chapter 04 imsm

7/27/2019 Chapter 04 IMSM

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CHAPTER 4CONSOLIDATED FINANCIAL STATEMENTS

AND OUTSIDE OWNERSHIPChapter Outline

I. Outside ownership may be present within any business combinationA. Complete ownership of a subsidiary is not a prerequisite for consolidationonly

enough voting shares need be owned so that the acquiring company has the abilityto control the decision-making process of the acquired company

B. Any ownership retained in a subsidiary corporation by a party unrelated to theacquiring company is termed a noncontrolling interest

II. Valuation of subsidiary assets and liabilities poses a problem when a noncontrollinginterest is present follows the acquisition method (Economic Unit Concept) SFAS 141Rand SFAS 160

1. The accounting emphasis is placed on the entire entity that results from the

business combination as measured by the sum of the acquisition-date fairvalues of the controlling and noncontrolling interests.

2. Valuation of subsidiary accounts is based on the acquisition-date fair value ofthe company (frequently determined by the consideration transferred and thefair value of the noncontrolling interest); specific subsidiary assets and liabilitiesare consolidated at their fair values

3. The noncontrolling interest balance is reported as a component of stockholders'equity

III. Consolidations involving a noncontrolling interestsubsequent to the date ofacquisition

A. According to the parent company concept, all noncontrolling interest amounts arecalculated in reference to the book value of the subsidiary company

B. Only four noncontrolling interest figures are determined for reporting purposes

1. Beginning of year balance

2. Interest in subsidiarys current income

3. Dividends paid during the period

4. End of year balance

C. Noncontrolling interest balances are accumulated in a separate column in theconsolidation worksheet

1. The beginning of year figure is recorded on the worksheet as a component ofEntries S and A

2. The noncontrolling interest's share of the subsidiary's income is established by acolumnar entry that simultaneously reports the balance in both the consolidatedincome statement and the noncontrolling interest column

3. Dividends paid to these outside owners are reflected by extending thesubsidiary's Dividends Paid balance (after eliminating intercompany transfers)into the noncontrolling interest column as a reduction

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


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4. The end of year noncontrolling interest total is the summation of the three itemsabove and is reported (in this book) between consolidated liabilities andstockholders' equity

IV. Step acquisitions

A. An acquiring company may make several different purchases of a subsidiary's stockin order to gain control

B. Upon attaining control, all of the parents previous investments in the subsidiary areadjusted to fair value and a gain or loss recognized as appropriate

C. Upon attaining control, the valuation basis for the subsidiary is established at itstotal fair value (the sum of the fair values of the controlling and noncontrollinginterests)

Vl. Sales of subsidiary stock

A. The proper book value must be established within the parent's Investment accountso that the sales transaction can be correctly recorded

B. The investment balance is adjusted as if the equity method had been applied duringthe entire period of ownership

C. If only a portion of the shares are being sold, the book value of the investmentaccount must be reduced based on either a FIFO or a weighted-average cost flowassumption

D. If the parent maintains control, any difference between the proceeds of the sale andthe equity-adjusted book value of the share sold is recognized as an adjustment toadditional paid-in capital.

E. If the parent loses control with the sale of the subsidiary shares, the differencebetween the proceeds of the sale and the equity-adjusted book value of the sharesold is recognized as a gain or loss.

F. Any interest retained by the parent company should be accounted for by either

consolidation, the equity method, or the fair value method depending on theinfluence remaining after the sale.

Learning Objectives

Upon completion of Chapter Four, "Consolidated Financial Statements and OutsideOwnership," students should be able to fulfill each of the following learning objectives:

1. Realize that complete ownership is not a prerequisite for the formation of a businesscombination.

2. Understand the meaning of the term "noncontrolling interest.

3. Explain the rationale underlying the acquisition method for accounting for thenoncontrolling interest.

4. Identify appropriate balance sheet placements for the components of the noncontrollinginterest in consolidated financial statements.

5. Identify and calculate the four noncontrolling interest figures that must be included withinthe consolidation process and be able to enter each balance on a consolidationworksheet.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20094-2 Solutions Manual


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6. Carry out a consolidation when a step acquisition has taken place.

7. Record the sale of a subsidiary (or a portion of its shares) when the parent has beenapplying either the Initial value method, the equity method, or the partial equity method.

8. Select an appropriate method by which to account for any shares remaining after thesale of a portion of an investment in a subsidiary company.

Answers to Questions

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

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

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

3. A control premium is the portion of an acquisition price (above currently traded market

values) paid by a parent company to induce shareholders to sell a sufficient number ofshares to obtain control. The extra payment typically becomes part of the goodwillacquired in the acquisition attributable to the parent company.

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

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

6. Allsports should remove the pre-acquisition revenues and expenses from theconsolidated totals. These amounts have been earned (incurred) prior to ownership by

Allsports and therefore should not be reported as earnings for the current parentcompany owners.

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



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8. When a company sells a portion of an investment, a gain or loss is recognized basedon the difference between the proceeds received and the book value of the investment(on the portion sold). The correct book value is determined based upon the consistentapplication of the equity method. Thus, if either the Initial value method or the partialequity method has been used, Duke must first restate the account to the equity methodbefore recording the sales transaction. This same method is also applied to the

operations of the current period occurring prior to the time of sale.

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

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



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Answers to Problems

1. D The acquisition method consolidates assets at fair value at acquisitiondate regardless of the parents percentage ownership.

2. D In consolidating the subsidiary's figures, all intercompany balances mustbe eliminated in their entirety for external reporting purposes. Even thoughthe subsidiary is less than fully owned, the parent nonetheless controls it.

3. C An asset acquired in a business combination is initially valued at 100%acquisition-date fair value and subsequently amortized its useful life.

Patent fair value at January 1, 2009................................................ $45,000Amortization for 2 years (10 year life)............................................. (9,000)Patent reported amount December 31, 2010.................................. $36,000

4. A Plaster building................................................................................. $510,000Turner building acquisition-date fair value $300,000Amortization for 3 years (10-year life) (90,000) 210,000

Consolidated buildings ................................................................... $720,000

-OR-

Plaster building................................................................................. $510,000Turner building 12/31/11 $182,000Excess acquisition-date fair value allocation 40,000Excess amortization for 3 years (10-year life) (12,000) 210,000

Consolidated buildings ................................................................... $720,000

5. C Hygille expense................................................................................. $621,000Nuyt expenses................................................................................... 714,000Excess fair value amortization (70,000 10 yrs)........................... 7,000Consolidated expenses.................................................................... $1,342,000

6. B Combined revenues......................................................................... $1,100,000Combined expenses......................................................................... (700,000)Excess acquisition-date fair value amortization........................... (15,000)Consolidated net income................................................................. $385,000Less: noncontrolling interest ($85,000 40%).............................. (34,000)Consolidated net income to controlling interest........................... $351,000

