CHAPTER 1UNDERSTANDING THE ISSUES1. (a) horizontal combinationboth are marine engine manufacturers (b) vertical combinationmanufacturer buys distribution outlets (c) conglomerateunrelated businesses 2. By accepting cash in exchange for the net assets of the company, the seller would have to recognize an immediate taxable gain. However, if the seller were to accept common stock of another corporation instead, the seller could construct the transaction as a tax-free reorganization. The seller could then account for the transaction as a tax-free exchange. The seller would not pay taxes until the shares received were sold. 3. Identifiable assets (fair value)......... $600,000 Deferred tax liability ($200,000 40%)...................... (80,000) Net assets.................................. $520,000 Goodwill [($850,000 $520,000) 60%]. $550,000 Deferred tax liability ($550,000 40%)...................... (220,000) Net goodwill............................... $330,000 4. (a) The net assets and goodwill will be recorded at their full fair value on the books of the parent on the date of acquisition. (b) The net assets will be marked up to fair value and goodwill will be recorded at the end of the fiscal year when the consolidated financial statements are prepared through the use of a consolidated worksheet. 5. Puncho will record the net assets at their fair value of $800,000 on its books. Also, Puncho will record goodwill of $100,000 ($900,000 $800,000) resulting from the excess of the price paid over the fair value. Semos will record the removal of its net assets at their book values. Semos will record a gain on the sale of business of $500,000 ($900,000 $400,000).

6.

Zone AnalysisPriority

Group Total$ 20,000

Cumulative Total$ 20,000

Nonpriority

500,000

520,000

(a) This price exceeds the fair value of all accounts and allows for goodwill. Current Assets (fair value).............. $120,000 Land (fair value).............................. 80,000 Liabilities (fair value)....................... (100,000) Building & Equipment (fair value).... 400,000 Customer list (fair value)................. 20,000 Goodwill.......................................... 280,000 Extraordinary Gain.......................... $800,000 (b) This price is a bargain. The nonpriority accounts are discounted. There is $430,000 ($450,000 $20,000 to priority accounts) available to be allocated to these accounts. Current Assets (fair value).............. $120,000 Liabilities (fair value)....................... (100,000) Land [(80 500) $430,000]......... 68,800 Building & Equipment [(400 500) $430,000]........... 344,000 Customer list [(20 500) $430,000] 17,200 Goodwill.......................................... Extraordinary Gain.......................... Total........................................... $450,000 (c) This price creates an extraordinary gain. Only priority accounts are recorded. Current Assets (fair value).............. $120,000 Liabilities (fair value)....................... (100,000) Building & Equipment (no amount available)................. Customer list (no amount available)................. Goodwill.......................................... Extraordinary Gain.......................... (5,000) Total........................................... $ 15,000

11

Ch. 5Exercises 7. (a) Direct costIncluded with the price paid to assign values to net assets, and possibly to goodwill. (b) Direct costIncluded with the price paid to assign values to net assets, and possibly to goodwill. (c) Direct costIncluded with the price paid to assign values to net assets, and possibly to goodwill. (d) Issue costDeducted from the amount assigned to stock issued in the combination. (e) Indirect costExpensed in the current period. 8. (a) Additional goodwill is recorded because the target was met. The entry would take the following form: Goodwill (fair value of stock issued) Common stock (par value of stock issued Paid-in capital in excess (fair value of stock issued minus par value) (b) In this case, the paid-in capital in excess of par account is reduced for the par value of the additional shares to be issued. The fair value of the stock originally issued is being devalued. The entry would take the following form: Paid-in capital in excess of par (par value of additional shares issued) Common stock (par value of additional shares issued 9. By using pooling, Mucho has enhanced income in 20X1 and future years since net assets are recorded at book value of $500,000 and no goodwill is recorded. If the purchase method had been used, net assets would have been recorded at $800,000 and goodwill of $200,000 would be recorded. Depreciation amounts will be lower since they will be based on the $500,000 book value, not the $800,000 fair value. There will be no goodwill amortization on the $200,000, as there would be had the transaction been recorded using the purchase method (amortization of goodwill was required prior to 20X1). Income will also be greater for 20X1 because Muchos income statement will include all of Smalls income for 20X1 even though the acquisition occurred on October 1. Under purchase accounting, Smalls income would only be included after October 1.

12

EXERCISES1. Current year income using the purchase method: Combined Net Income Year Ended December 31, 1998 Sales [$800,000 + (1/2 $500,000)].......................................................... Less: Cost of Goods Sold [$400,000 + (1/2 $300,000)].............................. Operating Expenses [$150,000 + (1/2 $75,000)]............................... Goodwill Amortization*.......................................................................... Other Expenses [$50,000 + (1/2 $25,000)]........................................ Net Income................................................................................................. *Purchase Price................................ Book value of net assets................. Goodwill........................................... Divide by.......................................... Amortization amount........................ $400,000 200,000 200,000 10 years $ 20,000 $1,050,000 550,000 187,500 10,000 62,500 $ 240,000

year = $10,000

Current year income using the pooling method: Combined Net Income Year Ended December 31, 1998 Sales ($800,000 + $500,000)...................................................................... Less: Cost of Goods Sold ($400,000 + $300,000).......................................... Operating Expenses ($150,000 + $75,000............................................ Other Expenses ($50,000 + $25,000)................................................... Net Income................................................................................................. $1,300,000 700,000 225,000 75,000 $ 300,000

2. (1) Current assets.......................................................................... Land......................................................................................... Building.................................................................................... Equipment................................................................................ Goodwill................................................................................... Liabilities.............................................................................. Cash (includes direct acquisition costs)...............................

100,000 75,000 300,000 275,000 167,000 102,000 815,000

23

Ch. 5Exercises

Exercise 1-2, Concluded (2) Cash........................................................................................ Liabilities.................................................................................. Accumulated depreciationbuilding........................................ Accumulated depreciationequipment.................................... Current assets..................................................................... Land..................................................................................... Building................................................................................ Equipment........................................................................... Gain on sale of business...................................................... Note: Seller does not receive direct acquisition costs. (3) Investment in Cardinal Company............................................. Cash.................................................................................... 815,000 815,000 800,000 100,000 200,000 100,000 80,000 50,000 450,000 300,000 320,000

Note: At year-end, Cardinal would be consolidated with Benz, as explained in Chapter 2.

3. Cash**............................................................................................. Inventory......................................................................................... Equipment....................................................................................... Land................................................................................................ Building........................................................................................... Discount on bonds payable............................................................. Goodwill*......................................................................................... Current liabilities......................................................................... Bonds payable............................................................................ Common stock............................................................................ Paid-in capital in excess of par.................................................... Cash**......................................................................................... *Total consideration Common stock (60,000 shares $20)....................................... Direct acquisition costs............................................................... Price paid........................................................................................ Less fair value of assets acquired: Cash........................................................................................... Inventory..................................................................................... Current liabilities......................................................................... Bonds payable............................................................................ Equipment................................................................................... Land............................................................................................ Buildings..................................................................................... Value of assets acquired................................................................. Excess of total cost over fair value of assets................................... **Cash accounts in this entry may be shown as a net amount.

