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Exercise 3-4 Purchase, Date of AcquisitionOn January, 1 2010, Peach Company issued 1,500 of its $20 par value common shares with a fair value of $60 per share in exchange for the 2,000 outstanding common shares of Swartz Company in a purchase transaction. Registration costs amounted to $1,700, paid in cash. Just prior to the acquisition, the balance sheets of the two companies were as follows:Peach Company Swartz CompanyCash $73,000 $13,000Accounts receivable (net) $95,000 $19,000Inventory $58,000 $25,000Plant and equipment (net) $95,000 $43,000Land $26,000 $22,000Total assets $347,000 $122,000Accounts payable $66,000 $18,000Notes payable $82,000 $21,000Common stock, $20 par value $100,000 $40,000Other contributed capital $60,000 $24,000Retained earnings $39,000 $19,000Total equities $347,000 $122,000Any difference between the book value of equity and the value implied by the purchase price relates to goodwill.Required:a. Prepare the journal entry on Peach Company’s books to record the exchange of stock.b. Prepare a Computation and Allocation Schedule for the difference between book value and value implied by the purchase price.c. Prepare a consolidated balance sheet at the date of acquisition.

Part A Investment in Swartz Company ($60 1,500) 90,000Common Stock ($20 1,500) 30,000Other Contributed Capital ($40 1,500) 60,000

Other Contributed Capital 1,700Cash 1,700

Part B Computation and Allocation of DifferenceParent Non- EntireShare Controlling Value

SharePurchase price and implied value $90,000 0 90,000Less: Book value of equity acquired 83,000* 0 83,000Difference between implied and book value 7,000 0 7,000Goodwill (7,000) (0) ( 7,000) Balance - 0 - - 0 - - 0 -

* $40,000 + $24,000 + $19,000 = $83,000Part C Peach Company and Subsidiary

Consolidated Balance SheetJanuary 1, 2010

AssetsCash ($73,000 + $13,000 - $1,700) $ 84,300Accounts Receivable 114,000Inventory 83,000Plant and Equipment 138,000Land 48,000Goodwill* 7,000 Total Assets $ 474,300

Liabilities and Stockholders’ EquityAccounts Payable $84,000Notes Payable 103,000 Total Liabilities $187,000Common Stock ($100,000 + $30,000) $130,000

Other Contributed Capital ($60,000 + $60,000 - $1,700) 118,300Retained Earnings 39,000Total Stockholders’ Equity 287,300 Total Liabilities and Stockholders’ Equity $ 474,300

* Cost of investment less fair value acquired equals goodwill or ($90,000 – $83,000 = $7,000).Recall that the book value of net assets equals the fair value of net assets in this problem.

Exercise 4-6Elimination Entry, Consolidated Balance SheetOn December 31, 2010, Price Company purchased a controlling interest in Shipley Company. The balance sheet of Price Company and the consolidated balance sheet on December 31, 2010, were as follows:Price Company ConsolidatedCash $22,000 $37,900Accounts receivable $35,000 $57,000Inventory $127,000 $161,600Investment in Shipley Company $212,000 0Plant and equipment (net) $190,000 $337,000Land $120,000 $220,412Total $706,000 $813,912Accounts payable $42,000 $112,500Note payable $100,000 $100,000Noncontrolling interest in Shipley Company $0 $37,412Common stock $300,000 $300,000Other contributed capital $164,000 $164,000Retained earnings $100,000 $100,000Total $706,000 $813,912On the date of acquisition, the stockholder’s equity section of Shipley Company’s balance sheet was as follows:Common stock $90,000

Other contributed capital $90,000Retained earnings $56,000Total $236,000Required:A. Prepare the investment elimination entry made to complete a consolidated balance sheet workpaper. Any difference between book value and the value implied by the purchase price relates to subsidiary land.B. Prepare Shipley Company’s balance sheet as it appeared on December 31, 2010.

