Chap004-10e

Chapter 04 - Consolidated Financial Statements and Outside Ownership

CHAPTER 04CONSOLIDATED FINANCIAL STATEMENTS

AND OUTSIDE OWNERSHIPChapter Outline

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

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

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

II. Valuation of subsidiary assets and liabilities poses a problem when a noncontrolling interest is present follows the acquisition method

1. The accounting emphasis is placed on the entire entity that results from the business combination as measured by the sum of the acquisition-date fair values of the controlling and noncontrolling interests.

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

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

III. Consolidations involving a noncontrolling interest—subsequent to the date of acquisitionA. According to the parent company concept, all noncontrolling interest amounts are

calculated in reference to the book value of the subsidiary companyB. Only four noncontrolling interest figures are determined for reporting purposes

1. Beginning of year balance2. Interest in subsidiary’s current income3. Dividends paid during the period4. End of year balance

C. Noncontrolling interest balances are accumulated in a separate column in the consolidation worksheet1. The beginning of year figure is recorded on the worksheet as a component of

Entries S and A2. The noncontrolling interest's share of the subsidiary's income is established by a

columnar entry that simultaneously reports the balance in both the consolidated income statement and the noncontrolling interest column

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

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4. The end of year noncontrolling interest total is the summation of the three items above and is reported in stockholders' equity.

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IV. Step acquisitionsA. An acquiring company may make several different purchases of a subsidiary's stock

in order to gain controlB. Upon attaining control, all of the parent’s previous investments in the subsidiary are

adjusted to fair value and a gain or loss recognized as appropriateC. Upon attaining control, the valuation basis for the subsidiary is established at its

total fair value (the sum of the fair values of the controlling and noncontrolling interests)

Vl. Sales of subsidiary stockA. The proper book value must be established within the parent's Investment account

so that the sales transaction can be correctly recordedB. The investment balance is adjusted as if the equity method had been applied during

the entire period of ownershipC. If only a portion of the shares are being sold, the book value of the investment

account is reduced using either a FIFO or a weighted-average cost flow assumptionD. If the parent maintains control, any difference between the proceeds of the sale and

the equity-adjusted book value of the share sold is recognized as an adjustment to additional paid-in capital.

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

F. Any interest retained by the parent company should be accounted for by either consolidation, the equity method, or the fair value method depending on the influence remaining after the sale.

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Answers to Questions

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

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

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

3. A control premium is the portion of an acquisition price (above currently traded market values) paid by a parent company to induce shareholders to sell a sufficient number of shares to obtain control. The extra payment typically becomes part of the goodwill acquired in the acquisition attributable to the parent company.

4. Current accounting standards require the noncontrolling interest to appear in various locations within consolidated financial statements. The end of year balance can be found in the stockholders' equity section. The noncontrolling interest's share of net income is shown as an allocated component of consolidated net income.

5. The ending noncontrolling interest can be determined on a consolidation worksheet by adding the four components found in the noncontrolling interest column: (1) the beginning balance of the subsidiary’s book value, (2) the noncontrolling interest share of the adusted acquisition-date excess fair over book value allocation, (3) its share of current year subsidiary income, (4) less dividends paid to these outside owners.

6. Allsports should remove the pre-acquisition revenues and expenses from the consolidated totals. These amounts were earned (incurred) prior to ownership by Allsports and therefore should are not earnings for the current parent company owners.

7. Following the second acquisition, consolidation is appropriate. Once Tree gains control, the 10% previous ownership is included at fair value as part of the total consideration transferred by Tree in the acquisition.

8. When a company sells a portion of an investment, it must remove the carrying value of that portion from its investment account. The carrying value is based upon application of the equity method. Thus, if either the initial value method or the partial equity method has been used, Duke must first restate the account to the equity method before recording the sales transaction. This same method is also applied to the operations of the current period occurring prior to the time of sale.

9. Unless control is surrendered, the acquisition method views the sale of subsidiary's stock as a transaction with its owners. Thus, no gain or loss is recognized. The difference between the sale proceeds and the carrying value of the shares sold (equity method) is accounted for as an adjustment to the parent’s additional paid in capital.

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

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Answers to Problems

1. C

2. D At the date control is obtained, the parent consolidates subsidiary assets at fair value ($500,000 in this case) regardless of the parent’s percentage ownership.

3. D In consolidating the subsidiary's figures, all intra-entity balances must be eliminated in their entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it.

4. C An asset acquired in a business combination is initially valued at 100% acquisition-date fair value and subsequently amortized its useful life.Patent fair value at January 1, 2011............................................... $45,000Amortization for 2 years (10 year life)............................................ (9,000)Patent reported amount December 31, 2012................................. $36,000

5. C

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

7. B

8. A Amie, Inc. fair value at July 1, 2012:30% previously owned fair value (30,000 shares × $5) ............... $150,00060% new shares acquired (60,000 shares × $6)........................... 360,00010% NCI fair value (10,000 shares × $5)........................................ 50,000Acquisition-date fair value.............................................................. $560,000 Net assets' fair value....................................................................... 500,000 Goodwill ........................................................................................... $60,000

9. C

10. B Fair value of 30% noncontrolling interest on April 1................... $165,000 30% of net income for remainder of year ($240,000 × 30%)......... 72,000 Noncontrolling interest December 31............................................ $237,000

11. C Proceeds of $80,000 less $64,000 (⅓ × $192,000) book value = $16,000Control is maintained so excess proceeds go to APIC.

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12. B Combined revenues......................................................................... $1,300,000 Combined expenses........................................................................ (800,000)Trademark amortization.................................................................. (6,000)Patented technology amortization................................................. (8,000 )Consolidated net income ............................................................... $486,000

13. C Subsidiary income ($100,000 – $14,000 excess amortizations). . $86,000 Noncontrolling interest percentage............................................... 40 % Noncontrolling interest in subsidiary income.............................. $34,400 Fair value of noncontrolling interest at acquisition date............ $200,00040% change in Solar book value since acquisition...................... 52,000Excess fair value amortization ($14,000 × 40% × 2 years)........... (11,200)Noncontrolling interest at end of year........................................... $240,800

14. A West trademark balance.................................................................. $260,000 Solar trademark balance................................................................. 200,000 Acquisition-date fair value allocation............................................ 60,000 Excess fair value amortization for two years................................ (12,000)Consolidated trademarks................................................................ $508,000

15. A Acquisition-date fair value ($60,000 ÷ 80%).................................. $75,000Strand's book value ........................................................................ (50,000)Fair value in excess of book value ................................................ $25,000Excess assigned to inventory (60%) ................................$15,000Excess assigned to goodwill (40%) .................................$10,000Park current assets.......................................................................... $70,000 Strand current assets...................................................................... 20,000 Excess inventory fair value............................................................ 15,000 Consolidated current assets.......................................................... $105,000

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

17.B Add the two book values and include 10% (the $6,000 current portion) of the loan taken out by Park to acquire Strand.

