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CHAPTER 3 AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Answers to Questions 1 2 A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a majority (over 50 percent) of its outstanding voting stock. Amounts allocated to identifiable assets and liabilities in excess of their recorded amounts on the books of the subsidiary are not recorded separately by the parent. Instead, the parent company records the purchase price of the interest acquired in an investment account. The allocation to identifiable asset and liability accounts is made through working paper entries when the parent and subsidiary financial statements are consolidated. The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the purchase price is equal to or greater than the fair value of the interest acquired. If the parent had acquired an 80 percent interest and the purchase price was equal to or greater than the fair value of the interest acquired, the land would appear in the consolidated balance sheet at $98,000. This amount consists of the $90,000 book value plus 80 percent of the $10,000 excess of fair value over book value of the land. Parent company a corporation that owns a majority of the outstanding voting stock of another corporation (its subsidiary). Subsidiary companya corporation that is controlled by a parent company that owns a majority of its outstanding voting stock, either directly or indirectly. Affiliated companies companies that are controlled by a single management team through parent-subsidiary relationships. (Although the term affiliate is a synonym for subsidiary, the parent company is included in the total affiliation structure.) Associated companies companies that are controlled through parent-subsidiary relationships or whose operations can be significantly influenced through equity investments of 20 percent to 50 percent. A noncontrolling interest is the equity interest in a subsidiary company that is owned by stockholders outside of the affiliation structure. In other words, it is the equity interest in a subsidiary that is not held by the parent company or subsidiaries of the parent company. Under the provisions of FASB Statement No. 94, Consolidation of All Majority-owned Subsidiaries, a subsidiary will not be consolidated if control is temporary or if control does not rest with the majority owner, such as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under severe foreign exchange restrictions or other governmentally imposed restrictions. Consolidated financial statements are intended primarily for the stockholders and creditors of the parent company, according to ARB No. 51. The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of the outstanding capital stock of the parent company. Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or consolidation accounted for as a purchase. But goodwill from consolidation would not appear in the general ledger of a parent company or its subsidiary. Goodwill is entered in consolidation working papers when the reciprocal investment and equity amounts are eliminated. Working paper entries affect consolidated financial statements, but they are not entered in any general ledger.

7 8 9

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10

The parent companys investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is consolidated. It would appear in the parent companys separate balance sheet under the heading investments or other assets. Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as investments or other assets. They are accounted for under the equity method if the parent can exercise significant influence over the subsidiary; otherwise, they are accounted for by the cost method. Parents books: Investment in subsidiary Sales Accounts receivable Interest income Dividends receivable Advance to subsidiary Reciprocal accounts on subsidiarys books: Capital stock and retained earnings Purchases Accounts payable Interest expense Dividends payable Advance from parent

11

12

Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order to show the financial position and results of operations of the total economic entity that is under the control of a single management team. Sales by a parent to a subsidiary are internal transactions from the viewpoint of the economic entity and the same is true of interest income and interest expense and rent income and rent expense arising from intercompany transactions. Similarly, receivables from and payables to affiliated companies do not represent assets and liabilities of the economic entity for which consolidated financial statements are prepared. The stockholders equity of a parent company under the equity method is the same as the consolidated stockholders equity of a parent company and its subsidiaries provided that the noncontrolling interest, if any, is reported outside of the consolidated stockholders equity. If noncontrolling interest is included in consolidated stockholders equity, it represents the sole difference between the parent companys stockholders equity under the equity method and consolidated stockholders equity. No. The amounts that appear in the parent companys statement of retained earnings under the equity method and the amounts that appear in the consolidated statement of retained earnings are identical. Noncontrolling interest income is not an expense, but rather it is an allocation of the total income to the consolidated entity between majority and noncontrolling stockholders. From the viewpoint of the majority interest (the stockholders of the parent company), noncontrolling interest income has the same effect on consolidated net income as any other expense. This is because consolidated net income is income to the parent company stockholders. The computation of noncontrolling interest is comparable to the computation of retained earnings. It is computed: Noncontrolling interest beginning of the period Add: Noncontrolling interest income Deduct: Noncontrolling interest dividends Noncontrolling interest end of the period XX XX XX XX

