chap2

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Updated Sixth Edition
CHAPTER 2
CONSOLIDATION OF FINANCIAL INFORMATION
Answers to Questions
1.
2.
3.
4.
5.
A business combination is the process of forming a single economic entity by the uniting
of two or more organizations under common ownership. The term also refers to the
entity that results from this process.
(1) A statutory merger is created whenever two or more companies come together to
form a business combination and only one remains in existence as an identifiable entity.
This arrangement is often instituted by the acquisition of substantially all of an
enterprise’s assets. (2) a statutory merger can also be produced by the acquisition of a
company’s capital stock. This transaction is labeled a statutory merger if the acquired
company transfers its assets and liabilities to the buyer and then legally dissolves as a
corporation. (3) A statutory consolidation results when two or more companies transfer
all of their assets or capital stock to a newly formed corporation. The original companies
are being “consolidated” into the new entity. (4) A business combination is also formed
whenever one company gains control over another through the acquisition of
outstanding voting stock. Both companies retain their separate legal identities although
the common ownership indicated that only a single economic entity exists.
Consolidated financial statements represent accounting information gathered form two
or more separate companies. This data, although accumulated individually by the
organizations, is brought together (or consolidated) to describe the single economic
entity created by the business combination.
Companies that form a business combination will often retain their separate legal
identities as well as their individual accounting systems. In such cases, internal financial
data continues to be accumulated by each organization. Separate financial reports may
be required for outside shareholders (a noncontrolling interest), the government, debt
holders, etc. This information may also be utilized in corporate evaluations and other
decision making. However, the business combination must periodically produce
consolidated financial statements encompassing all of the companies within the single
economic entity. A worksheet is used to organize and structure this process. The
worksheet allows for a simulated consolidation to be carried out on a regular, periodic
basis without affecting the financial records of the various component companies.
Three characteristics are normally indicative of a purchase:
(1) One of the companies can clearly be identified as the acquiring party;
(2) A bargained exchange transaction has taken place to form the business
combination;
(3) A purchase price can be determined as the cost incurred by the acquiring company
to gain control over the acquired company.
Conversely, a pooling of interests is viewed as the uniting of ownership interests through
the exchange of equity securities. In such transactions, (1) the distinction between
acquirer and acquiring company is not always clear and (2) the price of the transaction
may not be easy to determine. More precise characteristics of a pooling of interests can
be seen in the 12 criteria established by the Accounting Principles Board. These
requirements hold, in part, that substantially all of one company must be obtained (at
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6.
7.
8.
9.
10.
11.
least 90 percent) in a transaction that is carried to conclusion within one year. In
addition, assets cannot be sold off unless duplication results from the combination.
APB Opinion Number 16 specifies several situations in which the fair market value of
the 50,000 shares being issued might be difficult to ascertain. These examples include:
 The shares may be newly issued (if Jones has just been created) so that no
accurate value has as of yet been established;
 Jones may be a closely held corporation so that no market value is available for its
shares;
 The number of newly issued shares (especially if the amount is large in comparison
to the quantity of previously outstanding shares) may cause the price of the stock to
fluctuate widely so that no accurate market value can be determined during a
reasonable period of time;
 Jones’ stock may have historically experienced drastic swings in price. Thus, a
quoted figure at any specific point in time may not be an adequate or representative
value for long-term accounting purposes.
In every business combination, the assets and liabilities of the acquiring company retain
their book values. The problem facing the accountant is the recorded basis to be used
for the assets and liabilities of the acquired company. For a purchase, these accounts
are traditionally consolidated at fair market value with any excess payment being
attributed to goodwill. If the acquiring company pays an amount less than fair market
value, the difference is accounted for by decreasing the values assigned to the
noncurrent assets (other than long-term marketable securities). A deferred credit will
also have to be recognized if the reduction is of sufficient size. In a pooling of interests,
the book values of the two companies provide the basis for consolidating assets and
liabilities.
In a purchase the revenues and expenses (both current and past) of the parent are
included within reported figures. However, the revenues and expenses of the subsidiary
are only consolidated from the date of the acquisition forward. The operations of the
subsidiary are only applicable to the business combination if earned subsequent to its
creation.
For a pooling of interests, where neither company is considered to be truly in a parent or
subsidiary position, the revenues and expenses are consolidated as if the two
companies had always been joined.
Morgan’s additional purchase price may be attributed to many factors: favorable
earnings projections, competitive bidding to acquire Jennings, etc. However, in
accounting for a purchase combination, any amount paid by the parent company in
excess of the subsidiary’s fair market value is reported as goodwill.
This business combination must be accounted for as a purchase because the
acquisition was consummated by a cash transaction. Normally, in a purchase, all of the
subsidiary’s asset and liability accounts are recorded at fair market value (see Answer 7
above). However, since Lambert paid less than the total fair market value for Catron’s
net assets, a full allocation in this manner is not possible. When a bargain purchase
has occurred APB Opinion 16 requires that a proportional reduction be recorded in the
values reported for noncurrent assets (other than long-term investments in marketable
securities). If the decrease is of such a magnitude that these accounts will be
consolidated at zero values, any further reduction is recognized as a deferred credit.
When shares are issued in a purchase, they are recorded at their fair market value as if
the stock had actually been sold with the money obtained being used to acquire the
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12.
13.
subsidiary. The Common Stock account is recorded at the par value of these shares
with any excess amount attributed to additional paid-in capital.
In a purchase, all consolidation costs are included in the purchase price being paid to
obtain the subsidiary. Consequently, the $98,000 is an added component of this price.
An exception is made, though, for any stock issuance costs. Such costs are recorded
as a reduction in additional paid-in capital (or retained earnings, if an Additional Paid-in
Capital account does not exist). The $56,000 will be recorded in that manner.
When two companies are brought together in a pooling of interests, all income balances
from previous operations are reported through combined totals. Thus, in reporting
current and past time periods, all figures are shown as if the two companies had always
been a single entity.
In a purchase, the acquired company’s earnings that were generated during periods
preceding the combination are totally omitted. For reporting purposes, only the
acquiring company’s revenues and expenses are included for the periods prior to the
purchase while the income figures of both companies are combined thereafter.
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Answers to Purchase Method Problems
1.
B
2.
D
3.
C
4.
D
5.
D
6.
B
7.
D
8. C Atkins records new shares at market value because combination is a
purchase.
Value of shares issued (51,000 x $3) ....................................... $153,000
Par value of shares issued (51,000 x $1) .................................
51,000
Additional paid-in capital .......................................................... $102,000
In a purchase, the parent makes no change in retained earnings.
9. C Because the parent paid $2 million which is larger than fair market value of
the subsidiary’s net assets ($1,650,000), all accounts are recorded at fair
market value with the excess being attributed to goodwill
10. C Because the purchase price was $1.5 million, less was paid than the fair
market of the subsidiary’s net assets ($1,650,000). This bargain purchase
of $150,000 is assigned to land and buildings based on their relative fair
market values: land 40% and buildings—60%. A $60,000 reduction is
assigned to the Land account and a $90,000 reduction is assigned to the
Buildings account. These balances are consolidated after these reductions
to their fair market values.
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11. B Acquisition price (fair market value) ..............................
Book value of subsidiary (assets minus liabilities)
Payment in excess of book value ........................
Allocation of excess payment
Identified with specific accounts:
—Inventory .......................................................................
—Land ..............................................................................
—Buildings.......................................................................
—Long-term liabilities .....................................................
Goodwill ................................................................
$400,000
(300,000)
100,000
30,000
20,000
25,000
10,000
15,000
12. A In a purchase, the subsidiary’s income is only included if generated after
the acquisition.
