chap4

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Updated Sixth Edition
CHAPTER 4
CONSOLIDATED FINANCIAL STATEMENTS
AND OUTSIDE OWNERSHIP
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. Economic unit concept = $220,000 (fair market value)
b. Proportionate consolidation concept = $176,000 (80 percent of fair market value)
c. Parent company concept = $208,000 (all of the book value plus 80 percent of the
$60,000 difference between fair market value and book value)
3.
Basic information derived from this question:
Book value of Small ............................................................... $200,000
Fair market value of Small's-assets and liabilities
(includes adjustment for building) .................................... $210,000
Implied value of Small ($224,000/70%) ................................. $320,000
a. Economic Unit Concept—Valuation of Subsidiary Accounts
Implied value of subsidiary (above) .......................... $320,000
Annual Excess
Book value of assets and liabilities (100%) .............. {$200,000)
Life
Amortizations
Excess to be allocated based on fair market value .... $120,000
Allocated to building ..................................................
10,000 10 years
$1,000
Allocated to copyright ............................................... $110,000 20 years
5,500
Total ..................................................
0
$6,500
Economic Unit Concept—Consolidated Net Income
Giant net income ....................................................... $ 60,000
Small net income (100 %) ........................................... 30,000
Excess Amortization expenses (above) ...................... (6,500)
Total net income ................................................... $ 83,500
Noncontrolling interest in subsidiary income
(30% of Small's income after reduction for
excess amortizations) ........................................... (7,050)
CONSOLIDATED NET INCOME AFTER
NONCONTROLLING INTEREST ALLOCATION ........ $ 76,450
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b. Proportionate Consolidation Concept—Purchase Price Allocation
Purchase price ........................................................... $224,000
Book value equivalency—70% of total ....................... ( 140,000)
Excess cost over book value ................................ $ 84,000
Annual Excess
Allocated to building based on fair market value
Life Amortizations
($10,000 x 70%) .........................................................
7,000 10 years
$ 700
Allocated to copyright............................................... 77,000 20 years
3,850
Total ...........................................................
0
$4,550
Proportionate Consolidation Concept—Consolidated Net Income
Giant net income ........................................................ $ 60,000
Small net income (70% of book value) ....................... 21,000
Excess Amortization expenses (above) ...................... (4,550)
CONSOLIDATED NET INCOME ................................ $ 76,450
No noncontrolling interest figures are recognized under the proportionate
consolidation concept.
c. Parent Company Concept—Purchase Price Allocation
Purchase price ........................................................... $224,000
Book value 70% of total ............................................. ( 140,000)
Annual Excess
Excess cost over book value ..................................... $ 84,000 Life
Amortizations
Allocated to building based on fair market value
($10,000 x 70%) ........................................................
7,000 10 years
$ 700
Allocated to copyright .................................................. 77,000 20 years
3,850
Total .........................................................
0
$4,550
Parent Company Concept—Consolidated Net Income
Giant net income ........................................................ $ 60,000
Small net income (100%) ............................................ 30,000
Excess Amortization expenses (above) ...................... (4,550)
Total net income ......................................................... $ 85,450
Noncontrolling interest in subsidiary income (30% of book
value) .......................................................................... (9,000)
CONSOLIDATED NET INCOME AFTER
NONCONTROLLING INTEREST ALLOCATION ........ $ 76,450
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4.
The parent company concept is actually a hybrid approach to consolidations that blends
aspects of the economic unit concept and proportionate consolidation. In a manner
similar to that of proportionate consolidation, the parent company concept presumes
that consolidated financial statements are primarily for the benefit of the parent
company stockholders. Thus, the cost of making the purchase (and not the implied
value of the subsidiary) is of central importance to the establishment of subsidiary
account values. However, like the economic unit concept, the parent is viewed as having
an indivisible interest in the subsidiary company. For this reason, the full book value of
each subsidiary account is entered into the consolidation with no division being recorded
based on the ownership percentage.
5.
In practice, noncontrolling interest figures will appear in various locations within
consolidated financial statements. The end of year balance can be found in the liability
section, in the stockholders' equity section, or between these two. The noncontrolling
interest's share of net income can be shown as a reduction on either the income
statement or the statement of retained earnings. Based on current practice, this
textbook reports the ending balance between consolidated liabilities and stockholders'
equity with the income allocation shown as a reduction on the income statement.
6.
The ending noncontrolling interest can always be determined on a consolidation
worksheet by adding the components found in the noncontrolling interest column: the
beginning balance plus allocation of current year net income less dividends paid to
these outside owners. The ending balance can also be determined (at this point in the
exploration of consolidated financial statements) by multiplying the outside ownership
percentage by the subsidiary's ending book value. In subsequent chapters, this
calculation must be altered because of various adjustments made within the
consolidation process.
7.
Whenever the purchase of a subsidiary company is made within a fiscal period, the
accountant faces a problem of establishing comparable figures between current and
subsequent years. The subsidiary’s operational accounts could be included in the
consolidation for only the portion of the year after the purchase but comparison with the
full year figures reported in the future would be difficult if not impossible. Therefore, the
subsidiary’s revenue and expense accounts are usually consolidated in total as if the
purchase had taken place on the first day of the current period. Although this procedure
helps to ensure comparability, some accounting must be made to remove the results of
the subsidiary's operations prior to acquisition. A Preacquisition Income account serves
this purpose by reducing consolidated net income by the amount earned by the previous
ownership during this time. The figure reported is the subsidiary’s income for the period
before the takeover multiplied by the percentage of shares acquired.
In this combination, Sandridge has apparently purchased a subsidiary during the year.
The $55,000 preacquisition income being reported represents the current earnings of
the acquired portion of the subsidiary generated during the period before the purchase.
8.
In previous years, Tree has appropriately utilized the market-value method in accounting
for its investment In Limb. Now, following a second acquisition, consolidation has
become applicable. These two methods are not considered to be comparable.
Therefore, at the point in time that Tree begins to produce consolidated statements, all
previous financial reports must be restated as if the equity method had been applied
since the date of the first acquisition. This handling presents the reader of the financial
statements with figures that are more comparable from year to year.
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9.
When a company sells any portion of an investment, a gain or loss must be recognized.
This income effect is the difference between the proceeds received from this transaction
and the book value of the investment (or the portion of the investment being sold). The
correct book value can only be determined based upon the consistent application of the
equity method. Thus, if either the cost 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.
10.
In selling a portion of a subsidiary, a gain or loss is recognized by the parent based on
the difference in the proceeds received and the book value of that portion of the
investment that is removed from the financial records (after being adjusted, if necessary,
to the equity method).
11.
Unless control is surrendered, the economic unit concept views the sale of subsidiary's
stock as a treasury stock transaction. Thus, no gain or loss can be recognized.
12.
The decision as to the method to be utilized in accounting for the remaining shares is
totally dependent upon the relationship that now exists between the two companies. If
Duke has retained control, consolidation is still required. However, if the parent now has
only the ability to significantly influence the decision-making process, the equity method
should be applied. A third possibility does exist: Duke may have lost the power, because
of the sale, to exercise even significant influence. The market-value method then
becomes appropriate.
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ANSWERS TO PROBLEMS
1. D The economic unit concept consolidates assets at fair market value. The
proportionate consolidation concept uses the ownership percentage (60%,
in this case) of fair market value. The parent company concept
consolidates all of the asset's book value ($200,000) plus the ownership
percentage of the difference between market value and book value (60% of
$300,000 or $180,000).
2. D If the subsidiary's figures are consolidated, all of any intercompany
balance is intercompany and must be eliminated within the process of
producing financial statements for external reporting purposes.
3. B Purchase Price ...............................................
Book Value of Net Assets
($760,000 x 80%) ........................................
Purchase Price in Excess of Book Value ......
Annual Excess
Excess Purchase Price Assigned Based
on Market Value:
—Equipment ($60,000 x 80%) ..................
$12,000
—Patent ($45,000 x 80%) ..........................
3,600
Total ..........................................................
$692,000
(608,000)
$ 84,000
Life Amortizations
48,000
4 years
36,000
10 years
0
$15,600
Patent = $28,800 (allocation after two years of amortization)
4. A Undervaluation of Building ($310,000 - $260,000) .......................
Ownership Acquisition ............................................................
Allocation to Building at January 1, 2001 ...............................
Life of Building ..........................................................................
Annual Amortization .................................................................
$ 50,000
70%
$ 35,000
10 years
$ 3,500
Consolidated Building, 12/31/03 = $779,500 (add the two book values plus
the initial allocation after three years of amortization)
5. D Purchase Price ...............................................
Book Value of Net Assets ($880,000 x 80%) ..
Purchase Price in Excess of Book Value .....
Annual Excess
Excess Purchase Price Assigned Based
on Market Value:
—Building ($70,000 x 80%) .......................
$5,600
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$840,000
(704,000)
$136,000
Life
56,000
Amortizations
10 years
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—Goodwill .................................................
80,000
indefinite
0
6.
Total ..........................................................
0
$5,600
Consolidated Expenses = $1,340,600 (add the two book values plus the
annual excess amortization of the building allocation)
B Consolidated Revenues = $1,100,000 (add the two book values)
Consolidated Expenses = $708,800 (add the two book values plus the
annual excess amortization)
Consolidated Net Income = $351,200 (consolidated revenues less
consolidated expenses less non-controlling interest of $40,000)
7. C
8. B
9. A Allocation of First Purchase
Purchase price ................................................
Book value of net assets ($400,000 x 30%) ..
Goodwill ..........................................................
$160,000
120,000
$ 40,000
Allocation of Second Purchase
Purchase price ................................................
Book value of net assets ($550,000 x 40%) ..
Goodwill ..........................................................
$240,000
220,000
$ 20,000
Total Goodwill = $60,000
10. C
11. A Subsidiary’s reported income .......................
Outside ownership ....................................
Noncontrolling interest .............................
$240,000
30%
$ 72,000
Preacquisition Income
Subsidiary's reported income ..................
$240,000
Previous ownership ..................................
70%
Period of previous ownership .................. 3/12 Yr.
Preacquisition income ..............................
$ 42,000
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12. D Purchase Price Allocation and Amortization
Purchase price ..........................................
Book value equivalency (60%) ..................
Purchase price in excess of book value .......
Annual Excess
Excess cost assigned to specific
accounts based on fair market value
Equipment (60%) .......................................
$3,600
Buildings (60%) ..........................................
1,200
Total .....................................................
$300,000
(240,000)
$ 60,000
Life Amortizations
36,000
10 years
24,000
20 years
0
$4,800
Consolidated Net Income
Consolidated revenues (book values added) ...............................
Consolidated expenses (book values added) ..............................
Excess amortization expenses (above) ........................................
Consolidated net income ...............................................................
$1,300,000
(800,000)
(4,800)
$ 495,200
13. B 40% of the subsidiary's income ($100,000) and 40% of the subsidiary's
ending book value ($530,000, as found by subtracting liabilities from
assets): $40,000 and $212,000 respectively.
14. A David's book value .........................................................................
Mark's book value ...........................................................................
Allocation from purchase price (see 12 above) ...........................
Excess amortization for two years ...............................................
Consolidated equipment account ............................................
$260,000
200,000
36,000
(7,200)
$488,800
15. A Purchase price ................................................................................
90% of Strass's book value ...........................................................
Price paid in excess of book value ...............................................
$60,000
(45,000)
$15,000
Excess assigned to Inventory (60%) .............................................
Excess assigned to goodwill (40%) ..............................................
$ 9,000
$ 6,000
Consolidated current assets—$99,000 (add the two book values and
include $9,000 allocation above)
16. C Add the two book values and include $6,000 allocation to goodwill.
17. B Add the two book values and include 10% (the current portion) of the loan
taken out by Polk to acquire Strass.
18. B Add the two book values and include 90% (the noncurrent portion) of the
loan taken out by Polk to acquire Strass. in addition, because the problem
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so indicates, the 10% noncontrolling interest is included. These outside
owners report a $5,000 balance or 10% of the book value of the subsidiary.
19. A At the date of a purchase, only the parent's stockholders' equity accounts
are included.
20.
(8 Minutes) (Determine consolidated balances with a noncontrolling
interest present)
a. Harrison's income 2002 ............................................................
$220,000
Starr's income 2002 ..................................................................
70,000
Amortization expense (given) ..................................................
(8,000)
Noncontrolling interest in Starr's income (10%) ....................
(7,000)
Consolidated net income 2002 ...........................................
$275,000
Harrison's income 2003 ............................................................
Starr's income 2003 ..................................................................
Amortization expense (given) ..................................................
Noncontrolling interest in Starr's income (10%) ....................
Consolidated net income 2003 ................................................
b. Starr's book value January 1, 2002:
Common stock ..........................................