7. C

8. B



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

30% previously owned fair value (30,000 shares $5) ................. $150,00060% new shares acquired (60,000 shares $6)............................ 360,00010% NCI fair value (10,000 shares $5)......................................... 50,000Acquisition-date fair value............................................................... $560,000

Net assets' fair value........................................................................ 500,000Goodwill ............................................................................................ $60,000

10. C

11. A Fair value of noncontrolling interest on April 1............................. $165,00030% of net income for 9 months ( year $240,000 30%)........ 54,000Noncontrolling interest December 31............................................. $219,000

12. B Combined revenues.......................................................................... $1,300,000Combined expenses......................................................................... (800,000)

Trademark amortization................................................................... (6,000)Patented technology amortization.................................................. (8,000 )Consolidated net income................................................................. $486,000

13. C Subsidiary income ($100,000 $14,000 excess amortizations). . $86,000Noncontrolling interest percentage................................................ 40 %Noncontrolling interest in subsidiary income............................... $34,400

Fair value of noncontrolling interest at acquisition date............. $180,00040% change in Scott book value since acquisition....................... 52,000Excess fair value amortization ($14,000 40%)............................ (5,600)40% current year income.................................................................. 34,400

Noncontrolling interest at end of year............................................ $260,800

14. A Michael trademark balance.............................................................. $260,000Scott trademark balance.................................................................. 200,000Excess fair value............................................................................... 60,000Two years amortization (10-year life)............................................. (12,000)Consolidated trademarks................................................................. $508,000



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

Excess assigned to inventory (60%) .................................$15,000Excess assigned to goodwill (40%) ..................................$10,000

Park current assets........................................................................... $70,000Strand current assets....................................................................... 20,000Excess inventory fair value.............................................................. 15,000Consolidated current assets............................................................ $105,000

16. D Park noncurrent assets.................................................................... $90,000Strand noncurrent assets................................................................. 40,000Excess fair value to goodwill........................................................... 10,000Consolidated noncurrent assets..................................................... $140,000

17.B Add the two book values and include 10% (the $6,000 current portion) of

the loan taken out by Park to acquire Strand.

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

19. C Park stockholders' equity................................................................ $80,000Noncontrolling interest at fair value (20% $75,000)................... 15,000Total stockholders' equity............................................................... $95,000

20. (15 minutes) (Compute consolidated income and noncontrolling interests)

2009 2010Harrison income.............................................................. $220,000 $260,000Starr income..................................................................... 70,000 90,000Excess fair value amortization....................................... (8,000) (8,000 )Consolidated net income............................................... $282,000 $342,000

Starr fair value................................................................................... $1,200,000Fair value of consideration transferred.......................................... 1,125,000Noncontrolling interest fair value.................................................... $75,000

Noncontrolling interest fair value January 1, 2009 (above)........... $75,0002009 income to NCI ([$70,000 $8,000] 10%)................................. 6,200

2009 dividends to NCI ...................................................................... (3,000)Noncontrolling interest reported value December 31, 2009......... 78,2002010 income to NCI ([$90,000 $8,000] 10%)................................. 8,2002010 dividends to NCI ...................................................................... (3,000 )Noncontrolling interest reported value December 31, 2010 $83,400



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21. (40 minutes) (Several valuation and income determination questions for abusiness combination involving a noncontrolling interest.)

a. Business combinations are recorded generally at the fair value of theconsideration transferred by the acquiring firm plus the acquisition-date fairvalue of the noncontrolling interest.

Pattersons consideration transferred ($31.25 80,000 shares)......... $2,500,000Noncontrolling interest fair value ($30.00 20,000 shares)................. $600,000Sorianos total fair value 1/1/09............................................................. $3,100,000

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

c. In periods subsequent to acquisition, the subsidiarys assets and liabilities arereported at their acquisition-date fair values adjusted for amortization anddepreciation. Except for certain financial items, they are not continually

adjusted for changing fair values.

d. Sorianos total fair value 1/1/09............................................................. $3,100,000Sorianos net assets book value.......................................................... 1,290,000Excess acquisition-date fair value over book value........................... $1,810,000Adjustments from book to fair values..................................................

Buildings and equipment...................................... (250,000)Trademarks............................................................ 200,000Patented technology............................................. 1,060,000Unpatented technology......................................... 600,000 1,610,000

Goodwill ............................................................................................ $ 200,000

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

To noncontrolling interest:Sorianos revenues........................................................................... $1,400,000Sorianos expenses.......................................................................... (600,000)

Total excess amortization expenses (above)................................ (435,000)Sorianos adjusted net income........................................................ $365,000Noncontrolling interest percentage ownership............................. 20 %Noncontrolling interest share of consolidated net income......... $73,000

To controlling interest:Consolidated net income................................................................. $1,615,000



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Noncontrolling interest share of consolidated net income......... (73,000 )Controlling interest share of consolidated net income................ $1,542,000

-OR-

Pattersons revenues........................................................................ $3,000,000Pattersons expenses....................................................................... 1,750,000Pattersons separate net income.................................................... $1,250,000Pattersons share of Sorianos adjusted net income

(80% $365,000)..................................................................... 292,000Controlling interest share of consolidated net income................ $1,542,000

f. Fair value of noncontrolling interest January 1, 2009........................ $600,0002009 income............................................................................................ 73,000Dividends (20% $30,000)..................................................................... (6,000)Noncontrolling interest December 31, 2009........................................ $667,000

g. If Sorianos acquisition-date total fair value was $2,250,000, then a bargainpurchase has occurred.

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

The acquisition method requires that the subsidiary assets acquired andliabilities assumed be recognized at their acquisition date fair valuesregardless of the assessed fair value. Therefore, none of Sorianos identifiableassets and liabilities would change as a result of the assessed fair value.

When a bargain purchase occurs, however, no goodwill is recognized.



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

a. Acquisition-date total fair value .......................... $594,000Book value of net assets...................................... (400,000)Fair value in excess of book value ..................... $194,000 Annual ExcessExcess fair value assigned to Life Amortizations

Patent ............................................................ 140,000 5 years $28,000Land ............................................................ 10,000Buildings......................................................... 30,000 10 years 3,000Goodwill........................................................... 14,000Total ............................................................ -0- $31,000

Consolidated figures following January 1 acquisition date:Combined revenues .............................................................................. $1,500,000Combined expenses............................................................................... (1,031,000)Consolidated net income....................................................................... 469,000

NCI in Sawyers income ([200,000 31,000] 30%).......................... (50,700)Controlling interest in consolidated net income ............................... $418,300

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

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

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

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



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23. (15 minutes) Consolidated figures with noncontrolling interest

Fair value of company (given) $60,000Book value (10,000)Fair value in excess of book value 50,000to machine ($50,000 $10,000) 40,000 10 = $4,000 per yearto process trade secret $10,000 4 = 2,500 per year

$6,500 per year

Consolidated figures:

Noncontrolling interest in subsidiary income

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

End-of-year noncontrolling interest:

Beginning balance (40% $60,000) $24,000Income allocation 9,400

Dividend reduction (40% $5,000) (2,000)End-of-year noncontrolling interest $31,400

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

Process trade secret (net) = $10,000 $2,500 = $7,500

24. (20 Minutes) (Determine consolidated balances for a step acquisition).

