,000 + $50,000 + $60,000 + $150,000 - $55,000 -$120,000) Goodwill

$178,000 (140,000) $ 38,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

P1-31 Bargain Purchase Journal entries to record acquisition of Sark Corporation net assets: Merger Expense Cash Cash and Receivables Inventory Buildings and Equipment (net) Patent Accounts Payable Cash Gain on Bargain Purchase of Sark Corporation

5,000 5,000 50,000 150,000 300,000 200,000 30,000 625,000 45,000

Computation of gain Fair value of consideration given Fair value of net assets acquired ($700,000 - $30,000) Gain on bargain purchase

$625,000 (670,000) $ 45,000

P1-32 Computation of Account Balances a.

Acquisition price of reporting unit ($7.60 x 100,000) Fair value of net assets at acquisition ($810,000 - $190,000) Goodwill at acquisition

b. Maximum carrying value of reporting unit’s assets: Carrying value of assets at year-end Less: Carrying value of liabilities at year-end (given) Carrying value of net assets at year-end Less: Fair value of the reporting unit’s net assets

Maximum carrying value of assets

$760,000 (620,000) $140,000

$ X (70,000) $ X - $70,000 $ (930,000) $0 X - $70,00 = $930,000 X = $1,000,000

P1-33 Goodwill Assigned to Multiple Reporting Units a. A goodwill impairment of $95,000 ($20,000 + $50,000 + $25,000) must be reported in the current period for Prover Company: Computation of goodwill impairment: Reporting unit A 1-27 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

Carrying value of reporting unit Less: Fair value of reporting unit Goodwill impairment at year-end

$420,000 (400,000) $ 20,000

Reporting unit B Carrying value of reporting unit Less: Fair value of reporting unit Goodwill impairment at year-end

$500,000 (440,000) $ 60,000*

* Limited to the amount of goodwill on the reporting unit’s books ($50,000). Reporting unit C Carrying value of reporting unit Less: Fair value of reporting unit Goodwill impairment at year-end

$290,000 (265,000) $ 25,000

b. Goodwill to be reported by Prover Company: Reporting Unit A B Carrying value of goodwill $70,000 $50,000)* Less: Impairment (20,000) (50,000)* Goodwill to be reported at year-end 50,000 0)* * Limited to the amount of goodwill on the reporting unit’s books. Total goodwill to be reported at year-end: Reporting unit A Reporting unit B Reporting unit C Total goodwill to be reported

C $40,000 (25,000) 15,000

$ 50,000 0 15,000 $65,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

P1-34 Journal Entries Journal entries to record acquisition of Steel net assets: (1) Merger Expense Cash Record finder's fee and transfer costs.

19,000

(2) Deferred Stock Issue Costs Cash Record audit fees and stock registration fees.

9,000

(3) Cash Accounts Receivable Inventory Land Buildings and Equipment Bond Discount Goodwill Accounts Payable Bonds Payable Common Stock Additional Paid-In Capital Deferred Stock Issue Costs Record merger with Steel Company.

19,000

9,000 60,000 100,000 115,000 70,000 350,000 20,000 95,000 10,000 200,000 120,000 471,000 9,000

Computation of goodwill Fair value of consideration given (12,000 x $50) Fair value of net assets acquired ($695,000 - $10,000 - $180,000) Goodwill

$600,000 (505,000) $ 95,000

Computation of additional paid-in capital Number of shares issued Issue price in excess of par value ($50 - $10) Total Less: Deferred stock issue costs Increase in additional paid-in capital

1-29

12,000 x $40 $480,000 (9,000) $471,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

P1-35 Purchase at More than Book Value a. Journal entry to record acquisition of Stafford Industries net assets: Cash Accounts Receivable Inventory Land Buildings and Equipment Bond Discount Goodwill Accounts Payable Bonds Payable Common Stock Additional Paid-In Capital

30,000 60,000 160,000 30,000 350,000 5,000 125,000 10,000 150,000 80,000 520,000

b. Balance sheet immediately following acquisition: Pamrod Manufacturing and Stafford Industries Combined Balance Sheet January 1, 20X2 Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Goodwill

$ 100,000 160,000 360,000 80,000 950,000

Accounts Payable Bonds Payable Less: Discount Common Stock Additional Paid-In Capital (250,000) Retained Earnings 125,000 $1,525,000

$ $450,000 (5,000)

1-30

445,000 280,000 560,000 180,000 $1,525,000

Computation of goodwill Fair value of consideration given (4,000 x $150) Fair value of net assets acquired ($630,000 - $10,000 - $145,000) Goodwill

60,000

$600,000 (475,000) $125,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

P1-36 Business Combination Journal entry to record acquisition of Shoot-Toot Tuba net assets: Cash Accounts Receivable Inventory Plant and Equipment Other Assets Goodwill Allowance for Uncollectibles Accounts Payable Notes Payable Mortgage Payable Bonds Payable Capital Stock ($10 par) Premium on Capital Stock

300 17,000 35,000 500,000 25,800 86,500 1,400 8,200 10,000 50,000 100,000 90,000 405,000

Computation of fair value of net assets acquired Cash Accounts Receivable Allowance for Uncollectible Accounts Inventory Plant and Equipment Other Assets Accounts Payable Notes Payable Mortgage Payable Bonds Payable Fair value of net assets acquired

$300 17,000 (1,400) 35,000 500,000 25,800 (8,200) (10,000) (50,000) (100,000) $408,500

Computation of goodwill Fair value of consideration given (9,000 x $55) Fair value of net assets acquired Goodwill

1-31

$495,000 (408,500) $86,500

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

P1-37 Combined Balance Sheet a. Balance sheet: Pumpworks and Seaworthy Rope Company Combined Balance Sheet January 1, 20X3 Cash and Receivables Inventory Land Plant and Equipment Less: Accumulated Depreciation Goodwill

$110,000 Current Liabilities 142,000 Capital Stock 115,000 Capital in Excess 540,000 of Par Value Retained Earnings (150,000) 13,000 $770,000

100,000 214,000 216,000 240,000

770,000

222,000

328,000 240,000 790,000

Computation of goodwill Fair value of consideration given (700 x $300) Fair value of net assets acquired ($217,000 – $20,000) Goodwill b.

$210,000 (197,000) $13,000

(1) Stockholders' equity with 1,100 shares issued: Capital Stock [$200,000 + ($20 x 1,100 shares)] Capital in Excess of Par Value [$20,000 + ($300 - $20) x 1,100 shares] Retained Earnings

(2) Stockholders' equity with 1,800 shares issued: Capital Stock [$200,000 + ($20 x 1,800 shares)] Capital in Excess of Par Value [$20,000 + ($300 - $20) x 1,800 shares] Retained Earnings

$ 236,000 524,000 240,000 $1,000,000

(3) Stockholders' equity with 3,000 shares issued: Capital Stock [$200,000 + ($20 x 3,000 shares)] Capital in Excess of Par Value [$20,000 + ($300 - $20) x 3,000 shares] Retained Earnings

1-32

$ 260,000 860,000 240,000 $1,360,000

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

P1-38 Incomplete Data Problem a. 5,200 = ($126,000 - $100,000)/$5 b. $208,000 = ($126,000 + $247,000) - ($100,000 + $65,000) c. $46,000 = $96,000 - $50,000 d. $130,000 = ($50,000 + $88,000 + $96,000 + $430,000 - $46,000 $220,000 - $6,000) - ($40,000 + $60,000 + $50,000 + $300,000 $32,000 - $150,000 - $6,000) e. $78,000 = $208,000 - $130,000 f. $97,000 (as reported by Plend Corporation) g. $13,000 = ($430,000 - $300,000)/10 years P1-39 Incomplete Data Following Purchase a. 14,000 = $70,000/$5 b. $8.00 = ($70,000 + $42,000)/14,000 c. 7,000 = ($117,000 - $96,000)/$3 d. $24,000 = $65,000 + $15,000 - $56,000 e. $364,000 = ($117,000 + $553,000 + $24,000) – ($96,000 + $234,000) f. $110,000 = $320,000 - $210,000 g. $306,000 = ($15,000 + $30,000 + $110,000 + $293,000) ($22,000 + $120,000) h. $58,000 = $364,000 - $306,000

1-33

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

P1-40 Comprehensive Business Combination Problem a. Journal entries on the books of Pintime Industries to record the combination: Merger Expense Cash

135,000

Deferred Stock Issue Costs Cash

42,000

135,000 42,000

Cash Accounts Receivable Inventory Long-Term Investments Land Rolling Stock Plant and Equipment Patents Special Licenses Discount on Equipment Trust Notes Discount on Debentures Goodwill Current Payables Mortgages Payable Premium on Mortgages Payable Equipment Trust Notes Debentures Payable Common Stock Additional Paid-In Capital — Common Deferred Stock Issue Costs

28,000 251,500 395,000 175,000 100,000 63,000 2,500,000 500,000 100,000 5,000 50,000 109,700 137,200 500,000 20,000 100,000 1,000,000 180,000 2,298,000 42,000

Computation of goodwill Value of stock issued ($14 x 180,000) Fair value of assets acquired Fair value of liabilities assumed Fair value of net identifiable assets Goodwill

$2,520,000 $4,112,500 (1,702,200) (2,410,300) $ 109,700

1-34

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

P1-40 (continued) b. Journal entries on the books of SCC to record the combination: Investment in Pintime Industries Stock Allowance for Bad Debts Accumulated Depreciation Current Payables Mortgages Payable Equipment Trust Notes Debentures Payable Discount on Debentures Payable Cash Accounts Receivable Inventory Long-Term Investments Land Rolling Stock Plant and Equipment Patents Special Licenses Gain on Sale of Assets and Liabilities Record sale of assets and liabilities.