13. A All of Tucker’s accounts should be consolidated at fair market value in a
purchase. In this instance, however, Allen has paid $50,000 below fair
market value of $385,000. This $50,000 reduction is assigned to the three
noncurrent assets based on fair market value.
Fair Market
Value
Ratio
Reduction
Land ...................................$200,000
200,000 x 50,000
$20,000
500,000
Buildings ............................225,000
225,000 x 50,000
22,500
500,000
Equipment .......................... 75,000
75,000 x 50,000
7,500
500,000
Total
$500,000
$50,000
Consolidated Totals:
Inventory—$365,000 (combine Tucker’s fair market value).
Land—410,000 (combine Tucker’s fair market value less $20,000
reduction for bargain purchase).
Retained earnings—$130,000 (Allen’s balance only is included as
combination is a purchase).
14. D Total acquisition price of $400,000 is $15,000 in excess of Tucker’s fair
market value. Hence, that excess is recorded as Goodwill. Consolidated
retained earnings is Allen’s beginning balance because the combination is
a purchase.
15.
(30 Minutes) (Overview of the steps in applying the purchase method when
shares have been issued to create a combination. Includes a bargain
purchase.)
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a. Purchases are recorded at the fair market value sacrificed. In this case,
20,000 shares were issued valued at $55 per share. Thus, the purchase
price is $1.1 million.
b. The book value is found by subtracting the assets from the liabilities.
For Bakel, the assets are $1,380,000 and the liabilities are $400,000 for a
book value of the company’s net assets of $980,000. The same total can
be derived from the stockholders’ equity accounts after closing out
revenues and expenses.
c. In a purchase, stock issue costs are recorded as a reduction in
additional paid-in capital. Other direct costs of a combination are added
to the purchase price
d. The par value of the 20,000 shares issued is recorded as an increase of
$100,000 in the Common Stock account. The $50 market value in excess
of par value ($55 - $5) is an increase in additional paid-in capital of $1
million ($50 x 20,000 shares).
e. Purchase price (above) ..............................
Book value (above) ....................................
Price in excess of book value ..............
Allocations to specific accounts based on
difference between fair market value and
book value:
Inventory .....................................................
Land ............................................................
Building .......................................................
Liabilities ....................................................
Goodwill ................................................
$1,100,000
980,000
$ 120,000
$ 80,000
(200,000)
100,000
70,000
50,000
$ 70,000
f. In-process research and development would be recorded at $60,000 and
goodwill would be reduced to $10,000. Acquired in-process research
and development is typically reported as an expense in the year of the
acquisition assuming (1) no alternative use for the assets involved in
the research and development, and (2) no resulting products hvae
reached technological feasibility.
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g. In a purchase, any revenues and expenses of the subsidiary from the
period before the combination was created are omitted from the
consolidated totals. Only the operational figures for the subsidiary after
the purchase are applicable to the business combination. The previous
owners earned any previous profits.
h. The subsidiary’s Common Stock and Additional Paid-in Capital
accounts have no impact on the consolidated totals.
i. The subsidiary’s asset and liability accounts will be consolidated at
their fair market values with any excess payment being attributed to
goodwill. The equity, revenue, and expense figures of the subsidiary do
not affect the business combination at the date of acquisition. The
parent must record the issuance of the 20,000 new shares and the
payment of the stock issue costs.
j. If the stock was worth only $40 per share, the purchase price is now
$800,000. This amount indicates a bargain purchase:
Purchase price (above) ..............................
Book value (above) ....................................
Book value in excess of purchase price
Allocations to specific accounts based on
difference between fair market value
and book value:
Inventory .....................................................
Land ..........................................................
Building .......................................................
Liabilities ....................................................
Excess fair market value over cost .....
$ 800,000
980,000
$ (180,000)
$ 80,000
(200,000)
100,000
70,000
50,000
($230,000)
The bargain purchase figure must be allocated between the land and
building based on their fair market values of $400,000 (40%) and $600,000
(60%). Therefore, all of the assets and liabilities will be consolidated at fair
market value except that the land will be reported at $92,000 below market
value ($230,000 x 40%) and the building will be reported at $138,000 below
market value ($230,000 x 60%).
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16.
(10 Minutes) (Consolidated balances for a purchase.)
a. This combination must be a purchase because cash was paid.
Purchase price (fair market value):
—Cash ...................................................
$1,400,000
—Stock issued ......................................
800,000
$2,200,000
Book value of assets (no liabilities are indicated)
2,000,000
Cost in excess of book value ....................
$ 200,000
Excess cost assigned to Buildings account
based on fair market value...................
$ 100,000
Goodwill ......................................................
$ 100,000
b. None of Winston’s expenses will be included in consolidated figures as
of the date of acquisition. In a purchase, only subsidiary expenses
incurred after that date are applicable to the business combination. As a
purchase, the $30,000 stock issue costs reduce additional paid-in
capital.
c. None of Winston’s beginning retained earnings balance will be included
in consolidated figures as of the date of acquisition. As in Part b.
(above), only the subsidiary’s operational figures recognized after the
February 1, 2002 purchase relate to the business combination.
d. Buildings should be reported at $1,000,000. Unless a bargain purchase
has occurred, assets acquired in a purchase are recorded at fair market
value.
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17.
(10 Minutes) (Consolidated balances for a purchase.)
a. Purchase price: (includes combination costs) .............
Book value of assets (no liabilities are indicated) .......
Cost in excess of book value .........................................
Excess cost assigned to Buildings account
based on fair market value........................................
Goodwill ..........................................................................
$2,340,000
2,000,000
$ 340,000
100,000
$ 240,000
b. None of Winston’s expenses will be included in consolidated figures as
of the date of acquisition. In a purchase, only subsidiary expenses
incurred after that date are applicable to the business combination.
c. None of Winston’s beginning retained earnings balance will be included
in consolidated figures as of the date of acquisition. As in Part b.
(above), only the subsidiary’s operational figures recognized after the
February 1, 2002 purchase relate to the business combination.
d. Buildings should be reported at $1,000,000. Unless a bargain purchase
has occurred, assets acquired in a purchase are recorded at fair market
value.
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18.
(20 Minutes) (Consolidated balances for a bargain purchase.)
a. Inventory (fair market value)
$600,000
b. A bargain purchase has occurred; thus, no goodwill is recognized.
Purchase price (includes direct combination costs)
Book value of assets (no liabilities are indicated)
Cost in excess of book value
Excess cost assigned to Buildings account
based on fair market value
Bargain purchase
Allocation of $60,000 Bargain Purchase:
Noncurrent
Assets
Land
Buildings
Totals
Fair Market
Percentage
Value
$500,000
33 1/3%
1,000,000 66 2/3%
$1,500,000 100%
$2,040,000
2,000,000
$ 40,000
100,000
$ (60,000)
Allocation
$(20,000)
(40,000)
$(60,000)
c. None of Winston’s expenses will be included in consolidated figures as
of the date of acquisition. In a purchase, only subsidiary expenses
incurred after that date are reported by the business combination.
d. Buildings—fair market value .....................
Allocation of bargain purchase
(see b. above) .....................................
Balance to be consolidated .................
e. Land—fair market value ............................
Allocation of bargain purchase
(see b. above) .....................................
Balance to be consolidated .................
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$1,000,000
(40,000)
$ 960,000
$ 500,000
(20,000)
$ 480,000
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Solutions Manual
19.
As a purchase, the stock being issued is valued at its market value of
$250,000. This purchase price is also increased by the $10,000 direct
combination cost leading to a total price of $260,000. The $20,000 stock
issue cost is a reduction in additional paid-in capital. The Journal entries
for these transactions can be made as follows:
Bingham's Journal Entries
Investment in Laredo (fair market value) .................