$100,000
Retained earnings .....................................
200,000
Starr's income—2002 .....................................
$ 70,000
Dividends paid ................................................
(30,000)
Starr's income—2003 .....................................
$ 90,000
Dividends paid ................................................
(30,000)
Starr's book value December 31, 2003 .........
Outside ownership .........................................
Noncontrolling interest in Starr—December 31, 2003
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$260,000
90,000
(8,000)
(9,000)
$333,000
$300,000
40,000
60,000
$400,000
10%
$ 40,000
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21.
(20 Minutes) (Determine consolidation income balances, includes a
preacquisition income figure)
a. Purchase Price ..........................................
Book Value of Net Assets
($400,000 x 70 %) .................................
Purchase Price in Excess
of Book Value .......................................
Annual Excess
Excess Purchase Price Assigned
Based on Market Value:
—Patent ($140,000 x 70%) ........................
$19,600
—Land ($10,000 x 70%) ............................
—Buildings ($30,000 x 70%) ......................
2,100
Total .......................................................... $
$406,000
(280,000)
$126,000
Life
Amortizations
98,000
5 years
7,000
21,000
10 years
0
$21,700
Consolidated Figures:
—Revenues = $1,500,000 (add book values)
—Expenses = $1,021,700 (add book values and add excess amortizations)
—Noncontrolling interest in Subsidiary’s net income = $60,000 (30% of
Bytvl's income)
—Net income = $418,300 (revenues less expenses and noncontrolling
interest)
b.
Consolidated figures:
—Revenues = $1,350,000 (add book values)
—Expenses = $936,275 (add book values and add excess amortization for 9
months)
—Noncontrolling interest in subsidiary's net income = $63,000 (30% of
Bytvl's income)
—Preacquisition income = $36,750 (70% of Bytvl's income for 3 months)
—Net income = $313,975 (revenues less expenses, noncontrolling interest,
and preacquisition income)
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22.
(30 Minutes) (Determine various balances using each of the concepts presented in this chapter)
a. Economic Unit Concept
Implied Value of Company - $42,000/60% = ............................
Book Value .................................................................................
Implied Value in Excess of Book Value ..................................
Allocation to invention Based on Difference in Fair Market Value
and Book Value ($50,000 - $10,000) ......................................
Goodwill .....................................................................................
Excess Amortizations:
Invention $40,000/10 years =
$4,000
Goodwill indefinite life
0
Total
$4,000
$70,000
(10,000)
$60,000
40,000
$20,000
Consolidated Figures:
—Revenues = $50,000 (book value)
—Expenses = $24,000 (book value plus excess amortizations)
—Noncontrolling interest in subsidiary's income = $10,400 (40 percent
of revenues less expenses)
—Goodwill = $20,000 (original allocation)
—Invention = $45,000 (1/1/02 book value less one year of amortization
plus $40,000 allocation less one year of amortization on that figure)
b. Proportionate Consolidation
Purchase price ..........................................................................
Book Value ($10,000 x 60%) .....................................................
Purchase Price in Excess of Book Value ..........................
Allocation to Invention Based on Difference in Fair Market Value
and Book Value ($40,000 x 60%) ........................................
Goodwill .....................................................................................
Excess Amortizations:
Invention
$24,000/10 years =
Goodwill
indefinite life
Total
$42,000
(6,000)
$36,000
24,000
$12,000
$2,400
0
$2,400
Consolidated Figures:
—Revenues = $30,000 (60% of book value)
—Expenses = $14,400 (60% of book value plus amortization)
—Noncontrolling interest in subsidiary's income = -0- (not recognized in
this approach)
—Goodwill = $12,000 (original allocation)
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22. (continued)
—Invention = $27,000 (60% of 1/1/02 book value less one year of
depreciation [$6,000 less $600] plus $24,000 allocation less one year
of excess depreciation on that figure)
c. Parent Company Concept
Purchase price ..........................................................................
Book Value ($10,000 x 60%) .....................................................
Purchase Price in Excess of Book Value ................................
Allocation to invention on Difference in Fair Market Value
and Book Value ($40,000 X 60%) ........................................
Goodwill .....................................................................................
Excess Amortizations:
Invention $24,000/10 years =
Goodwill indefinite life
Total
$42,000
(6,000)
$36,000
24,000
$12,000
$2,400
0
$2,400
Consolidated Figures:
—Revenues = $50,000 (book value)
—Expenses = $22,400 (book value plus amortization)
—Noncontrolling interest in subsidiary's income = $12,000 (40 percent
of subsidiary revenues less expenses [amortization not included])
—Goodwill = $12,000 (original allocation)
—Invention = $30,600 (1/1/02 book value less one year of depreciation
plus $24,000 allocation less one year of excess depreciation on that
figure)
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23.
(20 Minutes) (Determine consolidated net income for a step purchase and
the ending balance of the noncontrolling interest)
a. Mabry's income—2002 (given) ......................
Thompson's income 2002:
Revenues ...................................................
$600,000
Expenses ...................................................
(420,000)
Excess amortization expenses
- First purchase (given) ............................
-second purchase ($10,000 x 3/12) ..........
Preacquisition income (second purchase)
($180,000 x 30% x 9/12) ............................
Noncontrolling interest in Thompson's income (10%)
Consolidated net income .........................
b. Thompson's book value—1/1/02
Common stock ...........................................
Retained earnings, 1/1/02 ..........................
Operations—2002
Net income (revenues minus expenses)
Dividends paid ..........................................
Book value 12/31/02 .......................................
Outside ownership .........................................
Noncontrolling interest in Thompson—12/31/02
$360,000
180,000
(6,000)
(2,500)
(40,500)
(18,000)
$473,000
$310,000
540,000 $850,000*
$180,000*
(70,000)*
110,000
$960,000
10%
$ 96,000
*Ending noncontrolling interest can also be computed by taking 10
percent of each of these three marked numbers and then totaling them
as in the noncontrolling interest column on the worksheet.
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24.
(10 Minutes) (Consolidated income statement figures for a step acquisition)
a. Revenues—Lamp ....................................................................
Expenses - Lamp ....................................................................
Net income Lamp ...................................................................
Outside ownership (at end of year) .................................
Noncontrolling interest in subsidiary income ................
$500,000
300,000
$200,000
20 %
$ 40,000
b. Preacquisition Income ($200,000 [earned by Lamp]
x 30% x 3/12 year) ............................................................
$ 15,000
c. Consolidated revenues ..........................................................
Consolidated expenses .........................................................
Amortization expense ($60,000 ÷ 20 years) .........................
Preacquisition Income (above) .............................................
Noncontrolling interest in subsidiary income (above) ........
Consolidated net income ......................................................
$1,100,000
(680,000)
(3,000)
(15,000)
(40,000)
$ 362,000
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25.
(30 Minutes) (Reporting the sale of a portion of an investment in a
subsidiary)
a. The 1,000 shares that are sold are reported by means of the equity
method for the period from January 1, 2002 until October 1, 2002. This
stock represents 10 percent of the outstanding shares of Green.
Consequently, an accrual of $9,000 is reported by Wilson (10% x
$120,000 x 9/12 year). This figure is then reduced by $1,071 in
amortization expense as computed below. Therefore, an "Equity Income
from Sold Shares of Green" in the amount of $7,929 will appear in the
2001 consolidated income statement for this business combination.
This figure appears although Green Company is actually being
consolidated. The consolidation will now include all of Green's
accounts with a 40 percent reduction for the noncontrolling interest.
Purchase price ..........................................................
70% of subsidiary's book value ...............................
Patent .........................................................................
Life of patent ..............................................................
$800,000
(700,000)
$100,000
10
years
Annual amortization ..................................................
$ 10,000
Amortization relating to 1,000 shares sold for period from January 1,
2002 until October 1, 2002:
Annual amortization ..................................................
Time period involved ................................................
Amortization for nine months ..................................
Shares sold—1,000 out of 7,000 ..............................
Amortization relating to sold shares .......................
b. Correct Investment Book Value 10/1/02
1/1/02 balance (given—partial equity method) .......
Amortization 1998-2001 (4 years) ............................
Recognition of 1/1/02-10/1/02 period:
Income accrual ($120,000 x 70% x 9/12) ............
Dividends ($40,000 x 70% x 9/12) .......................
Amortization ($10,000 x 9/12) . .............................
Correct investment book value—10/1/02 .................
$10,000
9/12
years
$ 7,500
1/7
$ 1,071 (rounded)
$1,085,000
(40,000)
63,000
(21,000)
(7,500)
$1,079,500
Computation of Income Effect—Sales Transaction
10/1/02 book value (above) .......................................
$1,079,500
Portion of investment being sold
(1,000 out of 7,000 shares) .......................................
1/7
Book value of investment being sold ...................... $ 154,214 (rounded)
Proceeds ....................................................................
191,000
Gain on sale ...............................................................
$ 36,786
25. (continued)
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c. Since Wilson continues to hold 6,000 shares of Green, control is still
maintained and consolidated financial statements would be appropriate
with a noncontrolling interest of 40 percent.
26.
(20 Minutes) (Consolidated figures with both preacquisition income and a
noncontrolling interest)
A. To provide figures that will be comparable with future time periods, the
consolidated income statement would include all $400,000 in revenues
generated by Quinn during the entire year of 2002.
B. The noncontrolling interest is Anita Blackwood who owned 30 percent
of Quinn during the entire year. Therefore, the noncontrolling interest in
Quinn’s income that will be reported in the consolidated income
statement is $54,000 ($180,000 net income multiplied by 30 percent
outside ownership).
C. The $3,500 per month (70%) paid in dividends to Palmer ($38,500 in total
for 11 months) is eliminated entirely within the consolidation process
(through Entry S). This money was distributed by Quinn to a person
who is no longer an owner. Thus, no reporting in the consolidated
statements is necessary.
D. Preacquisition income is the earnings that can be attributed to Palmer
for the first 11 months of the year. Her share of income was $10,500 per
month (70% of $15,000) for 11 months for a total $115,500. This amount
is a reduction within the consolidated income statement to bring the
final income figure in line with the amount actually accruing to Brown's
ownership during the final month of the year.
E. Preacquisition income ...........................................
Common stock—Quinn ........................................
Retained earnings—Quinn (Jan. 1).......................
Dividends paid .............................................
Investment in Quinn ....................................
Noncontrolling Interest ...............................
(beginning balance)
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115,500
10,000
90,000
38,500
147,000
30,000
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27.
(35 Minutes) (Various consolidated balances, includes a step acquisition
and the sale of a portion of the investment)
a. Schedule 1—Purchase Price Allocation and Excess Amortizations
Purchase price ..........................................
Book value equivalency ($140,000 x 80%)
Price in excess of book value ..................
Annual Excess
Allocation based on fair market value
—Land ($10,000 x 80%) .......................
--—Buildings and equipment
($20,000 x 80%) ...............................
$1,600
Goodwill .....................................................
$156,000
(112,000)
$ 44,000
Life
8,000
16,000
$ 20,000
Amortizations
---
10 years
indefinite
0
Total ......................................................
$1,600
Buildings and equipment
—Narcissus book value ..............................................
—Goldmund book value .............................................
—Allocation (see schedule 1 above) .........................
Consolidated balance ............................................
$600,000
160,000
16,000
$776,000
Goodwill (see schedule 1 above) ...............................
$ 20,000
b. Buildings and equipment
—Narcissus book value ..............................................
—Goldmund book value .............................................
—Allocation (see schedule 1 above) .........................
—Excess Amortization—1999-2003 ($1,600 x 5) ......
Consolidated balance ............................................
c. Consolidated revenues (add book values) ...............
Consolidated expenses (add book values) ...............
Excess Amortizations (see schedule 1 above) .........
Consolidated net income before
noncontrolling interest reduction ...................
McGraw-Hill?rwin
4-16
$570,000
180,000
16,000
(8,000)
$758,000
$400,000
(290,000)
(1,600)
$108,400
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
27.
(continued)
d. Revenues—Goldmund .................................................
Expenses—Goldmund ................................................
Income of subsidiary .............................................
Outside ownership ......................................................
Noncontrolling interest in
subsidiary's income .........................................
e.
$100,000
90,000
$ 10,000
20%
$ 2,000
NARCISSUS
Consolidated Income Statement
Year Ending December 31, 2003
Revenues (add book values) ......................................
Expenses (add book values and excess amortizations
[half-year]) ...............................................................
Preacquisition income (80% of subsidiary's income
for half-year) ...........................................................
Noncontrolling interest in subsidiary's income
(20 % of subsidiary's income for year) .................
Net Income ...................................................................
