CHAPTER 4
SOLUTIONS TO EXERCISES AND PROBLEMS
EXERCISES
E4.1
Equity Method Accounting
Calculation of Equity in Net Income:
Williams’ reported net income
Revaluation writeoffs:
Plant assets $50,000,000/25
Goodwill impairment loss
Equity in net income of Williams
Entries made by James during 2010:
Investment in Williams
Capital stock
Investment in Williams
$ 80,000,000
(2,000,000)
(25,000,000)
$ 53,000,000
450,000,000
450,000,000
53,000,000
Equity in net income of
Williams
Cash
53,000,000
24,000,000
Investment in Williams
E4.2
Equity Method Income and Working Paper Eliminations
(all amounts in millions)
a.
Investment balance, 1/1/11
Investment balance, 1/1/10 = $2,000 + $200
Change
2010 dividends
2010 equity income accrual
Writeoff of plant asset revaluation = ($160/10)
Saber’s 2010 net income
b.
c.
24,000,000
$2,286
2,200
86
60
146
16
$ 162
Saber’s stockholders’ equity, 1/1/10
2010 net income
2010 dividends
Saber’s stockholders’ equity, 1/1/11
$2,000
162
(60)
$2,102
Saber’s 2011 net income
Extra depreciation on revalued plant assets
Equity income accrual
$ 130
(16)
$ 114
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2010
65
d.
(C)
Equity income accrual
114
Dividends – Saber
Investment in Saber
40
74
(E)
Stockholders’ Equity –
Saber
2,102
Investment in Saber
2,102
(R)
Plant assets
Goodwill
160
40
Accumulated depreciation
Investment in Saber
16
184
(O)
Depreciation expense
16
Accumulated depreciation
e.
16
At the beginning of 2022, the plant assets are fully depreciated and the remaining balance
for goodwill is $40 - $30 = $10.
(R)
Plant assets
Goodwill
160
10
Accumulated depreciation
Investment in S
160
10
Entry (O) is not needed since no revaluations are written off in 2022.
E4.3
Consolidation at End of First Year
a.
The acquisition entry is as follows:
Investment in Saddlestone
Merger expenses
10,300,000
250,000
Capital stock
Contingent consideration
liability
Cash
Calculation of 2011 Equity in Net Income:
Saddlestone’s reported net income
Revaluation writeoff:
Identifiable intangibles $2,000,000/5
Equity in net income of Saddlestone
©Cambridge Business Publishers, 2010
66
10,000,000
300,000
250,000
$ 3,000,000
(400,000)
$ 2,600,000
Advanced Accounting, 1st Edition
Peak’s equity method entries for 2011:
Investment in Saddlestone
2,600,000
Equity in net income of
Saddlestone
Cash
2,600,000
1,000,000
Investment in Saddlestone
b.
1,000,000
Calculation of goodwill is as follows:
Acquisition cost
Book value of Saddlestone
Excess of acquisition cost over book value
Identifiable intangibles
Goodwill
$ 10,300,000
(7,200,000)
3,100,000
(2,000,000)
$ 1,100,000
Consolidation working paper eliminating entries for 2011:
(C)
Equity in net income of
Saddlestone
2,600,000
Dividends – Saddlestone
Investment in Saddlestone
(E)
Stockholders’ equity—
Saddlestone, 1/1
1,000,000
1,600,000
7,200,000
Investment in Saddlestone
(R)
Identifiable intangibles
Goodwill
7,200,000
2,000,000
1,100,000
Investment in Saddlestone
(O)
Amortization expense
400,000
Identifiable intangibles
Solutions Manual, Chapter 4
3,100,000
400,000
©Cambridge Business Publishers, 2010
67
E4.4
Eliminating Entries after First and Second Years
a.
Calculation of Equity in net income for 2012:
Safeco’s reported net income
Revaluation writeoffs:
Equipment $500,000/5
Inventory 90% x $200,000
Goodwill impairment loss
Equity in net income of Safeco
$ 1,600,000
(100,000)
(180,000)
(50,000)
$ 1,270,000
Peerless’s entries for 2012:
Investment in Safeco
8,000,000
Cash
8,000,000
Investment in Safeco
1,270,000
Equity in net income of
Safeco
1,270,000
Cash
600,000
Investment in Safeco
600,000
Calculation of goodwill is as follows:
Acquisition cost
Book value of Safeco
Excess of acquisition cost over book value
Fair value less book value:
Equipment
Inventory
Goodwill
$
$
500,000
200,000
8,000,000
(7,000,000)
1,000,000
(700,000)
$
300,000
Consolidation working paper eliminating entries for 2012:
(C)
Equity in net income of
Safeco
1,270,000
Dividends – Safeco
Investment in Safeco
(E)
Stockholders’ equity—Safeco,
1/1
600,000
670,000
7,000,000
Investment in Safeco
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68
7,000,000
Advanced Accounting, 1st Edition
(R)
Equipment, net
Inventory
Goodwill
500,000
200,000
300,000
Investment in Safeco
(O)
Depreciation expense
Cost of goods sold
Goodwill impairment loss
1,000,000
100,000
180,000
50,000
Equipment, net
Inventory
Goodwill
b.
100,000
180,000
50,000
Calculation of Equity in Net Income for 2013:
Safeco’s reported net income
Revaluation writeoffs:
Equipment $500,000/5
Inventory 10% x $200,000
Equity in net income of Safeco
$ 2,000,000
(100,000)
(20,000)
$ 1,880,000
Peerless’s equity method entries for 2013:
Investment in Safeco
1,880,000
Equity in net income of Safeco
Cash
1,880,000
800,000
Investment in Safeco
800,000
The Investment in Safeco balance at December 31, 2013 is $8,000,000 + 1,270,000 – 600,000 +
1,880,000 – 800,000 = $9,750,000.
Consolidation working paper eliminating entries for 2013:
(C)
Equity in net income of Safeco
1,880,000
Dividends – Safeco
Investment in Safeco
(E)
Stockholders’ equity—Safeco,
1/1
8,000,000
Investment in Safeco
Solutions Manual, Chapter 4
800,000
1,080,000
8,000,000
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69
Stockholders’ equity—Safeco at 1/1/2013 = $7,000,000 + 1,600,000 – 600,000 = $8,000,000
(R)
Equipment, net
Inventory
Goodwill
400,000
20,000
250,000
Investment in Safeco
(O)
Depreciation expense
Cost of goods sold
670,000
100,000
20,000
Equipment, net
Inventory
100,000
20,000
E4.5
Equity Method, Eliminating Entries, Several Years after Acquisition
a.
