SM ch06

6
THE PURCHASE METHOD:

POSTACQUISITION PERIODS
& PARTIAL OWNERSHIPS
LEVEL OF
TIME
DIFFICULTY (MINUTES)
REVIEW QUESTIONS
EXERCISES FOR 100%-OWNED SUBSIDIARIES
6-1
6-2
6-3
6-4
6-5
Recording parents entries under the equity and cost methods.............

Calculating consolidated and parent company amounts.......................
Applying the equity method; consolidation entries..............................
Applying the equity method; consolidation entries..............................
Calculating a goodwill impairment loss................................................
Simple
Simple
Moderate
Moderate
Moderate
10
10
20
20
20
Simple
Simple
Simple
Simple
Simple
Simple
Simple
5
15
10
10
10
10
10
EXERCISES FOR PARTIALLY OWNED SUBSIDIARIES

6-6
6-7
6-8
6-9
6-10
6-11
6-12
Calculating consolidated net income....................................................

Calculating consolidated and parent company amounts.......................
Separating parents cost into components.............................................
Separating parents cost into components.............................................
Determining subsidiarys equity from consolidated data.....................
PROBLEMS FOR 100%-OWNED SUBSIDIARIES

6-1 Consolidation worksheet (continuation of Problem 5-4)........................
Moderate
6-2 Consolidation worksheet (continuation of Problem 5-5)........................
Moderate
6-3 COMPREHENSIVE: Recording the acquisition; analyzing the Investment
account; applying the equity method; consolidation worksheet......... Moderate
6-4 COMPREHENSIVE CHALLENGER: Converting to the equity method
from the cost method two years after the acquisition date;
consolidation worksheet.....................................................................
Complex
6-5 COMPREHENSIVE: Recording the acquisition and selecting
relevant data; consolidation worksheet...............................................
Moderate
40
40
60
70
50
6-2
ADVANCED ACCOUNTING: Concepts and Practice
PROBLEMS FOR PARTIALLY OWNED SUBSIDIARIES

6-6
6-7
6-8
6-9
6-10
6-11
6-12
6-13
6-14
Consolidation worksheet as of the acquisition date..............................

Simple
Consolidation worksheet subsequent to the acquisition date
(continuation of Problem 6-6).............................................................
Moderate
Consolidation worksheet as of the acquisition date..............................
Simple
Consolidation worksheet subsequent to the acquisition date
(continuation of Problem 6-8).............................................................
Moderate
COMPREHENSIVE: Analyzing the investment account;
applying the equity method; consolidation worksheet.......................
Complex
REVIEW (Chapters 5 and 6): Analyzing the investment account;
applying the equity method; computing noncontrolling interest and
consolidated retained earnings............................................................
Moderate
COMPREHENSIVE: Recording the acquisition; selecting relevant data;
consolidation worksheet.....................................................................
Moderate
Step acquisition: Significant influence; 90% ownership obtained........ Moderate
Step acquisition: Significant influence; 70% ownership obtained;
mid-year acquisitionPost acquisition period.................................. Moderate
20
40
20
40
60
30
50
35
50
THINKING CRITICALLY
CASE
6-1
Actual practice case: Subsequently found unrecorded liability............
Simple
10
Simple
Simple
Moderate
10
10
70
Simple
10
FINANCIAL ANALYSIS PROBLEMS

6-1
6-2
6-3
Calculating parents annual return on investment: 100% ownership. . .

Calculating parents annual return on investment: 75% ownership.....
Evaluating profitability of the parents investment...............................
CHAPTER ETHICS QUESTION

Would you fudge the numbers? (page 195)..........................................
EXERCISES FOR APPENDIX 6AECONOMIC UNIT CONCEPT PROCEDURES

6A-1
..Comparison of the parent company concept and the economic unit
conceptTangible assets...................................................................
Simple

conceptTangible assets...................................................................
Simple

conceptTangible assets and goodwill.............................................
Simple
6A-2
6A-3
The Purchase Method: Postacquisition Periods and Partial Ownerships
6-3
ASSIGNMENT MATERIAL
Review Questions
1. An acquired businesss preacquisition earnings are never combined with the preacquisition earnings of the
acquiring entity. Thus they are eliminated in consolidation.
2. In a parent-subsidiary relationship, a liquidating dividend can occur only if the subsidiary was acquired (as
opposed to being created by the parent). In such situations, a liquidating dividend occurs when the
subsidiarys postacquisition dividends exceed the subsidiarys postacquisition earnings.
3. Under the equity method, liquidating dividends are recorded as a liquidation of the parents investmentthe
same treatment accorded nonliquidating dividends. Under the cost method, liquidating dividends are
recorded as a liquidation of the parents investmentnot as dividend income.
4. Under the equity method, amortization of a parents cost in excess of book value is recorded in its general
ledger. Under the cost method, amortization of a parents cost in excess of book value is not recorded in its
general ledger but on the consolidation worksheet during the consolidation process.
5. An acquired subsidiarys financial statements are relevant amounts only if the subsidiary has applied pushdown accounting to bring all accounts to their current values.
6. Goodwill must be tested for impairment annually (or more often if certain triggering events occur).
7. A reporting unit is either an operating segment (as defined by FAS 131) or a component of an operating
segment.
8. A reporting units fair value is determined using estimation techniques (such as calculating the present value
probability-weighted estimated future cash flows). Both the reporting units recognized intangible assets
(other than goodwill) and unrecognized intangible assets (other than goodwill) are included in determining
the reporting units fair value.
9. Goodwill is tested for impairment at the reporting unit level. (At the acquisition date, goodwill is assigned
to the appropriate reporting unit(s).)
10. Goodwills implied fair value is determined in a residual manner (in Step 2 of the impairment test) as if the
reporting unit had been acquired in a business combination on that testing date (a pro forma exercise).
11. Goodwill impairment writedowns are reported currently in the income statement as a separate line item
before the subtotal Income from Continuing Operations.
12. Under the parent company concept, an acquired subsidiarys assets and liabilities are revalued to their
current values only to the extent that the parent bought and paid for such undervaluation.
Under the economic unit concept, an acquired subsidiarys assets and liabilities are revalued to 100% of their
current values.
13. Under the parent company concept, goodwill is limited to the amount of goodwill actually paid for.
Under the economic unit concept, goodwill can be either (1) the goodwill implicit in the transactions (which
imputes an amount that accrues to the noncontrolling interest) or (2) the amount actually paid for by the
parent (same amount as determined under the parent company concept).
14. The FASBs latest proposal on consolidation procedures (May 1996) requires goodwill to be reported at the
amount that was bought and paid for by the parentno amounts are imputed to the noncontrolling interest.
(This proposal is currently on hold.)
15. In a step acquisition in which a noncontrolling interest exists, the subsidiarys assets and liabilities are
revalued (1) to 100% of their current values in consolidation under the economic unit concept and (2) only to
the extent of the parents ownership percentage under the parent company concept.
6-4
EXERCISES
E 6-1 (Estimated time: 10 minutes)
Requirements 1 and 2:
Equity Method
Investment in Subsidiary................................................................
Equity in Net Income (of subsidiary)...................................
90,000
Dividends Receivable/Cash............................................................
Investment in Subsidiary......................................................
Dividend Income..................................................................
Equity in Net Income (of subsidiary).............................................
Investment in Subsidiary.......................................................
40,000
Cost Method
(not required)
90,000
40,000
40,000
40,000
12,000
12,000

Requirement 1:
Consolidated net income for 2006.............................................................................................
a$900,000 + $120,000 $8,000 = $1,012,000.
$1,012,000a
Requirement 2:
Consolidated dividends declared for 2006.................................................................................
$ 200,000
Requirement 3:
Parents 2006 investment income under the equity method......................................................
a$120,000 $8,000 = $112,000.
$ 112,000a
Parents 2006 investment income under the cost method ( not required)................................. $
25,000

Requirement 1:
2006
Investment in Subsidiary................................................................................................. 35,000
Equity in Net Income (of subsidiary)....................................................................
Dividends Receivable/Cash............................................................................................
5,000
Investment in Subsidiary.......................................................................................
Equity in Net Income (of subsidiary).............................................................................. 11,000
2007
Equity in Net Loss (of subsidiary)..................................................................................
Dividends Receivable/Cash............................................................................................
35,000
5,000
11,000
10,000
10,000
5,000
5,000
6,000
6,000
6-5
E 6-3 (continued)
Requirement 2:
I. ANALYSIS OF THE INVESTMENT ACCOUNTBOOK VALUE ELEMENT
Balances, 1/1/06................................................................
+ Equity in net income......................................................
Dividends...................................................................
Balances, 12/31/06............................................................
+ Equity in net loss............................................................
Dividends...................................................................
Balances, 12/31/07............................................................
Parents
Investment
Account
Book Value
$160,000
35,000
(5,000)
$190,000
(10,000)
(5,000)
$175,000
BOOK VALUE ELEMENT

Subsidiarys Equity Accounts
Common
Retained
=
Stock
+ Earnings
$100,000
$60,000
35,000
(5,000)
$100,000
$90,000
(10,000)
(5,000)
$100,000
$75,000
II. ANALYSIS OF THE INVESTMENT ACCOUNTEXCESS COST ELEMENTS

Parents
UNDER- OR (OVER)VALUATION
Investment
OF NET ASSETS ELEMENT
Account
Building
Excess
Accum. GOODWILL
Cost = Inventory + Land
+ Cost + Depr. + ELEMENT
Life:
3 mo.
Indefinite
15 yrs.
Indefinite
Balances, 1/1/06........... $240,000
$ 5,000
$105,000
$90,000
$40,000
Amortization.............. (11,000)
(5,000)
(6,000)
Balances, 12/31/06.......$229,000
$ -0$105,000
$90,000
$ (6,000)
$40,000
Amortization.............. (6,000)
(6,000)
Balances, 12/31/07.......$223,000
$ -0$105,000
$90,000
$(12,000)
$40,000
Requirement 3:
Consolidation Date
12/31/06
12/31/07
Dr.
Cr.
Dr.
Cr.
(a) The basic elimination entry:
Common Stock.............................................................................. 100,000
Retained Earnings, 1/1/06 and 1/1/07........................................... 60,000
Equity in Net Income (of subsidiary)............................................ 35,000
Dividends Declared.............................................................
Equity in Net Loss (of subsidiary)......................................
Investment in Subsidiary.....................................................
100,000
90,000
5,000
5,000
10,000
175,000
190,000
(b) The unamortized excess cost reclassification entry (for BS):

Land............................................................................................... 105,000
Building......................................................................................... 90,000
Goodwill........................................................................................ 40,000
Accumulated Depreciation (building).................................
Investment in Subsidiary.....................................................
6,000
229,000
(c) The amortized excess cost reclassification entry (for IS):

Cost of Sales (all depreciation is assumed to be on mfg. plant). . . 11,000
Equity in Net Income (of subsidiary)..................................
11,000
105,000
90,000
40,000
12,000
223,000
6,000
6,000
6-6

Requirement 1:
2006:
Equity in Net Loss (of subsidiary).................................................................................. 15,000
Investment in Subsidiary......................................................................................
Dividends Receivable (when declared)/Cash (when collected)..................................... 1,000
2,000
2007:
Equity in Net Income (of subsidiary)........................................................................
Dividends Receivable (when declared)/Cash (when collected)..................................... 5,000
Investment in Subsidiary...........................................................................................
Investment in Subsidiary.................................................................................................
3,000
Equity in Net Income (of subsidiary)........................................................................
15,000
1,000
2,000
30,000
5,000
3,000
Requirement 2:
Balances, 1/1/06............................................................
+ Equity in net loss........................................................
Dividends...................................................................
Balances, 12/31/06........................................................
+ Equity in net income..................................................
Dividends...................................................................
Balances, 12/31/07........................................................
Parents
Investment
Account
Book Value
$350,000
(15,000)
(1,000)
$334,000
30,000
(5,000)
$359,000
BOOK VALUE ELEMENT

Common
Retained
=
Stock
+ Earnings
$250,000
$100,000
(15,000)
(1,000)
$250,000
$ 84,000
30,000
(5,000)
$250,000
$109,000

Parents
Investment
Account
Building
Excess
Accum.
Cost
= Inventory + Land + Cost +
Depr.
Balances, 1/1/06.................................. $(40,000)
Amortization....................................
(2,000)
Balances, 12/31/06.............................. $(42,000)
Amortization....................................
3,000
Balances, 12/31/07.............................. $(39,000)
$ 5,000
(5,000)
$ -0-
$30,000
$(75,000)
$30,000
$(75,000)
$ -0-
$30,000
$(75,000)
$3,000
$3,000
3,000
$6,000
6-7
E 6-4 (continued)
Requirement 3 (continued):
Consolidation Date
12/31/06
12/31/07
Dr.
Cr.
Dr.
Cr.
(a) The basic elimination entry:
Common Stock........................................................................ 250,000
Retained Earnings, 1/1/06 and 1/1/07..................................... 100,000
Equity in Net Income (of subsidiary).....................................
Dividends Declared.......................................................
Equity in Net Loss (of subsidiary)................................
Investment in Subsidiary..............................................
(b) The unamortized excess cost reclassification entry (for BS):
Land........................................................................................
30,000
Accumulated Depreciation (building)....................................
3,000
Investment in Subsidiary........................................................
42,000
Building.........................................................................
(c) The amortized excess cost reclassification entry (for P/L):
Cost of Sales...........................................................................
Equity in Net Income (of subsidiary)...........................
Equity in Net Income (of subsidiary).....................................
Cost of Sales.................................................................
250,000
84,000
30,000
1,000
15,000
334,000
5,000
359,000
30,000
6,000
39,000
75,000
75,000
2,000
2,000
3,000
3,000