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

b. Revaluation gain1/1 equity investment in Amsterdam (book value) $178,00025% income for 1st 6 months 8,750Investment book value at 6/30 186,750Fair value of investment 200,000Gain on revaluation to fair value $13,250

c. Goodwill at 12/31Fair value of Amsterdam at 6/30 $800,000Book value at 6/30 (700,000 + [70,000 2]) 735,000Excess fair value $65,000

Allocation to goodwill (no impairment) $65,000d. Noncontrolling interest

5% fair value balance at 6/30 $40,0005% Income from 6/30 to 12/31 1,7505% dividends (1,000 )Noncontrolling interest 12/31 $40,750

25. (30 Minutes) (Reporting the sale of a portion of an investment in a subsidiary.)



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a. The 1,000 shares sold are reported using the equity method for theJanuary 1, 2011 until October 1, 2011 period. This stock represents 10percent of the outstanding shares of Santana. An accrual of $9,000 isrecorded by Girardi (10% $120,000 year) reduced by $1,500 inamortization expense as computed below. Therefore, an "Equity Income

from Sold Shares of Santana" in the amount of $7,500 will appear in the2011 consolidated income statement. The consolidation will nowinclude all of Santana's accounts with the 40% noncontrolling interestrecognized.

Santana fair value 1/1/09 ............................................ $1,100,000Santana book value .................................................... (1,030,000)Patent ........................................................................... $70,000Life of patent ............................................................... 5 yearsAnnual amortization ................................................... $14,000

9-months amortization for the 1,000 shares sold:

Annual amortization ................................................... $14,000Time period involved ................................................. yearAmortization for nine months ................................... $10,500Shares sold1,000 out of 7,000 ............................... 1/7Amortization relating to sold shares ........................ $1,500

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

Investment Book Value 10/1/111/1/11 balance (givenequity method) .................... $1,085,000

Recognition of 1/1/1110/1/11 period:Income accrual ($120,000 70% ) ................. 63,000Dividends ($40,000 70% ) ............................ (21,000)Amortization ($14,000 ) .................................. (10,500)

Correct investment book value10/1/11.................. $1,116,500

Computation of Income EffectSales Transaction10/1/11 book value (above) ....................................... $1,116,500Portion of investment sold (1,000/7,000 shares) .. .. 1 /7Book value of investment sold ................................. $159,500Proceeds ..................................................................... 191,000Credit to Girardis additional paid-in capital ........... $ 31,500

c. Because Girardi continues to hold 6,000 shares of Santana, control isstill maintained and consolidated financial statements would beappropriate with a noncontrolling interest of 40 percent.

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



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a. From the original fair value allocation, $30,000 is assigned based on thefair value of the patent. With a 5-year life, excess amortization will be$6,000 per year.

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

Entry SCommon Stock (Bandmor) .............................300,000Retained Earnings, 1/1/11(Bandmor) ............ 268,000

Investment in Bandmor (70%) ................... 397,600Noncontrolling Interest in Bandmor, 1/1/11 170,400

(To eliminate stockholders' equity accounts of subsidiary andrecognize outside ownership. Retained earnings figure includes 2009and 2010 income and dividends.)

Entry APatent ................................................................ 18,000Goodwill ...........................................................190,000

Investment in Bandmor ............................. 145,600

Noncontrolling Interest in Bandmor (30%) 62,400(To recognize unamortized portions of acquisition-date fair valueallocations. Patent has undergone two years amortization)

Entry IEquity in Subsidiary Earnings ........................ 72,800

Investment in Bandmor ............................. 72,800(To eliminate intercompany income balance. Equity accrual of$72,800 [70% ($110,000 6,000 amortization)] has been recorded)

Entry DInvestment in Bandmor ................................... 42,000

Dividends Paid ........................................... 42,000

(To eliminate current intercompany dividend transfers70% of$60,000)

Entry EAmortization Expense...................................... 6,000

Patent........................................................... 6,000(To recognize amortization for current year)

Entry PAccounts Payable ............................................ 22,000

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



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26. (continued)

b. If the initial value method had been applied, the parent would haverecorded only the dividends received as income rather than an equityaccrual. Therefore, Entry *C is needed to adjust the parent's beginningretained earnings for 2011 to the equity method. During 2009 and 2010,

the subsidiary earned a total net income of $171,000 but paid dividendsof only $83,000. The parent's share of the difference is $61,600 (70% of$88,000 [$171,000 - $83,000]). In addition, the parents 70% share ofexcess amortization expense for two years must also be included($8,400 = 2 years $6,000 per year 70%). The net amount to berecognized is $53,200 ($61,600 - $8,400).

ENTRY *CInvestment in Bandmor ................................... 53,200

Retained Earnings, 1/1/11 ......................... 53,200

c. If the partial equity method had been applied, only the excessamortization expenses for the previous two years would have beenomitted from the parent's retained earnings. As shown above, thatfigure is $8,400 (2 years $6,000 per year 70%).

ENTRY *CRetained Earnings, 1/1/11 ............................... 8,400

Investment in Bandmor ............................. 8,400

d. Noncontrolling interest in Bandmor's income2011[($110,000 6,000) 30%] .............................. $31,200

Noncontrolling interest fair value January 1, 2009 $210,000

Adjustments to original basis:2009 Net Income to NCI....................................... $20,700

Dividends paid ........................................... (11,700) 9,000

2010 Net income to NCI ...................................... $27,000Dividends paid ........................................... (13,200) 13,800

2011 Net income to NCI....................................... $31,200Dividends paid ........................................... (18,000) 13,200

Noncontrolling interest in Bandmor 12/31/11..... $246,000

OR

Worksheet adjustment S...................................................... $170,400Worksheet adjustment A...................................................... $62,4002009 income to noncontrolling interest ............................ 31,2002009 dividends to noncontrolling interest ........................ (18,000)Noncontrolling interest in Bandmor 12/31/11.................... $246,000



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

a. Schedule 1Fair Value Allocation and Excess Amortizations

Consideration transferred by Miller ......... $664,000Noncontrolling interest fair value............. 166,000Taylors fair value....................................... $830,000Taylors book value.................................... (600,000)Fair value in excess of book value ......... 230,000 Annual Excess

Life AmortizationsExcess fair value assigned to buildings 80,000

20 years$4,000Goodwill ...................................................... $150,000 indefinite -0-

