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CHAPTER 4 CONSOLIDATED FINANCIAL STATEMENTS AND OUTSIDE OWNERSHIP

Answers to Questions

1. "Noncontrolling interest" refers to an equity interest that is held in a member of a business combination by an unrelated (outside) party. a. Acquisition method = $220,000 (fair value) b. Purchase method = $208,000 (all of the book value plus 80 percent of the $60,000 difference between fair value and book value) A control premium is the portion of an acquisition price (above currently traded market values) paid by a parent company to induce shareholders to sell a sufficient number of shares to obtain control. The extra payment typically becomes part of the goodwill acquired in the acquisition attributable to the parent company. In practice, noncontrolling interest figures will appear in various locations within consolidated financial statements. The end of year balance can be found in the liability section, in the stockholders' equity section, or between these two. The noncontrolling interest's share of net income can be shown as a reduction on either the income statement or the statement of retained earnings. Based on current practice, this textbook reports the ending balance between consolidated liabilities and stockholders' equity with the income allocation shown as a reduction on the income statement. The ending noncontrolling interest can be determined on a consolidation worksheet by adding the components found in the noncontrolling interest column: the beginning balance plus allocation of current year net income less dividends paid to these outside owners. The ending balance can also be determined (at this point in the exploration of consolidated financial statements) by multiplying the outside ownership percentage by the subsidiary's ending book value. In subsequent chapters, this calculation must be altered because of various adjustments made within the consolidation process. Allsports should remove the pre-acquisition revenues and expenses from the consolidated totals. These amounts have been earned (incurred) prior to ownership by Allsports and therefore should not be reported as earnings for the current parent company owners. In previous years, Tree has appropriately utilized the market-value method in accounting for its investment in Limb. Now, following a second acquisition, consolidation has become applicable. These two methods are not considered to be comparable. Therefore, at the point in time that Tree begins to produce consolidated statements, all previous financial reports must be restated as if the equity method had been applied since the date of the first acquisition. This handling presents the reader of the financial statements with figures that are more comparable from year to year. When a company sells a portion of an investment, a gain or loss is recognized based on the difference between the proceeds received and the book value of the investment (on

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the portion sold). The correct book value is determined based upon the consistent application of the equity method. Thus, if either the Initial value method or the partial equity method has been used, Duke must first restate the account to the equity method before recording the sales transaction. This same method is also applied to the operations of the current period occurring prior to the time of sale. 9. 10. Unless control is surrendered, the acquisition method views the sale of subsidiary's stock as a treasury stock transaction. Thus, no gain or loss can be recognized. The accounting method choice for the remaining shares depends upon the current relationship between the two firms. If Duke retains control, consolidation is still required. However, if the parent now can only significantly influence the decision-making process, the equity method is applied. A third possibility is Duke may have lost the power to exercise even significant influence. The market-value method then is appropriate.

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Answers to Problems 1. D The acquisition method consolidates assets at fair value at acquisition date regardless of the parent's percentage ownership. 2. D In consolidating the subsidiary's figures, all intercompany balances must be eliminated in their entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it. 3. C An asset acquired in a business combination is initially valued at 100% acquisition-date fair value and subsequently amortized its useful life. Patent fair value at January 1, 2009 ............................................... Amortization for 2 years (10 year life) ............................................ Patent reported amount December 31, 2010 ................................. 4. A Plaster building................................................................................ Turner building acquisition-date fair value $300,000 Amortization for 3 years (10-year life) (90,000) Consolidated buildings .................................................................. -ORPlaster building................................................................................ $510,000 Turner building 12/31/11 $182,000 Excess acquisition-date fair value allocation 40,000 Excess amortization for 3 years (10-year life) (12,000) 210,000 Consolidated buildings .................................................................. $720,000 5. C Hygille expense ............................................................................... $621,000 Nuyt expenses ................................................................................. 714,000 Excess fair value amortization (70,000 ÷ 10 yrs) .......................... 7,000 Consolidated expenses .................................................................. $1,342,000 6. B Combined revenues ........................................................................ $1,100,000 Combined expenses........................................................................ (700,000) Excess acquisition-date fair value amortization ........................... (15,000) Consolidated net income ................................................................ $385,000 Less: noncontrolling interest ($85,000 × 40%).............................. (34,000) Consolidated net income to controlling interest .......................... $351,000 7. C 8. B $45,000 (9,000) $36,000 $510,000 210,000 $720,000

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9. A Amie, Inc. Fair value at January 1, 2007: 30% previously owned fair value (30,000 shares × $5) ................ 60% new shares acquired (60,000 shares × $6) ............................ 10% NCI fair value (10,000 shares × $5) ......................................... Acquisition-date fair value .............................................................. Net assets' fair value ....................................................................... Goodwill .......................................................................................... 10. C 11. A Fair value of noncontrolling interest on April 1 ............................ 30% of net income for 9 months (¾ year × $240,000 × 30%) ....... Noncontrolling interest December 31 ............................................ $165,000 54,000 $219,000 $150,000 360,000 50,000 $560,000 500,000 $60,000

12. B Combined revenues ........................................................................ $1,300,000 Combined expenses........................................................................ (800,000) Trademark amortization .................................................................. (6,000) Patented technology amortization ................................................. (8,000) Consolidated net income ................................................................ $486,000 13. C Subsidiary income ($100,000 ­ $14,000 excess amortizations) .. Noncontrolling interest percentage ............................................... Noncontrolling interest in subsidiary income............................... Fair value of noncontrolling interest at acquisition date ............. 40% change in Scott book value since acquisition ...................... Excess fair value amortization ($14,000 × 40%)............................ 40% current year income ................................................................ Noncontrolling interest at end of year ........................................... 14. A Michael trademark balance............................................................. Scott trademark balance ................................................................. Excess fair value ............................................................................. Two years amortization (10-year life)............................................. Consolidated trademarks ............................................................... $86,000 40% $34,400 $180,000 52,000 (5,600) 34,400 $260,800 $260,000 200,000 60,000 (12,000) $508,000

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15. A Acquisition-date fair value ($60,000 ÷ 80%) .................................. Strand's book value ........................................................................ Fair value in excess of book value ................................................ Excess assigned to inventory (60%) ................................ $15,000 Excess assigned to goodwill (40%) ................................. $10,000 Park current assets ......................................................................... Strand current assets...................................................................... Excess inventory fair value ............................................................ Consolidated current assets .......................................................... 16. D Park noncurrent assets................................................................... Strand noncurrent assets ............................................................... Excess fair value to goodwill ......................................................... Consolidated noncurrent assets ....................................................

$75,000 (50,000) $25,000

$70,000 20,000 15,000 $105,000 $90,000 40,000 10,000 $140,000

17. B Add the two book values and include 10% (the $6,000 current portion) of the loan taken out by Park to acquire Strand. 18. B Add the two book values and include 90% (the $54,000 noncurrent portion) of the loan taken out by Polk to acquire Strand. 19. C Park stockholders' equity ............................................................... Noncontrolling interest at fair value (20% × $75,000) ................... Total stockholders' equity .............................................................. 20. $80,000 15,000 $95,000

(15 minutes) (Compute consolidated income and noncontrolling interests) 2009 Harrison income ............................................................ $220,000 Starr income .................................................................. 70,000 Excess fair value amortization ..................................... (8,000) Consolidated net income .............................................. $282,000 2010 $260,000 90,000 (8,000) $342,000

Starr fair value ................................................................................. $1,200,000 Fair value of consideration transferred ......................................... 1,125,000 Noncontrolling interest fair value .................................................. $75,000 Noncontrolling interest fair value January 1, 2009 (above) .......... 2009 income to NCI ([$70,000 ­ $8,000] × 10%) ................................ 2009 dividends to NCI .................................................................... Noncontrolling interest reported value December 31, 2009 ........ 2010 income to NCI ([$90,000 ­ $8,000] × 10%) ................................ 2010 dividends to NCI .................................................................... Noncontrolling interest reported value December 31, 2010 $75,000 6,200 (3,000) 78,200 8,200 (3,000) $83,400