Requirement 1:
Estimated fair value of the reporting unit.............................................................................
LessAmounts assigned to:
Tangible net assets.................................................................................................................
Recognized intangible assets.................................................................................................
Unrecognized intangible assets..............................................................................................
Implied Fair Value of Goodwill..............................................................................................
(520,000)
(250,000)
(100,000)
$ 30,000
Requirement 2:
Book Value of Goodwill............................................................................................................
Implied Fair Value of Goodwill (per requirement 1).................................................................
Goodwill Impairment Loss....................................................................................................
$290,000
30,000
$260,000
$900,000
Requirement 3
Parents adjusting entry
(assuming common stock was acquired and nonpush-down accounting is used)
Equity in Net Income of Subsidiary...........................................................................
Invesestment in Subsidiary.........................................................................................
(assuming assets were acquired instead of common stock)
Goodwill Impairment Loss.........................................................................................
Goodwill.............................................................................................................
Requirement 4
No entry would be made one year later if the goodwill recovered in value.
260,000
260,000
260,000
260,000
6-8
E 6-5 (continued)
Requirement 5
Estimated fair value of the reporting unit............................................................................. $1,000,000
LessAmounts assigned to:
Tangible net assets.................................................................................................................
(520,000)
Recognized intangible assets.................................................................................................
(250,000)
Unrecognized intangible assets.............................................................................................
(100,000)
Implied Fair Value of Goodwill ($160,000 below its book value of $290,000).................... $ 130,000
If the reporting units fair value were $1,000,000, step one of the impairment test would show that no goodwill
impairment had occurred (reporting units carrying value of $990,000 is below its fair value of $1,000,000).
Accordingly, step 2 is not required and no impairment loss would be recognizedeven though the goodwills
implied fair value is $160,000 below its book value.
Realistically, the result is as if (1) the goodwill was written down by $160,000 and (2) nongoodwill assets were
written up in total by $160,000 ($20,000 + $50,000 + $100,000 less $10,000 [$1,000,000 - $990,000]).

Consolidated
Income before amortization of cost in excess of book value ($1,000,000 + $600,000)............ $1,600,000
LessParents amortization of cost in excess of book value (given).......................................
(30,000)
Consolidated Net Income........................................................................................................ $1,570,000
To Noncontrolling Interest (25% of $600,000 = $150,000;.................................................. (150,000)b
To Controlling Interest........................................................................................................... $1,420,000

Requirement 1:
Calculation for Stane90% Owned (assumed owned for the entire year)
Stanes reported income for 2006................................................................................................ $300,000
LessParents amortization of cost in excess of book value (given).........................................
(27,000)
Income for Consolidated Reporting Purposes.......................................................................... $273,000
Accruing to NCI (10% $300,000)........................................................................................
Accruing to CI ($273,000 - $30,000)......................................................................................
$ 30,000
$ 243,000
Calculation for Steele80% Owned (assumed owned for the entire year)
Steeles reported income for 2006............................................................................................... $100,000
LessParents amortization of cost in excess of book value (given).........................................
(8,000)
Income for Consolidated Reporting Purposes.......................................................................... $ 92,000
Accruing to NCI (20% $100,000).......................................................................................
Accruing to CI ($92,000 - $20,000).......................................................................................
$ 20,000
$ 72,000
6-9
E 6-7 (continued)
Requirement 2:
Calculation for Stane90% Owned (assumed owned for 8 months of 2006)
Stanes reported income for 8 months of 2006 ($300,000 2/3 yr.)........................................... $200,000
LessParents amortization of cost in excess of book value ($27,000 2/3 yr.)...................... (18,000)
Income for Consolidated Reporting Purposes.......................................................................... $182,000
Accruing to NCI (10% $200,000).......................................................................................
Accruing to CI ($182,000 - $20,000).....................................................................................
a
$ 20,000a
$162,000
This amount assumes that the period from 1/1/06 to the acquisition date of 5/1/06 is not consolidated. If this
period were consolidated (an acceptable practice), the Preacquisition Earnings of $100,000 for this period
would be reported as a deduction in the consolidated income statement. Of this amount, $10,000 (10% of the
$100,000) may be classified as part of the noncontrolling interest deduction.
Calculation for Steele80% Owned (assumed owned for 6 months of 2006)
Steeles reported income for 6 months of 2006 ($100,000 yr.).............................................. $ 50,000

LessParents amortization of cost in excess of book value ($8,000 yr.)............................. (4,000)
Income for Consolidated Reporting Purposes.......................................................................
$ 46,000
Accruing to NCI (20% $50,000)........................................................................................... $ 10,000a
Accruing to CI ($46,000 - $10,000)......................................................................................... $ 36,000
This amount assumes that the period from 1/1/06 to the acquisition date of 7/1/06 is not consolidated. If this
period were consolidated (an acceptable practice), the Preacquisition Earnings of $50,000 for this period
would be reported as a deduction in the consolidated income statement. Of this amount, $10,000 (20% of
the $50,000) may be classified as part of the noncontrolling interest deduction.

Requirement 1:
Consolidated
Sales........................................................................................................................................... $ 1,000,000
Cost of sales...............................................................................................................................
(500,000)
Expenses.....................................................................................................................................
(190,000)
Consolidated Net Income......................................................................................................... $ 310,000
To noncontrolling interest (25% $60,000 of subsidiarys reported net income)..............
(15,000)
To controlling interest.......................................................................................................... $ 295,000
Requirement 2:
Consolidated
Sales........................................................................................................................................... $ 1,000,000
Cost of sales...............................................................................................................................
(500,000)
Expenses ($190,000 + $3,000 of amortization of excess cost)..................................................
(193,000)
Consolidated Net Income......................................................................................................... $ 307,000
To noncontrolling interest (25% x $60,000 of subsidiarys reported net income)..............
(15,000)
To controlling interest.......................................................................................................... $ 292,000
6-10

Requirement 1:
Parents net income for all of 2006............................................................................................
Subsidiarys net income for 8 months of 2006..........................................................................
Subtotal....................................................................................................................................
LessGoodwill amortization:
Parents amortization (given)..................................................................................................
Consolidated Net Income........................................................................................................
To Noncontrolling Interest (25% of $200,000 = $50,000).................................................
To Controlling Interest........................................................................................................
$ 800,000
200,000
$1,000,000
(24,000)
$ 976,000
(50,000)b
$ 926,000
Requirement 2:
Consolidated dividends declared for 2006 (the parents total dividends)................................. $ 420,000
Requirement 3:
Parents equity in the subsidiarys net income for 8 months of 2006 (75% of $200,000)........ $ 150,000
LessParents recorded goodwill amortization........................................................................
(24,000)
Parents Investment Income................................................................................................... $ 126,000

BREAKDOWN OF PARENTS COST AT DATE OF ACQUISITION
Book value element (60% $400,000).....................................................................................
Excess (negative) cost elements.................................................................................................
Cost (given)............................................................................................................................
$ 240,000
(21,000)
$ 219,000
I. ANALYSIS OF INVESTMENT ACCOUNTBOOK VALUE ELEMENT

Parents
NonInvestment
BOOK VALUE ELEMENT
controlling Account
Interest
Book
Common
Additional
Retained
(40%) +
Value
=
Stock
+ Paid-in-Capital +
Earnings
5/1/06...................... $160,000
$240,000
$50,000
$550,000
$(200,000)
II. ANALYSIS OF INVESTMENT ACCOUNTEXCESS COST ELEMENTS

Parents
Investment
Account
Excess
+
Cost
=
5/1/06.......................
$(21,000)
Lease
Deferred
Note
Bond GOODWILL
Impr. + Charges + Rec.
+ Pay. + ELEMENT
$(21,000)
$(24,000)
$6,000
$(12,000)
6-11

BREAKDOWN OF PARENTS COST AT DATE OF ACQUISITION
Book value element (70% $210,000)........................................................................................
Excess cost elements....................................................................................................................
Cost (given)..............................................................................................................................
$147,000
56,000
$203,000
I. ANALYSIS OF INVESTMENT ACCOUNT BOOK VALUE ELEMENT

Parents
Investment
NonControlling
Interest
Account
Book
Common
Additional
Retained
(30%)
+ Value
= Stock
+ Paid-in-Capital +
Earnings
1/1/06...........$63,000
$147,000
$100,000
$50,000
$60,000

Parents
Investment
Account
Excess
Cost =
1/1/06.........................
$56,000
Old
Bond
Land
+
Goodwill + Payable
$49,000
$(35,000)
$14,000
GOODWILL
+ ELEMENT
$28,000
6-12

Requirement 1:
Parents cost (given)..................................................................................................................... $105,000
Less: Parents excess cost assigned to undervaluation of Sodas fixed assets (given)................ (21,000)
Less: Parents share of goodwill reported in the consolidated balance sheet
(70% of $10,000 [given]).............................................................................................................
(7,000)
Portion of Parents Cost Relating to Sodas Book Value...................................................... $ 77,000
Divide by parents ownership percentage................................................................................
70%
Sodas Book Value at Date of Acquisition..........................................................................
$110,000
Requirement 2:
I. ANALYSIS OF INVESTMENT ACCOUNTBOOK VALUE ELEMENT
Non-
Parents
controlling
Accounts
Interest
BOOK VALUE ELEMENT

Investment
Subsidiarys Equity
Account
Common
Retained
(30%)
Acquisition date............
a
$33,000
Book Value
$77,000
Stock
$50,000
Earnings
$60,000a
$110,000 $50,000 for the common stock [a given amount] = $60,000.

Parents
Investment
Account
Fixed
Excess Cost =
Assets
+
Acquisition date............................ $28,000
$21,000
GOODWILL
ELEMENT
$7,000
6-13
PROBLEMS
P 6-1 (Estimated time: 40 minutes)
Requirement 1:
Parents
Investment
BOOK VALUE ELEMENT

Account
Book Value
Balances, 1/1/06................................................................ $190,000
60,000
Dividends........................................................................
(35,000)
Balances, 12/31/06........................................................... $215,000
Common
Stock
$100,000
$100,000
Retained
Earnings
$ 90,000
60,000
(35,000)
$ 115,000

Parents
Investment
Account
Equipment
Excess
Accum.
Cov. GOODWILL
Cost + Inventory = Land + Cost + Depr. + NTC + ELEMENT
Remaining life:
n/a
10 yrs.
4 yrs.
n/a
Balances, 1/1/06........... $135,000
$(5,000) $30,000 $50,000
$40,000
$20,000
- Amortization............. (10,000)
5,000
$ (5,000) (10,000)
Balances, 12/31/06...... $125,000
$ -0- $30,000 $50,000
$ (5,000) $30,000 $20,000
Requirement 2:
(1) The basic elimination entry:
Common Stock.............................................................................................................. 100,000
Retained Earnings, 1/1/06............................................................................................. 90,000
Equity in Net Income.................................................................................................... 60,000
Dividends Declared.............................................................................................
Investment in Subsidiary.....................................................................................
35,000
215,000
(2) The unamortized excess cost reclassification entry (for BS):

Land...............................................................................................................................
Equipment.....................................................................................................................
Covenant Not-to-Compete............................................................................................
Goodwill........................................................................................................................
Accumulated Depreciation (equipment).............................................................
Investment in Subsidiary.....................................................................................
5,000
125,000
30,000
50,000
30,000
20,000
(3) The amortized excess cost reclassification entry (for IS):

Cost of Sales (all depreciation expense is assumed to be on a manufacturing plant). . 10,000
Equity in Net Income..........................................................................................
10,000
(4) The accumulated depreciation elimination entry:

Accumulated Depreciation (the balance at the acquisition date per Problem 5-4).... 44,000
Buildings and Equipment....................................................................................
44,000
6-14
P 6-1 (continued)
Requirement 3:
Pya Inc. and Sya Inc.

