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Solutions Manual Advanced Accounting 10th Edition Beams, Robin P. Clement

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11-2
Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures
9
Traditional theory corresponds to entity theory in matters relating to unrealized and constructive gains and
losses from intercompany transactions. In other words, unrealized and constructive gains and losses are
allocated between controlling and noncontrolling interests in the same manner under these two theories.
10
Push-down accounting simplifies the consolidation process. The push-down adjustments are recorded in the
subsidiary’s separate books at the time of the business combination; thus, it is not necessary to allocate the
unamortized fair value-book value differentials in the consolidation working papers.
11
A joint venture is an entity that is owned, operated, and jointly controlled by a small group of investorventurers to operate a business for the mutual benefit of the venturers. Some joint ventures are organized as
corporations, while others are organized as partnerships or undivided interests. Each venturer typically
participates in important decisions of a joint venture irrespective of ownership percentage.
12
Investors in corporate joint ventures use the equity method of accounting and reporting for their investment
earnings and investment balances as required by APB Opinion No. 18. The cost method would be used only
if the investor could not exercise significant influence over the corporate joint venture.
Alternatively, investors in unincorporated joint ventures use the equity method of accounting and
reporting as explained in Interpretation No. 2 of APB Opinion No. 18 or proportional consolidation for
undivided interests specified as a special industry practice.
SOLUTIONS TO EXERCISES
Solution E11-1
1
2
3
4
A
A
C
A
5
6
7
B
C
D
4
5
D
C
Solution E11-2
1
2
3
B
B
D
Solution E11-3
1
c
Total value of Smith implied by purchase price
($720,000/.8)
Noncontrolling interest percentage
Noncontrolling interest
$900,000
20%
$180,000
2
a
Only the parent’s percentage of unrealized profits from upstream sales
is eliminated under parent company theory.
3
b
Subsidiary’s income of $200,000  10% noncontrolling
interest
Less: Patent amortization ($70,000/10 years  10%)
Noncontrolling interest share
$ 20,000
(700)
$ 19,300
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Chapter 11
11-3
Solution E11-3 (continued)
4
5
a
Implied fair value — $840,000 = patents at acquisition
Book value of 100% of identifiable net assets
Add: Patents at acquisition ($54,000/90%)
Total implied value
Percent acquired
Purchase price under entity theory
$840,000
60,000
900,000
80%
$720,000
b
Purchase price — ($840,000  80%) = patents at acquisition
Book value $840,000  80% = underlying equity
Add: Patents at acquisition ($54,000/90%)
Purchase price (traditional theory)
$672,000
60,000
$732,000
Solution E11-4
1
2
3
Goodwill
Parent company theory
Cost of investment in Staff
Fair value acquired ($400,000  80%)
Goodwill
Entity theory
Implied value based on purchase price ($500,000/.8)
Fair value of Staff’s net assets
Goodwill
Noncontrolling interest
Parent company theory
Book value of Staff’s net assets
Noncontrolling interest percentage
Noncontrolling interest
Entity theory
Total valuation of Staff
Noncontrolling interest percentage
Noncontrolling interest
Total assets
Parent company theory
Pond
Current assets
$ 20,000
Plant assets — net 480,000
Goodwill
$500,000
Entity theory
Current assets
$ 20,000
Plant assets — net 480,000
Goodwill
$500,000
Staff
$ 50,000
250,000
$
$
$
$
$
$
$
Adjustment
$ 40,000  80%
110,000  80%
$300,000
$ 50,000
250,000
$
$ 40,000  100%
110,000  100%
$300,000
625,000
400,000
225,000
260,000
20%
52,000
625,000
20%
125,000
Total
102,000
818,000
180,000
$1,100,000
$
$
110,000
840,000
225,000
$1,175,000
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500,000
320,000
180,000
11-4
Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures
Solution E11-5
Preliminary computations
Parent company theory
Cost of 80% interest