Total....................................................... $4,000

b. $150,000 (see schedule 1 above)

c. Entry (S)Common Stock (Taylor) ....................................... 300,000Additional Paid-in Capital (Taylor) ...................... 90,000Retained Earnings (Taylor) .................................. 210,000

Investment in Taylor Company (80%) ........... 480,000Noncontrolling interest in Taylor (20%) ........ 120,000

Entry (A)Buildings ................................................................ 80,000Goodwill ................................................................. 150,000

Investment in Taylor Company (80%) ........... 184,000

Noncontrolling interest in Taylor (20%) ........ 46,000

d. (1) Equity MethodIncome accrual (80%) ...................................... $56,000Excess amortization expense ........................ (3,200)

Investment income ..................................... $52,800

(2) Partial Equity MethodIncome accrual (80%) ...................................... $56,000

(3) Initial Value MethodDividends received (80%) ............................... $8,000

e. Equity MethodInitial fair value paid.............................................. $664,000Income accrual 20092011 ($260,000 80%) ..... 208,000Dividends 20092011 ($45,000 80%) ................ (36,000)Excess Amortizations 20092011 ($3,200 3) . . (9,600)

Investment in Taylor12/31/11 ...................... $826,400

27. (continued)



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Partial Equity MethodInvestment in Taylor12/31/11 = $836,000 (initial value paid plusincome accrual of $208,000 less dividends of $36,000 [no excessamortizations])

Initial Value MethodInvestment in Taylor12/31/11 = $664,000 (original value paid)

f. Using the acquisition method, the allocation will be the total difference($80,000) between the buildings' book value and fair value. Based on a20 year life, annual excess amortization is $4,000.

Miller book valuebuildings ............................... $800,000Taylor book valuebuildings ............................. 300,000Allocation ............................................................... 80,000Excess Amortizations for 20092010 ($4,000 2) (8,000 )

Consolidated buildings account ............. $1,172,000

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

h. If the parent has been applying the equity method, the stockholders'equity accounts on its books will already represent consolidated totals.The common stock and additional paid-in capital figures to be reportedare the parent balances only. As to retained earnings, the equity methodwill properly record all subsidiary income and amortization so that theparent balance is also a reflection of the consolidated total.



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28. (20 Minutes) (A variety of consolidated balances-midyear acquisition)

Book value of Reckers, 1/1(stockholders' equity accounts) ............... $1,400,000

Increase in book value:Net Income (revenues less cost of

goods sold and expenses) .................. $120,000Dividends ............................................ (20,000)

Change during year ................................... $100,000Change during first six months of year 50,000

Book value of Reckers, 7/1 (acquisition date) $1,450,000

Consideration transferred by Kaplan ............ $1,360,000Noncontrolling interest fair value .................. 300,000Reckers fair value (given)............................... $1,630,000Book value of Reckers.................................... (1,450,000)Fair value in excess of book value................. $180,000 Annual ExcessExcess fair value assigned Life Amortizations

Trademarks ................................................... 150,000 5 years $30,000Goodwill ........................................................ $60,000 indefinite -0-

Total ............................................................ $30,000

CONSOLIDATION TOTALS: Sales (1) $1,050,000

Cost of goods sold (2) 540,000

Operating expenses (3) 265,000

Net Income $245,000

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

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

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

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

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

Retained Earnings, 1/1 = $1,400,000 (the parents balance because thesubsidiary was acquired during the current year)

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

Goodwill = $60,000 (the original allocation)



18/45

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

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

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

Excess fair assignments: Annual ExcessLife Amortizations

Buildings................................................ 60,000 6 years $10,000Equipment.............................................. (20,000) 4 years (5,000)Patent...................................................... 100,000 10 years 10,000

Total ...................................................... -0- $15,000c. If the equity method had been applied, the Investment Income account

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

d. The initial value method recognizes neither the increase in thesubsidiary's book value nor the excess amortization expenses for prioryears. At the acquisition date, the subsidiarys book value was$550,000 as indicated by the assets less liabilities. At the beginning ofthe current year, the book value of the subsidiary is $780,000 as

indicated by beginning stockholders' equity balances.Increase in book value during prior years

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

e. Consolidated net income and allocation Revenues (add book values) $900,000 Expenses (add book values and excess amortization) (635,000) Consolidated net Income $265,000 Noncontrolling interest in consolidated net income

($90,000 15,000) 40% 30,000 Controlling interest in consolidated net income $235,000

29. (continued)



19/45

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

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



20/45

30. Acquisition Method Consolidated Balances

Adjustments

December 31, 2010 Pierson Steele & Eliminations NCI Consolidated

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

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

Depreciation expense 125,000 120,000 245,000Amortization expense 275,000 11,000 (E) 80,000 366,000

Interest expense 27,500 7,000 34,500

Equity in Steele Income (121,500) (I)121,500 -0-Separate companynet income (437,000) (215,000)

Consolidated net income (450,500)

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

Controlling interest in CNI (437,000)

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

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

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

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

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

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

(A)985,500 -0-

(I) 121,500

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

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

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

Goodwill (A)375,000 375,000

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

Accounts Payable (485,000) (200,000) (685,000)Notes Payable (542,000) (155,000) (697,000)

NCI in Steele (S) 85,500

(A)109,500 (195,000)

(206,000) (206,000)

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

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

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

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

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



21/45

30. (Continued)Controlling

NoncontrollingInterest Interest

Fair value at acquisition date $1,710,000 $190,000Relative fair values of identifiable net assets

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

Goodwill $337,500 $37,500

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

Fair value of Steele Company (1,710,000 + 152,500) $1,862,500Carrying amount acquired 725,000Excess fair value 1,137,500

to customer base 800,000to goodwill $337,500

Noncontrolling interest balance beginning of year $(157,500)Noncontrolling interest in consolidated net income (13,500)Dividends paid to noncontrolling interest 2,500Noncontrolling interest end of year $168,500

ControllingNoncontrolling

Interest Interest

Fair value at acquisition date $1,710,000 $152,500Relative fair values of identifiable net assets90% and 10% of $1,525,000 (acquisition daterecorded fair value plus customer base) 1,372,500 152,500

Goodwill $337,500 -0-



22/45

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

a. Fair Value Allocation and AmortizationConsideration transferred by Krause............. $504,000Noncontrolling interest fair value................... 126,000Leahy total fair value 1/1/09............................ $630,000Leahy book value 1/1/09................................. (380,000)Fair value in excess of book value ................ $250,000 Annual Excess

Life AmortizationsExcess price allocated to undervalued

Building.................................................. 45,000 5 years $9,000Trademark ............................................ 60,000 10 years 6,000

Goodwill....................................................... $145,000 $15,000

Explanation of Consolidation Entries Found on Worksheet

Entry *C: Convert the parents 1/1/10 retained earnings balance from thecash basis to the accrual basis.