Calculation of total goodwill is as follows:
Acquisition cost
Book value of Brussels
Excess of acquisition cost over book value
Fair value less book value:
Land
Buildings
Identifiable intangibles
Long-term debt
Goodwill
b.
$
$
450,000
(400,000)
1,000,000
250,000
5,000,000
(2,000,000)
3,000,000
(1,300,000)
$ 1,700,000
Calculation of Equity in net income for 2010:
Brussels’ reported net income
Revaluation writeoffs:
Buildings $(400,000)/20
Long-term debt $250,000/10
Goodwill impairment loss
Equity in net income of Brussels
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70
$ 400,000
20,000
(25,000)
(50,000)
$ 345,000
Advanced Accounting, 1st Edition
c.
Calculation of Investment in Brussels, 12/31/10
Investment in Brussels, 1/1/02
Brussels’ reported income, 2002-2009
Brussels’ reported dividends, 2002-2009
Revaluation writeoffs, 2002-2009:
Buildings $[(400,000)/20] x 8
Identifiable intangibles (full balance)
Long-term debt $[250,000/10] x 8
Goodwill impairment loss
Investment in Brussels, 1/1/10
Equity in net income, 2010
Brussels’ dividends, 2010
Investment in Brussels, 12/31/10
d.
$ 5,000,000
3,500,000
(1,000,000)
160,000
(1,000,000)
(200,000)
(300,000)
6,160,000
345,000
(90,000)
$ 6,415,000
Consolidation working paper eliminating entries for 2010:
(C)
Equity in net income of Brussels
345,000
Dividends – Brussels
Investment in Brussels
90,000
255,000
(E)
Stockholders’ equity—Brussels, 1/1
4,500,000
Investment in Brussels
4,500,000
Stockholders’ equity, January 1, 2010 = $2,000,000 + 3,500,000 – 1,000,000 = $4,500,000.
(R)
Land
Long-term debt
Goodwill
450,000
50,000
1,400,000
Investment in Brussels
1,660,000
Buildings, net
240,000
Revaluations at January 1, 2010 = original revaluations less writeoffs for 2002-2009.
(O)
Interest expense
Buildings, net
Goodwill impairment loss
25,000
20,000
50,000
Long-term debt
Depreciation expense
Goodwill
Solutions Manual, Chapter 4
25,000
20,000
50,000
©Cambridge Business Publishers, 2010
71
E4.6
Consolidation after Several Years
Calculation of total goodwill is as follows:
Acquisition cost
Book value of Baker
Excess of acquisition cost over book value
Fair value less book value:
Buildings
Goodwill
$
7,500,000
(5,000,000)
2,500,000
(1,000,000)
$ 1,500,000
Calculation of Equity in Net Income for 2011:
Baker’s reported net income
Revaluation writeoffs:
Buildings $1,000,000/25
Goodwill impairment loss
Equity in net income of Baker
$
300,000
(40,000)
(100,000)
$
160,000
Calculation of Investment balance at December 31, 2011:
Investment in Baker, 12/31/04
Baker reported income, 2005-2010
Baker reported dividends, 2005-2010
Revaluation writeoffs, 2005-2010:
Buildings ($1,000,000/25) x 6
Investment in Baker, 1/1/11
Equity in net income, 2011
Dividends, 2011
Investment in Baker, 12/31/11
$ 7,500,000
1,300,000
(400,000)
(240,000)
8,160,000
160,000
(100,000)
$ 8,220,000
Consolidation working paper eliminating entries for 2011:
(C)
Equity in net income of Baker
160,000
Dividends – Baker
Investment in Baker
(E)
Stockholders’ equity—Baker, 1/1
100,000
60,000
5,900,000
Investment in Baker
5,900,000
Stockholders’ equity, January 1, 2011 = $5,000,000 + 1,300,000 – 400,000 = $5,900,000.
©Cambridge Business Publishers, 2010
72
Advanced Accounting, 1st Edition
(R)
Buildings, net
Goodwill
760,000
1,500,000
Investment in Baker
2,260,000
Revaluations at January 1, 2011 = original revaluations less writeoffs for 2005-2010.
(O)
Depreciation expense
Goodwill impairment loss
40,000
100,000
Buildings, net
Goodwill
E4.7
40,000
100,000
Goodwill Impairment Losses
a.
Goodwill is not a standalone asset, but represents the value of above-average future performance
potential that cannot be assigned to identifiable assets such as property or specific intangible
assets. Because performance potential is related to business operations, to measure impairments
in its value it must be connected with a specific business unit. In the case of Time Warner, as
discussed in the text of Chapter 4, goodwill is assigned to “Networks” as a business unit. The
WB Network is one part of this business unit, but does not comprise the entire unit.
b.
Goodwill impairment testing is accomplished in two steps. First, the fair value of the business
unit is compared with its book value. If book value exceeds fair value, we go on to the second
step to determine the amount of the impairment, if any. The second step compares the fair value
of the goodwill with its carrying value. An impairment loss is reported if its carrying value
exceeds its fair value.
Since The WB Network was shut down, its future performance potential will no longer benefit
Time Warner, and the impairment charge is appropriate.
c.
Time Warner has a 50% interest in The CW, so under U.S. GAAP it does not have a controlling
interest and reports its investment using the equity method. Time Warner’s equity in the net
income of The CW is reported as part of consolidated other income. The investment balance is
reported as part of consolidated assets. The CW’s individual assets, liabilities, revenues and
expenses are not reported on the consolidated financial statements.
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2010
73
E4.8
Projecting Consolidation Entries
a.
(R)
Land
Equipment, net
80,000
18,000
Investment in Samson
98,000
Inventory has been sold, and the equipment revaluation as of the start of the third year is $30,000
– (2 x 6,000) = $18,000.
(O)
Depreciation expense
6,000
Equipment, net
b.
(R)
Land
6,000
80,000
Investment in Samson
80,000
Inventory has been sold, and the equipment revaluation has been completely written off.
Therefore no eliminating entry (O) is appropriate.
c.