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21. (40 minutes) (Several valuation and income determination questions for a business combination involving a noncontrolling interest.) a. Business combinations are recorded generally at the fair value of the consideration transferred by the acquiring firm plus the acquisition-date fair value of the noncontrolling interest. Patterson's consideration transferred ($31.25 × 80,000 shares) ......... $2,500,000 Noncontrolling interest fair value ($30.00 × 20,000 shares) ................. $600,000 Soriano's total fair value 1/1/09 ........................................................... $3,100,000 b. Each identifiable asset acquired and liability assumed in a business combination should initially be reported at its acquisition-date fair value. c. In periods subsequent to acquisition, the subsidiary's assets and liabilities are reported at their acquisition-date fair values adjusted for amortization and depreciation. Except for certain financial items, they are not continually adjusted for changing fair values. d. Soriano's total fair value 1/1/09 ........................................................... $3,100,000 Soriano's net assets book value ......................................................... 1,290,000 Excess acquisition-date fair value over book value .......................... $1,810,000 Adjustments from book to fair values ................................................. Buildings and equipment .................................... (250,000) Trademarks ........................................................... 200,000 Patented technology ............................................ 1,060,000 Unpatented technology ....................................... 600,000 1,610,000 Goodwill .......................................................................................... $ 200,000 e. Combined revenues.............................................................................. $4,400,000 Combined expenses ............................................................................. (2,350,000) Building and equipment excess depreciation .................................... 50,000 Trademark excess amortization .......................................................... (20,000) Patented technology amortization ...................................................... (265,000) Unpatented technology amortization .................................................. (200,000) Consolidated net income ..................................................................... $1,615,000 To noncontrolling interest: Soriano's revenues ......................................................................... $1,400,000 Soriano's expenses ......................................................................... (600,000) Total excess amortization expenses (above)................................ (435,000) Soriano's adjusted net income ...................................................... $365,000 Noncontrolling interest percentage ownership ............................ 20% Noncontrolling interest share of consolidated net income ......... $73,000

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To controlling interest: Consolidated net income ................................................................ $1,615,000 Noncontrolling interest share of consolidated net income ......... (73,000) Controlling interest share of consolidated net income................ $1,542,000 -ORPatterson's revenues ...................................................................... $3,000,000 Patterson's expenses...................................................................... 1,750,000 Patterson's separate net income ................................................... $1,250,000 Patterson's share of Soriano's adjusted net income (80% × $365,000) ................................................................... 292,000 Controlling interest share of consolidated net income................ $1,542,000 f. Fair value of noncontrolling interest January 1, 2009 ....................... 2009 income .......................................................................................... Dividends (20% × $30,000) ................................................................... Noncontrolling interest December 31, 2009 ....................................... $600,000 73,000 (6,000) $ 667,000

g. If Soriano's acquisition-date total fair value was $2,250,000, then a bargain purchase has occurred. Soriano's total fair value 1/1/09 ........................................................... $2,250,000 Collective fair values of Soriano's net assets .................................... $2,300,000 Bargain purchase ................................................................................. $50,000 The acquisition method requires that the subsidiary assets acquired and liabilities assumed be recognized at their acquisition date fair values regardless of the assessed fair value. Therefore, none of Soriano's identifiable assets and liabilities would change as a result of the assessed fair value. When a bargain purchase occurs, however, no goodwill is recognized.

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22. (20 Minutes) (Determine consolidated income balances, includes a mid-year acquisition) a. Acquisition-date total fair value .......................... Book value of net assets ...................................... Fair value in excess of book value ..................... Excess fair value assigned to Patent .......................................................... Land .......................................................... Buildings ......................................................... Goodwill .......................................................... Total .......................................................... $594,000 (400,000) $194,000

Annual Excess Life Amortizations 140,000 5 years $28,000 10,000 30,000 10 years 3,000 14,000 -0$31,000

Consolidated figures following January 1 acquisition date: Combined revenues ............................................................................. $1,500,000 Combined expenses ............................................................................. (1,031,000) Consolidated net income ..................................................................... 469,000 NCI in Sawyer's income ([200,000 ­ 31,000] × 30%) .............................. (50,700) Controlling interest in consolidated net income ............................... $418,300 b. Consolidated figures following April 1 acquisition date: Combined revenues (1)......................................................................... $1,350,000 Combined expenses (2) ........................................................................ (923,250) Consolidated net income .................................................................... $426,750 Noncontrolling interest in subsidiary income (3) ............................... (38,025) Controlling interest in consolidated net income ............................... $388,725

(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues (2) $600,000 Parker expenses plus $300,000 of post-acquisition Sawyer expenses plus $23,250 amortization expenses for 9 months (3) ($200,000 ­ 31,000) adjusted subsidiary income × 30% × ¾ year

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23.

(15 minutes) Consolidated figures with noncontrolling interest Fair value of company (given) Book value Fair value in excess of book value to machine ($50,000 ­ $10,000) to process trade secret Consolidated figures: · Noncontrolling interest in subsidiary income = 40% × ($50,000 revenues less $26,500 expenses) = $9,400 · End-of-year noncontrolling interest: Beginning balance (40% × $60,000) Income allocation Dividend reduction (40% × $5,000) End-of-year noncontrolling interest · · $24,000 9,400 (2,000) $31,400 $60,000 (10,000) 50,000 40,000 ÷ 10 = $4,000 per year $10,000 ÷ 4 = 2,500 per year $6,500 per year

Machine (net) = $45,000 ($9,000 book value plus $40,000 excess allocation less $4,000 excess depreciation for one year). Process trade secret (net) = $10,000 ­ $2,500 = $7,500

24.

(20 Minutes) (Determine consolidated balances for a step acquisition). a. Amsterdam fair value implied by price paid by Morey $560,000 ÷ 70% = b. Revaluation gain 1/1 equity investment in Amsterdam (book value) 25% income for 1st 6 months Investment book value at 6/30 Fair value of investment Gain on revaluation to fair value c. Goodwill at 12/31 Fair value of Amsterdam at 6/30 Book value at 6/30 (700,000 + [70,000 ÷ 2]) Excess fair value Allocation to goodwill (no impairment) d. Noncontrolling interest 5% fair value balance at 6/30 5% Income from 6/30 to 12/31 5% dividends Noncontrolling interest 12/31

$800,000 $178,000 8,750 186,750 200,000 $13,250 $800,000 735,000 $65,000 $65,000 $40,000 1,750 (1,000) $40,750

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25. (30 Minutes) (Reporting the sale of a portion of an investment in a subsidiary.) a. The 1,000 shares sold are reported using the equity method for the January 1, 2011 until October 1, 2011 period. This stock represents 10 percent of the outstanding shares of Santana. An accrual of $9,000 is recorded by Girardi (10% × $120,000 × ¾ year) reduced by $1,500 in amortization expense as computed below. Therefore, an "Equity Income from Sold Shares of Santana" in the amount of $7,500 will appear in the 2011 consolidated income statement. The consolidation will now include all of Santana's accounts with the 40% noncontrolling interest recognized. Santana fair value 1/1/09 .......................................... Santana book value .................................................. Patent ......................................................................... Life of patent .............................................................. Annual amortization .................................................. 9-months amortization for the 1,000 shares sold: Annual amortization .................................................. Time period involved ................................................ Amortization for nine months .................................. Shares sold--1,000 out of 7,000 .............................. Amortization relating to sold shares ....................... $1,100,000 (1,030,000) $70,000 5 years $14,000 $14,000 ¾ year $10,500 1/7 $1,500

b. As long as control is maintained, the acquisition method considers transactions in the stock of a subsidiary, whether purchases or sales, as transactions in the equity of the consolidated entity. Investment Book Value 10/1/11 1/1/11 balance (given--equity method) ................... Recognition of 1/1/11­10/1/11 period: Income accrual ($120,000 × 70% × ¾) ................ Dividends ($40,000 × 70% × ¾) ........................... Amortization ($14,000 × ¾) .................................. Correct investment book value--10/1/11 ................. Computation of Income Effect--Sales Transaction 10/1/11 book value (above) ....................................... Portion of investment sold (1,000/7,000 shares) .... Book value of investment sold ................................ Proceeds .................................................................... Credit to Girardi's additional paid-in capital ...........

$1,085,000 63,000 (21,000) (10,500) $1,116,500 $1,116,500 1/7 $159,500 191,000 $ 31,500

c. Because Girardi continues to hold 6,000 shares of Santana, control is still maintained and consolidated financial statements would be appropriate with a noncontrolling interest of 40 percent.

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26.