100,000 250,000 220,000 180,000 300,000 140,000 665,000 80,000 550,000 300,000 900,000 25,000 $1,200,000 25,000 $1,225,000 $ 100,000 250,000 (80,000) (410,000) 220,000 180,000 300,000 560,000 $ 665,000

24

Ch. 5Exercises

Exercise 1-3, Concluded In a purchase, assets acquired and liabilities assumed are recorded at fair value. Direct acquisition costs are added to the total purchase price of the acquisition. As an end result, the direct acquisition costs are assigned to Goodwill or to the value of the separable assets in a bargain purchase. General Expense....................................................................... Cash...................................................................................... Indirect acquisition costs are expensed. Paid-In Capital in Excess of Par................................................ Cash...................................................................................... 30,000 30,000 10,000 10,000

In a purchase, the costs to register and issue stock are treated as a reduction of the amount received for the stock.

4.

Pro Forma Income Statement Year Ended December 31, 20X2 Sales........................................................................................................... Less: Cost of Goods Sold ($340,000 + $25,000)............................................ Operating Expenses ($185,000 + $5,250*)........................................... Other Expenses.................................................................................... Net Income................................................................................................. *Operating expenses had the following adjustments: Depreciation expense: Equipment ($30,000 20 years)........................................................ Buildings ($75,000 20 years)........................................................... Total adjustments.................................................................................. $700,000 365,000 190,250 50,000 $ 94,750

$ $

1,500 3,750 5,250

5. Purchase price: Cash........................................................................................................... Direct acquisition costs incurred.................................................................. Total purchase price...................................................................................

$180,000 10,000 $190,000

25

Ch. 5Exercises

Exercise 1-5, Concluded Group Total $140,000 55,000 $190,000 140,000 50,000 Cumulative Group Total $140,000 195,000

Zone Analysis Priority accounts............................................................ Nonpriority accounts...................................................... Price paid....................................................................... Assign to priority............................................................ Assign to nonpriority...................................................... Goodwill......................................................................... Extraordinary gain.......................................................... Journal Entry:

Accounts Receivable*...................................................................... Inventory*........................................................................................ Equipment [(40 55) $50,000].................................................... Brand-name Copyright [(15 55) $50,000].................................. Cash........................................................................................ Current Liabilities*.................................................................... Mortgage Payable*................................................................... *Fair valueDr = Cr check amounts...............................................................................

200,000 270,000 36,364 13,636 190,000 80,000 250,000520,000 520,000

Acquisition Expense**..................................................................... Cash........................................................................................ **Indirect acquisition costs

15,000 15,000

6. Purchase price: Cash........................................................................................................... Direct acquisition costs incurred.................................................................. Total purchase price................................................................................... Group Total $140,000 55,000 $135,000 140,000 5,000

$125,000 10,000 $135,000 Cumulative Group Total $140,000 195,000

Zone Analysis Priority accounts............................................................ Nonpriority accounts...................................................... Price paid....................................................................... Assign to priority............................................................ Assign to nonpriority...................................................... Goodwill......................................................................... Extraordinary gain..........................................................

26

Ch. 5Exercises

Exercise 1-6, Concluded Journal Entry: Accounts Receivable*...................................................................... Inventory*........................................................................................ Cash........................................................................................ Current Liabilities*.................................................................... Mortgage Payable*................................................................... Extraordinary Gain................................................................... *Fair valueDr = Cr check amount................................................................................

200,000 270,000 135,000 80,000 250,000 5,000470,000 470,000

Note: There is no amount available to allocate to the nonpriority assets (equipment and brandname copyrights). Acquisition Expense**..................................................................... Cash........................................................................................ **Indirect acquisition costs 15,000 15,000

7. Purchase price: Cash........................................................................................................... Direct acquisition costs incurred.................................................................. Total purchase price................................................................................... Group Total $ 28,000* 500,000 $418,000 28,000 390,000

$400,000 18,000 $418,000 Cumulative Group Total $ 28,000 528,000

Zone Analysis Priority accounts............................................................ Nonpriority accounts...................................................... Price paid....................................................................... Assign to priority............................................................ Assign to nonpriority...................................................... Goodwill......................................................................... Extraordinary gain.......................................................... *$120,000 current assets $92,000 liabilities

Assignment and Allocation Schedule Fair Value $ 80,000 250,000 150,000 20,000 $500,000 Amount to Allocate $390,000 390,000 390,000 390,000 Allocated or Assigned Amount $ 62,400 195,000 117,000 15,600 $390,000

Nonpriority Accounts Land............................................ Buildings (net)............................. Equipment (net)........................... Patents........................................ Total nonpriority accounts...........

Percentage 16% 50% 30% 4% 100%

27

Ch. 5Exercises

Exercise 1-7, Concluded Journal Entry: Currents Assets*............................................................................. Land (from schedule)...................................................................... Buildings (net) (from schedule)........................................................ Equipment (net) (from schedule)..................................................... Patents (from schedule).................................................................. Cash........................................................................................ Liabilities*................................................................................. *Fair valueDr = Cr check amounts...............................................................................

120,000 62,400 195,000 117,000 15,600 418,000 92,000510,000 510,000

Acquisition Expense**..................................................................... Cash........................................................................................ **Indirect acquisition costs

5,000 5,000

8. Purchase price: Cash........................................................................................................... Direct acquisition costs incurred.................................................................. Total purchase price................................................................................... Zone Analysis Priority accounts............................................................ Nonpriority accounts...................................................... Price paid....................................................................... Assign to priority............................................................ Assign to nonpriority...................................................... Goodwill......................................................................... Extraordinary gain.......................................................... Journal Entry: Currents Assets*............................................................................. Cash........................................................................................ Liabilities*................................................................................. Extraordinary Gain................................................................... *Fair valueDr = Cr check amounts...............................................................................

$ 5,000 18,000 $23,000 Cumulative Group Total $ 28,000 528,000

Group Total $ 28,000 500,000 $ 23,000 28,000 5,000

120,000 23,000 92,000 5,000120,000 120,000

Note: There is no amount available to allocate to the nonpriority assets (land, buildings, equipment, and patents). Acquisition Expense**..................................................................... Cash........................................................................................ **Indirect acquisition costs 5,000 5,000

28

Ch. 5Exercises

9. (1) Purchase price..................................................................................... Fair value of net assets other than goodwill......................................... Goodwill............................................................................................... The estimated value of the unit exceeds $600,000, confirming goodwill. (2) (a) Estimated fair value of business units........................................... Book value of Anton net assets, including goodwill...................... No impairment exists. (b) Estimated fair value of business units........................................... Book value of Anton net assets, including goodwill...................... Estimated fair value of business units........................................... Fair value of net assets, excluding goodwill.................................. Re-measured amount of goodwill................................................. Existing goodwill........................................................................... Impairment loss............................................................................

$600,000 400,000 $200,000

$520,000 $500,000

$400,000 $450,000 $400,000 340,000 $ 60,000 200,000 $140,000

10. Machine = $200,000 Because goodwill (excess of total cost over the fair value of the net assets acquired) resulted from the purchase, the purchase asset may be recorded at its appraised value. Deferred tax liability = $16,800 In this tax-free exchange, depreciation on $56,000 ($200,000 appraised value$144,000 net book value) of the machines value is not deductible on future tax returns. The additional tax to be paid as a result of Lewisons inability to deduct the excess value assigned to the machine is $16,800 ($56,000 30%). Goodwill = $116,800 (net of deferred tax liability) $800,000 ($700,000 $16,800) Recorded as: Goodwill ($116,800 70%)......................................................................... Deferred tax liability (30% $166,857)...................................................... Net of tax goodwill....................................................................................... $166,857 (50,057) $116,800

29

Ch. 5Exercises

11. Current assets................................................................................. Equipment....................................................................................... Building........................................................................................... Deferred tax asset........................................................................... Goodwill.......................................................................................... Current liabilities....................................................................... Deferred tax liability.................................................................. Cash........................................................................................ Price paid........................................................................................ Less fair value of assets: Current assets.......................................................................... Equipment................................................................................ Building.................................................................................... Recorded (current) liabilities..................................................... Excess............................................................................................. Tax loss carryforward considerations: Deferred tax asset ($400,000 30%) = the value of the the remaining carryforward....................................................... Goodwill (net of deferred tax liability)............................................... Recorded as: Goodwill ($270,000 70%)...................................................... Deferred tax liability (30% $385,714).................................... Net of tax goodwill....................................................................