$400,000
(290,500)
(4,000)
(2,000)
$103,200
f. The book value of the investment account (on the parent's records) has
to be updated as of October 1, 2003, by means of the equity method to
enable the computation of the gain or loss on the sale of this one-fourth
interest.
Purchase price January 1, 2002 ..................................
2002 accrual ($5,000 drop in book value as indicated
by January 1, 2003, retained earnings balance x
80 %) .......................................................................
2003 amortization (see schedule 1 above) ................
2003 accrual for 9 months ($10,000 x 80 % x 9/12 year)
2003 amortization for 9 months ($1,600 x 9/12) ........
Book value-October 1, 2003 ..................................
Percentage of investment being sold ........................
Book value of shares sold ....................................
Sales price ...................................................................
Gain on sale of investment ...................................
$156,000
(4,000)
(1,600)
6,000
(1,250)
155,200
25%
38,800
82,000
$ 43,200
In addition, an equity income accrual must be recognized on the
consolidated income statement to record the income associated with this
investment for the nine months prior to its being sold. For the entire
investment, $4,800 was recognized during this period ($6,000 accrual less
$1,200 amortization). For the one-fourth sold, the equity income accrual
(must be recognized separately because it is not part of the consolidation)
is $1,200 ($4,800 x ¼).
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
4-17
28.
(30 Minutes) (Consolidation entries and the effect of different investment
methods)
a. From the original purchase price, $14,000 is assigned based on the fair
market value of the building ($20,000 x 70%). With a 10-year life, excess
amortization (depreciation) will be $1,400 per year.
Because the equity method is in use, no Entry *C is required.
Entry S
Common Stock (Barker) ................................
300,000
Retained Earnings, 1/1/04 (Barker) ...............
268,000
Investment in Barker (70%) .....................
397,600
Noncontrolling Interest in Barker, 1/1/04 (30%)
170,400
(To eliminate stockholders' equity accounts of subsidiary and
recognize outside ownership. Retained earnings figure includes
2002 and 2003 income and dividends.)
Entry A
Building ..........................................................
11,200
Goodwill .........................................................
60,000
Investment in Barker ................................
71,200
(To record unamortized portion of purchase price allocations.
Original balances indicated above have undergone 2002 and 2003
amortization, except for goodwill.)
Entry I
Equity in Subsidiary Earnings ......................
75,600
Investment in Barker ................................
75,600
(To eliminate 2004 intercompany income balances. Equity accrual of
$77,000 [70% of $110,000] has been recorded less excess
amortizations of $1,400.)
Entry D
Investment in Barker .....................................
42,000
Dividends Paid ..........................................
(To eliminate 2004 intercompany dividend transfers—70% of
$60,000.)
Entry E
Depreciation Expense ....................................
Building .....................................................
(To recognize amortization for 2004.)
1,400
Entry P
Accounts Payable ..........................................
22,000
Accounts Receivable ...............................
(To eliminate intercompany payable/receivable balance.)
McGraw-Hill?rwin
4-18
42,000
1,400
22,000
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
28. (continued)
b. If the cost 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 2001 to the equity method. During 2002 and 2003, 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, excess amortization expense
for these two years must also be included ($2,800 or 2 years x $1,400
per year). The net amount to be recognized is $58,800 ($61,600 - $2,800).
ENTRY *C
Investment in Barker .....................................
Retained Earnings, 1/1/04 ........................
58,800
58,800
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 $2,800 (2 years x $1,400 per year).
ENTRY *C
Retained Earnings, 1/1/04 .............................
Investment in Barker ................................
2,800
2,800
d. Noncontrolling interest in Barker's income—2004
($110,000 x 30%) ............................................
Barker's book value January 1, 2002:
Common stock ...............................................
Retained earnings ..........................................
Increases in book value:
2002
Net Income ................................................
Dividends paid ..........................................
2003
Net income ................................................
Dividends paid ..........................................
2004
Net income ................................................
Dividends paid ..........................................
Barker's book value—December 31, 2004 ........
Outside ownership ..............................................
Noncontrolling interest in Barker—December 31,
2004 ..................................................................
$ 33,000
$300,000
180,000 $480,000
$ 75,000
(39,000)
36,000
$ 96,000
(44,000)
52,000
$110,000
(60,000)
50,000
$618,000
30%
$185,400
Same answer can be derived by taking 30% of the 1/1/04 book value
(30% x $568,000 or $170,400) and adding 30% of net income ($33,000)
and subtracting 30% of dividends paid ($18,000).
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
4-19
29.
(45 Minutes) (Asks about several consolidated balances and consolidation
process. Includes the different accounting methods to record investment)
a. Schedule 1—Purchase Price Allocation and Excess Amortizations
Purchase price
(includes combination costs) .............
Book value of equivalency (80%) .............
Cost in excess of book value ...................
Excess cost assigned to buildings
based on fair market value
($80,000 x 80%) ....................................
$ 3,200
Goodwill .....................................................
$664,000
(480,000)
$184,000
Annual Excess
Life Amortizations
64,000
20 years
$120,000
indefinite
0
Total
.........................................................
$ 3,200
b. $120,000 (see schedule 1 above)
c. Common Stock (Dylan) .......................................
Additional Paid-in Capital (Dylan) ......................
Retained Earnings (Dylan) ..................................
Investment in Dylan Company (80%) ...........
Noncontrolling Interest in Dylan Company,
1/1/02 (20%) ...............................................
d. (1) Equity Method
Income accrual (80%) .........................................
Excess Amortization expenses ..........................
Investment income ........................................
300,000
90,000
210,000
480,000
120,000
$56,000
(3,200)
$52,800
(2) Partial Equity Method
Income accrual (80%) ....................................
$56,000
(3) Cost Method
Dividends received (80%) ..............................
$ 8,000
e. Equity Method
Purchase price .....................................................
Income accrual 2002-2004 ($260,000 x 80%) ....
Dividends 2002-2004 ($45,000 x 80%) ...............
Excess Amortizations 2000-2002 ($3,200 x 3) ..
Investment in Dylan - 12/31/04 ......................
$664,000
208,000
(36,000)
(9,600)
$826,400
Partial Equity Method
Investment in Dylan—12/31/04 = $836,000 (purchase price plus income
accrual of $208,000 less dividends of $36,000 [no excess amortizations])
Cost Method
Investment in Dylan—12/31/04 = $664,000 (original purchase price)
McGraw-Hill?rwin
4-20
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
29.
(continued)
f. Hearts book value—buildings ............................
Dylan book value—buildings .............................
Purchase price allocation (see schedule 1 above)
Excess Amortizations for 2002-2004 ($3,200 x 2;
see schedule 1 above) ...................................
Consolidated buildings account .............
$
800,000
300,000
64,000
(6,400)
$1,157,600
If the economic unit concept is used, the allocation will be the total
difference ($80,000) between the buildings' book value and fair market
value. Based on a 20 year life, annual excess amortization is $4,000.
Hearts book value—buildings ............................
Dylan book value—buildings .............................
Allocation .............................................................
Excess Amortizations for 2002-03 ($4,000 x 2) .
Consolidated buildings account ..................
g. Purchase price allocated to goodwill
(see schedule 1 above) .................................
Amortization for 2002-04 .....................................
Consolidated goodwill .............................
$ 800,000
300,000
80,000
(8,000)
$1,172,000
$120,000
0
$120,000
h. If the parent has been applying the equity method, the stockholders'
equity accounts on its books will already represent consolidated totals.
In a purchase, 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.
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
4-21
30.
(20 Minutes) (A variety of consolidated balances, includes preacquisition
income)
Book value of Lytle, 1/1/02
(stockholders' equity accounts) ..............
Increase in book value:
—Net Income (revenues less cost of
goods sold and expenses) ..................
—Dividends ...............................................
Change during year ...................................
—Change during first six months of
year (1/2) ...............................................
Book value of Lytle, 7/1/02
(date of purchase) .....................................
Purchase price ................................................
Book value of Lytle (above)
($1,450,000 x 80%) .....................................
Purchase price in excess of book value .......
Annual Excess
Excess purchase price assigned based
on market value:
- Buildings ($100,000 x 80%) ....................
$ 8,000
Goodwill ..........................................................
0
Total ..........................................................
$1,400,000
$120,000
(20,000)
$100,000
50,000
$1,450,000
$1,330,000
(1,160,000)
$170,000
Life
80,000
$ 90,000
Amortizations
10 years
indefinite
$8,000
CONSOLIDATION TOTALS:
—Preacquisition Income = $48,000 (80 percent of the subsidiary's $120,000
net income for the first six months of the year)
—Sales = $1,300,000 (add the two book values)
—Expenses = $304,000 (add the two book values and include excess
amortizations for the last half of the year [$8,000 x ½])
—Noncontrolling Interest in Net Income = $24,000 (20% of reported Income)
—Net Income: Sales
$1,300,000
Cost of goods sold
(add book values)
(680,000)
Expenses
(304,000)
Preacquisition Income
(48,000)
Noncontrolling Interest
(24,000)
Net Income
$244,000
—Retained Earnings, 1/1/02 = $1,400,000 (the parent balance since the
subsidiary was acquired during the current year)
—Buildings (net) = $1,076,000 (add the two book values and the purchase
price allocation after taking one-half year excess amortization)
—Land = $800,000 (add the two book values)
McGraw-Hill?rwin
4-22
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
—Goodwill = $90,000 (the original allocation)
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
4-23
31.
(25 Minutes) (A variety of consolidated questions and balances)
a. Monroe is applying the cost method because the original price of
$414,000 is still in the investment in Sunrise account. In addition, the
Investment Income account is equal to 60 percent of the dividends paid
by the subsidiary during the year.
b. Purchase price ...........................................
$414,000
Book value of Sunrise ($550,000 x 60%) ..
(330,000)
Purchase price In excess of book value .
$ 84,000
Excess purchase price assigned based
Annual Excess
on market value:
Life Amortizations
—Buildings ($60,000 x 60%) .....................
36,000
6 years
$6,000
—Equipment ([$20,000] x 60%) ................
(12,000)
4 years
(3,000)
—Patent ($100,000 x 60%) ........................
$60,000
10 years
6,000
Total ..................................................... $
0
$9,000
c. If the partial equity method had been applied, the Investment Income
account would have been the basic equity accrual: 60% of the
subsidiary's income of $90,000 or $54,000. If the equity method had
been applied, the Investment Income account would have been the
basic equity accrual less amortization: 60% of the subsidiary's income
of $90,000 or $54,000 less $9,000 = $45,000.
d. Because the cost method has been applied, neither the increase in the
subsidiary's book value nor the excess amortization expenses for prior
years has been recognized. At the date of acquisition, the book value of
the subsidiary 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) ...........................................................
Ownership .................................................................................
Equity accrual ......................................................................
Less: excess amortization ($9,000 per year for 3 years) .......
Increase required in parent's retained earnings, 1/1/04 ........
Parent's retained earnings, 1/1/04 as reported .......................
Consolidated retained earnings, 1/1/04....................................
$230,000
60%
$138,000
(27,000)
$111,000
700,000
$811,000
e. Reported income of $90,000 multiplied by 40 percent outside ownership
equals a noncontrolling interest of $36,000.
f. Consolidated Totals:
—Revenues (add book values) ...........................................
McGraw-Hill?rwin
4-24
$900,000
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
—Expenses (add book values and include excess
amortizations) ..................................................................
—Noncontrolling interest (see e.) ......................................
—Net Income ........................................................................
31. (continued)
32.
(629,000)
(36,000)
$235,000
g. Consolidated Buildings, 1/1/01 (Subsidiary):
—Book value ........................................................................
—Allocation ..........................................................................
—Consolidation figure ........................................................
$300,000
36,000
$336,000
h. Consolidated Buildings, 12/31/04:
—Parent's book value ...............................................................
—Subsidiary's book value ........................................................
—Original allocation .................................................................
—Amortization, 2001-04 ($6,000 x 4 years) .............................
—Consolidated balance ...........................................................
$700,000
200,000
36,000
(24,000)
$912,000
(30 Minutes) (Determine consolidated balances. Parent uses equity
method.)
Purchase price ................................................
Book value of subsidiary ($600,000 x 80%) ...
Cost in excess of book value ........................
Excess cost assigned to specific accounts
based on fair market value
—Land ($165,000 x 80%) ..........................
—
—Buildings and equipment ($25,000
x 80%) ..............................................
$(2,000)
—Notes payable ($10,000 x 80%) .............
1,000
Copyright ($100,000 x 80%) ............................
4,000
Total .......................................................... $
$680,000
(480,000)
$200,000
Annual Excess
Life Amortizations
132,000
—
(20,000)
10 years
8,000
8 years
$60,000
20 years
0
$ 3,000
The parent is applying the equity method: the equity in income of Sam is
$105,000 (80% of reported income less excess amortizations for year).
