Answers to Questions
1. a. CCES Corp., for its own recordkeeping, may apply the equity method to the investment in Schmaling. Under this approach, the parent's records parallel the activities of the subsidiary. Income will be accrued by the parent as it is earned by the subsidiary. Dividends paid by Schmaling cause a reduction in book value; therefore, the investment account is reduced by CCES in a corresponding manner.
In addition, any excess amortization expense associated with the allocation of
CCES's purchase price is recognized through a periodic adjustment. By applying the equity method, both the income and investment balances maintained by the parent accurately reflect consolidated totals. The equity method is especially helpful in monitoring the income of the business combination. This method can be, however, rather difficult to apply and a time-consuming process.
2. b. The initial value method . The initial value method can also be utilized by CCES
Corporation. Any dividends received will be accounted for as income but no other investment entries are recorded. Thus, the initial value method is quite easy to apply. However, the balances found within the parent's financial records may not provide a reasonable representation of the totals that will result from consolidating the two companies. c. The partial equity method combines the advantages of the previous two techniques.
Income is accrued as earned by the subsidiary in the same manner as the equity method. Similarly, dividends are reported as a reduction in the investment account.
However, no other entries are recorded; more specifically, amortization is not recognized by the parent. The method is, therefore, easier to apply than the equity method but the subsidiary's individual totals will still frequently approximate consolidated balances. a. The consolidated total for equipment is made up of the sum of Maguire’s book value,
Williams’ book value, and any unamortized excess acquisition-date fair value over book value attributable to Williams’ equipment. b. Although an Investment in Williams account is appropriately maintained by the parent, from a consolidation perspective the balance is intercompany in nature.
Thus, the entire amount will be eliminated in arriving at consolidated financial statements. c. Only dividends paid to outside parties are included in consolidated statements.
Because Maguire owns 100 percent of Williams, all of the subsidiary's dividends are intercompany. Consequently, only the dividends paid by the parent company will be reported in the financial statements for this business combination. d. Any goodwill recognized within Maguire's original acquisition price must still be reported for consolidation purposes. Reductions to the goodwill balance are made if goodwill is determined to be impaired.

3.
4.
5.
6. e. Unless intercompany revenues have been recorded, consolidation is achieved in subsequent periods by adding the two book values together. f. Consolidated expenses can be determined by adding the parent's book value to that of the subsidiary and then including any amortization expense associated with the purchase price. As will be discussed in detail in Chapter Five, intercompany expenses can also be present which require elimination in arriving at consolidated figures. g. Only the common stock outstanding for the parent company is included in consolidated totals. h. The net income for a business combination is calculated as the difference between consolidated revenues and consolidated expenses.
When using the equity method, subsidiary earnings are accrued and amortization expense (associated with the acquisition price in a purchase) is recognized in the same manner as in the consolidation process. The equity method parallels consolidation.
Thus, the net income and retained earnings reported by the parent company each year will equal the consolidated totals.
In the consolidation process, excess amortizations must be recorded annually for any portion of the purchase price that is allocated to specific accounts (other than land or to goodwill). Although this expense can be simulated in total on the parent's books by an equity method entry, the actual amortization of each allocated fair value adjustment is appropriate for consolidation. Hence, the effect of the parent's equity method amortization entry is removed as part of Entry I so that the amortization of specific accounts (e.g., depreciation) can be recorded (in consolidation Entry E).
When the initial value method is applied by the parent company, no accrual is recorded to reflect the subsidiary's change in book value during the years following acquisition.
Furthermore, recognition of excess amortizations relating to the acquisition price is also omitted by the parent. T he partial equity method, in contrast, records the subsidiary’s book value increases and decreases but not amortizations. Consequently, for both of these methods, a technique must be established within the consolidation process to record the omitted figures. Entry *C simply brings the parent's records (more specifically, the beginning retained earnings balance and the investment account) up-to-date as of the first day of the current year. If the initial value method has been applied by the acquiring company, any changes in the subsidiary's book value in previous years must be recorded on the worksheet along with the appropriate amount of amortization expense. For the partial equity method, only the amortization relating to these prior years needs to be recognized.
No similar entry is needed if the equity method has been applied; changes in the subsidiary's book value as well as excess amortization expense will be recorded each year by the parent. Thus, under the equity method, the parent's investment and beginning retained earnings balances are both correctly established without further adjustment.
Lambert's loan payable and the receivable held by Jenkins are intercompany accounts.
As such, the reciprocal balances should be offset in the consolidation process. The
$100,000 is not a debt to or a receivable from an unrelated (or outside) party and should, therefore, not be reported in consolidated financial statements. Additionally any

7. interest income/expense recognized on this loan is also intercompany in nature and must likewise be eliminated.
Since the equity method has been applied by Benns, the $920,000 is composed of four balances: a. The original consideration transferred by the parent; b. The annual accruals made by Benns to recognize income as it is earned by the subsidiary; c. The reductions that are created by the subsidiary's payment of dividends; d. The periodic amortization recognized by Benns in connection with the allocations identified with its purchase price.
8. The $100,000 attributed to goodwill is reported at its original amount unless a portion of goodwill is impaired or a unit of the business where goodwill resides is sold.
9. A parent should consider recognizing an impairment loss for goodwill associated with a purchased subsidiary when, at the reporting unit level, the fair value is less than its carrying amount. Goodwill is reduced when its carrying value is less than its fair value.
To compute fair value for goodwill, its implied value is calculated by subtracting the fair values o f the reporting unit’s identifiable net assets from its total fair value. The impairment is recognized as a loss from continuing operations.
10. The additional consideration is merely an extra component of the price paid by Remo to purchase Albane. Thus, any goodwill recognized at the original date of acquisition will be increased in 2009 by $100,000. However, if a bargain purchase occurred on January
1, 2009, this new payment reduces the allocations to noncurrent assets previously recognized for consolidation purposes.
11. At present, the Securities and Exchange Commission requires the use of push-down accounting for the separate financial statements of a subsidiary where no substantial outside ownership exists. Thus, if Company A owns all of Company B, the push-down method of accounting would be appropriate for the separately issued statements of
Company B. The SEC normally requires push-down accounting where 95 percent of a subsidiary is acquired and the company has no outstanding public debt or preferred stock.
Push-down accounting may be required if 80-95 percent of the outstanding voting stock is purchased. Push-down accounting is justified in that the consideration transferred by the present owners is reported. For example, if a piece of land costs Company B
$10,000 but Company A pays $13,000 for the land when acquiring Company B, the land has a basis to the current owners of B of $13,000. If B's financial records had been united with A at the time of the acquisition, the land would have been reported at
$13,000. Thus, leaving the $10,000 figure simply because separate incorporation is maintained is viewed, by proponents of push-down accounting, as unjustified.
12. When push-down accounting is applied, the subsidiary adjusts the book value of its assets and liabilities based on the allocations made at the date of the acquisition.
Periodic amortization expense is recognized subsequently by the subsidiary on each of these allocations (except for land). Therefore, the income recorded by the subsidiary is a fair representation of that company's impact on consolidated earnings.

The parent uses no special procedures when push-down accounting is being applied.
However, if the equity method is in use, amortization need not be recognized by the parent since that expense is included in the figure reported by the subsidiary.
13. Push-down accounting has become popular for the parent's internal reporting purposes for two reasons. First, this method simplifies the consolidation process each year. If purchase price allocations and subsequent amortization are recorded by the subsidiary, they do not need to be repeated each year on a consolidation worksheet. Second, recording of amortization by the subsidiary enables that company's information to provide a good representation of the impact that the acquisition has on the earnings of the business combination. For example, if the subsidiary earns $100,000 each year but annual amortization is $80,000, the acquisition is only adding $20,000 to the income of the combination each year rather than the $100,000 that is reported by the subsidiary unless push-down accounting is used.

Answers to Problems
1. A
2. B
3. A
4. D Willkom equipment book value
—12/31/11 .........................
Szabo book value
—12/31/11 ................................................
Original purchase price allocation to Szabo's equipment
($300,000 – $200,000) ...........................................................
Amortization of allocation
($100,000/10 years for 3 years) ......................................
Consolidated equipment ......................................................
5. A
6. B
7. D
8. B
9. A and B are correct
$210,000
140,000
100,000
(30,000)
$420,000
10. C
11. C $60,000 allocation to equipment is "pushed-down" to subsidiary and increases balance from $330,000 to $390,000. Consolidated balance is
$420,000 plus $390,000.