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

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

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

2011 2012 Harrison income............................................................. $220,000 $260,000 Starr income.................................................................... 70,000 90,000 Acquisition-date excess fair value amortization......... (8,000 ) (8,000 ) Consolidated net income............................................... $282,000 $342,000

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

Noncontrolling interest fair value January 1, 2011 (above).......... $75,000 2011 income to NCI ([$70,000 – $8,000] × 10%)................................ 6,200 2011 dividends to NCI .................................................................... (3,000) Noncontrolling interest reported value December 31, 2011.... 78,200 2012 income to NCI ([$90,000 – $8,000] × 10%)................................ 8,200 2012 dividends to NCI .................................................................... (3,000 ) Noncontrolling interest reported value December 31, 2012 $83,400

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

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

Patterson’s consideration transferred ($31.25 × 80,000 shares)......... $2,500,000Noncontrolling interest fair value ($30.00 × 20,000 shares)................. 600,000Soriano’s total fair value January 1..................................................... $3,100,000

b. Each identifiable asset acquired and liability assumed in a business combination is initially reported at its acquisition-date fair value.

c. In periods subsequent to acquisition, the subsidiary’s assets and liabilities are reported at their acquisition-date fair values adjusted for amortization and depreciation. Except for certain financial items, they are not continually adjusted for changing fair values.

d. Soriano’s total fair value January 1..................................................... $3,100,000Soriano’s net assets book value......................................................... 1,290,000Excess acquisition-date fair value over book value.......................... $1,810,000Adjustments from book to fair values.................................................

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

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

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

To noncontrolling interest:Soriano’s revenues.......................................................................... $1,400,000Soriano’s expenses......................................................................... (600,000)Total excess amortization expenses (above)............................... (435,000 )Soriano’s adjusted net income....................................................... $ 365,000Noncontrolling interest percentage ownership............................ 20 % Noncontrolling interest share of consolidated net income......... $ 73,000

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To controlling interest:Consolidated net income................................................................ $1,615,000 Noncontrolling interest share of consolidated net income......... (73,000 ) Controlling interest share of consolidated net income............... $1,542,000

-OR-

Patterson’s revenues....................................................................... $3,000,000Patterson’s expenses...................................................................... 1,750,000Patterson’s separate net income................................................... $1,250,000Patterson’s share of Soriano’s adjusted net income

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

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

g. If Soriano’s acquisition-date total fair value was $2,250,000, then a bargain purchase has occurred.

Collective fair values of Soriano’s net assets.................................... $2,900,000Soriano’s total fair value January 1..................................................... $2,250,000Bargain purchase.................................................................................. $ 650,000

The acquisition method requires that the subsidiary assets acquired and liabilities assumed be recognized at their acquisition date fair values regardless of the assessed fair value. Therefore, none of Soriano’s identifiable assets and liabilities would change as a result of the assessed fair value. When a bargain purchase occurs, however, no goodwill is recognized.

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

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

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

Consolidated figures following January 1 acquisition date:Combined revenues ............................................................................. $1,500,000Combined expenses............................................................................. (1,031,000)Consolidated net income..................................................................... 469,000NCI in Sawyer’s income ([200,000 – 31,000] × 30%)......................... (50,700)Controlling interest in consolidated net income .............................. $418,300

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

(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues (2) $600,000 Parker expenses plus $300,000 of post-acquisition Sawyer expenses

plus $23,250 amortization expenses for 9 months(3) ($200,000 – 31,000) adjusted subsidiary income × 30% × ¾ year

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23. (15 minutes) Consolidated figures with noncontrolling interest

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

$6,500 per yearConsolidated figures:

Noncontrolling interest in subsidiary income = 40% ($50,000 revenues less $26,500 expenses) = $9,400

End-of-year noncontrolling interest:Beginning balance (40% $60,000) $24,000Income allocation 9,400Dividend reduction (40% $5,000) (2,000)End-of-year noncontrolling interest $31,400

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

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

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

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

b. Revaluation gain:1/1 equity investment in Amsterdam (book value) $178,00025% income for 1st 6 months 8,750 Investment book value at 6/30 186,750Fair value of investment at 6/30 (25% × $800,000) 200,000Gain on revaluation to fair value $ 13,250

c. Goodwill at 12/31:Fair value of Amsterdam at 6/30 $800,000Book value at 6/30 (700,000 + [70,000 ÷ 2]) 735,000 Excess fair value $ 65,000Allocation to goodwill (no impairment) $ 65,000

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

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

a. Posada records an accrual of $7,950 (see computation below) as "Equity Income from Sold Shares of Sabathia" for the January 1, 2012 to October 1, 2012 period which will appear in the 2012 consolidated income statement. The consolidation will continue to include all of Sabathia's accounts but now recognizing a 40% noncontrolling interest.

Sabathia fair value 1/1/10 .......................................... $1,200,000Sabathia book value .................................................. (1,130,000 ) Patent ......................................................................... $70,000Life of patent .............................................................. 5 yearsAnnual amortization .................................................. $14,000Posada’s share of Sabathia’s income accruing to shares sold:Sabathia's net income................................................ $120,000Excess patent fair value amortization...................... (14,000 ) Sabathia's adjusted net income................................ 106,000Fraction of year held.................................................. 9 /12 Sabathia’s adjusted income for 9 months............... 79,500Percentage owned by Posada................................... 70 % Posada’s share of Sabathia’s 9 month income ...... 55,650Shares sold—1,000 out of 7,000 .............................. 1/7Posada’s income shares sold .................................. $7,950

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

Posada’s investment book value 10/1/121/1/12 balance (given—equity method) ................... $1,085,000Recognition of 1/1/12–10/1/12 period:

Income accrual ($120,000 × 70% × ¾) ................ 63,000Dividends ($40,000 × 70% × ¾) ........................... (21,000)Amortization ($14,000 × 70% × ¾) ...................... (7,350 )

Pre-sale investment book value—10/1/12................ $1,119,650Computation of income effect—sale transaction10/1/12 book value (above) ....................................... $1,119,650Portion of investment sold (1,000/7,000 shares) .... 1 /7 Book value of investment sold ................................ $159,950Proceeds .................................................................... 191,000Credit to Posada’s additional paid-in capital ......... $ 31,050

c. Because Posada continues to hold 6,000 shares of Sabathia, control is still maintained and consolidated financial statements would be appropriate with a noncontrolling interest of 40 percent.