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
4-25
32. (continued)
Father, Inc. and Sam Corporation
Consolidation Worksheet - 2002
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
1,085,000
Depreciation expense ....................
260,000
10,000
(E)2,000
268,000
Amortization expense ....................
5,000
(E) 4,000
9,000
Interest expense .............................
44,000
5,000
(E) 1,000
50,000
Noncontrolling interest in Sam's income
$ (27,000)
27,000
Equity in income of Sam ...............
(105,000)
(I) 105,000
Net income ...............................
$ (461,000)
$(135,000)
$ (461,000)
Retained earnings, 1/1/02 .............
$(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, 12/31/02 ....
$(1,466,000) $(510,000)
$(1,466,000)
Current assets ...............................
$ 965,000
$ 528,000
$ 1,493,000
Investment in Sam .........................
733,000
(D) 52,000 (S) 480,000
(I) 105,000
(A) 200,000
Land ...............................................
292,000
60,000 (A) 132,000
484,000
Buildings and equipment (net) ......
877,000
265,000 (E) 2,000 (A) 20,000
1,124,000
Copyright .......................................
95,000 (A) 80,000 (E) 4,000
171,000
Total assets ..............................
$ 2,867,000 $ 948,000
$ 3,272,000
Accounts payable ..........................
$ (191,000)
$(148,000)
$ (339,000)
Notes payable ................................
(460,000)
(130,000) (A) 8,000 (E) 1,000
(583,000)
Noncontrolling interest in Sam ....
(S) 120,000 (120,000)
$ (134,000)
(134,000)
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, 12/31/02 (above)
(1,466,000) (510,000)
(1,466,000)
Total liabilities and stockholders'
equity ..................................
$(2,867,000) $(948,000)
$(3,272,000)
McGraw-Hill?rwin
4-26
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
33.
(40 Minutes) (Determine consolidated balances. Apply the economic unit
concept.)
Implied value of subsidiary ($680,000/80%) ......
$850,000
Book value of subsidiary (given) ........................
(600,000)
Implied value in excess of book value ...............
$250,000
Allocations to specific accounts based on difference
between fair market value and book value
—Land ...............................................................
$165,000
—Buildings and equipment ................................
(25,000)
—Notes payable ...................................................
10,000
—Copyright ..........................................................
100,000
250,000
Total .......................................................
$
0
Annual excess amortizations:
—Buildings and equipment $(25,000)/10 years =
—Notes payable
10,000/ 8 years =
—Copyright
100,000/20 years =
Total
$(2,500)
1,250
5,000
$3,750
Consolidated Totals:
—Revenues = $1,900,000 (add the two book values)
—Expenses = $1,412,750 (add the two book values plus excess
amortization expenses)
—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, 1/1/02 = $1,265,000 (parent company balance;
subsidiary's operations prior to purchase 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
which is attributed to subsidiary in the economic unit concept
multiplied by 20 percent outside ownership)
—Dividends paid = $260,000 (parent company balance; subsidiary's
payments to parent are intercompany, payments to outside owners
decrease noncontrolling interest balance)
—Retained earnings, 12/31/02 = $1,466,000 (consolidated balance on 1/1/02
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 allocation)
McGraw-Hill/Irwin
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© The McGraw-Hill Companies, Inc., 2001
4-27
—Buildings and equipment (net) = $1,119,500 (add the book values less the
allocation [asset was overvalued] plus the excess amortization for the
year)
—Copyright = $190,000 (book value + residual 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 allocation plus
excess amortization)
—Noncontrolling interest in subsidiary = $183,250 (20% of implied value as
of 1/1/02 [$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, 12/31/02 = $1,466,000 (computed above)
—Total liabilities and equities = $3,319,500
McGraw-Hill?rwin
4-28
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
34.
(65 Minutes) (Consolidated balance. and consolidation worksheet. Parent
applies partial equity method.)
a. Purchase Price Allocation and Excess Amortizations
Purchase price ..........................................
$602,000
Book value equivalency
($460,000 x 90 %) .................................
(414,000)
Cost in excess of book value ...................
$188,000 Annual Excess
Excess cost allocated to specific accounts
Life Amortizations
based on fair market value ........................
—Land
$30,000 x 90%
$27,000
—
—
—Buildings
(20,000) x 90%
(18,000) 10 yrs.
($1,800)
—Equipment
40,000 x 90%
36,000
5 yrs.
7,200
—Patents
50,000 x 90%
45,000 10 yrs.
4,500
—Liabilities
20,000 x 90%
18,000
5 yrs.
3,600
108,000
Goodwill ....................................... $ 80,000
indefinite
0
Total ......................................................
$13,500
Because investment income is exactly 90 percent of Drexel's reported
earnings for 2004 (revenues minus expenses), Burke is apparently
applying the partial equity method.
CONSOLIDATED TOTALS:
Current Asset—$861,000 (add the two book values)
Land—$557,000 (add the book values and include the allocation above)
Building—$725,600 (add the book values and include the allocation
above [a negative] along with two years of excess amortization on
that allocation)
Equipment - 1,044,600 (add the book values and include the allocation
above along with two years of excess amortization on the allocation)
Patents—$36,000 (the above allocation after two years of amortization)
Goodwill—$80,000 (the above allocation)
Investment In Drexel— $0 (the intercompany balance is eliminated so
that the actual assets and liabilities of the subsidiary can be
included)
Cost of goods sold = $600,000 (add the two book values)
Depreciation expense = 160,400(add the two book values plus $5,400
net adjustment to building and equipment excess depreciation)
Amortization expense = $4,500 (the excess amortization for the patent)
Interest expense = $28,600 (add the two book values plus $3,600
interest expense adjustment from amortizing the liability adjustment)
Dividends Paid —$110,000 (the parent company balance only)
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
4-29
Noncontrolling Interest in Subsidiary’s Net Income--$12,000 (10 percent
of the subsidiary's reported income [revenues minus expenses])
Liabilities—$1,079,200 (add the book values and include the allocation
[a negative] along with excess amortization for two years)
Common Stock—$510,000 (the parent company balance only)
Retained Earnings, 1/1/04—$1,353,500 (the parent's balance less excess
amortization expense for the previous periods—inclusion of this
expense is necessary because parent is applying partial equity
method)
Revenues—$1,220,000 (add the book values)
Investment Income—$0 (the intercompany balance is eliminated so that
the actual revenues and expenses of the subsidiary can be included)
Noncontrolling Interest in Subsidiary, 12/31/04—$57,000 (10 percent of
the ending book value [assets minus liabilities or stockholders'
equity after closing out revenues and expenses])
b. Explanation of Consolidation Entries Found on Worksheet
Entry *C—Converts parent company figures from partial equity method
to equity method by recording 2003 amortization.
Entry S—Eliminates stockholders' equity accounts of subsidiary while
recognizing noncontrolling interest balance as of the beginning of
the current year.
Entry A—Recognizes allocations to specific subsidiary accounts as well
as to goodwill. This entry establishes unamortized balances as of the
beginning of the current year.
Entry I—Eliminates Intercompany Income accrual for 2004.
Entry D—Eliminates Intercompany dividend transfers.
Entry E—Records excess amortization expense for current year.
Columnar Entry—Recognizes noncontrolling interest's share of Drexel's
net income ($120,000 reported income x 10%).
McGraw-Hill?rwin
4-30
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
34. b. (continued)
BURKE CORPORATION AND DREXEL, INC.
Consolidation Worksheet
For Year Ending December 31, 2004
Consolidation Entries Noncontrolling
Accounts
Revenues
Cost of goods sold
Depreciation expense
Amortization expense
Interest expense
Investment income
Income to noncontrolling interest
Net income
Retained earnings, 1/1/04
Controlling interest net income
Dividends paid
Retained earnings, 12/31/04
Current assets
Investment in Drexel, Inc.
Land
Buildings
Equipment
Patents
Goodwill
Total assets
Liabilities
Common stock
Retained earnings—12/31/04 (above)
Noncontrolling interest, 1/1/04
(57,000)
Total liabilities and stockholders' equity
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
Burke
$(940,000)
500,000
100,000
20,000
(108,000)
$(428,000)
Drexel
$(280,000)
100,000
55,000
5,000
Debit
Credit
(E) 5,400
(E) 4,500
(E) 3,600
(I) 108,000
$(120,000)
$(1,367,000)$(340,000) (*C) 13,500
(S)340,000
(428,000)
(120,000)
(110,000)
(70,000)
$(1,685,000)$(390,000)
$ 611,000
701,000
$250,000
380,000
490,000
873,000
150,000
250,000
150,000
(D)63,000
$ 3,055,000 $800,000
$ (860,000)
$(230,000)
(510,000)
(180,000)
(1,685,000) (390,000)
Consolidated
Interest
Totals
$(1,220,000)
600,000
160,400
4,500
28,600
-0$(12,000) 12,000
(414,500)
$(1,353,500)
(D) 63,000
(*C) 13,500
(S) 468,000
(A) 174,500
(I) 108,000
(A) 27,000
(E) 1,800
(A) 28,800
(A) 40,500
(A) 80,000
(A) 14,400
(S)180,000
(A) 16,200
(E) 7,200
(E) 4,500
(E) 3,600
(S) 52,000
$(3,055,000)$(800,000)
© The McGraw-Hill Companies, Inc., 2001
4-31
(414,500)
7,000 110,000
$ 1,658,000
$ 861,000
-0-
557,000
725,600
1,044,600
36,000
80,000
$ 3,304,200
$ 1,079,200
510,000
1,658,000
(52,000)
$ 3,304,200
35.
(55 Minutes) (Consolidated worksheet based on economic unit concept)
Implied Value of Drexel - 668,889 ($602,000 purchase price/90%)
Implied value .............................................
Book value of Drexel .................................
Excess cost allocation based on fair
market value ..............................................
Amortizations
—Land ........................................... $30,000
—Buildings .................................. (20,000)
—Equipment ................................... 40,000
—Patents ......................................... 50,000
—Liabilities ..................................... 20,000
Goodwill ..........................................................
0
Total ..........................................................
$668,890
($460,000)
Annual Excess
$208,890
Life
—
—
10 years ($2,000)
5 years
8,000
10 years
5,000
5 years
4,000
120,000
$ 88,890
indefinite
$15,000
Because investment income is exactly 90 percent of Drexel's reported
earnings, Burke apparently is applying the partial equity method.
Explanation of Consolidation Entries Found on Worksheet
Entry *C Converts Burke's financial records from the partial equity method
to the equity method by recognizing amortization for 2003. 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, 2004.
Entry A—Records unamortized allocation balances as of January 1, 2004.
Under economic unit concept, allocations reflect the value of the entire
subsidiary. Thus, 10 percent of these amounts are attributed to the noncontrolling interest.
Entry I—Eliminates intercompany income accrual for 2001.
Entry D—Eliminates intercompany dividend transfers.
Entry E—Records amortization expense for current year.
Columnar Entry—Recognizes noncontrolling interest's share of Drexel's
net income. Because the economic unit concept is being used,
consolidated retained earnings rather than net income is reduced. In
addition, under the economic unit concept, amortization is viewed as an
expense relating to the subsidiary's accounts. Consequently, it affects
the noncontrolling interest computation:
Noncontrolling Interest in Drexel's Income (Columnar Entry)
Drexel reported income .................................................................
Excess amortization expenses 2004 .............................................
Adjusted income of Drexel .......................................................
Noncontrolling interest ownership ...............................................
McGraw-Hill?rwin
4-32
$120,000
(15,000)
$105,000
10%
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
Noncontrolling Interest in Drexel's Income ............................
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
$ 10,500
© The McGraw-Hill Companies, Inc., 2001
4-33
35. (continued)
Consolidation Entries Noncontrolling
Revenues
Cost of goods sold
Depreciation expense
Amortization expense
Interest expense
Investment income
Net Income
Income to noncontrolling interest
Income to controlling interest
Retained earnings, 1/1/04
Controlling interest net income
Dividends paid
Retained earnings, 12/31/04
Current assets
Investment in Drexel
Land
Buildings
Equipment
Patents
Goodwill
Total assets
Liabilities
Common stock
Retained earnings—12/31/04
Noncontrolling interest
(74,890)
Total liabilities and stockholders' equity
McGraw-Hill?rwin
4-34
Burke Corp. Drexel Inc.