Journal and Workpaper Entries - Equity MethodPart A Journal Entries

Investment in Sales 350,000Cash 350,000

Investment in Sales ($148,000)(.85) 125,800Equity in Subsidiary Income 125,800

Cash ($50,000)(.85) 42,500Investment in Sales 42,500

Part B Workpaper EntriesEquity in Subsidiary Income 125,800

Dividends Declared - Sales 42,500 Investment in Sales 83,300

Common Stock - Sales 100,000Other Contributed Capital – Sales 40,000Retained Earnings 1/1 – Sales 140,000Difference between Implied and Book Value 131,765

Investment in Sales 350,000Noncontrolling Interest 61,765

Goodwill 131,765Difference between Implied and Book Value 131,765

Computation and Allocation of Difference between Implied and Book Value Acquired

Parent Non- EntireShare Controlling Value

SharePurchase price and implied value 350,000 61,765 411,765 *Less: Book value of equity acquired: 238,000 42,000 280,000Difference between implied and book value 112,000 19,765 131,765Goodwill (112,000) (19,765) ( 131,765) Balance - 0 - - 0 - - 0 -

* $350,000/.85

PROBLEM 3-1 Consolidated Workpaper: Two CasesThe two following separate cases show the financial position of a parent company and itssubsidiary company on November 30, 2011, just after the parent had purchased 90% ofthe subsidiaryâ??s stock:Case I Case IIP Company S Company P Company S CompanyCurrent assets $ 880,000 $260,000 $ 780,000 $280,000Investment in S Company 190,000 190,000Long-term assets 1,400,000 400,000 1,200,000 400,000Other assets 90,000 40,000 70,000 70,000Total $2,560,000 $700,000 $2,240,000 $750,000Current liabilities $ 640,000 $270,000 $ 700,000 $260,000Long-term liabilities 850,000 290,000 920,000 270,000Common stock 600,000 180,000 600,000 180,000Retained earnings 470,000 (40,000) 20,000 40,000Total $2,560,000 $700,000 $2,240,000 $750,000Required:

Prepare a November 30, 2011, consolidated balance sheet workpaper for each of the foregoingcases. In Case I, any difference between book value of equity and the value implied by the purchaseprice relates to subsidiary long-term assets. In Case II, assume that any excess of bookvalue over the value implied by purchase price is due to overvalued long-term assets.

P COMPANY AND SUBSIDIARYConsolidated Balance Sheet Workpaper

November 30, 2011

P S Eliminations Noncontrolling ConsolidatedPart I Company Company Dr. Cr. Interest BalanceCurrent Assets 880,000 260,000 1,140,000 Investment in S Company 190,000 (1) 190,000 Difference between Implied and Book Value

(1) 71,111 (2) 71,111

Long-term Assets 1,400,000 400,000 (2) 71,111 1,871,111 Other Assets

Total Assets 90,000 40,000 130,000 2,560,000 700,000 3,141,111

Current Liabilities 640,000 270,000 910,000 Long-term Liabilities 850,000 290,000 1,140,000 Common Stock:

P Company 600,000 600,000 S Company 180,000 (1) 180,000

Retained EarningsP CompanyS Company

470,000 470,000 (40,000) (1) 40,000

Noncontrolling Interest       (2) 21,111 21,111 21,111 Total Liabilities and Equity 2,560,000 700,000 322,222 322,222 3,141,111

Part IICurrent Assets 780,000 280,000 1,060,000 Investment in S Company 190,000 (1) 190,000

Difference between Implied & Book Value

(2) 8,889 (1) 8,889

Long-term Assets 1,200,000 400,000 (2) 8,889 1,591,111 Other Assets 70,000 70,000 140,000

Total Assets 2,240,000 750,000 2,791,111

Current Liabilities 700,000 260,000 960,000 Long-term Liabilities 920,000 270,000 1,190,000 Common Stock:

P Company 600,000 600,000 S Company 180,000 (1) 180,000

Retained EarningsP Company 20,000 20,000 S Company 40,000 (1) 40,000

Noncontrolling Interest (1) 21,111 21,111 21,111 Total Liabilities and Equity 2,240,000 750,000 228,889 228,889 2,791,111

(1) To eliminate investment account and create noncontrolling interest account(2) To allocate the difference between implied value and book value to long-term assets.