Common Stock (par value) ..................................
Additional Paid-in Capital ....................................
250,000
Investment in Laredo (direct combination costs) ...
Additional Paid-in Capital (stock issue costs) ........
Cash ....................................................................
10,000
20,000
100,000
150,000
30,000
Once the purchase price has been established, an allocation should be
made.
Purchase price ...........................................................
Book value of Laredo, 12/31/02
(Assets minus liabilities) .....................................
Cost in excess of book value.........................
Excess cost assigned to specific accounts
based on fair market value:
—Buildings ...........................................................
Excess cost not attributed to specific accounts—
goodwill ................................................................
$260,000
(190,000)
$ 70,000
40,000
$ 30,000
CONSOLIDATED BALANCE-PURCHASE
Revenues (Bingham balance only, subsidiary not
included until after acquisition) ..........................
Expenses (Bingham balance only, subsidiary not
included until after acquisition) ..........................
Net income (revenues minus expenses) .................
Retained earnings, 1/1/02 (Bingham balance only,
subsidiary not included until after acquisition) .
Dividends ...................................................................
Retained earnings, 12/31/02 (beginning balance
plus net income less dividends) .........................
Cash (balances for the two companies less the
$30,000 paid above) .............................................
Receivables (summation) .........................................
Inventory (summation) ..............................................
Buildings and equipment (summation plus
allocation based on fair market value) ...............
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Advanced Accounting, Updated 6/e
$100,000
(60,000)
40,000
210,000
(30,000)
220,000
70,000
120,000
170,000
340,000
© The McGraw-Hill Companies, Inc., 2001
2-11
19. (continued)
Investment in Laredo (always eliminated in
consolidation).......................................................
Goodwill (computed above) .....................................
Total assets (summation) .........................................
Current liabilities (summation) .................................
Long-term liabilities (summation) ............................
Common stock (Bingham's balance after
adjustment for above entry) ................................
Additional paid-in capital (Bingham's balance
after adjustment for both of above entries) .......
Retained earnings, 12/31/02 (computed above) ......
Total liabilities and stockholders' equity
(summation)..........................................................
20.
-030,000
730,000
30,000
120,000
210,000
150,000
220,000
730,000
(75 Minutes) (Consolidated balances)
On the date the business combination is formed, the assets and liabilities
of Sun have a net book value of $560,000 but a fair market value of
$680,000.
a. Because Parrot acquires 100 percent of Sun in a business combination
accounted for as a purchase, the fair market value of each of the
subsidiary's assets and liabilities are consolidated. Goodwill is
calculated as $80,000, the amount that the $760,000 purchase price
exceeds the $680,000 fair market value of Sun.
Inventory—$670,000 (Parrot's book value plus Sun's fair market value)
Land—$710,000 (Parrot's book value plus Sun's fair market value)
Buildings—$930,000 (Parrot's book value plus Sun's fair market value)
Goodwill—$80,000 (calculated above)
Revenues—$960,000 (only parent company operational figures are
reported at date of a purchase)
Additional Paid-in Capital—$70,000 (Parrot's book value)
Expenses—$920,000 (only parent company operational figures are
reported at date of a purchase)
Retained Earnings, 1/1/02—$390,000 (Parrot's book value)
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20. (continued)
b. Because Parrot acquires 100 percent of Sun in a business combination
accounted for as a purchase, the fair market value of each of the
subsidiary's asset and liability accounts are consolidated. The $580,000
purchase price (cash plus value of stock issued plus $20,000 In direct
combination costs) is $100,000 below the $680,000 total fair market
value, thus necessitating a write-down within the consolidation
process. A reduction of this type is always made against the noncurrent
assets (other than financial and other specific assets). Thus, in this
combination, the $100,000 is apportioned as follows based on the fair
market values of the subsidiary's noncurrent asset accounts:
Land
110,000/660,000 = 1/6 x ($100,000) = ($16,667)
Buildings
330,000/660,000 = 1/2 x ($100,000) = ($50,000)
Equipment 220,000/660,000 = 1/3 x ($100,000) = ($33,333)
Inventory—$670,000 (Parrot's book value plus Sun's fair market value)
Land—$693,333 (Parrot's book value plus Sun's fair market value but
Less the $16,667 reduction calculated above)
Buildings—$880,000 (Parrot's book value plus Sun's fair market value
but less the $50,000 reduction calculated above)
Goodwill—-0- (Bargain purchase)
Revenues—$960,000 (parent company figure)
Additional Paid-in Capital—$265,000 (Parrot's book value after issuance
of 10,000 new shares at a value $20 above par but also less $5,000 in
stock issuance costs)
Expenses—$920,000 (parent company figure)
Retained Earnings, 1/1/02—$390,000 (parent company figure)
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21.
(20 Minutes) (Determine selected consolidated balances for a purchase)
As a purchase, fair market value is used to record the shares issued by
Willieslye:
Investment in Barrett (value of debt and shares issued)
Common Stock (par value) ........................................
Additional Paid-in Capital
(excess of stock value over par value) ...............
Liabilities ....................................................................
900,000
150,000
450,000
300,000
The payment to the broker must also be recorded and, since a purchase is
being made, is accounted for as a cost of the investment. However, the
stock issue cost is a reduction in additional paid-in capital.
Investment in Barrett .......................................................
Additional Paid-in Capital ...............................................
Cash ............................................................................
30,000
40,000
70,000
Allocation of Purchase Price:
Purchase Price of Barrett Stock (includes combination cost)
Book Value of Barrett, 12/31 ...........................................
Cost in Excess of Book Value ...................................
$930,000
770,000
$160,000
Excess Cost Assigned to Undervalued Equipment ......
Excess Cost Assigned to Overvalued Building ............
Goodwill ......................................................................
$100,000
(20,000)
$ 80,000
CONSOLIDATED BALANCES:
Net income (as a purchase, the figures earned by the
subsidiary prior to the takeover are not included) .................. $ 240,000
Retained Earnings, 1/1 (as a purchase, the figures earned
by the subsidiary prior to the takeover are not included) ......
800,000
Equipment (the parent's book value plus the fair market
value of the subsidiary) ............................................................. 1,400,000
Goodwill (computed above) ...........................................................
80,000
Liabilities (the parent's book value plus the fair market value
of the subsidiary's debt plus the debt issued by the parent
in acquiring the subsidiary) ...................................................... 1,210,000
Common Stock (the parent's book value after recording
the newly-issued shares) ..........................................................
510,000
Additional Paid-in Capital (the parent's book value
after recording the two entries above) .....................................
680,000
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Solutions Manual
22.
(45 Minutes) (Prepare entries for a purchase created as a statutory merger.
Also, use worksheet to derive consolidated totals.)
a. The combination of Merrill, Inc. and Harriss Co. must be a purchase
because cash was used, in part, to acquire the shares of Harriss. Thus,
a purchase price must be determined with any excess payment then
allocated to appropriate accounts.
Cash paid ..............................................................
Fair market value of shares issued ....................
Direct acquisition costs .......................................
Purchase price ................................................
$200,000
180,000
10,000
$390,000
Purchase price (above) ........................................
Book value of Harriss (assets minus
liabilities) .........................................................
Excess payment ...................................................
Excess payment assigned to specific
accounts based on fair market value:
—Receivables (overvalued) .................................
—Buildings ...........................................................
—Long-term liabilities .........................................
—Patent.................................................................
Goodwill ................................................................
$390,000
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280,000
$110,000
(10,000)
30,000
20,000
30,000
$ 40,000
© The McGraw-Hill Companies, Inc., 2001
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22. a (continued)
Journal Entries—Merrill, Inc.—January 1, 2002
Investment in Harriss Co ................................