(35 Minutes) (Consolidation entries and the effect of different investment methods) a. From the original fair value allocation, $30,000 is assigned based on the fair value of the patent. With a 5-year life, excess amortization will be $6,000 per year. Because the equity method is in use, no Entry *C is required. Entry S Common Stock (Bandmor) ........................... 300,000 Retained Earnings, 1/1/11(Bandmor) ........... 268,000 Investment in Bandmor (70%) ................. 397,600 Noncontrolling Interest in Bandmor, 1/1/11 170,400 (To eliminate stockholders' equity accounts of subsidiary and recognize outside ownership. Retained earnings figure includes 2009 and 2010 income and dividends.) Entry A Patent .............................................................. 18,000 Goodwill ......................................................... 190,000 Investment in Bandmor ............................ 145,600 Noncontrolling Interest in Bandmor (30%) 62,400 (To recognize unamortized portions of acquisition-date fair value allocations. Patent has undergone two years amortization) Entry I Equity in Subsidiary Earnings ...................... 72,800 Investment in Bandmor ............................ 72,800 (To eliminate intercompany income balance. Equity accrual of $72,800 [70% × ($110,000 ­ 6,000 amortization)] has been recorded) Entry D Investment in Bandmor ................................. 42,000 Dividends Paid .......................................... 42,000 (To eliminate current intercompany dividend transfers--70% of $60,000) Entry E Amortization Expense .................................... Patent ......................................................... (To recognize amortization for current year) 6,000 6,000

Entry P Accounts Payable .......................................... 22,000 Accounts Receivable ............................... (To eliminate intercompany payable/receivable balance)

22,000

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26. (continued) b. If the initial value method had been applied, the parent would have recorded only the dividends received as income rather than an equity accrual. Therefore, Entry *C is needed to adjust the parent's beginning retained earnings for 2011 to the equity method. During 2009 and 2010, the subsidiary earned a total net income of $171,000 but paid dividends of only $83,000. The parent's share of the difference is $61,600 (70% of $88,000 [$171,000 - $83,000]). In addition, the parent's 70% share of excess amortization expense for two years must also be included ($8,400 = 2 years × $6,000 per year × 70%). The net amount to be recognized is $53,200 ($61,600 - $8,400). ENTRY *C Investment in Bandmor ................................. Retained Earnings, 1/1/11 ........................ 53,200 53,200

c. If the partial equity method had been applied, only the excess amortization expenses for the previous two years would have been omitted from the parent's retained earnings. As shown above, that figure is $8,400 (2 years × $6,000 per year × 70%). ENTRY *C Retained Earnings, 1/1/11 ............................. Investment in Bandmor ............................ d. Noncontrolling interest in Bandmor's income--2011 [($110,000 ­ 6,000) × 30%] ............................. 8,400 8,400 $31,200

Noncontrolling interest fair value January 1, 2009 $210,000 Adjustments to original basis: 2009 Net Income to NCI...................................... $20,700 9,000 Dividends paid .......................................... (11,700) 2010 Net income to NCI ..................................... Dividends paid .......................................... 2011 Net income to NCI...................................... Dividends paid .......................................... Noncontrolling interest in Bandmor 12/31/11 .... ­OR­ Worksheet adjustment S .................................................... Worksheet adjustment A .................................................... 2009 income to noncontrolling interest ........................... 2009 dividends to noncontrolling interest ....................... Noncontrolling interest in Bandmor 12/31/11 ...................

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$27,000 (13,200) $31,200 (18,000)

13,800

13,200 $246,000

$170,400 $62,400 31,200 (18,000) $246,000

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27.

(45 Minutes) (Asks about several consolidated balances and consolidation process. Includes the different accounting methods to record investment.) a. Schedule 1--Fair Value Allocation and Excess Amortizations Consideration transferred by Miller ......... Noncontrolling interest fair value ............. Taylor's fair value ....................................... Taylor's book value .................................... Fair value in excess of book value .......... Excess fair value assigned to buildings $664,000 166,000 $830,000 (600,000) 230,000 80,000 $4,000 -0$4,000

Annual Excess Life Amortizations

20 years Goodwill ..................................................... $150,000 indefinite Total ....................................................... b. $150,000 (see schedule 1 above) c. Entry (S) Common Stock (Taylor) ...................................... Additional Paid-in Capital (Taylor) ..................... Retained Earnings (Taylor) ................................. Investment in Taylor Company (80%) .......... Noncontrolling interest in Taylor (20%) ....... Entry (A) Buildings .............................................................. Goodwill ............................................................... Investment in Taylor Company (80%) .......... Noncontrolling interest in Taylor (20%) ....... d. (1) Equity Method Income accrual (80%) .................................... Excess amortization expense ....................... Investment income ................................... (2) Partial Equity Method Income accrual (80%) .................................... (3) Initial Value Method Dividends received (80%) .............................. e. Equity Method Initial fair value paid ............................................. Income accrual 2009­2011 ($260,000 × 80%) ... Dividends 2009­2011 ($45,000 × 80%) .............. Excess Amortizations 2009­2011 ($3,200 × 3) . Investment in Taylor--12/31/11 .................... 300,000 90,000 210,000

480,000 120,000

80,000 150,000 184,000 46,000

$56,000 (3,200) $52,800 $56,000 $8,000 $664,000 208,000 (36,000) (9,600) $826,400

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27. (continued) Partial Equity Method Investment in Taylor--12/31/11 = $836,000 (initial value paid plus income accrual of $208,000 less dividends of $36,000 [no excess amortizations]) Initial Value Method Investment in Taylor--12/31/11 = $664,000 (original value paid) f. Using the acquisition method, the allocation will be the total difference ($80,000) between the buildings' book value and fair value. Based on a 20 year life, annual excess amortization is $4,000. Miller book value--buildings .............................. $800,000 Taylor book value--buildings ............................ 300,000 Allocation ............................................................. 80,000 Excess Amortizations for 2009­2010 ($4,000 × 2) (8,000) Consolidated buildings account ............. $1,172,000 g. Acquisition-date fair value allocated to goodwill (see schedule 1 above) ................................. $150,000 h. If the parent has been applying the equity method, the stockholders' equity accounts on its books will already represent consolidated totals. The common stock and additional paid-in capital figures to be reported are the parent balances only. As to retained earnings, the equity method will properly record all subsidiary income and amortization so that the parent balance is also a reflection of the consolidated total.

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28.

(20 Minutes) (A variety of consolidated balances-midyear acquisition) Book value of Reckers, 1/1 (stockholders' equity accounts) .............. Increase in book value: Net Income (revenues less cost of goods sold and expenses) .................. $120,000 Dividends .............................................. (20,000) Change during year ................................... $100,000 Change during first six months of year Book value of Reckers, 7/1 (acquisition date) $1,400,000

50,000 $1,450,000

Consideration transferred by Kaplan ........... $1,360,000 Noncontrolling interest fair value ................. 300,000 Reckers' fair value (given) .............................. $1,630,000 Book value of Reckers .................................... (1,450,000) Fair value in excess of book value................. $180,000 Annual Excess Excess fair value assigned Life Amortizations Trademarks .................................................. 150,000 5 years $30,000 -0Goodwill ....................................................... $60,000 indefinite Total .......................................................... $30,000 CONSOLIDATION TOTALS: Sales (1) Cost of goods sold (2) Operating expenses (3) Net Income Noncontrolling Interest in sub. Income (4) $1,050,000 540,000 265,000 $245,000 $9,000

(1) $800,000 Kaplan revenues plus $250,000 (post-acquisition subsidiary revenue) (2) $400,000 Kaplan COGS plus $140,000 (post-acquisition subsidiary COGS) (3) $200,000 Kaplan operating expenses plus $50,000 (post-acquisition subsidiary operating expenses) plus ½ year excess amortization of $15,000 (4) 20% of post-acquisition subsidiary income less excess fair value amortization [20% × (120,000 ­ 30,000) × ½ year] = $9,000

Retained Earnings, 1/1 = $1,400,000 (the parent's balance because the subsidiary was acquired during the current year) Trademark = $935,000 (add the two book values and the excess fair value allocation after taking one-half year excess amortization) Goodwill = $60,000 (the original allocation)

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29.

(25 Minutes) (A variety of consolidated questions and balances) a. Nascent applies the initial value method because the original price of $414,000 is still in the Investment in Sea-Breeze account. In addition, the Investment Income account is equal to 60 percent of the dividends paid by the subsidiary during the year. b. Consideration transferred in acquisition . Noncontrolling interest fair value ............. Sea-Breeze fair value 1/1/09 ..................... Sea-Breeze book value 1/1/09 Excess fair value over book value Excess fair assignments: $414,000 276,000 $690,000 550,000 $140,000 Annual Excess Life Amortizations 6 years $10,000 4 years (5,000) 10 years 10,000 $15,000

Buildings ............................................... 60,000 Equipment ............................................. (20,000) Patent ..................................................... 100,000 Total ..................................................... -0-

c. If the equity method had been applied, the Investment Income account would show the basic equity accrual less amortization: 60% of (the subsidiary's income of $90,000 less $15,000 excess fair value amortization) = $45,000. d. The initial value method recognizes neither the increase in the subsidiary's book value nor the excess amortization expenses for prior years. At the acquisition date, the subsidiary's book value was $550,000 as indicated by the assets less liabilities. At the beginning of the current year, the book value of the subsidiary is $780,000 as indicated by beginning stockholders' equity balances. Increase in book value during prior years ($780,000 ­ $550,000) .......................................................... Less excess amortization ......................................................... Net increase in book value ........................................................ Ownership ................................................................................. Increase required in parent's retained earnings, 1/1/12 ........ Parent's retained earnings, 1/1/12 as reported ....................... Parent's share of consolidated retained earnings, 1/1/12 ...... e. Consolidated net income and allocation Revenues (add book values) Expenses (add book values and excess amortization) Consolidated net Income Noncontrolling interest in consolidated net income ($90,000 ­ 15,000) × 40% Controlling interest in consolidated net income $230,000 (45,000) $185,000 60% $111,000 700,000 $811,000 $900,000 (635,000) $265,000 30,000 $235,000

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29. (continued) f. Consolidated buildings, 1/1/09 (subsidiary): Book value ............................................................................. Acquisition-date fair-value allocation ................................ Consolidation figure ............................................................ g. Consolidated buildings, 12/31/12: Parent's book value ............................................................. Subsidiary's book value ...................................................... Original allocation ............................................................... Amortization ($10,000 × 4 years) ........................................ Consolidated balance ..........................................................