Entry S: Eliminates stockholders' equity accounts of subsidiary whilerecognizing noncontrolling interest balance (20%) as of the beginning ofthe current year.

Entry A: Recognizes acquisition-date fair value allocations less 1 yearamortization for building and trademark and increases beginningbalance of the noncontrolling interest for its share.

Entry I: Eliminates Intercompany dividend payments recorded as incomeby parent.

Entry E: Recognizes amortization expense for current year.Columnar EntryRecognizes noncontrolling interest's share of

subsidiary's net income ($90,000 15,000) 20%).



23/45

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

For Year Ending December 31, 2010

Krause Leahy Consolidation Entries Noncontrolling Consolidated Accounts Corporation Inc. Debit Credit Interest Totals

Sales (584,000) (250,000) (834,000)Cost of goods sold 194,000 95,000 289,000Operating expenses 246,000 65,000 (E) 15,000 326,000Dividend income (16,000 ) ______ (I) 16,000 -0-

Separate company net income (160,000) (90,000)Consolidated net income 219,000NCI in Leahy's income (15,000) 15,000Krauses interest in consolidated income (204,000)

Retained earnings, 1/1 (700,000) (350,000) (S)350,000 (*C) 44,000 (744,000)Net income (above) (160,000) (90,000) (204,000)Dividends paid 70,000 20,000 (I) 16,000 4,000 70,000

Retained earnings, 12/31 (790,000) (420,000) (878,000)

Current assets 296,000 191,000 487,000Investment in Leahy 504,000 (*C) 44,000 (S)360,000 -0-

(A)188,000Buildings and equipment (net) 680,000 390,000 (A) 36,000 (E) 9,000 1,097,000Trademarks 100,000 144,000 (A) 54,000 (E) 6,000 292,000Goodwill 0 0 (A)145,000 145,000

Total assets 1,580,000 725,000 2,021,000

Liabilities (470,000) (205,000) (675,000)Common stock (320,000) (100,000) (S)100,000 (320,000)Retained earnings, 12/31 (above) (790,000) (420,000) (878,000)NCI in Leahy, 1/1 (S) 90,000

(A) 47,000 (137,000)NCI in Leahy, 12/31 148,000 (148,000)

Total liabilities and equities (1,580,000) (725,000) (2,021,000)



24/45

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

Consolidated Income StatementFor Year Ending December 31, 2010

Sales $834,000Cost of goods sold $289,000

Operating expenses 326,000Total expenses 615,000Consolidated net income $219,000

To 20% noncontrolling interest $15,000To controlling interest $204,000

Consolidated Net income $219,000

c. Consideration transferred by Krause for 80% of Leahy $504,000Noncontrolling interest fair value ($4.85 20,000 shares) 97,000Leahy fair value $601,000Fair value of Leahys underlying net assets 485,000

Goodwill $116,000

If the noncontrolling interest fair value was $4.85 per share at the acquisitiondate, then goodwill declines to $116,000 and the noncontrolling interest totalwould also decline from $149,000 to 120,000). Worksheet entries (S) and (A)assuming a $4.85 noncontrolling interest acquisition-date fair value:

(S) Common stock-Leahy 100,000Retained earnings- Leahy 1/1 350,000

Investment in Leahy 360,000Noncontrolling interest 90,000

(A) Buildings and equipment (net) 36,000Trademarks 54,000

Investment in Leahy 72,000Noncontrolling interest 18,000

Goodwill 116,000Investment in Leahy 116,000

ControllingNoncontrolling

Interest Interest

Fair value at acquisition date $504,000 $97,000Relative fair values of identifiable net assets

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

Goodwill $116,000 -0-



25/45

32. (40 Minutes) (Determine consolidated balances.)

Acquisition-date subsidiary fair value (given).... $850,000Book value of subsidiary (given) ........................ (600,000)Fair value in excess of book value ..................... $250,000

Allocations to specific accounts based on differencebetween fair value and book valueLand .................................................................. $165,000Buildings and equipment ............................... (25,000)Copyright .......................................................... 100,000Notes payable .................................................. 10,000 250,000

Total........................................................ -0-

Annual excess amortizations:Buildings and equipment [$(25,000) 10 years] $(2,500)Copyright ($100,000 20 years) 5,000Notes payable ($10,000 8 years) 1,250

Total $3,750

Consolidated Totals:

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

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

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

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

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

Equity in income of Sam = -0- (eliminated so that the individual revenuesand expenses of the subsidiary can be included in the consolidatedfigures)

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

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

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

Dividends paid = $260,000 (parent company balance; subsidiary'spayments to parent are intercompany, payments to outside ownersdecrease noncontrolling interest balance)



26/45

32. (continued)

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

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

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

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

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

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

Total assets = $3,319,500

Accounts payable = $339,000 (add book values) Notes payable = $581,250 (add the book values less $10,000 excess

allocation plus amortization)

Noncontrolling interest in subsidiary = $183,250 (20% of fair value as of1/1/09 [$170,000] plus noncontrolling interest in income of subsidiary[$26,250] less dividends paid to outside owners [$13,000])

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

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

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

Total liabilities and equities = $3,319,500



27/45

32. (continued) Acquisition MethodConsolidation Entries Noncontrolling Consolidated

Accounts Father Sam Debit Credit Interest Totals

Revenues......................................... (1,360,000) (540,000) (1,900,000)Cost of goods sold.......................... 700,000 385,000 1,085,000Depreciation expense..................... 260,000 10,000 (E) 2,500 267,500Amortization expense..................... -0- 5,000 (E) 5,000 10,000Interest expense............................. 44,000 5,000 (E) 1,250 50,250Equity in income of Sam ........ ..... (105,000) -0- (I) 105,000 -0-Separate company net income...... (461,000) (135,000)

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

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

Retained earnings 12/31 .......... (1,466,000) (510,000) (1,466,000)

Current assets ................................ 965,000 528,000 1,493,000Investment in Sam ......................... 733,000 (D) 52,000 (S) 480,000

(I) 105,000(A) 200,000 -0-

Land ................................................ 292,000 60,000 (A) 165,000 517,000Buildings and equipment (net)...... 877,000 265,000 (E) 2,500 (A) 25,000 1,119,500Copyright . .. .. ... .. ... .. .. .. .. .. .. .. . -0- 95,000 (A) 100,000 (E) 5,000 190,000

Total assets .............................. 2,867,000 948,000 3,319,500

Accounts payable .......................... (191,000) (148,000) (339,000)Notes payable ................................. (460,000) (130,000) (A) 10,000 (E) 1,250 (581,250)NCI in Sam 1/1................................. (S) 120,000NCI in Sam 12/31 (A) 50,000 (170,000)

.................................................... (183,250) (183,250)Common stock ............................... (300,000) (100,000) (S) 100,000 (300,000)Additional paid-in capital............... (450,000) (60,000) (S) 60,000 (450,000)Retained earnings 12/31 (above) (1,466,000) (510,000) (1,466,000)Total liab. and stockholders' equity (2,867,000) (948,000) (3,319,500)



28/45

33. (55 Minutes) (Consolidated worksheet)

a. Consideration transferred by Adams $603,000Noncontrolling interest fair value 67,000Acquisition-date total fair value $670,000Book value of Barstow (CS + RE 12/31/09) (460,000)

Excess fair value over book value $210,000

Annual Excess Life Amortizations

Land $30,000 Buildings (20,000) 10 years ($2,000)Equipment 40,000 5 years 8,000Patents 50,000 10 years 5,000Notes payable 20,000 5 years 4,000

120,000Goodwill $90,000 indefinite -0-

Total $15,000b. Because investment income is exactly 90 percent of Barstow's reported

earnings, Adams apparently is applying the partial equity method.

