29. (45 Minutes) (Consolidated totals and worksheet two years after acquisition. Parent uses initial value method. Includes question comparing initial value and equity methods).

a. 12/31/2013 Pinnacle Strata Adjustments and Eliminations Consolidated

Sales (7,000,000) (3,000,000) (10,000,000)

Cost of goods sold 4,650,000 1,700,000 6,350,000

Interest expense 255,000 160,000 415,000

Depreciation expense 585,000 350,000 E 30,000 965,000

Amortization expense 600,000 E 20,000 580,000

Dividend income (50,000) D 50,000 0

Net Income (1,560,000) (190,000) (1,690,000)

Retained earnings 1/1/13 (5,000,000) (1,350,000) S 1,350,000 *C 240,000 (5,240,000)

Net income (1,560,000) (190,000) (1,690,000)

Dividends paid 560,000 50,000 D 50,000 560,000

Retained earnings 12/31/13 (6,000,000) (1,490,000) (6,370,000)

Cash 433,000 165,000 598,000

Accounts receivable 1,210,000 200,000 P 85,000 1,325,000

Inventory 1,235,000 1,500,000 2,735,000

Investment in Strata 3,200,000 *C 240,000 S 2,850,000 0

A 590,000

Buildings (net) 5,572,000 2,040,000 A 270,000 E 30,000 7,852,000

Licensing agreements 1,800,000 E 20,000 A 80,000 1,740,000

Goodwill 350,000 A 400,000 750,000

Total Assets 12,000,000 5,705,000 15,000,000

Accounts payable (300,000) (715,000) P 85,000 (930,000)

Long-term debt (2,700,000) (2,000,000) (4,700,000)

Common stock - Pinnacle (3,000,000) (3,000,000)

Common stock - Strata (1,500,000) S 1,500,000 0

Retained earnings 12/31/13 (6,000,000) (1,490,000) (6,370,000)

Total Liabilities and OE (12,000,000) (5,705,000) 3,945,000 3,945,000 (15,000,000)

b. Subsidiary income (190,000 – 10,000) ...................................... $180,000

1/1/13 retained earnings (5,000,000 + 240,000) ..................... $5,240,000

Investment in Strata:

Initial value basis ............................................................. $3,200,000 Conversion to equity as of 1/1/13 $240,000 Income for 2013 180,000 Dividends for 2013 (50,000) 370,000 Equity method balance 12/31/13 ...................................... $3,570,000

c. The internal method choice for investment accounting has no effect on consolidated financial statements.

30. (30 Minutes) (Determine consolidated accounts and consolidation entries five years after purchase. Parent applies equity method.)

a. Fair value allocation and annual amortization Annual excess Allocation Life amortizations

Land .......................................... $20,000 Buildings ......................................... (30,000) 10 yrs. $(3,000) Equipment ....................................... 60,000 5 yrs. 12,000 Customer List ................................. 100,000 20 yrs. 5,000 Total .......................................... $14,000

CONSOLIDATED TOTALS

Revenues = $850,000 (add the two book values)

Cost of goods sold = $380,000 (the accounts of both companies are added together)

Depreciation expense = $179,000 (the accounts are added and include the excess depreciation adjustment of $9,000)

Amortization expense = $5,000 (current amortization for customer list recognized in acquisition)

Buildings (net) = $625,000 (add the two book values less the acquisition-date fair value allocation [a $30,000 reduction] after removing 5 years of amortization totaling $15,000)

Equipment (net) = $450,000 (add the two book values. The acquisition-date fair value allocation is completely amortized at end of current year)

Customer list = $75,000 ($100,000 original allocation less $25,000 [5 years of amortization])

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

Additional paid-in capital = $50,000 (parent company balance only) b. The method used by the parent is only important in determining the

parent's separate account balances (which are given here or are not needed) or consolidation worksheet entries (which are not required in a.)

30. (continued)

c. Consolidation entry S Common Stock (Hill) ........................... 40,000 Additional Paid-in Capital (Hill) .......... 160,000 Retained Earnings 1/1 ......................... 600,000

Investment in Hill ........................... 800,000 (To eliminate beginning stockholders' equity of subsidiary)

Consolidation entry A Land ...................................................... 20,000 Equipment (net) ................................... 12,000 Customer List (net) .............................. 80,000 Buildings (net) ................................ 18,000 Investment in Hill ........................... 94,000

(To enter unamortized allocation balances as of beginning of current year)

Consolidation entry I Investment Income .............................. 86,000 Investment in Hill ........................... 86,000

(To remove equity income recognized during year—equity method accrual of $100,000 [based on subsidiary's income] less amortization of $14,000 for the year)