$300,000 60,000 $360,000 $700,000 200,000 60,000 (40,000) $920,000

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30. Acquisition Method Consolidated Balances

December 31, 2010 Revenues Cost of goods sold Depreciation expense Amortization expense Interest expense Equity in Steele Income Separate company net income Consolidated net income NCI in Steele Income Controlling interest in CNI Retained Earnings 1/1 Net Income Dividends paid Retained Earnings 12/31 Current Assets Investment in Steele (2,625,000) (437,000) 350,000 (2,712,000) 1,204,000 1,854,000 (395,000) (215,000) 25,000 (585,000) 430,000 (D) 22,500 (S)769,500 (A)985,500 (I) 121,500 (E) 80,000 (S)395,000 (D) 22,500 2,500 Pierson (1,843,000) 1,100,000 125,000 275,000 27,500 (121,500) (437,000) Steele (675,000) 322,000 120,000 11,000 7,000 Adjustments & Eliminations NCI Consolidated (2,518,000) 1,422,000 245,000 366,000 34,500 -0-

(E) 80,000 (I)121,500

(215,000) (13,500) (450,500) (13,500) (437,000) (2,625,000) (437,000) 350,000 (2,712,000) 1,634,000 -0640,000 1,794,000 1,057,000 375,000 5,500,000 (685,000) (697,000) (S) 85,500 (A)109,500 (195,000) (206,000)

Customer base Buildings and Equipment Copyrights Goodwill Total Assets Accounts Payable Notes Payable NCI in Steele

-0931,000 950,000 4,939,000 (485,000) (542,000)

-0863,000 107,000 1,400,000 (200,000) (155,000)

(A)720,000

(A)375,000

Common Stock Additional Paid-In Capital Retained Earnings 12/31 Total Liab. and SE

(900,000) (300,000) (2,712,000) (4,939,000)

(400,000) (60,000) (585,000) (1,400,000)

(S)400,000 (S) 60,000

(206,000) (900,000) (300,000) (2,712,000) (5,500,000)

Fair value of Steele Company (1,710,000 ÷ 90%) Carrying amount acquired Excess fair value to customer base to goodwill

$1,900,000 725,000 1,175,000 800,000 $375,000

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© The McGraw-Hill Companies, Inc., 2009 Solutions Manual

30. (Continued) Controlling Noncontrolling Interest Interest $1,710,000 $190,000

Fair value at acquisition date Relative fair values of identifiable net assets 90% and 10% of $1,525,000 (acquisition date recorded fair value plus customer base) Goodwill

1,372,500 $337,500

152,500 $37,500

b. If the fair value of the noncontrolling interest was $152,500, both goodwill and the noncontrolling interest balance would be reduced equally by $37,500 as follows: Fair value of Steele Company (1,710,000 + 152,500) Carrying amount acquired Excess fair value to customer base to goodwill Noncontrolling interest balance beginning of year Noncontrolling interest in consolidated net income Dividends paid to noncontrolling interest Noncontrolling interest end of year $1,862,500 725,000 1,137,500 800,000 $337,500 $(157,500) (13,500) 2,500 $168,500 Controlling Noncontrolling Interest Interest $1,710,000 $152,500

Fair value at acquisition date Relative fair values of identifiable net assets 90% and 10% of $1,525,000 (acquisition date recorded fair value plus customer base) Goodwill

1,372,500 $337,500

152,500 -0-

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© The McGraw-Hill Companies, Inc., 2009 4-19

31.

(60 Minutes) (Consolidation worksheet and income statement with parent using initial value method. Also consolidated balances with a control premium paid by parent.) Fair Value Allocation and Amortization Consideration transferred by Krause ............ Noncontrolling interest fair value .................. Leahy total fair value 1/1/09 ............................ Leahy book value 1/1/09 ................................. Fair value in excess of book value ................

a.

$504,000 126,000 $630,000 (380,000) $250,000

Annual Excess Life Amortizations $9,000 6,000 $15,000

Excess price allocated to undervalued Building ................................................. 45,000 5 years Trademark ........................................... 60,000 10 years Goodwill ...................................................... $145,000 Explanation of Consolidation Entries Found on Worksheet

Entry *C: Convert the parent's 1/1/10 retained earnings balance from the cash basis to the accrual basis. Entry S: Eliminates stockholders' equity accounts of subsidiary while recognizing noncontrolling interest balance (20%) as of the beginning of the current year. Entry A: Recognizes acquisition-date fair value allocations less 1 year amortization for building and trademark and increases beginning balance of the noncontrolling interest for it's share. Entry I: Eliminates Intercompany dividend payments recorded as income by parent. Entry E: Recognizes amortization expense for current year. Columnar Entry--Recognizes noncontrolling interest's share of subsidiary's net income ($90,000 ­ 15,000) × 20%).

McGraw-Hill/Irwin 4-20

© The McGraw-Hill Companies, Inc., 2009 Solutions Manual

31. a. (continued)

KRAUSE CORPORATION AND LEAHY, INC. Consolidation Worksheet For Year Ending December 31, 2010

Krause Corporation Leahy Inc. Consolidation Entries Debit Credit Noncontrolling Consolidated Interest Totals

Accounts

Sales Cost of goods sold Operating expenses Dividend income Separate company net income Consolidated net income NCI in Leahy's income Krause's interest in consolidated income Retained earnings, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 Current assets Investment in Leahy Buildings and equipment (net) Trademarks Goodwill Total assets Liabilities Common stock Retained earnings, 12/31 (above) NCI in Leahy, 1/1 NCI in Leahy, 12/31 Total liabilities and equities

McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

(584,000) 194,000 246,000 (16,000) (160,000)

(250,000) 95,000 65,000 ______ (90,000)

(E) 15,000 (I) 16,000

(834,000) 289,000 326,000 -0219,000 15,000 (204,000) (744,000) (204,000) 70,000 (878,000) 487,000 -01,097,000 292,000 145,000 2,021,000 (675,000) (320,000) (878,000) (S) 90,000 (A) 47,000 (137,000) 148,000

(15,000)

(700,000) (160,000) 70,000 (790,000) 296,000 504,000 680,000 100,000 0 1,580,000 (470,000) (320,000) (790,000)

(350,000) (90,000) 20,000 (420,000) 191,000

(S)350,000 (*C) 44,000 (I) 16,000 4,000

(*C) 44,000 390,000 144,000 0 725,000 (205,000) (100,000) (420,000) (A) 36,000 (A) 54,000 (A)145,000

(S)360,000 (A)188,000 (E) 9,000 (E) 6,000

(S)100,000

(1,580,000)

(725,000)

© The McGraw-Hill Companies, Inc., 2009 4-21

(148,000) (2,021,000)

31. (continued) b.

KRAUSE CORPORATION AND LEAHY, INC.

Consolidated Income Statement For Year Ending December 31, 2010

Sales Cost of goods sold Operating expenses Total expenses Consolidated net income To 20% noncontrolling interest To controlling interest Consolidated Net income

$834,000 $289,000 326,000 615,000 $219,000 $15,000 $204,000 $219,000 $504,000 97,000 $601,000 485,000 $116,000

c. Consideration transferred by Krause for 80% of Leahy Noncontrolling interest fair value ($4.85 × 20,000 shares) Leahy fair value Fair value of Leahy's underlying net assets Goodwill

If the noncontrolling interest fair value was $4.85 per share at the acquisition date, then goodwill declines to $116,000 and the noncontrolling interest total would also decline from $149,000 to 120,000). Worksheet entries (S) and (A) assuming a $4.85 noncontrolling interest acquisition-date fair value: (S) Common stock-Leahy Retained earnings- Leahy 1/1 Investment in Leahy Noncontrolling interest Buildings and equipment (net) Trademarks Investment in Leahy Noncontrolling interest Goodwill Investment in Leahy 100,000 350,000 360,000 90,000 36,000 54,000 72,000 18,000 116,000 116,000 Controlling Noncontrolling Interest Interest $504,000 $97,000

(A)

Fair value at acquisition date Relative fair values of identifiable net assets 80% and 20% of $485,000 (acquisition date fair value of net identifiable assets) Goodwill

388,000 $116,000

97,000 -0-

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32.

