Chater 3: Problems

Problem #1. Pascal Company

Date of Acquisition: January 1, 20x4

Total Parent NCI
80% 20%
Company fair value 465,000 372,000 93,000
FV of Net Assets 450,000 360,000 90,000
Goodwill 15,000 12,000 3,000

Shareholder's equity-Sub.
common stock 240,000
Ret. Earnings 120,000
Total book value 360,000
adjustments: life
Inventory 6,000
land 7,200
Equipment 96,000 8
Building - 24,000 4
Bonds pay-discount 4,800
90,000
Fair value 450,000

Requirement No. 1
1. Determine the following items for January 1, 20x4
a. Consolidated retained earnings 360,000 RE of parent
b. Non-controlling interest
full NCI 93,000
partial NCI 90,000
c. Consolidated Stockholder's Equity
Full Partial
Common stock 600,000 600,000
Retained earnings 360,000 360,000
Controlling interest 960,000 960,000
NCI 93,000 90,000
Consolidated SHE 1,053,000 1,050,000
Requirement No. 2
Determine the following items for December 31, 20x4 & Dec. 31, 20x5
Partial Full Goodwill Partial Full Goodwill
Goodwill approach Goodwill approach
Approach Approach
Dec. 31, 2014 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2015
a. Cash 322,800 322,800 367,200 367,200
b. Accounts Receivable 150,000 150,000 276,000 276,000
c. Inventory 210,000 210,000 324,000 324,000
d. Land 265,200 265,200 265,200 265,200
e. Equipment(net) 273,000 273,000 240,000 240,000
f. Buildings (net) 549,000 549,000 492,000 492,000
Goodwill 9,000 11,250 9,000 11,250
g. Investment in SAX - -
h. Total assets 1,779,000 1,781,250 1,973,400 1,975,650
i. Accounts payable 240,000 240,000 240,000 240,000
j. Bonds Payable 360,000 360,000 360,000 360,000
discount on bonds payable - 3,600 - 3,600 - 2,400 - 2,400
k. Total Liabilities 596,400 596,400 597,600 597,600
l. Common stock 600,000 600,000 600,000 600,000
m. Retained Earnings 490,440 490,440 676,680 676,680
n. Sales 720,000 720,000 900,000 900,000
o. Cost of Goods sold 348,000 348,000 408,000 408,000
p. Gross profit 372,000 372,000 492,000 492,000
q. expenses 160,200 160,950 217,200 217,200
r. . Dividend income 0 0
s. Controlling interest in net income 202,440 202,440 258,240 258,240
t. non-controlling interest in net income 9,360 8,610 16,560 16,560
u. Net income 211,800 211,050 274,800 274,800
v. Common stock/ordinar share 600,000 600,000 600,000 600,000
w. Retained Earnings/Accum. P&L 490,440 490,440 676,680 676,680
x. Controlling interest/Equity holders of parent
Parents stockholder's equity 1,090,440 1,090,440 1,276,680 1,276,680
y. Non-controlling interest 92,160 94,410 99,120 101,370
z1. Srockholder's equity 1,182,600 1,184,850 1,375,800 1,378,050
z2. Liabilities and stockholders'equity 1,779,000 1,781,250 1,973,400 1,975,650
- -
Amortization of allocated excess life amort amort
2014 2015
Inventory 6,000 6,000
Equipment 96,000 8 12,000 12,000
Building - 24,000 4- 6,000 - 6,000
Bonds payable 4,800 4 1,200 1,200
13,200 7,200
Computation of Goodwill balance
Full Partial
Godwill, Jan 1, 2014 15,000 12,000
Impairment-full 3750 3750
partial 3750x20% = 750
3000 3,000
Balance, Dec. 31, 2014 11,250 9,000
Computation of revenue
2014 2014 2,015 2,015
Subsidiary Parent Subsidiary Parent
Sales 240,000 480,000 360,000 540,000
Cost of goods sold - 138,000 - 204,000 - 192,000 - 216,000
depreciation exp - 24,000 - 60,000 - 24,000 - 60,000
other expense - 18,000 - 48,000 - 54,000 - 72,000
Total 60,000 168,000 90,000 192,000
Add: div. income 28,800 38,400
Net income 60,000 196,800 90,000 230,400