Computation and Allocation of Difference (Case 2)Parent Non- EntireShare Controlling Value

SharePurchase price and implied value 190,000 21,111 211,111*Less: Book value of equity acquired 198,000 22,000 220,000

Difference between implied and book value (8,000) (889) (8,889)Decrease long-term assets to fair value 8,000 889 8,889Balance - 0 - - 0 - - 0 –

* $190,000/.90

Problem 3-8 Intercompany items, Two subsidiariesOn February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company and 85% of the

outstanding common stock of Rob Company. Immediately before the two acquisitions, balance sheets of the three companies were as follows:Punta Sara RobCash $165,000 $45,000 $17,000Accounts receivable $35,000 $35,000 $26,000Notes receivable $18,000 $0 $0Merchandise inventory $106,000 $35,500 $14,000Prepaid insurance $13,500 $2,500 $500Advances to Sara Company $10,000Advances to Rob Company $5,000Land $248,000 $43,000 $15,000Buildings (net) $100,000 $27,000 $16,000Equipment (net) $35,000 $10,000 $2,500Total $735,500 $198,000 $91,000Accounts payable $25,500 $20,000 $10,500Income taxes payable $30,000 $10,000 $0Notes payable $0 $6,000 $10,500Bonds payable $100,000 $0 $0Common stock, $10 par value $300,000 $144,000 $42,000Other contributed capital $150,000 $12,000 $38,000Retained earnings (deficit) $130,000 $6,000 ($10,000)Total $735,500 $198,000 $91,000The following additional information is relevant.1. One week before the acquisitions, Punto Company had advanced $10,000 to Sara Company and $5,000 to Rob Company. Sara Company recorded an increase to Accounts Payable for its advance, but Rob Company had not recorded the transaction.2. On the date of acquisition, Punto Company owed Sara Company $12,000 for purchases on account, and Rob Company owed Punto Company $3,000 and Sara Company $6,000 for such purchases. The goods purchased had all been sold to outside parties prior to acquisition.3. Punto Company exchanged 13,400 shares of its common stock with a fair value of $12 per share for 95% of the outstanding common stock of Sara Company. In addition, stock issue fees of $4,000 were paid in cash. The acquisition was accounted for as a purchase.

4. Punto Company paid $50,000 cash for the 85% interest in Rob Company. 5. Three thousand dollars of Sara Company’s notes payable and $9,500 of Rob Company’s notes payable were payable to Punto Company.6. Assume that for Sara, any difference between book value and the value implied by the purchase price relates to subsidiary land. However, for Rob, assume that any excess of book value over the value implied by the purchase price is due to overvalued buildings. Required:a. Give the book entries to record the two acquisitions in the accounts of Punto Company.b. Prepare a consolidated balance sheet workpaper immediately after acquisition.c. Prepare a consolidated balance sheet at the date of acquisition for Punto Company and its subsidiaries.

Part A Investment in Sara Co. (13,400 $12) 160,800 Common Stock (13,400 $10) 134,000 Other Contributed Capital ($26,800 – $4,000) 22,800 Cash 4,000

Investment in Rob Co. 50,000 Cash 50,000

Punto Company & Subsidiaries Consolidated Balance Sheet Workpaper at February 1, 2011

Part B PuntoCompany

SaraCompany

RobCompany

Eliminations NoncontrollingInterest

ConsolidatedBalanceDr. Cr.