(40 Minutes) (Determine consolidated balances.) Acquisition-date subsidiary fair value (given) ... $850,000 Book value of subsidiary (given) ........................ (600,000) Fair value in excess of book value ..................... $250,000 Allocations to specific accounts based on difference between fair value and book value Land ................................................................ $165,000 Buildings and equipment .............................. (25,000) Copyright ........................................................ 100,000 Notes payable ................................................. 10,000 250,000 Total ....................................................... -0Annual excess amortizations: Buildings and equipment [$(25,000) ÷ 10 years] Copyright ($100,000 ÷ 20 years) Notes payable ($10,000 ÷ 8 years) Total

$(2,500) 5,000 1,250 $3,750

Consolidated Totals: Revenues = $1,900,000 (add the two book values) Cost of goods sold = $1,085,000 (add the two book values) Depreciation expense = $267,500 (add the two book values less $2,500 excess adjustment) Amortization expense = $10,000 (add the two book values plus $5,000 excess adjustment) Interest expense = $50,250 (add the two book values plus $1,250 excess adjustment) Equity in income of Sam = -0- (eliminated so that the individual revenues and expenses of the subsidiary can be included in the consolidated figures) Net income = $487,250 (revenues less expenses) Retained earnings, 1/1 = $1,265,000 (parent company balance; subsidiary's operations prior to acquisition do not affect consolidated figures) Noncontrolling interest in income of subsidiary = $26,250 ($135,000 reported income of the subsidiary less $3,750 amortization expense multiplied by 20 percent outside ownership) Dividends paid = $260,000 (parent company balance; subsidiary's payments to parent are intercompany, payments to outside owners decrease noncontrolling interest balance)

McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009 4-23

32. (continued) Retained earnings, 12/31 = $1,466,000 (consolidated balance on 1/1/09 plus consolidated net income less noncontrolling interest in subsidiary's income less consolidated dividends) Current assets = $1,493,000 (add the two book values) Investment in Sam = -0- (eliminated so that the individual assets and liabilities of the subsidiary can be included in the consolidated figures) Land = $517,000 (add the book values plus the $165,000 excess allocation) Buildings and equipment (net) = $1,119,500 (add the book values less the $25,000 allocation [asset was overvalued] plus the excess amortization) Copyright = $190,000 (book value + $100,000 excess allocation less amortization for the year) Total assets = $3,319,500 Accounts payable = $339,000 (add book values) Notes payable = $581,250 (add the book values less $10,000 excess allocation plus amortization) Noncontrolling interest in subsidiary = $183,250 (20% of fair value as of 1/1/09 [$170,000] plus noncontrolling interest in income of subsidiary [$26,250] less dividends paid to outside owners [$13,000]) Common stock = $300,000 (parent company balance) Additional paid-in capital = 450,000 (parent company balance) Retained earnings, 12/31 = $1,466,000 (computed above) Total liabilities and equities = $3,319,500

McGraw-Hill/Irwin 4-24

© The McGraw-Hill Companies, Inc., 2009 Solutions Manual

32. (continued) Acquisition Method

Accounts Father Sam Consolidation Entries Debit Credit Noncontrolling Consolidated Interest Totals

Revenues ........................................ (1,360,000) Cost of goods sold ......................... 700,000 Depreciation expense .................... 260,000 Amortization expense .................... -0Interest expense ............................. 44,000 Equity in income of Sam ............... (105,000) Separate company net income ...... (461,000) Consolidated net income ............... Noncontrolling interest in Sam's income Controlling interest in CNI ............ Retained earnings 1/1 ................... (1,265,000) Net income (above) ....................... (461,000) Dividends paid ............................... 260,000 Retained earnings 12/31 .......... (1,466,000) Current assets ............................... 965,000 Investment in Sam ......................... 733,000

(540,000) 385,000 10,000 5,000 5,000 -0(135,000)

(E) (E) 5,000 (E) 1,250 (I) 105,000

2,500

(1,900,000) 1,085,000 267,500 10,000 50,250 -0(487,250) 26,250 (461,000) (1,265,000) (461,000) 260,000 (1,466,000) 1,493,000

(26,250) (440,000) (135,000) 65,000 (510,000) 528,000 (S) 440,000 (D) 52,000 13,000

Land ............................................... Buildings and equipment (net) ...... Copyright ....................................... Total assets .............................. Accounts payable .......................... Notes payable ................................ NCI in Sam 1/1 ................................ NCI in Sam 12/31 ................................................... Common stock .............................. Additional paid-in capital ............... Retained earnings 12/31... (above) Total liab. and stockholders' equity

292,000 877,000 -02,867,000 (191,000) (460,000)

60,000 265,000 95,000 948,000 (148,000) (130,000)

(D) 52,000 (S) 480,000 (I) 105,000 (A) 200,000 (A) 165,000 (E) 2,500 (A) 25,000 (A) 100,000 (E) 5,000

(A) 10,000 (E) 1,250 (S) 120,000 (A) 50,000 (S) 100,000 (S) 60,000

-0517,000 1,119,500 190,000 3,319,500 (339,000) (581,250) (170,000) (183,250)

(300,000) (450,000) (1,466,000) (2,867,000)

(100,000) (60,000) (510,000) (948,000)

(183,250) (300,000) (450,000) (1,466,000) (3,319,500)

McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009 4-25

33. a.

(55 Minutes) (Consolidated worksheet) Consideration transferred by Adams Noncontrolling interest fair value Acquisition-date total fair value Book value of Barstow (CS + RE 12/31/09) Excess fair value over book value $603,000 67,000 $670,000 (460,000) $210,000 Annual Excess Life Amortizations -- -- 10 years ($2,000) 5 years 8,000 10 years 5,000 5 years 4,000 120,000 $90,000 indefinite -0$15,000

Land Buildings Equipment Patents Notes payable Goodwill Total b.

$30,000 (20,000) 40,000 50,000 20,000

Because investment income is exactly 90 percent of Barstow's reported earnings, Adams apparently is applying the partial equity method. Explanation of Consolidation Entries Found on Worksheet Entry *C--Converts Adams's financial records from the partial equity method to the equity method by recognizing amortization for 2010. Total expense was $15,000 but only 90 percent (or $13,500) applied to the parent. Entry S--Eliminates subsidiary's stockholders' equity while recording noncontrolling interest balance as of January 1, 2011. Entry A--Records unamortized allocation balances as of January 1, 2011. The acquisition method attributes 10 percent of these amounts to the noncontrolling interest. Entry I--Eliminates intercompany income accrual for 2011. Entry D--Eliminates intercompany dividend transfers. Entry E--Records amortization expense for current year. Columnar Entry--Recognizes noncontrolling interest's share of Barstow's net income as follows: Noncontrolling Interest in Barstow's Income (Columnar Entry) Barstow reported income .............................................................. Excess amortization expenses 2011 ............................................. Adjusted income of Barstow .................................................... Noncontrolling interest ownership ............................................... Noncontrolling interest in Barstow's income ......................... $120,000 (15,000) $105,000 10% $10,500

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© The McGraw-Hill Companies, Inc., 2009 Solutions Manual

33. b. (continued)

ADAMS CORPORATION AND BARSTOW, INC. Consolidation Worksheet-Acquisition Method For Year Ending December 31, 2011

Adams Corp. Barstow Inc. Debit Credit

Noncontrolling Interest

Consolidated Totals

Revenues Cost of goods sold Depreciation expense Amortization expense Interest expense Investment income Separate company net income Consolidated net income Income to noncontrolling interest Income to controlling interest Retained earnings, 1/1 Net income Dividends paid Retained earnings, 12/31 Current assets Investment in Barstow

(940,000) 480,000 100,000 40,000 (108,000) (428,000)

(280,000) 90,000 55,000 15,000 (120,000)

(E) 6,000 (E) 5,000 (E) 4,000 (I) 108,000

(1,220,000) 570,000 161,000 5,000 59,000 -0(425,000) 10,500 (414,500) (1,353,500) (414,500) 110,000 (1,658,000) 860,000 -0-

(10,500) (1,367,000) (428,000) 110,000 (1,685,000) 610,000 702,000 (340,000) (120,000) 70,000 (390,000) 250,000 (D) 63,000 (*C) 13,500 (S) 468,000 (A) 175,500 (I) 108,000 (A) 18,000 (E) 8,000 (E) 5,000 (C*) 13,500 (S) 340,000 (D) 63,000 7,000

Land Buildings Equipment Patents Goodwill Total assets Notes payable Common stock Retained earnings, 12/31 Noncontrolling interest Total liabilities and stockholders' equity

McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

380,000 490,000 873,000

150,000 250,000 150,000

(A) (E) (A) (A) (A)

30,000 2,000 32,000 45,000 90,000

3,055,000 (860,000) (510,000) (1,685,000)

800,000 (230,000) (180,000) (390,000) (A) 16,000 (S) 180,000 (E) 4,000

560,000 724,000 1,047,000 40,000 90,000 3,321,000 (1,078,000) (510,000) (1,658,000) (71,500) (75,000)