$(940,000)
$(280,000)
500,000
100,000
100,000
55,000
5,000
20,000
(108,000)
$(428,000)
$(120,000)
$(1,367,000)$(340,000)
Debit
Credit
(E) 6,000
(E) 5,000
(E) 4,000
(I) 108,000
(C*)13,500
(S) 340,000
$250,000
380,000
490,000
873,000
150,000
250,000
150,000
(D) 63,000
(D)63,000
(*C) 13,500
(S) 468,000
(A) 174,500
(I) 108,000
(A) 30,000
(E) 2,000
(A) 32,000
(A) 45,000
(A) 88,890
(A) 18,000
(E) 8,000
(E) 5,000
$ 3,055,000 $800,000
$ (860,000)
$(230,000)
(510,000)
(180,000)
(1,685,000) (390,000)
Totals
$(1,220,000)
600,000
161,000
10,000
24,000
-0(425,000)
$(10,500) 10,500
(414,500)
$(1,353,500)
(428,000)
(120,000)
(110,000)
(70,000)
$(1,685,000)$(390,000)
$ 611,000
701,000
Consolidated
Interest
(A) 16,000
(S)180,000
(E) 4,000
(S) 52,000
(A) 19,390
$(3,055,000)$(800,000)
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
(414,500)
7,000 110,000
$(1,658,000)
$ 861,000
-0-
560,000
724,000
1,047,000
40,000
88,890
$ 3,320,890
$(1,078,000)
(510,000)
(1,658,000)
(71,390)
$(3,320,890)
36. (25 minutes) (Consolidated balances after a mid-year acquisition)
a. The $526,000 balance of the investment account indicates the cost
method is being used by the parent company.
Purchase price ..........................................
Book value of Down (below)
($765,000 x 60%) ..................................
Purchase price in excess of
book value ............................................
Excess purchase price assigned
based on market value:
—Equipment ($30,000 x 60%) .............
$ (3,000)
—Goodwill ............................................
$526,000
(459,000)
$ 67,000
Annual Excess
Life Amortizations
(18,000)
6 years
$85,000
indefinite
0
Total ......................................................
Amortization for 9 months ..................
$(3,000)
$2,250
BOOK VALUE OF SUBSIDIARY AT DATE OF ACQUISITION
Book value of Down, 1/1/02 (stockholders'
equity accounts) ..................................................
Increase in book value-net income (dividends
were paid after purchase) ................................... $100,000
Time prior to purchase (3 months) ..........................
3/12
Book value of down, 4/1/02 (date of purchase) ......
$740,000
25,000
$765,000
CONSOLIDATED INCOME STATEMENT:
Revenues
$900,000
Cost of goods sold
$440,000
Operating expenses (1)
231,750 671,750
Preacquisition income (2)
15,000
Noncontrolling interest in Down income (3)
40,000
Net income
$173,250
(1) Add book values less nine month excess equipment depreciation
reduction of $2,250.
(2) 60% of subsidiary income for first three months of the year
(3) 40% of subsidiary income for the entire year
b. —Goodwill = $85,000 (original allocation)
—Equipment = $784,250 (add the two book values and subtract
allocation [a cost reduction] after nine months of 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)
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
4-35
37.
(30 Minutes) (Determine consolidated balances when parent uses equity
method. Includes sale of a portion of the investment.)
a. Purchase Price Allocation and Excess Amortizations
Purchase price ..........................................
$250,000
Book value equivalency
($230,000 x 70%) ..................................
161,000
Annual Excess
Price in excess of book value ..................
$ 89,000
Life
Amortizations
Allocation based on market value ............
—Land
($10,000 x 70%)
$ 7,000
—Equipment ($68,000 x 70%)
47,600
14 yrs.
3,400
—Liabilities
($20,000 x 70%)
14,000
10 yrs.
1,400
68,600
Goodwill .....................................................
$ 20,400
indefinite
0
Total ..........................................................
$4,800
The parent is applying the equity method: Investment income of $44,200
represents the income accrual ($49,000 or 70% of $70,000) less $4,800
amortization expense.
Expenses = $814,800 (add the book values from both companies and the
excess amortization expenses)
Noncontrolling interest in Creedmoor's net Income = $21,000 (30% of
Creedmoor's reported income)
Revenues = $944,800 (add the two book values)
Retained earnings, January 1, 2005 = $760,000 (because the equity method
has been applied, the parent's balance is correct)
Net Income = $109,000 (consolidated revenues of $944,800 less consolidated
expenses of $814,800 less noncontrolling interest in the subsidiary's
income of $21,000)
Dividends paid = $68,000 (the parent company balance only)
Land = $298,000 (summation of the two book values plus the $7,000
acquisition price allocation from above)
Equipment = $239,200 (summation of the two book value plus the $47,600
allocated above after four years of excess amortization $3,400)
Liabilities = $221,600 (summation of the two book values less the $14,000
allocated reduction above after four years of excess amortization [$5,600])
Common stock = $50,000 (the parent company balance only)
Retained earnings, December 31, 2005 = $801,000 (because the equity
method has been applied, the parent's balance is correct)
Noncontrolling interest in Creedmore, December 31, 2005= $108,000 (30% of
Creedmoor's year-end book value)
b. 400 out of 2,800 shares (or 1/7 of the total investment) were sold.
Cash .......................................................................
60,000
McGraw-Hill?rwin
4-36
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
Investment in Creedmoor Corp. (1/7 x 321,800)
Gain on sale of portion of subsidiary ........
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
45,971
14,029
© The McGraw-Hill Companies, Inc., 2001
4-37
38. (70 Minutes) (Consolidation worksheet and consolidated balances with
preacquisition Income)
a.
Purchase Price Allocation and Amortization
Purchase price ................................................
Book value equivalency (80% of 1/1/02
balance based on equity accounts)..........
Price in excess of book value .......................
Annual Excess
$384,000
(304,000)
$ 80,000
Life
Excess price allocated to undervalued
building ($20,000 x 80%) ...........................
$1,600
Trademark ($80,000 x 80%) ............................
3,200
Total .......................................................... $
Amortizations
16,000
10 years
$ 64,000
20 years
0
$4,800
Explanation of Consolidation Entries Found on Worksheet
Entry C—Corrects handling of dividend payments by transferring receipts
for the year from the Sales account to Dividend Income. Amount is 80
percent of total dividends.
Entry Eliminates stockholders' equity accounts of subsidiary while
recognizing noncontrolling interest balance (20%) as of the beginning of
the current year.
Entry A—Recognizes allocations to specific subsidiary accounts as well as
to goodwill.
Entry I—Eliminates Intercompany dividend payments (now) recorded as
income by parent.
Entry E—Records amortization expense for current year.
Columnar Entry—Recognizes noncontrolling interest's share of
subsidiary's net income ($60,000 x 20%).
McGraw-Hill?rwin
4-38
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
38. a. (continued)
SEALS CORPORATION AND CROFT, INC.
Consolidation Worksheet
For Year Ending December 31 2002
Seals
Croft
Corporation
Inc.
Debit
$ (600,000)
200,000
246,000
$(210,000)
80,000
70,000
(C) 16,000
$ (154,000)
$ (60,000)
$ (700,000)
(154,000)
70,000
$ (784,000)
$ 400,000
384,000
$(280,000)
(60,000)
20,000
$(320,000)
$ 220,000
320,000
360,000
180,000
210,000
$1,464,000
$ 610,000
Liabilities
$ (470,000)
Common stock
(210,000)
Retained earnings 12/31/02 (above)
(784,000)
Noncontrolling interest in Croft—1/1/02
Noncontrolling interest in Croft—12/31/02
Total liabilities and equities
$(1,464,000)
Parentheses indicate a credit balance.
$(190,000)
(100,000)
(320,000)
Accounts
Sales
Cost of goods sold
Operating expenses
Dividend income
Consolidation Entries Noncontrolling
Credit
(E) 4,800
(I) 16,000 (C) 16,000
Noncontrolling interest in Croft's income
Net income
Retained earnings 1/1/02
Net income (above)
Dividends paid
Retained earnings—12/31/02
Current assets
Investment in Croft
Buildings (net)
Equipment (net)
Trademark
Total assets
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
Interest
Consolidated
Totals
$ (794,000)
280,000
320,800
0
$(12,000)
12,000
$ (181,200)
(S)280,000
(I) 16,000
(S)304,000
(A) 80,000
(A) 16,000 (E) 1,600
(A) 64,000 (E)
$ (700,000)
(181,200)
4,000
70,000
$ (811,200)
$ 620,000
0
514,400
570,000
60,800
$ 1,765,200
3,200
$ (660,000)
(210,000)
(811,200)
(S) 100,000
(S) 76,000
$(610,000)
© The McGraw-Hill Companies, Inc., 2001
4-39
(76,000)
$(84,000)
(84,000)
$(1,765,200)
38. (continued)
b.
Croft's Book Value on October 1, 2002 (Date of Purchase)
Book value—1/1/02 (based on equity accounts) ..........................
Net income 1/1/02-9/30/02 ($60,000 x 9/12) ...................................
Dividends paid—1/1/02-9/30/02 ($20,000 x 9/12) ..........................
Book value—10/1/02 .......................................................................
$380,000
45,000
(15,000)
$410,000
Purchase Price Allocation and Excess Amortizations
Purchase price ................................................
Book value equivalency (80% of
10/1/02 balance computed above) ................
Price in excess of book value .......................
$408,000
(328,000)
$ 80,000
Excess price allocated to undervalued
building ($20,000 x 80%) ...........................
$1,600
Trademark ($80,000 x 80%) ............................
3,200
Total .......................................................... $
Life
16,000
$ 64,000
20 years
0
$4,800
3/12 yr.
$ 1,200
Excess Amortizations for last three months of 2002
McGraw-Hill?rwin
4-40
Annual Excess
Amortizations
10 years
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
38.
b. (continued)
Consolidated Totals:
—Sales = $806,000 (add the two book values after subtracting $4,000
intercompany dividend payment [$20,000 x 3/12 year x 80 percent
ownership])
—Cost of goods sold = $280,000 (add book values)
—Operating expenses = $317,200 (add book values plus excess
amortization expenses for 3 months)
—Dividend income = -0- (eliminated as an intercompany cash transfer)
—Preacquisition Income = $36,000 (80% of $45,000 reported income for
first nine months of the current year ([$60,000 x 9/12])
—Noncontrolling interest in Croft's income = $12,000 (20% of $60,000
reported income for the year)
—Net Income = $160,800 (consolidated revenues less consolidated cost of
goods sold, operating expenses, preacquisition income, and
noncontrolling interest)
—Retained earnings, 1/1/02 = $700,000 (parent balance only because
purchase occurred during current year)
—Dividends paid = $70,000 (parent company balance)
—Retained earnings, 12/31/02 = $790,800 (consolidated beginning balance
plus net income less dividends paid)
—Current assets = $620,000 (add book values)
—Investment in Croft = -0- (balance must be eliminated so specific assets
and liabilities of the subsidiary can be included in consolidated figures)
—Buildings (net) = $515,600 (add the book values plus the purchase price
allocation less excess amortization for 3 months)
—Equipment (net) = $570,000 (add the book values)
—Trademark = $63,200 (residual allocation after amortization for 3 months)
—Total assets = $1,744,800
—Liabilities = $660,000 (add book values)
—Noncontrolling interest, 12/31/02 = $84,000 (20% of 1/1/01 book value
[$380,000] plus $12,000 income allocation [above] less 20% of dividends
[$20,000])
—Common stock = $210,000 (parent company balance only)
—Retained earnings, 12/31/02 = $790,800 (computed above)
—Total liabilities and equities = $1,744,800
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
4-41
39.
(50 Minutes) (A variety of questions and consolidated balances for
combination where parent applies equity method.)
a. Equity accrual (60% x $70,000) ..............................................
Excess amortizations (below) ................................................
Equity Income (parent uses equity method) ....................
$42,000
(5,600)
$36,400
Purchase Price Allocation and Excess Amortizations
Purchase price ..........................................
Book value acquired (60% of
$470,000 [assets minus liabilities]) ....
Price in excess of book value ..................
Excess price assigned to specific ac-......
counts based on fair market value ...........
—Equipment (overvalued)
([$30,000] x 60%) ..................................
$(1,800)
—Buildings ($155,000 x 60%) ...................
6,200
—Bonds payable ($20,000 x 60%) .............
1,200
Goodwill .....................................................
$400,000
282,000
$118,000
Life
Annual Excess
Amortizations
(18,000)
10 yrs.
93,000
15 yrs.
12,000
10 yrs.
$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 figure
e. Consolidated Totals:
—Revenues = $920,000 (add book values)
—Operating Expenses = $695,600 (add book values plus excess
amortizations for the year)
—Equity in subsidiary earnings = -0- (balance is removed so that
specific revenues and expenses of the subsidiary can be included in
the consolidated figures)
—Noncontrolling Interest is subsidiary's income = $28,000 (40% of
reported balance)
—Net income = $196,400 (consolidated revenues less consolidated expenses and the noncontrolling interest is the subsidiary's income)
f.