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26. (35 Minutes) (Consolidation entries and the effect of different investment methods)a. From the original fair value allocation, $30,000 is assigned based on the

fair value of the patent. With a 5-year life, excess amortization will be $6,000 per year.Because the equity method is in use, no Entry *C is required.Entry S

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

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

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

Entry A Patent ............................................................... 18,000Goodwill .......................................................... 190,000

Investment in Bandmor ............................ 145,600Noncontrolling Interest in Bandmor (30%) 62,400

(To recognize unamortized portions of acquisition-date fair value allocations. No control premium, so goodwill is allocated proportionately. Patent has undergone two years amortization)

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

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

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

Dividends Paid .......................................... 42,000(To eliminate current intra-entity dividend transfers—70% of $60,000)

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

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

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

Accounts Receivable ................................ 22,000(To eliminate intra-entity payable/receivable balance)

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26. (continued)b. If the initial value method had been applied, the parent would have

recorded only the dividends received as income rather than an equity accrual. Therefore, Entry *C is needed to adjust the parent's beginning retained earnings for 2011 to the equity method. During 2009 and 2010, the subsidiary earned a total net income of $171,000 but paid dividends of only $83,000. The parent's share of the difference is $61,600 (70% of $88,000 [$171,000 - $83,000]). In addition, the parent’s 70% share of excess amortization expense for two years must also be included ($8,400 = 2 years × $6,000 per year × 70%). The net amount to be recognized is $53,200 ($61,600 - $8,400).ENTRY *C

Investment in Bandmor .................................. 53,200Retained Earnings, 1/1/11 ......................... 53,200

c. If the partial equity method had been applied, only the excess amortization expenses for the previous two years would have been omitted from the parent's retained earnings. As shown above, that figure is $8,400 (2 years × $6,000 per year × 70%).ENTRY *C

Retained Earnings, 1/1/11 .............................. 8,400Investment in Bandmor ............................ 8,400

d. Noncontrolling interest in Bandmor's income—2011[($110,000 – 6,000) × 30%] .............................. $31,200

Noncontrolling interest fair value January 1, 2009 $210,000Adjustments to original basis:2009 Net Income to NCI...................................... $20,700

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

2010 Net income to noncontrolling interest .... $27,000Dividends to noncontrolling interest ...... (13,200) 13,800

2011 Net income to noncontrolling interest .... $31,200Dividends to noncontrolling interest ...... (18,000) 13,200

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

Worksheet adjustment S..................................................... $170,400Worksheet adjustment A..................................................... $62,4002011 income to noncontrolling interest ........................... 31,2002011 dividends to noncontrolling interest ....................... (18,000 )Noncontrolling interest in Bandmor 12/31/11................... $246,000

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27. (45 Minutes) (Asks about several consolidated balances and consolidation process. Includes the different accounting methods to record investment.)a. Schedule 1—Fair Value Allocation and Excess Amortizations

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

Life AmortizationsExcess fair value assigned to buildings 80,000

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

Total...................................................... $4,000b. $150,000 (see schedule 1 above)c. Entry (S)

Common stock (Taylor) ....................................... 300,000Additional paid-in capital (Taylor) ...................... 90,000Retained earnings (Taylor) .................................. 210,000

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

Entry (A)—no control premiumBuildings ............................................................... 80,000Goodwill ................................................................ 150,000

Investment in Taylor Company (80%) ........... 184,000Noncontrolling interest in Taylor (20%) ....... 46,000

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

Investment income .................................... $52,800(2) Partial equity method

Income accrual (80%) ..................................... $56,000(3) Initial value method

Dividends received (80%) .............................. $8,000e. Equity method

Initial fair value paid............................................. $664,000Income accrual 2009–2011 ($260,000 × 80%) .... 208,000Dividends 2009–2011 ($45,000 × 80%) ............... (36,000)Excess Amortizations 2009–2011 ($3,200 × 3) . . (9,600)

Investment in Taylor—12/31/11 ..................... $826,400

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27. (continued)

Partial Equity MethodInvestment in Taylor—12/31/11 = $836,000 (initial value paid plus income accrual of $208,000 less dividends of $36,000 [no excess amortizations])Initial Value MethodInvestment in Taylor—12/31/11 = $664,000 (original value paid)

f. Using the acquisition method, the allocation will be the total difference ($80,000) between the buildings' book value and fair value. Based on a 20 year life, annual excess amortization is $4,000.Miller book value—buildings .............................. $800,000Taylor book value—buildings ............................. 300,000Allocation .............................................................. 80,000Excess amortizations for 2009–2010 ($4,000 × 2) (8,000 )

Consolidated buildings account ............ $1,172,000 g. Acquisition-date fair value allocated to goodwill

(see schedule 1 above) .................................. $150,000h. If the parent has been applying the equity method, the stockholders'

equity accounts on its books will already represent consolidated totals. The common stock and additional paid-in capital figures to be reported are the parent balances only. As to retained earnings, the equity method will properly record all subsidiary income and amortization so that the parent balance is also a reflection of the consolidated total.

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28. (20 Minutes) (A variety of consolidated balances-midyear acquisition)Consideration transferred by Karson (cash and contingent consideration)........ $1,360,000 Noncontrolling interest fair value ................. 340,000Reilly’ fair value (given).................................. $1,700,000Book value of Reilly....................................... (1,450,000)*Fair value in excess of book value................ $250,000 Annual ExcessExcess fair value assigned Life Amortizations Trademarks .................................................. 150,000 5 years $30,000 Goodwill ....................................................... $100,000 indefinite -0-Total ........................................................... $30,000

*Reilly book value, January 1(Common stock + APIC + RE) ...................... $1,400,000

Increase in book value:Net income (revenues less cost of goods sold and expenses) ................... $120,000Dividends ............................................... (20,000 )Change during year ................................. $100,000Change during first 6 months of year..... 50,000

Reilly book value, July 1 (acquisition date)..... $1,450,000

CONSOLIDATION TOTALS: Sales (1) $1,050,000 Cost of goods sold (2) 540,000 Operating expenses (3) 265,000 Consolidated net Income $245,000 Noncontrolling Interest in sub. Income (4) $9,000

(1) $800,000 Karson revenues plus $250,000 (post-acquisition subsidiary revenue)

(2) $400,000 Karson COGS plus $140,000 (post-acquisition subsidiary COGS)

(3) $200,000 Karson operating expenses plus $50,000 (post-acquisition subsidiary operating expenses) plus ½ year excess amortization of $15,000

(4) 20% of post-acquisition subsidiary income less excess fair value amortization [20% × ½ year × (120,000 – 30,000)] = $9,000

Retained earnings, 1/1 = $1,400,000 (the parent’s balance because the subsidiary was acquired during the current year)

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

Goodwill = $100,000 (the original allocation)

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29. (25 Minutes) (A variety of consolidated questions and balances)a. Nascent applies the initial value method because the original price of

$414,000 is still in the Investment in Sea-Breeze account. In addition, the Investment Income account is equal to 60 percent of the dividends paid by the subsidiary during the year.