Fair value acquired ($350,000  80%)
Goodwill
$300,000
280,000
$ 20,000
Entity theory
Implied total value ($300,000 cost ÷ 80%)
Fair value of Shelly’s net identifiable assets
Goodwill
$375,000
350,000
$ 25,000
1
2
Consolidated net income and noncontrolling interest share for 2009:
Parent
Entity
Company Theory
Theory
Combined separate incomes
Depreciation on excess allocated to
equipment:
$75,000 excess  80% acquired ÷ 5 years
$75,000 excess ÷ 5 years
Total consolidated income
Less: Noncontrolling interest share
$50,000  20%
($50,000 -15,000)  20%
Controlling interest share of NI
$550,000
$550,000
$528,000
(7,000)
$528,000
Goodwill at December 31, 2009:
$ 20,000
$ 25,000
(12,000)
538,000
(15,000)
535,000
(10,000)
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Chapter 11
11-5
Solution E11-6
Preliminary computation
Interest acquired in Stahl: 72,000 shares  80,000 shares = 90%
1
Stahl’s net assets under entity theory
Implied value from purchase price: $1,800,000/90% interest
2
Goodwill
a
3
Entity theory
Implied value
Less: Fair value and book value of net assets
Goodwill
$2,000,000
1,710,000
$ 290,000
b
Parent company theory
Cost of 90% interest
$1,800,000
Fair values of net assets acquired ($1,710,000  90%) 1,539,000
Goodwill
$ 261,000
c
Contemporary theory (same as entity theory)
$
290,000
$
36,000
Investment income from Stahl
Income from Stahl ($80,000  1/2 year  90% interest)
4
$2,000,000
Noncontrolling interest under entity theory
Imputed value of Stahl at July 1, 2009
Add: Income for 1/2 year
Noncontrolling percentage
Noncontrolling interest
$2,000,000
40,000
2,040,000
10%
$ 204,000
Alternatively, $200,000 noncontrolling interest at July 1, plus $4,000
share of reported income = $204,000
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11-6
Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures
Solution E11-7
1
Parent company theory
Combined separate incomes of Palumbo and Seal
Less: Palumbo’s share of unrealized profits from upstream
inventory sales ($30,000  80%)
Less: Noncontrolling interest share ($300,000  20%)
Consolidated net income
2
$800,000
(24,000)
(60,000)
$716,000
Entity theory
Combined separate incomes
Less: Unrealized profits from upstream sales
Total consolidated income
$800,000
(30,000)
$770,000
Income allocated to controlling stockholders ($500,000 +
[$270,000  80%])
$716,000
Income allocated to noncontrolling stockholders
($300,000 - $30,000)  20%
$ 54,000
Solution E11-8
Combined separate incomes
Less: Unrealized inventory profits
from downstream sales
($60,000 - $30,000)  50%
Less: Unrealized profit on upstream
sale of land
($96,000 - $70,000)  100%
($96,000 - $70,000)  80%
Less: Noncontrolling interest share
($60,000 - $26,000)  20%
$60,000  20%
Controlling share of net income
Total consolidated income
Allocated to controlling stockholders
Allocated to noncontrolling
Stockholders
($60,000 - $26,000)  20%
Traditional
Theory
$180,000
(15,000)
Parent
Company
Theory
$180,000
(15,000)
(26,000)
Entity
Theory
$180,000
(15,000)
(26,000)
(20,800)
(6,800)
$132,200
(12,000)
$132,200
$139,000
$132,200
$
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6,800
Chapter 11
11-7
Solution E11-9
[Push-down accounting]
1
Push down under parent company theory
Retained earnings
800,000
Inventories
90,000
Land
450,000
270,000
Buildings — net
Goodwill
360,000
Equipment
180,000
Other liabilities
90,000
Push down equity
1,700,000
To record revaluation of 90% of the net assets and elimination of
retained earnings as a result of a business combination with
Pioneer Corporation. Push down equity = ($600,000 fair value —
book value differential  90%) + $360,000 goodwill + $800,000
retained earnings.
2
Push down under entity theory
Retained earnings
800,000
Inventories
100,000
Land
500,000
300,000
Buildings — net
Goodwill
400,000
200,000
Equipment — net
Other liabilities
100,000
Push down equity
1,800,000
To record revaluation of 100% of the net assets and elimination of
retained earnings as a result of a business combination with
Pioneer. Push down equity = $600,000 fair value — book value
differential + $400,000 goodwill + $800,000 retained earnings.