Consolidation Worksheet as of December 31, 2006
Pya
Inc.
Sya
Inc.
Consolidation Entries
Dr.
Cr.
Consolidated
INCOME STATEMENT: (2006)
Sales.....................................
Cost of sales.........................
Expenses...............................
Equity in net inc. (of Sya)....
Net Income......................
950,000 600,000
(520,000) (300,000)
(370,000) (240,000)
50,000
110,000
60,000
10,000(3)
60,000(1)
70,000
10,000(3)
10,000
1,550,000
(830,000)
(610,000)
-0110,000
STMT. OF RET. EARNINGS:
Balances, 1/1/06..................
+ Net income........................
Dividends declared............
Balances, 12/31/06..............
350,000
110,000
(80,000)
380,000
90,000
60,000
(35,000)
115,000
75,000
95,000
115,000
25,000
60,000
120,000
90,000(1)
70,000BF
160,000
350,000
10,000BF
35,000(1)
45,000
(80,000)
380,000
BALANCE SHEET:
Cash......................................
Accounts receivable, net......
Inventory..............................
Investment in subsidiary:
Book value element .......
Excess cost elements .....
Land.....................................
Buildings and equipment......
Accumulated depreciation....
Covenant not-to-compete.....
Goodwill...............................
Total Assets.....................
215,000
125,000
100,000
250,000
(210,000)
70,000
224,000
(59,000)
765,000
440,000
Payables and accruals........... 65,000

Long-term debt..................... 20,000
Common stock..................... 300,000
Retained earnings................. 380,000
Common stock.....................
Retained earnings.................
....................................... -0Total Liab. & Equity...... 765,000
75,000
150,000
100,000
155,000
235,000
215,000(1)
125,000(2)
30,000(2)
50,000(2)
44,000(4)
30,000(2)
20,000(2)
174,000
44,000(4)
5,000(2)
389,000
-0-0200,000
480,000
(230,000)
30,000
20,000
990,000
140,000
170,000
300,000
380,000
-0-
100,000
115,000
100,000(1)
160,000BF
440,000
260,000
45,000
Proof of debit and credit postings............................. 434,000

Explanation of entries:
434,000
(1) The basic elimination entry.

(4) The accumulated depreciation
(2) The unamortized excess cost reclassification entry (for BS).
elimination entry.
(3) The amortized excess cost reclassification entry (for IS).
990,000
6-15

Requirement 1:
Parents
Investment
Account
Book Value
Balances, 12/31/05................................ $260,000
+ Equity in net income........................... 70,000
- Dividends declared.............................. (45,000)
Balances, 12/31/06.................................. $285,000
BOOK VALUE ELEMENT

Common
Addl Paid-in
Retained
Stock
+
Capital
+ Earnings
$5,000
$95,000
$5,000
$95,000
$160,000
70,000
(45,000)
$185,000
Remaining life:
Parents
Investment
Account
Building
Excess
Accum.
Long-Term
Cost = Inventory + Land
+ Cost + Depr. +
Debt
6 mo.
Indefinite
20 yrs.
4 yrs.
Balances, 12/31/05....... $(50,000)

Amortization.............. 15,000
Balances, 12/31/06.......$ (35,000)
$(20,000)
20,000
$ -0-
$30,000
$30,000
$(100,000)
$(100,000)
$ 5,000
$ 5,000
$ 40,000
(10,000)
$30,000
Requirement 2:
Common Stock...............................................................................................................
5,000
Additional Paid-in Capital.............................................................................................. 95,000
Retained Earnings, 1/1/06.............................................................................................. 160,000
Equity in Net Income..................................................................................................... 70,000
Dividends Declared...............................................................................................
45,000
285,000

Land................................................................................................................................ 30,000
Accumulated Depreciation (building)............................................................................ 5,000
Long-Term Debt............................................................................................................. 30,000
Investment in Subsidiary................................................................................................ 35,000
Building................................................................................................................
100,000

Equity in Net Income.....................................................................................................
Expenses (interest).........................................................................................................
Cost of Sales.........................................................................................................
15,000
10,000

Accumulated Depreciation (the balance at the acquisition date per Problem 5-5)..... 55,000
Buildings and Equipment.........................................................................................
25,000
55,000
6-16
P 6-2 (continued)
Requirement 3:
Poz Inc. and Soz Inc.

Poz
Inc.
Soz
Inc.
Dr.
Cr.
Consolidated
Sales......................................... 910,000
820,000
Cost of sales............................. (510,000) (505,000)
Expenses.................................. (310,000) (245,000)
10,000(3)
Equity in net income (of Soz).....

......................................................
70,000(1)
15,000(3)
Net Income..........................
85,000
175,000
70,000
25,000(3)
1,730,000
(990,000)
(565,000)
-0-
95,000
25,000
175,000
Balances, 1/1/06...................... 200,000

+ Net income (loss).................. 175,000
175,000
Dividends declared................ (135,000)
Balances, 12/31/06.................. 240,000
160,000
70,000
(45,000)
185,000
160,000(1)
95,000BF
200,000
45,000
70,000
255,000
(135,000)
240,000
BALANCE SHEET:
Cash..........................................
40,000
Accounts receivable, net.......... 115,000
..................................................
Inventory..................................
90,000
Book value element ............ 285,000
Excess cost elements ........... (35,000)
Land......................................... 190,000
Buildings and equipment......... 500,000
.................................................
Accumulated depreciation....... (460,000)
.................................................
20,000
80,000
60,000
195,000
120,000
210,000
285,000(1)
100,000
305,000
(85,000)
35,000(2)
30,000(2)
100,000(2)
55,000(4)
5,000(2)
55,000
Total Assets........................ 725,000

540,000
125,000
Payables and accruals..............
75,000
25,000
Long-term debt.........................
10,000
230,000
30,000(2)
Common stock.........................
20,000
Additional paid-in capital........ 380,000
Retained earnings..................... 240,000
Common stock.........................
5,000
5,000(1)
Additional paid-in capital........
95,000
95,000(1)
Retained earnings.....................
185,000
255,000BF
........................................... -0Total Liab. & Equity......... 725,000
540,000
385,000
Proof of debit and credit postings....................................510,000
-0-0320,000
650,000
(485,000)
(4)
440,000
950,000
100,000
210,000
20,000
380,000
240,000
-0-0-
70,000
510,000
950,000

elimination entry.
6-17
6-18

The parents total cost is $190,000 ($120,000 + $70,000). The split-out is $202,000 and $(12,000).
Parents
BOOK VALUE ELEMENT
Investment
Account
Common
Retained
Book Value =
Stock
+ Earnings
Balances, 1/1/06.............................................................. $202,000
$100,000
$102,000
+ Equity in net income....................................................
85,000
85,000
Dividends..................................................................
(35,000)
(35,000)
.......................................................................
Balances, 12/31/06........................................................
$252,000
$100,000
$152,000
Charges

Parents
Investment
Account
BARGAIN
Excess
Land Held
Deferred
Long-Term PURCHASE
Cost
= for Development
+
Debt +
ELEMENT
Balances, 1/1/06............... $(12,000)

Extinguish bargain
purchase element........
Bal, 1/1/06 (adjusted)...... $(12,000)
Amortization..................
(1,000)
Balances, 12/31/06........... $(13,000)
$110,000
(50,000)
$ 60,000
(20,000)c
$ 40,000
$(42,000)
$(42,000)
14,000
$(28,000)
$(30,000)
$(30,000)
5,000
$(25,000)
$(50,000) a
50,000b
$ -0-
Proof: Book value of $202,000 + $110,000 - $42,000 - $30,000 = $240,000 of current value of the net assets.
Current value of net assets of $240,000 - $190,000 of parents cost ($120,000 + $70,000) = $50,000 BPE.
bThe bargain purchase element was allocated to Land Held for Development, because this is the subsidiarys only
noncurrent asset.
cDuring 2006, the subsidiary sold land costing $200,000, which is one-third of the $600,000 book value in the
Land Held for Development account at the acquisition date. Accordingly, one-third of the $60,000 difference
between current value and book value at the acquisition date must be amortized in 2006.
a
Adjusting Entries Required

Additional Paid-in Capital............................................................................................... 25,000
To charge direct costs of registration to equity.
Equity in Net Income (of subsidiary)....................................................................
To record equity in net income of subsidiary.
Equity in Net Income (of subsidiary).............................................................................. 1,000
To amortize excess cost.
Dividends Receivable...................................................................................................... 35,000
To record dividend receivable.
25,000
85,000
1,000
35,000
6-19
P 6-3 (continued)
Requirement 3:
Common Stock............................................................................................................... 100,000
Dividends Declared..............................................................................................
35,000
252,000

Land Held for Development........................................................................................... 40,000
Deferred Charges.................................................................................................
Long-Term Debt...................................................................................................
28,000
25,000

Cost of Sales...................................................................................................................
Expenses ($14,000 and $5,000)...........................................................................
Equity in Net Income...........................................................................................
19,000a
1,000
20,000
Technically, the $5,000 of amortization relating to the long-term debt should be reflected in the income
statement as a reduction to interest expense. Also, because the subsidiary amortized $14,000 of deferred charges
to Expenses (rather than to Cost of Sales), the $14,000 amortized from the Investment account should likewise
be reflected as a reduction to Expenses.

Accumulated Depreciation (the balance at the acquisition date).................................
Buildings and Equipment.....................................................................................
5,000
5,000
Note: The balance in the subsidiarys Accumulated Depreciation account at the

acquisition date was $5,000. The subsidiarys buildings and equipment were
fully depreciated at that date.
(5) The intercompany dividend receivable/payable elimination entry:
Dividend Payable...........................................................................................................
Dividend Receivable............................................................................................
35,000
35,000
6-20
P 6-3 (continued)
Requirement 4:
Pina Inc. and Sina Inc.

Pina
Inc.
Sina
Inc.
Dr.
Cr.
Consolidated
Sales.....................................
Cost of sales.........................
Expenses...............................
Equity in net inc. (of Sina)...
Net Income......................
950,000 330,000
(520,000) (200,000)
(204,000) (45,000)
84,000
310,000
85,000
19,000(3)
1,000(3)
20,000
1,280,000
(740,000)
(230,000)
-0310,000
20,000
35,000(1)
55,000
314,000
310,000
(100,000)
524,000
20,000(3)
85,000(1)
105,000
Balances, 1/1/06..................
+ Net income........................
Balances, 12/31/06..............
314,000
310,000
(100,000)
524,000
102,000
85,000
(35,000)
152,000
28,000
70,000
22,000
102,000(1)
105,000
207,000
BALANCE SHEET:
Cash......................................
Notes receivable...................
Dividends receivable............
Inventory..............................
Book value element ........
Excess cost elements .......
Land.....................................
Land held for development. .
Deferred charges..................
Total Assets.....................
50,000
35,000
130,000
252,000
(13,000)
88,000
700,000
(600,000)
690,000
35,000(5)
252,000(1)
13,000(2)
5,000
(5,000)
400,000
28,000
500,000

13,000
Dividends payable................
35,000
Long-term debt.....................
200,000
Common stock..................... 10,000
Additional paid-in capital..... 130,000
Common stock......................
100,000
Retained earnings..................
152,000
Total Liab. & Equity...... 690,000 500,000
Proof of debit and credit postings.........................
5,000(4)
5,000(4)
40,000(2)
58,000
28,000(2)
320,000
35,000(5)
25,000(2)
100,000(1)
207,000
55,000
342,000
80,000
400,000
400,000
50,000
70,000
50,000
-0130,000
-0-088,000
700,000
(600,000)
440,000
-0928,000
39,000
-0225,000
10,000
130,000
524,000
-0-0928,000
6-21
P 6-3 (continued)
Requirement 4: (continued)
(4) The accumulated depreciation elimination entry.
(5) The intercompany dividend receivable/payable elimination entry.

Parents
Investment
Account
Book Value
BOOK VALUE ELEMENT

Common
Retained
=
Stock
+ Earnings
Balances, 1/1/06................................................................ $510,000

90,000
Dividends........................................................................
(40,000)
Balances, 12/31/06............................................................ $560,000
140,000
Dividends......................................................................
(50,000)
Balances, 12/31/06............................................................ $650,000
$250,000
$260,000
90,000
(40,000)
$310,000
140,000
(50,000)
$400,000
$250,000
$250,000

Parents
Investment
UNDER- OR (OVER)VALUATION OF NET ASSETS ELEMENT
Account
Buildings and Equipment
Excess
Accum.
Old
10% Bonds GOODWILL
Cost = Inventory + Cost + Depr. + Patent + Goodwill + Payable + ELEMENT
$357,000
(41,000)
$316,000
(34,000)
$282,000
$ 7,000
(7,000)
$ -0-
$90,000
$ -0-
$90,000
$90,000
$40,000
$ (6,000)
(8,000)
$ (6,000) $32,000
(6,000)
(8,000)
$(12,000) $24,000
$(60,000)
$(60,000)
$(60,000)
$200,000
(20,000)
$180,000
(20,000)
$160,000
$80,000
$80,000
$80,000
Requirement 3:
Entry to convert to the equity method as of the beginning of 2006:
Investment in Subsidiary ($90,000 [net inc.] $40,000 [div.] $41,000 [amort.]).......
Retained Earnings.................................................................................................
9,000
Entry to convert to the equity method for 2006:

Dividend income............................................................................................................. 50,000
Investment in Subsidiary ($140,000 [net inc.] $50,000 [div.] $34,000 [amort.])...... 56,000
Equity in Net Income ($140,000 $34,000).........................................................
9,000
106,000
6-22
P 6-4 (continued)
Requirement 4:
Common Stock............................................................................................................... 250,000
Dividends Declared..................................................................................................
Investment in Subsidiary..........................................................................................
50,000
650,000

Buildings and Equipment...............................................................................................
Patent..............................................................................................................................
Long-Term Debt.............................................................................................................
Goodwill (new)..............................................................................................................
Accumulated Depreciation...................................................................................
Goodwill (old)......................................................................................................
12,000
60,000
282,000

Cost of Sales...................................................................................................................
Expenses.........................................................................................................................
a
90,000
24,000
160,000
80,000
14,000
20,000a
34,000
Technically, the amortization of $20,000 relating to the long-term debt should be

shown as an addition to interest expense (part of Expenses). For simplicity, we
assume that the remaining amortization ($6,000 + $8,000 = $14,000)
is properly classifiable with Cost of Sales.

