Sie sind auf Seite 1von 21

2011 Pearson Education, Inc.

publishing as Prentice Hall


3-1
CHAPTER 3

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Answers to Questions

1 A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a
controlling financial interest (generally over 50 percent) of its outstanding voting stock.

2 Amounts assigned to identifiable assets and liabilities in excess of recorded amounts on the books of the
subsidiary are not recorded separately by the parent. Instead, the parent records the fair value/purchase
price of the interest acquired in an investment account. The assignment to identifiable asset and liability
accounts is made through working paper entries when the parent and subsidiary financial statements are
consolidated.

3 The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the
purchase price of the subsidiary is greater than the book value of the subsidiarys net assets. If the parent
had acquired an 80 percent interest and the implied fair value of the subsidiary was greater than the book
value of the subsidiarys net assets, the land would still appear in the consolidated balance sheet at
$100,000. Under GAAP, the noncontrolling interest is also reported based on fair values at the acquisition
date.

4 Parent companya corporation that owns a controlling interest in the outstanding voting stock of another
corporation (its subsidiary).
Subsidiary companya corporation that is controlled by a parent that owns a controlling interest in its
outstanding voting stock, either directly or indirectly.
Affiliatescompanies that are controlled by a single management team through parent-subsidiary
relationships. (Although the term affiliate is a synonym for subsidiary, the parent is included in the total
affiliation structure.) In many annual reports, the term includes all investments accounted for by the equity
method.
Associatescompanies that are controlled through parent-subsidiary relationships or whose operations can
be significantly influenced through equity investments of 20 percent to 50 percent.

5 A noncontrolling interest is the equity interest in a subsidiary that is owned by stockholders outside of the
affiliation structure. In other words, it is the equity interest in a subsidiary (recorded at fair value) that is
not held by the parent or subsidiaries of the parent.

6 Under GAAP, a subsidiary will not be consolidated if control does not rest with the majority owner, such
as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under severe
foreign exchange restrictions or other governmentally imposed uncertainties.

7 Consolidated financial statements are intended primarily for the stockholders and creditors of the parent,
according to GAAP.

8 The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of
the outstanding capital stock of the parent.

9 Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or
consolidation accounted for as an acquisition. But goodwill from consolidation would not appear in the
general ledger of a parent or its subsidiary. Goodwill is entered in consolidation working papers when the
reciprocal investment and equity amounts are eliminated. Working paper entries affect consolidated
financial statements, but they are not entered in any general ledger.

3-2 An Introduction to Consolidated Financial Statements

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
10 The parents investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is
consolidated. It would appear in the parents separate balance sheet under the heading investments or
other assets. Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as
investments or other assets. They are accounted for under the equity method if the parent can exercise
significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost method.

11 Parents books: Reciprocal accounts on subsidiarys books:
Investment in subsidiary Capital stock and retained earnings
Sales Purchases
Accounts receivable Accounts payable
Interest income Interest expense
Dividends receivable Dividends payable
Advance to subsidiary Advance from parent

12 Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order to
show the financial position and results of operations of the total economic entity that is under the control of
a single management team. Sales by a parent to a subsidiary are internal transactions from the viewpoint of
the economic entity and the same is true of interest income and interest expense and rent income and rent
expense arising from intercompany transactions. Similarly, receivables from and payables to affiliates do
not represent assets and liabilities of the economic entity for which consolidated financial statements are
prepared.

13 The stockholders equity of a parent under the equity method is the same as the consolidated stockholders
equity of a parent and its subsidiaries provided that the noncontrolling interest, if any, is reported outside of
the consolidated stockholders equity. If noncontrolling interest is included in consolidated stockholders
equity, it represents the sole difference between the parents stockholders equity under the equity method
and consolidated stockholders equity.

14 No. The amounts that appear in the parents statement of retained earnings under the equity method and the
amounts that appear in the consolidated statement of retained earnings are identical, assuming that the
noncontrolling interest is included as a separate component of stockholders equity.