12. (35 Minutes) (Determine consolidated retained earnings when parent uses various accounting methods. Determine Entry *C for each of these methods)
a. CONSOLIDATED RETAINED EARNINGS
 EQUITY METHOD
Herbert (parent) balance
—1/1/09 ..................................
Herbert income
—2009 ...................................................
Herbert dividends —2009 (subsidiary dividends are intercompany and, thus, eliminated) .......................
Rambis income
—2009 (not included in parent's income)
Amortization
—2009 ........................................................
Herbert income — 2010 ...................................................
Herbert dividends —2010 ................................................
Rambis income
—2010 ...................................................
Amortization
—2010 .......................................................
Consolidated Retained Earnings, 12/31/10 ...................
 PARTIAL EQUITY METHOD AND INITIAL VALUE METHOD
$400,000
40,000
(10,000)
20,000
(12,000)
50,000
(10,000)
30,000
(12,000)
$496,000
Consolidated retained earnings are the same regardless of the method in use: the beginning balance plus the income of the parent less the dividends of the parent plus the income of the subsidiary less amortization expense. Thus, consolidated retained earnings on
December 31, 2010 are $496,000 as computed above. b. Investment in Rambis —Equity Method
Rambis fair value 1/1/09 ............................................................
Rambis income 2009 ..................................................................
Rambis dividends 2009 ............................................................. (5,000)
Herbert’s 2009 excess fair over book value amortization .....
(12,000)
Investment account balance 1/1/10 .......................................... $577,000
Investment in Rambis —Partial Equity Method
Rambis fair value 1/1/09 ............................................................
Rambis income 2009 ..................................................................
$574,000
20,000
$574,000
20,000
Rambis dividends 2009 ............................................................. (5,000)
Investment account balance 1/1/10 .......................................... $589,000
Investment in Rambis —Initial value method
Rambis fair value 1/1/09 ............................................................
Investment account balance 1/1/10 ..........................................
$574,000
$574,000

12. (continued) c. ENTRY *C



EQUITY METHOD
No entry is needed to convert the past figures to the equity method since that method has already been applied.
PARTIAL EQUITY METHOD
Amortization for the prior years (only 2009 in this case) has not been recorded and must be brought into the consolidation through worksheet entry *C:
ENTRY *C
Retained Earnings, 1/1/10 (Parent) ....................
Investment in Rambis ....................................
12,000
12,000
(To record 2009 amortization in consolidated figures. Expense was omitted because of application of partial equity method.)
INITIAL VALUE METHOD
Amortization for the prior years (only 2009 in this case) has not been recorded and must be brought into the consolidation through worksheet entry *C. In addition, only dividend income has been recorded by the parent ($5,000 in 2009). In this prior year, Rambis reported net income of $20,000. Thus, the parent has not recorded the
$15,000 income in excess of dividends. That amount must also be included in the consolidation through entry *C:
ENTRY *C
Investment in Rambis ......................................... 3,000
Retained Earnings, 1/1/10 (Parent) ...............
(To record 2009 unrecognized subsidiary earnings as part of the parent’s retained earnings. $15,000 income of subsidiary was not recorded by parent (income in excess of dividends). Amortization
3,000 expense of $12,000 was not recorded under the initial value method.
Note that *C adjustments bring the parent’s January 1, 2010 Retained
Earnings balance equal to that of the equity method.

13. (30 Minutes) (A variety of questions on equity method, initial value method, and partial equity method.) a. An allocation of the acquisition price (based on the fair value of the shares Issued) must be made first.
Acquisition fair value (consideration paid by Haynes) $135,000
Book value equivalency .................................................
Excess of Turner fair value over book value ...............
Excess fair value assigned to specific accounts based on fair value Life
Equipment ......................... $5,000 5 yrs.
Customer List ...................... 30,000 10 yrs.
(100,000)
$35,000
Annual Excess
Amortizations
$1,000
3,000
$4,000
Acquisition fair value ......................................................
2009 Income accrual ......................................................
2009 Dividends paid by Turner .....................................
2009 Amortizations (above) ...........................................
2010 Income accrual ......................................................
2010 Dividends paid by Turner .....................................
2010 Amortizations ........................................................
Investment in Turner account balance .........................
$135,000
110,000
(50,000)
(4,000)
130,000
(40,000)
(4,000)
$277,000 b. Net income of Haynes ....................................................
Net Income of Turner .....................................................
Depreciation expense .....................................................
Amortization expense .....................................................
$240,000
130,000
(1,000)
(3,000)
Consolidated net income 2010 ................................ c. Equipment balance Haynes ...........................................
$366,000
Equipment balance Turner ............................................
Allocation based on fair value (above) .........................
Depreciation for 2009-2010 ...........................................
Consolidated equipment
—December 31, 2010 ............
$500,000
300,000
5,000
(2,000)
$803,000
Parent's choice of an investment method has no impact on consolidated totals.

13. (continued) d. If the initial value method was applied during 2009, the parent would have recorded dividend income of $50,000 rather than $110,000 (as equity income). Income is, therefore, understated by $60,000. In addition, amortization expense of $4,000 was not recorded. Thus, the
January 1, 2010, retained earnings is understated by $56,000 ($60,000
–
$4,000). An Entry *C is necessary on the worksheet to correct this equity figure:
Investment in Turner ...........................................
Retained Earnings, 1/1/10 (Haynes) .............
56,000
56,000
If the partial equity method was applied during 2009, the parent would have failed to record amortization expense of $4,000. Retained earnings are overstated by $4,000 and are corrected through Entry *C:
Retained Earnings, 1/1/10 (Haynes) ...................
Investment in Turner .....................................
4,000
4,000
If the equity method was applied during 2009, the parent's retained earnings are the same as the consolidated figure so that no adjustment is necessary.

14. (20 minutes) (Record a merger combination with subsequent testing for goodwill impairment). a. In accounting for the combination, the total fair value of Beltran (consideration transferred) is allocated to each identifiable asset acquired and liability assumed with any remaining excess as goodwill.
Cash paid $450,000
Fair value of shares issued
Fair value transferred
1,248,000
$1,698,000
Fair value transferred (above)
Fair value of net assets acquired and
liabilities assumed
Goodwill recognized in the combination
$1,698,000
1,298,000
$400,000
Entry by Francisco to record assets acquired and liabilities assumed in the combination with Beltran:
Cash
Receivables
Inventory
$ 75,000
193,000
281,000
Patents
Customer relationships
Equipment
Goodwill
525,000
500,000
295,000
400,000
Accounts Payable
Long-Term Liabilities
Cash
Common Stock (Francisco Co., par value)
Additional Paid-in Capital b. Step one in goodwill impairment test:
Fair value of reporting unit as a whole
$ 121,000
450,000
450,000
104,000
1,144,000
Book value of reporting unit's net assets
1,425,000
1,585,000
Because the total fair value of the reporting unit is less than its carrying value, a potential goodwill impairment loss exists, step two is performed:
Fair value of reporting unit as a whole
Fair values of reporting unit's net assets (excluding goodwill)
Implied fair value of goodwill
Book value of goodwill
Goodwill impairment loss
$1,425,000
1,325,000
100,000
400,000
$300,000

15. (20 minutes) (Goodwill impairment testing.) a. Goodwill Impairment
Step 1
Fair value of reporting unit =
Carrying value of reporting unit =
$650
780
Because fair value < carrying value, there is a potential goodwill impairment loss.
Step 2
Fair value of reporting unit
Fair value of net assets excluding goodwill
Tangible assets
Recognized intangibles
Unrecognized intangibles
Implied value of goodwill
Carrying value of goodwill
Goodwill impairment loss b.
Tangible assets, net
Goodwill
Customer list
Patent
$110
$650
230
200 540
110
500
$390
$80
110
-0-
-0-

16. (30 minutes) (Goodwill impairment and intangible assets.)
Part a
Goodwill Impairment Test —Step 1
Sand Dollar
Salty Dog
Baytowne
Part b
Total fair value
$510,000
Carrying Potential goodwill value impairment?
< $530,000 yes
580,000 < 610,000
560,000 > 280,000 yes no
Goodwill Impairment Test —Step 2 (Sand Dollar and Salty Dog only)
Sand Dollar
—total fair value
Fair values of identifiable net assets
Tangible assets
Trademark
Customer list
Liabilities
Implied value of goodwill
Carrying value of goodwill
Impairment loss
$190,000
150,000
100,000
(30,000)
$510,000
410,000
100,000
120,000
$20,000
Salty Dog —total fair value
Fair values of identifiable net assets
Tangible assets
Unpatented technology
Licenses
Implied value of goodwill
Carrying value of goodwill
No impairment
$200,000
125,000
100,000
—implied value > carry value
$580,000
425,000
155,000
150,000
-0-
Part c
No changes in tangible assets or identifiable intangibles are reported based on goodwill impairment testing. The sole purpose of the valuation exercise is to estimate an implied value for goodwill. Destin will report a goodwill impairment loss of $20,000, which will reduce the amount of goodwill allocated to Sand Dollar. However, because the fair value of Sand Dollar’s trademarks is less than its carrying amount, the account should be subjected to a separate impairment testing procedure to see if the carrying value is “recoverable” in future estimated cash flows.