100,000 200,000 270,000 120,000 385,714 60,000 115,714 900,000 $ 900,000 $100,000 200,000 270,000 (60,000)

510,000 $ 390,000

(120,000) $ 270,000 $ 385,714 (115,714) $ 270,000

12. (1) Goodwill................................................................................... Cash.................................................................................... 2 (average income of $55,000 $25,000) (2) Paid-In Capital in Excess of Par............................................... Common Stock ($1 par)....................................................... Deficiency, $2 100,000 shares.................................................... Divide by $4 fair value..................................................................... Added number of shares.................................................................

60,000 60,000 50,000 50,000 $200,000 4 50,000

210

Ch. 5Exercises

APPENDIX A1A-1 (1) Calculation of Earnings in Excess of Normal: Average operating income: 20X1.......................................................... 20X2.......................................................... 20X3.......................................................... 20X4 (subtract 40,000).............................. 20X5..........................................................

$ 90,000 110,000 120,000 100,000 130,000 $550,000 5 years = $110,000

Less normal return on assets: Accounts receivable................................... Inventory.................................................... Land.......................................................... Building...................................................... Equipment................................................. Fair value of total assets.................................. Industry normal rate of return.......................... Normal return on assets............................ Expected annual earnings in excess of normal.... (a) (b) 5 $5,000 = $25,000 Goodwill

$100,000 125,000 100,000 300,000 250,000 $875,000 12% 105,000 $ 5,000

Capitalize the perpetual yearly earnings at 12%: Goodwill = = Yearly Excess Earnings Capitalization Rate $5,000 0.12

= $41,667 (c) Present value of a $5,000 annuity capitalized at 16%. The correct present value factor is found in the present value of an annuity of $1 table, at 16% for 5 periods. This factor multiplied by the $5,000 yearly excess earnings will result in the present value: 3.2743 $5,000 = $16,372 (2) The goodwill recorded would be $25,000. The journal entry would be: Accounts receivable............................................................. Inventory.............................................................................. Land..................................................................................... Building................................................................................ Equipment........................................................................... Goodwill............................................................................... Cash................................................................................ 100,000 125,000 100,000 300,000 250,000 25,000 900,000

211

Ch. 5Exercises

APPENDIX B1B-1 Qualifying General Shares: 1,000 Onan shares held prior to initiation date................................ 1,500 Onan shares held by subsidiary prior to initiation date........... 22,000 shares exchanged for common stock 2........................... 1,000 shares purchased for cash after initiation date...................... Total shares eligible to meet 90% requirement..................................... Test: 44,000 50,000 = 88%; 90% test has not been met.

n/a n/a 44,000 n/a 44,000

1B-2

Total Company S shares held by Company P....................................... Less ineligible shares: Shares owned prior to initiation date............................................... Share acquired with cash after the initiation date............................ Eligible shares.......................................................................................

96,000 (2,000) (2,000) 92,000

2,500 of the 92,000 eligible Company S shares received by Company P are a return of its own share. P 1 500 = = S 5 X X = 2,500 shares Therefore, only 89,500 (92,000 2,500) Company S shares have been received for purposes of applying the 90% rule, and the transaction does not qualify as a pooling of interest.

1B-3

(1) Number of shares to be issued: Purchase price........................................................................... Divided by fair value of the share............................................... Number of shares to be issued........................................................ (2) Current assets..................................................................... Property, plant, and equipment............................................ Accumulated depreciation.............................................. Current liabilities............................................................ Bonds payable............................................................... Common stock (36,000 5).......................................... Additional paid-in capital (200,000 180,000)............... Retained earnings..........................................................

$1,800,000 $50 36,000

400,000 2,200,000 500,000 100,000 800,000 180,000 20,000 1,000,000

212

Ch. 5Exercises

Exercise 1B-3, Concluded Equity Transfer

Taylor (Combiner)Common stock ($10 par)............ Additional paid-in capital............. Total paid-in capital..................... Retained earnings...................... Total equity................................. $ 200,000 0 $ 200,000 1,000,000 $1,200,000

Fischer (Issuer)Common stock ($5 par)......... Additional paid-in capital....... Total paid-in capital............... Retained earnings................. Total equity............................ 25,000 25,000 $ 180,000 20,000 $ 200,000 1,000,000 $1,200,000

General Expense................................................................. Cash..............................................................................

In a pooling, all acquisitions, stock issuance, and registration costs are expensed. (3) Investment in Fischer Industries.......................................... Current liabilities.................................................................. Bonds payable..................................................................... Accumulated depreciation.................................................... Current assets................................................................. Property, plant, and equipment........................................ Gain on sale of business................................................. Common stock..................................................................... Retained earnings................................................................ Gain on sale of business...................................................... Investment in Fischer Industries...................................... 1,800,000 100,000 800,000 500,000 400,000 2,200,000 600,000 200,000 1,000,000 600,000 1,800,000

Note: The shares received from the issuer may be recorded at the amount of the combiners net assets, in which case no gain is recorded. In this example, the book value assigned to the shares would be $1,200,000.

213

Ch. 5Exercises

1B-4

(1)

Equity Transfer

Hill BalancesCommon stock............................ Paid-in capital in excess of par.. . Total paid-in capital..................... Retained earnings...................... Total equity................................. $100,000 120,000 $220,000 175,000 $395,000

Add to KC BalancesCommon stock ($2 par)......... Paid-in capital in excess of par Total paid-in capital............... Retained earnings................. Total equity............................ 50,000 75,000 180,000 215,000 25,000 100,000 220,000 175,000 $220,000 0 $220,000 175,000 $395,000

Cash.................................................................................... Inventory.............................................................................. Equipment (net)................................................................... Plant (net)............................................................................ Accounts Payable.......................................................... Note Payable................................................................. Common Stock ($2 par)................................................. Retained Earnings......................................................... (2) Equity Transfer

Hill BalancesCommon stock....................... Paid-in capital in excess of par................................. Total paid-in capital................ Retained earnings.................. Total equity............................. $100,000 120,000 $220,000 175,000 $395,000

Reassignment

Add to KC BalancesCommon stock ($5 par)...... Paid-in capital in excess of par, Hill..................... Total paid-in capital............ Retained earnings.............. Total equity......................... 50,000 75,000 180,000 215,000 200,000 25,000 100,000 550,000 45,000 $550,000 (200,000) $350,000 45,000 $395,000

+130,000 130,000

Cash.................................................................................... Inventory.............................................................................. Equipment (net)................................................................... Plant (net)............................................................................ Paid-In Capital in Excess of Par (from KC).......................... Accounts Payable.......................................................... Note Payable................................................................. Common Stock ($5 par)................................................. Retained Earnings ($175,000 $130,000 needed to meet par requirement)..............................................