(S) 52,000 (A) 19,500 (3,055,000) (800,000)

© The McGraw-Hill Companies, Inc., 2009 4-27

(75,000) (3,321,000)

34. (25 minutes) (Consolidated balances after a mid-year acquisition) a. Investment account balance indicates the initial value method. Consideration transferred ........................ Noncontrolling interest fair value ............ Duncan acquisition-date fair value .......... Book value of Duncan (below) .................. Fair value in excess of book value .......... Excess assigned based on fair value: Equipment ........................................ Goodwill .......................................... Total ...................................................... Amortization for 9 months .................. $526,000 300,000 826,000 (765,000) $61,000 Annual Excess Life Amortizations (30,000) 5 years $(6,000) $91,000 indefinite -0$(6,000) $(4,500)

Acquisition-Date Subsidiary Book Value Book value of Duncan, 1/1/09 (CS + 1/1 RE) ........... $740,000 Increase in book value-net income (dividends were paid after acquisition) ................................ $100,000 Time prior to purchase (3 months) .......................... ×¼ 25,000 Book value of Duncan, 4/1/09 (acquisition date) .... $765,000 Consolidated Income Statement: Revenues (1) Cost of goods sold (2) Operating expenses (3) Consolidated net income Noncontrolling interest in CNI (4) Controlling interest in CNI $825,000 $405,000 214,500 619,500 205,500 28,200 $177,300

(1) $900,000 combined revenues less $75,000 (preacquisition subsidiary revenue) (2) $440,000 combined COGS less $35,000 (preacquisition subsidiary COGS) (3) $234,000 combined operating expenses less $15,000 (preacquisition subsidiary operating expenses) less nine month excess overvalued equipment depreciation reduction of $4,500 (4) 40% of post-acquisition subsidiary income less excess amortization

b.

Goodwill = $91,000 (original allocation) Equipment = $774,500 (add the two book values less $30,000 reduction to fair value plus $4,500 nine months excess amortization) Common Stock = $630,000 (parent company balance only) Buildings = $1,124,000 (add the two book values) Dividends Paid = $80,000 (parent company balance only)

McGraw-Hill/Irwin 4-28

© The McGraw-Hill Companies, Inc., 2009 Solutions Manual

35. (40 minutes) Determine consolidated balance for a mid-year acquisition. a. Consideration transferred by Truman .......... $720,000 Noncontrolling interest fair value ................. 290,000 Atlanta's acquisition-date total fair value ...... $1,010,000 Book value of Atlanta ...................................... (840,000) Fair value in excess of book value................. $170,000 Annual Excess Excess fair value assigned Life Amortizations Patent ......................................................... 100,000 5 years $20,000 Goodwill ....................................................... $70,000 indefinite -0Total .......................................................... $20,000 Controlling Noncontrolling Interest Interest $720,000 $290,000

b. Fair values at acquisition date Relative fair values of identifiable net assets 70% and 30% of $940,000 (acquisition date book value plus patent = net asset fair value) Goodwill c.

658,000 $62,000

282,000 $8,000 $720,000 35,000 (28,000) $727,000

Initial value at acquisition date Truman's share of Atlanta's income for half year ([$120,000 ­ 20,000 amortization × ½ year] × 70%) Dividends 2009 ($80,000 × ½ year × 70%) Investment account balance 12/31/09

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© The McGraw-Hill Companies, Inc., 2009 4-29

35. (continued) d. Consolidated Worksheet Revenues Operating Expenses Income of subsidiary Separate company net income Consolidated net income NCI in Atlanta's income Controlling interest in CNI Retained earnings, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 Current assets Investment in Atlanta Truman (670,000) 402,000 (35,000) (303,000) Atlanta (400,000) 280,000 (120,000) (15,000) (318,000) 15,000 (303,000) (823,000) (303,000) (S) 40,000 (D) 28,000 12,000 145,000 (981,000) 871,000 0

Adjustments & Eliminations

NCI

(S)200,000 (E) 10,000 (I) 35,000

(S)140,000

Cons. (870,000) 552,000 0

(823,000) (303,000) 145,000 (981,000) 481,000 727,000

(500,000) (120,000) 80,000 (540,000) 390,000

(S) 500,000

(D) 28,000

(S)588,000 (I) 35,000 (A)132,000

Land Buildings Patent Goodwill Total assets Liabilities Common stock Additional paid-in capital Retained earnings, 12/31 Noncontrolling interest, 7/1 Noncontrolling interest, 12/31 Total liabilities and stockholders' equity

388,000 701,000

200,000 630,000 (A) 100,000 (A) 70,000 (E) 10,000

2,297,000 (816,000) (95,000) (405,000) (981,000)

1,220,000 (360,000) (300,000) (20,000) (540,000)

588,000 1,331,000 90,000 70,000 2,950,000 (1,176,000) (95,000) (405,000) (981,000)

(S) 300,000 (S) 20,000 (A) 38,000 (S)252,000

(290,000) 293,000

(293,000) (2,950,000)

(2,297,000)

(1,220,000)

1,263,000

1,263,000

McGraw-Hill/Irwin 4-30

© The McGraw-Hill Companies, Inc., 2009 Solutions Manual

36. (60 minutes) (Consolidated statements for a step acquisition) a. Fair value of Sysinger 1/1/10 (given) Book value of Sysinger 1/1/10 (CS + APIC + RE) Excess fair value over book value To customer contract (4 year life) To goodwill Equity in earnings of Sysinger 2010 income (150,000 × 95%) Amortization (100,000 × 95%) Equity in earnings of Sysinger Revaluation of 15% block to fair value Consideration transferred 2009 Income (100,000 × 15%) 2009 dividends (30,000 × 15%) Book value at 1/1/10 Fair value at 1/1/10 Gain on revaluation Investment account balance 12/31/10 Fair value at 1/1/10 (15% block) Consideration transferred 1/1/10 (80% block) Equity earnings 2010 2010 income (95% × 150,000) Customer contract amortization Dividends 2010 (40,000 × 95%) Investment in Sysinger 12/31/10 $1,750,000 1,300,000 450,000 400,000 $50,000

b.

$142,500 (95,000) $47,500

$184,500 15,000 (4,500) 195,000 262,500 $67,500

$262,500 1,400,000 142,500 (95,000)

47,500 (38,000) $1,672,000

McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009 4-31

36. (Continued) c.

Accounts Revenues Operating expenses Equity earnings of Sysinger Gain on revaluation Separate company net income Consolidated net income NCI in Sysinger's income Allan's share of CNI Retained earnings, 1/1 Net income Dividends paid Retained earnings 12/31 Current assets Investment in Sysinger

Allan and Sysinger Consolidation Worksheet For Year Ending December 31, 2010 Allan Sysinger Consolidation Entries Company Company Debit Credit (931,000) (380,000) 615,000 230,000 (E)100,000 (47,500) -0(I) 47,500 (67,500) -0(431,000) (150,000)

Noncontrolling Consolidated Interest Totals (1,311,000) 945,000 -0(67,500) (433,500) 2,500 (431,000) (965,000) (431,000) 140,000 (1,256,000) 828,000 -0-

(2,500) (965,000) (431,000) 140,000 (1,256,000) 288,000 1,672,000 (600,000) (150,000) 40,000 (710,000) 540,000 -0(S) 600,000 (D) 38,000 2,000

(D) 38,000

(S)1,235,000 (I) 47,500 (A) 427,500

Property, plant, and equipment Patented technology Customer contract Goodwill Total assets Liabilities Common stock Additional paid-in capital Retained earnings 12/31 NCI in Sysinger, 1/1 NCI in Sysinger, 12/31 Total liab. and stockholders' equity

826,000 850,000 -03,636,000 (1,300,000) (900,000) (180,000) (1,256,000) -0-0(3,636,000)

590,000 370,000 -0-01,500,000 (90,000) (500,000) (200,000) (710,000) -0-0(1,500,000)

(A) 400,000 (A) 50,000

(E) 100,000

1,416,000 1,220,000 300,000 50,000 3,814,000 (1,390,000) (900,000) (180,000)) (1,256,000)

(S) 500,000 (S) 200,000 (S) 65,000 (A) 22,500 1,935,500 1,935,500

(87,500) (88,000)

(88,000) (3,814,000)

McGraw-Hill/Irwin 4-32

© The McGraw-Hill Companies, Inc., 2009 Solutions Manual

37. (60 minutes) (Step acquisition--control previously acquired.) a. According to the acquisition method, the valuation basis for a subsidiary is established on the date control is obtained, in this case January 1, 2009. Subsequent acquisitions are valued consistent with this initial value after adjusting the investment for subsidiary income and other changes. Because subsequent acquisitions are considered as transactions in the parent's own equity, no gains or losses are recorded. Differences in cash paid and the underlying value are recorded as adjustments to APIC. Fair value of Keane Company 1/1/09 ($573,000 ÷ 60%) Keane income 2009 Excess fair value amortization for copyright Keane dividends 2009 Initial fair value adjusted to 1/1/10 Percent acquired in step acquisition Value assigned to 30% acquisition Cash paid for the 30% acquisition Credit to APIC from 30% step acquisition *Fair value of Keane Company 1/1/09 ($573,000 ÷ 60%) Book value of Keane Company 1/1/09 (given) Excess fair value over book value To copyright (6 year life) To goodwill Entry to record 30% additional investment in Keane: 1/1/10 Investment in Keane Cash APIC from step acquisition 301,500 300,000 1,500 $573,000 78,000 (48,000) 301,500 144,000 (54,000) $994,500 $955,000 150,000 (20,000)* (80,000) $1,005,000 30% 301,500 300,000 $1,500 $955,000 810,000 145,000 120,000 $25,000

b. Investment in Keane Company 1/1/09 2009 Equity earnings [60% × (150,000 ­ 20,000)] 2009 Dividends received (60% × $80,000) Additional acquisition of 30% interest 2010 Equity earnings [90% × (180,000 ­ 20,000)] 2010 Dividends received (90% × $60,000) Investment in Keane Company 12/31/10

McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009 4-33

37. (continued) part c.