Explanation of Consolidation Entries Found on Worksheet

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

Entry SEliminates subsidiary's stockholders' equity while recordingnoncontrolling interest balance as of January 1, 2011.

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

Entry IEliminates intercompany income accrual for 2011.

Entry DEliminates intercompany dividend transfers.

Entry ERecords amortization expense for current year.

Columnar EntryRecognizes noncontrolling interest's share of Barstow'snet income as follows:

Noncontrolling Interest in Barstow's Income (Columnar Entry)Barstow reported income ................................................................ $120,000Excess amortization expenses 2011.............................................. (15,000)

Adjusted income of Barstow ..................................................... $105,000Noncontrolling interest ownership ................................................ 10%

Noncontrolling interest in Barstow's income .......................... $10,500



29/45

33. b. (continued) ADAMS CORPORATION AND BARSTOW, INC.Consolidation Worksheet-Acquisition Method

For Year Ending December 31, 2011 Noncontrolling Consolidated

Adams Corp. Barstow Inc. Debit Credi t Interest TotalsRevenues (940,000) (280,000) (1,220,000)Cost of goods sold 480,000 90,000 570,000Depreciation expense 100,000 55,000 (E) 6,000 161,000Amortization expense (E) 5,000 5,000Interest expense 40,000 15,000 (E) 4,000 59,000Investment income (108,000) (I) 108,000 -0-

Separate company net income (428,000) (120,000)Consolidated net income (425,000)Income to noncontrolling interest (10,500) 10,500Income to controlling interest (414,500)

Retained earnings, 1/1 (1,367,000) (340,000) (C*) 13,500 (1,353,500)(S) 340,000

Net income (428,000) (120,000) (414,500)Dividends paid 110,000 70,000 (D) 63,000 7,000 110,000Retained earnings, 12/31 (1,685,000) (390,000) (1,658,000)

Current assets 610,000 250,000 860,000Investment in Barstow 702,000 (D) 63,000 (*C) 13,500 -0-

(S) 468,000(A) 175,500(I) 108,000

Land 380,000 150,000 (A) 30,000 560,000Buildings 490,000 250,000 (E) 2,000 (A) 18,000 724,000Equipment 873,000 150,000 (A) 32,000 (E) 8,000 1,047,000

Patents (A) 45,000 (E) 5,000 40,000Goodwill (A) 90,000 90,000Total assets 3,055,000 800,000 3,321,000

Notes payable (860,000) (230,000) (A) 16,000 (E) 4,000 (1,078,000)Common stock (510,000) (180,000) (S) 180,000 (510,000)Retained earnings, 12/31 (1,685,000) (390,000) (1,658,000)

(S) 52,000Noncontrolling interest (A) 19,500 (71,500)

(75,000) (75,000)Total liabilities and stockholders' equity (3,055,000) (800,000) (3,321,000)



30/45

34. (25 minutes) (Consolidated balances after a mid-year acquisition)

a. Investment account balance indicates the initial value method.

Consideration transferred ......................... $526,000Noncontrolling interest fair value ............ 300,000Duncan acquisition-date fair value .......... 826,000

Book value of Duncan (below).................. (765,000 )Fair value in excess of book value .......... $61,000Excess assigned Annual Excessbased on fair value: Life Amortizations

Equipment......................................... (30,000) 5 years $(6,000)Goodwill ........................................... $91,000 indefinite -0-

Total ....................................................... $(6,000)Amortization for 9 months ................... $(4,500)

Acquisition-Date Subsidiary Book ValueBook value of Duncan, 1/1/09 (CS + 1/1 RE) ............ $740,000Increase in book value-net income (dividends

were paid after acquisition) ................................. $100,000Time prior to purchase (3 months) ........................... 25,000Book value of Duncan, 4/1/09 (acquisition date) ... . $765,000

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

(1) $900,000 combined revenues less $75,000 (preacquisition subsidiaryrevenue)(2) $440,000 combined COGS less $35,000 (preacquisition subsidiary

COGS)(3) $234,000 combined operating expenses less $15,000 (preacquisition

subsidiary operating expenses) less nine month excess overvaluedequipment depreciation reduction of $4,500

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

b. Goodwill = $91,000 (original allocation)Equipment = $774,500 (add the two book values less $30,000

reduction to fair value plus $4,500 nine months excessamortization)

Common Stock = $630,000 (parent company balance only)Buildings = $1,124,000 (add the two book values)Dividends Paid = $80,000 (parent company balance only)



31/45

35. (40 minutes) Determine consolidated balance for a mid-year acquisition.

a. Consideration transferred by Truman ........... $720,000Noncontrolling interest fair value .................. 290,000Atlantas acquisition-date total fair value...... $1,010,000Book value of Atlanta...................................... (840,000)Fair value in excess of book value................. $170,000 Annual ExcessExcess fair value assigned Life Amortizations

Patent .......................................................... 100,000 5 years $20,000Goodwill ........................................................ $70,000 indefinite -0-

Total ............................................................ $20,000

b. ControllingNoncontrolling

Interest InterestFair values at acquisition date $720,000 $290,000Relative fair values ofidentifiable net assets

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

Goodwill $62,000 $8,000

c. Initial value at acquisition date $720,000Trumans share of Atlantas income for half year

([$120,000 20,000 amortization year] 70%) 35,000Dividends 2009 ($80,000 year 70%) (28,000)Investment account balance 12/31/09 $727,000



32/45

35. (continued)d. Consolidated Worksheet

Truman AtlantaAdjustments &Eliminations NCI Cons.