214

Ch. 5Exercises

1B-5

(1) Inventory.............................................................................. Retained Earnings............................................................... Building.......................................................................... Accrued Interest Payable............................................... (2) Equity Transfer

50,000 135,000 180,000 5,000

Lumina Company BalancesCommon stock............................ Paid-in capital in excess of par.. . Total paid-in capital..................... Retained earnings...................... Total equity................................. $ 50,000 450,000 $500,000 75,000 $575,000

Add to Zeeco Company BalancesCommon stock ($10 par)....... Paid-in capital in excess of par Total paid-in capital............... Retained earnings................. Total equity............................ 150,000 250,000 50,000 100,000 80,000 155,000 100,000 400,000 75,000 $100,000 400,000 $500,000 75,000 $575,000

Cash ...........................................................................100,000 Receivables......................................................................... Inventory.............................................................................. Land..................................................................................... Building................................................................................ Equipment........................................................................... Liabilities......................................................................... Common Stock ($10 par)................................................ Paid-In Capital in Excess of Par...................................... Retained Earnings...........................................................

1B-6

Common Stock ($5 par).............................................................. Paid-In Capital in Excess of Par.................................................. Paid-In Capital in Excess of Par (retirement of stock)........... Treasury Stock (at cost)........................................................ *May net against paid-in capital in excess of par. Equity Transfer

50,000 80,000 10,000* 120,000

Koempfer Company BalancesCommon stock............................ Paid-in capital in excess of par.. . Total paid-in capital..................... Retained earnings...................... Total equity................................. $100,000 170,000 $270,000 640,000 $910,000

Add to Marcus Company BalancesCommon stock...................... Paid-in capital in excess of par Total paid-in capital............... Retained earnings................. Total equity............................ 200,000 800,000 90,000 50,000 220,000 640,000 $ 50,000 220,000 $270,000 640,000 $910,000

Current Assets............................................................................ Property, Plant, and Equipment.................................................. Current Liabilities.................................................................. Common Stock ($5 par)........................................................ Paid-In Capital in Excess of Par............................................ Retained Earnings.................................................................

215

Ch. 5Exercises

CHAPTER 2UNDERSTANDING THE ISSUES1. a. Johnson has a passive level of ownership and in future periods will record dividend income of only 10% of Bicklers declared dividends. b. Johnson has an influential level of ownership and in future periods will record investment income of 30% of Bicklers net income. c. Johnson has a controlling level of ownership and in future periods will add 100% of Bicklers net income to its own net income. Bicklers nominal account balances will be added to Johnsons nominal account balances, which results in consolidated net income. d. Johnson has a controlling level of ownership and in future periods will add 80% of Bicklers net income to its own net income. Bicklers nominal account balances will be added to Johnsons nominal account balances. This will result in consolidated net income with a distribution to the noncontrolling interest equal to 20% of Bicklers income. 2. Corporation: The parent must have the right to appoint or elect a majority of the board members. Aside from majority ownership, the parent could gain control by holding securities that can be converted into common stock. Also, if the parent holds a large noncontrolling interest that is three times larger than any other owner or group, the parent is deemed to have control. Finally, the corporate charter, bylaws, or some other agreement may grant control to the parent. Partnership: Two things must be true: (1) The parent is the only general partner in a limited partnership or has the unilateral right to assume this role. (2) No other partner or group of partners has the power to dissolve the partnership or remove the general partner. 3. The elimination process serves to make the consolidated financial statements appear as though the parent had purchased the net assets of the subsidiary. The investment account and the subsidiary equity accounts are eliminated and replaced by the subsidiarys net assets.

216

4. a. Net Assets marked up $200,000 ($600,000 $400,000) Goodwill $300,000 ($900,000 $600,000) b. Net Assets marked up $160,000 [($600,000 $400,000) 80%] Goodwill $240,000 [$720,000 (80% $600,000)] 5. Zone Analysis Priority Nonpriority Group Total $ 50,000 800,000 Cumulative Total $ 50,000 850,000 $ 50,000 450,000 150,000 $650,000 $ 50,000 100,000 $150,000

a. $1,000,000 $350,000 = $650,000 excess Current Assets................................................... Fixed assets....................................................... Goodwill............................................................. b. $500,000 $350,000 = $150,000 excess Current Assets.......................................................... Fixed assets.............................................................

317

Ch. 3Exercises 5. (Concluded) c. $30,000 $350,000 = ($320,000) shortage Current Assets................................................... $ 50,000 Fixed Assets....................................................... (350,000) Extraordinary Gain............................................. (20,000) $(320,000) Group Total $ 50,000 800,000 Ownership Share $ 40,000 640,000 Cumulative Total $ 40,000 680,000

6. Zone Analysis Priority Nonpriority

a. $800,000 (80% $350,000) = $520,000 excess Current Assets ($50,000 difference 80%)....... $ 40,000 Fixed Assets ($450,000 difference 80%)........ 360,000 Goodwill............................................................. 120,000 $520,000 b. $600,000 (80% $350,000) = $320,000 excess Current Assets ($50,000 difference 80%)....... $ 40,000 Depreciable Assets (balance)............................ 280,000 (maximum = $360,000) $320,000 c. $30,000 (80% $350,000) = ($250,000) shortage Current Assets ($50,000 80%)....................... $ 40,000 Fixed Assets ($350,000 80%)........................ (280,000) Extraordinary Gain............................................. (10,000) $(250,000)

7. NCI = $70,000 [($200,000 + $50,000 + $300,000 $200,000) 20%]. The NCI account will be displayed on the consolidated balance sheet as a subdivision of equity. It is shown as a total, not broken down into par, paid-in capital, and retained earnings.

EXERCISES1. Solara Corporation Pro Forma Income Statement 10% $640,000 300,000 340,000 120,000 220,000 1,500 $221,500 20% $640,000 300,000 340,000 120,000 220,000 70% $1,010,000 530,000 480,000 195,000

Sales........................................................................... Cost of Goods Sold..................................................... Gross Profit................................................................. Selling and Administrative Expenses.......................... Operating Income....................................................... Dividend Income (10% $15,000 dividends)............. Investment Income (20% $65,000 reported income) Net Income.................................................................. Noncontrolling Interest (30% $65,000 reported income).......................... Controlling Interest......................................................

$233,000

13,000 285,000 19,500 $ 265,500

318

Ch. 3Exercises

2. (1) (a)Cash .......................................................................40,000* Accounts Receivable........................................................... Inventory.............................................................................. Property, Plant, and Equipment (net)................................... Goodwill............................................................................... Current Liabilities.............................................................. Bonds Payable.................................................................. Cash................................................................................. *Cash may be shown as a net credit of $490,000. Exercise 2-2, Concluded (b) Glass Company Balance Sheet Assets Current assets: Cash............................................................................. Accounts receivable..................................................... Inventory....................................................................... Property, plant, and equipment (net)................................. Goodwill............................................................................ Total assets...................................................................... Liabilities and Stockholders Equity Liabilities: Current liabilities........................................................... Bonds payable.............................................................. Stockholders equity: Common stock............................................................. Retained earnings........................................................ Total liabilities and stockholders equity............................ (2) (a)Investment in Plastic............................................................ Cash...................................................................................

70,000 100,000 270,000 230,000 80,000 100,000 530,000*

$ 30,000 120,000 150,000

$ 300,000 520,000 230,000 $1,050,000

$220,000 350,000 $200,000 280,000

$ 570,000 480,000 $1,050,000

530,000 530,000

(b)Investment in Plastic appears as a long-term investment on Glasss unconsolidated balance sheet. (c)The balance sheet would be identical to that which resulted from the asset acquisition of part (1).