2,520,000 6,500 614,000 137,200 500,000 100,000 1,000,000 40,000 28,000 258,000 381,000 150,000 55,000 130,000 2,425,000 125,000 95,800 1,189,900

Common Stock Additional Paid-In Capital — Common Stock Treasury Stock Record retirement of Treasury Stock:* $7,500 = $5 x 1,500 shares $4,500 = $12,000 - $7,500

7,500 4,500

Common Stock Additional Paid-In Capital — Common Additional Paid-In Capital — Retirement of Preferred Retained Earnings Investment in Pintime Industries Stock Record retirement of SCC stock and distribution of Integrated Industries stock: $592,500 = $600,000 - $7,500 $495,500 = $500,000 - $4,500 1,410,000 = $220,100 + $1,189,900

592,500 495,500

*Alternative approaches exist.

1-35

12,000

22,000 1,410,000 2,520,000

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

CHAPTER 2 REPORTING INTERCORPORATE INVESTMENTS AND CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES WITH NO DIFFERENTIAL ANSWERS TO QUESTIONS Q2-1 (a) An investment in the voting common stock of another company is reported on an equity-method basis when the investor is able to significantly influence the operating and financial policies of the investee. (b) An investment in the voting common stock of another company is carried at fair value when the investor is NOT able to significantly influence the operating and financial policies of the investee. Q2-2 Under normal circumstances, the balance in the intercorporate investment account is expected to be different if the investment is carried at fair value, or if the equity method of accounting is used. Q2-3 At the time the investment qualifies for use of the equity method, the investor shall add the cost of acquiring the additional interest in the investee (if any) to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting Q2-4 A dividend is treated as a reduction of the investment account under equity-method reporting. A dividend received on investments carried at fair value is recorded as dividend income. Q2-5 For securities carried at fair value, the change in the fair value of the shares held by the investor is recorded as an unrealized gain or loss at the end of the period. Under the equity method the investor’s share of the earnings of the investee are recorded as investment income (and recorded as an increase to the investment account). Under the equity method any dividends received from the investee are treated as a reduction of the investment account and these dividends are not considered income to the investor. Q2-6 A one-line consolidation implies that under equity-method reporting the investor's net income and stockholders' equity will be the same as if the investee were consolidated. Income from the investee is included in a single line in the investor's income statement and the investment is reported as a single line in the investor's balance sheet. Q2-7 An adjusting entry is recorded on the company's books and causes the balances reported by the parent or subsidiary company to change. Consolidation entries, on the other hand, are not recorded on the books of the companies. Instead, they are entered in the consolidation worksheet so that when the amounts included in the consolidation entries are applied, - the appropriate balances for the consolidated entity are reported. Q2-8 Each of the stockholders' equity accounts of the subsidiary is eliminated in the consolidation process. Thus, none of the balances is included in the stockholders' equity accounts of the consolidated entity. That portion of the stockholders' equity claim assigned to the noncontrolling shareholders is reported indirectly in the balance assigned to the noncontrolling shareholders.

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

Q2-9 Additional entries are needed to eliminate all income statement and retained earnings statement effects of intercorporate ownership and any transfers of goods and services between related companies. Q2-10 Separate parts of the consolidation worksheet are used to develop the consolidated income statement, retained earnings statement, and balance sheet. All consolidation entries needed to complete the entire worksheet normally are entered before any of the three statements are prepared. The income statement portion of the worksheet is completed first so that net income can be carried forward to the retained earnings statement portion of the worksheet. When the retained earnings portion is completed, the ending balances are carried forward and entered in the consolidated balance sheet portion of the worksheet. Q2-11 None of the dividends declared by the subsidiary are included in the consolidated retained earnings statement. Those which are paid to the parent have not gone outside the consolidated entity and therefore must be eliminated in preparing the consolidated statements. Q2-12 Consolidated net income includes 100 percent of the revenues and expenses of the individual consolidating companies arising from transactions with unaffiliated companies. Q2-13 Consolidated retained earnings is that portion of the undistributed earnings of the consolidated entity accruing to the parent company shareholders. Q2-14 Consolidated retained earnings at the end of the period is equal to the beginning consolidated retained earnings balance plus consolidated net income attributable to the controlling interest, less consolidated dividends. Under the fully adjusted equity method, consolidated retained earnings should equal the parent company’s retained earnings. Q2-15 The retained earnings statement shows the increase or decrease in retained earnings during the period. Thus, income for the period is added to the beginning balance and dividends are deducted in deriving the ending balance in retained earnings. Because the consolidation worksheet includes the retained earnings statement, the beginning retained earnings balance must be entered in the worksheet. Q2-16A The general rule established in ASC 323 is that in the absence of other evidence, common stock ownership of 20 percent or more is viewed as indicating that the investor is able to exercise significant influence over the investee. However, ASC 323-10-15-6 also states a number of factors that could constitute other evidence of the ability to exercise significant influence: 1. Representation on board of directors. 2. Participation in policy making. 3. Material intercompany transactions. 4. Interchange of managerial personnel. 5. Technological dependency. 6. Size of investment in relation to concentration of other shareholdings. Q2-17A Equity-method reporting should not be used when (a) the investee has initiated litigation or complaints challenging the investor's ability to exercise significant influence, (b) the investor signs an agreement surrendering important shareholder rights, (c) majority ownership is concentrated in a small group that operates the company without regard to the investor's desires, (d) the investor is not able to acquire the information from the investee, or (e) the investor tries and fails to gain representation on the board of directors.

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

Q2-18A When the modified equity method is used, a proportionate share of subsidiary net income and dividends is recorded on the parent's books and an appropriate amount of any differential is amortized each period. In some situations, companies also choose not to make adjustments for intercompany profits and the amortization of the differential. Under the fully adjusted equity method, the parent's books also are adjusted for unrealized profits and any other items that are needed to bring the investor's net income into agreement with the income to the controlling interest that would be reported if consolidation were used. Q2-19A The term modified equity method generally is used when the investor records its portion of the reported net income and dividends of the investee and amortizes an appropriate portion of any differential. Unlike the fully adjusted equity method, no adjustment for unrealized profit on intercompany transfers normally is made on the investor's books. (In some situations, companies also choose not to amortize the differential.) When an investee is consolidated for financial reporting purposes, the investor may not feel it is necessary to record fully adjusted equity method entries on its books since income from the investee and the balance in the investment account must be eliminated in preparing the consolidated statements.

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

SOLUTIONS TO CASES C2-1 Choice of Accounting Method a. The equity method is to be used when an investor has significant influence over an investee. Significant influence normally is assumed when more than 20 percent ownership is held. Factors to be considered in determining whether to apply equity-method reporting include the following: 1. Is the investee under the control of the courts or other parties as a result of filing for reorganization or entering into liquidation procedures? 2. Does the investor have representation on the board of directors, or has it attempted to gain representation and been unable to do so? 3. Has the investee initiated litigation or complaints challenging the investor's ability to exercise significant influence? 4. Has the investor signed an agreement surrendering its ability to exercise significant influence? 5. Is majority ownership concentrated in a small group that operates the company without regard of the wishes of the investor? 6. Is the investor able to acquire the information needed to use equity-method reporting? b. The equity method will align the contribution to Slanted’s earnings with the earnings reported by Flat. If the investment is carried at fair value, the contribution to Slanted’s earnings will be aligned with the change in market value of Flat’s shares, thus market expectations play a key role in the contribution to earnings if the investment is carried at fair value. c. The key reason that the equity method is more appropriate as the percentage of ownership increases is that GAAP requires the use of the equity method at the point when the investor gains significant influence over an investee. Therefore Slanted is likely to be required to use the equity method to account for its investment in Flat. Some of the reasons for this include that as the investor uses more of its resources to acquire ownership of the investee, and as the investor has a greater share of the investee's profits and losses, the success of the investee's operations may have more of an impact on the overall financial well-being of the investor. In many cases, the investor will want to participate in key decisions of the investee once the investor's ownership share reaches a certain level. Also, use of the equity method eliminates the possibility of the investor manipulating its own income by influencing investee dividend distributions, as might occur if the investor carries the investment at fair value.