13

14 15

16

17

It is acceptable to consolidated the annual financial statements of a parent company and a subsidiary with different fiscal periods, provided that the dates of closing are not more than three months apart. Any significant developments that occur in the intervening three-month period should be disclosed in notes to the financial statements. In the situation described, it is acceptable to consolidate the financial statements of the subsidiary with an October 31 closing date with the financial statements of the parent with a December 31 closing date. The acquisition of shares held by noncontrolling stockholders does not constitute a business combination. It is not possible, by definition, to acquire a controlling interest from noncontrolling stockholders.

18

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SOLUTIONS TO EXERCISES Solution E3-1 1 2 3 4 5 6 b c d d b a Solution E3-2 1 2 3 4 5 6 7 d b d d a d c

Solution E3-3 [AICPA adapted] 1 c Consolidated current assets Less: Apexs current assets Add: Receivable from Apex Nadirs current assets 2 3 4 5 $146,000 (106,000) 2,000 $ 42,000

d Noncontrolling interest of $35,100/30% = $117,000 c Advance to Hill $75,000 + receivable from Ward $200,000 = $275,000 a a Owen accounts for Sharp using the equity method, therefore, consolidated retained earnings is equal to Owens retained earnings, or $1,240,000. d All intercompany receivables and payables are eliminated.

Solution E3-4 1 2 Goodwill at December 31, 2003 = Goodwill from consolidation $ 18,000 Consolidated net income Pintos reported net income Less: Correction for depreciation on excess allocated to equipment ($12,000/3 years) Consolidated net income Solution E3-5 1 $600,000, the dividends of Panderman $490,000 (4,000) $486,000

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$330,000, equal to $300,000 dividends payable of Panderman plus $30,000 dividends payable to noncontrolling interests of Sadisman.

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Solution E3-6 Preliminary computation Cost of Slider stock Fair value acquired ($1,000,000 100%) Goodwill 1 Journal entry to record push down values Inventories Land Buildings net Equipment net Goodwill Retained earnings Note payable Push-down capital 2 Assets Cash Accounts receivable Inventories Land Buildings net Equipment net Goodwill Total assets Liabilities Accounts payable Note payable Total liabilities Stockholders equity Capital stock Push-down capital Total stockholders equity Total liabilities and stockholders equity Slider Corporation Balance Sheet January 1, 2007 $ 70,000 80,000 100,000 200,000 500,000 300,000 250,000 $1,500,000 $ 100,000 150,000 250,000 20,000 50,000 150,000 80,000 250,000 210,000 10,000 750,000 $1,250,000 1,000,000 $ 250,000

500,000 750,000 1,250,000 $1,500,000

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Solution E3-7 1 Pasture Corporation and Subsidiary Consolidated Income Statement for the year 2007 Sales ($1,000,000 + $400,000) Less: Cost of sales ($600,000 + $200,000) Gross profit Less: Depreciation expense ($50,000 + $40,000) Other expenses ($199,000 + $90,000) Total consolidated income Less: Noncontrolling interest income ($70,000 30%) Consolidated net income 2 Pasture Corporation and Subsidiary Consolidated Income Statement for the year 2007 Sales ($1,000,000 + $400,000) Less: Cost of sales ($600,000 + $200,000) Gross profit Less: Depreciation expense ($50,000 + $40,000 - $2,000) Other expenses ($199,000 + $90,000) Total consolidated income Less: Noncontrolling interest income ($70,000 30%) Consolidated net income Supporting computations Depreciation of excess allocated to overvalued equipment: $10,000/5 years = $2,000 $1,400,000 (800,000) 600,000 (88,000) (289,000) 223,000 (21,000) 202,000 $1,400,000 (800,000) 600,000 (90,000) (289,000) 221,000 (21,000) 200,000