Cash .......................................................
Common Stock (Merrill, Inc.) (par value)
Additional Paid-in Capital ....................
(To record purchase of Harriss' shares)
380,000
200,000
100,000
80,000
Investment in Harriss Co. ...............................
Cash .......................................................
(Direct acquisition costs incurred)
10,000
Additional Paid-in Capital ...............................
Cash .......................................................
(Stock issuance costs incurred)
6,000
10,000
6,000
Cash ................................................................
40,000
Receivables ......................................................
80,000
Inventory ..........................................................
130,000
Land ................................................................
60,000
Buildings ..........................................................
140,000
Equipment ........................................................
50,000
Patent ...............................................................
30,000
Goodwill ...........................................................
40,000
Accounts Payable ......................................
30,000
Long-Term Liabilities .................................
150,000
Investment in Harriss Co. ..........................
390,000
(To remove investment account and replace it with fair market values of
specific accounts transferred from Harriss.)
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22. (continued)
b.
Accounts
Debits
Cash .................................
Receivables......................
Inventory ..........................
Investment in Harriss ......
MERRILL, INC., AND HARRISS CO.
Consolidation Worksheet
January 1, 2002
Consolidation Entries
Merrill, Inc.
Harriss Co.
Debit
Credit
$
84,000
160,000
220,000
390,000
$ 40,000
90,000
130,000
-0-
(A) 10,000
(S) 280,000
(A) 110,000
Consolidated
Totals
$ 124,000
240,000
350,000
-0160,000
540,000
170,000
30,000
40,000
$1,654,000
Land .................................
100,000
60,000
Buildings ..........................
400,000
110,000
(A) 30,000
Equipment ........................
120,000
50,000
Patent ...............................
-0-0(A) 30,000
Goodwill ...........................
-0-0(A) 40,000
Totals................................
$1,474,000
$480,000
Credits
Accounts payable ............
$ 160,000
$ 30,000
$ 190,000
Long-term liabilities ........
380,000
170,000
(A) 20,000
530,000
Common stock ................
500,000
40,000
(S) 40,000
500,000
Additional paid-in capital
74,000
-074,000
Retained earnings ...........
360,000
240,000 (S) 240,000
360,000
Totals................................
$1,474,000
$480,000
$1,654,000
Note: The accounts of Merrill have already been adjusted for the first three journal entries indicated in the answer to Part a.
to record the purchase price, the direct acquisition costs, and the stock issuance costs.
The consolidation entries are designed to:
—Eliminate the stockholders, equity accounts of the subsidiary
—Record all subsidiary assets and liabilities at fair market value (including the patent)
—Recognize the goodwill indicated by the acquisition price
—Eliminate the investment in Harriss account
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Advanced Accounting, Updated 6/e
2-17
23.
(50 Minutes) (Determine consolidated balances for a bargain purchase.
Prove those figures with a worksheet)
a. Prior to setting up the consolidation worksheet, Lee has to record the
three transactions that occurred in creating this business combination.
- Investment in Grant .......................................
400,000
Long-Term Liabilities .................................
200,000
Common Stock (par value) ........................
20,000
Additional Paid-in Capital ..........................
180,000
(liabilities and stock issued to purchase Grant are recorded at fair market
value)
- Investment in Grant .......................................
Cash ............................................................
(payment of direct acquisition costs)
30,000
- Additional Paid-in Capital .............................
Cash ............................................................
(payment of stock issuance costs)
12,000
30,000
12,000
These transactions must be taken into consideration in b. in setting up Lee's trial
balance (as shown in the consolidation worksheet that follows).
Since this combination is a purchase, the cost of the $430,000 investment must
be allocated:
Purchase price ......................................................................
$430,000
Book value (assets minus liabilities or
total stockholders' equity) ..............................................
460,000
Book value in excess of payment ............................
$(30,000)
Allocation to specific accounts based on fair market value:
- Inventory ........................................................................
- Land ...............................................................................
- Buildings........................................................................
Bargain purchase (fair market value in
excess of purchase price) ..............................................
McGraw-Hill/Irwin
2-18
5,000
20,000
30,000
$(85,000)
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
23. (continued)
Allocation of $85,000 Bargain Purchase to Noncurrent Assets:
Accounts
Land
Buildings
Equipment
Fair Market
Value
$200,000
250,000
50,000
$500,000
Percentage
40
50
10
100
$85,000
Reduction
$(34,000)
(42,500)
(8500)
$(85,000)
CONSOLIDATED TOTALS
-Cash - $38,000 - add the two book values after subtracting the two
payments made by the parent.
-Receivables - $360,000 - add the two book values.
-Inventory - $505,000 - add the two book values plus the $5,000 allocation
to the subsidiary's inventory based on Its market value.
-Land - $366,000 - add the two book values plus the $20,000 allocation to
the subsidiary's land based on Its market value less the $34,000
reduction caused by the bargain purchase.
-Buildings - $627,500 - add the two book values plus the $30,000 allocation
to the subsidiary's buildings based on its market value less the$42,500
reduction caused by the bargain purchase.
-Equipment - $201,500 - add the two book values less the $8,500 reduction
caused by the bargain purchase.
-Goodwill -0- - no residual exists because the price was below the fair
market value of the subsidiary's net assets.
-Total assets - $2,098,000 - summation of the individual figures.
-Accounts payable - $190,000 - add the two book values.
-Long-term liabilities - $830,000 - add the two book values plus the debt
incurred by the parent in acquiring the subsidiary.
-Common stock - $130,000 - the parent's book value after the issuance of
the shares to purchase the subsidiary.
-Additional paid-in capital - $528,000 - the parent's book value after the
issuance of the shares to purchase the subsidiary but less the stock
issuance costs.
-Retained earnings - $420,000 - parent company balance only because this
combination is a purchase.
-Total liabilities and equities - $2,098,000 - summation of the individual
figures.
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
2-19
23. (continued)
b.
LEE COMPANY AND CONSOLIDATED SUBSIDIARY
Worksheet
January 1, 2002
Accounts
Debit Balances
Cash ............................................
Receivables ...............................
Inventory ...................................
Land ...........................................
Buildings (net) ..........................
Equipment (net) ........................
Investment in Grant ..................
Total debits ..........................
Credit Balances
Accounts payable .....................
Long-term liabilities .................
Common stock ..........................
Additional paid-in capital .........
Retained earnings, 1/1/02 ........
Total credits ..........................
Lee
Company*
$
Grant
Company
18,000
270,000
360,000
200,000
420,000
160,000
430,000
$1,858,000
$ 20,000
90,000
140,000
180,000
220,000
50,000
-0$700,000
$ 150,000
630,000
130,000
528,000
420,000
$1,858,000
$ 40,000
200,000
120,000
-O340,000
$700,000
Consolidation Entries Consolidated
Debit
Credit
Totals
$
(A) 5,000
(A) 20,000
(A) 30,000
(A) 30,000
(S) 120,000
(S) 340,000
Lee's accounts have been adjusted for acquisition entries (see part a.).
McGraw-Hill/Irwin
2-20
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
(A) 34,000
(A) 42,500
(A) 8,500
(S)460,000
38,000
360,000
505,000
366,000
627,500
201,500
-0$2,098,000
$ 190,000
830,000
130,000
528,000
420,000
$2,098,000
24.
(20 Minutes) (Prepare consolidation worksheet for a purchase.) An
allocation of Landover's purchase price is necessary as a prerequisite for
creating the consolidation worksheet.
Purchase price .................................................................
Book value of Smithers ...................................................
Cost in excess of book value ....................................
