Student Name:Class:

Problem 03-24

Part a. Michael Company and Aaron Company

- Fair Value allocation and Annual Amortization

Aaron fair valueBook value of subsidiaryExcess fair over book value

AnnualAssigned to specific accounts Life Excess based on fair market value: (years) Amortizations Royalty agreements Trademark Total

-Conversion to initial value method for years prior to 2013

Aaron retained earnings, 1/1/13Retained earnings at date of purchaseIncrease since date of purchaseExcess amortization expenses Conversion to equity method for years prior to 2013

Student Name:Class:

Problem 03-24

Part a. Consolidated Worksheet

MICHAEL COMPANY AND CONSOLIDATED SUBSIDIARYConsolidation Worksheet

For Year Ending December 31, 2013

Michael Aaron Consolidation Entries ConsolidatedAccounts Company Company Debit Credit Totals

Revenues $ (610,000) $ (370,000)Cost of goods sold 270,000 140,000 Amortization expense 115,000 80,000 Dividend income (5,000) - Net income $ (230,000) $ (150,000)

Retained earnings, 1/1 $ (880,000) (490,000)

Net income (230,000) (150,000)Dividends paid 90,000 5,000 Retained earnings, 12/31 $ (1,020,000) $ (635,000)

Cash $ 110,000 $ 15,000 Receivables 380,000 220,000 Inventory 560,000 280,000 Investment in Aaron Co. 470,000 -

Copyrights 460,000 340,000 Royalty agreements 920,000 380,000 Trademark - - Total assets $ 2,900,000 $ 1,235,000

Liabilities $ (780,000) $ (470,000)Preferred stock (300,000) - Common stock (500,000) (100,000)Additional paid-in capital (300,000) (30,000)Retained earnings, 12/31 (1,020,000) (635,000)Total liabilities and equity $ (2,900,000) $ (1,235,000)

Parentheses indicate a credit balance.

Student Name:Class:

Problem 03-24

Part b. Equity method - What account balances would be altered on Michael's financial statements?

NewAccount Balance

Part c. Equity method - What changes would be necessary in the consolidation entries in the December 31, 2013 Consolidation Worksheet?

Part d. Equity method - What changes would be created in the consolidation figures to be reported by this combination.

Given Data P03-24:

MICHAEL COMPANY

Aaron Company outstanding common stock 100% acquired by Michael CompanyMichael Company's $1 par common stock issued $ 20,000 for acquisition - number of sharesFair market value of Michael stock - per share $ 23.50 Aaron' reported retained earnings at date of purchase $ 230,000 Book value for Aaron at date of purchase $ 360,000 Aaron's royalty agreements undervalued by $ 60,000 Remaining life of Aaron's royalty agreements - years 6 Fair value of Aaron's trademark $ 50,000 Remaining life of Aaron's trademark - years 10

Michael AaronCompany Company12/31/2013 12/31/2013

Revenues $ (610,000) $ (370,000)Cost of goods sold 270,000 140,000 Amortization expense 115,000 80,000 Dividend income (5,000) - Net income $ (230,000) $ (150,000)

Retained earnings, 1/1/13 $ (880,000) $ (490,000)Net income (230,000) (150,000)Dividends paid 90,000 5,000 Retained earnings, 12/31/13 $ (1,020,000) $ (635,000)

Cash $ 110,000 $ 15,000 Receivables 380,000 220,000 Inventory 560,000 280,000 Investment in Aaron Company 470,000 - Copyrights 460,000 340,000 Royalty agreements 920,000 380,000 Total assets $ 2,900,000 $ 1,235,000

Liabilities $ (780,000) $ (470,000)Preferred Stock (300,000) - Common stock (500,000) (100,000)Additional paid-in capital (300,000) (30,000)Retained earnings, 12/31/13 (1,020,000) (635,000) Total liabilities and equity $ (2,900,000) $ (1,235,000)

Student Name:Class:

Problem 03-25

a. How was $135,000 Equity in Income of Small balance computed?