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

Excess fair assignments: Annual ExcessLife Amortizations

Buildings................................................ 60,000 6 years $10,000Equipment............................................. (20,000) 4 years (5,000)Patent..................................................... 100,000 10 years 10,000Total ..................................................... -0- $15,000

c. If the equity method had been applied, the Investment Income account would show the basic equity accrual less amortization: 60% of (the subsidiary's income of $90,000 less $15,000 excess fair value amortization) = $45,000.

d. The initial value method recognizes neither the increase in the subsidiary's book value nor the excess amortization expenses for prior years. At the acquisition date, the subsidiary’s book value was $550,000 as indicated by the assets less liabilities. At the beginning of the current year, the book value of the subsidiary is $780,000 as indicated by beginning stockholders' equity balances.Increase in book value during prior years

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

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

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

4-19


29. (continued)

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

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

4-20


30. Acquisition Method Consolidated Balances

AdjustmentsDecember 31, 2011 Pierson Steele & Eliminations NCI Consolidated

Revenues (1,843,000) (675,000) (2,518,000)Cost of goods sold 1,100,000 322,000 1,422,000 Depreciation expense 125,000 120,000 245,000 Amortization expense 275,000 11,000 (E) 80,000 366,000 Interest expense 27,500 7,000 34,500 Equity in Steele Income (121,500) (I)121,500 -0-Separate company net income (437,000) (215,000) Consolidated net income (450,500)NCI in Steele Income (13,500) (13,500)Controlling interest in CNI (437,000)

Retained Earnings 1/1 (2,625,000) (395,000) (S)395,000 (2,625,000)Net Income (437,000) (215,000) (437,000)Dividends paid 350,000 25,000 (D) 22,500 2,500 350,000 Retained Earnings 12/31 (2,712,000) (585,000) (2,712,000)

Current Assets 1,204,000 430,000 1,634,000 Investment in Steele 1,854,000 (D) 22,500 (S)769,500

(A)985,500 -0- (I) 121,500

Customer base -0- -0- (A)720,000 (E) 80,000 640,000 Buildings and Equipment 931,000 863,000 1,794,000 Copyrights 950,000 107,000 1,057,000 Goodwill (A)375,000 375,000 Total Assets 4,939,000 1,400,000 5,500,000

Accounts Payable (485,000) (200,000) (685,000)Notes Payable (542,000) (155,000) (697,000)NCI in Steele (S) 85,500

(A)109,500 (195,000) (206,000) (206,000)

Common Stock (900,000) (400,000) (S)400,000 (900,000)Additional Paid-In Capital (300,000) (60,000) (S) 60,000 (300,000)Retained Earnings 12/31 (2,712,000) (585,000) (2,712,000)Total Liab. and SE (4,939,000) (1,400,000) (5,500,000)

Fair value of Steele Company (1,710,000 ÷ 90%) $1,900,000Carrying amount acquired 725,000

Excess fair value 1,175,000to customer base 800,000to goodwill $375,000

4-21


30. (Continued)Controlling

NoncontrollingInterest Interest

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

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

Goodwill $337,500 $37,500

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

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

Excess fair value 1,137,500to customer base 800,000to goodwill $337,500

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

ControllingNoncontrolling

Interest InterestFair value at acquisition date $1,710,000 $152,500Relative fair values of identifiable net assets

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

Goodwill $337,500 -0-

4-22


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

a. Fair Value Allocation and AmortizationConsideration transferred by Krause............ $504,000Noncontrolling interest fair value.................. 126,000Leahy total fair value 1/1/11............................ $630,000Leahy book value 1/1/11................................ (380,000)Fair value in excess of book value ............... $250,000 Annual Excess

Life AmortizationsExcess price allocated to undervalued

Building....................................................... 45,000 5 years $9,000Trademark ................................................. 60,000 10 years 6,000Goodwill...................................................... $145,000 indefinite -0 -

$15,000Explanation of Consolidation Entries Found on WorksheetEntry *C: Convert the parent’s 1/1/12 retained earnings balance from the

cash basis to the accrual basis.Entry S: Eliminates stockholders' equity accounts of subsidiary while

recognizing noncontrolling interest balance (20%) as of the beginning of the current year.

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

Entry I: Eliminates Intra-entity dividend payments recorded as income by parent.

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

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

4-23


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

For Year Ending December 31, 2012

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

Sales (584,000) (250,000) (834,000)Cost of goods sold 194,000 95,000 289,000Operating expenses 246,000 65,000 (E) 15,000 326,000Dividend income (16,000 ) ______ (I) 16,000 -0-Separate company net income (160,000) (90,000) Consolidated net income 219,000NCI in Leahy's income (15,000) 15,000Krause’s interest in consolidated income (204,000)

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

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

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

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

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

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

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

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

4-24


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

Consolidated Income StatementFor Year Ending December 31, 2012

Sales $834,000Cost of goods sold $289,000Operating expenses 326,000Total expenses 615,000Consolidated net income $219,000

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

c. Consideration transferred by Krause for 80% of Leahy $504,000Noncontrolling interest fair value ($4.85 × 20,000 shares) 97,000Leahy fair value $601,000Fair value of Leahy’s underlying net assets 485,000Goodwill $116,000

If the noncontrolling interest fair value was $4.85 per share at the acquisition date, then goodwill declines to $116,000 and the noncontrolling interest total would also decline from $148,000 to $119,000.

Worksheet entries (S), (A1) and (A2) assuming a $4.85 noncontrolling interest acquisition-date fair value:

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

Investment in Leahy 360,000Noncontrolling interest 90,000

(A1) Buildings and equipment (net) 36,000Trademarks 54,000

Investment in Leahy 72,000Noncontrolling interest 18,000

(A2) Goodwill 116,000Investment in Leahy 116,000

ControllingNoncontrolling

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

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

Goodwill $116,000 -0-

4-25


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

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

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

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

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

Total $3,750

Consolidated Totals: Revenues = $1,900,000 (add the two book values) Cost of goods sold = $1,085,000 (add the two book values) Depreciation expense = $267,500 (add the two book values less $2,500

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

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

adjustment) Equity in income of Sam = -0- (eliminated so that the individual revenues

and expenses of the subsidiary can be included in the consolidated figures)

Net income = $487,250 (revenues less expenses) Retained earnings, 1/1 = $1,265,000 (parent company balance; subsidiary's

operations prior to acquisition do not affect consolidated figures) Noncontrolling interest in income of subsidiary = $26,250 ($135,000

reported income of the subsidiary less $3,750 amortization expense multiplied by 20 percent outside ownership)