Allocations (see a)
—Equipment (18,000)
—Buildings 93,000
—Bonds payable 12,000
McGraw-Hill?rwin
4-42
Excess Amortizations
for 4 years
(7,200)
24,800
4,800
Allocations
12/31/02
(10,800)
68,200
7,200
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
—Goodwill 31,000
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
0
31,000
© The McGraw-Hill Companies, Inc., 2001
4-43
39.
(continued)
g. Noncontrolling interest, 1/1/05 (40% of book value of $630,000) $252,000
Noncontrolling interest in subsidiary's income (see e) ...........
28,000
Noncontrolling interest in subsidiary's dividends ....................
(16,000)
(40% x $40,000)
Noncontrolling interest in subsidiary, 12/31/05 ........................ $264,000
h. Consolidated Totals:
—Current assets = $475,000 (add book values)
—Investment in Houston = -0- (balance is removed so that the
subsidiary's assets and liabilities can be included in the
consolidated totals)
—Equipment (net) = $909,200 (add book values and subtract the
remaining unamortized allocation [shown in f])
—Buildings (net) = $1,001,200 (add book values and add the remaining
unamortized allocation [shown in f])
—Goodwill = $31,000 (original allocation)
—Total assets = $2,416,400
—Current liabilities = $560,000 (add book values)
—Bonds payable = $462,800 (add book values and subtract the
remaining unamortized allocation [shown in f])
—Noncontrolling Interest in subsidiary, 12/31/05 = $264,000 (see g)
—Common stock = $310,000 (parent company balance only)
—Retained earnings, 12/31/05 = $819,600 (parent company balance
since equity method has been applied)
—Total liabilities and equities = $2,416,400
McGraw-Hill?rwin
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© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
40.
(40 Minutes) (Determine consolidated balances, parent has applied the cost
method)
Acquisition price ............................................
Book value acquired (see Schedule 1)
($1,120,000 x 80%) ..........................................
Cost in excess of book value ........................
..........................................................
Excess cost allocated to buildings based
on fair market value ($80,000 x 80%) ............
$ 6,400
Unpatented technology ($550,000 x 80%) ....
44,000
Total
.......................................................... $
$1,400,000
896,000
$ 504,000
Annual Excess
Life Amortizations
64,000
10 years
440,000
0
10 years
$50,400
Schedule 1—Book Value of Morning (January 1, 2002)
Book value, January 1, 2005
(stockholders' equity accounts) ..............
2004 Increase in book value ..........................
2003 Increase in book value ..........................
2002 Increase in book value ..........................
380,000
Book value, January 1, 2002 ..........................
$1,500,000
$200,000
100,000
80,000
$1,120,000
Revenues = $1,384,000 (add the two book values)
Expenses = $550,400 (add the two book values and then include 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)
Net Income—$753,600 (consolidated revenues less both consolidated
expenses and the noncontrolling interest's share of net income)
Retained earnings, 1/1/05 = $1,952,800 (the cost method is in use since 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 x 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, 12/31/05 = $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 intercompany
balance)
Inventory = $900,000 (add book values)
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
4-45
Investment in Morning = -0- (balance is removed so that subsidiary's assets
and liabilities can be included in the consolidated figures)
40. (continued)
Land = $1,300,000 (add book values)
Buildings = $1,038,400 (add book values plus allocation after four years of
excess amortization)
Unpatented technology = $264,000 (original allocation after four years
amortization)
Total assets = $5,002,400
Liabilities = $720,000 (add book values after removing intercompany
balance)
Noncontrolling Interest in subsidiary, 12/31/05 = $356,000 (20% of
subsidiary's beginning book value [$1,500,000] plus interest in 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, 12/31/05 = $2,326,400 (computed above)
Total liabilities and equities = $5,002,400
Consolidated figures can also be determined through a worksheet as
follows:
CONSOLIDATION ENTRIES
Entry *C
Investment in Morning ........................................
Retained Earnings, 1/1/05 Good ...................
152,800
152,800
(To record Good's share of Morning's increase in book value during the 20022005 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 S
Common Stock (Morning) ..................................
Additional Paid-in Capital (Morning) .................
Retained Earnings, 1/1/05 (Morning) .................
Investment in Morning (80%) ........................
Noncontrolling Interest in Morning (20%) ....
460,000
40,000
1,000,000
1,200,000
300,000
(To eliminate subsidiary's stockholders' equity accounts while recording the
January 1, 2005 balance of the noncontrolling interest.)
McGraw-Hill?rwin
4-46
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
40. (continued)
Entry A
Buildings ...............................................................
Unpatented technology ......................................
Investment in Morning ...................................
44,800
308,000
352,800
(To recognize unamortized amounts paid in connection with acquisition of
Morning. Original allocations have undergone three previous years of excess
amortizations.)
Entry I
Dividend Income .................................................
Dividends Paid ...............................................
(To eliminate Intercompany Income accounts.)
Entry E
Operating Expenses ...........................................
Buildings ........................................................
Unpatented technology ..................................
(To recognize amortization expenses for 2005.)
Entry P
Liabilities .............................................................
Receivables ....................................................
(To eliminate Intercompany debt.)
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
96,000
96,000
50,400
6,400
44,000
100,000
100,000
© The McGraw-Hill Companies, Inc., 2001
4-47
40. (continued)
GOOD AND MORNING
Consolidation Worksheet
For Year Ending December 31, 2005
Accounts
Revenues
Operating Expenses
Dividend Income
Noncontrolling interest in Morning's
income (20% of book value)
Net Income
Retained earnings, 1/1/05
--Good
--Morning
Net income (above)
Dividends paid
Retained earnings, 12/31/05
Cash
Receivables
Inventory
Investment in Morning
Land
Buildings
Unpatented Technology
Total assets
Good
Morning
$ (884,000)
400,000
(96,000)
$ (500,000)
100,000
-0-
-0$ (580,000)
-0$ (400,000)
Consolidation Entries Noncontrolling
Debit
Credit
Interest
$ (80,000)
(*C) 152,800
$(1,000,000) (S)1,000,000
(580,000)
(400,000)
380,000
120,000
$(2,000,000) $(1,280,000)
$ 300,000
700,000
400,000
1,400,000
700,000
300,000
-0$ 3,800,000
$(1,384,000)
550,400
-0-
(E) 50,400
(I) 96,000
$(1,800,000)
(I)
$ 500,000
1,000,000
900,000
-01,300,000
1,038,400
264,000
$ 5,002,400
(P) 100,000
(S) 460,000
(S) 40,000
$(720,000)
(1,000,000)
(600,000)
(2,326,400)
(S) 300,000
Parentheses indicate a credit balance.
McGraw-Hill?rwin
4-48
96,000
80,000
$(753,600)
$(1,952,800)
-0(753,600)
24,000
380,000
$(2,326,400)
$200,000
400,000
(P) 100,000
500,000
-0- (*C) 152,800 (S)1,200,000
(A) 352,800
600,000
700,000 (A) 44,800 (E)
6,400
-0- (A) 308,000 (E) 44,000
$ 2,400,000
Liabilities
$ (200,000) $ (620,000)
Common stock
(1,000,000)
(460,000)
Additional paid-in capital
(600,000)
(40,000)
Retained earnings 12/31/05 (above)
(2,000,000) (1,280,000)
Noncontrolling interest in Morning, 1/1/05
-0-0Noncontrolling interest, 12/31/05
-0-0Total liabilities and stockholders' equity $(3,800,000) $(2,400,000)
Consolidated
Totals
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
(300,000)
$(356,000)
$ (356,000)
$(5,002,400)
41. (65 Minutes) (Consolidation worksheet for a step acquisition with
preacquisition income)
a. Book value of Atlanta as of January 1, 2002
Stockholders' Equity of Atlanta, 1/1/03:
Common stock ....................................................................
Additional paid-in capital ....................................................
Retained earnings ...............................................................
Book value, 1/1/03 ....................................................................
Remove 2002 Income ...............................................................
Remove 2002 dividend payments ...........................................
Book value, 1/1/02 ...............................................................
$300,000
20,000
500,000
$820,000
(90,000)
60,000
$790,000
Allocation and Amortization Relating to First Purchase
Purchase price ..........................................................................
Book value acquired ($790,000 x 30%) ...................................
Goodwill ....................................................................................
Life ........................................................................................
Annual amortization .................................................................
$257,000
(237,000)
20,000
indefinite
$
-0-
b. Investment in Atlanta—December 31, 2002
Acquisition price ......................................................................
Income accrual ($90,000 x 30%) ..............................................
Dividends ($60,000 x 30%) .......................................................
Investment in Atlanta—12/31/02 ........................................
$257,000
27,000
(18,000)
$266,000
c. Book Value of Atlanta- April 1, 2003
Book value as of 1/1/03 (see Part a above) ............................
Income earned 1/11/03-3/31/03 ($120,000 x 3/12 year) ..........
Dividends paid 1/1/03-3/31/03 ($80,000 x 3/12 year) ...............
Book value 4/1/06 .................................................................
$820,000
30,000
(20,000)
$830,000
Allocation and Excess Amortizations Relating to Second Purchase
Acquisition price ......................................
Book value equivalency—4/1/03
($830,000 x 30%) .................................
Excess price over book value .................
Allocated to patent based on fair
market value ($100,000 x 30%) ...........
$5,000
Goodwill ....................................................
0
Total .....................................................
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
$309,000
(249,000)
$ 60,000
Annual Excess
Life Amortizations
30,000
6 yrs.
$ 30,000
indefinite
$5,000
© The McGraw-Hill Companies, Inc., 2001
4-49
d. Income of Subsidiary—2003
First acquisition: 30% of $120,000 ..........................................
Second acquisition: 30% x $120,000 x 9/12 ...........................
Amortization ($5,000 x 9/12) ....................................
Income of subsidiary ..........................................................
e. Investment in Subsidiary—12/31/03
Account balance, 1/1/03 (see Part b above) ...........................
Second acquisition (cost) ........................................................
Income for current year (see Part d above) ............................
Dividends paid—2003
First acquisition—30% x $80,000 .......................................
Second acquisition—30% x $80,000 x 9/12 ......................
Investment in subsidiary—1/31/03 ...............................
$36,000
27,000
(3,750)
$59,250
$266,000
309,000
59,250
(24,000)
(18,000)
$592,250
f. Consolidated retained earnings as of January 1, 2003 is $823,000. The
parent is applying the equity method. Therefore, the parent's retained
earnings reflects the consolidated balance.
g. Explanation of Consolidation Entries Found on Worksheet
Entry S—Eliminates stockholders' equity accounts of subsidiary while
recognizing noncontrolling interest (40 percent) as of the beginning
of the year. Stockholders' equity is removed as of January 1, 2003
even though the second investment was acquired on April 1, 2003. To
bring the dates into agreement, preacquisition income of $9,000
($120,000 x 30% x 3/12) for this period is recognized (as a reduction
to income) while the $6,000 in dividends paid to these previous
owners is eliminated. The investment balance credit in Entry S is
equal to 30 percent of the January 1, 2003 book value and 30 percent
of the April 1, 2003 book value.
Entry A—Allocates amounts attributed to specific subsidiary accounts
and to goodwill. Goodwill of $20,000 was recognized in the first
purchase. Goodwill of $30,000 was present in the second payment.
Also, within the second acquisition, an allocation of $30,000 was
assigned to a patent owned by Atlanta.
Entry I—Eliminates Intercompany Income accrued for 2003.
Entry D—Eliminates Intercompany dividend transfers (30% for full year
and another 30% for last nine months).
Entry E—Recognizes amortization expense for the current year. In
connection with the second investment, only amortization for nine
months is being recorded.
Columnar Entry—Recognizes noncontrolling interest's share of Atlanta's
net income ($120,000 x 40%).