17. (30 Minutes) (Consolidation entries for two years. Parent uses equity method.)
Fair Value Allocation and Annual Amortization:
Acquisition fair value (consideration paid) ............
Book value (assets minus liabilities or total stockholders'
$490,000 equity) ..................................................................
Excess fair value over book value ..........................
Excess fair value assigned to specific accounts based on individual fair values
Land ....................................
Buildings .............................
Equipment ...........................
$10,000
Life
--
40,000 4 yrs.
(20,000) 5 yrs.
(400,000)
$90,000
Annual Excess
Amortizations
--
$10,000
(4,000)
Total assigned to specific accounts ........................
Goodwill ..............................
30,000
60,000 Indefinite -0-
$6,000 Total .................................... $90,000
Consolidation Entries as of December 31, 2009
Entry S
Common Stock —Abernethy ................................
Additional Paid-in Capital ...................................
Retained Earnings —1/1/09 .................................
250,000
50,000
100,000
Investment in Abernethy ...............................
(To eliminate stockholders' equity accounts of subsidiary)
400,000
Entry A
Land .....................................................................
Buildings ..............................................................
Goodwill ...............................................................
Equipment ......................................................
Investment in Abernethy ...............................
10,000
40,000
60,000
20,000
90,000
(To recognize allocations attributed to fair value of specific accounts at acquisition date with residual fair value recognized as goodwill).

17. (continued)
Entry I
Equity in Subsidiary Earnings ...........................
Investment in Abernethy ...............................
74,000
74,000
(To eliminate $80,000 income accrual for 2009 less $6,000 amortization recorded by parent using equity method)
Entry D
Investment in Abernethy .....................................
Dividends Paid ...............................................
(To eliminate intercompany dividend transfers)
10,000
10,000
Entry E
Depreciation expense ..........................................
Equipment .............................................................
Buildings .........................................................
(To record 2009 amortization expense)
Consolidation Entries as of December 31, 2010
6,000
4,000
10,000
Entry S
Common Stock —Abernethy ............................... 250,000
Additional Paid-in Capital ...................................
Retained Earnings
—1/1/10 ..................................
50,000
170,000
Investment in Abernethy ...............................
(To eliminate beginning stockholders' equity of subsidiary —the
470,000
Retained Earnings account has been adjusted for 2009 income and dividends. Entry *C is not needed because equity method was applied.)
Entry A
Land .....................................................................
Buildings ..............................................................
Goodwill ...............................................................
Equipment ......................................................
10,000
30,000
60,000
16,000
Investment in Abernethy ............................... 84,000
(To recognize allocations relating to investment
—balances shown here are as of beginning of current year [original allocation less excess amortizations for the prior period])

17. (continued)
Entry I
Equity in Subsidiary Earnings ...........................
Investment in Abernethy ...............................
104,000
104,000
(To eliminate $110,000 income accrual less $6,000 amortization recorded by parent during 2010 using equity method)
Entry D
Investment in Abernethy ..................................... 30,000
Dividends Paid ............................................... 30,000
(To eliminate intercompany dividend transfers)
Entry E
Same as Entry E for 2009
18. (35 Minutes) (Consolidation entries for two years. Parent uses initial value method.)
Purchase Price Allocation and Annual Excess Amortizations:
Acquisition date value (consideration paid) .....
Book value ...........................................................
$500,000
(400,000)
Excess price paid over book value .................... $100,000
Excess price paid assigned to specific accounts based on fair values Life
Annual Excess
Amortizations
Equipment
Long-term liabilities
Goodwill
Total
$20,000 5 yrs.
30,000 4 yrs.
$50,000 Indefinite
$100,000
Consolidation Entries as of December 31, 2009
Entry S
Common Stock —Abernethy .............................. 250,000
Additional Paid-in Capital .................................. 50,000
Retained Earnings —1/1/09 ................................ 100,000
$4,000
7,500
-0-
$11,500
Investment in Abernethy ...............................
(To eliminate stockholders' equity accounts of subsidiary)
400,000
Entry A
Equipment ...........................................................
Long-term Liabilities ..........................................
Goodwill .............................................................. acquisition-date fair values)
20,000
30,000
50,000
Investment in Abernethy .............................. 100,000
(To recognize allocations determined above in connection with

18. (continued)
Entry I
Dividend Income ................................................
Dividends Paid ..............................................
10,000
10,000
(To eliminate intercompany dividend payments recorded by parent as income)
Entry E
Depreciation expense ........................................
Interest expense ..................................................
Equipment ......................................................
Long-term liabilities .......................................
(To record 2009 amortization expense)
4,000
7,500
4,000
7,500
Consolidation Entries as of December 31, 2010
Entry *C
Investment in Abernethy ....................................
Retained Earnings —1/1/10 (Chapman) .......
58,500
58,500
(To convert parent company figures to equity method by recognizing subsidiary's increase in book value for prior year [$80,000 net income less $10,000 dividend payment] and excess amortizations for that period [$11,500])
Entry S
Common Stock —Abernethy ..............................
Additional Paid-in Capital ..................................
Retained Earnings
—1/1/10 ................................
Investment in Abernethy ..............................
250,000
50,000
170,000
(To eliminate beginning of year stockholders' equity accounts of
470,000 subsidiary. The retained earnings balance has been adjusted for 2009 income and dividends)
Entry A
Equipment ...........................................................
Long-term Liabilities ..........................................
Goodwill ..............................................................
16,000
22,500
50,000
Investment in Abernethy .............................. 88,500
(To recognize allocations relating to investment
—balances shown here are as of the beginning of the current year [original allocation less excess amortizations for the prior period])
Entry I
Dividend Income ................................................ 30,000
Dividends Paid ......................................... 30,000
(To eliminate intercompany dividend payments recorded by parent as income)
Entry E
Same as Entry E for 2009

19. (20 Minutes) (Consolidation entries for two years. Parent uses partial equity method.)
Fair Value Allocation and Annual Excess Amortizations:
Abernethy fair value (consideration paid) .............. $520,000
Book value ................................................................
Excess fair value over book value (all goodwill) ...
Life assigned to goodwill ......................................... Indefinite
Annual excess amortizations ..................................
(400,000)
$120,000
-0-
Consolidation Entries as of December 31, 2009
Entry S
Common Stock
Additional Paid-in Capital ...................................
Retained Earnings
Investment in Abernethy ...............................
(To eliminate stockholders' equity accounts of subsidiary)
Entry A
—Abernethy ...............................
—Abernethy—1/1/09 ............
Goodwill ...............................................................
Investment in Abernethy ...............................
250,000
50,000
100,000
120,000
400,000
120,000
(To recognize goodwill portion of the original acquisition fair value)
Entry I
Equity in Earnings of Subsidiary ........................
Investment in Abernethy ...............................
80,000
80,000
(To eliminate intercompany income accrual for the current year based on the parent's usage of the partial equity method)
Entry D
Investment in Abernethy .....................................
Dividends Paid ...............................................
(To eliminate intercompany dividend transfers)
Entry E
Consolidation Entries as of December 31, 2010
Entry *C
Entry S
—Not needed. Goodwill is not amortized.
—Not needed. Goodwill is not amortized.
Common Stock —Abernethy ................................
Additional Paid-in Capital
Retained Earnings
—Abernethy ..............
—Abernethy—1/1/10 ............
Investment in Abernethy ...............................
10,000
250,000
50,000
170,000
10,000
470,000

