ACCT 223- Ch 4 – Solutions of Exercises
26. (30 minutes) Step acquisition.
a. Investment in Sellinger
445,000
Cash
Additional paid-in capital
415,000
30,000
Acquisition-date fair value ($1,141,000 ÷ .7)
$1,630,000
Sellinger net income 2020
340,000
Excess fair value amortization 2020
(40,000)
Sellinger dividends 2020
(150,000)
Acquisition-date adjusted subsidiary value 12/31/20
1,780,000
Percent acquired 1/1/21
0.25
Acquisition-date based value of newly acquired shares
$ 445,000
Acquisition price for 25% interest
Credit to Palka’s APIC
b. Initial value for 70% acquisition
415,000
$
30,000
$1,141,000
70% of adjusted 2020 subsidiary net income
($340,000 – $40,000)
70% of subsidiary dividends 2020
Adjusted fair value of newly acquired shares
210,000
(105,000)
445,000
95% of adjusted subsidiary 2021 net income
($440,000 – $40,000)
380,000
95% of subsidiary dividends 2021
(171,000)
Investment in Sellinger 12/31/21
$1,900,000
27. (20 Minutes) (Determine consolidated income balances, includes a mid-year
acquisition)
a.
Acquisition-date total fair value ..........................
$594,000
Book value of net assets ......................................
(400,000)
Fair value in excess of book value
$194,000 .................................................
Excess fair value assigned to specific
accounts based on fair value
Patent
$28,000
Remaining
Annual excess
life
amortizations
..........................................................
140,000
..........................................................
10,000
Buildings .........................................................
3,000
30,000
Goodwill ..........................................................
14,000
Total
-0-
Land
..........................................................
5 years
10 years
$31,000
Consolidated figures following January 1 acquisition date:
Combined revenues .............................................................................
Combined expenses .............................................................................
Consolidated net income .....................................................................
Net income to noncontrolling interest ([200,000 – 31,000] × 30%) .......
Net income attributable to Parker, Inc. ...............................................
$1,500,000
(1,031,000)
469,000
(50,700)
$ 418,300
b. Consolidated figures following April 1 acquisition date:
Combined revenues (1).........................................................................
Combined expenses (2) ........................................................................
Consolidated net income ....................................................................
Net income attributable to noncontrolling interest (3) .......................
Net income attributable to Parker, Inc ................................................
$1,350,000
(923,250)
$ 426,750
(38,025)
$ 388,725
(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues
(2) $600,000 Parker expenses plus $300,000 of post-acquisition Sawyer expenses
plus $23,250 amortization expenses for 9 months
(3) ($200,000 – 31,000) adjusted subsidiary net income × 30% × ¾ year
30. (45 minutes) Noncontrolling interest in the presence of a control premium.
a.
Goodwill allocation:
Parflex
NCI
$344,000
$36,000
Share of identifiable net assets ($324,000 + $18,000) 307,800
34,200
Goodwill allocation
$1,800
Acquisition-date fair value
$36,200
b. Investment in Eagle
Initial value
$344,000
Change in Eagle’s RE × 90%
($341,000 – $174,000) × 90%
Excess amortization (3 years) × 90%
Investment in Eagle 12/31/21
150,300
(5,400)
$488,900
-OR-
Investment in Eagle
Initial value
$344,000
2019-2020 change in Eagle’s RE × 90%
($278,000 – $174,000) × 90%
93,600
Excess fair value amortization
(3,600)
Equity income 2021 (below)
79,200
Eagle 2021 dividends × 90%
(24,300)
Investment in Eagle 12/31/21
$488,900
Equity in Eagle’s earnings:
Eagles reported 2021 net income
Excess equipment amortization
$90,000
(2,000)
Adjusted net income
$88,000
Parflex ownership share
90%
Equity in Eagle’s earnings
$79,200
30. continued
c. December 31, 2021
Parflex
Eagle
(862,000)
(366,000)
(1,228,000)
Cost of goods sold
515,000
209,000
724,000
Depreciation expense
191,200
67,000
E
2,000
260,200
Equity in Eagle's earnings
(79,200)
0
I
79,200
0
(235,000)
(90,000)
Sales
Adjustments
NCI
Consolidated
Separate company net
income
Consolidated net income
(243,800)
to noncontrolling interest
(8,800)
to Parflex Corporation
8,800
(235,000)
Retained earnings, 1/1
(500,000)
(278,000)
Net income (above)
(235,000)
(90,000)
Dividends declared
130,000
27,000
(605,000)
(341,000)
(605,000)
Cash and receivables
135,000
82,000
217,000
Inventory
255,000
136,000
391,000
Investment in Eagle
488,900
0
Retained earnings, 12/31
Property & equipment (net)
964,000
328,000
Goodwill
Total assets
1,842,900
546,000
S 278,000
(500,000)
(235,000)
24,300
D
24,300
A1
14,000
A2
38,000
D
385,200
S
12,600
A1
36,200
A2
79,200
I
2,000
E
2,700
130,000
-0-
1,304,000
38,000
1,950,000
Liabilities
(722,900)
(55,000)
Common stock
(515,000)
(150,000)
(777,900)
S 150,000
NCI 1/1
(515,000)
42,800
S
1,400
A1
1,800
A2
NCI 12/31
Retained earnings, 12/31
Total liabilities and equities
(46,000)
(52,100)
(605,000)
(341,000)
(1,842,900)
(546,000)
(52,100)
(605,000)
585,500
585,500
(1,950,000)
33. (30 Minutes) (Reporting the sale of a portion of an investment in a subsidiary.)
a. Posada records an accrual of $7,950 (see computation below) as "Equity
Income from Sold Shares of Sabathia" for the January 1, 2021 to
October 1, 2021 period which will appear in the 2021 consolidated
income statement. The consolidation will continue to include all of
Sabathia's accounts but now recognizing a 40% noncontrolling interest.