No eliminating entries are necessary to recognize or write off the revaluations, because the assets
requiring revaluation have been either sold or written off.
E4.9
Identifiable Intangibles and Goodwill, U.S. GAAP
Amortization expense for 2011:
Customer relationships
Favorable leaseholds
Total
$2,000,000/4
$6,000,000/5
$ 500,000
1,200,000
$1,700,000
Impairment testing – identifiable intangibles:
Customer relationships
Book value = $2,000,000 – 2 x ($2,000,000/4) = $1,000,000
Book value > Sum of undiscounted cash flows? $1,000,000 > $800,000: Yes
Impairment loss = $1,000,000 - $650,000 = $350,000
Favorable leaseholds
Book value = $6,000,000 – 1.5 x ($6,000,000/5) = $4,200,000
Book value > Sum of undiscounted cash flows? $4,200,000 < $4,500,000: No
©Cambridge Business Publishers, 2010
74
Advanced Accounting, 1st Edition
Brand names
Book value = $14,000,000
Book value > Sum of undiscounted cash flows? $14,000,000 > $12,000,000: Yes
Impairment loss = $14,000,000 - $10,000,000 = $4,000,000
Impairment testing – Goodwill:
Reporting Unit
Unit FV < BV?
Fair Value of GW
GW impairment loss
Asia
$400,000,000 > $300,000,000:
No
$350,000,000> $200,000,000:
No
$500,000,000< $600,000,000:
Yes
$500,000,000 – 325,000,000
= 175,000,000
$250,000,000 – 175,000,000 =
$75,000,000
South America
Europe
Summary:
Amortization expense – identifiable intangibles
Impairment losses – identifiable intangibles
Goodwill impairment loss
Total
$ 1,700,000
4,350,000
75,000,000
$ 81,050,000
E4.10 Identifiable Intangibles and Goodwill, IFRS
Amortization expense for 2011:
Customer relationships
Favorable leaseholds
Total
$2,000,000/4
$6,000,000/5
$ 500,000
1,200,000
$1,700,000
Impairment testing – identifiable intangibles:
Customer relationships
Book value = $2,000,000 – 2 x ($2,000,000/4) =
$1,000,000
Book value > Sum of discounted cash flows? $1,000,000 > $650,000: Yes
Impairment loss = $1,000,000 - $650,000 = $350,000
Favorable leaseholds
Book value = $6,000,000 – 1.5 x ($6,000,000/5) = $4,200,000
Book value > Sum of discounted cash flows? $4,200,000 > $3,800,000: Yes
Impairment loss = $4,200,000 – $3,800,000 = $400,000
Brand names
Book value = $14,000,000
Book value > Sum of discounted cash flows? $14,000,000 > $10,000,000: Yes
Impairment loss = $14,000,000 - $10,000,000 = $4,000,000
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2010
75
Impairment testing – Goodwill:
Reporting Unit
Unit FV < BV?
E. Asia
Indonesia
$310,000,000 > $200,000,000: No
$90,000,000 < $100,000,000: Yes
Brazil
$125,000,000 < $130,000,000: Yes
Mediterranean
$180,000,000 < $220,000,000: Yes
Scandinavia
$190,000,000 < $300,000,000: Yes
Summary:
Amortization expense – identifiable intangibles
Impairment losses – identifiable intangibles
Goodwill impairment loss
Total
GW impairment loss
$100,000,000 – 90,000,000 =
$10,000,000
$130,000,000 – 125,000,000 =
$5,000,000
$220,000,000 – 180,000,000 =
$40,000,000
$300,000,000 – 190,000,000 =
$110,000,000; impairment limited to
full goodwill balance of $100,000,000.
$
1,700,000
4,750,000
155,000,000
$161,450,000
E4.11 Consolidated Income Statement
a.
(amounts in millions)
Sales $5,000 + 2,000
Cost of goods sold $3,000 + 800 + 160
Gross margin
Depreciation expense $500 + 140 – (200/10)
Interest expense $100 + 60 + (100/5)
Other expenses $600 + 700
Total operating expenses
Net income
$7,000
3,960
3,040
620
180
1,300
2,100
$ 940
b.
Parson reports its own income of $800 million plus its equity in the income of Soaper of $140
million. Equity in the income of Soaper is Soaper’s reported income adjusted for write-offs of
Soaper’s net asset revaluations. Consolidated income is Parson’s and Soaper’s reported revenues
and expenses, with Soaper’s expenses adjusted for the revaluation writeoffs. Parson’s separately
reported income and consolidated income therefore report the same items, packaged differently.
©Cambridge Business Publishers, 2010
76
Advanced Accounting, 1st Edition
E4.12 Amortization and Impairment Testing of Identifiable Intangible Assets
a.
Technology
Arroyo
WebEx
$15,000/5 x 9/12 =
$312,000/4 x 1/12 =
Customer Relationships
Arroyo
WebEx
$14,000/7 x 9/12 =
$153,000/6 x 1/12 =
Total amortization expense
$
2,250
6,500
1,500
2,125
$ 12,375
b.
Technology
Arroyo
WebEx
Customer
Relationships
Arroyo
WebEx
7/31/07
Book value>
Book
Undiscounted
value
cash flows?
Impairment loss
$ 12,750 $12,750>$14,000? No
--305,500 $305,500>$300,000? Yes $305,500-250,000= $ 55,500
-12,500 $12,500>$16,000? No
$150,875-100,000=
150,875 $150,875>$140,000? Yes
Total impairment loss
-50,875
$106,375
c.
Arroyo
WebEx
7/31/07 book value
Solutions Manual, Chapter 4
Technology
$ 12,750
250,000
$ 262,750
Customer
Relationships
$ 12,500
100,000
$ 112,500
©Cambridge Business Publishers, 2010
77
PROBLEMS
P4.1
Condensed Consolidated Financial Statements One Year after Acquisition
a.
Calculation of Equity in net income for 2010:
Santo’s reported net income
Revaluation writeoffs:
Inventory (1)
Plant assets $8,000,000/8
Patents $1,500,000/4
Long-term debt $1,000,000/10
Goodwill impairment loss
Equity in net income of Santo
$ 5,000,000
(2,000,000)
(1,000,000)
(375,000)
100,000
(400,000)
$ 1,325,000
(1)
Santo’s beginning inventory on its own books is $3,000,000 (= $5,200,000
+
4,000,000 – 6,200,000). Since Santo’s cost of goods sold is $4,000,000, its
beginning
inventory is completely sold in 2010, and the revaluation is written off.
b.