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Solution E3-8 1 Capital stock The capital stock appearing in the consolidated balance sheet at December 31, 2006 is $1,800,000, the capital stock of Poball, the parent company. 2 Goodwill at December 31, 2006 Investment cost at January 2, 2006 $700,000 (480,000) Book value acquired ($600,000 80%) Excess (considered goodwill since no fair value information is given) $220,000 3 Consolidated retained earnings at December 31, 2006 Poballs retained earnings January 2, 2006 (equal to beginning consolidated retained earnings Add: Net income of Poball (equal to consolidated net income) Less: Dividends declared by Poball Consolidated retained earnings December 31, 2006 4 Noncontrolling interest at December 31, 2006 Capital stock and retained earnings of Softcan on January 2, 2006 Add: Softcans net income Less: Dividends declared by Softcan Softcans stockholders equity December 31, 2006 Noncontrolling interest percentage Noncontrolling interest December 31, 2006 5 Dividends payable at December 31, 2006 Dividends payable to stockholders of Poball $ 90,000 Dividends payable to noncontrolling stockholders ($25,000 5,000 20%) Dividends payable to stockholders outside the consolidated entity $ 95,000 $600,000 90,000 (50,000) 640,000 20% $128,000 $800,000 300,000 (180,000) $920,000

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Solution E3-9 Paskey Corporation and Subsidiary Partial Balance Sheet at December 31, 2007 Stockholders equity: Capital stock, $10 par Additional paid-in capital Retained earnings Equity of majority stockholders Noncontrolling interest* Total stockholders equity
*

$300,000 50,000 65,000 415,000 41,000 $456,000

Some students may not classify noncontrolling interest as stockholders equity.

Supporting computations Computation of consolidated retained earnings: Paskeys December 31, 2006 retained earnings Add: Paskeys reported income for 2007 Less: Paskeys dividends Consolidated retained earnings December 31, 2007 Computation of noncontrolling interest at December 31, 2007: Salams December 31, 2006 stockholders equity Income less dividends for 2007 ($20,000 - $15,000) Salams December 31, 2007 stockholders equity Noncontrolling interest percentage Noncontrolling interest December 31, 2007 $ 35,000 55,000 (25,000) $ 65,000 $200,000 5,000 205,000 20% $ 41,000

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Solution E3-10 Peekos Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2008 Sales Cost of goods sold Gross profit Deduct: Operating expenses Total consolidated income Deduct: Noncontrolling interest income Consolidated net income Supporting computations Investment cost January 2, 2006 Book value acquired ($700,000 90%) Excess cost over book value acquired Excess allocated to: Inventories (sold in 2006) Equipment (4 years remaining use life) Goodwill Excess of cost over book value acquired Operating expenses: Combined operating expenses of Peekos and Slogger Add: Depreciation on excess allocated to equipment ($20,000/4 years) Consolidated operating expenses $ 820,000 (630,000) $ 190,000 $ $ 30,000 20,000 140,000 190,000 $2,100,000 1,100,000 1,000,000 555,000 445,000 15,000 $ 430,000

$ $

550,000 5,000 555,000

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SOLUTIONS TO PROBLEMS Solution P3-1 1 Pennyvale Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2006 Assets Cash ($32,000 + $18,000) Accounts receivable ($45,000 + $34,000 - $5,000) Inventories ($143,000 + $56,000) Equipment net ($380,000 + $175,000) Total assets Liabilities and Stockholders Equity Liabilities: Accounts payable ($40,000 + $33,000 - $5,000) Stockholders equity: Common stock, $10 par Retained earnings Noncontrolling interest ($150,000 + $100,000) 20% Total liabilities and stockholders equity 2 Consolidated net income for 2007 Pennyvales separate income Add: Income from Sutherland Sales ($90,000 80%) Consolidated net income for 2007 $170,000 72,000 $242,000 $ 50,000 74,000 199,000 555,000 $878,000

$ 68,000 460,000 300,000 50,000 $878,000

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Solution P3-2 1 Schedule to allocate cost/book value differential Cost of investment in Setting Book value acquired ($110,000 70%) Excess cost over book value acquired Excess allocated: Fair Value Book Value Inventories ($50,000 $30,000) Land ($60,000 $50,000) ($90,000 $70,000) Buildings net ($30,000 $40,000) Equipment net Other liabilities ($40,000 $50,000) Allocated to identifiable net assets Goodwill for the remainder Excess cost over book value acquired 2 $178,000 (77,000) $101,000 Interest Acquired 70% 70% 70% 70% 70% Allocation $ 14,000 7,000 14,000 (7,000) 7,000 35,000 66,000 $101,000