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

C2-2 Intercorporate Ownership MEMO To:

Chief Accountant Most Company

From: Re:

, CPA Equity Method Reporting for Investment in Adams Company

The equity method should be used in reporting investments in which the reporting company has a significant influence over the operating and financing decisions of another company. In this case, Most Company holds 15 percent of the voting common stock of Adams Company and Port Company holds an additional 10 percent. During the course of the year, both Most and Port are likely to carry their respective investments in Adams at fair value. However, when consolidated statements are prepared for Most, the combined ownership must be used in determining whether significant influence exists. Both direct and indirect ownership must be taken into consideration. [ASC 323] A total of 15 percent of the voting common stock of Adams is held directly by Most Company and an additional 10 percent is controlled indirectly through Most’s ownership of Port Company. Equity-method reporting for the investment in Adams Company therefore appears to be required in the consolidated financial statements. If Most and Port have carried their investments in Adams at fair value during the year, then at the time consolidated statements are prepared, adjustments must be made to (a) increase the balance in the investment account for a proportionate share of the investee’s reported net income (25 percent) and reduce the balance in the investment account for a proportionate share of the dividend paid by the investee, (b) include a proportionate share of the investee’s net income in the consolidated income statement, (c) delete any dividend income recorded by Most and Port, and (d) reverse any impact of entries that Most and Port have made related to changes in fair value of Adams stock during the year. Primary citation ASC 323

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

C2-3 Application of the Equity Method MEMO To:

Controller Forth Company

From: Re:

, CPA Equity Method Reporting for Investment in Brown Company

This memo is prepared in response to your request to evaluate whether Forth should use the equity method in accounting for its investment in Brown Company, or if the investment should be carried at fair value. Forth Company held 85 percent of the common stock of Brown Company prior to January 1, 20X2, and was required to fully consolidate Brown Company in its financial statements prepared prior to that date [ASC 810]. Forth now holds only 15 percent of the common stock of Brown. Investments are normally carried at fair value when ownership is less than 20 percent of the stock that is directly or indirectly held by the investor. Equity-method reporting should be used when the investor has “significant influence over operating and financing policies of the investee.” While 20 percent ownership is regarded as the level at which the investor is presumed to have significant influence, other factors must be considered as well. [ASC 323] Although Forth currently holds only 15 percent of Brown’s common stock, the other factors associated with its ownership indicate that Forth does exercise significant influence over Brown. Forth has two members on Brown’s board of directors, it purchases a substantial portion of Brown’s output, and Forth appears to be the largest single shareholder by virtue of its sale of 10,000 shares to each of 7 other investors. These factors provide strong evidence that Forth has significant influence over Brown and points to the need to use equity-method reporting for its investment in Brown. Your office should monitor the activities of the standard setting bodies with respect to consolidation standards [www.fasb.org]. Active consideration is being given to situations in which control may be exercised even though the investor does not hold majority ownership. It is conceivable that your situation might be one in which consolidation could be required. Primary citations APB 18, par. 17; ASC 323-10-15-6 through 15-8 ASC 810

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

C2-4 Need for Consolidation Process After the financial statements of each of the individual companies are prepared in accordance with generally accepted accounting principles, consolidated financial statements must be prepared for the economic entity as a whole. The individual companies generally record transactions with other subsidiaries on the same basis as transactions with unrelated enterprises. In preparing consolidated financial statements, the effects of all transactions with related companies must be removed, just as all transactions within a single company must be removed in preparing financial statements for that individual company. It therefore is necessary to prepare a consolidation worksheet and to enter a number of special journal entries in the worksheet to remove the effects of the intercorporate transactions. The parent company also reports an investment in each of the subsidiary companies and investment income or loss in its financial statements. Each of these accounts must be eliminated as well as the stockholders' equity accounts of the subsidiaries. The latter must be eliminated so that only the parent’s equity remains. This is because only the parent's ownership is held by parties outside the consolidated entity.

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

C2-5 Account Presentation MEMO To:

Chief Accountant Prime Company

From: Re:

, Accounting Staff Combining Broadly Diversified Balance Sheet Accounts

Many manufacturing and merchandising enterprises excluded finance, insurance, real estate, leasing, and perhaps other types of subsidiaries from consolidation prior to 1987 on the basis of “nonhomogeneous” operations. Companies generally argued that the accounts of these companies were dissimilar in nature and combining them in the consolidated financial statements would mislead investors. ASC 810 specifically eliminated the exception for nonhomogeneous operations. ASC 810 affirms the requirement for consolidating entities in which a controlling financial interest is held. Prime Company controls companies in very different industries and combining the accounts of its subsidiaries may lead to confusion by some investors; however, it may be equally confusing to provide detailed listings of assets and liabilities by industry or other breakdowns in the consolidated balance sheet. The actual number of assets and liabilities presented in the consolidated balance sheet must be carefully considered, but is the decision of Prime’s management. It is important to recognize that the notes to the consolidated financial statements are regarded as an integral part of the financial statements and Prime Company is required to include in its notes to the financial statements certain information on its reportable segments [ASC 280]. Because of the diversity of its ownership, Prime may wish to provide more than the minimum disclosures specified in the guidance. Segment information appears to be used quite broadly by investors and permits the company to provide sufficient detail to assist the financial statement user in gaining a better understanding of the various operating divisions of the company. You have requested information on those situations in which it may not be appropriate to combine similar appearing accounts of two or more subsidiaries. The following is a partial listing of such situations: (a) the accounts of a subsidiary should not be included along with other subsidiaries if control of the assets and liabilities does not rest with Prime Company, as when a subsidiary is in receivership; (b) while the assets and liability accounts of the subsidiary should be combined with the parent, the equity account balances should not; (c) negative account balances in cash or accounts receivable should be reclassified as liabilities rather than being added to the positive balances of other affiliates if there is no right of offset in the underlying bank accounts, and (d) assets pledged for a specific purpose and not available for other use by the consolidated entity generally should be separately reported. Primary citations: ASC 810 ASC 280-10 ASC 810-10-65-1 Secondary sources: ASC 810

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

C2-6 Consolidating an Unprofitable Subsidiary MEMO TO:

Chief Accountant Amazing Chemical Corporation

FROM: Re:

, Accounting Staff Consolidation of Unprofitable Boatyard

This memo is intended to provide recommendations on the presentation of the boatyard in Amazing Chemical’s consolidated financial statements. Amazing Chemical Corporation currently has full ownership of the boatyard and should fully consolidate the boatyard in its financial statements. Consolidated statements should be prepared when a company directly or indirectly has a controlling financial interest in one or more other companies. [ASC 810]. Amazing Chemical appears to be following generally accepted accounting procedures in fully consolidating the boatyard in its financial statements and should continue to do so. The operations of the boatyard appear to be distinct from the other operations of the parent company and its losses appear to be sufficient to establish it as a reportable segment [ASC 280]. While the operating losses of the boatyard may not be evident in analyzing the consolidated income statement, a review of the notes to the consolidated statements should provide adequate disclosure of its operations as a reportable segment. The financial statements for the current period should contain these disclosures and if prior period statements have not included the boatyard as a reportable segment it may be necessary to restate those statements. Failure of the president of Amazing Chemical to receive approval by the board of directors for the purchase of the boatyard and his subsequent actions to keep information about its operations from the board members appears to be a serious breach of ethics. These actions by the president should immediately be brought to the attention of the board of directors for appropriate action by the board. Primary citations: ASC 810-10-10-1 ASC 810 ASC 280-10-50 ASC 810-10-65-1

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

E2-3 Multiple-Choice Questions on Applying Equity Method [AICPA Adapted] 1. d – $250,000 + ($100,000 x 0.30) – ($10,000 x 0.30) = $277,000 2. d – If the investment had been accounted for using the equity method, Investor would have recorded its share of Alimand’s income by increasing the investment account and increasing earnings by $40,000 ($100,000 x 40%). Investor would also have decreased the investment account by $4,000 for its share of the dividends ($10,000 x 40%). However, since Investor incorrectly accounted for the investment as if were carried at fair value, the only entry Investor recorded was to increase income by $4,000 for the dividends. As a result, the investment account will be understated, earnings will be understated, and retained earnings will be understated. 3. d – Under the equity method, dividends by the investee are recorded with a credit to the investment account, not to dividend revenue. By wrongly classifying this entry, the investment is overstated, and retained earnings are also overstated. (a) Incorrect. Because the dividend entry was recorded incorrectly, the financial position will not be correctly stated. (b) Incorrect. Because the dividends were recorded as dividend revenue, retained earnings would be overstated. (c) Incorrect. Currently, the investment is overstated because the dividends declared should have resulted in a reduction to the investment account.

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

E2-4 Carrying an Investment at Fair Value versus Equity Method Reporting a. Winston Corporation net income – carried at fair value: 20X2 20X3 20X4

$100,000 $ 60,000 $250,000

+ + +

.40($30,000) .40($60,000) .40($50,000)

+ + +

$20,000 $20,000 $20,000

b. Winston Corporation net income – equity method: 20X2 $100,000 + .40($70,000) 20X3 $ 60,000 + .40($40,000) 20X4 $250,000 + .40($25,000)

$132,000 104,000 290,000

$128,000 76,000 260,000

E2-5 Acquisition Price Balance at date of acquisition: a. Carried at fair value:

$54,000 − $6,000 = $48,000

The investment account would be increased by $2,000 each year reflecting the increase in the market value of Phillips' investment in Jones' stock. b. Equity method Year

$54,000 - $2,000 = $52,000 Net Income

20X1 $ 8,000 20X2 12,000 20X3 20,000 Change in account balance

Dividends $15,000 10,000 10,000

Phillips’s share of Investment $(2,800) 800 4,000 $ 2,000

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

E2-6 Investment Income a. (1) Ravine Corporation net income when investment is carried at fair value: 20X6 20X7 20X8 20X9

$140,000 $ 80,000 $220,000 $160,000

+ + + +

0.30($20,000) 0.30($40,000) 0.30($30,000) 0.30($20,000)

+ $10,000 + $10,000 + $10,000 + $10,000

= = = =

$156,000 $102,000 $242,000 $176,000

(2) Ravine Corporation net income under Equity Method: 20X6 20X7 20X8 20X9

$140,000 $ 80,000 $220,000 $160,000

+ + + +

0.30($30,000) 0.30($50,000) 0.30($10,000) 0.30($40,000)