Consolidation Working Paper, December 31, 2010
Trial Balances Taken From
Books
Dr (Cr)
Eliminations
Consolidated
Cash and receivables
Inventory
Plant assets, net
Investment in Santo
Patents
Goodwill
Current liabilities
Long-term debt
Capital stock
Retained earnings, Jan. 1
Sales
Equity in income of Santos
Cost of goods sold
Depreciation and
amortization expense
Interest and other expenses
GW impairment loss
Ponon
Santo
$ 4,500,000
5,000,000
8,000,000
26,325,000
$ 3,100,000
5,200,000
12,000,000
--
--(5,100,000)
(20,000,000)
(8,000,000)
(4,800,000)
(30,000,000)
(1,325,000)
18,000,000
2,000,000
--(2,000,000)
(3,300,000)
(6,000,000)
(4,000,000)
(13,200,000)
-4,000,000
3,200,000
$
5,400,000
--0- $
©Cambridge Business Publishers, 2010
78
1,000,000
--0-
Dr
Cr
Balances
$
(R) 2,000,000
(R) 8,000,000
(R) 1,500,000
(R) 4,500,000
(O-4) 100,000
(E) 6,000,000
(E) 4,000,000
2,000,000 (O-1)
1,000,000 (O-2)
1,325,000 (C)
10,000,000 (E)
15,000,000 (R)
375,000 (O-3)
400,000 (O-5)
1,000,000 (R)
(C) 1,325,000
(O-1) 2,000,000
(O-2) 1,000,000
(O-3) 375,000
100,000 (O-4)
(O-5) 400,000
_______
$ 31,200,000 $31,200,000
7,600,000
10,200,000
27,000,000
--
1,125,000
4,100,000
(7,100,000)
(24,200,000)
(8,000,000)
(4,800,000)
(43,200,000)
-24,000,000
6,575,000
6,300,000
400,000
$
-0-
Advanced Accounting, 1st Edition
c.
Consolidated Statement of Income and Retained Earnings For the Year 2010
Sales
$ 43,200,000
Costs of goods sold
(24,000,000)
Gross margin
19,200,000
Operating expenses:
Depreciation and amortization expense
$ 6,575,000
Interest and other expenses
6,300,000
Goodwill impairment loss
400,000
(13,275,000)
Net income
5,925,000
Retained earnings, beginning balance
4,800,000
Retained earnings, ending balance
$ 10,725,000
Consolidated Balance Sheet, December 31, 2010
Assets
Cash and receivables
Inventory
Plant assets, net
Patents
Goodwill
Total assets
Liabilities and stockholders’ equity
Current liabilities
Long-term debt
Capital stock
Retained earnings
Total liabilities and stockholders’ equity
$
7,600,000
10,200,000
27,000,000
1,125,000
4,100,000
$ 50,025,000
$
7,100,000
24,200,000
8,000,000
10,725,000
$ 50,025,000
P4.2
Equity Method and Eliminating Entries Three Years after Acquisition
a.
Calculation of Equity in Net Income for 2012:
Sea Coast’s reported net income for 2012
Revaluation writeoffs:
Plant assets ($100,000)/10
Identifiable intangibles $300,000/20
Equity in net income of Sea Coast
Solutions Manual, Chapter 4
$ 130,000
10,000
(15,000)
$ 125,000
©Cambridge Business Publishers, 2010
79
b.
Calculation of Investment balance at December 31, 2012:
Investment in Sea Coast, December 31, 2009
Sea Coast’s reported income, 2010-2012
Sea Coast’s reported dividends, 2010-2012 (60% of reported
income)
Revaluation writeoffs, 2010-2012:
Plant assets [($100,000)/10] x 3
Identifiable intangibles ($300,000/20) x 3
Investment in Sea Coast, December 31, 2012
$ 2,000,000
400,000
(240,000)
30,000
(45,000)
$ 2,145,000
Note to instructor: Under LIFO and increasing inventory, the acquisition date
revalued inventory is assumed to still be on hand.
c.
Consolidation working paper eliminating entries for 2012:
(C)
Equity in net income of Sea Coast
125,000
Dividends – Sea Coast
(.6 x $130,000)
Investment in Sea
Coast
(E)
Stockholders’ equity—Sea Coast,
1/1
78,000
47,000
1,508,000
Investment in Sea
Coast
1,508,000
Sea Coast’s stockholders’ equity, December 31, 2009 = $1,400,000 (acquisition cost $2,000,000
less excess over book value $600,000).
Sea Coast’s stockholders’ equity, January 1, 2012 = $1,400,000 + (1 - .6)(400,000 – 130,000) =
$1,508,000.
(R)
Inventory
Identifiable intangibles
400,000
270,000
Plant assets, net
80,000
Investment in Sea
Coast
590,000
Revaluations at January 1, 2012 = original revaluations less writeoffs for 2010 and 2011.
©Cambridge Business Publishers, 2010
80
Advanced Accounting, 1st Edition
(O)
Plant assets, net
Amortization expense
10,000
15,000
Depreciation expense
Identifiable intangibles
10,000
15,000
d.
Pelican’s income from its own operations plus equity in net income of Sea Coast = consolidated
net income: $500,000 + $125,000 = $625,000.
P4.3
Consolidation at End of First Year, Preacquisition Contingency
a.
Calculation of Equity in Net Income for 2011:
Sanders’ reported net income for 2011
Revaluation writeoffs:
Inventory $80,000 x 60%
Equipment $200,000/10
Equity in net income of Sanders
Perkins’entries for 2011:
Investment in Sanders
Merger expenses
Restructuring expenses
$ 500,000
(48,000)
(20,000)
$ 432,000
4,000,000
50,000
100,000
Cash
4,150,000
Investment in Sanders
432,000
Equity in net income of
Sanders
432,000
Cash
150,000
Investment in Sanders
b.