319

Ch. 3Exercises

3. Common information: 100% Purchase Ownership interest........................................................................................ Vase Company's Balance Sheet before PurchaseBook Value Priority assets: Cash equivalents............................... Inventory........................................... Total priority assets..................... 60,000 120,000 180,000 Fair Value 60,000 160,000 220,000 100,000 300,000 Current liabilities............. Total liabilities............ Book Value 60,000 60,000

100%

Fair Value 60,000 60,000

Nonpriority assets: Land............................................ 50,000 Building (net)............................... 200,000

Total nonpriority assets............... Existing goodwill.............................. Total assets......................................

250,000 430,000

400,000 620,000

Stockholders equity: Common stock............. 100,000 Paid-in capital in excess of par............ 150,000 Retained earnings....... 120,000 Total equity.................. 370,000 Value of net assets..................... 370,000

560,000

Zone Analysis Priority accounts............................... Nonpriority accounts.........................

Group Total $160,000 400,000

Ownership Portion $160,000 400,000

Cumulative Total $160,000 560,000

1. Goodwill will be recorded if the price is above $560,000. 2. The fixed assets will be recorded at less than fair value if the price is below $560,000. 3. An extraordinary gain will be recorded if the price is below $160,000.

4. (1) Investment in Pine Inc.......................................................... Cash.............................................................................. Indirect Costs Expense........................................................ Cash.............................................................................. Group Total $150,000 700,000 Exercise 2-4, Concluded Price Analysis Price.........................................................................320

960,000 960,000 3,000 3,000 Cumulative Total $150,000 850,000

(2)

Zone Analysis Priority accounts.................... Nonpriority accounts..............

Ownership Portion $150,000 700,000

$960,000

Ch. 3Exercises

Assign to priority accounts....................................... Assign to nonpriority accounts................................. Goodwill...................................................................

150,000 700,000 110,000

full value full value

Determination and Distribution of Excess Schedule Price paid for investment................... Less book value interest acquired: Common stock............................ Paid-in capital in excess of par.... Retained earnings....................... Total equity............................ Interest acquired......................... Excess of cost over book value (debit).......................................... Adjustments: Inventory..................................... Land............................................ Bonds payable............................ Depreciable fixed assets (net)..... Goodwill...................................... Extraordinary gain....................... Total adjustments.................. $960,000 $300,000 380,000 20,000 $700,000 100%

700,000 $260,000 $ 50,000 100,000 110,000 $260,000 debit D1 debit D2 debit D3

(3).................................................................Elimination entries: Common Stock ($10 par)............................................ Paid-In Capital in Excess of Par.................................. Retained Earnings....................................................... ................................................Investment in Pine Inc. 700,000 Inventory..................................................................... Depreciable Fixed Assets........................................... Goodwill...................................................................... ................................................Investment in Pine Inc. 260,000 300,000 380,000 20,000

50,000 100,000 110,000

5. (1) Zone Analysis Priority accounts.................... Nonpriority accounts.............. Group Total $ 55,000 830,000 Ownership Portion $ 55,000 830,000 Cumulative Total $ 55,000 885,000

Goodwill would be recorded if the price is above $885,000.

321

Ch. 3Exercises

Exercise 2-5, Continued (2) An extraordinary gain would be recorded if the price is below $55,000. (3) Price Analysis Price......................................................................... Assign to priority accounts....................................... Assign to nonpriority accounts................................. Goodwill...................................................................

$1,000,000 55,000 830,000 115,000

full value full value

Determination and Distribution of Excess Schedule Price paid for investment................... Less book value interest acquired: Common stock............................ Paid-in capital in excess of par.... Retained earnings....................... Total equity............................ Interest acquired......................... Excess of cost over book value (debit).......................................... Adjustments: Inventory..................................... Land............................................ Bonds payable............................ Depreciable fixed assets............. Computer software...................... Goodwill...................................... Extraordinary gain....................... Total adjustments.................. Elimination entries: Common Stock ($5) Par...................................................... Paid-In Capital in Excess of Par........................................... Retained Earnings............................................................... Investment in Gemini Company..................................... Inventory.............................................................................. Depreciable Fixed Assets.................................................... Computer Software.............................................................. Goodwill............................................................................... Premium on Bonds Payable........................................... Investment in Gemini Company..................................... 200,000 300,000 175,000 675,000 15,000 200,000 5,000 115,000 10,000 325,000 $ 1,000,000 $200,000 300,000 175,000 $675,000 100% $ $

675,000 325,000 15,000 (10,000) 200,000 5,000 115,000 325,000 debit D1 credit D2 debit D3 debit D4 debit D5

$

322

Ch. 3Exercises

Exercise 2-5, Concluded (4) Price Analysis Price......................................................................... Assign to priority accounts....................................... Assign to nonpriority accounts................................. Goodwill................................................................... Extraordinary gain....................................................

$810,000 55,000 755,000

full value allocate

Determination and Distribution of Excess Schedule Price paid for investment................... Less book value interest acquired: Common stock............................ Paid-in capital in excess of par.... Retained earnings....................... Total equity............................ Interest acquired......................... Excess of cost over book value (debit).......................................... Adjustments: Inventory..................................... Bonds payable............................ Depreciable fixed assets............. Computer software...................... Goodwill...................................... Extraordinary gain....................... Total adjustments.................. $810,000 $200,000 300,000 175,000 $675,000 100%

675,000 $135,000 $ 15,000 (10,000) 136,747 (6,747) $135,000 debit D1 credit D2 debit D3 credit D4

Allocation Tables Market Percent Available Depreciable fixed assets.......... 700,000 84% 755,000 Computer software................... 130,000 16% 755,000 Total to other fixed assets. . 830,000 100% Elimination entries: Common Stock ($5) Par...................................................... Paid-In Capital in Excess of Par........................................... Retained Earnings............................................................... Investment in Gemini Company..................................... Inventory.............................................................................. Depreciable Fixed Assets.................................................... Premium on Bonds Payable........................................... Computer Software........................................................ Investment in Gemini Company..................................... 200,000 300,000 175,000 675,000 15,000 136,747 10,000 6,747 135,000 Assign 636,747 118,253 755,000 Book Adjust 500,000 136,747 125,000 (6,747) 625,000 130,000

323

Ch. 3Exercises

6. (1)

Zone Analysis Priority accounts.................... Nonpriority accounts..............

Group Total $(140,000) 800,000

Ownership Portion $(140,000) 830,000

Cumulative Total $(140,000) 660,000

Price Analysis Price......................................................................... Assign to priority accounts....................................... Assign to nonpriority accounts................................. Goodwill................................................................... Extraordinary gain....................................................