= = = =

$149,000 $ 95,000 $223,000 $172,000

b. Journal entries recorded by Ravine Corporation in 20X8: (1) Carried at fair value: Cash Dividend Income

12,000

Investment in Valley Stock Unrealized Gain on Valley Stock

10,000

12,000 10,000

(2) Equity method: Cash Investment in Valley Stock

12,000

Investment in Valley Stock Income from Valley

3,000

12,000 3,000

E2-7 Investment Value The following amounts would be reported as the carrying value of Port’s investment in Sund: 20X2 20X3 20X4

$184,500 = $193,500 = $195,000 =

$180,000 $184,500 $193,500

+ ($40,000 x 0.30) + ($30,000 x 0.30) + ($5,000 x 0.30)

($25,000 x 0.30)

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

E2-8 Carrying an Investment at Fair Value versus Equity Method Reporting a. Fair value method: Operating income reported by Mock Unrealized gain on increase in value of Small stock Dividend income from Small ($15,000 x 0.20) Net income reported by Mock

$90,000 16,000 3,000 $ 109,000

b. Equity method: Operating income reported by Mock Income from investee ($40,000 x 0.20) Net income reported by Mock

$90,000 8,000 $98,000

E2-9 Carrying an Investment at Fair Value versus Equity Method Reporting a. Journal entries under the equity method: (1) Investment in Lomm Company Stock Cash Record purchase of Lomm Company stock.

140,000 140,000

(2) Cash Investment in Lomm Company Stock Record dividends from Lomm Company: $20,000 x 0.35

7,000

(3) Investment in Lomm Company Stock Income from Lomm Company Record equity-method income: $80,000 x 0.35

28,000

7,000

28,000

Journal entries for investment carried at fair value. (1) Investment in Lomm Company Stock Cash Record purchase of Lomm Company stock. (2) Cash Dividend Income Record dividends from Lomm Company: $20,000 x 0.35

140,000 140,000 7,000

(3) Investment in Lomm Company Stock 34,000 Unrealized Gain on Increase in Value of Lomm Stock Record increase in value of Lomm stock: $174,000 - $140,000

7,000

34,000

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

E2-10 Basic Consolidation Entry Common Stock – Broadway Corporation Additional Paid-In Capital Retained Earnings Investment in Broadway Common Stock

200,000 300,000 100,000 600,000

E2-11 Balance Sheet Worksheet a. Equity Method Entries on Blank's Books: Investment in Faith 150,000 Cash 150,000 Record the initial investment in Faith 12/31/X2 Goodwill = 0

Identifiable excess = 0

$150,000 Initial investment in Faith

Book value = CS + RE = 150,000

Book Value Calculations: Total Book Value Ending book value

150,000

Common Stock

60,000

Retained Earnings 90,000

Basic Consolidation Entry Common stock

60,000

Retained earnings

90,000

Investment in Faith

150,000

Accumulated Depreciation Consolidation Entry Accumulated depreciation Buildings & equipment

30,000 30,000

Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

E2-11 (continued)

(Since the buildings and equipment are reported net of accumulated depreciation on the balance sheet, this entry will not affect the worksheet. However, if sufficient information had been given, this entry would have made a difference in the worksheet balances for Buildings and Equipment and Accumulated Depreciation. Additionally, this entry would impact any footnote disclosure of the details of Buildings and Equipment.) b. Consolidation Entries Blank

Faith

Consolidated

Cash

65,000

18,000

83,000

Accounts Receivable

87,000

37,000

124,000

Inventory

110,000

60,000

Buildings & Equipment (net)

220,000

150,000

Investment in Faith

150,000

Total Assets

632,000

265,000

Accounts Payable

92,000

35,000

127,000

Notes Payable

150,000

80,000

230,000

Common Stock

100,000

60,000

100,000

Retained Earnings

290,000

90,000

290,000

Total Liabilities & Equity

632,000

265,000

150,000

Balance Sheet

170,000 30,000

30,000

370,000

150,000

180,000

747,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-29 (continued) c. Powder Co.

Sawmill Corp.

Consolidation Entries DR

Consolidated

Income Statement Service Revenue

610,000

240,000

850,000

Less: Cost of Services

(470,000)

(130,000)

(600,000)

Less: Depreciation Expense

(35,000)

(18,000)

Less: Other Expenses

(57,000)

(60,000)

Income from Sawmill Corp.

28,000

Net Income

76,000

Beginning Balance

4,000

(57,000) (117,000)

32,000

4,000

32,000

36,000

4,000

76,000

292,000

120,000

Net Income

76,000

32,000

36,000

Less: Dividends Declared

(30,000)

(12,000)

Ending Balance

338,000

140,000

Cash

74,000

42,000

Accounts Receivable

130,000

53,000

Land

60,000

50,000

Buildings & Equipment

500,000

350,000

40,000

Less: Accumulated Depreciation

(265,000)

(93,000)

25,000

Investment in Sawmill Corp.

268,000

Statement of Retained Earnings

156,000

292,000 4,000

76,000

12,000

(30,000)

16,000

338,000

Balance Sheet 116,000 2,500

180,500 110,000

25,000

865,000

12,000

(345,000)

240,000

28,000 Total Assets

767,000

402,000

65,000

Accounts Payable

71,000

17,000

2,500

Taxes Payable

58,000

60,000

118,000

Notes Payable

100,000

85,000

185,000

Common Stock

200,000

100,000

Retained Earnings

338,000

140,000

156,000

16,000

338,000

Total Liabilities & Equity

767,000

402,000

258,500

16,000

926,500

4-50

307,500

926,500

85,500

200,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-30 Acquisition at Other than Fair Value of Net Assets a. Ownership acquired for $280,000: Equity Method Entries on Power Corp.'s Books: Investment in Scrub Co.

280,000

Cash

280,000

Record the initial investment in Scrub Co. Book Value Calculations: Total Book Value Book value at acquisition

Common Stock

255,000

80,000

Retained Earnings 175,000

1/1/X9 Goodwill = 12,000

Identifiable Excess = 13,000

$280,000 Initial investment in Scrub Co.

100% Book value = 255,000

Basic Consolidation Entry Common stock

80,000

Retained earnings

175,000

Investment in Scrub Co.

255,000

Excess Value (Differential) Calculations: Total Balances

25,000

Land

20,000

Inventories (7,000)

Excess Value (Differential) Reclassification Entry: Land

20,000

Goodwill

12,000

Inventories

7,000

Investment in Scrub Co.

25,000

4-51

Goodwill 12,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-30 (continued) Investment in Scrub Co. Acquisition Price

280,000 255,000

Basic

25,000

Excess Reclass.

b. Ownership acquired for $251,000: Equity Method Entries on Power Corp.'s Books: Investment in Scrub Co. Cash Gain on Bargain Purchase

268,000 251,000 17,000

Record the initial investment in Scrub Co. Book Value Calculations: Total Book Value Book value at acquisition

Common Stock

255,000

80,000

Retained Earnings 175,000

Basic Consolidation Entry Common Stock

80,000

Retained Earnings

175,000

Investment in Scrub Co.

255,000

Excess Value (Differential) Calculations: Total Balances

(13,000)

Land

20,000

Inventories (7,000)

Excess Value (Differential) Reclassification Entry: Land

20,000

Inventories

7,000

Investment in Scrub Co.

13,000

Investment in Scrub Co. Acquisition Price

268,000 255,000

Basic

13,000

Excess Reclass.

4-52

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-31 Intercorporate Receivables and Payables a. Consolidation entries: Equity Method Entries on Pretzel Corp.'s Books: Investment in Stick Co.

305,000

Cash

305,000

Record the initial investment in Stick Co. Book Value Calculations: Total Book Value Book value at acquisition

285,000

Common Stock

150,000

Additional PIC 140,000

1/1/X7

Goodwill = 20,000

Identifiable Excess = 0

$305,000 Initial investment in Stick Co.

100% Book value = 285,000

Basic Consolidation Entry Common stock

150,000

Paid-in capital in excess of par

140,000

Retained earnings

5,000

Investment in Stick Co.

285,000

Excess Value (Differential) Calculations: Total Balances

20,000

Goodwill 20,000

Excess Value (Differential) Reclassification Entry: Goodwill

20,000

Investment in Stick Co.

20,000

4-53

Retained Earnings (5,000)

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-31 (continued) Eliminate Intercompany Accounts: Bonds Payable

50,000

Investment in Stick Co. Bonds

50,000

Accounts Payable

10,000

Accounts Receivable

10,000

Accumulated Depreciation Consolidation Entry Accumulated depreciation

75,000

Building & equipment

75,000

Investment in Stick Co. Acquisition Price

305,000 285,000

Basic

20,000

Excess Reclass.

0 b. Pretzel Corp.

Stick Co.