$295,000
220,000
$ 75,000
Excess cost allocated to specific assets and
liabilities based on fair market value:
—Land .........................................................
—Buildings .................................................
—Equipment ...............................................
—Notes payable .........................................
Goodwill ...........................................................
55,000
$ 20,000
$50,000
20,000
(10,000)
(5,000)
Consolidation Entries
Landover Smithers
Debit
Credit
Consolidated
Cash
Receivables
Inventory
Investment in
Smithers (cost)
$
Land
Buildings (net)
Equipment (net)
Goodwill
Total assets
Accounts payable
Notes payable
Common stock
Retained earnings
Total liabilities
and equities
36,000
116,000
144,000
$ 16,000
52,000
90,000
295,000
-0-
210,000
640,000
308,000
-0 $1,749,000
20,000
60,000
40,000
-0$278,000
$ 88,000
510,000
380,000
771,000
$ 8,000
50,000
80,000
140,000
$1,749,000
$278,000
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
Totals
$ 52,000
168,000
234,000
(S)220,000
(A) 75,000
(A) 50,000
(A) 20,000
280,000
720,000
(A) 10,000
338,000
(A) 20,000
20,000
$1,812,000
(A) 5,000
(S) 80,000
(S)140,000
$ 96,000
565,000
380,000
771,000
$1,812,000
© The McGraw-Hill Companies, Inc., 2001
2-21
Answers to Pooling Method Problems
25.
26.
27.
28. C
C
D
B
Premtick’s Journal entry to create the combination is based on the book
value of Starten. However, the shares issued have a par value that is
$10,000 larger than the $300,000 contributed capital of Starten. Normally,
this excess would be recorded as a reduction to Premtick’s additional paid
in capital. Since Premtick does not have an Additional Paid-in Capital
account, the reduction is made to retained earnings in the following entry:
Investment in Starten (book value) ................
Common Stock (par value) ........................
Retained Earnings ......................................
(book value of Starten less $10,000)
700,000
310,000
390,000
This entry raises Premtick’s retained earnings to $1,190,000
29. B As a pooling of interests, Atkins’ journal entry to create this combination is
based on the book value of Waterson ($175,000). The 51,000 shares being
issued have a par value of $51,000. Since Waterson reports total
contributed capital of $65,000 (common stock plus additional paid-in
capital), Atkins must record $14,000 as its own additional paid-in capital.
Atkins also records $110,000 in retained earnings, a balance that equals
that of Waterson. The $14,000 and $110,000 additions bring Atkins’ equity
accounts to $104,000 and $410,000.
30. B Book values are combined in a pooling of interests.
31. B In a pooling, all income is combined retroactively.
32. B In issuing its shares, Allen will credit $80,000 to its Common Stock account
(par value). A credit of $20,000 will then be made to Allen’s Additional Paidin Capital to equal the $100,000 total paid-in capital shown by Tucker. This
entry increases Allen’s APIC account to $30,000. In the same manner
Tucker’s beginning retained earnings is added to Allen’s beginning
retained earnings.
McGraw-Hill/Irwin
2-22
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
33. B In issuing its shares, Allen will credit $160,000 to its Common Stock
account (par value). A reduction of $60,000 is, therefore, necessary to
Allen’s Additional Paid-in Capital account to arrive at the $100,000 total
paid-in capital shown by Tucker. However, since Allen is only reporting
$10,000 in APIC, the remaining $50,000 decrease is made to retained
earnings. Thus, consolidated additional paid-in capital has become zero
and retained earnings is:
Allen’s balance at January 1, 2000 .......................................
Tucker’s balance at January 1, 2000 ....................................
Reduction explained above because
APIC has been decreased to zero ...................................
Consolidated retained earnings .................................
34.
$130,000
150,000
(50,000)
$230,000
(20 Minutes) (Asks for verbal discussion of the pooling of interests
method.)
a. In a pooling of interests, the recorded book value of all assets and
liabilities of the two separate companies are simply added to become
the recorded amounts for the combined corporation. The existing basis
of accounting is continued. A business combination that is accounted
for as a pooling of interests is a combination of the ownership interests
of two previously separated companies. Since only the ownership
changes, no event has occurred that mandates a change in recorded
values. The existing basis of accounting continues for both companies.
A change in company ownership should not necessitate adjustments in
the reported value of either assets or liabilities.
b. For a pooling of interests, the registration fees and any other direct
costs relating to effecting the business combination should be
deducted in determining the net income of the resulting combined
corporation for the period in which the expenses are incurred. In this
manner, the recorded value of all assets, liabilities, and capital accounts
are not changed by the combination.
c. Although the companies combined during the year, in a pooling of
interests, the combination is reported as if the companies had always
been combined. Revenues for both companies for the entire year are
reported as well as expenses. Operations are combined retroactively.
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
2-23
35.
(25 Minutes) (Overview of the steps in applying the pooling of interests
method.)
a. The book value is found by subtracting assets from liabilities. For
Harcourt, the assets are $1,490,000 and the liabilities are $800,000 for a
book value of the company’s net assets of $690,000. The same total can
be derived from the stockholders’ equity accounts after closing out
revenues and expenses.
b. In a pooling of interests, stock issuance costs and all other direct costs
of creating the business combination are expensed as incurred.
c. Poolings of interest are recorded retroactively. For this reason, the entry
to record the issuance of the shares is made using the book value of
Harcourt as of the first day of the year. That figure can be found from
the stockholders’ equity accounts, using the beginning retained
earnings figure for the period ($100,000 + $90,000 + $440,000 or
$630,000).
In this entry, Lee’s common stock must be recorded at its par value of
$200,000. Since Harcourt’s total contributed capital is only $190,000, a
reduction in additional paid-in capital must be shown of $10,000.
Investment in Harcourt (book value) ........................ 630,000
Additional Paid-in Capital .......................................... 10,000
Common Stock (par value) ..................................
Retained Earnings, 1/1/00
(equal to Harcourt’s beginning balance) ........
200,000
440,000
d. The par value of the shares issued is reduced which changes the
amount recorded to additional paid-in capital.
Investment in Harcourt (book value) ........................ 630,000
Common Stock (par value) ..................................
Additional Paid-In Capital ....................................
Retained Earnings, 1/1/00
(equal to Harcourt’s beginning balance) .........
McGraw-Hill/Irwin
2-24
20,000
170,000
440,000
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
35. (continued)
e. The par value of the shares issued is increased which changes the
amount of the reduction in additional paid-in capital.
Investment in Harcourt (book value) ........................ 630,000
Additional Paid-In Capital .......................................... 110,000
Common Stock (par value) ..................................
Retained Earnings, 1/1/00
(equal to Harcourt’s beginning balance) .........
300,000
440,000
f. In a pooling of interests, the companies are consolidated retroactively
as if they had always been together. Hence, the revenues and expenses
(both currently and in the past) from the two companies are included in
the reported figures. Since a change in ownership occurred rather than
a change in the companies, the previous operations are still considered
to be applicable.
g. The subsidiary’s assets and liability accounts will be consolidated at
their book values. The revenue and expense figures of the subsidiary
are also recorded at their book values. The parent must record the
issuance of the new shares and the payment of the stock issuance
costs. The equity accounts of Harcourt do not directly affect the
consolidation but do have an impact on the amounts recorded by Lee at
the time that the new shares are issued.
h. See appendix to this chapter.
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
2-25
36.
(10 Minutes) (Consolidated balances for a pooling of interests method.)
a. Buildings (book values are used in a pooling
of interests) ................................................................
$ 900,000
b. Goodwill is never recognized in a pooling of interests.
37.
c. Expenses (operations are consolidated retroactively
in a pooling of interests) ...........................................