150,000
Consolidation working paper eliminating entries for 2011:
(C)
Equity in net income of
Sanders
432,000
Dividends – Sanders
Investment in Sanders
(E)
Stockholders’ equity—
Sanders, 1/1
2,200,000
Investment in Sanders
Solutions Manual, Chapter 4
150,000
282,000
2,200,000
©Cambridge Business Publishers, 2010
81
(R)
Inventory
Equipment, net
In-process research and
development
Goodwill
80,000
200,000
300,000
1,305,000
Lawsuit liability
Investment in Sanders
85,000
1,800,000
Note: Because the change in the lawsuit liability occurs within the measurement period, the
increased liability value increases acquisition date goodwill.
(O)
Cost of goods sold
Depreciation expense
48,000
20,000
Inventory
Equipment, net
P4.4
48,000
20,000
Consolidated Balance Sheet Working Paper, Bargain Purchase (see related P3.4)
(all amounts in millions)
a.
Calculation of Equity in Net Income for 2013:
Saxon’s reported net income for 2013 ($10,000 + 10 – 8,000 – 40 – 25 – 1,600)
Revaluation writeoffs:
Inventory
Marketable securities
Buildings and equipment $300/20
Long-term debt $110/5
Equity in net income of Saxon
$ 345
(100)
50
(15)
(22)
$ 258
Calculation of Investment balance, December 31, 2013:
Investment balance, December 31, 2012 (1)
Equity in net income for 2013
Dividends for 2013
Investment balance, December 31, 2013
(1)
$2,000
258
(100)
$2,158
Paxon acquired Saxon for $1,800, but there is a bargain gain that increases the investment
balance by $200, as follows:
©Cambridge Business Publishers, 2010
82
Advanced Accounting, 1st Edition
Calculation of gain on acquisition:
Acquisition cost
Book value ($100 + 350 + 845)
Excess of acquisition cost over book value
Excess of fair value over book value:
Inventory
Marketable securities
Land
Buildings and equipment
Long-term debt (discount)
Gain on acquisition
$ 1,800
(1,295)
505
$ 100
(50)
245
300
110
$
705
200
Therefore Paxon’s entry to record the acquisition was:
Investment in Saxon
2,000
Cash
Gain on acquisition
1,800
200
b.
Consolidation Working Paper, December 31, 2013
Trial Balances Taken
From Books
Dr (Cr)
Eliminations
Consolidated
Paxon
Saxon
Cash and receivables
Inventory
Marketable securities
Investment in Saxon
$ 3,100
2,260
-2,158
$
Land
Buildings and equipment, net
Current liabilities
Long-term debt
Common stock
Additional paid-in capital
Retained earnings, Jan. 1
Dividends
Sales revenue
Equity in income of Saxon
Gain on sale of securities
Cost of goods sold
Depreciation expense
Interest expense
Other operating expenses
650
3,600
(2,020)
(5,000)
(500)
(1,200)
(2,610)
500
(30,000)
(258)
-26,000
300
250
2,770
$
-0-
300
1,150
(1,200)
(450)
(100)
(350)
(845)
100
(10,000)
-(10)
8,000
40
25
1,600
$ -0-
Solutions Manual, Chapter 4
800
940
---
Dr
Cr
(R) 100
(O-2) 50
100 (O-1)
50 (R)
158 (C)
1,295 (E)
705 (R)
(R) 245
(R) 300
(R) 110
(E) 100
(E) 350
(E) 845
15 (O-3)
22 (O-4)
100 (C)
(C) 258
50 (O-2)
(O-1) 100
(O-3) 15
(O-4) 22
______
$ 2,495
_______
$ 2,495
Balances
$ 3,900
3,200
---
1,195
5,035
(3,220)
(5,362)
(500)
(1,200)
(2,610)
500
(40,000)
-(60)
34,100
355
297
4,370
$ -0-
©Cambridge Business Publishers, 2010
83
c.
Consolidated Statement of Income and Retained Earnings For the Year 2013
Sales
$ 40,000
Costs of goods sold
(34,100)
Gross margin
5,900
Operating expenses:
Depreciation expense
$ 355
Interest expense
297
Other operating expenses
4,370
(5,022)
Income before other gains
878
Gain on sale of securities
60
Net income
938
Retained earnings, January 1
2,610
Dividends
(500)
Retained earnings, December 31
$ 3,048
Consolidated Balance Sheet, December 31, 2013
Assets
Cash and receivables
Inventory
Land
Buildings and equipment, net
Total assets
Liabilities and stockholders’ equity
Current liabilities
Long-term debt
Common stock
Additional paid-in capital
Retained earnings
Total liabilities and stockholders’ equity
P4.5
$
3,900
3,200
1,195
5,035
$ 13,330
$
3,220
5,362
500
1,200
3,048
$ 13,330
Goodwill Allocation and Impairment
a.
Identifiable assets acquired
Liabilities assumed
Net identifiable assets acquired
Total acquisition cost
Total goodwill
©Cambridge Business Publishers, 2010
84
$ 53,000,000
(19,000,000)
34,000,000
50,000,000
$ 16,000,000
Advanced Accounting, 1st Edition
Allocation to business units:
Identifiable assets acquired
Liabilities assumed
Net assets assigned
Fair value of reporting unit
Less: Net assets assigned
Increase in fair value
Tentative allocation of
goodwill
Total tentative allocation is
$20,000,000; goodwill to be
assigned is $16,000,000.
20% reduction
Allocation of goodwill
b.
Unit X
$ 30,000,000
(12,000,000)
$ 18,000,000
Unit Y
$16,000,000
(5,000,000)
$11,000,000
Unit Z
$ 7,000,000
(2,000,000)
$ 5,000,000
Total
$ 53,000,000
(19,000,000)
$ 34,000,000
Unit X
$ 24,000,000
(18,000,000)
__ N/A___
Unit Y
$ 15,000,000
(11,000,000)
___N/A___
Unit Z
$ 10,000,000
(5,000,000)
___N/A___
$ 5,000,000
6,000,000
4,000,000
5,000,000
5,000,000
(1,200,000)
$ 4,800,000
(800,000)
$ 3,200,000
(1,000,000)
$ 4,000,000
(1,000,000)
$ 4,000,000
Unit J
Step 1 of impairment test: Compare the fair value of each reporting unit at December 31,
2010 with its book value at that date.