Cash

70,000

35,000

Accounts Receivable

90,000

65,000

Inventory

84,000

80,000

Buildings & Equipment

400,000

300,000

Less: Accumulated Depreciation

(160,000)

(75,000)

Investment in Stick Company

305,000

Consolidation Entries DR

Consolidated

Balance Sheet 105,000 10,000

145,000 164,000

75,000 75,000

625,000 (160,000)

285,000

20,000 Investment in Stick Company Bonds

50,000

Goodwill

20,000

0 20,000

Total Assets

839,000

405,000

95,000

Accounts Payable

50,000

20,000

10,000

60,000

Bonds Payable

200,000

100,000

50,000

250,000

Common Stock

300,000

150,000

300,000

140,000

Capital in Excess of Par Retained Earnings

289,000

(5,000)

Total Liabilities & Equity

839,000

405,000

4-54

350,000

440,000

899,000

5,000

289,000

5,000

899,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-31 (continued)

Pretzel Corporation and Subsidiary Consolidated Balance Sheet January 1, 20X7 Cash Accounts Receivable Inventory Buildings and Equipment Less: Accumulated Depreciation Goodwill Total Assets

$105,000 145,000 164,000 $625,000 (160,000)

Accounts Payable Bonds Payable Common Stock Retained Earnings Total Liabilities and Stockholders' Equity

4-55

465,000 20,000 $899,000 $ 60,000 250,000

$300,000 289,000

589,000 $899,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-32 Balance Sheet Consolidation a. Equity Method Entries on Primary Corp.'s Books: Investment in Secondary Co.

650,000

Bonds Payable

650,000

Record the initial investment in Secondary Co. b. Book Value Calculations: Total Book Value Book value at acquisition

478,000

Common Stock

Add’l PaidIn-Capital

200,000

130,000

1/1/X8

Goodwill = 48,000

Identifiable Excess = 124,000

100% Book value = 478,000

$650,000 Initial investment in Secondary Co.

Basic Consolidation Entry Common Stock

200,000

Additional Paid-in capital

130,000

Retained Earnings

148,000

Investment in Secondary Co.

478,000

4-56

Retained Earnings 148,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-32 (continued)

Total Balances

Inventory

172,000

4,000

Land

Buildings & Equipment

20,000

50,000

Patent 40,000

Disc. on Bonds Payable

10,000

Excess Value (Differential) Reclassification Entry: Inventory

4,000

Land

20,000

Buildings & Equipment

50,000

Patent

40,000

Discount on Bonds Payable

10,000

Goodwill

48,000

Investment in Secondary Co.

172,000

Eliminate Intercompany Accounts: Current Payables

6,500

Receivables

6,500

FYI, the FASB now requires that no allowance accounts be carried forward from the acquiree in a business combination. However, because of immateriality and the short-lived nature of the carry forward subsequent to the date of combination, the allowance in this problem has not been offset against the receivable. If such an offset is desired, the following consolidation entry would be made:

Allowance for Bad Debts Receivables

1,000 1,000

However, since receivables are reported net of the allowance, the entry is not shown in the worksheet included here. Accumulated Depreciation Consolidation Entry Accumulated depreciation

220,000

Building & equipment

220,000

Investment in Secondary Co. Acquisition Price

650,000 478,000

Basic

172,000

Excess Reclass.

4-57

Goodwill 48,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-32 (continued) c. Consolidation Entries

Primary Corp.

Secondary Co.

Cash

12,000

9,000

Receivables (net)

39,000

30,000

Inventory

86,000

68,000

4,000

158,000

Land

55,000

50,000

20,000

125,000

Buildings & Equipment Less: Accumulated Depreciation

960,000

670,000

50,000

(411,000)

(220,000)

220,000

Investment in Secondary Co.

650,000

Consolidated

Balance Sheet 21,000 6,500

220,000

62,500

1,460,000 (411,000)

478,000

172,000 Patents

40,000

Goodwill

48,000

Total Assets

1,391,000

607,000

382,000

Current Payables

38,000

29,000

6,500

Bonds Payable

850,000

100,000 10,000

(10,000)

Common Stock

300,000

200,000

300,000

Additional Paid-In Capital

100,000

130,000

100,000

Retained Earnings

103,000

148,000

103,000

1,391,000

607,000

494,500

Discount on Bonds Payable

Total Liabilities & Equity

4-58

876,500

1,503,500

60,500 950,000

1,503,500

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-32 (continued)

Primary Corporation and Subsidiary Consolidated Balance Sheet January 2, 20X8 Cash Receivables Less: Allowance for Bad Debts Inventory Land Buildings and Equipment Less: Accumulated Depreciation Patent Goodwill Total Assets

$ $

65,500 (3,000)

$1,460,000 (411,000)

Current Payables Bonds Payable Less: Discount on Bonds Payable Stockholders’ Equity Common Stock Additional Paid-In Capital Retained Earnings Total Liabilities and Stockholders' Equity

$ 300,000 100,000 103,000

P4-33 Consolidation Worksheet at End of First Year of Ownership a. Equity Method Entries on Price Corp.'s Books: Investment in Saver Co.

128,000

Cash

128,000

Record the initial investment in Saver Co. Investment in Saver Co.

24,000

Income from Saver Co.

24,000

Record Price Corp.'s 100% share of Saver Co.'s 20X8 income Cash

16,000

Investment in Saver Co.

16,000

Record Price Corp.'s 100% share of Saver Co.'s 20X8 dividend

Income from Saver Co.

62,500 158,000 125,000 1,049,000 40,000 48,000 $1,503,500 $

$ 950,000 (10,000)

7,500

Investment in Saver Co.

7,500

Record amortization of excess acquisition price

4-59

21,000

60,500 940,000

503,000 $1,503,500

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

Book Value Calculations: Total Book Value Beginning book value

100,000

Common Stock

Retained Earnings

60,000

40,000

+ Net Income

24,000

- Dividends

(16,000)

Ending book value

108,000

60,000

48,000

1/1/X8

12/31/X8

Goodwill = 8,000

Goodwill = 2,500

Identifiable Excess = 18,000

Identifiable Excess = 20,000

$128,000 Initial investment in Saver Co.

100% Book value = 100,000

$128,500 Net investment in Saver Co.

100% Book value = 108,000

Basic Consolidation Entry Common Stock

60,000

Retained Earnings

40,000

Income from Saver Co.

24,000

Dividends Declared

16,000

Investment in Saver Co.

108,000

Excess Value (Differential) Calculations: Buildings & Total = Equipment Beginning balance

28,000

Changes

(7,500)

Ending balance

20,500

Acc. Depr.

20,000 20,000

2,000

Goodwill Impairment Loss

5,500

Income from Saver Co.

8,000

(2,000)

(5,500)

(2,000)

2,500

7,500

4-60

Goodwill

Amortized Excess Value Reclassification Entry: Depreciation Expense

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-33 (continued) Excess Value (Differential) Reclassification Entry: Buildings & Equipment

20,000

Goodwill

2,500

Accumulated Depreciation

2,000

Investment in Saver Co.

20,500

Accumulated Depreciation Consolidation Entry Accumulated Depreciation

30,000

Building & Equipment

30,000

Investment in

Income from

Saver Co.

Acquisition Price

128,000

100% Net Income

24,000

Ending Balance

16,000

100% Dividends

7,500

Excess Val. Amort. Basic

20,500

Excess Reclass.

100% Net Income

16,500

Ending Balance

7,500

128,500 108,000

24,000

24,000 7,500 0

4-61

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-33 (continued) b. Consolidation Entries

Price Corp.

Saver Co.

Sales

260,000

180,000

440,000

Less: COGS

(125,000)

(110,000)

(235,000)

Less: Wage Expense

(42,000)

(27,000)

Less: Depreciation Expense

(25,000)

(10,000)

Less: Interest Expense

(12,000)

(4,000)

(16,000)

Less: Other Expenses

(13,500)

(5,000)

(18,500)

Consolidated

Income Statement

Less: Impairment Loss

(69,000) 2,000

(37,000)

5,500

Income from Saver Co.

16,500

Net Income

59,000

Beginning Balance Net Income

(5,500)

24,000

7,500

24,000

31,500

7,500

59,000

102,000

40,000

59,000

24,000

31,500

Less: Dividends Declared

(30,000)

(16,000)

Ending Balance

131,000

48,000

Cash

19,500

21,000

40,500

Accounts Receivable

70,000

12,000

82,000

Inventory

90,000

25,000

115,000

Land

30,000

15,000

45,000

Buildings & Equipment Less: Accumulated Depreciation

350,000

150,000

20,000

30,000

490,000

(145,000)

(40,000)

30,000

2,000

(157,000)

Investment in Saver Co.

128,500

108,000

Statement of Retained Earnings

71,500

102,000 7,500

59,000

16,000

(30,000)

23,500

131,000

Balance Sheet

20,500 Goodwill

2,500

Total Assets

543,000

183,000

Accounts Payable

45,000

16,000

52,500

2,500 160,500

618,000

61,000

Wages Payable

17,000

9,000

26,000

Notes Payable

150,000

50,000

200,000

Common Stock

200,000

60,000

Retained Earnings

131,000

48,000

71,500

23,500

131,000

Total Liabilities & Equity

543,000

183,000

131,500

23,500

618,000

4-62

200,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-34 Consolidation Worksheet at End of Second Year of Ownership a. Equity Method Entries on Price Corp.'s Books: Investment in Saver Co.

36,000

Income from Saver Co.

36,000

Record Price Corp.'s 100% share of Saver Co.'s 20X9 income Cash

20,000

Investment in Saver Co.

20,000

Record Price Corp.'s 100% share of Saver Co.'s 20X9 dividend Income from Saver Co.

2,000

Investment in Saver Co.