Stock issuance costs and combination costs ..............
Balance to be consolidated ......................................
$ 500,000
59,000
$ 559,000
d. Retained earnings, 1/1/00—Winston (operations are
consolidated retroactively in a pooling of interests) ...
$1,100,000
(40 Minutes) (Consolidated balances for a pooling of interests.)
a. In a pooling of interests, the book values are added together. However,
Bingham's issuance of 10,000 shares of stock must first be recorded as
well as the $10,000 in direct combination costs and the $20,000 in stock
issue costs. Both of these costs must be expensed in a pooling of
interests.
In recording the stock issue, Bingham reduces additional paid-in capital
by $10,000 so that the total paid-in capital being recorded ($100,000 par
value less $10,000 reduction) equals the total paid-in capital of Laredo
($90,000 common stock). Book value at 1/1/00 is determined from
stockholders' equity accounts.
Bingham's Journal Entries
Investment in Laredo (book value at 1/1/00) ........ 160,000
Additional Paid-in Capital ...................................... 10,000
Common Stock (par value) ..............................
Retained Earnings, 1/1/00
(equal to balance reported by Laredo) ......
Expenses ................................................................ 30,000
Cash ...................................................................
McGraw-Hill/Irwin
2-26
100,000
70,000
30,000
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
37. (continued)
CONSOLIDATED BALANCES POOLING OF INTERESTS
(Unless indicated, the balances for Bingham and Laredo are added.)
Revenues...............................................................................
Expenses (balances for the two companies
plus the $30,000 paid above) .........................................
Net income (revenues minus expenses) ............................
Retained earnings, 1/1/00
(Bingham's balance after entry) .....................................
Dividends ..............................................................................
Retained earnings, 12/31/00 (beginning balance
plus net income less dividends) ....................................
Cash (balances for the two companies
less the $30,000 paid above) ..........................................
Receivables ...........................................................................
Inventory ...............................................................................
Buildings and equipment (net) ............................................
Investment in Laredo
(always eliminated in a consolidation) ..........................
Goodwill (not recognized in a pooling) ..............................
Total assets (summation) ....................................................
Current liabilities ..................................................................
Long-term liabilities .............................................................
Common stock
(Bingham's balance after above entry) .........................
Additional paid-in capital (Bingham's balance
after adjustment for above entry) ..................................
Retained earnings, 12/31/00 (computed above) .................
Total liabilities and stockholders' equity
(summation).....................................................................
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
$180,000
(140,000)
40,000
280,000
(30,000)
290,000
70,000
120,000
170,000
300,000
-0-0660,000
30,000
120,000
210,000
10,000
290,000
660,000
© The McGraw-Hill Companies, Inc., 2001
2-27
38.
a. As a pooling of interests, the book values of the two companies will
serve as the basis for consolidated figures. A journal entry must be
recorded by Parrot to reflect the issuance of its common stock (12,000
shares in this case). Total paid-in capital should be $300,000, Sun's
book value.
Investment in Sun (book value on 1/1/00) ..........
Common Stock (Parrot) (par value)...............
Additional Paid-in Capital ..............................
Retained Earnings, 1/1/00 (Parrot) ................
540,000
240,000
60,000
240,000
Inventory—$620,000 (book values from both companies)
Land—$730,000 (book values from both companies)
Buildings—$870,000 (book values from both companies)
Goodwill— -0- (goodwill is not recognized in a pooling of interests)
Revenues—$1,290,000 (book values from both companies)
Additional Paid-in Capital—$130,000 (Parrot's book value after inclusion
of journal entry recorded above)
Expenses—$1,230,000 (book values from both companies)
Retained Earnings, 1/1/00—$630,000 (Parrot's book value after inclusion
of journal entry recorded above)
McGraw-Hill/Irwin
2-28
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
38. (continued)
b. Parrot must first record its issuance of 16,000 shares of stock. For this
entry, the investment account is recorded at the $540,000 book value of
Sun at the beginning of the current year (stockholders' equity using
beginning retained earnings). Paid-in capital accounts must be recorded
by Parrot at a total value of $300,000 to agree with the sum of those
same accounts as reported by Sun. Since the par value of the issued
stock is $320,000, additional paid-in capital must be reduced by $20,000.
The Retained Earnings is then recognized at $240,000 to reflect the
income of Sun Company earned prior to the formation of the business
combination. The entry prepared by Parrot would be as shown below.
The $8,000 stock issuance cost is recorded as an expense.
Investment in Sun (book value) .....................
540,000
Additional Paid-in Capital (Parrot).................
20,000
Common Stock (Parrot) (par value) .........
320,000
Retained Earnings, 1/1/00 (Parrot) ...........
240,000
Inventory—$620,000 (book values from both companies)
Land—$730,000 (book values from both companies)
Buildings—$870,000 (book values from both companies)
Goodwill—-0- (goodwill is not recognized in a pooling of interests)
Revenues—$1,290,000 (book values from both companies)
Additional Paid-in Capital—$50,000 (Parrot's book value after
adjustment for initial investment entry shown above)
Expenses—$1,238,000 (book values from both companies plus $8,000
stock issuance costs)
Retained Earnings, 1/1/00—$630,000 (Parrot's book value after
adjustment for initial investment entry [above] which increased that
balance based on the retained earnings of Sun)
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
2-29
38. (continued)
c. As a pooling of interests, book value will serve as the basis for the
consolidated figures. Again, Parrot must first record the issuance of Its
shares (19,000 in this case). The investment account is recorded at the
$540,000 book value of Sun as of the beginning of the current year.
Paid-in capital accounts should be recorded in this entry at $300,000 to
agree with the total of those same accounts as reported by Sun.
However, after recording the $380,000 par value of the stock issued, a
$80,000 decrease in Additional Paid-in Capital would be necessary.
Since Parrot's Additional Paid-in Capital account only shows a $70,000
balance, the remaining $10,000 is offset against Retained Earnings. To
absorb this amount, Parrot will record a net increase of only $230,000 in
Retained Earnings rather than the $240,000 balance presently reported
by Sun.
Investment in Sun (book value) ..........................
Additional Paid-in Capital (Parrot) ......................
Common Stock (Parrot) (par value)...............
Retained Earnings, 1/1/00 (Parrot) ................
540,000
70,000
380,000
230,000
Inventory—$620,000 (book values from both companies)
Land— 730,000 (book values from both companies)
Buildings—$870,000 (book values from both companies)
Goodwill—-0- (goodwill is not recognized in a pooling of interests)
Revenues $1,290,000 (book values from both companies)
Additional Paid-in Capital—-0- (account balance is removed by Parrot in
the process of recording the issuance of stock as shown above)
Expenses—$1,239,000 (book values from both companies plus $9,000
In direct combination costs)
Retained Earnings, 1/1/00-$620,000 (Parrot's book value after initial
investment entry which increased this balance by $230,000 as shown
in entry above)
McGraw-Hill/Irwin
2-30
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
39.
(30 Minutes) (Consolidated balances for a pooling of interests)
As a pooling of interests, the stock being issued by Hope must be recorded
based on the book value of Kaisley's stockholders' equity accounts.
However, Kaisley's total contributed capital of $430,000 is less than the par
value ($450,000) of the shares issued by Hope. Thus, additional paid-in
capital is reduced here by $20,000. Since this combination is a pooling of
interests, the transaction is recorded based on the beginning of year book
value as shown by the stockholders' equity accounts.
Investment in Kaisley (book value as of 1/1/00)......
Additional Paid-in Capital
(to arrive at $430,000 contributed capital) .........
Common Stock (par value) ............................
Retained Earnings (book value at 1/1/00) .....