Consolidation entry D Investment in Hill ................................. 40,000 Dividends Paid ............................... 40,000 (To remove intra-entity dividend payments) Consolidation entry E Amortization Expense .......................... 5,000 Depreciation Expense .......................... 9,000 Buildings .............................................. 3,000 Equipment........................................ 12,000 Customer List .................................. 5,000 (To recognize excess acquisition-date fair-value amortizations

for the period)

31. (30 Minutes) (Determine parent company and consolidated account

balances for a bargain purchase combination. Parent applies equity method)

a. Acquisition-date fair value allocation and annual excess amortization

Consideration transferred ............ $1,090,000 Santiago book value (given) .......... $950,000 Technology undervaluation (6 yr. life) 240,000 Acquisition fair value of net assets 1,190,000 Gain on bargain purchase .............. $(100,000)

Santiago income $(200,000) Technology amortization ................ 40,000 Equity earnings in Santiago ........... $(160,000) Fair value of net assets at acquisition-date $1,190,000 Equity earnings from Santiago ...... 160,000 Dividends received ......................... (50,000) Investment in Santiago 12/31/13 .... $1,300,000

Because a bargain purchase occurred, Santiago’s net asset fair value replaces the fair value of the consideration transferred as the initial value assigned to the subsidiary on Peterson’s books. 31 b.

Peterson and Subsidiary Consolidated Worksheet

For the Year Ended December 31, 2013

Income Statement Peterson Santiago Adj. & Elim. Consolidated

Revenues (535,000) (495,000) (1,030,000)

Cost of goods sold 170,000 155,000 325,000

Gain on bargain purchase (100,000) -0- (100,000) Depreciation and amortization 125,000 140,000 (E) 40,000 305,000

Equity earnings in Santiago (160,000) -0- (I) 160,000 -0-

Net income (500,000) (200,000) (500,000)

Statement of Retained Earnings

Retained earnings, 1/1 (1,500,000) (650,000) (S) 650,000 (1,500,000)

Net income (above) (500,000) (200,000) (500,000)

Dividends paid 200,000 50,000 (D) 50,000 200,000

Retained earnings, 12/31 (1,800,000) (800,000) (1,800,000)

Balance Sheet

Current assets 190,000 300,000 490,000

Investment in Santiago 1,300,000 -0- (D) 50,000 (I) 160,000

(S) 950,000 -0-

(A) 240,000

Trademarks 100,000 200,000 300,000

Patented technology 300,000 400,000 (A) 240,000 (E) 40,000 900,000

Equipment 610,000 300,000 910,000

Total assets 2,500,000 1,200,000 2,600,000

Liabilities (165,000) (100,000) (265,000)

Common stock (535,000) (300,000) (S) 300,000 (535,000)

Retained earnings, 12/31 (1,800,000) (800,000) (1,800,000)

Total liabilities and equity (2,500,000) (1,200,000) 1,440,000 1,440,000 (2,600,000)

32. (35 minutes) (Contingent performance obligation and worksheet adjustments for equity and initial value methods.) a. 1/1/12 Investment in Wolfpack, Inc. 500,000 Contingent Performance Obligation 35,000 Cash 465,000 b.12/31/12 Loss from Increase in Contingent Performance Obligation 5,000 Contingent Performance Obligation 5,000 12/31/13 Loss from Increase in Contingent Performance Obligation 10,000 Contingent Performance Obligation 10,000 12/31/13 Contingent Performance Obligation 50,000 Cash 50,000 c. Equity Method Worksheet Adjustments

Common Stock- Wolfpack 200,000 Retained Earnings-Wolfpack 180,000 Investment in Wolfpack 380,000 Royalty Agreements 90,000 Goodwill 60,000 Investment in Wolfpack 150,000 Equity Earnings of Wolfpack 65,000 Investment in Wolfpack 65,000 Investment in Wolfpack 35,000 Dividends Paid 35,000 Amortization Expense 10,000 Royalty Agreements 10,000 Investment account after worksheet adjustments = (560,000 – 380,000 – 150,000 – 65,000 + 35,000) = 0 d. Initial Value Method Investment in Wolfpack 30,000 Retained Earnings-Branson 30,000 Common Stock- Wolfpack 200,000 Retained Earnings-Wolfpack 180,000 Investment in Wolfpack 380,000**

32. (continued) Royalty Agreements 90,000 Goodwill 60,000 Investment in Wolfpack 150,000 Dividend Income 35,000 Dividends Paid 35,000 Amortization Expense 10,000 Royalty Agreements 10,000