Life ExcessFair value allocations (years) Amortizations Land Equipment Goodwill

Total

b. Totals to be reported by business combination for year ending December 31, 2013

Account Name Balance ExplanationRevenues

Cost of goods sold

Depreciation expense

Equity in Income of Small

Net income

Retained earnings, 1/1/13

Dividends paid

Retained earnings, 12/31/13

Current assets

Investment in Small

Land

Buildings

Student Name:Class:

Problem 03-25

Equipment

Goodwill

Total assets

Liabilities

Common stock

Retained earnings, 12/31/13

Total liabilities & equity

Student Name:Class:

Problem 03-25

Part c. Consolidated Worksheet

GIANT COMPANY AND SMALL COMPANYConsolidation Worksheet

For Year Ending December 31, 2013

Giant Small Consolidation Entries ConsolidatedAccounts Company Company Debit Credit Totals

Revenues $ (1,175,000) $ (360,000)Costs of goods sold 550,000 90,000 Depreciation expense 172,000 130,000 Equity income of Small (135,000) - Net income $ (588,000) $ (140,000)

Retained earnings, 1/1 $ (1,417,000) $ (620,000)Net income (588,000) (140,000)Dividends paid 310,000 110,000 Retained earnings, 12/31 $ (1,695,000) $ (650,000)

Current assets $ 398,000 $ 318,000 Investment in Small 995,000 -

Land 440,000 165,000 Buildings (net) 304,000 419,000 Equipment (net) 648,000 286,000 Goodwill - - Total assets $ 2,785,000 $ 1,188,000

Liabilities $ (840,000) $ (368,000)Common stock (250,000) (170,000)Retained earnings (1,695,000) (650,000) Total liabilities and equity $ (2,785,000) $ (1,188,000)

Parentheses indicate a credit balance.

Part d.

GIANT COMPANYGeneral Journal

Account Debit CreditGoodwill impairment loss Investment in Small

Given Data P03-25:

Small outstanding common stock purchased by Giant 100%Portion of fair value price applied to undervalued land $ 90,000 Portion of fair value price applied to equipment with 10-year life $ 50,000 Portion of unallocated fair value price allocated to goodwill $ 60,000 Amount Small owes Giant on December 31, 2013 $ 10,000

Giant Small12/31/2013 12/31/2013

Revenues $ (1,175,000) $ (360,000)Cost of goods sold 550,000 90,000 Depreciation expense 172,000 130,000 Equity in income of Small (135,000) - Net income $ (588,000) $ (140,000)

Retained earnings, 1/1/13 $ (1,417,000) $ (620,000)Net income (588,000) (140,000)Dividends paid 310,000 110,000 Retained earnings, 12/31/13 $ (1,695,000) $ (650,000)

Current assets $ 398,000 $ 318,000 Investment in Small 995,000 - Land 440,000 165,000 Buildings (net) 304,000 419,000 Equipment (net) 648,000 286,000 Goodwill - - Total assets $ 2,785,000 $ 1,188,000

Liabilities $ (840,000) $ (368,000)Common stock (250,000) (170,000)Retained earnings (1,695,000) (650,000) Total liabilities and equity $ (2,785,000) $ (1,188,000)

Student Name: Morgan Bertone Class:

Problem 03-26

a. Fair Value Allocation and Annual AmortizationAnnual

Life ExcessAllocation (years) Amortizations

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

Correct!

Account Name Balance ExplanationRevenues $ (850,000) Add the parent and the subsiary together 600,000+250,000

Cost of goods sold $ 380,000 Add both the parent and subsiary together 280,000+100,000

Depreciation expense $ 179,000 Add both depreciation expenses together and also add the excess deprecation. 120,000+50,000+12,000-3,000

Amortization expense $ 5,000 The amortization expenses is from above from the customer list

Buildings (net) $ 625,000 Add the book values of the parent and subsiary of 500,000and 140,000 subtract the 30,000 overvalued add the deprecation of 3,000*5

Equipment (net) $ 450,000 Add together the subsiary of 200,000 and the parent of 250,000Not amoritized because a the end of five years no life left

Customer list $ 75,000 The book value minus the 5,000 multipled by the five years

Common stock $ 300,000 Just take the parents balance

Additional paid-in capital $ 50,000 Just take the parents balance

Student Name: Morgan Bertone Class:

Problem 03-26

Part b. Why can consolidated totals be determined without knowing the consolidation method used?

Beacause the consolidated totals are used for consolidated worksheetsor coming up with separate account balances which you are not asked to do in this problem.

Part c. If the equity method is used by the parent, what consolidation entries would be used?

MERGARONITE COMPANYGeneral Journal

Account Debit Credit

Consolidation Entry SCommon stock (Hill) 40,000 Correct!

Additional paid-in capital (Hill) 160,000 Correct!

Retained earnings, 1/1 600,000 Correct!

Investment in Hill 800,000 Correct!

(To eliminate beginning stockholders' equity of subsidiary)

Consolidation Entry ALand 20,000 Correct!

Equipment (net) 12,000 Correct!

Customer list (net) 80,000 Correct!

Buildings (net) 18,000 Correct!