Solution E11-10
Each of the investments should be accounted for by the equity method as a oneline consolidation because the joint venture agreement requires consent of
each venturer for important decisions. Thus, each venturer is able to exercise
significant influence over its joint venture investment irrespective of
ownership interest.
The 40 percent venturer:
Income from Sun-Belt ($500,000  40%)
Investment in Sun-Belt ($8,500,000  40%)
$ 200,000
$3,400,000
The 15 percent venturer
Income from Sun-Belt ($500,000  15%)
Investment in Sun-Belt ($8,500,000  15%)
$
75,000
$1,275,000
Solution E11-11
In general, VIE accounting follows normal consolidation principles.
Under that approach, the noncontrolling interest share would be 90% of VIE
earnings, or $450,000. However, the intercompany fees must be allocated to the
primary beneficiary, not to noncontrolling interests. Therefore, in this case,
noncontrolling interest share would be 90% of $460,000, or $414,000.
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11-8
Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures
Solution E11-12
As primary beneficiary, Paxel must include Polo in its consolidated
financial staements. Additionally, Paxel must make the following disclosures:
(a) the nature, purpose, size, and activities of the variable interest entity,
(b) the carrying amount and classification of consolidated assets that are
collateral for the variable interest entity’s obligations, and (c) lack of
recourse if creditors (or beneficial interest holders) of a consolidated
variable interest entity have no recourse to the general credit of the primary
beneficiary.
Darden will not consolidate Polo, since they are not the primary beneficiary.
As in traditional consolidations, only one firm consolidates a subsidiary.
However, since Darden has a significant interest in Polo, they must disclose:
(a) the nature of its involvement with the variable interest entity and when
that involvement began, (b) the nature, purpose, size, and activities of the
variable interest entity, and (c) the enterprise’s maximum exposure to loss as
a result of its involvement with the variable interest entity.
Solution E11-13
According to FIN 46(R), if an enterprise absorbs a majority of a
variable interest entity’s expected losses and another receives a majority of
expected residual returns, the enterprise absorbing the losses is the primary
beneficiary and must consolidate the variable interest entity. The contractual
arrangement makes Laura the primary beneficiary.
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Chapter 11
11-9
SOLUTION TO PROBLEMS
Solution P11-1
Picody Corporation and Subsidiary
Comparative Consolidated Balance Sheets
at December 31, 2010
Parent
Company Theory
Assets
Cash
Receivables — net
Inventories
Plant assets — neta
Patentsb
Total assets
Liabilities
Accounts payable
Other liabilities
Noncontrolling interestc
Total liabilities
Capital stock
Retained earnings
Noncontrolling interestd
Total stockholders’ equity
Total liabilities and
stockholders’ equity
a
b
c
d
$
Entity Theory
52,000
300,000
450,000
1,998,000
64,000
$2,864,000
52,000
300,000
450,000
2,010,000
80,000
$2,892,000
$
$
304,000
500,000
160,000
964,000
1,000,000
900,000
0
1,900,000
$2,864,000
$
304,000
500,000
804,000
1,000,000
900,000
188,000
2,088,000
$2,892,000
Parent company theory: Combined plant assets of $1,950,000 + ($80,000  3/5
undepreciated excess)
Entity theory: Combined plant assets of $1,950,000 + ($100,000  3/5 undepreciated
excess)
Parent company theory: $80,000 patents - $16,000 amortization
Entity theory: $100,000 patents - $20,000 amortization
Parent company theory: Noncontrolling interest equals Scone’s equity of $800,000 
20%
Entity theory: [Scone’s equity of $800,000 + ($60,000 undepreciated plant assets +
$80,000 unamortized patents)]  20%
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11-10
Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures
Solution P11-2
Preliminary computation
Implied value of Pisces based on purchase price ($160,000/.8)
Book value