Revenues (670,000) (400,000)(S)200,00

0 (870,000)

Operating Expenses 402,000 280,000

(E)

10,000 (S)140,000 552,000Income of subsidiary (35,000) (I) 35,000 0

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

Consolidated net income (318,000)

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

Controlling interest in CNI (303,000)

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

500,000 (823,000)

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

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

(D) 28,000 145,000


Current assets 481,000 390,000 871,000

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

(I) 35,000

(A)132,000

Land 388,000 200,000 588,000

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

Patent(A)

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

Goodwill(A)

70,000 70,000

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

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

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

300,000 (95,000)

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


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

Noncontrolling interest, 12/31 293,000 (293,000)Total liabilities and

stockholders' equity (2,297,000) (1,220,000) 1,263,000 1,263,000 (2,950,000)



33/45

36. (60 minutes) (Consolidated statements for a step acquisition)

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

b. Equity in earnings of Sysinger2010 income (150,000 95%) $142,500Amortization (100,000 95%) (95,000)Equity in earnings of Sysinger $47,500

Revaluation of 15% block to fair valueConsideration transferred $184,5002009 Income (100,000 15%) 15,0002009 dividends (30,000 15%) (4,500 )

Book value at 1/1/10195,000

Fair value at 1/1/10 262,500Gain on revaluation $67,500

Investment account balance 12/31/10Fair value at 1/1/10 (15% block) $262,500Consideration transferred 1/1/10 (80% block) 1,400,000Equity earnings 2010

2010 income (95% 150,000) 142,500Customer contract amortization (95,000) 47,500

Dividends 2010 (40,000 95%) (38,000)Investment in Sysinger 12/31/10 $1,672,000



34/45

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

For Year Ending December 31, 2010Allan Sysinger Consolidation Entries Noncontrolling Consolidated

Accounts Company Company Debit Credit Interest TotalsRevenues (931,000) (380,000) (1,311,000)Operating expenses 615,000 230,000 (E)100,000 945,000Equity earnings of Sysinger (47,500) -0- (I) 47,500 -0-Gain on revaluation (67,500) -0 - (67,500)Separate company net income (431,000) (150,000)Consolidated net income (433,500)NCI in Sysingers income (2,500) 2,500Allans share of CNI (431,000)

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

Current assets 288,000 540,000 828,000Investment in Sysinger 1,672,000 -0- (D) 38,000 (S)1,235,000 -0-

(I) 47,500(A) 427,500

Property, plant, and equipment 826,000 590,000 1,416,000Patented technology 850,000 370,000 1,220,000Customer contract -0- -0- (A) 400,000 (E) 100,000 300,000Goodwill -0 - (A) 50,000 50,000

Total assets 3,636,000 1,500,000 3,814,000

Liabilities (1,300,000) (90,000) (1,390,000)Common stock (900,000) (500,000) (S) 500,000 (900,000)Additional paid-in capital (180,000) (200,000) (S) 200,000 (180,000))Retained earnings 12/31 (1,256,000) (710,000) (1,256,000)NCI in Sysinger, 1/1 -0- -0- (S) 65,000

(A) 22,500 (87,500)NCI in Sysinger, 12/31 -0 - -0 - (88,000) (88,000)Total liab. and stockholders' equity (3,636,000) (1,500,000) 1,935,500 1,935,500 (3,814,000)



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37. (60 minutes) (Step acquisitioncontrol previously acquired.)

a. According to the acquisition method, the valuation basis for a subsidiary isestablished on the date control is obtained, in this case January 1, 2009.Subsequent acquisitions are valued consistent with this initial value afteradjusting the investment for subsidiary income and other changes.

Because subsequent acquisitions are considered as transactions in the parentsown equity, no gains or losses are recorded. Differences in cash paid and theunderlying value are recorded as adjustments to APIC.

Fair value of Keane Company 1/1/09 ($573,000 60%) $955,000Keane income 2009 150,000Excess fair value amortization for copyright (20,000)*Keane dividends 2009 (80,000)Initial fair value adjusted to 1/1/10 $1,005,000Percent acquired in step acquisition 30 %

Value assigned to 30% acquisition 301,500Cash paid for the 30% acquisition 300,000Credit to APIC from 30% step acquisition $1,500

*Fair value of Keane Company 1/1/09 ($573,000 60%) $955,000Book value of Keane Company 1/1/09 (given) 810,000Excess fair value over book value 145,000To copyright (6 year life) 120,000To goodwill $25,000

Entry to record 30% additional investment in Keane:

1/1/10 Investment in Keane 301,500Cash 300,000APIC from step acquisition 1,500

b. Investment in Keane Company 1/1/09 $573,0002009 Equity earnings [60% (150,000 20,000)] 78,0002009 Dividends received (60% $80,000) (48,000)Additional acquisition of 30% interest 301,5002010 Equity earnings [90% (180,000 20,000)] 144,0002010 Dividends received (90% $60,000) (54,000)Investment in Keane Company 12/31/10 $994,500



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

Year Ending December 31, 2010

Consolidation Entries Noncontrolling ConsolidatedAccounts Bretz, Inc. Keane Co. Debit Credit Interest Totals

Revenues (402,000) (300,000) (702,000)Operating expenses 200,000 120,000 (E) 20,000 340,000Equity in Keanes income (144,000) (I) 144,000Separate company net income (346,000) (180,000Consolidated net income (362,000)

NCI in Keanes income (16,000) 16,000Bretzs share of CNI (346,000)

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

Current assets 224,000 190,000 414,000Investment in Keane Company 994,500 (S) 792,000 0

(D)54,000 (A) 112,500(I) 144,000

Trademarks 106,000 600,000 706,000Copyrights 210,000 300,000 (A)100,000 (E) 20,000 590,000Equipment (net) 380,000 110,000 490,000Goodwill (A) 25,000 25,000Total assets 1,914,500 1,200,000 2,225,000

Liabilities (453,000) (200,000) (653,000)Common stock (400,000) (300,000) (S)300,000 (400,000)Additional paid-in capital (60,000) (80,000) (S) 80,000 (60,000)APIC-step acquisition (1,500) (1,500)Retained earnings,12/31 (1,000,000) (620,000) (1,000,000)

(A) 12,500 (100,500)Non-controlling interest 12/31 (S) 88,000 110,500 (110,500)

Total liabilities and equities (1,914,500) (1,200,000) 1,223,000 1,223,000 (2,225,000)



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

Purchase Price Allocation and Excess Amortizations

Purchase price ........................................... $250,000Book value acquired

($230,000 70%) ................................... 161,000Price in excess of book value .................. $89,000 Annual ExcessAllocation based on fair value................... Life Amortizations

Land ($10,000 70%) $7,000Equipment ($68,000 70%) 47,600 14 yrs. $3,400Liabilities ($20,000 70%) 14,000 10 yrs. 1,400

68,600Goodwill ...................................................... $20,400 indefinite -0-Total ............................................................ $4,800

The parent uses the equity method: Investment income of $44,200 =$49,000 (70% $70,000) less $4,800 amortization expense.