Investment in Hill 94,000 Correct!

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

Consolidation Entry IInvestment income 86,000 Correct!

Investment in Hill 86,000 Correct!

(To remove equity income recognized during year-equity method accrual

[based on subsidiary's income] less amortization for the year)

Consolidation Entry DInvestment in Hill 40,000 Correct!

Dividends paid 40,000 Correct!

(To remove intercompany dividend payments)

Consolidation Entry EAmortization expense 5,000 Correct!

Depreciation expense 9,000 Correct!

Buildings 3,000 Correct!

Equipment 12,000 Correct!

Customer list 5,000 Correct!

(To recognize excess acquisition-date fair-value amortizations for the period)

Given Data P03-26:

Mergaronite Hill12/31/2013 12/31/2013

Revenues $ (600,000) $ (250,000)Cost of goods sold 280,000 100,000 Depreciation expense 120,000 50,000 Investment income not given NA Retained earnings, 1/1/13 (900,000) (600,000)Dividends paid 130,000 40,000 Current assets 200,000 690,000 Land 300,000 90,000 Buildings (net) 500,000 140,000 Equipment (net) 200,000 250,000 Liabilities (400,000) (310,000)Common stock (300,000) (40,000)Additional paid-in capital (50,000) (160,000)

Mergaronite's $10 par common stock issued $ 7,000 for acquisition of Hill - number of sharesFair market value of Mergaronite stock - per share $ 100 Hill's land undervalued by $ 20,000 Hill's buildings overvalued by $ 30,000 Hill's equipment undervalued by $ 60,000 Remaining life of buildings - years 10 Remaining life of equipment - years 5 Appraised value of Hill's customer list $ 100,000 Remaining life of Hill's customer list - years 20

Student Name:Class:

Problem 03-28

BRANSONGeneral Journal

Account Debit Credita.Acquisition Method:Investment in Wolfpack, Inc. Contingent performance obligation Cash

b.12/31/2011Loss from increase in contingent performance obligation Contingent performance obligation

12/31/2012Loss from increase in contingent performance obligation Contingent performance obligation

12/31/2012Contingent performance obligation Cash

c.Equity Method:Common stock - WolfpackRetained earnings - Wolfpack Investment in Wolfpack

Royalty agreementsGoodwill Investment in Wolfpack

Equity earnings of Wolfpack Investment in Wolfpack

Investment in Wolfpack Dividends paid

Amortization expense Royalty agreements

Student Name:Class:

Problem 03-28

d.Initial Value Method:Investment in Wolfpack Retained earnings - Branson

Common stockRetained earnings - Wolfpack Investment in Wolfpack

Royalty agreementsGoodwill Investment in Wolfpack

Dividend income Dividends paid

Amortization expense Royalty agreements

Given Data P03-28:

Branson paid cash for all outstanding common stock $ 465,000 of Wolfpack, Inc.Wolfpack's book value at date of acquisition $ 340,000 Book value of Wolfpack's common stock $ 200,000 Book value of Wolfpack's retained earnings $ 140,000 Fair value of Wolfpack's unrecorded royalty agreements $ 100,000 Remaining life of Wolfpack's royalty agreements 10 Additional cash paid to previous owners of Wolfpack $ 50,000 Probability adjusted present value of contingent consideration $ 35,000 Increased present value of contingency at 12/31/11 $ 40,000

Wolfpack's balances during subsequent years:

Net DividendsIncome Paid

2011 $65,000 $ 25,000 2012 75,000 35,000

Student Name:Class:

Problem 03-30

a. Investment in Jasmine Company

Schedule 1 - Acquisition-Date Fair-Value Allocation and AmortizationJasmine's acquisition-date fair valueBook value of JasmineFair value in excess of book value

AnnualAllocation to specific accounts Life Excess based on individual fair values: (years) Amortizations Equipment Buildings (overvalued) Goodwill

Total

Investment in Jasmine Company - 12/31/11

Jasmine's acquisition-date fair value2009 Increase in book value of subsidiary2009 Excess amortizations2010 Increase in book value of subsidiary2010 Excess amortizations2011 Increase in book value of subsidiary2011 Excess amortizations Investment in Jasmine Company

Student Name:Class:

Problem 03-30

b. Equity in subsidiary earnings

Income accrual Excess amortizations Equity in subsidiary earnings

c. Consolidated net income

Consolidated revenuesConsolidated expensesExcess amortization expenses Consolidated net income

d. Consolidated equipment

Book values added togetherAllocation of purchase priceExcess depreciation Consolidated equipment

e. Consolidated buildings

Book values added togetherAllocation of purchase priceExcess depreciation Consolidated buildings

f. Consolidated goodwill

Allocation of excess fair value to goodwill

g. Consolidated common stock

h. Consolidated retained earnings

Given Data P03-30:

Tyler paid cash for all outstanding stock $ 206,000 of JasmineJasmine's book value at date of acquisition 140,000 Jasmine's equipment was undervalued 54,400 Remaining life of Jasmine's equipment 8 Jasmine's building was overvalued $ 10,000 Remaining life of Jasmine's building 20

Jasmine's balances during subsequent years:

Net DividendsIncome Paid

2009 $ 50,000 $ 10,000 2010 60,000 40,000 2011 30,000 20,000

Financial records as of December 31, 2011:

Tyler JasmineRevenues-operating $(310,000) $ (104,000)Expenses 198,000 74,000 Equipment (net) 320,000 50,000 Buildings (net) 220,000 68,000 Common stock (290,000) (50,000)Retained earnings, 12/31/11 (410,000) (160,000)

Student Name:Class:

Problem 03-31

a. Picante 12/31/10 Investment in Salsa account balance

Consideration transferred 1/1/10Increase in Salsa's RE to 1/1/11In-process R&D write-off in 2010Amortization 2010Income 2011Dividends paid in 2011Amortization 2011Investment balance 12/31/11

Part b. Consolidated Worksheet

PICANTE CORPORATION AND SUBSIDIARY SALSA

Consolidation Worksheet

For Year Ending December 31, 2010

Picante Salsa Adjustments Consolidated

Accounts Corporation Corporation Debit Credit Totals

Sales (3,500,000) (1,000,000)

Cost of goods sold 1,600,000 630,000

Deprecation expense 540,000 160,000

Subsidiary income (203,000)

Net income (1,563,000) (210,000)

Retained earnings, 1/1/11 (3,000,000) (800,000)

Net income (1,563,000) (210,000)

Dividends paid 200,000 25,000

Retained earnings, 12/31/11 (4,363,000) (985,000)

Cash 228,000 50,000

Accounts receivable 840,000 155,000

Inventory 900,000 580,000

Investment in Salsa 2,042,000

Land 3,500,000 700,000

Equipment (net) 5,000,000 1,700,000

Goodwill 290,000

Total assets 12,800,000 3,185,000

Accounts payable (193,000) (400,000)

Long-term debt (3,094,000) (800,000)

Common stock - Picante (5,150,000)

Common stock - Salsa (1,000,000)

Retained earnings, 12/31/11 (4,363,000) (985,000)

Total liabilities and equity (12,800,000) (3,185,000) - -

Parentheses indicate a credit balance.

Given Data P03-31:

Picante paid cash for all outstanding voting stock $ 1,765,000 of Salsa

Salsa's balance sheet at 1/1/10:

Cash $ 14,000 Accounts Receivable 100,000 Land 700,000 Equipment (net) 1,886,000

$ 2,700,000

Accounts Payable $ 120,000 Long-term Debt 930,000 Common Stock 1,000,000 Retained Earnings 650,000

$ 2,700,000

Allocation at acquisition date:

Fair value of consideration transferred $ 1,765,000 Book value acquired 1,650,000 Excess fair value over book value 115,000 To in-process research and development $ 44,000 To equipment (8 year remaining life) 56,000 100,000 To goodwill (indefinite life) $ 15,000

Financial records as of December 31, 2011:

December 31, 2011 Picante SalsaSales $ (3,500,000) $ (1,000,000)Cost of goods sold 1,600,000 630,000 Deprecation expense 540,000 160,000 Subsidiary income (203,000)Net income $ (1,563,000) $ (210,000)

Retained earnings, 1/1/11 $ (3,000,000) $ (800,000)Net income (1,563,000) (210,000)Dividends paid 200,000 25,000 Retained earnings, 12/31/11 $ (4,363,000) $ (985,000)

Cash $ 228,000 $ 50,000 Accounts receivable 840,000 155,000 Inventory 900,000 580,000 Investment in Salsa 2,042,000 Land 3,500,000 700,000 Equipment (net) 5,000,000 1,700,000 Goodwill 290,000 Total assets $ 12,800,000 $ 3,185,000

Accounts payable $ (193,000) $ (400,000)Long-term debt (3,094,000) (800,000)Common stock (5,150,000) (1,000,000)Retained earnings, 12/31/11 (4,363,000) (985,000)Total liabilities and equities $ (12,800,000) $ (3,185,000)

Student Name: Morgan Bertone Class:

Problem 03-32

a. Relevant initial test to determine whether goodwill could be impaired

12/31 Carrying value $ 120,070,000 12/31 Fair value 110,000,000

$ 10,070,000 Correct!