Consolidated Net income 2014

Sub. Parent Consolidated
Net income 60,000 196,800
less: dividends (28,800)
Total Net income fr. Own oper. 60,000 168,000 228,000
amortization of allocated excess
amortization (13,200)
Adjusted 46,800 168,000 214,800
NCI-20% 9,360 9,360 NCI-NI-partial
sub total 205,440
Impairment loss (3,000) (3,000)
Controlling interest in net income 202,440
211,800 CNI-partial
NCI-partiall20%x46800 9,360
Less impairment on partial goodwill 3750x20% 750
NCI in net income 8,610 full 211,050 CNI-full

Consolidated Retained Earnings-12/31/14.

Consolidated Retained Earnings-Jan. 1, 2014 360,000
Add: controlling interest in net income 202,440
Total 562,440
less: dividend paid by parent 2014 72,000
Consolidated Retained Earnings-Dec. 31, 2014 490,440

Consolidated total equity, Dec. 31 partial full

Common stock 600,000 600,000
Consolidated Retained Earnings 490,440 490,440
Consolidated equity attrib. to parent 1,090,440 1,090,440
Noncontrolling interest 92,160 94,410
Consolidated total equity, Dec. 31 1,182,600 1,184,850
Non controlling interest, Dec. 31, 2014
Common stock-S Company 240,000
Retained Earnings, Dec. 31
RE, jan.1 120,000
Add: net income 60,000
Total 180,000
less: div. paid - 36,000 144,000
Stockholders' equity-S Company 384,000
Adjustments to reflect fair value 90,000
amortization of allocated excess - 13,200
Fair value of stockholders' equity, Dec. 31 460,800
NCI % 20%
NCI-partial goodwill 92,160
or
Non-controlling interest, partial, Jan. 1 90,000
add: NCI in net income 9,360
less: div. paid 36000x20% - 7,200
NCI-partial goodwill 92,160

NCI-Partial goodwill 92,160

add: nontrolling interest on full goodwill, net of imp. Loss
NCI, Partial goodwill 3000
less impairment 750 2,250
NCI, full goodwill 94,410
or
Non-controlling interest, partial, Jan. 1 93,000
add: NCI in net income 8,610
less: div. paid 36000x20% - 7,200
NCI-full goodwill 94,410

Dec. 31, 2015

Consolidated Net income 2015
Sub. Parent Consolidated
Net income 90,000 230,400
less: dividends (38,400)
Total Net income fr. Own oper. 90,000 192,000 282,000
amortization of allocated excess
amortization (7,200)
Adjusted 82,800 192,000 274,800 CNI
NCI-20% 16,560 16,560 NCI-NI
Controlling interest in net income 258,240

Consolidated Retained Earnings-12/31/15.

Consolidated Retained Earnings-Jan. 1, 2015 490,440
Add: controlling interest in net income 258,240
Total 748,680
less: dividend paid by parent 2015 72,000
Consolidated Retained Earnings-Dec. 31, 2015 676,680

Consolidated total equity, Dec. 31 partial full

Common stock 600,000 600,000
Consolidated Retained Earnings 676,680 676,680
Consolidated equity attrib. to parent 1,276,680 1,276,680
Noncontrolling interest 99,120 101,370
Consolidated total equity, Dec. 31 1,375,800 1,378,050
Non controlling interest, Dec. 31, 2015
Common stock-S Company 240,000
Retained Earnings, Dec. 31
RE, jan.1 144,000
Add: net income 90,000
Total 234,000
less: div. paid - 48,000 186,000
Stockholders' equity-S Company 426,000
Adjustments to reflect fair value 90,000
amortization of allocated excess 2014 - 13,200
amortization of allocated excess 2015 - 7,200
Fair value of stockholders' equity, Dec. 31 495,600
NCI % 20%
NCI-partial goodwill 99,120
or
Non-controlling interest, partial, Jan. 1 92,160
add: NCI in net income 16,560
less: div. paid 48000x20% - 9,600
NCI-partial goodwill 99,120