McGraw-Hill?rwin
4-50
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
41. (continued)
TURNER AND ATLANTA
Consolidation Worksheet
For Year Ending December 31, 2003
Accounts
Turner
Atlanta
Revenues
$ (660,000)
Expenses
398,000
Preacquisition income
Income of subsidiary
(59,250)
Noncontrolling interest in Atlanta's income
Net income
$ (321,250)
$ (400,000)
280,000
Retained earnings, 1/1/03
Net income (above)
Dividends paid
$ (821,000)
(321,250)
148,000
$ (500,000)
(120,000)
80,000
$ (996,250)
$ (540,000)
$
481,000
592,250
$ 410,000
Land
388,000
Buildings
700,900
Patent
Goodwill
Total assets
$ 2,162,150
Liabilities
$ (660,900)
Common stock
(95,000)
Additional paid-in capital
(410,000)
Retained earnings 12/31/03 (above)
(996,250)
Noncontrolling interest in Atlanta, 1/1/03
Noncontrolling interest, 12/31/03
200,000
630,000
Retained earnings, 12/31/03 balance
Current assets
Investment in subsidiary
Consolidation Entries Noncontrolling Consolidated
Debit
Credit
Interest
Totals
$(1,060,000)
681,750
9,000
0
$ (48,000)
48,000
$ (321,250)
(E) 3,750
(S) 9,000
(I) 59,250
$ (120,000)
(S) 500,000
(S) 6,000
(D) 42,000
$ (996,250)
(D) 42,000
(A) 50,000
$ 1,240,000
$ (380,000)
(300,000)
(20,000)
(540,000)
$891,000
0
(S) 495,000
(I) 59,250
(A) 80,000
588,000
1,330,900
26,250
50,000
$ 2,886,150
$(1,040,900)
(95,000)
(410,000)
(996,250)
(E) 3,750
(S)300,000
(S) 20,000
(S) 328,000
Total liabilities and stockholders' equity $(2,162,150) $(1,240,000)
Parentheses indicate a credit balance.
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
32,000
$ (821,000)
(321,250)
148,000
© The McGraw-Hill Companies, Inc., 2001
4-51
(328,000)
$(344,000)
(344,000)
$(2,886,150)
42.
(55 Minutes) (Determine consolidated balances for a step acquisition with
preacquisition income. Parent applies partial equity method.)
Book Value of Holt as of January 1, 2002
Book Value—1/1/32
—Common stock ...........................................
—Additional paid-In capital ...........................
—Retained earnings ......................................
Remove 2002 income ....................................
Remove 2002 dividends paid ........................
Book value January 1, 2021 .....................
$300,000
80,000
500,000
$880,000
(150,000)
80,000
$810,000
First Purchase Price Allocation January 1, 2021
Purchase price ...............................................
Book value equivalency
($810,000 x 60%) .......................................
Cost in excess of book value ........................
$566,000
(486,000)
$ 80,000
Excess cost allocated to building based on
fair market value ($70,000 x 60%) .................
$7,000
Goodwill ..........................................................
0
Total
..........................................................
Life
42,000
Annual Excess
Amortizations
6 yrs.
$ 38,000
indefinite
$7,000
Book Value of Holt as of May 1, 2003
Book value—1/1/03
(based on stockholders' equity accounts) .............................
Income—1/1/03-4/30/03 ($180,000 x 4/12) ....................................
Dividends paid 1/1/03-4/30/03 ($60,000 x 4/12) ............................
Book value—May 1, 2003 ..........................................................
$880,000
60,000
(20,000)
$920,000
Second Purchase Price Allocation: May 1, 2003
Purchase price ...............................................
Book value equivalency
($920,000 x 30%) ............................................
Cost in excess of book value ........................
Excess cost allocated to building based on
fair market value ($260,000 x 30%) .........
$15,600
- Goodwill .......................................................
0
Total ..........................................................
..........................................................
Amortization for last 8 months of 2003 ........
McGraw-Hill?rwin
4-52
$366,000
(276,000)
$ 90,000
Life
78,000
$ 12,000
Annual Excess
Amortizations
5 yrs.
indefinite
$15,600
8/12yr.
$10,400
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
The parent is applying the partial equity method as indicated on the income
statement.
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
4-53
42. (continued)
Consolidated financial statements can be produced without the use of a
worksheet by analyzing each individual account and the effect created upon
it by the business combination. However, because many students will
develop a worksheet for this problem, a completed consolidation worksheet
for Ace and Holt has been produced.
Explanation of Consolidation Entries Found on Worksheet
Entry *C—Converts figures determined by parent using partial equity
method to the equity method by recording 2002 amortization expense
($7,000) from first purchase.
Entry S—Eliminates stockholders' equity accounts of subsidiary while
recognizing noncontrolling interest (10%) as of the beginning of the year.
Stockholders' equity is removed as of January 1, 2003 even though the
second purchase (30%) was made on May 1, 2003. To bring the dates
into agreement, preacquisition income of $18,000 ($180,000 x 30% x 4/12)
for this period is recognized (as a reduction in consolidated net income)
while the $6,000 dividend payment made to these previous owners is
eliminated. The investment balance removed in Entry S is equal to 60%
of the January 1, 2003 book value and 30% of the May 1, 2003 book
value.
Entry A—Allocates amounts attributed to specific subsidiary accounts and
to goodwill. From the first purchase, $42,000 was assigned to the
building with $78,000 added by the second purchase. The $120,000 total
has now been reduced by the 2002 amortization ($7,000) on the first
purchase. Goodwill from the two acquisitions totals $50,000 ($38,000 +
$12,000).
Entry I—Eliminates intercompany income accrued for 2003.
Entry D—Eliminates intercompany dividend transfers (60% for full year and
another 30% for eight months).
Entry E—Recognizes excess amortization expenses for current year. In
connection with the second investment, only amortization for eight
months is being recorded.
Columnar Entry—Recognizes the noncontrolling interest's share of Holt's
net income ($180,000 x 10%).
McGraw-Hill?rwin
4-54
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
42. (continued)
ACE, INC. AND HOLT COMPANY
Consolidation Worksheet
Year Ending December 31, 2003
Accounts
Ace, Inc.
Holt Co.
Revenues
Operating Expenses
Investment income
Noncontrolling interest in Holt's income
Preacquisition income
Net income
$ (400,000)
200,000
(144,000)
$ (300,000)
120,000
$ (344,000)
$ (180,000)
Retained earnings, 1/1/03
Net income (above)
Dividends paid
$ (800,000)
(344,000)
144,000
$ (500,000)
(180,000)
60,000
$(1,000,000)
$(620,000)
$ 200,000
1,070,000
$190,000
100,000
210,000
380,000
600,000
300,000
110,000
$ 1,960,000
$ 1,200,000
$ (500,000)
(400,000)
(60,000)
(1,000,000)
$ (200,000)
(300,000)
(80,000)
(620,000)
Retained earnings, 12/31/03 balance
Current assets
Investment in Holt
Land
Buildings (net)
Equipment (net)
Goodwill
Total assets
Liabilities
Common stock
Additional paid-in capital
Retained earnings 12/31/03 (above)
Noncontrolling interest in Holt - 1/1/03
Noncontrolling interest in Holt - 12/31/03
Total liabilities and equities
Consolidation Entries Noncontrolling Consolidated
Debit
Credit
Interest
Totals
(E) 17,400
(I) 144,000
$ (18,000)
(S) 18,000
(*C) 7,000
(S)500,000
(S) 6,000
(D) 48,000
$ (793,000)
(326,600)
144,000
$ (975,600)
(D)48,000 (*C) 7,000
(S) 804,000
(A) 163,000
(I) 144,000
(A)113,000
(E) 17,400
(A) 50,000
(S) 300,000
(S) 80,000
(S)88,000
$(1,960,000) $(1,200,000)
Parentheses indicate a credit balance.
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
6,000
$ (700,000)
337,400
0
18,000
18,000
$ (326,600)
© The McGraw-Hill Companies, Inc., 2001
4-55
$ 390,000
0
700,000
605,600
490,000
50,000
$ 2,235,600
$ (700,000)
(400,000)
(60,000)
(975,600)
(88,000)
0
$(100,000) $ (100,000)
$(2,235,600)
42.
(continued)
ACE, INCORPORATED AND CONSOLIDATED SUBSIDIARY
Income Statement
Year ending December 31, 2003
Revenues ....................................................................................
Operating expenses .......................................................................
Income before noncontrolling interest and preacquisition income
Noncontrolling interest in Holt income .........................................
Preacquisition income ...................................................................
Consolidated net income ...........................................................
$700,000
337,400
$362,600
18,000
18,000
$326,600
ACE, INCORPORATED AND CONSOLIDATED SUBSIDIARY
Statement of Retained Earnings
Year Ending December 31, 2003
Retained earnings, January 1, 2003 ..............................................
Consolidated net income ..............................................................
Less: Dividends paid .....................................................................
Retained earnings, December 31, 2003 ..................................
$793,000
326,600
(144,000)
$975,600
ACE, INCORPORATED AND CONSOLIDATED SUBSIDIARY
Balance Sheet
December 31, 2003
Assets
Current assets ................................................................................
Land
..........................................................................................
Buildings (net) ................................................................................
Equipment (net) ..............................................................................
Goodwill ..........................................................................................
Total assets ...............................................................................
$390,000
700,000
605,600
490,000
50,000
$2,235,600
Liabilities and Equities
Liabilities ....................................................................
Noncontrolling interest in subsidiary .....................
Equities:
Common stock .....................................................
Additional paid-in capital ....................................
Retained earnings ...............................................
Total liabilities and equities ..........................
43.
$ 700,000
100,000
$400,000
60,000
975,600 1,440,800
$2,235,600
(70 Minutes) (Prepare worksheet and consolidated statements for a step
acquisition. Parent applies equity method and a portion of the investment is
sold.)
McGraw-Hill?rwin
4-56
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
The problem states that the balance in the investment in Hampton Corp.
account was correctly reported as of January 1, 2003. The balance that now
appears ($870,000) has been reduced by the $140,000 sales price indicating
that the correct January 1, 2003 balance was $1,010,000. No other entries
have been recorded for the current year. A correct book value as of April 1,
2003 must be established so that the gain or loss on the sale of the 1,000
shares can be ascertained. To proceed with the problem, amortization
expense amounts must be calculated:
Customer base (1st acquisition) ..................
$6,000
Customer base (2nd acquisition) .................
2,000
Patent (second acquisition) ..........................
4,000
Total ..........................................................
Annual Excess
Life Amortizations
$120,000
20 yrs.
40,000
20 yrs.
40,000
10 yrs.
$12,000
Investment Balance April 1, 2003
Investment in Hampton Corp. - 1/1/03 (above) ............................
Income accrual ($160,000 x 80% x 3/12) ......................................
Excess amortizations ($12,000 x 3/12) .........................................
Investment in Hampton Corp.--4/1/03 .....................................
Book value of 1,000 shares (1,000/8,000 x $1,039,000) ..............
$1,010,000
32,000
(3,000)
$1,039,000
$ 129,875
Gain on Sale of 1,000 Shares
Sales price ......................................................................................
$140,000
Book value of investment (above) ................................................
(129,875)
Gain on sale of investment ......................................................
$ 10,125
Since Wilbourne reduced its investment balance by the entire $140,000, a
correcting entry (labeled as Entry C) must be made on the worksheet to
reinstate $10,125 of the asset balance and recognize the associated gain
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
4-57
43. (continued)
Equity Income Accrual for 1,000 Share Ownership -- 1/1/03 - 4/1/03
As 1,000 shares of Hampton were sold on April 1, 2003, this portion of the
investment is not included as part of the consolidation. However, Wilbourne
must recognize the income that accrued on this investment during the
period of ownership in 2003. To establish comparability between 2003 and
future years, the consolidation is produced based on holding 70 percent of
the shares for the entire year with income on the 10 percent interest for
three months shown separately as an equity accrual:
Income accrual ($160,000 reported income
x 3/12 x 10% of outstanding shares) .......................................
$4,000
Amortization ($12,000 x 3/12 x 1/8 of Investment) ......................
(375)
Equity income accrual for 1,000 share
ownership—1 /1/03 – 4/1/03 ................................................
$3,625
This $3,625 equity accrual is recorded as Entry EA on the worksheet.
Acquisition Price Allocation and Excess Amortizations—Entry A for 2003
Wilbourne has now sold 1,000 shares or 1/8 of its investment. Thus, only the
remaining 7/8 of the amounts allocated to the customer base and to the
patent should be recognized in the current consolidation.
Allocation
Customer $120,000
Base (1st
acquisition)
Amortization
1/1/03 Percentage
Balance Remaining
1/1/03
Balance
Adjusted
$24,000
(1999-2002)
$96,000
7/8
$ 84,000
Customer
Base (2nd
acquisition)
40,000
2,000
(2002)
38,000
7/8
33,250
Patent
40,000
4,000
(2002)
36,000
7/8
31,500
Total
$148,750
Amortization expenses for 2003 will be 7/8 of $12,000 or $10,500: $5,250 for
the first purchase customer base, $1,750 the second purchase customer
base and $3,500 for the patent.
McGraw-Hill?rwin
4-58
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
43. (continued)
WILBOURNE CO. AND HAMPTON CORP.