19. (continued)
(To eliminate beginning of year stockholders' equity accounts of subsidiary —the retained earnings balance has been adjusted for 2009
Income and dividends.)
Entry A
Goodwill ............................................................... 120,000
Investment in Abernethy ...............................
(To recognize original goodwill balance.)
120,000
Entry I
Equity in Earnings of Subsidiary ........................ 110,000
Investment in Abernethy ...............................
(To eliminate Intercompany Income accrual for the current year.)
110,000
Entry D
Investment in Abernethy .....................................
Correction note: To solve part d. of this problem, it must be assumed that
Jefferson had identical income in 2009 and 2010.
30,000
Dividends Paid ...............................................
(To eliminate Intercompany dividend transfers.)
Equity E
—not needed
30,000
20. (45 Minutes) (Variety of questions about the three methods of recording an
Investment in a subsidiary for internal reporting purposes.) a. Purchase Price Allocation and Annual Amortization:
Hamilton’s acquisition-date fair value ..... $510,000
Book value (assets minus liabilities or stockholders' equity) ...................... 450,000
Fair value in excess of book value ..........
Excess
60,000 Annual
Allocation to equipment based on Life Amortizations difference between fair value and book value .................................................
Goodwill .....................................................
Total ..........................................................
50,000 5 yrs. $10,000
$10,000 indefinite -0-
$10,000
EQUITY METHOD
Investment Income —2010:
Equity accrual (based on Hamilton's income)
Amortization (above) .....................................................
$60,000
(10,000)

Total ................................................................................. $50,000

20. (continued)
Investment in Hamilton
—December 31, 2010:
Consideration transferred for Hamilton .......................
2009:
Equity accrual (based on Hamilton's Income) .......
Excess amortizations (above) .................................
Dividends received ...................................................
$510,000
55,000
(10,000)
(5,000)
2010:
Equity accrual ...........................................................
Excess amortizations ...............................................
60,000
(10,000)
Dividends received ................................................... -0-
Total ................................................................................ $600,000
PARTIAL EQUITY METHOD
Investment Income
—2010:
Equity accrual ................................................................
Investment in Hamilton
—December 31, 2010:
Consideration transferred for Hamilton .......................
2009:
$60,000
$510,000
Equity accrual (based on Hamilton's Income) .......
Dividends received ...................................................
2010:
Equity accrual ...........................................................
55,000
(5,000)
60,000
Dividends received ................................................... -0-
Total ........................................................................... $620,000
INITIAL VALUE METHOD
Investment Income —2010:
Dividend Income (none indicated) ...............................
Investment in Hamilton
—December 31, 2010:
Consideration transferred for Hamilton .......................
0 -
$510,000 b. The consolidated account balances are not affected by the method of recording used by the parent. Thus, consolidated Expenses ($480,000 or $290,000 + $180,000 + amortizations of $10,000) are the same regardless of whether the equity method, the partial equity method, or the initial value method is applied by Jefferson.

20. (continued) c. The consolidated account balances are not affected by the method of recording used by the parent. Thus, consolidated Equipment ($970,000 or $520,000 + $420,000 + allocation of $50,000 – two years of excess depreciation of $20,000) is the same regardless of whether the equity method, the partial equity method, or the initial value method is applied by Jefferson. d. Correction note: To solve part d. of this problem, it must be assumed that Jefferson had identical income in 2009 and 2010.
Jefferson Retained Earnings —Equity Method
Jefferson Retained Earnings —1/1/09 .................................
Jefferson income 2009 (400,000
– 290,000) .......................
$860,000
2009 equity accrual for Hamilton income ..........................
110,000
55,000
2009 excess amortization .................................................... (10,000)
Jefferson Retained Earnings —1/1/10 ................................. $1,015,000
Jefferson Retained Earnings
—Partial Equity Method
Jefferson Retained Earnings —1/1/09 .................................
Jefferson income 2009 (400,000 – 290,000) .......................
2009 equity accrual for Hamilton income ..........................
Jefferson Retained Earnings —1/1/10 .................................
Jefferson Retained Earnings —Initial value method
$860,000
110,000
55,000
$1,025,000
Jefferson Retained Earnings
—1/1/09 .................................
Jefferson income 2009 (400,000 – 290,000) .......................
2009 dividend income from Hamilton .................................
Jefferson Retained Earnings —1/1/10 .................................
$860,000
110,000
5,000
$975,000

20. (continued) e. EQUITY METHOD —Entry *C is not utilized since parent's retained earnings balance is correct.
PARTIAL EQUITY METHOD —Entry *C is needed to record amortization for prior year.
Retained earnings, 1/1/10 (parent) ..................... 10,000
Investment in Hamilton ................................. 10,000
INITIAL VALUE METHOD —Entry *C is needed to record increase in subsidiary's book value ($50,000) and amortization ($10,000) for prior year.
Investment in Hamilton .......................................
Retained earnings, 1/1/10 (parent) ...............
40,000
40,000 f. Entry S is not affected by the method used by the parent to record the
Investment in Hamilton. Under each of these three methods, the following Entry S would be appropriate for 2010:
Common stock (Hamilton) ............................
Retained earnings, 1/1/10 (Hamilton) ............
Investment in Hamilton ............................
150,000
350,000
500,000 g. Consolidated revenues (add the two book values)
Consolidated expenses (add the two book values
$640,000
(480,000)
$160,000 and excess amortizations) ............................
Consolidated net income ...................................
21. (15 Minutes) (Consolidated accounts one year after acquisition)
Stanza acquisition fair value ($10,000 in stock issue costs reduce additional paid-in capital) .................... $680,000
Book value of subsidiary
(1/1/10 stockholders' equity balances) .....
Fair value in excess of book value ..........
Excess fair value allocated to copyrights
(480,000)
$200,000
Annual
Excess
Life Amortizations based on fair value ..............................
Goodwill .....................................................
Total ......................................................
120,0006 yrs. $20,000
$80,000 indefinite -0-
$20,000 a. Consolidated copyrights
Penske (book value) ......................................
Stanza (book value) .......................................
$900,000
400,000
Allocation (above) .......................................... 120,000
Excess amortizations, 2010 .......................... (20,000)
Total ........................................................... $1,400,000

21. (continued) b. Consolidated net income, 2010
Revenues (add book values) ........................
Expenses:
Add book values .......................................
Excess amortizations ...............................
Consolidated net income ............................... c. Consolidated retained earnings, 12/31/10
Retained earnings 1/1/10 (Penske) ...............
Net income 2010 (above) ...............................
Dividends paid 2010 (Penske) ......................
$1,100,000
$700,000
20,000 720,000
$380,000
Total ...........................................................
$600,000
380,000
(80,000)
$900,000
Stanza's retained earnings balance as of January 1, 2010, is not included because these operations occurred prior to the purchase. Stanza's dividends were paid to Penske and therefore are excluded because they are intercompany in nature. d. Consolidated goodwill, 12/31/10
Allocation (above) .......................................... $80,000
22. (30 Minutes) (Consolidated balances three years after the date of acquisition. Includes questions about parent's method of recording investment for internal reporting purposes.) a. Acquisition-Date Fair Value Allocation and Amortization:
Consideration transferred 1/1/09 ............. $600,000
Book value (given) ....................................
Fair value in excess of book value .....
Allocation to equipment based on
(470,000)
130,000
Annual
Excess
Life Amortizations difference in fair value and book value ............................................
Goodwill .....................................................
Total ......................................................
90,000 10 yrs. $9,000
$40,000 indefinite 0 -
$9,000
CONSOLIDATED BALANCES
 Depreciation expense = $659,000 (book values plus $9,000 excess depreciation)
 Dividends Paid = $120,000 (parent balance only. Subsidiary's dividends are eliminated as intercompany transfer)
 Revenues = $1,400,000 (add book values)
 Equipment = $1,563,000 (add book values plus $90,000 allocation less three years of excess depreciation [$27,000])

22. (continued)

Buildings = $1,200,000 (add book values)
 Goodwill = $40,000 (original residual allocation)
 Common Stock = $900,000 (parent balance only) b. The parent's choice of an investment method has no impact on the consolidated totals. The choice of an investment method only affects the internal reporting of the parent. c. The initial value method is used. The parent's Investment in Subsidiary account still retains the original consideration transferred of $600,000.
In addition, the Investment Income account equals the amount of dividends paid by the subsidiary. d. If the partial equity method had been utilized, the investment income account would have shown an equity accrual of $100,000. If the equity method had been applied, the Investment Income account would have included both the equity accrual of $100,000 and excess amortizations of $9,000 for a balance of $91,000. e. Initial Value Method
—Foxx’s Retained Earnings—1/1/11
Foxx’s 1/1/11 balance (initial value method was employed)
$1,100,000
Partial Equity Method —Foxx’s Retained Earnings—1/1/11
Foxx’s 1/1/11 balance (initial value method) .....................
2009 net equity accrual for Greenburg (90,000
– 20,000) .
2010 net equity accrual for Greenburg (100,000
– 20,000)
Foxx’s 1/1/11 Retained Earnings ........................................
$1,100,000
70,000
80,000
$1,250,000
Equity Method —Foxx’s Retained Earnings—1/1/11
Foxx’s 1/1/11 balance (initial value method) .....................
2009 net equity accrual for Greenburg (90,000
– 20,000) .
2009 excess fair over book value amortization .................
2010 net equity accrual for Greenburg (100,000 – 20,000)
2010 excess fair over book value amortization .................
Foxx’s 1/1/11 Retained Earnings ........................................
(9,000)
$1,232,000
23. (50 Minutes) (Consolidated totals for a purchase. Worksheet is produced as a separate requirement.)
$1,100,000
70,000
(9,000)
80,000 a. O’Brien acquisition-date fair value ....................
O’Brien book value .............................................
Fair value in excess of book value ....................
$550,000
(350,000)
$200,000