Unit X
Unit Y
Unit Z
Unit J
Fair value at
December 31, 2010
$26,000,000
$ 12,000,000
$ 5,000,000 $ 63,000,000
Carrying amount at
December 31, 2010
25,000,000
13,000,000
7,000,000
65,000,000
Difference
$ 1,000,000
$(1,000,000)
$(2,000,000)
$(2,000,000)
Preliminary
Not impaired
May be
May be
May be
conclusion
impaired
impaired
impaired
Step 2 of the impairment test: For those reporting units where goodwill may be impaired,
calculate the implied fair value of goodwill at December 31, 2010 and compare to the carrying
amount of goodwill at that date.
Unit Y
Unit Z
Unit J
Fair value of reporting unit
$ 12,000,000
$ 5,000,000
$63,000,000
Fair value of identifiable net assets
at December 31, 2010
7,000,000
4,000,000
58,000,000
Implied value of goodwill
5,000,000
1,000,000
5,000,000
Carrying amount of goodwill
3,200,000
4,000,000
4,000,000
Difference
$ 1,800,000
$(3,000,000)
$ 1,000,000
Conclusion
Goodwill is not
Goodwill is
Goodwill is
impaired
impaired
not impaired
Goodwill is impaired for Reporting Unit Z. A $3,000,000 goodwill impairment loss should be
recorded at December 31, 2010.
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2010
85
P4.6
Intangible Assets and Goodwill: Amortization and Impairment
2013 amortization expense:
Customer lists $500,000/5
Developed technology $800,000/10
Total
$ 100,000
80,000
$ 180,000
2013 impairment test for identifiable intangibles:
Original carrying amount
Less: amortization
2011
2012
2013
Carrying amount, December 31, 2013
Customer
lists
$ 500,000
Developed
technology
$ 800,000
Internet
domain name
$ 1,300,000
(100,000)
(100,000)
(100,000)
$ 200,000
(80,000)
(80,000)
(80,000)
$ 560,000
–
–
___–_____
$ 1,300,000
Step 1 of impairment test: To determine whether impairment has occurred, compare the
undiscounted future cash flows from the asset to its carrying value.
Customer
Developed
Internet
lists
technology domain name
Future undiscounted cash flows
$ 250,000
$ 500,000
$ 1,000,000
Carrying amount
200,000
560,000
1,300,000
Difference
$ 50,000
$ (60,000)
$ (300,000)
Conclusion
Not impaired
Impaired
Impaired
Step 2 of impairment test: For intangibles that are deemed impaired in Step 1, calculate amount
of impairment as the difference between discounted cash flows and carrying value.
Developed
Internet
technology
domain name
Future discounted cash flows
$ 420,000
$ 750,000
Carrying amount
560,000
1,300,000
Impairment
$ 140,000
$ 550,000
2013 goodwill impairment test:
Step 1 of impairment test: compare fair value of reporting unit at December 31, 2013 to the
carrying amount of the unit at that date.
Fair value of reporting unit
$17,000,000
Carrying amount
18,500,000
Difference
$(1,500,000)
Conclusion: Goodwill may be impaired.
©Cambridge Business Publishers, 2010
86
Advanced Accounting, 1st Edition
Step 2 of impairment test: Calculate the implied fair value of goodwill at December 31, 2013 and
compare to the carrying amount at that date.
Fair value of reporting unit
$ 17,000,000
Fair value of identifiable net assets
14,200,000
Implied fair value of goodwill
2,800,000
Carrying amount of goodwill
6,200,000
Difference
$ (3,400,000)
Conclusion: Goodwill impairment loss is $3,400,000.
Summary:
Amortization expense for 2013:
Customer lists
Developed technology
Impairment write-offs for 2013:
Developed technology
Internet domain name
Goodwill
Total expense for 2013
$
$
100,000
80,000
140,000
550,000
3,400,000
$
180,000
4,090,000
$ 4,270,000
P4.7 Consolidated Balance Sheet Working Paper, Three Years after Acquisition
related P3.2)
(see
(all amounts in millions)
a.
Calculation of Equity in Net Income for fiscal 2011, 2012, and 2013:
Saxon’s reported net income (loss)
Revaluation writeoffs:
Property, plant and equipment $(60)/20
Patents and trademarks $10/5
Long-term debt $(3)/3
Advanced technology $5/5
Customer lists impairment loss
Goodwill impairment loss
Equity in net income of Saxon
2011
$ 15
2012
$ (2)
3
(2)
1
(1)
3
(2)
1
(1)
(2)
_(3)
$ (6)
_(2)
$ 14
2013
$ 12 (1)
3
(2)
1
(1)
(4)
_(2)
$ 7
(1) $12 = $900 – 800 – 88
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2010
87
Calculation of Investment balance, June 30, 2013:
Investment balance, June 30, 2010 (adjusted to remove earnings contingency)
Equity in net income for fiscal 2011
Equity in net income for fiscal 2012
Equity in net income for fiscal 2013
Increase in GOC’s AOCI for fiscal 2011-2013 (= $5 – 3)
Investment balance, June 30, 2013
$ 110
14
(6)
7
__2
$ 127
b.
Consolidation Working Paper, June 30, 2013
Trial Balances
Taken From Books
Dr. (Cr.)
Eliminations
Consolidated
ITI
Current assets
Property, plant and
equipment, net
Identifiable intangible assets
$
Investment in GOC
Goodwill (1)
Current liabilities
Long-term liabilities
Common stock
Additional paid-in capital
Retained earnings, July 1
Accumulated other
comprehensive income
Treasury stock
Sales revenue
Equity in income of Saxon
Cost of goods sold
Goodwill impairment loss
Other operating expenses
$
GOC
Dr
$
12
140
(R) 5
(O-1) 3
1,100
30
(R) 6
(R) 3
(R) 23
127
--
-(175)
(1,125)
(22)
(580)
(118)
-(10)
(105)
(4)
(60)
12
(20)
8
(2,000)
(7)
1,400
-580
(5)
2
(900)
-800
-88
232
600
_____
_____
-0- $
-0-
©Cambridge Business Publishers, 2010
88
Balances
Cr
(R) 83
(O-3) 1
(E) 4
(E) 60
$
54 (R)
2 (O-2)
1 (O-4)
4 (O-5)
7 (C)
55 (E)
65 (R)
2 (O-6)
1 (R)
12
(E)
(E) 5
2 (E)
(C)
7
(O-6) 2
(O-2) 2
3 (O-1)
(O-4) 1
1 (O-3)
(O-5) 4
_______
$ 209 $ 209
249
689
1,155
--
81
(185)
(1,230)
(22)
(580)
(118)
(20)
8
(2,900)
-2,200
2
____671
$
-0-
Advanced Accounting, 1st Edition
(1)
Acquisition-date goodwill is calculated as follows:
Acquisition cost (adjusted)
GOC’s book value
Excess of acquisition cost over book value
Excess of fair value over book value:
Inventory
Property, plant and equipment
Patents and trademarks
Advanced technology
Customer lists
Long-term debt
Goodwill
$ 110
(40)
70
$
5
(60)
10
5
25
(3)
c.