15 Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total
income to the consolidated entity between controlling and noncontrolling stockholders. From the viewpoint
of the controlling interest (the stockholders of the parent), income attributable to noncontrolling interest
has the same effect on consolidated net income as an expense. This is because consolidated net income is
income to all stockholders. Alternatively, you can view total consolidated net income as being allocated to
the controlling and noncontrolling interests.

16 The computation of noncontrolling interest is comparable to the computation of retained earnings. It is
computed:

Noncontrolling interest beginning of the period XX
Add: Income attributable to noncontrolling interest XX
Deduct: Noncontrolling interest dividends XX
Deduct: Noncontrolling interest of amortization of
excess of fair value over book value
Add: Noncontrolling interest of amortization of
excess of book value over fair value
Noncontrolling interest end of the period

17 It is acceptable to consolidate the annual financial statements of a parent and a subsidiary with different
fiscal periods, provided that the dates of closing are not more than three months apart. Any significant
developments that occur in the intervening three-month period should be disclosed in notes to the financial
Chapter 3 3-3

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
statements. In the situation described, it is acceptable to consolidate the financial statements of the
subsidiary with an October 31 closing date with the financial statements of the parent with a December 31
closing date.

18 The acquisition of shares from noncontrolling stockholders is not a business combination. It must be
accounted for as a treasury stock transaction if the acquirer is the controlling interest. It is not possible, by
definition, to acquire a controlling interest from noncontrolling stockholders.


SOLUTIONS TO EXERCISES

Solution E3-1 Solution E3-2

1 b 1 d
2 c 2 b
3 d 3 d
4 d 4 d
5 a 5 a
6 b
7 c


Solution E3-3 [ AI CPA adapt ed]

1 c Advance t o Hi l l $75, 000 + r ecei vabl e f r omWar d $200, 000 = $275, 000

2 a Zer o, goodwi l l has an i ndet er mi nat e l i f e and i s not amor t i zed.

3 a Pow account s f or Sap usi ng t he equi t y met hod, t her ef or e,
consol i dat ed r et ai ned ear ni ngs i s equal t o Pow s r et ai ned ear ni ngs, or
$2, 480, 000.

4 d Zer o, al l i nt er company r ecei vabl es and payabl es ar e el i mi nat ed.


Solution E3-4 (in thousands)

1 I mpl i ed f ai r val ue of San ( $1, 800 / 90%) $2, 000
Less: Book val ue of San ( 1, 800)
Excess f ai r val ue over book val ue $ 200
Equi pment under val ued 60
Goodwi l l at J anuar y 1, 2011 $ 140
Goodwi l l at December 31, 2011 = Goodwi l l f r omconsol i dat i on $ 140
Si nce goodwi l l i s not amor t i zed

2 Consolidated net income

Pi n s r epor t ed net i ncome $980
Less: Cor r ect i on t o i ncome f r omSan f or
depr eci at i on on excess al l ocat ed

t o equi pment [ ( $60, 000/ 3 year s) x 90%] ( 18)
Cont r ol l i ng shar e of consol i dat ed net i ncome $962

Noncont r ol l i ng shar e of consol i dat ed net i ncome
[ $200, 000 - $20, 000 depr eci at i on] x 10% $ 18
Cont r ol l i ng shar e of consol i dat ed net i ncome 962
Consol i dat ed net i ncome $980
3-4 An Introduction to Consolidated Financial Statements

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l

Chapter 3 3-5

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E3-5 (in thousands)

1 $1, 200, t he di vi dends of Pan

2 $660, equal t o $600 di vi dends payabl e of Pan pl us $60 ( 30%of $200)
di vi dends payabl e t o noncont r ol l i ng i nt er est s of Sad.