830,000
20,000
450,000
400,000
The combination costs are recorded by Hope as expenses since this
combination is a pooling of interests.
Expenses ....................................................................
50,000
Cash ......................................................................
50,000
CONSOLIDATED BALANCES (as a pooling of interests, the balances are
derived from book values except where affected by the above entries)
Revenues (add book values) ..........................................
Expenses (add book values and combination costs) ..
Net income
(subtract consolidated expenses from
consolidated revenues) .............................................
Retained Earnings, 1/1
(Hope's balance after recording the above entry) ...
Dividends Paid (add book values) .................................
Retained Earnings, 12/31 (beginning consolidated
balance plus net income less dividends).................
Cash (add book values and subtract payment
for combination costs) ..............................................
Receivables and inventory (add book values) ..............
Buildings (add book values) ...........................................
Equipment (add book values).........................................
Tool Assets (add consolidated totals) ...........................
Liabilities (add book values) ..........................................
Common Stock (Hope's balance plus
newly-issued shares) .................................................
Additional Paid-in Capital
(Hope's balance less reduction recorded above) ....
Retained Earnings, 12/31 (computed above) ................
Total Liabilities and Stockholders' Equity (add
consolidated totals) ...................................................
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
$ 800,000
530,000
270,000
1,000,000
180,000
1,090,000
180,000
400,000
900,000
1,100,000
2,580,000
400,000
1,080,000
10,000
1,090,000
2,580,000
© The McGraw-Hill Companies, Inc., 2001
2-31
40.
(40 Minutes) (Create worksheet for a pooling of interests. Also make entries
if created as a statutory merger.):
a. Green Co. must initially prepare a journal entry to record the issuance of
8,000 shares of Its stock. This entry is based on the $280,000 book value
of Gold Co. as of January 1, 2000: the $70,000 book value of Gold's
paid-in capital plus the $210,000 balance in Gold's retained earnings as
of January 1, 2000:
Green's Financial Records
Investment in Gold Co. (book value) ....................
Additional Paid-in Capital ......................................
Common Stock (par value) ..............................
Retained Earnings, 1/1/00 ................................
280,000
10,000
80,000
210,000
The $10,000 reduction in additional paid-in capital in this entry brings
total paid-in capital down to $70,000, an amount equivalent to Gold's
total paid-in capital.
Since this combination is a pooling of interests, Green will record as an
expense the $12,000 that It pays for direct consolidation costs.
Green's Financial Records
Expenses ................................................................
Cash ...................................................................
12,000
12,000
After adjusting Green's account balances for these two entries, the
worksheet that follows can be produced.
McGraw-Hill/Irwin
2-32
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
40. a. (continued)
Accounts
Sales ...........................................
Expenses ....................................
Net income .................................
Retained earnings, 1/1/00 .........
Net income (above) ...................
Dividends paid ...........................
Retained earnings, 12/31/00 .....
Current assets ...........................
Investment in Gold Co. .............
Land ............................................
Buildings ....................................
Total assets ................................
Liabilities ....................................
Common stock...........................
Additional paid-in capital ..........
Retained earnings, 12/31/00 .....
Total liabilities and equities ......
GREEN CO. AND GOLD CO.
Consolidation Worksheet
For Year Ending December 31, 2000
Consolidation Entries
Green Co.
Gold Co.
Debit
Credit
$ (300,000)
$(190,000)
212,000
110,000
$ (88,000)
$ (80,000)
$ (610,000)
$(210,000)(S)210,000
(88,000)
(80,000)
30,000
--0-$ (668,000)
$(290,000)
$
288,000
$ 100,000
280,000
--0-(S)280,000
100,000
90,000
400,000
280,000
$ 1,068,000 $ 470,000
$ (90,000)
$(110,000)
(240,000)
(60,000) (S)60,000
(70,000)
(10,000) (S)10,000
(668,000)
(290,000)
$(1,068,000) $(470,000)
Consolidated
Totals
$ (490,000)
322,000
$ (168,000)
$ (610,000)
(168,000)
30,000
$ (748,000)
$
388,000
--0-190,000
680,000
$ 1,258,000
$ (200,000)
(240,000)
(70,000)
(748,000)
$(1,258,000)
Parentheses indicate a credit balance.
Green's accounts have been adjusted for the issuance of 8,000
shares of stock and payment of attorneys' and accountants' fees.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Advanced Accounting, Updated 6/e
2-33
40. (continued)
b. Green will initially record the same two entries shown in a., the first for
the issuance of the 8,000 shares and the second for the payment of the
$12,000 in direct combination costs. Subsequently, the $280,000
investment in Gold Company account will be removed and replaced by
the specific accounts of Gold. As a pooling of interests, all assets and
liabilities will be entered at book value. In addition, current revenues
and expenses of Gold will be recorded even though they were incurred
prior to the creation of the combination. Note that the investment holds
a January 1, 2000, balance while the assets and liabilities being
recorded are set at December 31, 2000, balances. The difference is
reconciled by recording Gold's revenues and expenses for the period.
Current Assets .....................................................
Land ......................................................................
Buildings ...............................................................
Expenses ..............................................................
Sales ................................................................
Liabilities .........................................................
Investment in Gold Co. ...................................
McGraw-Hill/Irwin
2-34
100,000
90,000
280,000
110,000
190,000
110,000
280,000
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
41.
(40 Minutes) (Determine consolidated balances for a pooling of interests.
Prove those figures with a worksheet.)
a. As a pooling of interests, the book value of Swathmore will be retained.
Thus, the market value figures given in the problem are not used in
producing the consolidation.
Since no investment account appears on Lincoln’s balance sheet, no
journal entry has been made for the issuance of the 7,000 shares of
stock. The entry is set to arrive at a total paid-in capital of $80,000, the
amount reported by Swathmore.
Lincoln's Financial Records
Investment in Swathmore (book value on 1/1/00) ....
Common Stock (par value) ...................................
Additional Paid-in CapitaL ....................................
Retained Earnings
(equal to Swathmore's 1/1/00 balance) ...........
41.
190,000
70,000
10,000
110,000
CONSOLIDATED TOTALS:
—Revenues = $1,530,000 - add the two book values.
—Expenses = $970,000 - add the two book values. let income = $560,000
- subtract consolidated expenses from consolidated revenues.
—Retained earnings, 1/1/00 = $940,000 – Lincoln’s balance after
recording the shares issued to create the pooling of interests.
—Dividends paid = $350,000 - add the two book values (since the
combination was created at the end of the year, none of the
Swathmore's dividends were paid intercompany to Lincoln.)
—Retained earnings, 12/31/00 = $1,150,000 - the consolidated beginning
balance plus consolidated net income less consolidated dividends
paid cash = $89,000 - add the two book values.
—Receivables = $215,000 - add the two book values.
—Inventory = $310,000 - add the two book values.
—Land = $340,000 - add the two book values.
—Buildings (net) = $900,000 - add the two book values.
—Equipment (net) = $370,000 - add the two book values.
—Total assets = $2,224,000 - summation of the individual figures.
—Accounts payable = $144,000 - add the two book values.
—Notes payable = $420,000 - add the two book values.
—Common stock = $470,000 - Lincoln's balance after recording the
above entry.
—Additional paid-in capital = $40,000 – Lincoln’s balance after
recording the above entry.
—Retained earnings = $1,150,000 - computed above.
—Total liabilities and equities = $2,224,000 - summation of the individual
figures.
(continued)
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
2-35
b.