2,000

Record amortization of excess acquisition price Book Value Calculations: Total Book Value

Common Stock 60,000

Retained Earnings

Beginning book value

108,000

+ Net Income

36,000

- Dividends

(20,000)

Ending book value

124,000

60,000

48,000

64,000

1/1/X9

12/31/X9

Goodwill = 2,500

Identifiable Excess = 18,000

100% Book value = 108,000

Identifiable Excess = 16,000 $128,500 Net investment in Saver Co.

4-63

100% Book value = 124,000

$142,500 Net investment in Saver Co.

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-34 (continued) Basic Consolidation Entry Common Stock

60,000

Retained Earnings

48,000

Income from Saver Co.

36,000

Dividends Declared

20,000

Investment in Saver Co.

124,000

Excess Value (Differential) Calculations: Buildings & Total = Equipment Beginning balance

20,500

Changes

(2,000)

Ending balance

18,500

Acc. Depr.

20,000

Goodwill

(2,000)

2,500

(2,000) 20,000

(4,000)

2,500

Amortized Excess Value Reclassification Entry: Depreciation Expense

2,000

Income from Saver Co.

2,000

Excess Value (Differential) Reclassification Entry: Buildings & Equipment

20,000

Goodwill

2,500

Accumulated Depreciation

4,000

Investment in Saver Co.

18,500

Accumulated Depreciation Consolidation Entry Accumulated Depreciation

30,000

Building & Equipment

30,000

Investment in

Income from

Saver Co.

Beginning Balance

128,500

100% Net Income

36,000

Ending Balance

20,000

100% Dividends

2,000

Excess Val. Amort.

2,000

124,000

Basic

36,000

18,500

Excess Reclass.

142,500

36,000

100% Net Income

34,000

Ending Balance

2,000 0

4-64

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-34 (continued) b. Consolidation Entries

Price Corp.

Saver Co.

Sales

290,000

200,000

490,000

Less: COGS

(145,000)

(114,000)

(259,000)

Less: Wage Expense

(35,000)

(20,000)

Less: Depreciation Expense

(25,000)

(10,000)

Less: Interest Expense

(12,000)

(4,000)

(16,000)

Less: Other Expenses

(23,000)

(16,000)

(39,000)

Income from Saver Co.

34,000

Net Income

84,000

Beginning Balance Net Income

Consolidated

Income Statement

(55,000) 2,000

(37,000)

36,000

2,000

36,000

38,000

2,000

84,000

131,000

48,000

84,000

36,000

38,000

Less: Dividends Declared

(30,000)

(20,000)

Ending Balance

185,000

64,000

Cash

45,500

32,000

77,500

Accounts Receivable

85,000

14,000

99,000

Inventory

97,000

24,000

121,000

Land

50,000

25,000

75,000

Buildings & Equipment

350,000

150,000

20,000

30,000

490,000

Less: Accumulated Depreciation

(170,000)

(50,000)

30,000

4,000

(194,000)

Investment in Saver Co.

142,500

124,000

Statement of Retained Earnings

86,000

131,000 2,000

84,000

20,000

(30,000)

22,000

185,000

Balance Sheet

18,500 Goodwill

2,500

Total Assets

600,000

195,000

Accounts Payable

51,000

15,000

66,000

Wages Payable

14,000

6,000

20,000

Notes Payable

150,000

50,000

200,000

Common Stock

200,000

60,000

Retained Earnings

185,000

64,000

86,000

22,000

185,000

Total Liabilities & Equity

600,000

195,000

146,000

22,000

671,000

4-65

52,500

2,500 176,500

671,000

200,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-34 (continued)

Price Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X9

Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Goodwill Total Assets

$ 77,500 99,000 121,000 75,000 $490,000 (194,000)

Accounts Payable Wages Payable Notes Payable Common Stock Retained Earnings Total Liabilities and Stockholders' Equity

296,000 2,500 $671,000 $ 66,000 20,000 200,000

$200,000 185,000

385,000 $671,000

Price Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X9 Sales Cost of Goods Sold Wage Expense Depreciation Expense Interest Expense Other Expenses Total Expenses Consolidated Net Income

$490,000 $259,000 55,000 37,000 16,000 39,000 (406,000) $ 84,000

Price Corporation and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X9 Retained Earnings, January 1, 20X9 20X9 Net Income Dividends Declared, 20X9 Retained Earnings, December 31, 20X9

4-66

$131,000 84,000 $215,000 (30,000) $185,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-35 Comprehensive Problem: Wholly Owned Subsidiary a. Equity Method Entries on Prime Corp.'s Books: Investment in Steak Products

30,000

Income from Steak Products

30,000

Record Prime Corp.'s 100% share of Steak Products' 20X5 income Cash

10,000

Investment in Steak Products

10,000

Record Prime Corp.'s 100% share of Steak Products' 20X5 dividend Income from Steak Products

5,000

Investment in Steak Products

5,000

Record amortization of excess acquisition price b. Basic Consolidation Entry Common Stock

100,000

Retained Earnings

90,000

Income from Steak Products

30,000

Dividends Declared

10,000

Investment in Steak Products

210,000

Excess Value (Differential) Calculations: Buildings & Total = Equipment Beginning balance

30,000

Changes

(5,000)

Ending balance

25,000

50,000

Acc. Depr. (20,000) (5,000)

50,000

(25,000)

Amortized Excess Value Reclassification Entry: Depreciation Expense

5,000

Income from Steak Products

5,000

Excess Value (Differential) Reclassification Entry: Building

50,000

Accumulated Depreciation

25,000

Investment in Steak Products

25,000

Eliminate Intercompany Accounts: Accounts Payable

10,000

Cash and Receivables

10,000

4-67

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-35 (continued) Accumulated Depreciation Consolidation Entry Accumulated Depreciation

10,000

Building & Equipment

10,000

c. Prime Corp.

Steak Products

Consolidation Entries DR

Consolidated

Income Statement Sales

200,000

100,000

300,000

Less: COGS

(120,000)

(50,000)

(170,000)

Less: Depreciation Expense

(25,000)

(15,000)

Less: Inventory Losses

(15,000)

(5,000)

Income from Steak Products

25,000

Net Income

65,000

Beginning Balance

5,000

(45,000) (20,000)

30,000

5,000

30,000

35,000

5,000

65,000

318,000

90,000

Net Income

65,000

30,000

35,000

Less: Dividends Declared

(30,000)

(10,000)

Ending Balance

353,000

110,000

Cash and Receivables

43,000

65,000

Inventory

260,000

90,000

350,000

Land

80,000

160,000

Buildings & Equipment

500,000

150,000

50,000

10,000

690,000

Less: Accumulated Depreciation

(205,000)

(105,000)

10,000

25,000

(325,000)

Investment in Steak Products

235,000

210,000

Statement of Retained Earnings

125,000

318,000 5,000

65,000

10,000

(30,000)

15,000

353,000

10,000

98,000

Balance Sheet

25,000 Goodwill

Total Assets

913,000

280,000

60,000

Accounts Payable

60,000

20,000

10,000

Notes Payable

200,000

50,000

Common Stock

300,000

100,000

Retained Earnings

353,000

110,000

125,000

15,000

353,000

Total Liabilities & Equity

913,000

280,000

235,000

15,000

973,000

4-68

280,000

973,000

70,000 250,000 300,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-36 Comprehensive Problem: Differential Apportionment a. Equity Method Entries on Prince Corp.'s Books: Investment in Sword Company

203,000

Cash

203,000

Record the initial investment in Sword Company. Investment in Sword Co.

60,000

Income from Sword Co.

60,000

Record Prince Corp.'s 100% share of Sword Company's 20X7 income Cash

20,000

Investment in Sword Co. 20,000 Record Prince Corp.'s 100% share of Sword Company's 20X7 dividend Income from Sword Co.

3,000

Investment in Sword Co.

3,000

Record amortization of excess acquisition price b. Book Value Calculations: Total Book Value Beginning book value

150,000

Common Stock 50,000

Retained Earnings 100,000

+ Net Income

60,000

- Dividends

(20,000)

Ending book value

190,000

50,000

140,000

1/1/X7

12/31/X7

Goodwill = 20,000

Identifiable Excess = 33,000

100% Book value = 150,000

$203,000 Initial investment in Sword Co.

Identifiable Excess = 30,000

$240,000 Net investment in Sword Co.

100% Book value = 190,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-36 (continued) Basic Consolidation Entry Common Stock

50,000

Retained Earnings

100,000

Income from Sword Co.

60,000

Dividends Declared

20,000

Investment in Sword Co.

190,000

Excess Value (Differential) Calculations: Buildings & Total = Equipment Beginning balance

53,000

Changes

(3,000)

Ending balance

50,000

Acc. Depr.

33,000 33,000

Goodwill

20,000

(3,000)

20,000

Amortized Excess Value Reclassification Entry: Depreciation Expense

3,000

Income from Sword Co.

3,000

Excess Value (Differential) Reclassification Entry: Buildings & Equipment

33,000

Goodwill

20,000

Accumulated Depreciation

3,000

Investment in Sword Co.

50,000

Eliminate Intercompany Accounts: Accounts Payable

16,000

Accounts Receivable

16,000

Accumulated Depreciation Consolidation Entry Accumulated depreciation

60,000

Building & Equipment

60,000

Investment in

Income from

Sword Co.

Acquisition Price

203,000

100% Net Income

60,000

Ending Balance

20,000

100% Dividends

3,000

Excess Val. Amort. Basic

50,000

Excess Reclass.