Cash 111,000 45,000 17,000 (a) 5,000 178,000 Account Receivable 35,000 35,000 26,000 (2) 21,000 75,000 Notes Receivable 18,000 (3) 12,500 5,500 Merchandise Inventory 106,000 35,500 14,000 155,500 Prepaid Insurance 13,500 2,500 500 16,500 Investment in Sara Company 160,800 (4) 160,800 Investment in Rob Company 50,000 (5) 50,000 Difference between Implied and (4) 7,263 ** (5) 11,176 Book Value (7) 11,176 (6) 7,263

6,900*Advances to Sara Company 10,000 (1) 10,000

Advances to Rob Company 5,000 (1) 5,000Land 248,000 43,000 15,000 (6) 7,263 313,263 Buildings (net) 100,000 27,000 16,000 (7) 11,176 131,824 Equipment (net) 35,000 10,000 2,500 47,500

Total Assets 892,300 198,000 91,000 923,087 Accounts Payable 25,500 20,000 10,500 (1) 15,000

(2) 21,000 (a) 5,000 25,000 Income Taxes Payable 30,000 10,000 40,000 Notes Payable 6,000 10,500 (3) 12,500 4,000 Bonds Payable 100,000 100,000 Common Stock:

Punto Company 434,000 434,000 Sara Company 144,000 (4) 144,000Rob Company 42,000 (5) 42,000

Other Contributed Capital: Punto Company 172,800 172,800 Sara Company 12,000 (4) 12,000Rob Company 38,000 (5) 38,000

Retained Earnings Punto Company 130,000 130,000 Sara Company 6,000 (4) 6,000 Rob Company (10,000) (5) 10,000

Noncontrolling Interest (4)(5)17,287 * 17,287 17,287 Total Liabilities and Equity 892,300 198,000 91,000 321,202 321,202 923,087

(a) To adjust for cash in transit from Punto to Rob(1) To eliminate intercompany advances(2) To eliminate intercompany accounts receivable and accounts payable(3) To eliminate intercompany notes receivable and notes payable(4) To eliminate investment in Sara Company and create noncontrolling interest account of $8,463(5) To eliminate investment in Rob Company and create noncontrolling interest account of $8,824(6) To allocate the difference between implied and book value to the under-valuation of Sara’s land

(7) To allocate the difference between implied and book value to the over-valuation of Rob’s buildings

* [$160,800/.95 x .05] = $8,463

$8,463 (entry 4) + $8,824 (entry 5) = $17,287** $160,800/.95 – ($144,000 + $12,000 + $6,000)

Computation and Allocation of Difference Parent Non- EntireShare Controlling Value

SharePurchase price and implied value 50,000 8,824 58,824*Less: Book value of equity acquired 59,500 10,500 70,000

Difference between implied and book value (9,500) (1,676) (11,176)Decrease buildings to fair value 9,500 1,676 11,176Balance - 0 - - 0 - - 0 -

* $50,000/.85

Part C PUNTO COMPANY AND SUBSIDIARIESConsolidated Balance Sheet

February 1, 2011AssetsCurrent Assets:

Cash $178,000 Accounts Receivable 75,000 Notes Receivable 5,500 Merchandise Inventory 155,500 Prepaid Insurance 16,500

Total Current Assets $ 430,500

Long-Term Assets:Land 313,263 Buildings(net) 131,824 Equipment(net) 47,500

Total Assets $ 923,087 Liabilities and Stockholders' Equity

Current Liabilities:Accounts Payable $25,000 Income Tax Payable 40,000 Notes Payable 4,000

Total Current Liabilities $ 69,000 Bonds Payable 100,000

Total Liabilities 169,000 Stockholders’ Equity:

Noncontrolling Interest in Subsidiaries 17,287Common Stock 434,000 Other Contributed Capital 172,800 Retained Earnings 130,000

Total Stockholders’ Equity 754,087 Total Liabilities and Stockholders’ Equity $ 923,087