Accumulated Depreciation............................................................................................. 300,000
300,000
6-23
P 6-4 (continued)
Requirement 5:
Pali Inc. and Sali Inc.

Pali
Inc.
Sali
Inc.
Dr.
Cr.
Consolidated
INCOME STATEMENT (2006):
Sales......................................... 8,500,000
Cost of sales............................. (4,500,000)
Expenses.................................. (3,640,000)
Equity in net income (of Sali).. 106,000
........................................... -0Net Income.......................... 466,000
980,000
(530,000)
(310,000)
9,480,000
(5,044,000)
(3,970,000)
14,000(3)
20,000(3)
140,000(1)
140,000
174,000
310,000
140,000
310,000(1)
174,000BF
(50,000)
400,000
484,000
34,000
466,000
Balances, 1/1/06...................... 649,000

+ Net income............................ 466,000
466,000
Balances, 12/31/06................. 1,015,000
649,000
50,000(1)
84,000
(100,000)
1,015,000
BALANCE SHEET:
Cash.......................................... 458,000
98,000
190,000
Inventory.................................. 820,000
380,000
Book value element ........... 650,000
Excess cost elements ........... 282,000
Land......................................... 760,000
240,000
Buildings and equipment......... 6,260,000 1,720,000
Accumulated depreciation.......(2,465,000) (480,000)
Patent........................................ 100,000
12,000
Goodwill (old)..........................
60,000
Goodwill (new)........................
Total Assets......................... 7,615,000 2,220,000
556,000
940,000
1,200,000
650,000(1)
282,000(2)
90,000(2)
300,000(4)
24,000(2)
300,000(4)
12,000(2)
60,000(2)
80,000(2)
494,000
1,304,000
-0-01,000,000
7,770,000
(2,657,000)
136,000
-080,000
9,025,000
Payables and accruals.............. 1,600,000

370,000
1,970,000
Long-term debt......................... 3,000,000 1,200,000
160,000(2)
4,040,000
Common stock......................... 2,000,000
2,000,000
Retained earnings..................... 1,015,000
1,015,000
Common stock.........................
250,000
250,000(1)
-0Retained earnings.....................
400,000
484,000BF
............................................ -0Total Liabilities & Equity. 7,615,000 2,220,000
894,000
84,000
9,025,000
Proof of debit and credit postings............................... 1,388,000 1,388,000
elimination entry.
6-24
P 6-4 (continued)
Requirement 6:
The parents independent auditors would not have to mention this change in accounting principle if they are
reporting on the consolidated financial statements because the Investment in Subsidiary account will have been
eliminated in preparing those statements. If, for some unusual reason, the parent company issues parentcompany-only financial statements, an independent auditor reporting on those statements would have to mention
this change in accounting principles in the audit report.

Requirement 1:
Investment in Subsidiary (6,000 shares $70 per share)............................................... 420,000
Common Stock (6,000 shares $10).....................................................................
Additional Paid-in Capital (residual).....................................................................
To record issuance of shares.
Additional Paid-in Capital...............................................................................................
Cash........................................................................................................................
To record direct costs pertaining to the acquisition and registration of shares.
60,000
360,000
50,000
40,000
90,000
Requirement 2:
See the consolidation worksheet on page 6-25.
Requirement 3:
Parents
Investment
Account
Book Value
BOOK VALUE ELEMENT

Common
Retained
=
Stock
+ Earnings
Balances, 7/1/06................................................................ $338,000

60,000
Dividends........................................................................
(20,000)
Balances, 12/31/06............................................................ $378,000
$200,000
$200,000
$138,000
60,000
(20,000)
$178,000

Parents
Investment
Account
Bldg. and Equipment
Excess
Accum.
Cost = Inventory + Cost + Depr.
+ LTD
Remaining life:
Bal., 7/1/06....... $132,000
Amortization.
(8,000)
Bal., 12/31/06... $124,000
2 mo.
12 yr.
$4,000
(4,000)
$ -0-
$72,000
$72,000
(3,000)
$(3,000)
Old
GOODWILL
+ Goodwill + ELEMENT
8 yr.
Indefinite
Indefinite
$16,000
(1,000)
$15,000
$(20,000)
$60,000
$(20,000)
$60,000
6-25
P 6-5 (continued)
Requirement 4:
Common Stock............................................................................................................... 200,000
Investment in SOS................................................................................................
20,000
378,000

Buildings and Equipment............................................................................................... 72,000
Long-Term Debt............................................................................................................. 15,000
Goodwill (new).............................................................................................................. 60,000
Goodwill (old)......................................................................................................
Accumulated Depreciation...................................................................................
20,000
3,000
124,000

Cost of Sales ($4,000 + $3,000).....................................................................................
Expenses ($1,000 pertaining to amortization applicable to the long-term debt)...........
7,000
1,000
8,000
Calculation of amortization amounts:

Inventory......................................................................................................... $4,000
Buildings and equipment ($72,000 12 years year)............................... 3,000
Long-term debt ($16,000 8 years year)................................................ 1,000
Total Amortization.................................................................................... $8,000
Accumulated Depreciation............................................................................................. 140,000
140,000
6-26
P 6-5 (continued)
Requirement 5:
PBM Inc. and SOS Inc.

PBM
Inc.
SOS
Inc.
Dr.
Cr.
Consolidated
Sales......................................... 2,600,000
Cost of sales............................. (1,300,000)
Expenses.................................. (800,000)
Equity in net income (of SOS).
52,000
Net Income.......................... 552,000
500,000
(260,000)
(180,000)
60,000
7,000(3)
1,000(3)
60,000(1)
68,000
138,000
60,000
138,000(1)
68,000BF
8,000 (3)
8,000
3,100,000
(1,567,000)
(981,000)
-0552,000
Balances, 1/1/06...................... 750,000

+ Net income............................ 552,000
.....................................552,000
(300,000)
Balances, 12/31/06.................. 1,002,000
(20,000)
178,000
750,000
20,000(1)
206,000
28,000
1,002,000
BALANCE SHEET:
Current assets........................... 700,000

Land......................................... 943,000
Buildings and equipment......... 2,200,000
Accumulated depreciation....... (330,000)
Book value element .......... 378,000
Excess cost elements .......... 124,000
Goodwill (old)..........................
Goodwill (new)........................
Total Assets......................... 4,015,000
398,000
202,000
450,000
(170,000)
20,000
900,000
72,000(1) 140,000 (4)

140,000(4)
3,000 (2)
378,000 (1)
124,000 (2)
20,000 (2)
60,000(2)
272,000
665,000
Payables and accruals.............. 433,000

122,000
Long-term debt......................... 1,600,000
400,000
15,000(1)
Common stock......................... 160,000
Additional paid-in capital........ 820,000
Common stock.........................
200,000
200,000(1)
178,000
206,000BF
.................................................
-0Total Liab. & Equity.......... 4,015,000
900,000
421,000
28,000
Proof of debit and credit postings.................................. 693,000
693,000
1,098,000
1,145,000
2,582,000
(363,000)
-0-0-060,000
4,522,000
555,000
1,985,000
160,000
820,000
1,002,000
-0-
4,522,000
6-27
6-28
P 6-6 (Date Of Acquisition) (Estimated time: 20 minutes)

Requirement 1:
SPLITTING OF THE INVESTMENT ACCOUNT AT THE ACQUISITION DATE
Total Cost (given).........................................................................................................................
LessBook value element (80% $190,000)............................................................................
Excess Cost Elements.................................................................................................................
$260,000
(152,000)
$108,000
I. ANALYSIS OF THE INVESTMENT ACCOUNT--BOOK VALUE ELEMENT

Noncontrolling
Interest
(20%)
12/31/05............................ $38,000
Parents
Investment
Account
Book Value
$152,000
BOOK VALUE ELEMENT

Common
Retained
Stock
+
Earnings
$100,000
$90,000
II. ANALYSIS OF THE INVESTMENT ACCOUNT--EXCESS COST ELEMENTS

Parents
Investment
Account UNDER- OR (OVER)VALUATION OF
Excess
NET ASSETS ELEMENT (@ 80%)
GOODWILL
Cost = Inventory + Land + Equip. + Cov. + ELEMENT
Remaining life:
2 mo .
Indefinite
10 yr .
4 yr .
Indefinite
12/31/05......................... $108,000
$(4,000)
$24,000
$40,000
$32,000
$16,000
Requirement 2:
(1) The basic elimination entry (under non-push-down accounting):
Common Stock............................................................................................................... 100,000
Retained Earnings.......................................................................................................... 90,000
NCI in Net Assets.................................................................................................
152,000
38,000

Land................................................................................................................................
Equipment......................................................................................................................
Covenant not-to-compete...............................................................................................
Goodwill.........................................................................................................................
Inventory............................................................................................................
4,000
108,000

Accumulated Depreciation.............................................................................................
Equipment............................................................................................................
24,000
40,000
32,000
16,000
44,000
44,000
6-29
P 6-6 (Date Of Acquisition) (continued)

Requirement 3:

Pya
(80% owned) Consolidation Entries

Sya
Dr.
Cr.
Consolidated
BALANCE SHEET:
Cash......................................
Accounts receivable.............
Inventory..............................
Excess cost element ........
Land.....................................
Covenant not-to-compete.....
................................... 32,000
Goodwill...............................
Total Assets.....................
110,000
75,000
105,000
152,000
108,000
100,000
250,000
(150,000)
20,000
70,000
80,000
4,000(2)
152,000(1)
108,000(2)
70,000
204,000
(44,000)
750,000
400,000

Long-term debt..................... 20,000
NCI in net assets...................
Common stock..................... 300,000
Common stock.....................
Total Liab. & Equity...... 750,000
60,000
150,000
24,000(2)
40,000(2)
44,000(3)
32,000(2)
16,000(2)
156,000
44,000(3)
308,000
38,000(1)
100,000
90,000
400,000
100,000(1)
90,000(1)
190,000
Proof of debit and credit postings........................... 346,000
38,000
346,000
Note: The income statements cannot be consolidated because no postacquisition earnings exist
(the acquisition occurred on 12/31/05).
Requirement 4:
$240,000 (see note to worksheet in requirement 3)
130,000
145,000
181,000
-0-0194,000
450,000
(150,000)
16,000
998,000
140,000
170,000
38,000
300,000
350,000
-0-0998,000
6-30

Requirement 1:
SPLITTING OF THE INVESTMENT ACCOUNT AT 12/31/06
Total carrying value at 12/31/06 (given)......................................................................................
Excess Cost Elements...............................................................................................................
$272,000
(172,000)
$100,000
I. ANALYSIS OF THE INVESTMENT ACCOUNT--BOOK VALUE ELEMENT

Noncontrolling
Interest
(20%)
Balances, 1/1/06................ $38,000

+ Equity in N.I.:
To Parent......................
To NCI.......................... 12,000
Dividends:
To Parent......................
To NCI.......................... (7,000)
Balances, 12/31/06............$43,000
Parents
Investment
Account
Book Value
$152,000
BOOK VALUE ELEMENT

Common
Retained
Stock
+
Earnings
$100,000
$90,000
48,000
48,000
12,000
(28,000)
$172,000
(28,000)
(7,000)
$115,000
$100,000
II. ANALYSIS OF THE INVESTMENT ACCOUNT--EXCESS COST ELEMENTS

Parents
UNDER- OR (OVER)VALUATION OF
Investment
NET ASSETS ELEMENT (@80%)
Account
Equipment
Excess
Accum.
GOODWILL
Cost = Inventory + Land + Cost + Depr. + Cov. + ELEMENT
Remaining life:
2 mo.
Indefinite 10 yrs.
4 yr.
Indefinite
1/1/06............................. $108,000
Amortization..............
(8,000)
12/31/06......................... $100,000
$(4,000)
4,000
$ -0-
$24,000
$40,000
$24,000
(4,000)
$40,000 $(4,000)
$32,000
(8,000)
$24,000
$16,000
$16,000
6-31
P 6-7 (continued)
Requirement 2:
Common Stock............................................................................................................... 100,000
NCI in Net Income......................................................................................................... 12,000
NCI in Net Assets.................................................................................................
35,000
172,000
43,000