23. (continued)
Excess assigned to specific accounts based on fair value Life
Annual
Excess
Amortizations
Trademarks .............................. 100,000indefinite -0-
Customer relationships ...........
Equipment ................................
Goodwill ...................................
Total ..........................................
75,000 5 yrs.
(30,000) 10 yrs.
$15,000
(3,000)
55,000 indefinite -0-
$200,000 $12,000
If the partial equity method were in use, the Income of
O’Brien account would have had a balance of $222,000 (100% of O’Brien's reported income for the period). If the initial value method were in use, the Income of O’Brien account would have had a balance of $80,000 (100% of the dividends paid by
O’Brien).
Thus, the equity method must be in use. The Income of
O’Brien balance is an equity accrual of $222,000 (100% of O’Brien’s reported income) less excess amortizations of $12,000 (as computed above). b. Students can develop consolidated figures conceptually, without relying on a worksheet or consolidation entries. Thus, part b. asks students to determine independently each balance to be reported by the business combination.
 Revenues = $1,645,000 (the accounts of both companies combined)

Cost of Goods Sold = 528,000 (the accounts of both companies combined)
 Amortization Expense = $40,000 (the accounts of both companies and the acquisition-related adjustment of $15,000)
 Depreciation Expense = $142,000 (the accounts for both companies and the acquisition-related depreciation adjustment of $3,000)
 Income of O’Brien = $0 (the balance reported by the parent is removed and replaced with the subsidiary’s individual revenue and expense accounts)
 Net Income = 935,000 (consolidated revenues less expenses)

Retained Earnings, 1/1 = $700,000 (only the parent's retained earnings figure is included)
 Dividends Paid = $142,000 (the subsidiary's dividends were paid to the parent and, thus, as an intercompany transfer are eliminated)

Retained Earnings, 12/31 = $1,493,000 (the beginning balance for the parent plus consolidated net income less consolidated [parent] dividends)
 Cash = $290,000 (the accounts of both companies are added together)
 Receivables = $281,000 (the accounts of both companies are combined)

Inventory = $310,000 (the accounts of both companies are combined)

23. (continued)
 Investment in
O’Brien = $0 (the parent’s balance is removed and replaced with the subsidiary’s individual asset and liability accounts)
 Trademarks = $634,000 (the accounts of both companies are added together plus the 100,000 fair value adjustment)
 Customer relationships = $60,000 (the initial $75,000 fair value adjustment less $15,000 amortization expense)
 Equipment = $1,170,000 ( both company’s balances less the $30,000 fair value adjustment net of $3,000 in depreciation expense reduction)
 Goodwill = $55,000 (the original allocation)
 Total Assets = $2,800,000 (summation of consolidated balances)
 Liabilities = $907,000 (the accounts of both companies are combined)

Common Stock = $400,000 (parent balance only)
 Retained Earnings, 12/31 = $1,493,000 (computed above)
 Total Liabilities and Equities = 2,800,000 (summation of consolidated balances)

23. (Continued) c.
Accounts
Revenues
Cost of goods sold
Depreciation expense
Amortization expense
Income of O’Brien
Net income
Retained earnings, 1/1
Net income (above)
Dividends paid
Retained earnings, 12/31
Cash
Receivables
Inventory
Investment in O’Brien
Trademarks
Customer relationships
Equipment (net)
Goodwill
Total assets
Liabilities
Common stock
Retained earnings (above)
Total liabilities and equity
PATRICK COMPANY AND CONSOLIDATED SUBSIDIARY
Consolidation Worksheet
Patrick
For Year Ending December 31
Consolidation Entries
O’Brien
$(1,125,000) $(520,000)
300,000 228,000
75,000
25,000
70,000
-0-
Debit
(E) 15,000
Credit
(E) 3,000
(210,000) -0-
$(935,000) $(222,000)
(I) 210,000
$(700,000)
(935,000)
$(250,000) (S)250,000
(222,000)
142,000 80,000
$(1,493,000) $(392,000)
(D) 80,000
$185,000
225,000
175,000
680,000
$105,000
56,000
135,000
(D) 80,000 (S) 350,000
(A) 200,000
474,000
-0-
60,000 (A) 100,000
-0- (A) 75,000
(I) 210,000
(E) 15,000
925,000 272,000 (E) 3,000
-0- -0- (A) 55,000
$2,664,000 $628,000
(A) 30,000
$(771,000)
(400,000)
$(136,000)
(100,000) (S)100,000
(1,493,000) (392,000)
$(2,664,000) $(628,000)
Consolidated
Totals
$(1,645,000)
528,000
142,000
40,000
-0-
$(935,000)
$(700,000)
(935,000)
142,000
$(1,493,000)
$290,000
281,000
310,000
-0-
634,000
60,000
1,170,000
55,000
$2,800,000
$(907,000)
(400,000)
(1,493,000))
$(2,800,000)

24. (60 Minutes) (Consolidation worksheet five years after acquisition with parent using initial value method. Effects of using equity method also included)
Acquisition-Date Fair Value Allocation and Annual Amortization: a. Aaron fair value (stock exchanged at fair value) .......................................
Book value of subsidiary .......................
Excess fair value over book value ........
Excess assigned to specific accounts based on fair values
Royalty agreements
Trademark
Total
$470,000
(360,000)
$110,000
Annual Excess
Life Amortizations
$60,000 6 yrs. $10,000
50,000 10 yrs.
$110,000
5,000
$15,000
The parent company is apparently applying the initial value method: only dividend income is recognized during the current year and the investment account retains its original $470,000 balance. Therefore, both the subsidiary's change in retained earnings during 2009 –2012 as well as the amortization for that period must be brought into the consolidation.
Aaron' retained earnings January 1, 2013 ........................
Retained earnings at date of purchase .............................
Increase since date of purchase ........................................
Excess amortization expenses ($15,000 x 4 years) .........
$490,000
(230,000)
$260,000
(60,000)
Conversion to equity method for years prior to 2013
(Entry *C) ...................................................................
Explanation of Consolidation Entries Found on Worksheet
$200,000
Entry*C: Converts 1/1/13 figures from initial value method to equity method as per computation above.
Entry S: Eliminates stockholders' equity accounts of subsidiary as of the beginning of current year.
Entry A: Recognizes allocations to royalty agreements and trademark.
This entry establishes unamortized balances as of the beginning of the current year.
Entry I: Eliminates intercompany dividends.
Entry E: Records excess amortization expenses for the current year.
See next page for worksheet.