BRETZ, INC. AND KEANE COMPANY Consolidation Worksheet Year Ending December 31, 2010 Bretz, Inc. (402,000) 200,000 (144,000) (346,000) Keane Co. (300,000) 120,000 (180,000 (16,000) (797,000) (346,000) 143,000 (1,000,000) 224,000 994,500 (500,000) (180,000) 60,000 (620,000) 190,000 (D)54,000 (S) 792,000 (A) 112,500 (I) 144,000 (S) 500,000 (D) 54,000 6,000 (362,000) 16,000 (346,000) (797,000) (346,000) 143,000 (1,000,000) 414,000 0 Consolidation Entries Noncontrolling Consolidated Debit Credit Interest Totals (702,000) (E) 20,000 340,000 (I) 144,000

Accounts Revenues Operating expenses Equity in Keane's income Separate company net income Consolidated net income NCI in Keane's income Bretz's share of CNI Retained earnings, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 Current assets Investment in Keane Company

Trademarks Copyrights Equipment (net) Goodwill Total assets Liabilities Common stock Additional paid-in capital APIC-step acquisition Retained earnings,12/31 Non-controlling interest 12/31 Total liabilities and equities

106,000 210,000 380,000 1,914,500 (453,000) (400,000) (60,000) (1,500) (1,000,000)

600,000 300,000 110,000 1,200,000 (200,000) (300,000) (80,000) (620,000)

(A)100,000 (A) 25,000

(E) 20,000

706,000 590,000 490,000 25,000 2,225,000 (653,000) (400,000) (60,000) (1,500) (1,000,000)

(S)300,000 (S) 80,000

(1,914,500)

(1,200,000)

1,223,000

(A) 12,500 (S) 88,000 1,223,000

(100,500) 110,500

(110,500) (2,225,000)

McGraw-Hill/Irwin 4-34

© The McGraw-Hill Companies, Inc., 2009 Solutions Manual

38.

(30 Minutes) (Determine consolidated balances when parent uses equity method. Includes sale of a portion of the investment) Purchase Price Allocation and Excess Amortizations Purchase price .......................................... $250,000 Book value acquired ($230,000 × 70%) .................................. 161,000 Price in excess of book value .................. $89,000 Annual Excess Allocation based on fair value .................. Life Amortizations Land ($10,000 × 70%) $7,000 Equipment ($68,000 × 70%) 47,600 14 yrs. $3,400 Liabilities ($20,000 × 70%) 14,000 10 yrs. 1,400 68,600 Goodwill ..................................................... $20,400 indefinite -0Total .......................................................... $4,800 The parent uses the equity method: Investment income of $44,200 = $49,000 (70% × $70,000) less $4,800 amortization expense.

Revenues Operating expenses Investment income Noncontrolling int(E)erest in Creedmoor income Net income Retained earnings, 1/1/09 Net income Dividends paid Retained earnings, 12/31/09 Current assets Investment in Creedmoor

Bon Air (694,800) 630,000 (44,200)

Creedmoor (250,000) 180,000 -0-

Adjustments & Eliminations (E) 4,800 (I) 44,200

NCI

Consolidated

(944,800) 814,800 -0(21,000) 21,000 (109,000) (760,000) (109,000) 68,000 (801,000) 192,000

(109,000) (760,000) (109,000) 68,000 (801,000) 72,000 321,800

(70,000) (260,000) (70,000) 10,000 (320,000) 120,000 -0(S)260,000 (D) 7,000 3,000

(D) 7,000

(S)210,000 (I) 44,200 (A)74,600

-0298,000 489,000 239,200 20,400 1,238,600 (221,600) (50,000) (58,000) (90,000) 108,000 (108,000) (801,000) (1,238,600)

Land Buildings (net) Equipment (net) Goodwill Total assets Liabilities Common stock Additional paid-in capital Noncontrolling interest 1/1/09 Noncontrolling interest 12/31/09 Retained earnings, 12/31/09 Total liabilities and equities

241,000 289,000 165,200 -01,089,000 (180,000) (50,000) (58,000)

50,000 200,000 40,000 -0410,000 (50,000) (40,000) -0-

(A) 7,000 (A)37,400 (A)20,400 3,400

(A) 9,800 (S) 40,000

(E) 1,400

(S)90,000

(801,000) (1,089,000)

(320,000) (410,000)

430,600

430,600

McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009 4-35

39.

(50 Minutes) (A variety of questions and consolidated balances for combination where parent applies equity method) a. Equity accrual (60% × $70,000) .............................................. Excess amortizations (below) ................................................ Equity income (parent uses equity method) .................... Purchase Price Allocation and Excess Amortizations Purchase price .......................................... Book value acquired (60% of $470,000 [assets minus liabilities]) .... Price in excess of book value .................. Excess price assigned to specific ............ accounts based on fair value .................... Equipment (overvalued) ([$30,000] × 60%) .................................. Buildings ($155,000 × 60%) ................. Bonds payable ($20,000 × 60%) ........... Goodwill ..................................................... Total ...................................................... $400,000 282,000 $118,000 Life (18,000) 93,000 12,000 $31,000 Annual Excess Amortizations $(1,800) 6,200 1,200 -0$5,600 $42,000 (5,600) $36,400

10 yrs. 15 yrs. 10 yrs. indefinite

b. No adjustment to the parent's retained earnings is needed because the company is applying the equity method. c. $5,600--see a. d. $28,000--40% of $70,000 reported income figure e. Watson Corporation Consolidated Income Statement For the Year Ended December 31, 2009 Revenues Operating expenses Combined entity net income Noncontrolling interest in Houston income Consolidated net income f. Allocations (see a) Equipment Buildings Bonds payable Goodwill (18,000) 93,000 12,000 31,000 $920,000 695,600 224,400 28,000 $196,400 Remaining Allocations 12/31/09 (10,800) 68,200 7,200 31,000

Excess Amortizations for 4 years (7,200) 24,800 4,800 -0-

McGraw-Hill/Irwin 4-36

© The McGraw-Hill Companies, Inc., 2009 Solutions Manual

39.

(continued) g. Noncontrolling interest, 1/1/08 (40% of book value of $630,000) $252,000 Noncontrolling interest in subsidiary's income (see e) ........... 28,000 Noncontrolling interest in subsidiary's dividends .................... (16,000) (40% × $40,000) Noncontrolling interest in subsidiary, 12/31/09 ........................ $264,000 h. Watson Corporation Consolidated Balance Sheet December 31, 2009 Current assets Equipment (net) Buildings (net) Goodwill Total assets $475,000 Current liabilities 909,200 1,001,200 31,000 $2,416,400 Bonds Payable Noncontrolling interest Common stock Retained earnings Total liabilities and equity $560,000 462,800 264,000 310,000 819,600 $2,416,400

40.