NCI-Partial goodwill 99,120

add: nontrolling interest on full goodwill, net of imp. Loss
NCI, Partial goodwill 3000
less impairment 750 2,250
NCI, full goodwill 101,370
or
Non-controlling interest, partial, Jan. 1 93,000
add: NCI in net income 2014 8,610
2015 16,560
less: div. paid-2014 36000x20% - 7,200
less: div. paid 2015 48000x20% - 9,600
NCI-full goodwill 101,370
Problem III. Large Company
Cost model vs equity method

D&AE Total Parent Sub.

100% 75% 25%
Company fair value 800,000 600,000
Book value 500,000
Allocated Excess 300,000
Inventory (40,000)
patent 5yrs 70,000
Goodwill 330,000

Total Parent Sub.

100% 75% 25%
Company fair value 800,000 600,000 200,000
Less: FV 500000+40000-70000 470,000 352,500 117,500
Goodwill 330,000 247,500 82,500

Schedule of amortization
Bal. Bal.
Life Jan.1-2014. 2014 2015 2016 !2/31/16.
Inventory under 40,000 (40,000) -
Patent over 5 (70,000) 14,000 14,000 14,000 (28,000)
Goodwill 330,000 (19,300) 310,700
300,000 (26,000) 14,000 (5,300) 282,700

Journal Entries
Cost Method 2014 2015 2016
Inv. In Subsidiary 600,000
Cash 600,000

Cash 18,750 7,500 30,000

Dividend Income 18,750 7,500 30,000

Equity Method 2014 2015 2016

Inv. In Subsidiary 600,000
Cash 600,000

Cash 18,750 7,500 30,000

Inv. In Subsidiary 18,750 7,500 30,000

Inv. In Subsidiary 60,000 67,500

Inv. Income 60,000 67,500
26,250
Inv. Income 26,250
Inv. In Subsidiary
Amortization
Inv. Income 19,500 3,975
Inv. In Subsidiary 19,500 3,975
10,500
Inv. In Subsidiary 10,500
Inv. Income
Requirement No. 1
Cost Method Equity Method
Investment Investment
Balance Income Balance Income
Jan.1-2014. 600000 600,000
2014 600000 18,750 621,750 40,500
2015 600000 7,500 598,500 (15,750)
2016 600000 30,000 632,025 63,525
Equity Method
Equity Method Investment Income
Investment Balance 19500 60,000
jan.1-2014 600,000 18750 div. 40,500 2014
income 60000 19500 amort 26000x75%
621,750 End bal
660,000 660,000

Jan.1-2015 621,750 7,500 loss 26250 10,500

amort(14000x75%) 10,500 26,250 div. 15,750 2015
598,500 End Bal.
632,250 632,250
3,975 67500
Jan. 1-2016. 598,500 30,000 63,525 2016
income 67,500 3,975 amort(5300x75%)
632,025 End Bal.
666,000 666,000

Requirement No. 2: Balances

a. partial goodwill - jan. 1,2014 247,500
b. Full-goodwill - jan. 1, 2014 330,000
c. Annual amortization
2014 (26,000)
2015 14,000
2016 (5,300)
d. Non-controlling interest -Jan. 1, 2016
Common Stock, 12/31/15. 400,000
Retained Earnings, Subsidiary-Dec. 31, 2015.
Jan.1,2014 100,000
2014 income 80,000
2015 income(loss) (35,000)
2014-dividend (25,000)
2015-dividend (10,000) 110,000
Stockholders equity-Dec. 31, 2015 510,000
Adjustments to reflect fair value-(over)/under valuation
of assets and liabilities-Jan. 1, 2014 (30,000)
amortization of allocated excess
2014 (26,000)
2015 14,000 (12,000)
Fair value of stockholder's equity-Dec. 31, 2015 468,000
multiply by NCI % 25%
Fair Value of NCI(partial goodwill) Dec. 31, 2015 117,000
Add: NCI on full goodwill, net of impairment loss
Full 330,000
partial 247,500 82,500
less: impairment loss 0 82,500
FV of NCI(full goodwill-Dec. 31, 2015 199,500
e. Consoidated Retained Earnings on Jan. 1, 2016. 498,500
given in the problem -beg. RE-equity method