Consolidation Worksheet
Year Ending December 31, 2003
Accounts
Wilbourne
Hampton
Revenues
$ (920,000)
Operating Expenses
650,000
Gain on sale of investment
Equity income of Hampton (10%)
Noncontrolling interest in Hampton's
income (30%)
Net Income
$ (270,000)
Retained earnings, 1/1/03
$(1,417,000)
Net income (above)
(270,000)
Dividends paid
150,000
Retained earnings, 12/31/03
$(1,537,000)
$ (600,000)
440,000
Cash
Receivables
Inventories
Investment in Hampton Corp
$ 60,000
430,000
677,000
870,000
Consolidation Entries Noncontrolling
Debit
Credit
Interest
$(1,520,000)
1,100,500
(10,125)
(3,625)
(E) 10,500
(C) 10,125
(EA) 3,625
$ (48,000)
$ (160,000)
$ (750,000) (S) 750,000
(160,000)
$ (910,000)
48,000
$ (385,250)
$(1,417,000)
(385,250)
150,000
$(1,652,250)
$98,000
210,000
620,000
$ 158,000
640,000
1,297,000
0
(C) 10,125 (S) 735,000
(EA) 3,625 (A) 148,750
Buildings and equipment (net)
620,000
514,000
Patents
40,000
90,000 (A) 31,500
(E) 3,500
Customer base
(A)117,250
(E) 7,000
Total assets
$2,697,000 $ 1,532,000
Liabilities
$ (690,000) $ (322,000)
Common stock
(470,000)
(300,000) (S) 300,000
Retained earnings 12/31/03 (above) (1,537,000)
(910,000)
Noncontrolling interest in Hampton—
1/1/03 (30%)
(S) 315,000
Noncontrolling interest in Hampton—
12/31/03 (30%)
Total liabilities and equities
$(2,697,000) $(1,532,000)
Parentheses indicate a credit balance.
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
Consolidated
Totals
© The McGraw-Hill Companies, Inc., 2001
4-59
1,134,000
158,000
110,250
$ 3,497,250
$(1,012,000)
(470,000)
(1,652,250)
(315,000)
$(363,000)
0
(363,000)
$(3,497,250)
43.
(continued)
WILBOURNE CO. AND HAMPTON CORP.
Income Statement
Year ending December 31, 2003
Revenues ................................................................................................ $1,520,000
Operating expenses ............................................................................. (1,100,500)
Gain on sale of investment .................................................................
10,125
Equity income on subsidiary shares sold........................................
3,625
Income before noncontrolling interest and preacquisition income $ 433,250
Noncontrolling interest in Hampton income ...................................
48,000
Consolidated net income.....................................................................
$ 385,250
WILBOURNE CO. AND HAMPTON CORP.
Statement of Retained Earnings
Year Ending December 31, 2003
Retained earnings, January 1 ........................................................
Consolidated net income ..............................................................
Less: Dividends paid .....................................................................
Retained earnings, December 31 ..................................................
$1,417,000
385,250
(150,000)
$1,652,250
WILBOURNE CO. AND HAMPTON CORP.
Balance Sheet
December 31, 2003
Assets
Cash
..........................................................................................
Receivables .....................................................................................
Inventories .......................................................................................
Buildings and equipment (net) .....................................................
Patents ..........................................................................................
Customer base ................................................................................
Total assets ...............................................................................
$ 158,000
640,000
1,297,000
1,134,000
158,000
110,250
$3,497,250
Liabilities and Equities
Liabilities ........................................................
Noncontrolling interest in Hampton .............
Equities:
Common stock ..........................................
Retained earnings ....................................
Total liabilities and equities ...............
McGraw-Hill?rwin
4-60
$1,012,000
363,000
$ 470,000
1,662,250 2,122,250
3,497,250
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
Chapter 4 Computer Project Solution
80% Ownership—Parent Company Concept
December 31, 2002 Worksheet: Parent Company Concept 80% Ownership
Pinter
($840,000)
$690,000
($136,600)
Strong
($740,000)
$550,000
Net Income
($286,000)
($190,000)
Retained earnings-Pinter 1/1/02
Retained Earnings-Strong 1/1/02
Net income (above)
Dividends declared
Retained earnings 12/31/02
($775,000)
Revenues
Operating expenses
Income of Strong
Adjustments & Eliminations
$16,000
$136,000
($38,000)
($286,000)
$115,000
($946,000)
$102,000
$96,000
$20,000
$225,000
$916,000
$32,000
$140,000
Land
Buildings (net)
Equipment (net)
Goodwill
Total assets
$200,000
$550,000
$350,000
$100,000
$120,000
$310,000
$2,459,000
$910,000
Dividend payable
Liabilities
Common stock
Noncontrolling interest
($513,000)
($1,000,000)
($25,000)
($120,000)
($250,000)
Retained earnings (above)
Total liabilities and equity
($946,000)
($2,459,000)
$350,000
$20,000
Cost Allocation Schedule
Price Paid
Book Value Acquired
Excess Cost
to Land
to Building
to Equipment
to Goodwill
$800,000
($480,000)
$320,000
($9,600)
$24,000
$36,000
$269,600
$5,000
($286,000)
$115,000
($946,000)
$134,000
$236,000
$0
$433,000
$0
$20,000
$208,000
$20,000
$24,000
$36,000
$269,600
$136,000
$480,000
$320,000
$9,600
$4,000
$12,000
($515,000)
($910,000)
Life
6
3
indefinite
$290,400
$690,000
$684,000
$269,600
$2,737,000
$20,000
($5,000)
($633,000)
($1,000,000)
$250,000
$120,000
80%
$38,000
($286,000)
($775,000)
($350,000)
($190,000)
$25,000
($515,000)
Cash
Accounts receivable
Dividend receivable
Inventory
Investment in Strong
Percentage owned
Consolidated
($1,580,000)
$1,256,000
Noncontrolling interest in Strong's Income
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
Noncontrolling
Interest
$1,121,600
$1,121,600
($120,000)
($153,000)
($153,000)
($946,000)
($2,737,000)
Amortizations
$4,000
$12,000
$
0
$16,000
© The McGraw-Hill Companies, Inc., 2001
4-61
80% Ownership—Economic Unit Concept
December 31, 2002 Worksheet: Economic Unit Concept 80% Ownership
Pinter
($840,000)
$690,000
($136,000)
Strong
($740,000)
$550,000
Net Income
($286,000)
($190,000)
Retained earnings-Pinter 1/1/02
Retained Earnings-Strong 1/1/02
Net income (above)
Dividends declared
Retained earnings 12/31/02
($775,000)
Revenues
Operating expenses
Income of Strong
Adjustments & Eliminations
$20,000
$136,000
($34,000)
($286,000)
$115,000
($946,000)
$102,000
$96,000
$20,000
$225,000
$916,000
$32,000
$140,000
Land
Buildings (net)
Equipment (net)
Goodwill
Total assets
$200,000
$550,000
$350,000
$100,000
$120,000
$310,000
$2,459,000
$910,000
Dividend payable
Other liabilities
Common stock
Noncontrolling interest
($513,000)
($1,000,000)
($25,000)
($120,000)
($250,000)
Retained earnings (above)
Total liabilities and equity
($946,000)
($2,459,000)
$350,000
$20,000
$5,000
Cost Allocation Schedule
Implied Value
Total book value
Excess Value
to Land
to Building
to Equipment
to Goodwill
$1,000,000
($600,000)
$400,000
($12,000)
$30,000
$45,000
$337,000
($286,000)
$115,000
($946,000)
$134,000
$236,000
$20,000
$208,000
$20,000
$30,000
$45,000
$337,000
($515,000)
($910,000)
$12,000
$5,000
$15,000
$20,000
Life
6
3
indefinite
$288,000
$695,000
$690,000
$337,000
$2,813,000
($5,000)
($633,000)
($1,000,000)
$250,000
$1,208,000
$433,000
$0
$136,000
$480,000
$320,000
$120,000
$80,000 ($200,000)
($229,000)
80%
$34,000
($286,000)
($775,000)
($350,000)
($190,000)
$25,000
($515,000)
Cash
Accounts receivable
Dividend receivable
Inventory
Investment in Strong
Percentage owned
Consolidated
($1,580,000)
$1,260,000
Noncontrolling interest in Strong's Income
McGraw-Hill?rwin
4-62
Noncontrolling
Interest
$1,208,000
($229,000)
($946,000)
($2,813,000)
Amortizations
$5,000
$15,000
0
$20,000
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
100% Ownership—Parent Company Concept
December 31, 2002 Worksheet: Parent Company Concept 100% Ownership
Pinter
($840,000)
$690,000
($170,000)
Strong
($740,000)
$550,000
Net Income
($320,000)
($190,000)
Retained earnings-Pinter 1/1/02
Retained Earnings-Strong 1/1/02
Net income (above)
Dividends paid
Retained earnings 12/31/02
($775,000)
Revenues
Operating expenses
Income of Sand
Adjustments & Eliminations
$20,000
$170,000
$0
($320,000)
$115,000
($980,000)
$102,000
$96,000
$25,000
$225,000
$945,000
$32,000
$140,000
Land
Buildings (net)
Equipment (net)
Goodwill
Total assets
$200,000
$550,000
$350,000
$100,000
$120,000
$310,000
$2,493,000
$910,000
Dividend payable
Liabilities
Common stock
Noncontrolling interest
($513,000)
($1,000,000)
($25,000)
($120,000)
($250,000)
Retained earnings (above)
Total liabilities and equity
($980,000)
($2,493,000)
$350,000
$25,000
Cost Allocation Schedule
Price Paid
Book Value Acquired
Excess Cost
to Land
to Building
to Equipment
to Goodwill
$800,000
($600,000)
$200,000
($12,000)
$30,000
$45,000
$137,000
$0
$25,000
$25,000
$30,000
$45,000
$137,000
($515,000)
($910,000)
$170,000
$600,000
$200,000
$12,000
$5,000
$15,000
Life
6
3
indefinite
$288,000
$695,000
$690,000
$137,000
$2,613,000
$25,000
$0
($633,000)
($1,000,000)
$250,000
$1,052,000
($320,000)
$115,000
($980,000)
$134,000
$236,000
$0
$433,000
$0
$208,000
$0
100%
$0
($320,000)
($775,000)
($350,000)
($190,000)
$25,000
($515,000)
Cash
Accounts receivable
Dividend receivable
Inventory
Investment in Strong
Percentage owned
Consolidated
($1,580,000)
$1,260,000
Noncontrolling interest in Strong's Income
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
Noncontrolling
Interest
$1,052,000
$0
$0
$0
($980,000)
($2,613,000)
Amortizations
$5,000
$15,000
0
$20,000
© The McGraw-Hill Companies, Inc., 2001
4-63
100% Ownership—Economic Unit Concept
December 31, 2002 Worksheet: Economic Unit Concept 100% Ownership
Pinter
($840,000)
$690,000
($170,000)
Strong
($740,000)
$550,000
Net Income
($320,000)
($190,000)
Retained earnings-Pinter 1/1/02
Retained Earnings-Strong 1/1/02
Net income (above)
Dividends declared
Retained earnings 12/31/02
($775,000)
Revenues
Operating expenses
Income of Sand
Adjustments & Eliminations
$20,000
$170,000
$0
($320,000)
$115,000
($980,000)
$102,000
$96,000
$25,000
$225,000
$945,000
$32,000
$140,000
Land
Buildings (net)
Equipment (net)
Goodwill
Total assets
$200,000
$550,000
$350,000
$100,000
$120,000
$310,000
$2,493,000
$910,000
($513,000)
($1,000,000)
($25,000)
($120,000)
($250,000)
Percentage owned
100%
Cost Allocation Schedule
Implied Value
Total book value
Excess Value
to Land
to Building
to Equipment
to Goodwill
$800,000
($600,000)
$200,000
($12,000)
$30,000
$45,000
$137,000
McGraw-Hill?rwin
4-64
$350,000
$25,000
$0
($320,000)
$115,000
($980,000)
$134,000
$236,000
$25,000
$208,000
$25,000
$30,000
$45,000
$137,000
($515,000)
($910,000)
Life
6
3
indefinite
$433,000
$0
$170,000
$600,000
$200,000
$12,000
$5,000
$15,000
$288,000
$695,000
$690,000
$137,000
$2,613,000
$25,000
$0
($633,000)
($1,000,000)
$250,000
$0
$0
($980,000)
($2,493,000)
$0
($320,000)
($775,000)
($350,000)
($190,000)
$25,000
($515,000)
Cash
Accounts receivable
Dividend receivable
Inventory
Investment in Strong
Retained earnings (above)
Total liabilities and equity
Consolidated
($1,580,000)
$1,260,000
Noncontrolling interest in Strong's Income
Dividend payable
Other liabilities
Common stock
Noncontrolling interest
Noncontrolling
Interest
$1,052,000
$1,052,000
$0
$0
$0
($980,000)
($2,613,000)
Excess
Amortizations
$5,000
$15,000
0
$20,000
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
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