100% Net Income

57,000

Ending Balance

3,000

240,000 190,000

60,000

60,000 3,000 0

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-36 (continued) c. Consolidation Entries

Prince Corp.

Sword Co.

Sales

700,000

400,000

1,100,000

Less: COGS

(500,000)

(250,000)

(750,000)

Less: Depreciation Expense

(25,000)

(15,000)

Less: Other Expenses

(75,000)

Income from Sword Co.

57,000

Net Income

157,000

Beginning Balance

Consolidated

Income Statement

3,000

(43,000) (150,000)

60,000

3,000

60,000

63,000

3,000

157,000

290,000

100,000

Net Income

157,000

60,000

63,000

Less: Dividends Declared

(50,000)

(20,000)

Ending Balance

397,000

140,000

82,000

25,000

Statement of Retained Earnings

163,000

290,000 3,000

157,000

20,000

(50,000)

23,000

397,000

Balance Sheet Cash

107,000

Accounts Receivable

50,000

55,000

Inventory

170,000

100,000

16,000

270,000

89,000

Land

80,000

20,000

100,000

Buildings & Equipment

500,000

150,000

33,000

Less: Accumulated Depreciation

(155,000)

(75,000)

60,000

Investment in Sword Co.

240,000

60,000

623,000

3,000

(173,000)

190,000 50,000

Goodwill

20,000

Total Assets

967,000

275,000

113,000

319,000

1,036,000

Accounts Payable

70,000

35,000

16,000

Mortgages Payable

200,000

50,000

Common Stock

300,000

50,000

Retained Earnings

397,000

140,000

163,000

23,000

397,000

Total Liabilities & Equity

967,000

275,000

229,000

23,000

1,036,000

89,000 250,000 300,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-37 Push-Down Accounting a.

Entry to record acquisition of Size stock on books of Print: Investment in Size Company Cash

935,000 935,000

Entry to record revaluation of assets on books of Size Company at date of combination: Inventory 5,000 Land 85,000 Buildings 100,000 Equipment 70,000 Revaluation Capital Revalue assets to reflect fair values at date of combination.

Investment consolidation entry in consolidation worksheet prepared December 31, 20X6 (no other entries needed): Common Stock — Size Company Additional Paid-In Capital Retained Earnings Revaluation Capital Investment in Size Company Stock

260,000

100,000 400,000 175,000 260,000 935,000

Equity-method entries on the books of Print during 20X7: Cash Investment in Size Company Record dividend from Size Company.

50,000

Investment in Size Company Income from Size Company Record equity-method income.

88,000

50,000

88,000

Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

P4-37 (continued) e.

Consolidation entries in consolidation worksheet prepared December 31, 20X7 (no other entries needed): Common Stock — Size Company Additional Paid-In Capital Retained Earnings, January 1 Revaluation Capital Income from Size Company Dividends Declared Investment in Size Company Stock Eliminate ending investment balance. $973,000 = $935,000 + $88,000 - $50,000

100,000 400,000 175,000 260,000 88,000 50,000 973,000

Consolidation entries in consolidation worksheet prepared December 31, 20X8 (no other entries needed): Common Stock — Size Company Additional Paid-In Capital Retained Earnings, January 1 Revaluation Capital Income from Size Company Dividends Declared Investment in Size Company Stock Eliminate ending investment balance. $213,000 = $175,000 + $88,000 - $50,000 $1,013,000 = $973,000 + $90,000 - $50,000

100,000 400,000 213,000 260,000 90,000 50,000 1,013,000

CHAPTER 5 CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES ACQUIRED AT MORE THAN BOOK VALUE ANSWERS TO QUESTIONS Q5-1 The noncontrolling interest is reported as a separate item in the stockholders’ equity section of the balance sheet. Q5-2 The consolidated balance sheet always includes 100 percent of the subsidiary’s assets and liabilities. When the parent holds less than 100 percent ownership of the subsidiary, the noncontrolling interest’s claim on those net assets must be reported. The balance sheet will not balance without this additional amount. Q5-3 The income statement portion of the consolidation worksheet is expanded to include a line for income assigned to the noncontrolling interest. This amount is deducted from consolidated net income in computing income to the controlling interest. The balance sheet portion of the worksheet also is expanded to include the claim of the noncontrolling shareholders on the net assets of the subsidiary. Q5-4 The balance assigned to the noncontrolling interest is based on the fair value of the noncontrolling interest at the date of acquisition. Q5-5 Consolidated retained earnings includes only amounts attributable to the shareholders of the parent company. Thus, none of the retained earnings is assigned to the noncontrolling interest. Q5-6 One hundred percent of the fair value of the subsidiary’s assets is included. Q5-7 The amount of goodwill at the date of acquisition is determined by deducting the fair value of the net assets of the acquired company from the sum of the fair value of the consideration given by the acquiring company and the fair value of the noncontrolling interest. The resulting goodwill must be apportioned between the controlling and noncontrolling interest. Under normal circumstances, goodwill apportioned to the noncontrolling interest will equal the excess of the fair value of the noncontrolling interest over its proportionate share of the fair value of the net assets of the acquired company. Q5-8 Income assigned to the noncontrolling interest normally is a proportionate share of the net income of the subsidiary. Q5-9 Income assigned to noncontrolling shareholders is reported as a deduction from consolidated net income in arriving at income assigned to the parent company shareholders. Q5-10 Dividends paid to noncontrolling shareholders are eliminated in preparing the consolidated statement of retained earnings as are those paid by the subsidiary to the parent. Only dividends paid by the parent company are reported as dividends in the consolidated financial statements.

Chapter 05 - Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value

Q5-11 A parent will discontinue consolidating a subsidiary when it can no longer exercise control over it. Control might be lost for a number of reasons, such as: (1) the parent sells some or all of its interest in the subsidiary, (2) the subsidiary issues additional common stock, (3) the parent enters into an agreement to relinquish control, or (4) the subsidiary comes under the control of the government or other regulator. Q5-12 Other comprehensive income elements reported by the subsidiary must be included in other comprehensive income in the consolidated financial statement. If the subsidiary is not wholly owned, comprehensive income assigned to the noncontrolling interest will include a proportionate share of the subsidiary’s other comprehensive income. Q5-13 The parent’s portion of the subsidiary’s other comprehensive income is included in comprehensive income attributable to the controlling interest. Q5-14A The only effect of a negative balance in retained earnings is the need for a credit to subsidiary retained earnings, rather than a debit to retained earnings, when the stockholders’ equity accounts of the subsidiary and the investment account of the parent are eliminated. Q5-15A In the period in which the land is sold, the gain or loss recorded by the subsidiary must be adjusted by the amount of the differential assigned to the land. When the differential is assigned in the worksheet consolidation entries at the end of the period, a debit will be made to the gain or loss on sale of land that came to the worksheet from the subsidiary’s books.

Chapter 05 - Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value

SOLUTIONS TO CASES C5-1 Consolidation Worksheet Preparation a. Yes. If the parent company is using the equity method, the elimination of the income recognized by the parent from the subsidiary generally should not be equal to a proportionate share of the subsidiary’s dividends. If the parent has recognized only dividend income from the subsidiary, it is using the cost method. b. Not usually. It should be possible to tell if the preparer has included the parent's share of the subsidiary's reported income in computing consolidated net income. However, it is not possible to tell from looking at the worksheet alone whether or not all the adjustments that should have been made for amortization of the differential or to eliminate unrealized profits have been properly treated in computing the consolidated net income. c. Yes. If the parent paid more than its proportionate share of the fair value of the subsidiary’s net assets, the consolidation entries relating to that subsidiary should show amounts assigned to individual asset accounts for fair value adjustments and to goodwill when the investment account balance is eliminated and any noncontrolling interest is established in the worksheet. It should be relatively easy to determine if this has occurred by examining the consolidation worksheet. d. One approach might be to divide the total amount of the parent’s subsidiary investment account eliminated in the worksheet by the sum of the total parent’s investment account eliminated and the total amount of the noncontrolling interest established in the worksheet through consolidation entries. However, this approach assumes that the fair value of the consideration given by the parent when acquiring its subsidiary interest and the fair value of the noncontrolling interest on that date were proportional, which is usually, but not always, the case.