Parlor Corporation and Subsidiary Consolidated Balance Sheet at January 1, 2006 Assets Current assets: Cash ($32,000 + $20,000) Receivables net ($80,000 + $30,000) Inventories ($70,000 + $30,000 + $14,000) Property, plant and equipment: Land ($100,000 + $50,000 + $7,000) Buildings net ($110,000 + $70,000 + $14,000) Equipment net ($80,000 + $40,000 - $7,000) Goodwill from consolidation Total assets Liabilities and Stockholders Equity Liabilities: Accounts payable ($90,000 + $80,000) Other liabilities ($10,000 + $50,000 - $7,000) Stockholders equity: Capital stock Retained earnings Equity of majority stockholders Noncontrolling interest Total liabilities and stockholders equity

$ 52,000 110,000 114,000 $157,000 194,000 113,000

$276,000

464,000 66,000 $806,000

$170,000 53,000 $500,000 50,000 550,000 33,000

$223,000

583,000 $806,000

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Solution P3-3 Cost of investment in Softback Books January 1, 2006 Book value acquired ($2,500,000 80%) Excess cost over book value acquired Schedule to Allocate Cost Book Value Differential Fair Value - Book Value $ 500,000 1,000,000 Percent 80% 80 Initial Final Allocation Reallocation Allocation $400,000 $ --$400,000 800,000 (375,000) 425,000 (125,000) (125,000) (500,000) 500,000 --$700,000 0 $700,000 $2,700,000 2,000,000 $ 700,000

Current assets Equipment Other plant assets Negative goodwill Excess cost over book value acquired

Reallocation of negative goodwill to plant assets: Equipment $3,000,000/$4,000,000 $500,000 = $375,000 Other plant assets $1,000,000/$4,000,000 $500,000 = $125,000

Solution P3-4 Noncontrolling interest of $52,000 divided by Spechts $260,000 stockholders equity shows that the noncontrolling interest percentage is 20%. Therefore, Pharms interest is 80%. Cost of 80% interest in Specht Book value acquired ($260,000 80%) Excess cost over book value acquired Excess allocated to: Fair Value ($210,000 Book Value $200,000) Interest Acquired 80% $ 260,000 (208,000) $ 52,000

Plant assets net Goodwill

$ $

8,000 44,000 52,000

Excess cost over book value acquired

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Solution P3-5 Palmer Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2006 Assets Current assets Plant assets Goodwill Equities Liabilities Capital stock Retained earnings Supporting computations Sorrels net income ($400,000 - $300,000 - $50,000) Less: Excess allocated to inventories that were sold in 2005 Less: Depreciation on excess allocated to plant assets ($40,000/4 years) Income from Sorrel Plant assets ($500,000 + $300,000 + $40,000 - $10,000) Palmers retained earnings: Beginning retained earnings Add: Operating income Add: Income from Sorrel Deduct: Dividends Retained earnings December 31, 2006 $ 50,000 (20,000) (10,000) 20,000 830,000 340,000 100,000 20,000 (50,000) 410,000 $ 340,000 830,000 200,000 $1,370,000 $ 660,000 300,000 410,000 $1,370,000

$ $ $

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Solution P3-6 Perry Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2006
Perry per books $ 42,000 50,000 400,000 150,000 600,000 409,000 a $1,651,000 $ 410,000 60,000 1,000,000 181,000 $ $ 500,000 80,000 10,000 300,000 110,000 500,000 b 9,000 a 300,000 a 110,000 a $1,651,000 $ 40,000 Sim per books $ 20,000 130,000 50,000 200,000 100,000 a 409,000 40,000 $1,773,000 490,000 61,000 1,000,000 181,000 41,000 41,000 $1,773,000 $ Adjustments and Eliminations b Consolidated Balance Sheet $ 62,000 9,000 171,000 450,000 350,000 700,000

Cash Receivables net Inventories Land Equipment net Investment in Sim Goodwill Total assets Accounts payable Dividends payable Capital stock Retained earnings Noncontrolling interest Total equities a b

To eliminate reciprocal investment and equity accounts, record unamortized goodwill ($40,000), and enter the noncontrolling interest ($410,000 10%). To eliminate reciprocal dividends receivable (included in receivables net) and dividends payable amounts ($10,000 dividends 90%).