(40 Minutes) (Determine consolidated balances, parent has applied the cost method) Acquisition price ............................................ $1,400,000 Book value acquired (see Schedule 1) ($1,120,000 × 80%) .......................................... 896,000 Cost in excess of book value ........................ $504,000 Annual Excess Excess cost allocated to buildings based Life Amortizations on fair value ($80,000 × 80%) ......................... 64,000 10 years $6,400 Unpatented technology ($550,000 × 80%) .... 440,000 10 years 44,000 Total .......................................................... $ -0$50,400 Schedule 1--Book Value of Morning (January 1, 2006) Book value, January 1, 2009 (stockholders' equity accounts) .............. 2008 Increase in book value .......................... 2007 Increase in book value .......................... 2006 Increase in book value .......................... Book value, January 1, 2006 .......................... $1,500,000 $200,000 100,000 80,000

380,000 $1,120,000

Revenues = $1,384,000 (add the two book values) Expenses = $550,400 (add the two book values and then include $50,400 excess amortization expenses for the year as computed above) Noncontrolling interest in subsidiary's net income = $80,000 (20% of subsidiary's reported income of $400,000)

McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 4-37

40. (continued) Net Income = $753,600 (consolidated revenues less both consolidated expenses and the noncontrolling interest's share of net income) Retained earnings, 1/1/09 = $1,952,800 (the cost method is in use because the original purchase price is still in the Investment account. Thus, the $380,000 increase in book value for the three previous years [income of $680,000 less dividends paid of $300,000] multiplied by the 80 percent ownership gives an equity accrual of $304,000. Excess amortization for these same three years totals $151,200 ($50,400× 3). Therefore, the parent's retained earnings must be increased by the net amount [$152,800 or $304,000 ­ $151,200]) Dividends paid = $380,000 (the parent company balance only) Retained earnings, 12/31/09 = $2,326,400 (beginning balance plus net income less dividends paid) Cash = $500,000 (add book values) Receivables = $1,000,000 (add book values after removing $100,000 intercompany balance) Inventory = $900,000 (add book values) Investment in Morning = -0- (balance is removed so that subsidiary's assets and liabilities can be included in the consolidated figures) Land = $1,300,000 (add book values) Buildings = $1,038,400 (add book values plus $64,000 allocation less four years of $6,400 annual excess amortization) Unpatented technology = $264,000 ($440,000 original allocation less four years of $44,000 annual amortization) Total assets = $5,002,400 Liabilities = $720,000 (add book values after removing $100,000 intercompany balance) Noncontrolling Interest in subsidiary, 12/31/09 = $356,000 (20% of subsidiary's beginning book value [$1,500,000] plus interest in subsidiary income [$80,000 as computed above] less 20% of subsidiary's dividends [$120,000]) Common stock = $1,000,000 (parent company balance) Additional paid-in capital = $600,000 (parent company balance) Retained earnings, 12/31/09 = $2,326,400 (computed above) Total liabilities and equities = $5,002,400

McGraw-Hill/Irwin 4-38

© The McGraw-Hill Companies, Inc., 2009 Solutions Manual

40. (continued) Consolidated figures can also be determined through a worksheet as follows: Consolidation Entries Entry *C Investment in Morning ........................................ Retained Earnings, 1/1/09 Good ................... 152,800 152,800

(To recognize Good's share of Morning's increase in book value during the 2006-2008 period as well as the amortization expense for that same period. Because the original $1,400,000 is still the balance in the investment in Morning account, the parent is applying the cost method. Thus, 80% of Morning's $380,000 increase in book value [$304,000] must be accrued. Excess amortizations of $151,200 [$50,400 per year for these three years] is also recorded leaving a net adjustment of $152,800.)

Entry S Common Stock (Morning) .................................. Additional Paid-in Capital (Morning) ................. Retained Earnings, 1/1/09 (Morning) ................. Investment in Morning (80%) ........................ Noncontrolling Interest in Morning (20%) ....

460,000 40,000 1,000,000 1,200,000 300,000

(To eliminate subsidiary's stockholders' equity accounts while recording the January 1, 2009 balance of the noncontrolling interest.)

Entry A Buildings ............................................................... Unpatented technology ...................................... Investment in Morning ...................................

44,800 308,000 352,800

(To recognize unamortized amounts paid in connection with acquisition of Morning. Original allocations have undergone three previous years of excess amortizations.)

Entry I Dividend Income ................................................. Dividends Paid ...............................................

(To eliminate intercompany income accounts.)

96,000 96,000

Entry E Operating Expenses ........................................... Buildings ........................................................ Unpatented technology .................................. Entry P Liabilities ............................................................. Receivables ....................................................

(To eliminate intercompany debt.)

50,400 6,400 44,000

(To recognize amortization expenses for current year.)

100,000 100,000

McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009 4-39

40. (continued)

GOOD AND MORNING Consolidation Worksheet For Year Ending December 31, 2009

Good Morning Consolidation Entries Debit Credit Noncontrolling Consolidated Interest Totals

Accounts

Revenues Operating Expenses Dividend Income NCI in Morning's income (20% × 400,000) Net Income Retained earnings, 1/1 Good Morning Net income (above) Dividends paid Retained earnings, 12/31 Cash Receivables Inventory Investment in Morning Land Buildings Unpatented Technology Total assets Liabilities Common stock Additional paid-in capital Retained earnings, 12/31 (above) NCI in Morning, 1/1 NCI in Morning, 12/31 Total liabilities and stockholders' equity

McGraw-Hill/Irwin 4-40

(884,000) 400,000 (96,000) -0(580,000) (1,800,000) (580,000) 380,000 (2,000,000) 300,000 700,000 400,000 1,400,000 700,000 300,000 -03,800,000 (200,000) (1,000,000) (600,000) (2,000,000) -0-0(3,800,000)

(500,000) 100,000 (E) -0- (I) -0(400,000)

50,400 96,000 (80,000)

(1,384,000) 550,400 -080,000 (753,600) (1,952,800) -0(753,600) 380,000 (2,326,400) 500,000 1,000,000 900,000 -01,300,000 1,038,400 264,000 5,002,400 (720,000) (1,000,000) (600,000) (2,326,400)

(*C) 152,800 (1,000,000) (S)1,000,000 (400,000) 120,000 (I) 96,000 (1,280,000) 200,000 400,000 (P) 100,000 500,000 -0- (*C) 152,800 (S)1,200,000 (A) 352,800 600,000 700,000 (A) 44,800 (E) 6,400 -0- (A) 308,000 (E) 44,000 2,400,000 (620,000) (P) 100,000 (460,000) (S) 460,000 (40,000) (S) 40,000 (1,280,000) -0(S) 300,000 -0(2,400,000)

© The McGraw-Hill Companies, Inc., 2009 Solutions Manual

24,000

(300,000) (356,000)

(356,000) (5,002,400)

Accounting Theory Research Case: Noncontrolling Interest In deliberations prior to the issuance of SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements," the FASB consider three alternatives for displaying the noncontrolling interest in the consolidated statement of financial position. What were these three alternatives? 1. As a liability 2. As equity 3. In the "mezzanine" area between liabilities and owners' equity What criteria did the FASB use to evaluate the desirability of each alternative? The FASB evaluated whether the classifications conformed to current definitions of financial statement elements (assets, liabilities, or equity) as articulated in FASB Concept Statement No. 6. In what specific ways did FASB Concept Statement 6 affect the FASB's evaluation of these alternatives? From SFAS 160 paragraphs 32-34 If it required that the noncontrolling interest be reported in the mezzanine, the Board would have had to create a new element--noncontrolling interest in subsidiaries--specifically for consolidated financial statements. The Board concluded that no compelling reason exists to create a new element specifically for consolidated financial statements to report the interests in a subsidiary held by owners other than the parent. The Board believes that using the existing elements of financial statements along with appropriate labeling and disclosure provides financial information in the consolidated financial statements that is representationally faithful, understandable, and relevant to the entity's owners, creditors, and other resource providers. The Board concluded that a noncontrolling interest in a subsidiary does not meet the definition of a liability in the Board's conceptual framework. Paragraph 35 of Concepts Statement 6 defines liabilities as "probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events" The Board concluded that a noncontrolling interest represents the residual interest in the net assets of a subsidiary within the consolidated group held by owners other than the parent. The noncontrolling interest, therefore, meets the definition of equity in Concepts Statement 6. Paragraph 49 of Concepts Statement 6 defines equity (or net assets) as "the residual interest in the assets of an entity that remains after deducting its liabilities."

McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009 4-41

Research and Communication Case Memorandum To: CFO, Allied Telecom Corporation Re: Surefire Cell Corporation Noncontrolling Interest Valuation You are correct in observing that the newly created 10 percent noncontrolling interest in your recent acquisition, Surefire Cell, must be valued for presentation in your consolidated financial statements. The acquisition-date fair value is the required valuation basis for the noncontrolling interest--usually provided by market trading data. However, because the 10 percent shares do not appear to be actively traded, a valuation alternative will need to be selected According to SFAS 157, "Fair Value Measurements," three main techniques are available for the noncontrolling interest valuation: the market approach, the income approach, and the cost approach. The market approach involves obtaining fair values for similar assets or businesses that are comparable to Surefire Cell. This valuation technique is appropriate when such comparable firms with observable market values are available. The income approach values a firm by discounting the best available measures of future benefits, typically cash flows or earnings. Often the income approach requires both supportable assumptions and a sufficient number of inputs to create an accurate forecasting model. The cost approach looks to the replacement cost of the firm's net assets (in current condition) to value the firm. This approach requires ready market prices for the firm's assets and does not rely on estimates of future cash flows or earnings. As such it is often the least accurate valuation method.

McGraw-Hill/Irwin 4-42

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