Land.............................................................................................................................
Equipment....................................................................................................................
Covenant Not-to-Compete...........................................................................................
Goodwill.......................................................................................................................
Accumulated Depreciation.................................................................................
Investment in Subsidiary....................................................................................
4,000
100,000
24,000
40,000
24,000
16,000

Cost of Sales (all charged to this account for simplicity)............................................
Equity in Net Income.........................................................................................
8,000

Accumulated Depreciation (the balance at the acquisition date per Problem 6-6)...
Equipment..........................................................................................................
44,000
8,000
44,000
6-32
P 6-7 (continued)
Requirement 3:

(80% owned)
Pya
Sya
Dr.
Cr.
Consolidated
Sales..................................... 950,000 600,000

Cost of sales......................... (520,000) (300,000)
Expenses............................... (370,000) (240,000)
Equity in net inc. (of Sya)....
40,000
Net Income........................ 100,000
60,000
NCI in Net Income.........
CI in Net Income..........
1,550,000
(828,000)
(610,000)
8,000(3)
48,000(1)
56,000
12,000(1)
68,000
8,000(3)
8,000(3)
(12,000)
100,000
8,000
Balances, 1/1/06.................. 350,000

90,000
+ Net income........................ 100,000
60,000
100,000
Dividends declared............ (80,000) (35,000)
Balances, 12/31/06.............. 370,000 115,000
90,000(1)
68,000BF
158,000
350,000
35,000(1)
43,000
(80,000)
370,000
BALANCE SHEET:
Cash...................................... 133,000
25,000
Accounts receivable, net...... 95,000
60,000
Inventory.............................. 115,000 120,000
Book value element ........ 172,000
Excess cost elements ...... 100,000
Land..................................... 100,000
70,000
Buildings and equipment...... 250,000 224,000
Accumulated depreciation.... (210,000) (59,000)
Covenant not-to- compete....
................................. 24,000
Goodwill..............................
Total Assets..................... 755,000 440,000
75,000
Long-term debt..................... 20,000 150,000
NCI in net assets...................
Common stock..................... 300,000
Common stock.....................
100,000
115,000
....................................... -0Total Liab. & Equity...... 755,000 440,000
Proof of debit and credit postings.........................
158,000
155,000
235,000
172,000(1)
100,000(2)
24,000(2)
40,000(2)
44,000(4)
24,000(2)
16,000(2)
148,000
44,000(4)
4,000(2)
320,000
43,000(1)
100,000(1)
158,000BF
258,000
406,000
86,000
406,000
-0-0194,000
470,000
(229,000)
16,000
1,023,000
140,000
170,000
43,000
300,000
370,000
-01,023,000
elimination entry.
6-33
6-34
P 6-8 (Date Of Acquisition) (Estimated time: 20 minutes)

Requirement 1:
Total Carrying value at 12/31/05 (given).....................................................................................
Excess Cost Elements (cost below book value) .......................................................................
$168,000
(208,000)
$ (40,000)
I. ANALYIS OF THE INVESTMENT ACCOUNTBOOK VALUE ELEMENT
12/31/05......
NonParents
BOOK VALUE ELEMENT
controlling
Investment
Interest
Account
Common
Additional
Retained
(20%)
+ Book Value
= Stock
+ Paid-in Capital + Earnings
$52,000
$208,000
$5,000
$95,000
$160,000
12/31/05....................
Parents
Investment
Account
Excess
Long-Term
Cost = Inventory + Land + Building + Debt
$(40,000)
$(16,000)
$24,000 $(80,000)
$32,000
Requirement 2:
Common Stock...............................................................................................................
5,000
Additional Paid-in Capital.............................................................................................. 95,000
Retained Earnings.......................................................................................................... 160,000
NCI in Net Assets.................................................................................................
Land................................................................................................................................
Long-Term Debt.............................................................................................................
Investment in Subsidiary................................................................................................
Inventory..............................................................................................................
Building................................................................................................................
Accumulated Depreciation.............................................................................................
Equipment................................................................................................................
208,000
52,000
24,000
32,000
40,000
16,000
80,000
55,000
55,000
6-35
P 6-8 (Date Of Acquisition) (continued)

Requirement 3:

Poz
(80% owned)
Soz
Dr.
Cr.
Consolidated
BALANCE SHEET:
Cash......................................
Accounts receivable.............
Inventory..............................
274,000
Excess cost element .........
.............................................
Land.....................................
.............................................
Total Assets.....................
Payables and accruals...........
Long-term debt.....................
..............................................
NCI in net assets...................
Common stock.....................
Additional Paid-in Capital....
Common stock.....................
Additional Paid-in Capital....
Retained earnings................
Total Liab. & Equity......
47,000
65,000
140,000
208,000
(40,000)
-0190,000
500,000
10,000
40,000
150,000
16,000(2)
208,000(1)
100,000
305,000
15,000
275,000
24,000(2)
80,000(2)
55,000(3)
55,000(3)
119,000
359,000
(440,000)
980,000
32,000(2)
20,000
380,000
200,000
5,000
95,000
160,000
550,000
314,000
670,000
75,000
52,000(1)
670,000
-0-
40,000(2)
(440,000) (55,000)
670,000 550,000
60,000
10,000
253,000
57,000
105,000
5,000(1)
95,000(1)
160,000(1)
292,000
52,000
Proof of debit and credit postings......................... 411,000
52,000
20,000
380,000
200,000
-0-0-0980,000
411,000
Note: The income statements cannot be consolidated because no postacquisition earnings exist (the acquisition
occurred on 12/31/05).
Requirement 4:
$1,200,000 (see note to worksheet in requirement 3)
6-36

Requirement 1:
Total carrying value at 12/31/06 (given)......................................................................................
Excess Cost (cost below book value).....................................................................................
$324,000
(352,000)
$ (28,000)

NonParents
controlling Investment
Interest
Account
(20%) + Book Value =
Balances, 1/1/06........... $52,000
+ Equity in N.I.:
To Parent....................
To NCI....................... 14,000
Dividends declared...... (9,000)
Balances, 12/31/06....... $57,000
$208,000
BOOK VALUE ELEMENT

Common
Additional
Retained
Stock + Paid-in Capital + Earnings
$5,000
$95,000
$160,000
$95,000
56,000
14,000
(45,000)
$185,000
56,000
(36,000)
$228,000
$5,000

Parents
Investment
Account
Building
Excess
Accum.
Long-Term
Cost
= Inventory + Land + Cost + Depr. +
Debt
Remaining life:
2 mo.
20 yr.
4 yr.
Balances, 1/1/06.......
$(40,000)
$(16,000) $24,000 $(80,000)
$32,000
Amortization.........
12,000
16,000
$4,000
(8,000)
Balances, 12/31/06....
$(28,000)
$ -0$24,000 $(80,000) $4,000
$24,000
6-37
P 6-9 (continued)
Requirement 2:
Common Stock...............................................................................................................
Additional Paid-in Capital..............................................................................................
Retained Earnings, 1/1/06..............................................................................................
Equity in Income............................................................................................................
NCI in Income................................................................................................................
Dividends declared...............................................................................................
NCI in Net Assets.................................................................................................
Land.............................................................................................................................
Accumulated Depreciation...........................................................................................
Long-Term Debt..........................................................................................................
Investment in Subsidiary..............................................................................................
Building..............................................................................................................
Expenses ($8,000 pertaining to long-term debt, which is charged to interest exp.)....
Equity in Net Loss.......................................................................................................
Cost of Sales ($56,000 for the inventory + $4,000 for the depreciation, all
of which is assumed to be on a manufacturing plant)...................................
Accumulated Depreciation (the balance at the acquisition date per Problem 6-8)...
Equipment..........................................................................................................
5,000
95,000
160,000
56,000
14,000
45,000
228,000
57,000
24,000
4,000
24,000
28,000
80,000
8,000
12,000
20,000
55,000
55,000
6-38
P 6-9 (continued)
Requirement 3:

(80% owned) Consolidation Entries
Poz
Soz
Dr.
Cr.
Consolidated
20,000(3)
1,730,000
(995,000)
Sales.....................................
Cost of sales.........................
Expenses...............................
..............................(563,000)
Equity in net inc. (of Soz.)
............................................
..............................................
Net Income.......................
910,000 820,000
(510,000) (505,000)
(310,000) (245,000)
8,000(3)
68,000
56,000(1)
-0-
158,000
12,000(3)
76,000
-0172,000
70,000
NCI in Net Income...........
20,000
14,000(1)
CI in Net Income........
90,000
20,000
(14,000)
158,000
Balances, 1/1/06..................
+ Net income........................
158,000
Balances, 12/31/06..............
200,000
158,000
160,000
70,000
(135,000) (45,000)
223,000 185,000
160,000(1)
90,000BF
250,000
200,000
45,000(1)
65,000
223,000
BALANCE SHEET:
Cash......................................
Inventory..............................
Book value element .......
Excess cost elements .....
....................................... -0Land.....................................
..............................................
73,000
115,000
90,000
20,000
80,000
120,000
228,000
(28,000)
228,000(1)
190,000
500,000
100,000
305,000
24,000(2)
(460,000)
(85,000)
4,000(2)
55,000(4)
..............................................
Total Assets..................... 708,000
Long-term debt..................... 10,000
............................... 216,000
NCI in net assets...................
Common stock..................... 20,000
Additional paid-in capital..... 380,000
Common stock.....................
Additional paid-in capital.....
Retained earnings................
-0-
28,000(2)
.................................................
..................................................
93,000
195,000
210,000
540,000
25,000
230,000
80,000(2)
55,000(4)
111,000
(486,000)
363,000
996,000
100,000
24,000(2)
57,000(1)
5,000
95,000
185,000
314,000
670,000
5,000(1)
95,000(1)
250,000BF
65,000BF
57,000
20,000
380,000
223,000
-0-0-
Total Liab. & Equity...... 708,000 540,000 374,000

Proof of debit and credit postings............................. 485,000
122,000
485,000
6-39
996,000
elimination entry.

Noncontrolling
Interest
(40%)
Balances, 1/1/06................ $208,000
+ Equity in N.I.:
To Parent......................
To NCI.......................... 84,000
Dividends:
To Parent......................
To NCI.......................... (22,000)
Balances, 12/31/06............$270,000
Parents
Investment
Account
Book Value
$312,000
BOOK VALUE ELEMENT

Common
Retained
Stock
+
Earnings
$200,000
$320,000
126,000
126,000
84,000
(33,000)
(33,000)
(22,000)
$475,000
$405,000
$200,000

Parents
Investment
Account
Excess
Cost
=
Building
LongOld
InvenAccum.
TermGood- GOODWILL
tory + Cost + Depr. + Patent + Debt + Will + ELEMENT
6 mo.
15 yrs.
5 yrs.
4 yrs.
$(12,000) $45,000
Remaining life:
1/1/06.......... $216,000
$96,000 $(36,000) $48,000
Amortization (30,000)
12,000
12/31/06....... $186,000
$ -0-
$45,000
$(3,000)
$(3,000)
(15,000) (24,000)
$60,000 $72,000 $(36,000) $48,000
Requirement 3:
Adjusting entries the parents financial statements to reflect the equity method of accounting:
To record share of subsidiarys net income.
To record amortization of cost in excess of book value.
126,000
30,000
Requirement 4:
Common Stock............................................................................................................... 200,000
NCI in Net Income......................................................................................................... 84,000
Dividends Declared............................................................................................
NCI in Net Assets.................................................................................................
55,000
405,000
270,000
6-41
P 6-10
(continued)
Requirement 4: (continued)
Equipment....................................................................................................................
Patent............................................................................................................................
Long-Term Debt..........................................................................................................
Goodwill (new)............................................................................................................
Accumulated Depreciation................................................................................
Goodwill (old)...................................................................................................
Investment in Subsidiary...................................................................................
Cost of Sales [$(12,000) for the inventory + $3,000 for the depreciation {all of
which is assumed to be used in the manufacturing process} + $15,000 for the
patent {assumed to be used in the manufacturing process}]...................................
Expenses (for the interest on the LTD)........................................................................
Equity in Net Income........................................................................................
Equipment..........................................................................................................
45,000
60,000
72,000
48,000
3,000
36,000
186,000
6,000
24,000
30,000
300,000
300,000
6-42
P 6-10
(continued)
Requirement 5:
PDQ Inc. and SAS Inc.