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Solution P3-7 Preliminary computations Cost of investment January 3, 2006 Book value acquired ($250,000 80%) Excess cost over book value acquired January 3, 2006 1 2 Noncontrolling interest income: Slenders net income $50,000 20% noncontrolling interest Current assets: Combined current assets ($204,000 + $75,000) Less: Dividends receivable ($10,000 80%) Current assets Income from Slender: None Investment income is eliminated in consolidation. Capital stock: $500,000 Capital stock of the parent, Portly Corporation. Investment in Slender: None The investment account is eliminated. Excess of cost over book value acquired: Consolidated net income: Equals Portlys net income, or: Consolidated sales Less: Consolidated cost of goods sold Less: Consolidated expenses Less: Noncontrolling interest income Consolidated net income $ 80,000 $600,000 (370,000) (80,000) (10,000) $140,000 $280,000 (200,000) $ 80,000 $ 10,000 $279,000 (8,000) $271,000

3 4 5 6 7

8 9

Consolidated retained earnings December 31, 2006: $200,000 Equals Portlys beginning retained earnings. Consolidated retained earnings December 31, 2007: Equal to Portlys ending retained earnings: Beginning retained earnings Add: Consolidated net income Less: Portlys dividends for 2007 Ending retained earnings Noncontrolling interest December 31, 2007: Slenders capital stock and retained earnings Add: Net income Less: Dividends Slenders equity December 31, 2007 Noncontrolling interest percentage Noncontrolling interest December 31, 2007

$200,000 140,000 (60,000) $280,000 $300,000 50,000 (25,000) 325,000 20% $ 65,000

10

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Solution P3-8 [AICPA adapted] Preliminary computations Investment cost: Meadow (1,000 shares 80%) $70 Van (3,000 shares 70%) $40 Book value acquired Meadow ($70,000 80%) Van ($120,000 70%) Difference 1 Journal entries to account for investments January 1, 2006 Acquisition of investments Investment in Meadow (80%) Cash To record acquisition of 800 shares of Meadow common stock at $70 a share. Investment in Van (70%) Cash To record acquisition of 2,100 shares of Van common stock at $40 per share. During 2006 Dividends from subsidiaries Cash 12,800 Investment in Meadow (80%) 12,800 To record dividends received from Meadow ($16,000 80%). 6,300 Investment in Van (70%) To record dividends received from Van ($9,000 70%). 6,300 56,000 56,000 Meadow $56,000 $84,000 56,000 0 84,000 0 Van

84,000 84,000

Cash

December 31, 2006 Share of income or loss Investment in Meadow (80%) 28,800 Income from Meadow 28,800 To record investment income from Meadow ($36,000 80%). Loss from Van 8,400 Investment in Van (70%) To record investment loss from Van ($12,000 70%). 8,400

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Solution P3-8 (continued) 2 Noncontrolling interest December 31, 2006 Common stock Capital in excess of par Retained earnings Equity December 31 Noncontrolling interest percentage Noncontrolling interest December 31 3 Consolidated retained earnings December 31, 2006 Consolidated retained earnings is reported at $304,600, equal to the retained earnings of Todd Corporation, the parent, at December 31, 2006. 4 Investment balance December 31, 2006: Investment cost January 1 Add (deduct): Income (loss) Deduct: Dividends received Investment balances December 31 Meadow $56,000 28,800 (12,800) $72,000 Van $84,000 (8,400) (6,300) $69,300 Meadow $50,000 20,000 40,000 90,000 20% $18,000 Van $60,000 19,000 99,000 30% $29,700