$ 620,000 (140,000) full value 760,000 allocate

Determination and Distribution of Excess Schedule Price paid for investment................... Less book value interest acquired: Common stock............................ Paid-in capital in excess of par.... Retained earnings....................... Total equity............................ Interest acquired......................... Excess of cost over book value (debit).......................................... Adjustments: Inventory..................................... Equipment (net)........................... Mineral rights.............................. Goodwill...................................... Extraordinary gain....................... Total adjustments.................. $620,000 $100,000 300,000 (50,000) $350,000 100%

350,000 $270,000 $ (40,000) (55,000) 415,000 (50,000) $270,000 debit D1 credit D2 debit D3 credit D4

Allocation Tables Market Percent Available Equipment (net)........................ 100,000 13% 760,000 Mineral rights............................ 700,000 88% 760,000 Total to other fixed assets. . 800,000 100% Assign 95,000 665,000 760,000 Book Adjust 150,000 (55,000) 250,000 415,000 400,000 360,000

324

Ch. 3Exercises

Exercise 2-6, Concluded (2) Elimination entries: Common Stock ($5 par)....................................................... Paid-In Capital in Excess of Par........................................... Retained Earnings......................................................... Investment in Villard Company...................................... Mineral Rights...................................................................... Inventory........................................................................ Equipment...................................................................... Goodwill......................................................................... Investment in Villard Company...................................... 100,000 300,000 50,000 350,000 415,000 40,000 55,000 50,000 270,000

7. (1)

Zone Analysis Priority accounts.................... Nonpriority accounts..............

Group Total $ (180,000) 1,000,000 Price Analysis

Ownership Portion $(144,000) 800,000

Cumulative Total $(144,000) 656,000

Price......................................................................... Assign to priority accounts....................................... Assign to nonpriority accounts................................. Goodwill...................................................................

$ 730,000 (144,000) full value 800,000 full value 74,000

Determination and Distribution of Excess Schedule Price paid for investment................... Less book value interest acquired: Common stock............................ Paid-in capital in excess of par.... Retained earnings....................... Total equity............................ Interest acquired......................... Excess of cost over book value (debit).......................................... Adjustments: Inventory..................................... Land............................................ Building (net)............................... Equipment (net)........................... Goodwill...................................... Extraordinary gain....................... Total adjustments.................. $730,000 $100,000 150,000 250,000 $500,000 80%

400,000 $330,000 $ 80,000 80,000 120,000 (24,000) 74,000 $330,000 debit D1 debit D2 debit D3 credit D4 debit D5

325

Ch. 3Exercises

Exercise 2-7, Concluded (2) Elimination entries: Common Stock ($5 par)....................................................... Paid-In Capital in Excess of Par........................................... Retained Earnings............................................................... Investment in Cooker..................................................... Inventory.............................................................................. Land..................................................................................... Building................................................................................ Goodwill............................................................................... Equipment...................................................................... Investment in Cooker..................................................... 80,000 120,000 200,000 400,000 80,000 80,000 120,000 74,000 24,000 330,000

8. (1) Zone Analysis Priority accounts.................... Nonpriority accounts..............

Group Total $170,000 500,000

Ownership Portion $136,000 400,000

Cumulative Total $136,000 536,000

Price Analysis Price......................................................................... Assign to priority accounts....................................... Assign to nonpriority accounts................................. Goodwill...................................................................

$656,000 136,000 400,000 120,000

full value full value

Determination and Distribution of Excess Schedule Price paid for investment................... Less book value interest acquired: Common stock............................ Paid-in capital in excess of par.... Retained earnings....................... Total equity............................ Interest acquired......................... Excess of cost over book value (debit).......................................... Adjustments: Inventory..................................... Property, Plant, and Equipment. . Goodwill [$120,000 (80% 100,000)]. Extraordinary gain....................... Total adjustments.................. $656,000 $ 50,000 130,000 370,000 $550,000 80%

440,000 $216,000 $ 96,000 80,000 40,000 $216,000 debit D1 debit D2 debit D3

326

Ch. 3Exercises

Exercise 2-8, Concluded (2) Elimination entries: Common Stock ($5) Par...................................................... Paid-In Capital in Excess of Par........................................... Retained Earnings............................................................... Investment in Saturn Company...................................... Inventory.............................................................................. Property, Plant, and Equipment........................................... Goodwill............................................................................... Investment in Saturn Company...................................... (3) Price Analysis Price......................................................................... Assign to priority accounts....................................... Assign to nonpriority accounts................................. Goodwill................................................................... Extraordinary gain.................................................... 40,000 104,000 296,000 440,000 96,000 80,000 40,000 216,000

$512,000 136,000 376,000

full value allocate

Determination and Distribution of Excess Schedule Price paid for investment................... Less book value interest acquired: Common stock............................ Paid-in capital in excess of par.... Retained earnings....................... Total equity............................ Interest acquired......................... Excess of cost over book value (debit).......................................... Adjustments: Inventory..................................... Property, Plant, and Equipment [376,000 (80% 400,000)]... Goodwill...................................... Extraordinary gain....................... Total adjustments.................. Elimination entries: Common Stock ($5) Par...................................................... Paid-In Capital in Excess of Par........................................... Retained Earnings............................................................... Investment in Saturn Company...................................... Inventory.............................................................................. Property, Plant, and Equipment........................................... Goodwill......................................................................... Investment in Saturn Company...................................... 40,000 104,000 296,000 440,000 96,000 56,000 80,000 72,000 $512,000 $ 50,000 130,000 370,000 $550,000 80%

440,000 $ 72,000 $ 96,000 56,000 (80,000) $ 72,000 debit D1 debit D2 credit D3

327

Ch. 3Exercises

9. (1) Zone Analysis Priority accounts.................... Nonpriority accounts..............

Group Total $ (30,000) 930,000

Ownership Portion $ (30,000) 930,000

Cumulative Total $ (30,000) 900,000

Price Analysis Price......................................................................... Assign to priority accounts....................................... Assign to nonpriority accounts................................. Goodwill...................................................................

$950,000 (30,000) full value 930,000 full value 50,000 950,000 950,000 20,000 30,000 100,000 20,000 50,000 10,000 420,000 650,000

Investment in Craig Company.............................................. Cash.............................................................................. (2) Accounts Receivable........................................................... Land..................................................................................... Building................................................................................ Discount on Bonds Payable................................................. Goodwill............................................................................... Deferred Tax Liability........................................................... Retained Earnings............................................................... Paid-In Capital in Excess of Par..................................... (3) Elimination entries: Common Stock.................................................................... Paid-In Capital in Excess of Par........................................... Investment in Craig Company........................................

300,000 650,000 950,000

328

Ch. 3Exercises

Chapter 3UNDERSTANDING THE ISSUES1. (a) Subsidiary Income = $30,000. Investment in Subsidiary ($400,000 + $30,000 $5,000) = $425,000. (b) Subsidiary Income ($30,000 $5,000) = $25,000. Investment in Subsidiary ($400,000 + $25,000 $5,000) = $420,000 (c) Subsidiary Income = $0 Dividend Income = $5,000 Investment in Subsidiary = $400,000 2. Date alignment means adjusting the investment account to reflect the same date as the subsidiary equity accounts so that their balances reflect the same point in time. (a) Simple equity methodThe subsidiarys equity accounts reflect beginning of the year balances, yet the investment account reflects an end of the year balance. During the consolidation process, the subsidiary income and the parents share of the subsidiarys declared dividends are closed to the investment account to return it to its beginning of the year balance. (b) Sophisticated equity methodThe subsidiarys equity accounts reflect beginning of the year balances, yet the investment account reflects an end of the year balance. During the consolidation process, the subsidiary income and the parents share of the subsidiarys declared dividends are closed to the investment account to return it to its beginning of the year balance. (c) Cost methodThe subsidiarys equity accounts reflect beginning of the year balances, yet the investment account reflects the balance on the date of acquisition. Therefore, the investment account is converted to its simple equity balance at the beginning of the period to create date alignment. 3. The noncontrolling share of consolidated net income is the outside ownership share of the subsidiarys internally generated income. This amount does not reflect adjustments based on fair values at the purchase date. In the past, it has been displayed as an expense. However, it should be displayed as a distribution of consolidated net income to the NCI.