Dividends paid = $260,000 (parent company balance; subsidiary's payments to parent are intra-entity, payments to outside owners decrease noncontrolling interest balance)

4-26


32. (continued) Retained earnings, 12/31 = $1,466,000 (consolidated balance on 1/1/11 plus

consolidated net income less noncontrolling interest in subsidiary's income less consolidated dividends)

Current assets = $1,493,000 (add the two book values) Investment in Sam = -0- (eliminated so that the individual assets and

liabilities of the subsidiary can be included in the consolidated figures) Land = $517,000 (add the book values plus the $165,000 excess allocation) Buildings and equipment (net) = $1,119,500 (add the book values less the

$25,000 allocation [asset was overvalued] plus the excess amortization) Copyright = $190,000 (book value + $100,000 excess allocation less

amortization for the year) Total assets = $3,319,500 Accounts payable = $339,000 (add book values) Notes payable = $581,250 (add the book values less $10,000 excess

allocation plus amortization) Noncontrolling interest in subsidiary = $183,250 (20% of fair value as of

1/1/11 [$170,000] plus noncontrolling interest in income of subsidiary [$26,250] less dividends paid to outside owners [$13,000])

Common stock = $300,000 (parent company balance) Additional paid-in capital = 450,000 (parent company balance) Retained earnings, 12/31 = $1,466,000 (computed above) Total liabilities and equities = $3,319,500

4-27


32. (continued) Acquisition Method Consolidation Entries Noncontrolling Consolidated

Accounts Father Sam Debit Credit Interest Totals Revenues......................................... (1,360,000) (540,000) (1,900,000)Cost of goods sold......................... 700,000 385,000 1,085,000Depreciation expense.................... 260,000 10,000 (E) 2,500 267,500Amortization expense.................... -0- 5,000 (E) 5,000 10,000Interest expense............................. 44,000 5,000 (E) 1,250 50,250Equity in income of Sam ............. (105,000) -0- (I) 105,000 -0-Separate company net income...... (461,000) (135,000) Consolidated net income............... (487,250)Noncontrolling interest in Sam's income (26,250) 26,250Controlling interest in CNI ............ (461,000)Retained earnings 1/1 ................... (1,265,000) (440,000) (S) 440,000 (1,265,000)Net income (above) ........................ (461,000) (135,000) (461,000)Dividends paid .......................... 260,000 65,000 (D) 52,000 13,000 260,000

Retained earnings 12/31 .......... (1,466,000) (510,000) (1,466,000)Current assets ............................... 965,000 528,000 1,493,000Investment in Sam ......................... 733,000 (D) 52,000 (S) 480,000

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

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

Total assets .............................. 2,867,000 948,000 3,319,500Accounts payable .......................... (191,000) (148,000) (339,000)Notes payable ................................ (460,000) (130,000) (A) 10,000 (E) 1,250 (581,250)NCI in Sam 1/1................................. (S) 120,000 NCI in Sam 12/31 (A) 50,000 (170,000)

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

4-28


33. (55 Minutes) (Consolidated worksheet)

a. Consideration transferred by Adams $603,000Noncontrolling interest fair value 67,000Acquisition-date total fair value $670,000Book value of Barstow (CS + RE 12/31/09) (460,000)Excess fair value over book value $210,000

Annual Excess Life Amortizations

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

120,000Goodwill $90,000 indefinite -0- Total $15,000

b. Because investment income is exactly 90 percent of Barstow's reported earnings, Adams apparently is applying the partial equity method.Explanation of Consolidation Entries Found on WorksheetEntry *C—Converts Adams's financial records from the partial equity method to the equity method by recognizing amortization for 2010. Total expense was $15,000 but only 90 percent (or $13,500) applied to the parent.Entry S—Eliminates subsidiary's stockholders' equity while recording noncontrolling interest balance as of January 1, 2011.Entry A—Records unamortized allocation balances as of January 1, 2011. The acquisition method attributes 10 percent of these amounts to the non-controlling interest.Entry I—Eliminates intra-entity income accrual for 2011.Entry D—Eliminates intra-entity dividend transfers.Entry E—Records amortization expense for current year.Columnar Entry—Recognizes noncontrolling interest's share of Barstow's net income as follows:Noncontrolling Interest in Barstow's Income (Columnar Entry)Barstow reported income ............................................................... $120,000Excess amortization expenses 2011.............................................. (15,000)

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

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

4-29


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

For Year Ending December 31, 2011 Noncontrolling Consolidated Adams Corp. Barstow Inc. Debit Credit Interest Totals

Revenues (940,000) (280,000) (1,220,000)Cost of goods sold 480,000 90,000 570,000Depreciation expense 100,000 55,000 (E) 6,000 161,000Amortization expense (E) 5,000 5,000Interest expense 40,000 15,000 (E) 4,000 59,000Investment income (108,000) (I) 108,000 -0-Separate company net income (428,000) (120,000) Consolidated net income (425,000)Income to noncontrolling interest (10,500) 10,500Income to controlling interest (414,500 ) Retained earnings, 1/1 (1,367,000) (340,000) (C*) 13,500 (1,353,500)

(S) 340,000Net income (428,000) (120,000) (414,500)Dividends paid 110,000 70,000 (D) 63,000 7,000 110,000Retained earnings, 12/31 (1,685,000) (390,000) (1,658,000)Current assets 610,000 250,000 860,000Investment in Barstow 702,000 (D) 63,000 (*C) 13,500 -0-

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

Land 380,000 150,000 (A) 30,000 560,000Buildings 490,000 250,000 (E) 2,000 (A) 18,000 724,000Equipment 873,000 150,000 (A) 32,000 (E) 8,000 1,047,000Patents (A) 45,000 (E) 5,000 40,000Goodwill (A) 90,000 90,000Total assets 3,055,000 800,000 3,321,000Notes payable (860,000) (230,000) (A) 16,000 (E) 4,000 (1,078,000)Common stock (510,000) (180,000) (S) 180,000 (510,000)Retained earnings, 12/31 (1,685,000) (390,000) (1,658,000)

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

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

4-30


34. (25 minutes) (Consolidated balances after a mid-year acquisition)a. Investment account balance indicates the initial value method.