(60% owned)
PDQ
SAS
Dr.
Cr.
Consolidated
Sales......................................... 9,000,000
Cost of sales............................. (5,000,000)
Expenses.................................. (2,800,000)
...............................(3,014,000)
Equity in net income (of SAS).
96,000
Net Income........................... 1,296,000
NCI in Net Income............
(84,000)
CI in Net Income.............
870,000
(470,000)
(190,000)
210,000
9,870,000
(5,476,000)
6,000(3)
24,000(3)
126,000(1)
156,000
84,000(1)
30,000(3)
30,000
1,380,000
240,000
30,000
1,296,000
Balances, 1/1/06...................... 1,600,000

+ Net income............................ 1,296,000
1,296,000
Balances, 12/31/06.................. 1,996,000
320,000
210,000
320,000(1)
240,000BF
(55,000)
475,000
560,000
1,600,000
55,000(1)
85,000
1,996,000
BALANCE SHEET:
Cash.......................................... 665,000
138,000
270,000
Inventory.................................. 1,200,000
560,000
Book value element ........... 405,000
Excess cost elements ......... 186,000
Land......................................... 1,000,000
780,000
Buildings and equipment......... 4,800,000 1,050,000
(4).............................5,595,000
Accumulated depreciation.......(1,700,000) (390,000)
Patent........................................ 300,000
32,000
Goodwill (old)..........................
60,000
Goodwill (new)........................
Total Assets......................... 7,696,000 2,500,000
803,000
1,110,000
1,760,000
405,000(1)
186,000(2)
-01,780,000
45,000(2)
300,000(4)
60,000(2)
3,000(2)
392,000
36,000(2)
48,000(2)
453,000
930,000
Payables and accruals.............. 1,100,000

625,000
Long-term debt......................... 2,600,000 1,200,000
72,000(2)
..................................3,728,000
NCI in net assets......................
270,000(1)
Common stock......................... 2,000,000
Common stock.........................
200,000
200,000(1)
475,000 560,000BF
85,000BF
Total Liab. & Equity.......... 7,696,000 2,500,000
832,000
355,000
Proof of debit and credit postings............................... 1,285,000
1,285,000
48,000
9,719,000
1,725,000
270,000
2,000,000
1,996,000
-09,719,000

elimination entry.
6-43
6-44

Requirement 1:
a. To record investments in subsidiaries:
Dr.
Investment in Shaft Inc. Common Stock (7,500 shares x $14)........................... 105,000

Investment in Tee Inc. Common Stock (1,800 shares x $40).............................
72,000
Cash...........................................................................................................
To record investments in:
Shaft: 10,000 shares outstanding x 75% = 7,500 shares.
7,500 shares x $14 per share = $105,000.
Shaft: 3,000 shares outstanding x 60% = 1,800 shares.
1,800 shares x $40 per share = $72,000.
Cr.
177,000
b. To record investments in subsidiaries:

Investment in Shaft Inc. Common Stock (7,500 shares x $14)...........................
Equity in Subsidiary (Tee) Loss (60% x $15,000)..............................................
Equity in Subsidiary (Tee) Loss (60% x $15,000)....................................
Investment in Tee Inc. Common Stock (1,800 shares x $40)...................
27,000
9,000
27,000
9,000
c. To record parents share of subsidiary dividends for 2006:

Cash.....................................................................................................................
Investment in Shaft Inc. Common Stock (75% x $28,000)......................
Investment in Tee Inc. Common Stock (60% x $10,000).........................
27,000
21,000
6,000
d. Shaft: No amortization because its only undervalued asset is land (indefinite life); Goodwill of $45,000
is not amortized.
Tee: No amortization because (1) it was purchased at book value and (2) none of its assets or liabilities
was under- or overvalued.
Requirement 2:
Shaft Inc.:
Common stock.......................................................................................................................... $100,000
Retained earnings, 12/31/06.....................................................................................................
28,000
$128,000
NCI in Net Assets:
At book value ($128,000 x 25%)....................................................................................
$ 32,000
Tee Inc.:
Common stock.......................................................................................................................... $ 60,000
Additional Paid-in Capital........................................................................................................
10,000
Retained earnings, 12/31/06.....................................................................................................
25,000
$ 95,000
NCI in Net Assets:
At book value ($95,000 x 40%)......................................................................................
$ 38,000
6-45
P 6-11 (continued)
Requirement 3:
Net Income of Puttnam Inc., as given (under the cost method)...............................................
LessDividend income from investment in Shaft, Int. (75% of $28,000).............................
Puttnams earnings from its own separate operations............................................................
$193,000
(21,000)
$172,000
Requirement 4:
Puttnam Inc:
Retained earnings, 1/1/06........................................................................................................ $300,000
+ Net Income from own separate operations (as shown in requirement 3)........................... 172,000
+ Equity in net income of Shaft Inc. ($36,000 x 75%)..........................................................
27,000
- Equity in net loss of Tee, Inc. ($(15,000) x 60%)...............................................................
(9,000)
Subtotal....................................................................................................................................
$490,000
- Dividends declared............................................................................................................... (110,000)
Consolidated Retained Earnings, 12/31/06......................................................................
$380,000
P 6-12 (The Equity Method) (Estimated time: 30 minutes)

Requirement 1:
Entries to Record the Acquisition
Investment in Subsidiary (8,000 shares x $65 per share)...............................................520,000
Common Stock....................................................................................................
Additional Paid-in Capital.....................................................................................
To record issuance of shares.
Additional Paid-in Capital...............................................................................................
Cash.......................................................................................................................
To record direct costs pertaining to the acquisition and the registration of shares.
40,000
480,000
32,000
60,000
Requirement 2:
See the Pepsi Inc. and Sprite Inc. columns of the consolidation worksheet in requirement 5.
92,000
6-46
P 6-12 (continued)
Requirement 3:
Total carrying value at 7/1/06 ($520,000 + $32,000)..................................................................
Excess Cost Elements...............................................................................................................
$552,000
(420,000)
$132,000

Noncontrolling
Interest
(20%)
Balances, 7/1/06................ $105,000

+ Equity in N.I.:
To Parent......................
To NCI.......................... 12,000
Dividends:
To Parent......................
To NCI.......................... (7,000)
Balances, 12/31/06............$110,000
Parents
Investment
Account
Book Value
$420,000
BOOK VALUE ELEMENT

Common
Retained
Stock
+
Earnings
$300,000
$225,000
48,000
48,000
12,000
(28,000)
$440,000
$300,000
(28,000)
(7,000)
$250,000

Parents
Investment
Account
Equipment
LongExcess
Accum.
Term
Cost = Inventory + Cost + Depr. + Patent + Debt
Remaining life:
2 mo.
14 yrs.
3 yr.
1 yr.
Balances, 7/1/06........... $132,000
Amortization.............. (16,000)
................................
Balances, 12/31/06....... $116,000
$8,000
(8,000)
$ -0-
$56,000
$(2,000)
$56,000
$(24,000) $20,000
4,000 (10,000)
$(2,000) $(20,000) $10,000
GOODWILL
ELEMENT
Indefinite
$72,000
$72,000
6-47
P 6-12 (continued)
Requirement 4:
Common Stock............................................................................................................... 300,000
NCI in Net Income......................................................................................................... 12,000
NCI in Net Assets.................................................................................................
35,000
440,000
110,000

Buildings and Equipment.............................................................................................
Long-Term Debt..........................................................................................................
Goodwill.......................................................................................................................
Patents.................................................................................................................
Accumulated Depreciation.................................................................................
Investment in Subsidiary....................................................................................
20,000
2,000
116,000

Cost of Sales (all depreciation is assumed to be on a manufacturing plant)...............
Expenses (for the $10,000 relating to the LTD, which is charged to interest)............
Equity in Net Income.........................................................................................
56,000
10,000
72,000
6,000
10,000
16,000

Equipment..........................................................................................................
200,000
(5) The intercompany dividend payable and receivable elimination entry:

Intercompany Dividend Payable..................................................................................
Intercompany Dividend Receivable....................................................................
28,000
200,000
28,000
Requirement 5
See the following page for the consolidated worksheet. The parents beginning retained earnings in that
worksheet is $327,000. The amount was determined using the $367,000 amount given in the text for retained
earnings at 6/30/05 less $200,000 of earnings for the first six months of 2005 and plus dividends declared of
$160,000 for the first six months of 2005.
6-48
P 6-12 (continued)
Requirement 5 (continued):
Pepsi Inc. and Sprite Inc.

(80% owned)
Pepsi
(12 mo.)
Sales......................................... 2,200,000
Cost of sales............................. (1,100,000)
Expenses.................................. (600,000)
..................................(920,000)
Equity in net income (of Sprite)
32,000
Net Income........................... 532,000
NCI in Net Income.............
CI in Net Income..............
Balances, beginning.................
327,000
+ Net income............................ 532,000
532,000
Balances, 12/31/06.................. 539,000
Sprite
Dr.
Cr.
Consolidated
(6 mo.)
800,000
(430,000)
(310,000)
60,000
3,000,000
(1,536,000)
6,000(3)
10,000(3)
48,000(1)
64,000
12,000(1)
76,000
225,000
60,000
225,000(1)
76,000BF
(35,000)
250,000
301,000
16,000(3)
16,000(3)
16,000
(12,000)
532,000
327,000
35,000(1)
51,000
(320,000)
539,000
BALANCE SHEET:
Current assets........................... 1,356,0000 475,000

Investment in Subsidiary:
Book value element ............ 440,000
Excess cost elements .......... 116,000
Land......................................... 700,000
200,000
Buildings and equipment......... 3,000,000
900,000
Accumulated depreciation....... (600,000) (250,000)
Patents......................................
75,000
Goodwill.................................
Total Assets......................... 5,012,000 1,400,000
Payables and accruals.............. 913,000
350,000
................................. 1,235,000
Long-term debt......................... 2,100,000
500,000
..................................2,590,000
NCI in net assets......................
Common stock......................... 540,000
Addl Paid-in Capital............... 920,000
Retained earnings..................... 539,000
Common stock.........................
300,000
250,000
........................................... -0Total Liab. & Equity.......... 5,012,000 1,400,000
Proof of debit and credit postings................................
28,000(5)
440,000(1)
116,000(2)
56,000(2)
200,000(4)
72,000(2)
328,000
28,000(5)
200,000(4)
2,000(2)
20,000(2)
806,000
-0-0900,000
3,756,000
(652,000)
72,000
5,934,000
10,000(2)
110,000(1)
300,000(1)
301,000BF
639,000
967,000
161,000
967,000
110,000
540,000
920,000
539,000
-0-
5,934,000
(5) The interco. dividend receivable

and payable elimination entry.

6-49
6-50
P 6-13 (Estimated time: 35 minutes) [uses most information in P 5-8]

Requirement 1:
UNDERVALUATION
BOOK VALUE ELEMENT
OF NET ASSETS
Investors Common Retained
ELEMENT
GOODWILL
Cost = Stock + Earnings +
Patent + ELEMENTc
5 yrs.
Indefinite
Ownership
Percentage
Acquired
Assigned life:
20% Block purchase1/1/05 .........$ 40,000 $ 20,000a $ 5,000b

+ Equity in net income
(20% of $45,000).................... 9,000
9,000
Dividends (20% of $15,000).. (3,000)
(3,000)
Amortization ($15,000/5 yrs.)(2,000)
(2,000)
20
Balances, 12/31/05................... $ 44,000 $ 20,000 $ 11,000
20
+ Block purchase1/1/06 ...... 56,000
20,000
11,000
Balances, 1/1/06..................... $100,000 $ 40,000 $ 22,000
+ Equity in net income
(40% of $80,000).................... 32,000
32,000
Dividends (40% of $15,000).. (6,000)
(6,000)
Amortization ($16,000/4 yrs.) (4,000)
40
Balances, 6/30/06................... $122,000 $ 40,000 $ 48,000
50
+ Block purchase12/31/06 .. 180,000
50,000
60,000
90% Balances, 12/31/06................... $302,000 $90,000 $108,000
$10,000d
$ 5,000
$ 8,000
8,000d
$16,000
$ 5,000
17,000
$22,000
(4,000)
$12,000
17,500 d
$29,500
$22,000
52,500
$74,500
NCI10%
+ NCI at 10%.........
Balances, 12/31/06.
$22,000
10,000
12,000
$22,000 + $302,000 = $100,000 + $120,000
$29,500
$74,500
Calculated at 20% of $100,000. (Subsequent additions to this column are based on ownership
percentages and book values.)
bCalculate at 20% of $25,000. (Subsequent additions to this column are based on ownership
percentages and book values
cAll additions to this column were determined residually.
dCalculated using the block ownership percentage acquired times the undervaluation at this date.
a
Requirement 2:
The parents Investment account balance of $302,000 should be separated into its (1) book value element portion
($198,000) and (2) its excess cost elements portion ($104,000) before preparing the consolidation entries
required at 12/31/06.
Common Stock..........................................................................................................
Retained Earnings.....................................................................................................
NCI in Net Assets.............................................................................................
(2) The unamortized excess cost reclassification entry:
Patent.........................................................................................................................
Goodwill....................................................................................................................
Investment in Subsidiary...............................................................................
100,000
120,000
198,000
22,000
29,500
74,500
104,000

Requirement 1
Ownership
BOOK VALUE ELEMENT
Percent age
Investor's
Common
Retained
GOODWILL
Acquired
Cost
=
Stock + Earnings + ELEMENT
Assigned life:
Indefinite
30% Block purchase--1/1/06.. $380,000
$180,000a
$120,000b
$80,000c
+ Equity in 1st. qtr.net income
(30% x $70,000)............... 21,000
21,000
Dividends declared in 1st. qtr.
(30% x $50,000)............... (15,000)
(15,000)
30% Balances, 3/31/06..........
$386,000
$180,000
$126,000
$80,000
45% + Block purchase--4/1/06.
501,000
270,000d
189,000e
42,000c
75% Balances, 4/1/06 (the control date). $887,000
$450,000
$315,000
$122,000
NCI25%
+ NCI amounts..$255,000f
Balances,4/1/06. $255,000
+ Equity in net income:
To Parent.(75%)...
To NCI (25%).. 60,000
Dividends declared:
To Parent.(75%)...
To NCI (25%).. (35,000)
Balances, 12/31/06
$280,000
$887,000
150,000
$600,000
105,000
$420,000
180,000
180,000
60,000
(105,000)
(105,000)
(35,000)
$520,000
$962,000
$600,000
$122,000
$122 ,000
30% x $600,000 = $180,000.