4. (a) Parent net income for 20X1 $140,000 Parents share of subsidiary .................net income in 20X1 ($60,000 year 80%) 24,000 Amortization of excess for 20X1 ($100,000 10 year) (5,000) NCI share of subsidiary net income in 20X1 20%) ($60,000 12,000 Consolidated net income $171,000(b) NCI share of net income = $60,000 20% = $12,000. 5. In 20X1, consolidated net income would be reduced by $16,000 as a result of the inventory and equipment. The inventory would increase cost of goods sold by $8,000 [($60,000 $50,000) 80%]. The equipment would increase depreciation expense by $8,000 [($150,000 $100,000) 80% 5 years]. In 20X2, consolidated net income would be reduced by $8,000 as a result of the equipment. The equipment would increase depreciation expense by $8,000 [($150,000 $100,000) 80% 5 years]. The inventory would reduce controlling retained earnings by $8,000 in future years. 6. The total noncontrolling interest will consist of 20% of the subsidiarys common stock, paid-in capital in excess of par, retained earnings, dividends declared, and internally generated

329

Ch. 3Exercises income. The NCI is shown as a subdivision of equity as a total amount on the consolidated balance sheet. 7. Consolidated net income could exceed the sum of the separately calculated net incomes of the parent and subsidiary. This would occur if the fair value of the subsidiarys net assets were less than their book value, resulting in a markdown of assets. The amortization of this markdown would decrease expense; therefore, consolidated net income is increased.

8. Push-down accounting simplifies the consolidated worksheet procedures since the subsidiarys accounts will already reflect the fair value adjustments. There is no need to make adjustments to fair value on the consolidated worksheet since fair value already exists. The investment account is eliminated against subsidiary equity with no excess. Also, there is no need to record any additional amortization, since the subsidiary has already done this.

EXERCISES1. Zone Analysis Priority accounts.......................... Nonpriority accounts................... Group Total $ 0 325,000 Price Analysis Price............................................................................... Assign to priority accounts............................................. Assign to nonpriority accounts....................................... Goodwill......................................................................... $360,000 0 260,000 100,000 Ownership Portion $ 0 260,000 Cumulative Total $ 0 260,000

full value full value

Determination and Distribution of Excess Schedule Price paid for investment........................ Less book value interest acquired: Common stock.................................. Paid-in capital in excess of par......... Retained earnings............................. Total equity................................. Interest acquired............................... Excess of cost over book value (debit). . . Equipment.............................................. Goodwill.................................................. Total adjustments........................ $360,000 $ 50,000 100,000 150,000 $300,000 80%

240,000 $120,000 $ 20,000 100,000 $120,000 5 debit debit Amortization $4,000

(a)

Event

Simple Equity Method Investment in Hill Company ............ Subsidiary Income...................... 48,000 48,000

20X1 Subsidiary income of $60,000 reported to parent

330

Ch. 3Exercises

Dividends of $10,000 paid by Hill 20X2 Subsidiary income of $40,000 reported to parent Dividends of $10,000 paid by Hill

Cash................................................. Investment in Hill Company........ Investment in Hill Company............. Subsidiary Income...................... Cash................................................. Investment in Hill Company........Exercise 3-1, Concluded

8,000 8,000 32,000 32,000 8,000 8,000

(b)

Event 20X1 Subsidiary income of $60,000 reported to parent Dividends of $10,000 paid by Hill 20X2 Subsidiary income of $40,000 reported to parent Dividends of $10,000 paid by Hill (c) Event 20X1 Subsidiary income of $60,000 reported to parent Dividends of $10,000 paid by Hill 20X2 Subsidiary income of $40,000 reported to parent Dividends of $10,000 paid by Hill

Sophisticated Equity Method Investment in Hill Company*............ Subsidiary Income...................... Cash................................................. Investment in Hill Company........ Investment in Hill Company*............ Subsidiary Income...................... Cash................................................. Investment in Hill Company........ Cost Method No entry Cash................................................. Dividend Income......................... No entry Cash................................................. Dividend Income......................... 8,000 8,000 8,000 8,000 44,000 44,000 8,000 8,000 28,000 28,000 8,000 8,000

2. Zone Analysis Priority accounts.......................... Nonpriority accounts...................

Group Total $ 80,000 450,000

Ownership Portion $ 60,000 337,500

Cumulative Total $ 60,000 397,500

331

Ch. 3Exercises

Price Analysis Price............................................................................... Assign to priority accounts............................................. Assign to nonpriority accounts....................................... Goodwill......................................................................... Extraordinary gain.......................................................... Exercise 3-2, Concluded Determination and Distribution of Excess Schedule Price paid for investment........................ Less book value interest acquired: Common stock.................................. Paid-in capital in excess of par......... Retained earnings............................. Total equity................................. Interest acquired............................... Excess of cost over book value (debit). . . Inventory................................................. Buildings and equipment (net)................ Patent..................................................... Goodwill.................................................. Extraordinary gain................................... Total adjustments........................ $462,500 $ 50,000 150,000 200,000 $400,000 75% $462,500 60,000 337,500 65,000

full value full value

300,000 $162,500 $ 7,500 75,000 15,000 65,000 $162,500 1 debit 20 debit 10 debit debit Amortization $3,750 1,500

(a) Simple equity $462,500+ (75% Cost Increase in Retained Earnings of $78,000*)..................... Balance..................................................................................................... 58,500 $521,000

(b) Sophisticated equity $462,500+ (75% Cost Increase in Retained Earnings of $78,000*)..................... 58,500

20X4 Amortization of Excess ($7,500 Inventory + $3,750 Building + $1,500 Patent) 20X5 Amortization of Excess ($3,750 Building + $1,500 Patent)*Or 75% ($70,000 $20,000 + $48,000 $20,000)

(12,750) (5,250)

Balance.....................................................................................................

$503,000

(c) Cost $462,500

332

Ch. 3Exercises

333

3.

(1) Determination and Distribution of Excess Schedule Price paid for investment................... $250,000 Less book value of interest acquired: Common stock ($10 par)............. $100,000 Paid-in capital in excess of par. . . Retained earnings....................... 150,000 Total equity........................... $250,000 Interest acquired.......................... 80% 200,000 Excess of cost over book value (debit) $50,000 Amortization Existing goodwill................................. Excess available................................ $ 50,000 Adjustments: Depreciable fixed assets............. $ 50,000 10 debit $5,000 Goodwill....................................... Extraordinary gain....................... Total adjustments................. $ 50,000(2) CY1 Subsidiary Income........................................................... Investment in Salt Company............................................... To eliminate parents share of subsidiary earnings for the current year. CY2 Investment in Salt Company............................................ Dividends Declared............................................................ To eliminate parents share of dividends for the current year. EL Common StockSalt......................................................... Retained EarningsSalt........................................................ Investment in Salt Company............................................... To eliminate pro rata share of the beginningof-the-year Salt equity balances. D Depreciable Fixed Assets*................................................. Investment in Salt Company............................................... To distribute excess per determination and distribution of excess schedule. * Assuming no accumulated depreciation existed on the date of acquisition. A Depreciation Expense........................................................ Accumulated Depreciation.................................................. To amortize excess for the current year. 20,000 20,000