Consideration transferred by Gibson...... $528,000Noncontrolling interest fair value ............ 352,000Davis acquisition-date fair value ............. 880,000Book value of Davis (below)..................... (765,000 ) Fair value in excess of book value .......... $115,000Excess assigned Annual Excessbased on fair value: Life Amortizations

Equipment (overvalued)................. (30,000 ) 5 years $(6,000)Goodwill .......................................... $145,000 indefinite -0-

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

Acquisition-date subsidiary book value:Book value of Davis, 1/1/11 (CS + 1/1 RE) ............... $740,000Increase in book value-net income (dividends

were paid after acquisition) ................................ $100,000Time prior to purchase (3 months) .......................... × ¼ year 25,000Book value of Davis, 4/1/11 (acquisition date) ....... $765,000Consolidated income statement:

Revenues (1) $825,000Cost of goods sold (2) $405,000Operating expenses (3) 214,500 619,500Consolidated net income 205,500Noncontrolling interest in CNI (4) 31,800 Controlling interest in CNI $173,700(1) $900,000 combined revenues less $75,000 (preacquisition subsidiary

revenue)(2) $440,000 combined COGS less $35,000 (preacquisition subsidiary

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

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

(4) 40% of post-acquisition subsidiary income less excess amortizationb. Goodwill = $145,000 (original allocation)

Equipment = $774,500 (add the two book values less $30,000 reduction to fair value plus $4,500 nine months excess

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

4-31


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

a. Consideration transferred by Truman .......... $720,000Noncontrolling interest fair value ................. 290,000Atlanta’s acquisition-date total fair value..... $1,010,000Book value of Atlanta..................................... (840,000)Fair value in excess of book value................ $170,000 Annual ExcessExcess fair value assigned Life Amortizations Patent .......................................................... 100,000 5 years $20,000 Goodwill ....................................................... $70,000 indefinite -0- Total ........................................................... $20,000

b. Goodwill allocation with control premium ControllingNoncontrolling

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

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

Goodwill $ 62,000 $ 8,000

c. Initial value at acquisition date $720,000 Truman’s share of Atlanta’s income for half year

([$120,000 – 20,000 amortization × ½ year] × 70%) 35,000 Dividends 2011 ($80,000 × ½ year × 70%) (28,000 )Investment account balance 12/31/11 $727,000

4-32


35. (continued)d. Consolidated Worksheet

TRUMAN COMPANY AND SUBSIDIARY ATLANTA COMPANYConsolidation Worksheet


Truman Atlanta Adjustments & Eliminations NCI Cons.Revenues (670,000) (400,000) (S)200,000 (870,000)Operating Expenses 402,000 280,000 (E) 10,000 (S)140,000 552,000 Income of subsidiary (35,000) (I) 35,000 0 Separate company net income (303,000) (120,000)Consolidated net income (318,000)NCI in Atlanta's income (15,000) 15,000 Controlling interest in CNI (303,000)

Retained earnings, 1/1 (823,000) (500,000) (S) 500,000 (823,000)Net income (above) (303,000) (120,000) (303,000)Dividends paid 145,000 80,000 (S) 40,000 12,000

(D) 28,000 145,000 Retained earnings, 12/31 (981,000) (540,000) (981,000)

Current assets 481,000 390,000 871,000 Investment in Atlanta 727,000 (D) 28,000 (S)588,000 0

(I) 35,000 (A1) 70,000 (A2) 62,000

Land 388,000 200,000 588,000 Buildings 701,000 630,000 1,331,000 Patent (A1)100,000 (E) 10,000 90,000 Goodwill (A2) 70,000 70,000 Total assets 2,297,000 1,220,000 2,950,000

Liabilities (816,000) (360,000) (1,176,000)Common stock (95,000) (300,000) (S) 300,000 (95,000)Additional paid-in capital (405,000) (20,000) (S) 20,000 (405,000)Retained earnings, 12/31 (981,000) (540,000) (981,000)Noncontrolling interest, 7/1 (A1) 30,000

(A2) 8,000(S) 252,000 (290,000)

Noncontrolling interest, 12/31 293,000 (293,000) Total liabilities and stockholders' equity (2,297,000) (1,220,000) 1,263,000 1,263,000 (2,950,000)

4-33


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

a. Fair value of Sysinger 1/1/12 (given) $1,750,000 Book value of Sysinger 1/1/12 (CS + APIC + RE) 1,300,000 Excess fair value over book value 450,000 To customer contract (4 year life) 400,000 To goodwill $50,000

b. Equity in earnings of Sysinger2012 income (150,000 × 95%) $142,500 Amortization (100,000 × 95%) (95,000)Equity in earnings of Sysinger $47,500

Revaluation of 15% block to fair valueConsideration transferred $184,500 2011 Income (100,000 × 15%) 15,000 2011 dividends (30,000 × 15%) (4,500 ) Book value at 1/1/12

195,000 Fair value at 1/1/12 262,500 Gain on revaluation $67,500

Investment account balanceFair value at 1/1/12 (15% block) $262,500 Consideration transferred 1/1/12 (80% block) 1,400,000 Equity earnings 2012

Income (95% × 150,000) 142,500Customer contract amortization (95,000) 47,500

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

4-34


36. (Continued) c. Allan and SysingerConsolidation Worksheet

For Year Ending December 31, 2012 Allan Sysinger Consolidation Entries Noncontrolling Consolidated

Accounts Company Company Debit Credit Interest Totals Revenues (931,000) (380,000) (1,311,000)Operating expenses 615,000 230,000 (E)100,000 945,000Equity earnings of Sysinger (47,500) -0- (I) 47,500 -0-Gain on revaluation (67,500 ) -0 - (67,500)Separate company net income (431,000) (150,000)

Consolidated net income (433,500) NCI in Sysinger’s income (2,500) 2,500

Allan’s share of CNI (431,000 ) Retained earnings, 1/1 (965,000) (600,000) (S) 600,000 (965,000)Net income (431,000) (150,000) (431,000)Dividends paid 140,000 40,000 (D) 38,000 2,000 140,000

Retained earnings 12/31 (1,256,000) (710,000) (1,256,000)Current assets 288,000 540,000 828,000Investment in Sysinger 1,672,000 -0- (D) 38,000 (S)1,235,000 -0-

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

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

Total assets 3,636,000 1,500,000 3,814,000Liabilities (1,300,000) (90,000) (1,390,000)Common stock (900,000) (500,000) (S) 500,000 (900,000)Additional paid-in capital (180,000) (200,000) (S) 200,000 (180,000)Retained earnings 12/31 (1,256,000) (710,000) (1,256,000)NCI in Sysinger, 1/1 -0- -0- (S) 65,000

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

4-35


37. (60 minutes) (Step acquisition—control previously acquired.)

a. According to the acquisition method, the valuation basis for a subsidiary is established on the date control is obtained, in this case January 1, 2010. Subsequent acquisitions are valued consistent with this initial value after adjusting the investment for subsidiary income and other changes.

Because subsequent acquisitions are considered as transactions in the parent’s own equity, no gains or losses are recorded. Differences in cash paid and the underlying value are recorded as adjustments to APIC.