Consolidated Statement of Income and Retained Earnings For Fiscal 2013
Sales revenue
Costs of goods sold
Gross margin
Operating expenses:
Goodwill impairment loss
$
2
Other operating expenses
_671
Net income
Retained earnings, beginning balance
Retained earnings, ending balance
Consolidated Balance Sheet, June 30, 2013
Assets
Current assets
Property, plant and equipment, net
Identifiable intangible assets
Goodwill
Total assets
Liabilities and stockholders’ equity
Current liabilities
Long-term liabilities
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock
Total liabilities and stockholders’ equity
Solutions Manual, Chapter 4
_(18)
$ 88
$ 2,900
(2,200)
700
__673
27
__118
$ 145
$
249
689
1,155
__81
$ 2,174
$
185
1,230
22
580
145
20
__(8)
$ 2,174
©Cambridge Business Publishers, 2010
89
P4.8
Working Paper Eliminating Entries, Partial Year Consolidation (see related P3.3)
(all numbers in millions)
a.
Calculation of Equity in net income for 2003:
Pharmacia’s reported net income
Revaluation writeoffs:
Inventory
Property, plant and equipment [$(317)/20] x [8.5/12]
In-process research and development
Developed technology rights $31,596/11 x (8.5/12)
Long-term debt
Other assets $(15,606)/10 x (8.5/12)
Equity in net income of Pharmacia
b.
$
5,000
(2,939)
11
(716)
(2,035)
12
1,105
$
438
Consolidation working paper eliminating entries for 2003:
(C)
Equity in net income of Pharmacia
438
Investment in Pharmacia
(E)
Stockholders’ equity—Pharmacia,
4/16/03
438
7,236
Investment in Pharmacia
(R)
Inventory
Long-term investments
In-process R&D
Developed technology rights
Goodwill
2,939
40
5,052
37,066
21,304
Property, plant and
equipment
Long-term debt
Other assets
Investment in Pharmacia
©Cambridge Business Publishers, 2010
90
7,236
317
1,841
15,606
48,637
Advanced Accounting, 1st Edition
(O)
Cost of goods sold
Property, plant and equipment
Impairment loss
Amortization expense
Long-term debt
Other assets
2,939
11
716
2,035
12
1,105
Inventory
Depreciation expense
In-process research and
development
Developed technology
rights
Interest expense
Other operating expenses
P4.9
2,939
11
716
2,035
12
1,105
Goodwill Impairment Testing, IFRS and U.S. GAAP
a.
BP’s 2007 annual report states the following:
The future cash flows are usually adjusted for risks specific to the asset and discounted using a pre-tax
discount rate of 11% (2006 10%). This discount rate is derived from the group’s post-tax weighted average
cost of capital. In some cases the group’s pre-tax discount rate may be adjusted to account for political risk
in the country where the asset is located.
Cash flows are adjusted for risk before they are discounted, thereby taking into consideration
differences in the uncertainty of the business environment. Most likely the cash flows of
Exploration and Production segment CGUs are more uncertain than those of Refining and
Marketing, although the two segments are closely related.
If the cash flows were not adjusted, the discount rate should be adjusted to reflect differences in
risk.
Solutions Manual, Chapter 4
©Cambridge Business Publishers, 2010
91
b.
Exploration and Production
CGU
UK
US
Rest of world
Total
Value in use
Carrying value
$ 9,000
$ 1,114
35,000
6,144
2,500
2,840
$ 46,500
$ 10,098
Impairment loss
None
None
$ 340
Refining and Marketing
CGU
Refining
Retail
Lubricants and other
Total
Value in use
Carrying value Impairment loss
$ 13,000
$ 1,557
None
6,000
1,938
None
4,000
4,880
$ 880
$ 23,000
$ 8,375
Total goodwill impairment loss is $340 + 880 = $1,220
c.
$2,840 – 2,140 = $700, suggesting a GW impairment loss of that amount. However, total
goodwill allocated to the Rest of World CGU is $515. Therefore, the goodwill impairment loss
is $515, and other assets of the CGU would be written down, based on appropriate impairment
tests.
d.
U.S. GAAP requires goodwill to be assigned to reporting units, in this case Exploration and
Production, and Refining and Marketing. Goodwill is then evaluated using a two-step test.
Goodwill is tested for impairment only if the fair value of the reporting unit is less than its
carrying value. Because fair value is generally calculated using discounted cash flows, we
assume it can be approximated by value in use. For both reporting units above, value in use
significantly exceeds carrying value, so no impairment loss is reported.
Because reporting units aggregate CGUs, it is likely that CGUs with carrying value greater than
value in use will be offset by those with a value in use that is greater than carrying value when
applying the first step for impairment testing under U.S. GAAP.
©Cambridge Business Publishers, 2010
92
Advanced Accounting, 1st Edition
P4.10 Consolidation One and Two Years after Acquisition
a.
The investment cost under SFAS 141R amounts to $598,000,000 [= ($590,000,000 –
$15,000,000) + $23,000,000], and the $248,000,000 excess of acquisition cost over book value
($598,000,000 – $350,000,000) is allocated as follows, with goodwill being the residual at the
bottom:
Excess of acquisition cost over book value
Allocation to identifiable items:
Inventories
Identifiable intangibles (5-year life)
In-process research and development (IPRD)
Plant assets (20-year life, straight-line)
Goodwill (unallocated balance)
b.