Chapter 05 - Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value

C5-2 Consolidated Income Presentation MEMO TO:

Treasurer Standard Company

FROM: RE:

, Accounting Staff Allocation of Consolidated Income to Parent and Noncontrolling Shareholders

ASC 810 specifies that consolidated net income reflects the income of the entire consolidated entity and that consolidated net income must be allocated between the controlling and noncontrolling interests. Earnings per share reported in the consolidated income statement is based on the income allocated to the controlling interest only. Consolidated net income increased by $34,000 from 20X4 to 20X5, an increase of 52 percent. However, consolidated net income allocated to the controlling interest increased by $24,100 from 20X4 to 20X5, an increase of only 38 percent. The increase in the controlling interest’s share of consolidated net income did not keep pace with the increase in sales because nearly all of the sales increase was experienced by Jewel, which has a very low profit margin. In addition the parent receives only 55 percent of the increased profits of the subsidiary. Consolidated net income for the two years is computed and allocated as follows: 20X4 $160,000 (a) (94,000)(c) $ 66,000 (2,700)(e) $ 63,300

Consolidated revenues Operating costs Consolidated net income Income to noncontrolling shareholders Income to controlling shareholders (a) (b) (c) (d) (e) (f)

20X5 $400,000 (b) (300,000)(d) $100,000 (12,600) (f) $ 87,400

$100,000 + $60,000 $120,000 + $280,000 ($100,000 x .40) + ($60,000 x .90) ($120,000 x .40) + ($280,000 x .90) ($60,000 x .10 x .45) ($280,000 x .10 x .45)

Primary citations: ASC 810

Chapter 05 - Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value

C5-3 Pro Rata Consolidation MEMO To:

Financial Vice-President Rose Corporation

From: Re:

, Senior Accountant Pro Rata Consolidation of Joint Venture

This memo is in response to your request for additional information on the desirability of using pro rata consolidation rather than equity method reporting for Rose Corporation’s investment in its joint venture with Krome Company. The equity method is used by most companies in reporting their investments in corporate joint ventures. [ASC 323] While the accounting literature provides guidance for joint ventures that have issued common stock, it does not provide guidance for ownership of noncorporate entities. ASC 323 suggests that the equity method would be appropriate for unincorporated entities as well. Assuming the joint venture with Krome Company is unincorporated, Rose owns an undivided interest in each asset held by the joint venture and is liable for its share of each of its liabilities and, under certain circumstances, the entire amount. In this case, it can be argued pro rata consolidation provides a more accurate picture of Rose’s assets and liabilities, although not all agree with this assertion. Pro rata consolidation is generally considered not acceptable in this country, although it is a widely used industry practice in a few industries such as oil and gas exploration and production. If the joint venture is incorporated, Rose does not have a direct claim on the assets of the joint venture and Rose’s liability is sheltered by the joint venture’s corporate structure. In this case, continued use of the equity method appears to be appropriate. Primary citations: ASC 323

Chapter 05 - Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value

C5-4 Consolidation Procedures a. The consolidation entries are recorded only in the consolidation worksheet and therefore do not change the balances recorded on the company's books. Each time consolidated statements are prepared the balances reported on the company's books serve as the starting point. Thus, all the necessary consolidation entries must be entered in the consolidation worksheet each time consolidated statements are prepared. b. The noncontrolling interest at a point in time is equal to its fair value on the date of combination, adjusted to date for a proportionate share of the undistributed earnings of the subsidiary and the noncontrolling interest’s share of any write-off of differential. Another approach to determining the noncontrolling interest at a point in time is to add the remaining differential at that time to the subsidiary’s common stockholders’ equity and multiply the result by the noncontrolling interest’s proportionate ownership interest in the subsidiary. (However, this is only true if the goodwill is proportionate between the controlling and noncontrolling shareholders.) c. In the consolidation worksheet the ending balance assigned to noncontrolling interest is derived by crediting noncontrolling interest for the starting balance, as indicated in the preceding question, and then adding income assigned to the noncontrolling interest in the consolidated income statement and deducting a pro rata portion of subsidiary dividends declared during the period. This is similar to the equity method of accounting for an investment. d. All the stockholders' equity account balances of the subsidiary must be eliminated each time consolidated financial statements are prepared. Intercompany receivables and payables, if any, must also be eliminated. e. The "investment in subsidiary" and "income from subsidiary" accounts must be eliminated each time consolidated financial statements are prepared. Intercompany receivables and payables, if any, must also be eliminated.

Chapter 05 - Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value

C5-5 Changing Accounting Standards: Monsanto Company a. Monsanto reported the income (loss) to noncontrolling (minority) shareholders of consolidated subsidiaries in a separate line between “Net Income” and “Net Income Attributable to Monsanto Company” in the Statements of Consolidated Operation of its 2016 income statement. b. Monsanto reported the noncontrolling (minority) interest in consolidated subsidiaries in the equity section of its consolidated balance sheet. c. In Note 2 which accompanied its 2016 financial statements, Monsanto stated they consolidated “entities for which the company has a controlling financial interest or is primary beneficiary.” This implies that VIEs were consolidated where the company’s ownership was less than a controlling interest – if the company was deemed to be the primary beneficiary of the VIE. Additionally in Note 8, other VIEs are discussed and the determination is Monsanto has the power to direct the activities most significant to the economic performance of VIEs, therefore these VIEs are also consolidated.

Chapter 05 - Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value

SOLUTIONS TO EXERCISES * E5-1 Multiple-Choice Questions on Consolidation Process 1. d – Under the equity method, consolidated retained earnings will always equal the retained earning balance of the acquiring company (A company) at the date of acquisition regardless of the percentage owned. The retained earnings balance of the acquired company (B Company) is eliminated in consolidation. This will continue to be true if the parent uses the fully-adjusted equity method to account for its investment. (a) Incorrect. The retained earnings of B Company is eliminated during consolidation. (b) Incorrect. Goodwill does not arise in every consolidation. If goodwill were to arise in this acquisition, it would appear on the consolidated balance sheet. However, there is insufficient data to determine the existence of goodwill. (c) Incorrect. B Company’s retained earnings are never carried forward, rather they are eliminated during consolidation. 2. d – Because the consolidated balance sheet contains the assets of the parent company as well as the assets of the subsidiary, total assets of the parent company will always be less than total assets reported on the consolidated balance sheet. (a) Incorrect. The noncontrolling shareholders’ claim on the subsidiary’s net assets is based on the fair value of the net assets, not the book value. (b) Incorrect. The entire differential is assigned and proportionately allocated to both the parent and the noncontrolling interest’s respective share. (c) Incorrect. Goodwill represents the difference between the fair value of the subsidiary’s net assets and the amount paid by the parent to buy ownership. 3. b – The only amount included in the consolidated retained earnings balance is the retained earnings balance from the parent’s books. (a) Incorrect. Foreign subsidiaries are still required to be consolidated even if they are reported as a separate operating segment. However, if laws of the foreign country prevented the parent from exercising control, the foreign subsidiary would not be consolidated. (c) Incorrect. The noncontrolling shareholders’ claim on the net assets does include their proportionate share of goodwill that results in the acquisition. (d) Incorrect. Consolidation is only required when control is held over the subsidiary, not just significant influence. 4. d – The only accounts receivable from affiliates that will be eliminated from the consolidated balance sheet are receivables from consolidated entities (Winn Corporation). Thus, the receivable from any unconsolidated investees (Carr Corporation) would be reported on the consolidated balance sheet. [AICPA Adapted] (a) Incorrect. Receivables from consolidated entities (Winn Corporation) would be eliminated in consolidated, while any receivables from an unconsolidated investee would still be reported. (b) Incorrect. Receivables from the consolidated entity (Winn Corporation) would be eliminated in their entirety, while receivables from investees under significant influence (Carr Corporation) would be reported in their entirety, not proportionately eliminated.

Chapter 05 - Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value

(c) Incorrect. The only amounts that should be recorded on the consolidated balance sheet are the receivables from the investee under significant influence (Carr Corporation), while receivable from the consolidated entity (Winn Corporation) would be eliminated in consolidation. E5-2 Multiple-Choice Questions on Consolidation [AICPA Adapted] 1. b – Subsidiary dividends declared have no effect on consolidated retained earnings (because the parent’s retained earnings appear as the consolidated retained earnings, but they do decrease the noncontrolling interest just as they decrease the controlling interest. (a) Incorrect. The noncontrolling interest is decreased by dividends declared by the subsidiary. (c) Incorrect. The retained earnings balance is not decreased by subsidiary dividends declared. (d) Incorrect. Retained earnings is unaffected, while the noncontrolling interest is decreased. 2. c – The noncontrolling interest’s proportionate share of the subsidiary’s income is allocated based on the percentage of ownership in the subsidiary held by the noncontrolling shareholders. (a) Incorrect. The parent’s net income would never be subtracted from the subsidiary’s net income. (b) Incorrect. The entire portion of the subsidiary’s income is not extended to the noncontrolling interest, but rather is proportionately allocated between the controlling and noncontrolling interest based on ownership percentage. (d) Incorrect. The noncontrolling interest’s ownership percentage is not multiplied by the consolidated earnings because it would then be allocating a portion of the parent’s own earnings as well. The noncontrolling interest is not entitled to any of the parent’s income, only their share of the subsidiary’s income. 3. a – $650,000 = $500,000 + $200,000 - $50,000 4. c – $95,000 = ($956,000 + $239,000) - $1,000,000 - $100,000 5. c – $251,000 = .20[($956,000 + $239,000) + ($190,000 - $5,000 - $125,000)]

Chapter 05 - Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value

E5-3 Consolidation entries with Differential a. Equity Method Entries on Private Corp.'s Books: Investment in Secret Co.

49,200

Cash

49,200

Record the initial investment in Secret Co. Book Value Calculations: NCI 40% Book value at acquisition

22,800

Private Corp. 60%

34,200

Common Stock

20,000

Retained Earnings 37,000

6/10/X8 Goodwill = 0 Identifiable Excess = 15,000

$49,200 Initial investment in Secret Corp.

60% Book value = 34,200

Basic consolidation entry Common Stock

20,000

Retained Earnings

37,000

Investment in Secret Co.

34,200

NCI in NA of Secret Co.

22,800

Excess Value (Differential) Calculations: NCI Private Corp. 40% + 60% Beginning balances

10,000

15,000

Inventory 5,000

Buildings & Equipment 20,000

Excess Value (Differential) Reclassification Entry: Inventory

5,000

Buildings & Equipment

20,000

Investment in Secret Co.

15,000

NCI in NA of Secret Co.

10,000 5-10