Fair value of Keane Company 1/1/10 ($573,000 ÷ 60%) $955,000Keane income 2010 150,000Excess fair value amortization for copyright (20,000)*Keane dividends 2010 (80,000)Initial fair value adjusted to 1/1/11 $1,005,000Percent acquired in step acquisition 30 % Value assigned to 30% acquisition 301,500Cash paid for the 30% acquisition 300,000Credit to APIC from 30% step acquisition $1,500

*Fair value of Keane Company 1/1/10 ($573,000 ÷ 60%) $955,000 Book value of Keane Company 1/1/10 (given) 810,000 Excess fair value over book value 145,000 To copyright (6 year life) 120,000 To goodwill $25,000

Entry to record 30% additional investment in Keane:

1/1/11 Investment in Keane 301,500Cash 300,000APIC from step acquisition 1,500

b. Investment in Keane Company 1/1/10 $573,0002010 Equity earnings [60% × (150,000 – 20,000)] 78,0002010 Dividends received (60% × $80,000) (48,000)Additional acquisition of 30% interest 301,5002011 Equity earnings [90% × (180,000 – 20,000)] 144,0002011 Dividends received (90% × $60,000) (54,000)Investment in Keane Company 12/31/11 $994,500

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

Year Ending December 31, 2011

Consolidation Entries Noncontrolling Consolidated Accounts Bretz, Inc. Keane Co. Debit Credit Interest Totals Revenues (402,000) (300,000) (702,000)Operating expenses 200,000 120,000 (E) 20,000 340,000Equity in Keane’s income (144,000 ) (I) 144,000Separate company net income (346,000) (180,000 ) Consolidated net income (362,000)NCI in Keane’s income (16,000) 16,000Bretz’s share of CNI (346,000)Retained earnings, 1/1 (797,000) (500,000) (S) 500,000 (797,000)Net income (above) (346,000) (180,000) (346,000)Dividends paid 143,000 60,000 (D) 54,000 6,000 143,000Retained earnings, 12/31 (1,000,000) (620,000) (1,000,000)Current assets 224,000 190,000 414,000Investment in Keane Company 994,500 (S) 792,000 0

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

Trademarks 106,000 600,000 706,000Copyrights 210,000 300,000 (A)100,000 (E) 20,000 590,000Equipment (net) 380,000 110,000 490,000Goodwill (A) 25,000 25,000Total assets 1,914,500 1,200,000 2,225,000Liabilities (453,000) (200,000) (653,000)Common stock (400,000) (300,000) (S)300,000 (400,000)Additional paid-in capital (60,000) (80,000) (S) 80,000 (60,000)APIC-step acquisition (1,500) (1,500)Retained earnings,12/31 (1,000,000) (620,000) (1,000,000)Non-controlling interest 1/1 (A) 12,500

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

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

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38. (30 Minutes) (Determine SFAS 141 purchase method consolidated balances when parent uses equity method.

Purchase Price Allocation and Excess AmortizationsPurchase price ........................................... $250,000Book value acquired

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

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

Goodwill ..................................................... $20,400 indefinite -0-Total ........................................................... $4,800The parent uses the equity method: Investment income of $44,200 = $49,000 (70% × $70,000) less $4,800 amortization expense.

Bon Air Creedmo

orAdjustments & Eliminations NCI Consolidated

Revenues (694,800) (250,000) (944,800)Operating expenses 630,000 180,000 (E) 4,800 814,800 Investment income (44,200) -0- (I) 44,200 -0- Noncontrolling interest in Creedmoor income (21,000) 21,000 Net income (109,000) (70,000) (109,000)

Retained earnings, 1/1/10 (760,000) (260,000) (S)260,000 (760,000)Net income (109,000) (70,000) (109,000)Dividends paid 68,000 10,000 (D) 7,000 3,000 68,000 Retained earnings, 12/31/10 (801,000) (320,000) (801,000)

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

(I) 44,200 -0- (A)74,600

Land 241,000 50,000 (A) 7,000 298,000 Buildings (net) 289,000 200,000 489,000 Equipment (net) 165,200 40,000 (A)37,400 (E) 3,400 239,200 Goodwill -0- -0- (A)20,400 20,400 Total assets 1,089,000 410,000 1,238,600

Liabilities (180,000) (50,000) (A) 9,800 (E) 1,400 (221,600)Common stock (50,000) (40,000) (S) 40,000 (50,000)Additional paid-in capital (58,000) -0- (58,000)Noncontrolling interest 1/1/10 (S)90,000 (90,000)Noncontrolling interest 108,000 (108,000)

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12/31/10Retained earnings, 12/31/10 (801,000) (320,000) (801,000)Total liabilities and equities

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

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39. (50 Minutes) (A variety of questions and consolidated balances for a SFAS 141 purchase method combination where parent applies equity method)a. Equity accrual (60% × $70,000) ............................................... $42,000

Excess amortizations (below) ................................................. (5,600)Equity income (parent uses equity method) .................... $36,400

Purchase Price Allocation and Excess AmortizationsPurchase price ........................................... $400,000Book value acquired (60% of

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

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

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

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

c. $5,600—see a.d. $28,000—40% of $70,000 reported income figuree. Watson Corporation

Consolidated Income StatementFor the Year Ended December 31, 2011

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

Remaining f. Excess Amortizations Allocations

Allocations (see a) for 4 years 12/31/11Equipment (18,000) (7,200) (10,800)Buildings 93,000 24,800 68,200Bonds payable 12,000 4,800 7,200Goodwill 31,000 -0- 31,000

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39. (continued)

g. Noncontrolling interest, 1/1/11 (40% of book value of $630,000)$252,000Noncontrolling interest in subsidiary's income (see e) ........... 28,000Noncontrolling interest in subsidiary's dividends.................... (16,000)

(40% × $40,000) Noncontrolling interest in subsidiary, 12/31/11 ........................ $264,000

h. Watson CorporationConsolidated Balance Sheet

December 31, 2011Current assets $475,000 Current liabilities $560,000

Bonds Payable 462,800Equipment (net) 909,200 Noncontrolling interest 264,000Buildings (net) 1,001,200 Common stock 310,000Goodwill 31,000 Retained earnings 819,600Total assets $2,416,400 Total liabilities and equity $2,416,400

40. (40 Minutes) (Determine consolidated balances using the SFAS 141 purchase method, parent has applied the cost method)

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

Annual ExcessExcess cost allocated to buildings based Life Amortizationson fair value ($80,000 × 80%) ......................... 64,000 10 years $6,400Unpatented technology ($550,000 × 80%) .... 440,000 10 years 44,000Total ........................................................... $ -0- $50,400Schedule 1—Book Value of Morning (January 1, 2008)Book value, January 1, 2011