Consolidated Retained Earnings, Jan. 1, 2016

Retained earnings-Parent-Jan. 1-Cost model 500,000
Adj. to convert from cost model to equity method for purposes
of consolidation or to establish reciprocity:
Parent's share in adjusted net increase in Subsidiary's
Retained Earnings:
Retained Earnings-Sub.-Jan.1-2016 110,000
Retained Earnings-Sub.-Jan.12014 100,000
Increase in RE since date of acquisition 10,000
amortization of allocated excess-2014 (26,000)
amortization of allocated excess-2015 14,000
(2,000)
multiply by controlling interest 75%
(1,500)
less: goodwill impairment (full goodwill)2016 - (1,500)
Consolidated Retained Earnings-Jan. 1, 2016 498,500

Requirement No. 4: Balances on Dec. 31, 2016

a. Goodwill 12/31/16 partial gooodwill 247500-(19300x75%) 233,025
b. Goodwill 12/31/16 full gooodwill 330000-19300 310,700
c. noncontrolling interest-12/31/16.
Common Stock, 12/31/16 400,000
Retained Earnings, Subsidiary-Dec. 31, 2016.
Jan.1,2014 100,000
2014 income 80,000
2015 income(loss) (35,000)
2016 income 90,000
2014-dividend (25,000)
2015-dividend (10,000)
2016-dividend (40,000) 160,000
Stockholders equity-Dec. 31, 2016 560,000
Adjustments to reflect fair value-(over)/under valuation
of assets and liabilities-Jan. 1, 2014 (30,000)
amortization of allocated excess
2014 (26,000)
2015 14,000
2016 14,000 2,000
Fair value of stockholder's equity-Dec. 31, 2016 532,000
multiply by NCI % 25%
Fair Value of NCI(partial goodwill) Dec. 31, 2016 133,000
Add: NCI on full goodwill, net of impairment loss
Full 330,000
partial 247,500 82,500
less: impairment loss 19300x25% 4,825 77,675
FV of NCI(full goodwill-Dec. 31, 2016 210,675
 alternative computation
Common stock 12/31/16. 400,000
Retained Earnings-12-31-16 110,000
add: NI -sub-2016 90,000
dividends (40,000) 160,000
Book value of SHE 560,000
Adj. to refelect fair value (increase in net assets) 300,000
amortization of allocated excess
inventory 2014 (40,000)
patent 14000x3 42,000
impairment of goodwill-2016 (19,300) 282,700
FV of SHE 842,700
multiply by NCI percentage 25%
FV of NCI 210,675

d. Profit attributable to parent or controlling interest 233,525

e. Profit attributable to non controlling interest 21,175
f. Consolidate Net income 254,700

Consolidated Net income

Sub. Parent Consolidated
Net income 90,000 200,000
less: dividends 40000x75% 30,000
Total Net income fr. Own oper. 90,000 170,000
amortization of allocated excess
amortization 14,000
impairment (19,300)
Adjusted 84,700 170,000 254,700 CNI
NCI-25% 21,175 21,175 NCI
CNI attributable to parent 233,525

G. Consolidated Retained Earnings-12/31/16.

Consolidated Retained Earnings-Jan. 1, 2016 498,500
Add: controlling interest in net income 233,525
Total 732,025
less: dividend paid by parent 2016 70,000
Consolidated Retained Earnings-Dec. 31, 2016 662,025

Requirement No. 5: Requirement from cost method to equity method

a. Investment Balance, cost method 600,000

Retroactive adjustment (net income less dividends)
Net income Dividend
2014 80,000 25,000
2015 (35,000) 10,000
2016 90,000 40,000
135,000 75,000 60,000
Less: cumulative amortization of allocated excess 17,300
42,700
x controlling interest 75%
32,025
less: impairment of goodwill 0 32,025
Investment balance under equity method 632,025