30% x $400,000 = $120,000.
c
Residually determined.
d
45% x $600,000 = $270,000.
e
45% x $420,000 ($400,000 + $70,000 - $50,000) = $189,000.
f
$255,000 share of book value (25% x $1,020,000).
b
Requirement 2
Consolidation Entries at 4/1/06
Common Stock..................................................................................................
Retained Earnings, 4/1/06.................................................................................
Investment in Subsidiary (Total cost of $887,000 - $122,000 of goodwill).....
NCI in Net Assets................................................................................
600,000
420,000
765,000
255,000

Goodwill............................................................................................................
Investment in Subsidiary.......................................................................
Requirement 3
See analysis presented in requirement 1.
122,000
122,000
6-51
6-52

Requirement 4
Consolidation Entries at 12/31/06
Common Stock........................................................................................
Retained Earnings, 4/1/06........................................................................
Equity in Net Income (75% x $240,000)................................................
NCI in Net Income (25% x $240,000).....................................................
Dividends Declared.........................................................................
Investment in Subsidiary (Total cost of $962,000 - $122,000)......
NCI in Net Assets...........................................................................
600,000
420,000
180,000
60,000

Goodwill.......................................................................................................
Investment in Subsidiary..................................................................
122,000
(3) The amortized excess cost reclassification entry:

Cost of Sales.............................................................................................
Equity in Net Income.....................................................................
9,000
140,000
840,000
280,000
122,000
9,000
Requirement 5
Partial-year consolidation. The parent may include the subsidiary's revenues, costs, and expenses for the period
4/1/06 through 12/31/06, with its own 2006 revenues, costs, and expenses. Accordingly, the parent would report
the equity in the subsidiary's first-quarter net income as a one-line item in the income statement. The income
statement would show $21,000.
Full-Year Consolidation. Alternatively, the parent may include the subsidiary's revenues, costs, and expenses
for the entire year with its own 2006 revenues, costs, and expenses so that both companies show full-year
amounts. Accordingly, the $19,000 amount in the Equity in Net Income of Subsidiary account that pertains to the
parent's 30% ownership interest during the first quarter of 2006 ($21,000 - $2,000 of goodwill amortization) is
eliminated in consolidating the first quarter's income statement. Furthermore, the subsidiary's remaining $49,000
of net income for the pre-control period of 1/1/06 through 3/31/06 (70% x $70,000)--that the parent did not
record under the equity method of accounting--is reported as a deduction in the consolidated income statement.
This $49,000 deduction can be reported in either of two ways:
(1) Reporting the entire $49,000 deduction as a separate line item called "Preacquisition Earnings of
Acquired Subsidiary." Under this approach, the NCI deduction is based only on the subsidiary's earnings
that occurred subsequent to the control date (4/1/06), because a noncontrolling interest could not have
existed prior to that date.
(2) Splitting the $49,000 deduction between "Preacquisition Earnings of Acquired Subsidiary" and
Noncontrolling Interest in Net Income. Under this approach, which is that of "as if the control date had
been established at the beginning of the year," the $49,000 amount is split between the parent and the
noncontrolling interest as follows:
Parent's portion (45% of $70,000)................................................................ $31,500
NCI portion (25% of $70,000)....................................................................... 17,500
Total......................................................................................................... $49,000
Accordingly, an additional $17,500 is added to the NCI amount otherwise calculated for the period from the
control date to the end of 2008 (the $60,000 amount calculated in requirement 4 [25% x $240,000]). The
remaining $31,500 is reported as a separate line item called "Preacquisition Earnings of Acquired Subsidiary."
CASE
6-53
C 6-1 (Estimated time: 10 minutes)

Requirement 1
Whether Primex has legal recourse to the subsidiary's former owners depends on whether they made
representations to Primex during the negotiations concerning Sumex's statement of financial position. Thus
Primex would have had to rely on Sumex's financial statements in negotiating the purchase price.
Requirement 2
A literal application of FAS 141, "Business Combinations," appears to require charging the $40 million to
Goodwill. Substance should always prevail over form, however. Because the liabilities were not anticipated
when the purchase was consummated, Primex paid $40 million for net assets that did not exist. This is a loss of
corporate assets that was never intended to be a purchase of goodwill. Accordingly, the $40 million should be
expensed, possibly as an extraordinary item.
In 1982, the SEC required Alexander and Alexander Services, Inc. to treat such an item (of $40 million) as an
extraordinary charge against income.
Procedurally, the conceptual analysis of the investment account is adjusted as follows:
Parent's
Cost
=
Pre-adjustment $300,000,000
Adjustment (40,000,000)
Post-adjustment.. $260,000,000
UNDERVALUATION
BOOK VALUE OF NET ASSETS
GOODWILL
ELEMENT + ELEMENT
+ ELEMENT
$180,000,000
(40,000,000)
$140,000,000
$50,000,000
$70,000,000
$50,000,000
$70,000,000
Note how this treatment contrasts with treating the $40 million as additional goodwill as shown below.
UNDERVALUATION
Parent's BOOK VALUE OF NET ASSETS GOODWILL
Cost = ELEMENT + ELEMENT
+ ELEMENT
Preadjustment $300,000,000 $180,000,000
Adjustment.
(40,000,000)
Postadjustment.. $300,000,000 $140,000,000
$50,000,000
$50,000,000
$ 70,000,000
40,000,000
$110,000,000
6-54
FINANCIAL ANALYSIS PROBLEMS

FAP 6-1 (Estimated time: 10 minutes)
Requirement 1:
Calculation of AROI under the Equity Method
Reported net income of subsidiary
Less--amortization of cost in excess of book value
Net Income of Subsidiary Based on the Parent's Cost
Net income, per above
$
$
150,000
(30,000)
120,000
$120,000
$1,000,000
Investment (beginning 2006 balance)
= 12%
Note: Some students may improperly ignore the $ 30,000 of amortization in this calculation, which gives a
15% return on investment. The $ 30,000 is subtracted because a new basis of accounting for the subsidiary's assets has resulted from the business combination. In explaining this to students, it is often
useful to point out that if assets instead of common stock had been acquired, the division's net
income would have been $ 120,000.
Requirement 2:
Net income, as shown in requirement 1................................................ $120,000
---------------- = 13%
Investment (beginning 2006 balance, net of $ 100,000 dividend) ......... $900,000a
a
Because the $100,000 dividend was paid at the beginning of 2006 (January 3), the parent had only $900,000
invested in the subsidiary during 2006. On 1/3/06, this dividend would be considered a liquidating dividend.

Calculation of Parent's AROI for 2006
Net Income
Investment
a
$50,000
250,000b
= 20%
75% of $ 80,000 of 2005 reported net income - $ 10,000 of amortization.
Investment balance on 1/1/06 of $ 325,000 - $ 75,000 (75% of $ 100,000) dividend declared and paid on 1/2/06.
The parent really has only $ 250,000 of capital at risk from 1/2/05 forward-the $ 75,000 dividend is a liquidation
of the investment.
6-55

Problem Objectives.
The problem is designed to see if the student can:
1. Properly update the Investment in Subsidiary account using the equity method of accounting.
2. Properly record the parent's sale of its entire interest in the subsidiary.
3. Properly report amounts relating to the sale of the subsidiary in the parent's 2007 income statement --this
includes recognizing that the unamortized goodwill at the beginning of 2007 lost its value at that time and
should have been written off at that time.
4. Properly calculate the parent's AROI for each of the four years that it owned the subsidiary. In basic finance
texts, this is called a return on equity (ROE) calculation.
5. Determine whether it makes more sense to use the beginning-of-year balance or the average balance for the
year in making AROI calculations.
6. Determine how dividends paid at various dates affect the denominator used in the AROI calculations.
7. Calculate the internal rate of return (IRR).
8. Determine how dividends paid at different dates affect the IRR calculation.
9. Determine whether the AROI calculations or the IRR calculation is best suited to evaluating the profitability
of the parent's investment.
Requirement 1
Balance, 1/1/04....
2004 Net income..
Balance, 12/31/04..
2005 Net income..
Balance, 12/31/05..
2006 Net income..
Balance, 12/31/06..
Subtotal...........
Balance, 12/31/07.
Investment in Subsidiary
$400,000
120,000
20,000 2004 Amortization
$500,000
220,000
100,000 2005 Dividends
$600,000
80,000
160,000 2006 Dividends
$500,000
60,000 2007 Net loss
$430,000
430,000 Disposition
$ -0-
Requirement 2
Cash............................................................................................................................. 288,640
Loss on Disposal of Subsidiary ($430,000 - $288,640).............................................. 141,360
To record sale of entire interest in subsidiary
430,000
Requirement 3
Because the parent has recorded only $10,000 of amortization of cost in excess of book value in 2007, it
evidently would report the following amounts in its 2007 income statement:
Equity in net loss of subsidiary
($60,000 + $10,000 of amortization)............ $ (70,000)
Loss on disposal of subsidiary................ (141,360)
6-56
FAP 6-3 (continued)