Result:The fair value is higer then the carrying value therefore this leads you to have totest for impairment.

b. Calculation of Lydia reporting unit loss for the year

12/31 Fair value for Lydia $ 110,000,000 Fair value of assets and liabilities Cash $ 109,000 Receivables (net) 897,000 Movie library 60,000,000 Broadcast licenses 20,000,000 Equipment 19,000,000 Current liabilities (650,000) Long-term debt (6,250,000)Total net fair value 93,106,000 Implied fair value for goodwill 16,894,000 Carrying value for goodwill 50,000,000 Impairment loss $ 33,106,000

Correct!

Journal entry by Prine:Goodwill Impairment Loss 33,106,000 Investment in Lyndia 33,106,000

c. Consolidated net income for the year:

Revenunes 30,000,000 Ooperating Expenses (22,200,000)Impairment Loss (33,106,000)Net Income $ (25,306,000)

Correct!

d.12/31 Consolidated goodwill:

Try again!

e.12/31 Consolidated broadcast licenses $ 14,364,000

Correct!

f. Consolidated WorksheetPRINE and LYDIA

Consolidation Worksheet

December 31

Adjusting Entries Consolidated

Accounts Prine, Inc. Lydia Co. Debit Credit Totals

Revenues (18,000,000) (12,000,000) (30,000,000)

Expenses 10,350,000 11,800,000 [E] 50,000 22,200,000

Equity in Lydia earnings (150,000) - [ I ] 150,000 -

Impairment loss 33,106,000 - 33,106,000

Net income/loss 25,306,000 (200,000) 25,306,000

Retained earnings, 1/1 (52,000,000) (2,000,000) [S] 2,000,000 (52,000,000)

Dividends paid 300,000 80,000 [D] 80,000 300,000

Net Income 25,306,000 (200,000) 25,306,000

Retained earnings, 12/31 (26,394,000) (2,120,000) (26,394,000)

Cash 260,000 109,000 369,000

Receivables (net) 210,000 897,000 1,107,000

Investment in Lydia Co. 86,964,000 - [D] 80,000 [S] 69,500,000 -

[A] #VALUE!

[ I ] 150,000

Broadcast licenses 350,000 14,014,000 14,364,000

Movie library 365,000 45,000,000 45,365,000

Equipment (net) 136,000,000 17,500,000 [A] 500,000 [E] 50,000 153,950,000

Goodwill - - [A] 16,894,000

Total assets 224,149,000 77,520,000 232,049,000

Current liabilities (755,000) (650,000) (1,405,000)

Long-term debt (22,000,000) (7,250,000) (29,250,000)

Common stock (175,000,000) (67,500,000) [S] 67,500,000 (175,000,000)

Retained earnings, 12/31 (26,394,000) (2,120,000) (26,394,000)

Total liabilities and equity (224,149,000) (77,520,000) (232,049,000)

Parentheses indicate a credit balance.

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Correct!

Given Data P03-32:

Lydia common stock purchased by Prine 100%Fair value paid in cash and stock $120,000,000 Lydia's equipment undervalued by: $ 500,000 Lydia's equipment life remaining in years 10 Lydia reporting unit reduced fair value at 12/31 $110,000,000

Fair values of reporting unit through first year: Fair Values1/1 12/31

Cash $ 215,000 $ 109,000 Receivables (net) 525,000 897,000 Movie library (25-year life) 40,000,000 60,000,000 Broadcast licenses (indefinite life) 15,000,000 20,000,000 Equipment (10-year life) 20,750,000 19,000,000 Current liabilities (490,000) (650,000)Long-term debt (6,000,000) (6,250,000)

Balances at December 31: Prine, Inc Lydia Co.

Revenues $(18,000,000) $(12,000,000)Operating expenses 10,350,000 11,800,000 Equity in Lydia earnings (150,000) N/A Dividends paid 300,000 80,000 Retained earnings 1/1 (52,000,000) (2,000,000)Cash 260,000 109,000 Receivables (net) 210,000 897,000 Investment in Lydia 120,070,000 N/A Broadcast licenses 350,000 14,014,000 Movie library 365,000 45,000,000 Equipment (net) 136,000,000 17,500,000 Current liabilities (755,000) (650,000)Long-term debt (22,000,000) (7,250,000)Common stock (175,000,000) (67,500,000)