Bon AirCreedmo

orAdjustments &Eliminations NCI Consolidated

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

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

Investment income (44,200) -0- (I) 44,200 -0-Noncontrollingint(E)erest inCreedmoor income (21,000) 21,000

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

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

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

Dividends paid 68,000 10,000 (D) 7,000 3,000 68,000Retained earnings,12/31/09 (801,000) (320,000) (801,000)

Current assets 72,000 120,000 192,000Investment inCreedmoor 321,800 -0- (D) 7,000 (S)210,000

(I) 44,200 -0-

(A)74,600

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

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

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

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

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

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

Common stock (50,000) (40,000) (S) 40,000 (50,000)Additional paid-incapital (58,000) -0- (58,000)Noncontrolling interest1/1/09 (S)90,000 (90,000)Noncontrolling interest 108,000 (108,000)



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12/31/09

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

(1,089,000) (410,000) 430,600 430,600 (1,238,600)



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

a. Equity accrual (60% $70,000) ................................................ $42,000Excess amortizations (below) .................................................. (5,600)

Equity income (parent uses equity method) ..................... $36,400

Purchase Price Allocation and Excess Amortizations

Purchase price ........................................... $400,000Book value acquired (60% of

$470,000 [assets minus liabilities]) .. .. 282,000Price in excess of book value .................. $118,000Excess price assigned to specific............ Annual Excessaccounts based on fair value.................... Life Amortizations

Equipment (overvalued)([$30,000] 60%) .................................. (18,000) 10 yrs. $(1,800)Buildings ($155,000 60%) ................. 93,000 15 yrs. 6,200Bonds payable ($20,000 60%)........... 12,000 10 yrs. 1,200

Goodwill ...................................................... $31,000 indefinite -0-Total ....................................................... $5,600

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

c. $5,600see a.

d. $28,00040% of $70,000 reported income figure

e. Watson CorporationConsolidated Income Statement

For the Year Ended December 31, 2009

Revenues $920,000Operating expenses 695,600Combined entity net income 224,400Noncontrolling interest in Houston income 28,000Consolidated net income $196,400

Remainingf. Excess Amortizations Allocations

Allocations (see a) for 4 years 12/31/09Equipment (18,000) (7,200) (10,800)Buildings 93,000 24,800 68,200Bonds payable 12,000 4,800 7,200

Goodwill 31,000 -0- 31,000



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39. (continued)

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

(40% $40,000)Noncontrolling interest in subsidiary, 12/31/09 ......................... $264,000

h. Watson CorporationConsolidated Balance Sheet

December 31, 2009

Current assets $475,000 Current liabilities $560,000

Bonds Payable 462,800Equipment (net) 909,200 Noncontrolling interest 264,000Buildings (net) 1,001,200 Common stock 310,000

Goodwill 31,000 Retained earnings 819,600Total assets $2,416,400 Total liabilities and equity $2,416,400

40. (40 Minutes) (Determine consolidated balances, parent has applied thecost

method)

Acquisition price ............................................. $1,400,000Book value acquired (see Schedule 1)($1,120,000 80%) ......................................... 896,000Cost in excess of book value ......................... $504,000

Annual ExcessExcess cost allocated to buildings based Life Amortizationson fair value ($80,000 80%) ......................... 64,000 10 years $6,400Unpatented technology ($550,000 80%) .. .. 440,000 10 years 44,000Total ............................................................ $ -0- $50,400

Schedule 1Book Value of Morning (January 1, 2006)

Book value, January 1, 2009(stockholders' equity accounts) ............... $1,500,000

2008 Increase in book value ........................... $200,0002007 Increase in book value ........................... 100,000

2006 Increase in book value ......................... 80,000 380,000Book value, January 1, 2006 .......................... $1,120,000

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

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

subsidiary's reported income of $400,000)40. (continued)



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

Retained earnings, 1/1/09 = $1,952,800 (the cost method is in use becausethe original purchase price is still in the Investment account. Thus, the$380,000 increase in book value for the three previous years [income of

$680,000 less dividends paid of $300,000] multiplied by the 80 percentownership gives an equity accrual of $304,000. Excess amortization forthese same three years totals $151,200 ($50,400 3). Therefore, theparent's retained earnings must be increased by the net amount[$152,800 or $304,000 $151,200])

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

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

Cash = $500,000 (add book values)

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

Inventory = $900,000 (add book values)

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

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

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

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

Total assets = $5,002,400

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

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

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

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

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

Total liabilities and equities = $5,002,400



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

Consolidation Entries

Entry *CInvestment in Morning .......................................... 152,800

Retained Earnings, 1/1/09 Good .................... 152,800(To recognize Good's share of Morning's increase in book value during the2006-2008 period as well as the amortization expense for that same period.Because the original $1,400,000 is still the balance in the investment inMorning account, the parent is applying the cost method. Thus, 80% ofMorning's $380,000 increase in book value [$304,000] must be accrued.Excess amortizations of $151,200 [$50,400 per year for these three years] isalso recorded leaving a net adjustment of $152,800.)

Entry SCommon Stock (Morning) .................................... 460,000Additional Paid-in Capital (Morning) .................. 40,000

Retained Earnings, 1/1/09 (Morning) .................. 1,000,000Investment in Morning (80%) .......................... 1,200,000Noncontrolling Interest in Morning (20%) ..... 300,000

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

Entry ABuildings................................................................. 44,800Unpatented technology ........................................ 308,000

Investment in Morning .................................... 352,800(To recognize unamortized amounts paid in connection with acquisition ofMorning. Original allocations have undergone three previous years of excess

amortizations.)

Entry IDividend Income ................................................... 96,000

Dividends Paid ................................................. 96,000(To eliminate intercompany income accounts.)

Entry EOperating Expenses ............................................. 50,400

Buildings .......................................................... 6,400Unpatented technology................................... 44,000(To recognize amortization expenses for current year.)

Entry PLiabilities ............................................................... 100,000

Receivables ...................................................... 100,000(To eliminate intercompany debt.)



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40. (continued) GOOD AND MORNINGConsolidation Worksheet

For Year Ending December 31, 2009

Consolidation Entries Noncontrolling ConsolidatedAccounts Good Morning Debit Credit Interest Totals

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

Net Income (580,000) (400,000) (753,600)

Retained earnings, 1/1Good (1,800,000) (*C) 152,800 (1,952,800)Morning (1,000,000) (S)1,000,000 -0-

Net income (above) (580,000) (400,000) (753,600)Dividends paid 380,000 120,000 (I) 96,000 24,000 380,000

Retained earnings, 12/31 (2,000,000) (1,280,000) (2,326,400)

Cash 300,000 200,000 500,000Receivables 700,000 400,000 (P) 100,000 1,000,000Inventory 400,000 500,000 900,000Investment in Morning 1,400,000 -0- (*C) 152,800

chapter 04 imsm

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