Check: Investment balances should be equal to the underlying book value Meadow $90,000 80% = $72,000 Van $99,000 70% = $69,300

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Solution P3-9 Pansy Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2006
Pansy 300,000 600,000 90,000 700,000 600,000 2,000,000 1,500,000 3,220,000 a $9,010,000 $3,700,000 $ 600,000 100,000 2,000,000 1,000,000 b 90,000 a 2,000,000 a 1,000,000 a $3,700,000 220,000 90% Snowdrop $ 200,000 400,000 600,000 700,000 1,000,000 800,000 a 300,000 a 3,220,000 220,000 $9,920,000 900,000 510,000 7,000,000 1,210,000 300,000 300,000 $9,920,000 $ Adjustments and Eliminations Consolidated Balance Sheet $ 500,000 1,000,000 1,300,000 1,300,000 3,000,000 2,600,000

Cash Receivables net Dividends receivable Inventory Land Buildings net Equipment net Investment in Snowdrop Goodwill Total assets

90,000

Accounts payable $ 300,000 Dividends payable 500,000 Capital stock 7,000,000 Retained earnings 1,210,000 Noncontrolling interest Total equities $9,010,000 a b

To eliminate reciprocal investment and equity accounts, enter unamortized excess allocated to equipment, record goodwill, and enter noncontrolling interest. To eliminate reciprocal dividends receivable and dividends payable amounts.

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Solution P3-10 1 Purchase price of investment in Snaplock Underlying book value of investment in Snaplock: Equity of Snaplock January 1, 2006 ($220,000 80% acquired) Add: Excess investment cost over book value acquired: Goodwill at December 31, 2010 Investment cost 2 Snaplocks stockholders equity on December 31, 2010 20% noncontrolling interests equity = $50,000 Total equity = Noncontrolling interests equity $50,000/20% = $250,000 3 Pandoras investment in Snaplock account balance at December 31, 2010 Underlying book value in Snaplock December 31, 2010 ($250,000 80%) Add: Goodwill December 31, 2010 Investment in Snaplock December 31, 2010 Alternative solution: Investment cost January 1, 2006 Add: 80% of Snaplocks increase since acquisition ($250,000 - $220,000) 80% Investment in Snaplock December 31, 2010 4 $200,000 60,000 $260,000 $236,000 24,000 $260,000

$176,000 $ 60,000 $236,000

Pandoras capital stock and retained earnings December 31, 2010 Capital stock Retained earnings $400,000 $ 30,000

Amounts are equal to capital stock and retained earnings shown in the consolidated balance sheet.

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Solution P3-11 Preliminary computations Cost of investment in Stubb Book value acquired ($800,000 70%) Excess Excess allocated: Inventories $20,000 70% Plant assets $80,000 70% Goodwill Excess Investment balance at January 1, 2006 Share of Stubbs retained earnings increase ($60,000 70%) Less: Amortization Excess allocated to inventories (sold in 2006) Excess allocated to plant assets ($56,000/8 years) Investment balance at December 31, 2006 Pope Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2006
Pope 60,000 440,000 70% Stubb 20,000 200,000 10,000 7,000 500,000 100,000 700,000 691,000 a $2,498,000 $ 300,000 10,000 40,000 600,000 1,000,000 548,000 $1,050,000 $ 80,000 10,000 100,000 500,000 360,000 b c 10,000 7,000 40,000 Adjustments and Eliminations Consolidated Balance Sheet $ 80,000 640,000

$670,000 560,000 $110,000 $ 14,000 56,000 40,000 $110,000 $670,000 42,000 (14,000) (7,000) $691,000

Cash Accounts receivable net Accounts receivable Pope Dividends receivable Inventories Land Plant assets net Investment in Stubb Goodwill Assets Accounts payable Account payable to Stubb Dividends payable Long-term debt Capital stock Retained earnings Noncontrolling interest ($860,000 30%) Equities

b c

10,000 7,000 820,000 250,000 1,099,000

320,000 150,000 350,000

49,000 a 691,000

40,000 $2,929,000 $ 380,000 43,000 700,000 1,000,000 548,000 a 258,000 258,000 $2,929,000

a 500,000 a 360,000

$2,498,000

$1,050,000

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Solution P3-12 Preliminary computations Investment in Shasti at cost January 1, 2006 Book value acquired ($900,000 80%) Excess cost over book value allocated to goodwill Shasti Dividends $ 40,000 50,000 60,000 $150,000 Shasti Net Income $ 80,000 100,000 120,000 $300,000 80% of Net Income $ 64,000 80,000 96,000 $240,000 $ $ $ 50,000 100,000 40,000 $ 760,000 (720,000) $ 40,000