Sabathia fair value 1/1/19 ..........................................
Sabathia book value .................................................
Patent .........................................................................
Remaining life of patent ............................................
Annual amortization ..................................................
$1,200,000
(1,130,000)
$70,000
5 years
$14,000
Posada’s share of Sabathia’s net income accruing to shares sold:
Sabathia's net income ...............................................
$120,000
Excess patent fair value amortization ......................
(14,000)
Sabathia's adjusted net income ................................
106,000
Fraction of year held ..................................................
9/12
Sabathia’s adjusted net income for 9 months .........
79,500
Percentage owned by Posada ...................................
70%
Posada’s share of Sabathia’s 9 month net income
55,650
Shares sold—1,000 out of 7,000 ..............................
1/7
Posada’s income for shares sold ............................
$7,950
b. As long as control is maintained, the acquisition method considers
transactions in the stock of a subsidiary, whether purchases or sales,
as transactions in the equity of the consolidated entity.
Posada’s investment book value 10/1/21
1/1/21 balance (given—equity method) ...................
$1,085,000
Recognition of 1/1/21–10/1/21 period:
Income accrual ($120,000 × 70% × ¾) ................
63,000
Dividends ($40,000 × 70% × ¾) ...........................
Amortization ($14,000 × 70% × ¾) .......................
(21,000)
(7,350)
Pre-sale investment book value—10/1/21 ................
$1,119,650
Computation of income effect—sale transaction
10/1/21 book value (above) .......................................
$1,119,650
Portion of investment sold (1,000/7,000 shares) ....
1/7
Book value of investment sold ................................
Proceeds ....................................................................
$ 159,950
191,000
Credit to Posada’s additional paid-in capital ..........
$
31,050
c. Because Posada continues to hold 6,000 shares of Sabathia, control is
still maintained and consolidated financial statements would be
appropriate with a noncontrolling interest of 40 percent.
35.
(45 Minutes) (Asks about several consolidated balances and consolidation
process. Includes the different accounting methods to record investment.)
a. Schedule 1—Fair Value Allocation and Excess Amortizations
Consideration transferred by Miller .........
$664,000
Noncontrolling interest fair value .............
166,000
Taylor’s fair value .......................................
$830,000
Taylor’s book value ....................................
(600,000)
Fair value in excess of book value ..........
230,000
Excess fair value assigned to specific
accounts based on fair value
Excess fair value assigned to buildings
$4,000
Goodwill .....................................................
Remaining Annual excess
life
amortizations
80,000
20 years
$150,000
indefinite
-0Total .......................................................
b. $150,000 (see schedule 1 above)
$4,000
c. Entry (S)
Common stock (Taylor) ......................................
300,000
Additional paid-in capital (Taylor) .....................
90,000
Retained earnings (Taylor) .................................
210,000
Investment in Taylor Company (80%) ..........
480,000
Noncontrolling interest in Taylor (20%) .......
120,000
Entry (A)—no control premium
Buildings ..............................................................
80,000
Goodwill ...............................................................
150,000
Investment in Taylor Company (80%) ..........
184,000
Noncontrolling interest in Taylor (20%) .......
46,000
d. (1) Equity method
Income accrual (80%) ...........................................
Excess amortization expense ..............................
Investment income ..........................................
$56,000
(3,200)
$52,800
(2) Partial equity method
Income accrual (80%) ...........................................
$56,000
(3) Initial value method
Dividends received (80%) .....................................
$8,000
35. (continued)
e. (1) Equity method
Initial fair value paid ..............................................
Income accrual 2019–2021 ($260,000 × 80%) .....
$664,000
208,000
Dividends 2019–2021 ($45,000 × 80%) ................
(36,000)
Excess amortizations 2019–2021 ($3,200 × 3) ....
(9,600)
Investment in Taylor—12/31/21 ......................
$826,400
(2) Partial Equity Method
Investment in Taylor—12/31/21 = $836,000 (initial value paid plus
income accrual of $208,000 less dividends of $36,000 [no excess
amortizations])
(3) Initial Value Method
Investment in Taylor—12/31/21 = $664,000 (original value paid)
f. Using the acquisition method, the allocation will be the total difference
($80,000) between the buildings' book value and fair value. Based on a
20 year remaining life, annual excess amortization is $4,000.
Miller book value—buildings .........................................
$800,000
Taylor book value—buildings .......................................
300,000
Allocation ........................................................................
80,000
Excess amortizations for 2019–2020 ($4,000 × 2 years)
(8,000)
Consolidated buildings account .............................
$1,172,000
g. Acquisition-date fair value allocated to goodwill
(see schedule 1 above) ............................................
$150,000
h. If the parent has been applying the equity method, the stockholders'
equity accounts on its books will already represent consolidated totals.
The common stock and additional paid-in capital figures to be reported
are the parent balances only. As to retained earnings, the equity method
will properly record all subsidiary net income and amortization so that
the parent balance is also a reflection of the consolidated total.