Requirement 3 (continued)
As stated in the problem, the parent had 2007 net income of $500,000 from its own separate
operations--excluding any amounts relating to the subsidiary's operations. The $(141,360) loss on the disposal is
material to the parent's net income (both on a gross and after tax benefit basis). Accordingly, the parent would
report the loss on disposal of the subsidiary (as well as the equity in net loss for 2007) as a separate line item in
the income statement (net of income tax benefit if the disposal qualifies as a "disposal of a segment" under the
provisions of APB Opinion No. 30, "Reporting the Results of Operations").
The $120,000 of unamortized goodwill at the beginning of 2007 should have been written off at the
beginning of 2007, however, when it lost its value. If this had been done, the following amounts would be
reported for 2007:
Equity in Net Loss (of subsidiary) ($60,000 + $120,000 of amortization)........... $(180,000)
Loss on Disposal (of subsidiary).............
( 31,360)
The $(31,360) amount is immaterial to the parent's net income and need not be set out separately in the
parent's income statement.
Requirement 4:
2004:
Parent's Share of Net Income
(net of amortization)
=
Beginning Investment
$100,000
$400,000
= 25%
2005:
$200,000
$500,000
= 40%
2006:
$60,000
$600,000
= 10%
2007:
$(211,340)a
$500,000
= (42)%
Includes $141,360 loss on sale of the investment on 12/31/07 ($430,000 - $288,640). Many students will
inadvertently not include this loss in the numerator. The information in the problem indicates that the good-will lost
its value in early 2007. If all the good-will had been written off at the time, the 2007 amortization would have been
$110,000 more and the loss on sale of the subsidiary would have been $110,000 less.
Requirement 5:
Earning and Amortization
The beginning-of-year investment balance should be used. Accordingly, the subsidiary's earnings and parent's
amortization should be ignored, even though these items were assumed to occur evenly throughout the year. By so
doing, the true return on investment is obtained. This is best explained using the following example:
Amount Invested in
Financial Institution
In January 1, 2006
$100,000
Stated
Interest
Rate
10%
Interest
Paid
Semiannually
FAP 6-3
6-57
(continued)
Solution:
Interest earned in first six months (10% x $100,000 x 1/2 yr.)$ 5,000
Interest earned in second six months (10% x $105,000 x 1/2 yr.)$ 5,250
Total Interest Income ... $10,250
Financial institutions quote not only a stated rate but also a yield rate. In this case, the yield is 10.25%
($10,250 / $100,000). If the average investment were used, 10% would be the ROI ($10,250 / $102,500). In
financial circles, the yield is generally considered the true return on investment.
It should be noted, however, that some finance texts advocate using an average investment balance that
considers the earnings of the business. This is not necessarily wrong - there is just a difference of opinion as to
which is the more appropriate technique.
Dividends
Dividends should be ignored as long as they are declared and paid at year-end. If they are declared near the very
beginning of the year (such as January 5), the beginning investment balance should be reduced by the dividends in
determining the appropriate denominator. If the dividends are declared and paid at other than the beginning or end
of the year, they should be ignored unless the dividends exceed the current year earnings to date. If the dividends
exceed the current year earnings to date, a partial liquidation of the investment has occurred; accordingly, an
average investment balance must be calculated for the year. This is illustrated in requirement 6.
Requirement 6:
Assumption A: The $125,000 2005 dividend is declared and paid in early January 2005 (rather than at the end of
2005):
In this case, the beginning 2005 investment balance of $500,000 should be reduced by $100,000 (80% $125,000)
in determining the appropriate denominator in 2002's AROI calculation.
$200,000
$400,000
= 50%
Assumption B: The $125,000 2005 dividend is declared and paid in early July 2005 (rather than at the end of
2005):
In this case the $100,000 dividend received by the parent equals the subsidiary's earnings that the parent would
record under the equity method of accounting for the first six months of 2005 (net of the amortization).
Accordingly, the dividend should be viewed as a distribution of current year earnings rather than a return (or
liquidation) of the beginning-of-year capital balance. Consequently, the parent's beginning-of-year capital balance
of $500,000 should be used in the denominator of the AROI calculation.
$200,000
$500,000
40%
Note: If the parent had received a $200,000 dividend in early July 2005 (instead of $100,000), the incremental
$100,000 would be treated as a reduction of the beginning-of-year capital balance of $500,000 in
determining the capital invested during the last six months of 2005. As a result, the parent's investment
during the first six months should be $500,000, and the investment during the last six months would be
$400,000. Accordingly, an average investment balance of $450,000 would be used as the denomination in
2005's AROI calculation.
$200,000
= 44%
$450,000
6-58
FAP 6-3
(continued)
Requirement 7:
The cash flow table follows:
2004 (initial outflow).$(400,000)
2004
-02005 100,000
2006 160,000
2007 288,640
The internal rate of return is 10%.
Requirement 8:
General Comment. In using the IRR function of Excel or LOTUS 1-2-3, the cash flow amount for any given
period is always assumed to occur at the end of the period. Accordingly, cash flows that take place at other than the
end of a period need to be treated carefully to assign them the most appropriate period regardless of the period in
which they actually occur.
Assumption A: The $125,000 2005 dividend is paid 1/3/06 (rather than on 12/31/05):
This cash flow of $100,000 (80% x $125,000) should still be shown as 2005 cash flow because it occurred closer
to the end of 2005 than the end of 2006.
Assumption B: The $125,000 2005 dividend is paid 1/5/05 (rather than on 12/30/05):
This cash flow of $100,000 (80% x $125,000) should be shown as 2001 cash flow because it occurred closer to the
end of 2001 than the end of 2005.
The internal rate of return would be 10.74%.
Assumption C: The $125,000 2005 dividend is paid 7/1/05 (rather than on 12/30/05):
This cash flow of $100,000 (80% $125,000) cannot be assigned entirely to either 2004 or 2005. A practical
manner of dealing with this is to divide the $100,000 equally with $50,000 being shown as a 2001 cash flow and
$50,000 being shown as a 2005 cash flow.
The internal rate of return is 10.36%.
An alternate approach is to view the four years as comprising eight periods, whereby the $100,000 cash
flow received on 7/1/05 is assigned to the third period. The percentage obtained is 5.05%. Multiplying this percent
by 2 gives an annual percentage return (APR in financial sections of newspapers) of 10.1%, which is a rough
approximation of the correct answer. Technically, the following formula should be used:
Thus
(1 + r)2
(1 + .505) 2
1
1
10.35%
Note: The squaring power is a function of the number of periods in a year; if quarterly periods were used, the
squaring power would be four.
Observe that this answer is very close to the 10.36% obtained by evenly splitting the $100,000 between the two
years.
FAP 6-3
(continued)
6-59
Requirement 9:
Balance, 1/1/04....
2004 Net income..
(10% $400,000)
Balance, 1/1/05.
2005 Net income..
(10% $440,000)
Balance, 1/1/06..
2006 Net income..
(10% $384,000)
Balance, 1/1/07..
2007 Net income
(10% $262,400
Investment in Subsidiary
$400,000
$500,000
160,000
Dividends
38,400
$262,400
160,000
Dividends
26,240
288,640
Disposal
$384,000
$ -0Requirement 10:
Both the AROI calculations and the IRR calculation are correct. The IRR of 10%, however, is merely an
artificial, assumed average return over the four years. The AROI percentages in requirement 4 show exactly what
happened each individual yearsomething the 10% IRR percentage cannot do. Thus each calculation serves a
different purpose. The only meaningful way to compare the two calculations is to compare the 8.25% average of
the AROI calculations ([25% + 10% 42%]/4) to the 10% IRR rate.
It should be pointed out that the AROI percentages are only as good as the validity of the amounts used in
the numerator and denominator.
Requirement 11:
The parents return on its investment for 2007 would be the same ( 42%) whether the subsidiary was sold on
12/31/07 or 1/3/08. If sold on 1/3/08, the carrying value of the investment at 12/31/07 should not exceed the
proceeds received on 1/3/08. Accordingly, a write-down of $141,360 would have to be made to the investment at
12/31/07.
Technically, the goodwill (which is included in the parents Investment account) should have been
written off in early 2007 (when it lost its value). At 12/31/07, the unamortized goodwill is $110,000 ($150,000
$40,000 of amortization to date). The difference between the $141,360 and the $110,000 suggests that the
subsidiary has other assets stated in excess of their realizable values by $31,360 at 12/31/07.
CHAPTER ETHICS QUESTION

Would You Fudge the Numbers? (page 195) (Estimated time: 5 minutes)
In the early 1990s, several accountants at Phar-Mor Inc. (headquartered in Youngstown, Ohio) complied with the
president's request to grossly overstate earnings. In the eventual legal proceedings that occurred after the fraud
became public, the president (Mickey Monus) denied involvement in the falsification and said he was "duped by
his accountants." The chief financial officer was sentenced to 6 years in prison. (Monus was also convicted and
sent to prison.)
Frontline eventually produced a special on this company's perpetrated fraud titled "How to Steal $500
million."
6-60
EXERCISES FOR APPENDIX 6AECONOMIC UNIT CONCEPT

PROCEDURES
E 6A-1
Note: For requirements 1 and 2, it is useful to prepare a conceptual analysis of the investment account as follows:
Non-
controlling
Interest
$1,200,000
Total
+
Cost
$2,400,000
BOOK VALUE
ELEMENT
$3,000,000
UNDEREVALUATION OF
NET ASSETS ELEMENT
+
(Land)
.
$600,000
Requirement 1:
$650,000 ($50,000 + $600,000)
Requirement 2:
$1,050,000 ($50,000 + $1,000,000)
Requirement 3:
Under the partial revaluation results produced with the parent company concept, the noncontrolling interest is
based on the book value of the subsidiary's net assets. No amount is added to the noncontrolling interest for the
undervaluation of the land.
Under the full revaluation results produced with the economic unit concept, the noncontrolling interest is based
on the current value of the subsidiary's net assets. In this exercise, the additional valuation of $400,000 assigned to
the land results in reporting the noncontrolling interest at $400,000 above the noncontrolling interest in the book
value of the subsidiary's net assets. Because the noncontrolling interest is classified as part of stockholders' equity,
stockholders' equity is substantially greater under the economic unit concept than under the parent company
concept.
E 6A-2
Note: For the requirements 1 and 2, it is useful to prepare a conceptual analysis of the investment account as
follows:
Non controlling
Interest
$1,500,000
Total
Cost
=
$4,200,000
Requirement 1:
$700,000
Requirement 2:
$1,000,000 ($700,000 / 70%)
BOOK VALUE
ELEMENT
$5,000,000
GOODWILL
ELEMENT
$700,000
E 6A-2
6-61
(continued)
Requirement 3:
Under the parent company concept, goodwill is reported in consolidation only to the extent that it has been bought
and paid for by the parent company. As a result, no amount is added to the noncontrolling interest for the additional
goodwill deemed to exist based on the parent's purchase price.
Under the economic unit concept, the entire amount of goodwill implicit is the transaction is reported in
consolidation. The additional goodwill imputed to exist results in a greater noncontrolling interest in consolidation.
In this exercise, the $300,000 additional goodwill reported in consolidation increases the noncontrolling interest.
Because the noncontrolling interest is classified as part of stockholders' equity is substantially greater under the
economic unit concept than under the parent company concept.
E 6A-3
Note: For requirements 1 and 2 it is useful to prepare a conceptual analysis of the investment account as follows:
UNDEREVALUATION OF
Non controlling
Total
BOOK VALUE
NET ASSETS ELEMENT GOODWILL
Interest
$1,500,000
a
Cost
=
$6,400,000
ELEMENT
$7,500,000
(Land)
$240,000 a
ELEMENT
$160,000
80% of $300,000.
Requirement 1:
Land:
Goodwill:
$640,000 ($400,000 of book value plus $240,000 of revaluation)

$160,000
Requirement 2:
Land:
$700,000 (full current value)
Goodwill: $200,000 ($1,600,000 of purchased goodwill and $40,000 of imputed goodwill)
Requirement 3:
Under the parent company concept, land is revalued upward only to the extent such undervaluation was bought
and paid for. Likewise, goodwill is reported only to the extent that it was paid for by the parent company.
Under the economic unit concept, land is valued at its current value. Goodwill implicit is the transaction is
reported in consolidation. In this exercise, the additional valuation of $60,000 assigned to the land and the
additional imputed goodwill of $40,000 results is reporting the noncontrolling interest at $100,000 above the
noncontrolling interest in the book value of the subsidiary's net assets. Because noncontrolling interest is classified
as part of stockholders' equity (under the economic unit concept), stockholders' equity is substantially greater
under the economic unit concept than under the parent company concept.

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6

THE PURCHASE METHOD:

Recording parents entries under the equity and cost methods.............

EXERCISES FOR PARTIALLY OWNED SUBSIDIARIES

Calculating consolidated net income....................................................

PROBLEMS FOR 100%-OWNED SUBSIDIARIES

ADVANCED ACCOUNTING: Concepts and Practice

PROBLEMS FOR PARTIALLY OWNED SUBSIDIARIES

Consolidation worksheet as of the acquisition date..............................

Actual practice case: Subsequently found unrecorded liability............

FINANCIAL ANALYSIS PROBLEMS

Calculating parents annual return on investment: 100% ownership. . .

CHAPTER ETHICS QUESTION

EXERCISES FOR APPENDIX 6AECONOMIC UNIT CONCEPT PROCEDURES

..Comparison of the parent company concept and the economic unit

..Comparison of the parent company concept and the economic unit

The Purchase Method: Postacquisition Periods and Partial Ownerships

ADVANCED ACCOUNTING: Concepts and Practice

E 6-2 (Estimated time: 10 minutes)

E 6-3 (Estimated time: 20 minutes)

The Purchase Method: Postacquisition Periods and Partial Ownerships

BOOK VALUE ELEMENT

II. ANALYSIS OF THE INVESTMENT ACCOUNTEXCESS COST ELEMENTS

(b) The unamortized excess cost reclassification entry (for BS):

(c) The amortized excess cost reclassification entry (for IS):

ADVANCED ACCOUNTING: Concepts and Practice

E 6-4 (Estimated time: 20 minutes)

BOOK VALUE ELEMENT

II. ANALYSIS OF THE INVESTMENT ACCOUNTEXCESS COST ELEMENTS

The Purchase Method: Postacquisition Periods and Partial Ownerships

E 6-5 (Estimated time: 20 minutes)

ADVANCED ACCOUNTING: Concepts and Practice

E 6-6 (Estimated time: 5 minutes)

E 6-7 (Estimated time: 15 minutes)

The Purchase Method: Postacquisition Periods and Partial Ownerships

Steeles reported income for 6 months of 2006 ($100,000 yr.).............................................. $ 50,000

E 6-8 (Estimated time: 10 minutes)

ADVANCED ACCOUNTING: Concepts and Practice

E 6-9 (Estimated time: 10 minutes)

E 6-10 (Estimated time: 10 minutes)

I. ANALYSIS OF INVESTMENT ACCOUNTBOOK VALUE ELEMENT

II. ANALYSIS OF INVESTMENT ACCOUNTEXCESS COST ELEMENTS

The Purchase Method: Postacquisition Periods and Partial Ownerships

E 6-11 (Estimated time: 10 minutes)

I. ANALYSIS OF INVESTMENT ACCOUNT BOOK VALUE ELEMENT

II. ANALYSIS OF INVESTMENT ACCOUNTEXCESS COST ELEMENTS

ADVANCED ACCOUNTING: Concepts and Practice

E 6-12 (Estimated time: 10 minutes)

BOOK VALUE ELEMENT

$110,000 $50,000 for the common stock [a given amount] = $60,000.

The Purchase Method: Postacquisition Periods and Partial Ownerships

BOOK VALUE ELEMENT

Subsidiarys Equity Accounts

II. ANALYSIS OF THE INVESTMENT ACCOUNTEXCESS COST ELEMENTS

(2) The unamortized excess cost reclassification entry (for BS):

(3) The amortized excess cost reclassification entry (for IS):

(4) The accumulated depreciation elimination entry:

ADVANCED ACCOUNTING: Concepts and Practice

Pya Inc. and Sya Inc.

INCOME STATEMENT: (2006)

STMT. OF RET. EARNINGS:

Payables and accruals........... 65,000

Proof of debit and credit postings............................. 434,000