2006 2007 2008 1 2 3 4

Shastis dividends for 2007 ($40,000/80%) Shastis net income for 2007 ($50,000 dividends 2) Goodwill December 31, 2007 Noncontrolling interest expense 2008 Shastis income for 2008 ($48,000 dividends received/80%) 2 Noncontrolling interest percentage Noncontrolling interest expense

$ $

120,000 20% 24,000

Noncontrolling interest December 31, 2008 Equity of Shasti January 1, 2006 Add: Income for 2006, 2007 and 2008 Deduct: Dividends for 2006, 2007 and 2008 Equity of Shasti December 31, 2008 Noncontrolling interest percentage Noncontrolling interest December 31, 2008 $ 900,000 300,000 (150,000)

1,050,000 20% $ 210,000

Consolidated net income for 2008 Pendletons separate income Add: Income from Shasti Consolidated net income $ $ 280,000 96,000 376,000

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Solution P3-13 Preliminary computations Investment in Sidney (cost) January 2, 2007 Book value acquired ($250,000 80%) Excess cost over book value acquired Excess allocated to: Buildings (fair value $170,000 - book value $150,000) 80% Remainder to goodwill Excess cost over book value acquired Part 1 a Total current assets Cash ($50,000 + $20,000) Other current assets ($150,000 + $80,000) Total current assets Plant and equipment net of depreciation Land ($300,000 + $50,000) Buildings net ($400,000 + $150,000) Excess allocated to buildings Plant and equipment net Common stock Par value of Peytons stock December 31, 2006 Add: Par value of shares issued for Sidney Common stock Additional paid-in capital Additional paid-in capital of Peyton December 31, 2006 Add: Increase from shares issued from Sidney Additional paid-in capital Retained earnings Consolidated retained earnings = Peytons retained earnings December 31, 2006 $ 70,000 230,000 $300,000 $350,000 550,000 16,000 $916,000 $600,000 100,000 $700,000 $ 60,000 200,000 $260,000 $300,000 (200,000) $100,000 $ 16,000 84,000 $100,000

$140,000

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Solution P3-13 (continued) Part 2 a Income from Sidney 2007 Share of Sidneys income ($40,000 80%) Less: Depreciation on excess buildings ($16,000/5 years) Income from Sidney Investment in Sidney December 31, 2007 Cost January 2 Add: Income from Sidney Less: Dividends from Sidney ($20,000 80%) Investment in Sidney December 31 Consolidated net income 2007 Separate income of Peyton Add: Income from Sidney Consolidated net income Consolidated retained earnings December 31, 2007 Retained earnings of Peyton December 31, 2006 Add: Consolidated net income Less: Peytons dividends Consolidated retained earnings December 31 Noncontrolling interest December 31, 2007 Equity of Sidney December 31, 2006 Add: Net income Less: Dividends Equity of Sidney December 31 Noncontrolling interest percentage Noncontrolling interest December 31 $ 32,000 (3,200) $ 28,800 $300,000 28,800 (16,000) $312,800 $ 90,000 28,800 $118,800 $140,000 118,800 (50,000) $208,800 $250,000 40,000 (20,000) 270,000 20% $ 54,000

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Solution P3-14 1 Schedule to allocate the investment cost book value differential: Investment cost January 2, 2006 Book value of interest acquired ($2,300,000 80%) Excess cost over book value acquired Excess allocated: Fair Value - Book Value Inventories $ 500,000 $ 400,000 Other current assets 200,000 150,000 Land 600,000 500,000 1,800,000 1,000,000 Buildings net 600,000 800,000 Equipment net Other liabilities 560,000 610,000 Remainder to goodwill Excess cost over book value acquired Interest Acquired = Allocated 80% 80% 80% 80% 80% 80% $ 80,000 40,000 80,000 640,000 (160,000) 40,000 200,000 $920,000 $2,760,000 (1,840,000) $ 920,000