Excess to undervalued equipment
1
$200,000
170,000
$ 30,000
Pisces Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2009
Sales
Less: Cost of sales
Gross profit
Other expenses
Depreciationa
$600,000
380,000
220,000
$ 80,000
79,500
Total consolidated net income
Allocation of income to:
Noncontrolling interestb
Controlling interest
a
b
159,500
$ 60,500
$ 4,100
$ 56,400
$75,000 depreciation - $500 piecemeal recognition of gain on equipment
through depreciation + ($30,000 excess  6 years) excess depreciation
($30,000 reported income - $5,000 unrealized gain on equipment + $500
piecemeal recognition of gain on equipment - $5,000 excess depreciation) 
20% interest
2
Pisces Corporation and Subsidiary
Consolidated Balance Sheet
at December 31, 2009
Assets
Current assets
Plant and equipment — net
($595,000 - $199,500 + 25,000)
Total assets
Liabilities and equity
Liabilities
Capital stock
Retained earningsa
Noncontrolling interestb
Total liabilities and stockholders’ equity
a
b
$241,600
420,500
$662,100
$150,000
300,000
170,000
42,100
$662,100
Pisces beginning retained earnings $163,600 + Pisces net income $56,400 Pisces dividends of $50,000
($190,000 stockholders’ equity + $25,000 excess - $4,500 unrealized gain on
equipment)  20%
Check: $40,000 beginning noncontrolling interest + $4,100 noncontrolling
interest share - $2,000 noncontrolling interest dividends = $42,100
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Chapter 11
11-11
Solution P11-3
Parent company theory
1a
Income from Sign for 2009 ($90,000  70%)
$ 63,000
1b
Goodwill at December 31, 2009
($595,000 cost - $525,000 fair value)
$ 70,000
1c
Consolidated net income for 2009
Palace’s separate income
Add: Income from Sign
1d
$300,000
63,000
Noncontrolling interest share for 2009
Net income of Sign of $90,000  30%
1e
$363,000
$ 27,000
Noncontrolling interest December 31, 2009
Sign’s stockholders’ equity $790,000  30%
$237,000
Entity theory
2a
Income from Sign for 2009 ($90,000  70%)
2b
Goodwill at December 31, 2009
Imputed value ($595,000/70%)
Fair value of Sign’s net assets
Goodwill
2c
$ 63,000
$850,000
750,000
$100,000
Total consolidated income for 2009
Income to controlling stockholders ($300,000 + $63,000)
Add: Noncontrolling interest share ($90,000  30%)
Total consolidated income
$363,000
27,000
$390,000
2d
Noncontrolling interest share (computed in 2c above)
$ 27,000
2e
Noncontrolling interest at December 31, 2009
(Book equity $790,000 + $100,000 goodwill)  30%
$267,000
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11-12
Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures
Solution P11-4
Preliminary computations
Parent company theory
Investment in Smedley
Fair value of 80% interest acquired ($240,000  80%)
Goodwill
$224,000
192,000
$ 32,000
Entity Theory
Implied value of Smedley ($224,000/.8)
Fair value of identifiable net assets
Goodwill
$280,000
240,000
$ 40,000
Pierre used an incomplete equity method in accounting for its investment in
Smedley. It ignored the intercompany upstream sales of inventory. Income from
Smedley on an equity basis would be:
$ 40,000
Share of Smedley’s income ($50,000  .8)
Less: Unrealized profits in ending inventory from
(3,200)
upstream sale ($8,000  50%  80%)
Income from Smedley
$ 36,800
Pierre Corporation and Subsidiary
Comparative Consolidated Income Statements
for the year ended December 31, 2010
Sales
Less: Cost of sales
Gross profit
Traditional
Theory
$1,000,000
(575,000)
425,000
Expenses
Parent
Company
Theory
$1,000,000
(575,000)
425,000
Entity
Theory
$1,000,000
(575,000)
425,000
(200,000)
(200,000)
(200,000)
Less: Unrealized profit on
upstream sale of inventory
($23,000 - $15,000)  50%  100%
($23,000 - $15,000)  50%  80%
Noncontrolling interest share
($50,000 - $4,000)  20%
$50,000  20%
Consolidated net income
Total consolidated income
Allocated to controlling
Stockholders
Allocated to noncontrolling
Stockholders
($50,000 - $4,000)  20%
(4,000)
(4,000)
(3,200)
(9,200)
$
211,800
$
(10,000)
211,800
$
221,000
$
211,800
$
9,200
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