24. a. (continued)
MICHAEL COMPANY AND CONSOLIDATED SUBSIDIARY
Consolidation Worksheet
Revenues
Accounts
Cost of goods sold
Amortization expense
Dividend income
Net income
Retained earnings 1/1
Net income (above)
Dividends paid
Retained earnings 12/31
Cash
Receivables
Inventory
Investment in Aaron Co.
Copyrights
Royalty agreements
Trademark
Total assets
Liabilities
Preferred stock
Common stock
Additional paid-in capital
Retained earnings 12/31
Total liabilities and equity
Parentheses indicate a credit balance.
For Year Ending December 31, 2013
Michael
$(610,000)
Consolidation Entries
Aaron Debit Credit
$(370,000)
270,000
115,000
140,000
80,000 (E) 15,000
(5,000) -0- (I) 5,000
$(230,000) $(150,000)
$(880,000)
(230,000)
90,000
(490,000)(S) 490,000
(150,000)
5,000
$(1,020,000) $(635,000)
(*C) 200,000
(I) 5,000
$110,000
380,000
560,000
470,000
460,000
920,000
0 -
$2,900,000
$15,000
220,000
280,000
0 (*C) 200,000 (S) 620,000
(A) 50,000
340,000
380,000 (A) 20,000
0 (A) 30,000
$1,235,000
(E) 10,000
(E) 5,000
$(780,000)
(300,000)
$(470,000)
0 -
(500,000)
(300,000)
(100,000)(S) 100,000
(30,000)(S) 30,000
(1,020,000) (635,000)
$(2,900,000) $(1,235,000)
Consolidated
Totals
$(980,000)
410,000
210,000
0 -
$(360,000)
$(1,080,000)
0 -
(360,000)
90,000
$(1,350,000)
$125,000
600,000
840,000
0 -
800,000
1,310,000
25,000
$3,700,000
$(1,250,000)
(300,000)
(500,000)
(300,000)
(1,350,000)
$(3,700,000)

24. (continued) b. If the equity method had been applied by Michael, three figures on that company's financial records would be different: Equity in Earnings of
Aaron, Retained Earnings —1/1/13, and Investment in Aaron Co.
Equity in Earnings of Aaron: $135,000 (the parent would accrue 100% of
Aaron's $150,000 income but must also recognize $15,000 in amortization expense.)
Retained Earnings, 1/1/13: $1,080,000 (increases by $200,000 —the parent would have recognized the $260,000 increment in the subsidiary's book value during previous years as well as $60,000 in excess amortization expenses for these same four years [see Part a.])
Investment in Aaron: $800,000 (increases by $330,000 —the parent would have recognized the $260,000 increment in the subsidiary's book value during previous years as well as $60,000 in excess amortization expenses for these same four years [see Part a.]. In the current year, income of $135,000 would have been recognized [see above] along with a reduction of $5,000 for dividends received). c. No Entry *C is needed on the worksheet if the equity method is applied.
Both the investment account as well as beginning retained earnings would be stated appropriately.
Entry I would have been used to eliminate the $135,000 Equity in
Earnings of Aaron from the parent's income statement and from the
Investment in Aaron Co. account.
Entry D would eliminate the $5,000 current year dividend from Dividends
Paid and the Investment in Aaron account balances. d. Consolidated figures are not affected by the investment method used by the parent. The parent company balances would differ and changes would be required in the worksheet entries. However, the figures to be reported do not depend on the parent's selection of a method.

25. (65 Minutes) (Consolidated totals and worksheet five years after acquisition. Parent uses equity method. Includes goodwill impairment.) a. Acquisition-date fair value allocations (given) Life
Land
Equipment
Goodwill
$90,000
50,000
60,000
--
10 yrs. indefinite
Excess
Amortizations
--
$5,000
0
Total $200,000 $5,000
The problem states that the equity method is in use. Thus, the $135,000
"Equity in Income of Small" would be comprised of a $140,000 equity accrual (100% of the subsidiary's reported earnings) less $5,000 in amortization expense computed above. b.
 Revenues = $1,535,000 (both balances are added together)

Cost of Goods Sold = $640,000 (both balances are added)
 Depreciation Expense = $307,000 (both balances are added along with excess equipment depreciation)
 Equity in Income of Small = $0 (the parent's income balance is removed and replaced with Small's individual revenue and expense accounts)

Net Income = $588,000 (consolidated expenses are subtracted from consolidated revenues)
 Retained Earnings, 1/1/13 = $1,417,000 (the parent ’s balance)

Dividends Paid = $310,000 (the parent number alone because the subsidiary's dividends are intercompany, paid to Giant)
 Retained Earnings, 12/31/13 = $1,695,000 (the parent’s balance at beginning of the year plus consolidated net income less consolidated dividends paid)

Current Assets = $706,000 (both book balances are added together while the $10,000 intercompany receivable is eliminated)
 Investment in Small = $0 (the parent's asset is removed so that Small's individual asset and liability accounts can be brought into the consolidation)
 Land = $695,000 (both book balances are added together along with the purchase price allocation of $90,000)
 Buildings = $723,000 (both book balances are added together)

Equipment = $959,000 (both book balances are added plus the unamortized portion of the purchase price allocation [$50,000 less
$25,000 after 5 years of excess depreciation])

25. b. (continued)

Goodwill = $60,000 (represents the original price allocation)
 Total Assets = $3,143,000 (summation of all consolidated assets)
 Liabilities = $1,198,000 (both balances are added together while the
$10,000 intercompany payable is eliminated)

Common Stock = $250,000 (parent balance only)
 Retained Earnings, 12/31/13 = $1,695,000 (see above)
 Total Liabilities and Equity = $3,143,000 (summation of all consolidated liabilities and equity) a. Worksheet is presented on following page. b. If all goodwill from the Small investment was determined to be impaired,
Giant would make the following journal entry on its books:
Goodwill impairment loss
Investment in Small
60,000
60,000
After this entry, the worksheet process would no longer require an adjustment in Entry (A) to recognize goodwill. The impairment loss would simply carry over to the consolidated income column. The impairment loss would be reported as a separate line item in the operating section of the consolidated income statement.

25. c. (continued)
GIANT COMPANY AND SMALL COMPANY
Consolidation Worksheet
For Year Ending December 31, 2013
Consolidation Entries Consolidated
Accounts
Revenues ............................................................
Cost of goods sold ............................................
Depreciation expense ........................................
Equity income of Small......................................
Net income ....................................................
Giant
550,000
172,000
Small
(1,175,000) (360,000)
Debit
90,000
130,000 (E) 5,000
(135,000) -0- (I) 135,000
(588,000) (140,000)
Credit Totals
(1,535,000)
640,000
307,000
-0-
(588,000)
(1,417,000) (620,000)(S) 620,000
(588,000) (140,000)
310,000 110,000
(1,695,000) (650,000)
(D) 110,000
(1,417,000)
(588,000)
310,000
(1,695,000)
Retained earnings 1/1 ........................................
Net income (above) ............................................
Dividends paid ...................................................
Retained earnings 12/31 ..............................
Current assets ....................................................
Investment in Small ...........................................
Land .................................................................
Buildings (net) ....................................................
Equipment (net) .................................................
Goodwill .............................................................
Total assets ..................................................
Liabilities ............................................................
Common stock ...................................................
Retained earnings (above) ................................
Total liabilities and equity ...........................
Parentheses indicate a credit balance.
398,000 318,000 (P) 10,000
995,000
440,000
304,000
-0- (D) 110,000
165,000 (A) 90,000
419,000
(S) 790,000
(A) 180,000
(I) 135,000
648,000 286,000 (A) 30,000 (E) 5,000
-0- -0- (A) 60,000
2,785,000 1,188,000
(840,000)
(250,000)
(368,000)(P) 10,000
(170,000)(S)170,000
(1,695,000) (650,000)
(2,785,000) (1,188,000)
706,000
-0-
695,000
723,000
959,000
60,000
3,143,000
(1,198,000)
(250,000)
(1,695,000)
(3,143,000)

26. (30 Minutes) (Determine consolidated accounts and consolidation entries five years after purchase. Parent applies equity method.) a. Fair Value Allocation and Annual Amortization
Land .....................................
Buildings ..............................
Allocation
$20,000
Life Amortizations
(30,000) 10 yrs.
Annual Excess
$(3,000)
Equipment ............................
Customer List ......................
Total .....................................
60,000 5 yrs.
100,000 20 yrs.
12,000
5,000
$14,000
CONSOLIDATED TOTALS

Revenues = $850,000 (add the two book values)
 Cost of Goods Sold = $380,000 (the accounts of both companies are added together)
 Depreciation Expense = $179,000 (the accounts are added and include the excess depreciation adjustment of $9,000)

Amortization Expense = $5,000 (current amortization for customer list recognized in acquisition)
 Buildings (net) = $625,000 (add the two book values less the purchase price allocation [a $30,000 reduction] after removing 5 years of amortization totaling $15,000)
 Equipment (net) = $450,000 (add the two book values. The purchase price allocation is completely amortized at end of current year)
 Customer List = $75,000 ($100,000 original allocation less $25,000 [5 years of amortization])
 Common stock = $300,000 (parent company balance only)
 Additional paid-in capital = $50,000 (parent company balance only) b. The method used by the parent is only important in determining the parent's separate account balances (which are given here or are not needed) or consolidation worksheet entries (which are not required in a.)