(stockholders' equity accounts) .............. $1,500,0002010 Increase in book value .......................... $200,0002009 Increase in book value .......................... 100,0002008 Increase in book value ........................ 80,000 380,000Book value, January 1, 2008 .......................... $1,120,000Revenues = $1,384,000 (add the two book values)Expenses = $550,400 (add the two book values and then include $50,400

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

subsidiary's reported income of $400,000)

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40. (continued)Net Income = $753,600 (consolidated revenues less both consolidated

expenses and the noncontrolling interest's share of net income)Retained earnings, 1/1/11 = $1,952,800 (the cost method is in use because

the original purchase price is still in the Investment account. Thus, the $380,000 increase in book value for the three previous years [income of $680,000 less dividends paid of $300,000] multiplied by the 80 percent ownership gives an equity accrual of $304,000. Excess amortization for these same three years totals $151,200 ($50,400× 3). Therefore, the parent's retained earnings must be increased by the net amount [$152,800 or $304,000 – $151,200])

Dividends paid = $380,000 (the parent company balance only)Retained earnings, 12/31/11 = $2,326,400 (beginning balance plus net

income less dividends paid)Cash = $500,000 (add book values)Receivables = $1,000,000 (add book values after removing $100,000 intra-

entity balance)Inventory = $900,000 (add book values)Investment in Morning = -0- (balance is removed so that subsidiary's

assets and liabilities can be included in the consolidated figures)Land = $1,300,000 (add book values)Buildings = $1,038,400 (add book values plus $64,000 allocation less four

years of $6,400 annual excess amortization)Unpatented technology = $264,000 ($440,000 original allocation less four

years of $44,000 annual amortization)Total assets = $5,002,400Liabilities = $720,000 (add book values after removing $100,000 intra-entity

balance)Noncontrolling Interest in subsidiary, 12/31/11 = $356,000 (20% of

subsidiary's beginning book value [$1,500,000] plus interest in subsidiary income [$80,000 as computed above] less 20% of subsidiary's dividends [$120,000])

Common stock = $1,000,000 (parent company balance)Additional paid-in capital = $600,000 (parent company balance)Retained earnings, 12/31/11 = $2,326,400 (computed above)Total liabilities and equities = $5,002,400

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

Consolidation EntriesEntry *C

Investment in Morning ......................................... 152,800Retained Earnings, 1/1/11 Good .................... 152,800

(To recognize Good's share of Morning's increase in book value during the 2008-2010 period as well as the amortization expense for that same period. Because the original $1,400,000 is still the balance in the investment in Morning account, the parent is applying the cost method. Thus, 80% of Morning's $380,000 increase in book value [$304,000] must be accrued. Excess amortizations of $151,200 [$50,400 per year for these three years] is also recorded leaving a net adjustment of $152,800.)

Entry SCommon Stock (Morning) ................................... 460,000Additional Paid-in Capital (Morning) .................. 40,000Retained Earnings, 1/1/11 (Morning) .................. 1,000,000

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

(To eliminate subsidiary's stockholders' equity accounts while recording the January 1, 2011 balance of the noncontrolling interest.)

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

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

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

Dividends Paid ................................................ 96,000(To eliminate intra-entity income accounts.)

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

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

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

Receivables ..................................................... 100,000(To eliminate intra-entity debt.)

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40. (continued) GOOD AND MORNINGConsolidation Worksheet


Consolidation Entries Noncontrolling Consolidated Accounts Good Morning Debit Credit Interest Totals

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

Net Income (580,000) (400,000) (753,600)Retained earnings, 1/1 Good (1,800,000) (*C) 152,800 (1,952,800) Morning (1,000,000) (S)1,000,000 -0-Net income (above) (580,000) (400,000) (753,600)Dividends paid 380,000 120,000 (I) 96,000 24,000 380,000

Retained earnings, 12/31 (2,000,000) (1,280,000) (2,326,400)Cash 300,000 200,000 500,000Receivables 700,000 400,000 (P) 100,000 1,000,000Inventory 400,000 500,000 900,000Investment in Morning 1,400,000 -0- (*C) 152,800 (S)1,200,000

(A) 352,800 -0-Land 700,000 600,000 1,300,000Buildings 300,000 700,000 (A) 44,800 (E) 6,400 1,038,400Unpatented Technology -0- -0- (A) 308,000 (E) 44,000 264,000

Total assets 3,800,000 2,400,000 5,002,400

Liabilities (200,000) (620,000) (P) 100,000 (720,000)Common stock (1,000,000) (460,000) (S) 460,000 (1,000,000)Additional paid-in capital (600,000) (40,000) (S) 40,000 (600,000)Retained earnings, 12/31 (above) (2,000,000) (1,280,000) (2,326,400)NCI in Morning, 1/1 -0- -0- (S) 300,000 (300,000 ) NCI in Morning, 12/31 -0- -0- (356,000) (356,000)

Total liabilities and stockholders' equity (3,800,000) (2,400,000) (5,002,400)

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Accounting Theory Research Case: Noncontrolling Interest

In deliberations prior to the issuance of SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements,” the FASB considered three alternatives for displaying the noncontrolling interest in the consolidated balance sheet

What were these three alternatives?1. As a liability2. As equity3. In the “mezzanine” area between liabilities and owners’ equity

What criteria did the FASB use to evaluate the desirability of each alternative?The FASB evaluated whether the classifications conformed to current definitions of financial statement elements (assets, liabilities, or equity) as articulated in FASB Concept Statement No. 6.

In what specific ways did FASB Concept Statement 6 affect the FASB’s evaluation of these alternatives?From SFAS 160 paragraphs 32-34

If it required that the noncontrolling interest be reported in the mezzanine, the Board would have had to create a new element—noncontrolling interest in subsidiaries—specifically for consolidated financial statements. The Board concluded that no compelling reason exists to create a new element specifically for consolidated financial statements to report the interests in a subsidiary held by owners other than the parent. The Board believes that using the existing elements of financial statements along with appropriate labeling and disclosure provides financial information in the consolidated financial statements that is representationally faithful, understandable, and relevant to the entity’s owners, creditors, and other resource providers.

The Board concluded that a noncontrolling interest in a subsidiary does not meet the definition of a liability in the Board’s conceptual framework. Paragraph 35 of Concepts Statement 6 defines liabilities as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events”

The Board concluded that a noncontrolling interest represents the residual interest in the net assets of a subsidiary within the consolidated group held by owners other than the parent. The noncontrolling interest, therefore, meets the definition of equity in Concepts Statement 6. Paragraph 49 of Concepts Statement 6 defines equity (or net assets) as “the residual interest in the assets of an entity that remains after deducting its liabilities.”

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Chap004-10e

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