Revenues
Expenses
Net income
Retained earnings,
1/1/00
Net income
Dividends paid
Retained earnings,
12/31/00
Consolidation Entries
Lincoln
Swathmore
Debit
Credit
$ 990,000 $540,000
640,000
330,000
$ 350,000 $210,000
$ 940,000
350,000
(220,000)
$110,000(S)110,000
210,000
(130,000)
$1,070,000$190,000
Cash
Receivables
Inventory
Investment in
Swathmore
Land
Buildings (net)
Equipment (net)
Total assets
$60,000
150,000
190,000
Accounts payable
Notes payable
Common stock
Additional paid-in
capital
Retained earnings
Total liabilities
and equities
$ 110,000
370,000
470,000
Consolidated
Totals
$1,530,000
970,000
$ 560,000
$ 940,000
560,000
(350,000)
$1,150,000
$ 29,000
65,000
120,000
$ 89,000
215,000
310,000
190,000
-0310,000
30,000
840,000
60,000
320,000
50,000
$2,060,000$354,000
(S) 190,000
$ 34,000
50,000
50,000(S)50,000
-0340,000
900,000
370,000
$2,224,000
$ 144,000
420,000
470,000
40,000
30,000(S)30,000
1,070,000 190,000
40,000
1,150,000
$2,060,000$354,000
$2,224,000
*Lincoln's balances have been adjusted for entry to record issuance of shares to
create business combination.
McGraw-Hill/Irwin
2-36
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
42.
(70 Minutes) (Consolidation worksheet for a pooling of interests.
a. Several journal entries must be made to the individual financial records
before beginning the consolidation process. As a pooling of interests,
the expenditures to create this business combination should be
recorded by Sherman as an expense.
Sherman Financial Records
Expenses ....................................................................
Cash .......................................................................
20,000
20,000
Sherman will then record the issuance of 17,000 shares of its common
stock. As a pooling of interests, this entry will be based on the $600,000
book value of Atlanta as of the first day of the current year.
Sherman's Journal entry to record these 17,000 shares would be as
follows:
Sherman's Financial Records
Investment in Atlanta .................................................
Common Stock (par value of 17,000
shares)..............................................................
Additional Paid-in Capital ....................................
Retained Earnings, 1/1/00
(adjusted book value) ......................................
600,000
340,000
60,000
200,000
In the above entry, the additional paid-in capital was set at $60,000 so
that total paid-in capital being recorded would equal Atlanta's book
value of $400,000 for its paid-in capital.
After the above entries are posted to the individual financial records, the
following consolidation worksheet can be developed.
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
2-37
42. (continued)
Accounts
Income Statement
Revenues ..................................
Expenses ..................................
Net income................................
Statement of Retained Earnings
Retained earnings, 1/1/00 ........
Net Income (above) ..................
Dividends paid..........................
Retained earnings, 12/31/00 ....
SHERMAN COMPANY AND ATLANTA COMPANY
Consolidation Worksheet
For Year Ending December 31, 2000
Consolidation Entries
Sherman*
Atlanta
Debit
Credit
$ (600,000) $ (480,000)
560,000
210,000
$ (40,000) $ (270,000)
$(1,080,000)
770,000
$ (310,000)
$ (670,000) $ (200,000) (S) 200,000
(40,000)
(270,000)
30,000
-0$ (680,000) $ (470,000)
$ (670,000)
(310,000)
30,000
$ (950,000)
Balance Sheet
Cash ..........................................
Receivables (net)......................
Inventory ...................................
Investment in Atlanta ...............
Land ..........................................
Buildings (net) ..........................
Equipment (net) ........................
Total assets ........................
Accounts payable .....................
Long-term liabilities .................
Common stock .........................
Additional paid-in capital .........
Retained earnings, 12/31/00 ....
Total liabilities and equities
$ 90,000
300,000
440,000
600,000
280,000
270,000
810,000
$ 2,790,000
20,000
290,000
260,000
$
(S) 600,000
80,000
290,000
320,000
$ 1,260,000
$ (120,000)
(60,000)
(960,000)
(330,000)
(860,000)
(300,000) (S) 300,000
(170,000)
(100,000)(S) 100,000
(680,000)
(470,000)
$(2,790,000) $(1,260,000)
Parentheses indicate a credit balance.
*Accounts adjusted for preliminary entries.
McGraw-Hill/Irwin
2-38
Consolidated
Totals
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
110,000
590,000
700,000
-0360,000
560,000
1,130,000
$ 3,450,000
$ (180,000)
(1,290,000)
(860,000)
(170,000)
(950,000)
$(3,450,000)
42. (continued)
b. Several journal entries must be made to the individual financial records
before beginning the consolidation process. As a purchase, the
expenditures to create this business combination should be recorded
by Sherman as part of the price.
Sherman's Financial Records
Investment in Atlanta .................................................
Cash .......................................................................
20,000
20,000
Sherman will then record the issuance of 17,000 shares of Its common
stock. As a purchase, this entry will be based on the market value of
these shares.
Investment in Atlanta (17,000 x $57) .........................
Common Stock (par value) ..................................
Additional Paid-in Capital ....................................
969,000
340,000
629,000
The allocation of the purchase price is now appropriate.
Purchase Price ...........................................................
Book Value, 12/31/00 (after closing entries) ............
Price In excess of book value ...................................
Assigned to undervalued land ..................................
Goodwill ......................................................................
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
$989,000
870,000
119,000
60,000
$ 59,000
© The McGraw-Hill Companies, Inc., 2001
2-39
42. (continued)
SHERMAN COMPANY AND ATLANTA COMPANY
Consolidation Worksheet
For Year Ending December 31, 2000
Consolidation Entries
Sherman*
Atlanta**
Debit
Credit
Consolidated
Totals
Accounts
Income Statement
Revenues .............................................
Expenses .............................................
Net income............................................
$ (600,000)
540,000
$ (60,000)
$ (600,000)
540,000
$ (60,000)
Statement of Retained Earnings
Retained earnings, 1/1/00 ....................
Net Income (above) .............................
Dividends paid .....................................
Retained earnings, 12/31/00 ................
$ (470,000)
(60,000)
30,000
$ (500,000)
$ (470,000)
(60,000)
30,000
$ (500,000)
Balance Sheet
Cash .....................................................
Receivables (net) .................................
Inventory ..............................................
Investment in Atlanta ..........................
.........................................................
Land .....................................................
Buildings (net) .....................................
Equipment (net) ....................................
Goodwill................................................
Total assets ..........................................
$
90,000
300,000
440,000
989,000
20,000
290,000
260,000
--0--
280,000
270,000
810,000
--0-$ 3,179,000
80,000(A) 60,000
290,000
320,000
--0-(A) 59,000
$ 1,260,000
$
(S) 870,000
(A) 119,000
Accounts payable ................................
$ (120,000)
(60,000)
Long-term liabilities ............................
(960,000)
(330,000)
Common stock ....................................
(860,000)
(300,000) (S) 300,000
Additional paid-in capital ....................
(739,000)
(100,000)(S) 100,000
Retained earnings, 12/31/00
(500,000)
(470,000)(S) 470,000
Total liabilities and equities
$(3,179,000) $(1,260,000)
Parentheses indicate a credit balance.
*Accounts adjusted for preliminary entries.
**As a purchase, the subsidiary’s revenue, expense, and dividend accounts have been closed out.
McGraw-Hill/Irwin
2-40
© The McGraw-Hill Companies, Inc., 2001
Solutions Manual
110,000
590,000
700,000
-0420,000
560,000
1,130,000
59,000
$ 3,569,000
$ (180,000)
(1,290,000)
(860,000)
(739,000)
(500,000)
$(3,569,000)
McGraw-Hill/Irwin
Advanced Accounting, Updated 6/e
© The McGraw-Hill Companies, Inc., 2001
2-41
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