$ 248,000,000
(30,000,000)
(40,000,000)
(60,000,000)
(50,000,000)
$ 68,000,000
2007 equity income accrual:
Essex’s reported net income
Revaluation write-offs:
FIFO inventory sold (.4 X $30,000,000)
Amortization of identifiable intangibles ($40,000,000/5)
Depreciation of plant assets ($50,000,000/20)
Goodwill impairment
Equity income accrual
$ 140,000,000
(12,000,000)
(8,000,000)
(2,500,000)
(15,000,000)
$ 102,500,000
December 31, 2007 working paper eliminations:
(C)
Equity income accrual
102,500,000
Dividends – S (.55 x
$140,000,000)
Investment in S
(E)
Stockholders’ equity – Essex,
1/25/07
350,000,000
Investment in S
Solutions Manual, Chapter 4
77,000,000
25,500,000
350,000,000
©Cambridge Business Publishers, 2010
93
(R)
Inventories
Identifiable intangibles
In-process research and
development
Plant assets
Goodwill
30,000,000
40,000,000
60,000,000
50,000,000
68,000,000
Investment in S
(O)
Cost of goods sold
Amortization expense
Depreciation expense
Goodwill impairment loss
248,000,000
12,000,000
8,000,000
2,500,000
15,000,000
Inventories
Identifiable intangibles
Accumulated
depreciation
Goodwill
c.
12,000,000
8,000,000
2,500,000
15,000,000
2008 equity income accrual:
Essex’s reported net income
Revaluation write-offs:
Amortization of identifiable intangibles ($40,000,000/5)
Depreciation of plant assets ($50,000,000/20)
IPRD impairment
Equity income accrual
December 31, 2008, working paper eliminations:
(C)
Equity income accrual
Dividends – S (.55 x
$160,000,000)
Investment in S
(E)
Stockholders’ equity – Essex,
1/1/08 (1)
(1)
Investment in S
$350,000,000 + $140,000,000 - $77,000,000
©Cambridge Business Publishers, 2010
94
$160,000,000
(8,000,000)
(2,500,000)
(20,000,000)
$129,500,000
129,500,000
88,000,000
41,500,000
413,000,000
413,000,000
Advanced Accounting, 1st Edition
(R)
Inventories (.6 x
$30,000,000)
Identifiable intangibles
In-process research and
development
Plant assets
Goodwill
18,000,000
32,000,000
60,000,000
50,000,000
53,000,000
Accum. depreciation
Investment in S
(O)
Amortization expense
Depreciation expense
IPRD impairment loss
2,500,000
210,500,000
8,000,000
2,500,000
20,000,000
Identifiable intangibles
Accumulated
depreciation
IPRD
8,000,000
2,500,000
20,000,000
P4.11 Intangibles under IFRS
a.
Whereas the double-declining balance rate is twice the straight-line rate, 150% declining balance
is 1.5 x 10% straight-line rate, or 15%. Following the conventional declining-balance
calculations, we have this amount of amortization expense for 2011, the second year after
acquisition:
Amortization expense = .15 x [€50,000,000 – (.15 x €50,000,000)] = €6,375,000
b.
At December 31, 2010, the carrying amount is €9,000,000 after 2010 amortization of
€1,000,000, and the market value of these intangibles is €9,500,000.
December 31, 2010 entries are:
Amortization expense
1,000,000
Intangible assets
Intangible assets
500,000
Revaluation surplus
(OCI)
Solutions Manual, Chapter 4
1,000,000
500,000
©Cambridge Business Publishers, 2010
95
December 31, 2011, entries are:
Amortization expense
1,055,555
Intangible assets
1,055,555
€9,500,000/9 = €1,055,555
Revaluation surplus (OCI)
Loss
500,000
944,445
Intangible assets
1,444,445
At this point the ending carrying amount is €7,000,000 (= €10,000,000 – €1,000,000 + €500,000
– €1,055,555 – €1,444,445], equal to the market value on that date.
c.
IFRS impairment loss = carrying amount – greater of (value in use, €15,300,000; market value,
€14,000,000) = €17,000,000 – €15,300,000 = €1,700,000.
U.S. GAAP impairment loss = 0 (sum of undiscounted cash flows €18,000,000 > carrying
amount, €17,000,000, indicating “no impairment”).
The two-step test in U.S GAAP removes some potential impairments from consideration. IFRS
goes immediately to an amount lower than the sum of the undiscounted cash flows, and will
likely recognize more impairment losses over time than U.S. GAAP.
P4.12 Consolidation in First Year, Intangible Asset Issues
(all dollar amounts in millions)
a.
Net Assets
$26,900
Liabilities
Liabilities
=
=
=
=
Assets - Liabilities
$(20,800 + 9,400 + 4,800) – Liabilities
$35,000 – $26,900
$8,100
b.
Going “by the book,” the question is simply whether useful lives can be reasonably estimated or
whether the intangible has an obviously very long indeterminate (indefinite) life. Many cases
will be clear-cut and can be justified to the auditors but others will be in gray areas such that the
desired reporting result will call forth the case justifying the classification of the intangible one
way or another.
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Advanced Accounting, 1st Edition
In these gray areas, management may elect to minimize periodic amortization charges against
earnings and take their chances on the somewhat random and very subjective impairment tests.
To the extent possible, management would likely classify items and load cost in the indefinitelived category to minimize the effect on earnings.
c.
With goodwill no longer being subject to amortization, and impairment charges being part of
income from continuing operations, companies may seek to lower the probability that they will
have to recognize goodwill impairment charges. The subjectivity inherent in valuing the
reporting units to which the goodwill is assigned—cash flow forecasts and discount rate
selections—facilitates decisions to load goodwill onto reporting units that are less-likely
impairment candidates, i.e., units with fair value significantly above carrying value.
d.
Revaluation of limited-life intangibles is $2,000 (= $3,000 – $1,000).
Amortization of this revaluation for 2007 = $2,000/15 x 9/12 = $100.
Equity method income = $1,000 – $100 = $900
Consolidation Working Paper Entries:
(C)
Equity income
900
Dividends—Caremark
Investment in Caremark
(E)
Stockholders’ equity—Caremark (1)
(1)
550
350
1,700
Investment in Caremark
$26,900 – $20,800 – ($9,400 – $5,000)
(R)
Goodwill
Identifiable intangibles, limited life
Identifiable intangibles, indefinite life
(2)
1,700
20,800
2,000
2,400
Investment in Caremark
(2)
25,200
$6,400 – $4,000
(O)
Amortization expense
100
Identifiable intangibles,
limited life
Solutions Manual, Chapter 4
100
©Cambridge Business Publishers, 2010
97
©Cambridge Business Publishers, 2010
98
Advanced Accounting, 1st Edition