4,000 4,000

80,000 120,000 200,000

50,000 50,000

5,000 5,000

4-34

Ch. 4Problems

Exercise 3-3, Continued

(3)

Pepper Company and Salt Company Consolidated Income Statement For Year Ended December 31, 20X1Revenue.................................................................................................... Less expenses (add $5,000 adjustment)................................................... Consolidated net income........................................................................... Distributed to noncontrolling interest......................................................... Distributed to controlling interest............................................................... $250,000 190,000 $ 60,000 5,000 $ 55,000

Subsidiary Salt Company Income Distribution Internally generated net income $25,000 Adjusted income $25,000 NCI share 20% NCI 5,000 Parent Pepper Company Income Distribution Depreciable fixed assets.... $40,000 80% Salt adjusted income of $25,000 20,000 Controlling interest $55,000Exercise 3-3, Concluded

$

$5,000

Internally generated net income

(4)

Pepper Company and Salt Company Consolidated Balance Sheet December 31, 20X1 Assets

41

Ch. 4Problems

Current assets..... $190,000 Depreciable fixed assets $650,000 Less accumulated depreciation ...............519,000 Total assets........ $709,000

131,000

Liabilities and Stockholders EquityCurrent liabilities. $100,000 Stockholders equity: Noncontolling interest Controlling interest: Common stock $300,000 Retained earnings Total liabilities and stockholders equity

54,000 255,000 555,000 $709,000

4.

(1) CY1 Subsidiary Income........................................................... Investment in Salt Company............................................... To eliminate parents share of subsidiary earnings for the current year. CY2 Investment in Salt Company............................................ Dividends Declared............................................................ To eliminate parents share of dividends for the current year. EL Common StockSalt......................................................... Retained EarningsSalt........................................................ Investment in Salt Company............................................... To eliminate pro rata share of the beginningof-the-year Salt equity balances. D Depreciable Fixed Assets*................................................. Investment in Salt Company............................................... To distribute excess to plant assets. * No accumulated depreciation existed on the date of acquisition. Exercise 3-4, Concluded A Depreciation Expense........................................................ Retained EarningsPepper................................................... Accumulated Depreciation.................................................. To amortize excess for past and current year.

12,000 12,000

8,000 8,000

80,000 136,000 216,000

50,000 50,000

5,000 5,000 10,000

(2)

Pepper Company and Salt Company Consolidated Income Statement For Year Ended December 31, 20X2

41

Ch. 4Problems

Revenue............................................................................................. Less expenses (add $5,000 adjustment)............................................ Consolidated net income.................................................................... Distributed to noncontrolling interest.................................................. Distributed to controlling interest........................................................

$300,000 250,000 $ 50,000 3,000 $ 47,000

Subsidiary Salt Company Income Distribution Internally generated net income $15,000 Adjusted income $15,000 NCI share 20% NCI 3,000 Parent Pepper Company Income Distribution Depreciable fixed assets.... $5,000 $40,000 80% Salt adjusted income of $15,000 12,000 Controlling interest $47,000 Internally generated net income $

5.

(1)

Same as Exercise 3, Part 1. 15,000 15,000 4,000 4,000 80,000 120,000 200,000

(2) CY1 Subsidiary Income........................................................... Investment in Salt Company............................................... CY2 Investment in Salt Company............................................ Dividends Declared............................................................ EL Common StockSalt......................................................... Retained EarningsSalt....................................................... Investment in Salt Company...............................................

41

Ch. 4Problems

Exercise 3-5, Concluded DDepreciable Fixed Assets*.................................................... Investment in Salt Company............................................... *No accumulated depreciation existed on the date of acquisition. A Depreciation Expense........................................................... Accumulated Depreciation.................................................. (3) Same as Exercise 3, Part 3. (4) Same as Exercise 3, Part 4. 50,000 50,000

5,000 5,000

6.

(1) CY1 Subsidiary Income........................................................... Investment in Salt Company............................................... CY2 Investment in Salt Company............................................ Dividends Declared............................................................ EL Common StockSalt......................................................... Retained EarningsSalt....................................................... Investment in Salt Company............................................... DDepreciable Fixed Assets*.................................................... Investment in Salt Company............................................... Accumulated Depreciation.................................................. *No accumulated depreciation existed on the date of acquisition. A Depreciation Expense........................................................... Accumulated Depreciation.................................................. (2) Same as Exercise 4, Part 2.

7,000 7,000 8,000 8,000 80,000 136,000 216,000 50,000 45,000 5,000

5,000 5,000

7.

(1) Same as Exercise 3, Part 1. (2) CY2 Dividend Income.............................................................. Dividends Declared............................................................ To eliminate parents share of subsidiary dividends for the current year. 4,000 4,000

41

Ch. 4Problems

Exercise 3-7, Concluded EL Common StockSalt......................................................... Retained EarningsSalt....................................................... Investment in Brewer Company......................................... To eliminate pro rata share of the beginningof-the-year Salt equity balances. DDepreciable Fixed Assets*.................................................... Investment in Salt Company............................................... To distribute excess per determination and distribution of excess schedule. *No accumulated depreciation existed on the date of acquisition. A Depreciation Expense........................................................... Accumulated Depreciation.................................................. To amortize excess for the current year. (3) Same as Exercise 3, Part 3. (4) Same as Exercise 3, Part 4. 80,000 120,000 200,000

50,000 50,000

5,000 5,000

8.

(1) CV Investment in Salt Company............................................... Retained EarningsPepper............................................... Convert from cost to equity method by adding to investment account parents share of subsidiary equity increase. [80% ($170,000 $150,000)] CY2 Dividend Income.............................................................. Dividends Declared............................................................ To eliminate parents share of subsidiary dividends for the current year. EL Common StockSalt......................................................... Retained EarningsSalt....................................................... Investment in Salt Company............................................... To eliminate pro rata share of the beginningof-the-year Salt equity balances. DDepreciable Fixed Assets*.................................................... Investment in Salt Company............................................... To distribute excess to plant assets. *No accumulated depreciation existed on the date of acquisition.

16,000 16,000

8,000 8,000

80,000 136,000 216,000

50,000 50,000

41

Ch. 4Problems

Exercise 3-8, Concluded A Depreciation Expense........................................................... Retained EarningsPepper.................................................. Accumulated Depreciation.................................................. To amortize excess for past and current year. (2) Same as Exercise 4, Part 2. 5,000 5,000 10,000

9. Amortization Schedule Account Adjustments Inventory........................... Amortization: Investments.................. Bonds Payable............. Buildings (net)............... Equipment (net)............ Patent........................... Trademark.................... Total......................... Life 1 5 5 20 5 10 10 Annual Amount 5,000 4,000 2,000 10,000 27,600 1,800 1,600 20X1 5,000 4,000 2,000 10,000 27,600 1,800 1,600 52,000 4,000 2,000 10,000 27,600 1,800 1,600 47,000 4,000 2,000 10,000 27,600 1,800 1,600 47,000 4,000 2,000 10,000 27,600 1,800 1,600 47,000 20X2 20X3 20X4

10. (1) Determination and Distribution of Excess Schedule Price paid for investment........................ Less book value interest acquired: Common stock................................... Retained earnings.............................. Income of Karen, Jan. 1 to July 1....... Total equity................................... Interest acquired................................. Excess of book value over cost (credit). . Adjustments: Depreciable fixed assets.................... Goodwill............................................. Extraordinary gain.............................. Total adjustments......................... $310,000 $100,000 300,000 30,000 $430,0