Goodwill check: Investment cost $2,760,000 - Fair value acquired ($3,200,000 80%) = Goodwill $200,000

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Solution P3-14 (continued) 2 Portland Corporation and Subsidiary Consolidated Balance Sheet at January 2, 2006 Assets Current Assets: Cash ($240,000 + $60,000) Receivables net ($800,000 + $200,000) Inventories ($1,100,000 + $400,000 + $80,000) Other current assets ($900,000 + $150,000 + $40,000) Total current assets Fixed Assets: Land ($3,100,000 + $500,000 + $80,000) Buildings net ($6,000,000 + $1,000,000 + $640,000) Equipment net ($3,500,000 + $800,000 - $160,000) Goodwill Total fixed assets Total assets Liabilities and Stockholders Equity Liabilities: Accounts payable ($400,000 + $200,000) Other liabilities ($1,500,000 + $610,000 - $40,000) Total liabilities Stockholders equity: Capital stock Retained earnings Noncontrolling interest ($2,300,000 20%) Total stockholders equity Total liabilities and stockholders equity

300,000 1,000,000 1,580,000 1,090,000 3,970,000

$ 3,680,000 7,640,000 4,140,000 200,000 15,660,000 $19,630,000

600,000 2,070,000 2,670,000

$15,000,000 1,500,000 460,000 16,960,000 $19,630,000

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An Introduction to Consolidated Financial Statements

Solution P3-15 1 Schedule to allocate the investment cost book value differential: Investment cost January 2, 2006 Book value of interest acquired Excess book value over cost Excess allocated: Fair Value Reallocation Less Interest Initial of Negative Final Book Value Acquired Allocation Goodwill* Allocation Inventories $ 100,000 80% Other current assets 50,000 80% Land 100,000 80% 800,000 80% Buildings net (200,000) 80% Equipment net Other liabilities (50,000) 80% Total allocated to identifiable assets Negative goodwill Excess book value over cost
*

$1,660,000 (1,840,000) $ (180,000)

80,000 40,000 80,000 $(180,000) 640,000 (540,000) (160,000) (180,000) 40,000 720,000 (900,000) 900,000

$ 80,000 40,000 (100,000) 100,000 (340,000) 40,000 (180,000)

$(180,000)

$(180,000)

Reallocation of negative goodwill based on fair values:

Land Buildings Equipment

$600,000/$3,000,000 $900,000 = $1,800,000/$3,000,000 $900,000 = $600,000/$3,000,000 $900,000 =

$180,000 540,000 180,000 $900,000

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Chapter 3

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Solution P3-15 (continued) 2 Portland Corporation and Subsidiary Consolidated Balance Sheet at January 2, 2006 Assets Current Assets: Cash ($1,340,000 + $60,000) Receivables net ($800,000 + $200,000) Inventories ($1,100,000 + $400,000 + $80,000) Other current assets ($900,000 + $150,000 + $40,000) Total current assets Fixed Assets: Land ($3,100,000 + $500,000 - $100,000) Buildings net ($6,000,000 + $1,000,000 + $100,000) Equipment net ($3,500,000 + $800,000 - $340,000) Total fixed assets Total assets Liabilities and Stockholders Equity Liabilities: Accounts payable ($400,000 + $200,000) Other liabilities ($1,500,000 + $610,000 - $40,000) Total liabilities Stockholders equity: Capital stock Retained earnings Noncontrolling interest ($2,300,000 20%) Total stockholders equity Total liabilities and stockholders equity

$ 1,400,000 1,000,000 1,580,000 1,090,000 5,070,000 $ 3,500,000 7,100,000 3,960,000 14,560,000 $19,630,000

600,000 2,070,000 2,670,000

$15,000,000 1,500,000 460,000 16,960,000 $19,630,000

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