26. (continued) c. Consolidation Entry S
Common Stock (Hill) ............................
Additional paid-in capital (Hill) ...........
Retained Earnings 1/1 .........................
Investment in Hill ............................
40,000
160,000
600,000
(To eliminate beginning stockholders' equity of subsidiary)
Consolidation Entry A
Land ......................................................
Equipment (net) ...................................
20,000
12,000
800,000
Customer List (net) ..............................
Buildings (net) ................................
Investment in Hill ............................
80,000
18,000
94,000
(To record unamortized allocation balances as of beginning of current year)
Consolidation Entry I
Investment Income .............................. 86,000
Investment in Hill ............................ 86,000
(To remove equity income recognized during year
—equity method accrual of $100,000 [based on subsidiary's income] less amortization of $14,000 for the year)
Consolidation Entry D
Investment in Hill .................................
Dividends Paid ................................
(To remove Intercompany dividend payments)
Consolidation Entry E
Amortization expense ...........................
40,000
5,000
40,000
Depreciation expense ...........................
Buildings ..............................................
Equipment ........................................
Customer List ..................................
9,000
3,000
12,000
5,000
(To recognize excess acquisition-date fair-value amortizations for
the period)

27. (30 Minutes) (Determine parent company and consolidated account balances for a bargain purchase combination. Parent applies equity method) a. Acquisition-Date Fair Value Allocation and Annual Excess Amortization
Consideration transferred ............ $1,090,000
Santiago book value (given) .......... $950,000
Technology undervaluation (6 yr. life)
Acquisition fair value of net assets
Gain on bargain purchase ..............
240,000
1,190,000
$(100,000)
Santiago income ..............................
Technology amortization ................
Equity earnings in Santiago ...........
$(200,000)
40,000
$(160,000)
Fair value of net assets at acquisition-date
Equity earnings from Santiago .......
Dividends received ..........................
$1,190,000
160,000
(50,000)
Investment in Santiago 12/31/09 .... $1,300,000
Because a bargain purchase occurred, Santiago’s net asset fair value replaces the fair value of the consideration transferred as the initial value assigned to the subsidiary on Peterson’s books.

c.
Income Statement
Gain on bargain purchase
Depreciation and amortization
Statement of Retained
Earnings
Balance Sheet
Trademarks
Patented technology
Peterson
(100,000)
125,000
100,000
300,000
Santiago
(495,000)
155,000
-0-
Adj. & Elim. Consolidated
(1,030,000)
325,000
(100,000)
140,000 (E) 40,000
-0- (I) 160,000
(200,000)
305,000
-0-
(500,000)
(650,000) (S) 650,000
(200,000)
50,000 (D) 50,000
(800,000)
300,000
-0- (D) 50,000 (I) 160,000
(S) 950,000
200,000
(A) 240,000
400,000 (A) 240,000 (E) 40,000
300,000
1,200,000
(100,000)
(300,000) (S) 300,000
(800,000)
(1,200,000) 1,440,000 1,440,000
(1,500,000)
(500,000)
200,000
(1,800,000)
490,000
-0-
300,000
900,000
910,000
2,600,000
(265,000)
(535,000)
(1,800,000)
(2,600,000)

b.
28. (35 minutes) (Acquisition method: Contingent performance obligation and worksheet adjustments for equity and initial value methods.) a. Investment in Wolfpack, Inc.
Contingent performance obligation
500,000
35,000
Cash 465,000
12/31/09 Loss from increase in contingent performance obligation 5,000
Contingent performance obligation 5,000
12/31/10 Loss from increase in contingent performance obligation 10,000
10,000 Contingent performance obligation
12/31/10 Contingent performance obligation
Cash
50,000
50,000 c. Equity Method
Common stock- Wolfpack
Retained earnings-Wolfpack
Investment in Wolfpack
Royalty agreements
Goodwill
Investment in Wolfpack
Equity earnings of Wolfpack
Investment in Wolfpack
Investment in Wolfpack
Dividends paid
Amortization expense
Royalty agreements d. Initial Value Method
Investment in Wolfpack
Retained earnings-Branson
Common stock
Retained earnings-Wolfpack
Investment in Wolfpack
200,000
180,000
90,000
60,000
65,000
35,000
10,000
30,000
200,000
180,000
380,000
150,000
65,000
35,000
10,000
30,000
380,000

28. (continued)
Royalty agreements
Goodwill
Investment in Wolfpack
90,000
60,000
150,000
Dividend income
Dividends paid
35,000
35,000
Amortization expense
Royalty agreements
10,000
10,000
29. (45 Minutes) (Prepare consolidation worksheet five years after purchase.
Parent applies equity method. Includes question on push-down accounting.) a. Allocation of Acquisition-Date Fair Value and Determination of
Amortization:
Storm’s acquisition-date fair value ....................
Book value of Storm (acquisition date) .............
$140,000
(105,000)
Fair value in excess of book value ....................
Excess assigned to specific accounts:
Land ...........................................
Equipment .................................
$35,000
Annual Excess
$10,000
Life Amortizations
– –
5,000 5 yrs. $1,000
Formula ...................................... 20,000 20 yrs. 1,000
Total ................................................ $35,000 $2,000
The equity in subsidiary earnings account reflects the equity method.
The initial value method would have recorded $40,000 (100% of dividend payments) as income while the partial equity method would have shown
$68,000 (100% of the subsidiary's income). Under the equity method, an income accrual of $66,000 is recognized (100% of reported income less the $2,000 in excess amortization expenses computed above). b. Explanation of Consolidation Entries Found on Worksheet
Entry S —Eliminates stockholders' equity accounts of the subsidiary as of the beginning of the current year.
Entry A —Records remaining unamortized allocation from acquisitiondate fair value adjustments. As of the beginning of the current year, equipment and formula have undergone four years of amortization.
Entry I —Eliminates intercompany income accrual for the current year.
Entry D —Eliminates intercompany dividend transfers.
Entry E
—Recognizes excess amortization expenses for current year.

29. (continued) Palm and Subsidiary Consolidated Worksheet for year ended December 31, 2013
Accounts
Income Statement
Revenues ..........................................................
Cost of goods sold ..........................................
Depreciation expense ......................................
Amortization expense ......................................
Equity in subsidiary earnings .........................
Net income ..................................................
Statement of Retained Earnings
Retained earnings 1/1 ......................................
Net income (above) ..........................................
Dividends paid .................................................
Retained earnings 12/31 ............................
Balance Sheet
Current assets ..................................................
Investment in Storm Co. ..................................
Land ...............................................................
Buildings and equipment (net) .......................
Formula ............................................................
Total assets ................................................
Current liabilities .............................................
Long-term liabilities .........................................
Common stock .................................................
Additional paid-in capital ................................
Retained earnings 12/31 ..................................
Total liabilities and equity .........................
Parentheses indicate a credit balance.
Consolidation Entries Consolidated
Palm Co. Storm Co. Debit Credit Totals
(485,000)
160,000
130,000
(190,000)
70,000
52,000(E) 1,000
-0- -0- (E) 1,000
(66,000) -0- (I) 66,000
(261,000) (68,000)
(659,000)
(261,000)
175,500
(744,500)
(98,000)(S) 98,000
(68,000)
40,000
(126,000)
(D) 40,000
268,000
216,000
75,000
-0- (D) 40,000 (S) 163,000
(A) 27,000
(I) 66,000
427,500 58,000(A) 10,000
713,000
-0-
161,000(A) 1,000 (E) 1,000
-0- (A) 16,000 (E) 1,000
1,624,500 294,000
(110,000)
(80,000)
(600,000)
(19,000)
(84,000)
(60,000)(S) 60,000
(90,000) (5,000)(S) 5,000
(744,500) (126,000)
(1,624,500) (294,000)
(675,000)
230,000
183,000
1,000
-0-
(261,000)
(659,000)
(261,000)
175,500
(744,500)
343,000
-0-
495,500
874,000
15,000
1,727,500
(129,000)
(164,000)
(600,000)
(90,000)
(744,500)
(1,727,500)

29. (continued) c. If push-down accounting had been applied, the purchase price allocations to land ($10,000), equipment ($5,000), and formula ($20,000) would have been entered into the subsidiary's balances with an offsetting $35,000 increase in additional paid-in capital. The equipment and the formula would then have been amortized by the subsidiary as annual expenses of $1,000 each. For 2013, the subsidiary's expenses would have been $2,000 higher leaving reported net income at $66,000.
At the end of 2013, land would still have been $10,000 higher because no amortization is recorded on that asset. Equipment would be no higher at this time since the $5,000 allocation is fully depreciated at the end of this fifth year. However, the secret formula would be recorded by the subsidiary as $15,000, the $20,000 allocation less five years of amortization at $1,000 per year.
30. (20 Minutes) (Consolidated balances three years after purchase. Parent has applied the equity method.) a. Schedule 1 —Acquisition-Date Fair Value Allocation and Amortization
Jasmine’s acquisition-date fair value $206,000
Book value of Jasmine .................. (140,000)
Fair value in excess of book value
Excess fair value assigned to specific
66,000 accounts based on individual fair values
2010 Excess amortizations (Schedule 1) .....................
2011 Increase in book value of subsidiary ..................
2011 Excess amortizations (Schedule 1) .....................
Investment in Jasmine Company ............................
Annual Excess
Life Amortization
Equipment .................................
Buildings (overvalued) .............
54,400 8 yrs.
(10,000) 20 yrs.
$6,800
(500)
Goodwill ....................................
Total ...........................................
Investment in Jasmine Company —12/31/11
$21,600 indefinite -0-
$6,300
Jasmine’s acquisition-date fair value ............................
$206,000
2009 Increase in book value of subsidiary ..................
2009 Excess amortizations (Schedule 1) .....................
2010 Increase in book value of subsidiary ..................
40,000
(6,300)
20,000
(6,300)
10,000
(6,300)
$257,100

30. (continued) b. Equity in Subsidiary Earnings
Income accrual ................................................................
Excess amortizations (Schedule 1) ..............................
Equity in subsidiary earnings .................................. c. Consolidated Net Income
Consolidated revenues (add book values) ..................
Consolidated expenses (add book values) ..................
Excess amortization expenses (Schedule 1) ...............
Consolidated net income .............................................. d. Consolidated Equipment
Book values added together .........................................
Allocation of purchase price .........................................
Excess depreciation ($6,800
×
3) ..................................
Consolidated equipment .......................................... e. Consolidated Buildings ..................................................
Book values added together .........................................
Allocation of purchase price .........................................
Excess depreciation ($500 × 3) .....................................
Consolidated buildings ............................................. f. Consolidated goodwill
$30,000
(6,300)
$23,700
$414,000
(272,000)
(6,300)
$135,700
$370,000
54,400
(20,400)
$404,000
$288,000
(10,000)
1,500
$279,500
Allocation of excess fair value to goodwill ................... g. Consolidated Common Stock ........................................
$21,600
$290,000
As a purchase, the parent's balance of $290,000 is used (the acquired company's common stock will be eliminated each year on the consolidation worksheet). h. Consolidated Retained Earnings ................................... $410,000
Tyler's balance of $410,000 is equal to the consolidated total because the equity method has been applied.
31. (35 minutes) (Consolidation with IPR&D, equity method) a. Consideration transferred 1/1/09
Increase in
Salsa’s RE to1/1/10
$1,765,000
In-process R&D write-off in 2009
Amortizations 2009
Income 2010
150,000
(44,000)
(7,000)
210,000
Dividends paid 2010
Amortization 2010
Investment balance 12/31/10
(25,000)
(7,000)
$2,042,000

31. (continued) b.
Accounts
Sales
Cost of Goods Sold
Depreciation Expense
Subsidiary Income
Net Income
Ret. Earnings 1/1/10
Net Income
Dividends Paid
Ret. Earnings 12/31/10
Cash
Accounts Receivable
Inventory
Investment in Salsa
Land
Equipment (net)
Goodwill
Total Assets
Accounts Payable
Long-term Debt
Common Stock —Picante
Common Stock —Salsa
Ret. Earnings 12/31/10
Picante and Subsidiary Salsa
Consolidated Worksheet for the year ended December 31, 2010
12/31/10
Picante
12/31/10
Salsa Adjustments Consolidated
(3,500,000) (1,000,000)
1,600,000 630,000
540,000
(203,000)
160,000 (E) 7,000
(I) 203,000
(1,563,000)
(3,000,000)
(1,563,000)
(210,000)
(800,000)
(210,000)
(S) 800,000
200,000
(4,363,000)
228,000
25,000
(985,000)
50,000
(D) 25,000
(4,500,000)
2,230,000
707,000
-0-
(1,563,000)
(3,000,000)
(1,563,000)
200,000
(4,363,000)
278,000
840,000
900,000
2,042,000
155,000
580,000
(D) 25,000 (S)1,800,000
(A) 64,000
3,500,000 700,000
(I) 203,000
5,000,000 1,700,000 (A) 49,000 (E) 7,000
290,000 -0- (A) 15,000
12,800,000
(193,000)
(3,094,000)
3,185,000
(400,000)
(800,000)
(5,150,000)
(1,000,000) (S)1,000,000
(4,363,000) (985,000)
(12,800,000) (3,185,000) 2,099,000
995,000
1,480,000
-0-
4,200,000
6,742,000
305,000
14,000,000
(593,000)
(3,894,000)
(5,150,000)
(4,363,000)
2,099,000 (14,000,000)

32. (55 minutes) (Goodwill impairment test, consolidated balances, and worksheet) a. Prine should compare follows:
Lydia’s total fair value to its carrying value, as
12/31 Carrying value (equity method balance)
12/31 Fair value
Excess carrying value over fair value
$120,070,000
110,000,000
$10,070,000
Because fair value is less than carrying value, Prine is required to further test whether goodwill is impaired. b. 12/31 Fair value for Lydia
Fair values of assets and liabilities
Cash
Receivables (net)
Movie library
$110,000,000
Broadcast licenses
Equipment
Current liabilities
Long-term debt
Total net fair value
Implied fair value for goodwill
Carrying value for goodwill
Impairment loss
$109,000
897,000
60,000,000
20,000,000
19,000,000
(650,000)
(6,250,000)
93,106,000
16,894,000
50,000,000
$33,106,000
Journal Entry by Prine:
Goodwill impairment loss
Investment in Lydia Co.
33,106,000
33,106,000 c. Combined revenues
Combined expenses (including excess amortization)
Income before impairment loss
Goodwill impairment loss —Lydia
Net loss d. Consolidated goodwill = $50,000,000 –
$30,000,000
22,200,000
7,800,000
(33,106,000)
$(25,306,000)
$33,106,000 = $16,894,000

32. (continued) e. Consolidated broadcast licenses = $350,000 + $14,014,000 = $14,364,000
The consolidated balance equals the sum of parent’s book value plus the fair value of the subsidiary broadcast licenses at acquisition date adjusted for any changes since acquisition. Because the subsidiary’s book value equaled fair value at acquisition date, no worksheet adjustment is needed. Because the broadcast licenses are considered to have indefinite lives, they are not amortized. Note that the 12/31 fair value, assessed for purposes of computing implied value for goodwill, is not used for financial reporting purposes.

32. f. (continued)
Entries Consolidated
Accounts
Revenues
Expenses
50,000
Equity in Lydia earnings
Impairment loss
Net income/loss
Retained Earnings 1/1
2,000,000
Dividends paid
Net income
Retained earnings 12/31
Cash
Receivables (net)
Investment in Lydia, Co.
Broadcast licenses
Movie library
Equipment (net)
500,000
Goodwill
Total assets
Current Liabilities
Long-term Debt
Common stock
(S)67,500,000
Retained earnings 12/31
Total liabilities and equity
Prine and Lydia
Consolidated Worksheet
December 31
Adjusting
Prine, Inc.
10,350,000
Lydia Co.
(18,000,000)
Debit
(12,000,000)
11,800,000(E)
(150,000)
22,200,000
-0- (I) 150,000
33,106,000 -0-
25,306,000 (200,000)
Credit
(52,000,000) (2,000,000) (S)
(52,000,000)
300,000 80,000
25,306,000 (200,000)
(26,394,000) (2,120,000)
(D) 80,000
260,000
210,000
86,964,000
350,000
365,000
136,000,000
109,000
897,000
-0- (D) 80,000 (S)69,500,000
14,014,000
45,000,000
17,500,000(A)
(E) 50,000
-0-
224,149,000
153,950,000
-0- (A)16,894,000
77,520,000
(A)17,394,000
(I) 150,000
(755,000)
(22,000,000)
(650,000)
(7,250,000)
(175,000,000) (67,500,000)
(175,000,000)
(26,394,000) (2,120,000)
(224,149,000) (77,520,000)
Totals
(30,000,000)
-0-
33,106,000
25,306,000
300,000
25,306,000
(26,394,000)
369,000
1,107,000
-0-
14,364,000
45,365,000
16,894,000
232,049,000
(1,405,000)
(29,250,000)
(26,394,000)
(232,049,000 )