Solution E3-6 (in thousands)

Preliminary computation
Cost of Sl i st ock ( Fai r val ue) $2, 500
Fai r val ue of Sl i s i dent i f i abl e net asset s 2, 000
Goodwi l l $ 500

1 Journal entry to record push down values

I nvent or i es 40
Land 100

Bui l di ngs net
300

Equi pment net
160
Goodwi l l 500
Ret ai ned ear ni ngs 420
Not e payabl e 20
Push- down capi t al 1, 500

2 Sli Corporation
Bal ance Sheet
J anuar y 1, 2011
( i n t housands)
Assets
Cash $ 140
Account s r ecei vabl e 160
I nvent or i es 200
Land 400

Bui l di ngs net
1, 000

Equi pment net
600
Goodwi l l 500
Tot al asset s $3, 000

Liabilities
Account s payabl e $ 200
Not e payabl e 300
Tot al l i abi l i t i es 500

Stockholders equity
Capi t al st ock $1, 000
Push- down capi t al 1, 500
Tot al st ockhol der s equi t y 2, 500
Tot al l i abi l i t i es and st ockhol der s equi t y $3, 000



3-6 An Introduction to Consolidated Financial Statements

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E3-7

1 Pas Corporation and Subsidiary
Consol i dat ed I ncome St at ement
f or t he year 2012
( i n t housands)
Sal es ( $2, 000 + $800) $2, 800
Less: Cost of sal es ( $1, 200 + $400) ( 1, 600)

Gr oss pr of i t 1, 200
Less: Depr eci at i on expense ( $100 + $80) ( 180)
Ot her expenses ( $398 + $180) ( 578)

Consol i dat ed net i ncome 442

Less: Noncont r ol l i ng i nt er est shar e ( $140 30%)
( 42)
Cont r ol l i ng i nt er est shar e of cnsol i dat ed net i ncome $ 400

2 Pas Corporation and Subsidiary
Consol i dat ed I ncome St at ement
f or t he year 2012
( i n t housands)
Sal es ( $2, 000 + $800) $2, 800
Less: Cost of sal es ( $1, 200 + $400) ( 1, 600)

Gr oss pr of i t 1, 200
Less: Depr eci at i on expense ( $100 + $80 - $12) ( 168)
Ot her expenses ( $398 + $180) ( 578)

Consol i dat ed net i ncome 454
Less: Noncont r ol l i ng i nt er est shar e
[ ( $140 30%) + ( $12 depr eci at i on x 30%) ]

( 45. 6)
Cont r ol l i ng i nt er est shar e of consol i dat ed net i ncome $ 408. 4

Supporting computations

Depr eci at i on of excess al l ocat ed t o overvalued equi pment :
$60/ 5 year s = $12

Chapter 3 3-7

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E3-8 (in thousands)

1 Capital stock

The capi t al st ock appear i ng i n t he consol i dat ed bal ance sheet at
December 31, 2011 i s $3, 600, t he capi t al st ock of Pob, t he par ent
company.

2 Goodwill at December 31, 2011

I nvest ment cost at J anuar y 2, 2011 ( 80%i nt er est ) $1, 400
I mpl i ed t ot al f ai r val ue of Sof ( $1, 400 / 80%) $1, 750
Book val ue of Sof ( 100%) ( 1, 200)
Excess i s consi der ed goodwi l l si nce no ot her f ai r val ue
i nf or mat i on i s gi ven.

$ 550

3 Consolidated retained earnings at December 31, 2011

Pob s r et ai ned ear ni ngs J anuar y 2 ( equal t o
begi nni ng consol i dat ed r et ai ned ear ni ngs $1, 600
Add: Net i ncome of Pob ( equal t o cont r ol l i ng shar e of
consol i dat ed net i ncome)

600
Less: Di vi dends decl ar ed by Pob ( 360)
Consol i dat ed r et ai ned ear ni ngs December 31 $1, 840

4 Noncontrolling interest at December 31, 2011

Capi t al st ock and r et ai ned ear ni ngs of Sof on
J anuar y 2

$1, 200
Add: Sof s net i ncome 180
Less: Di vi dends decl ar ed by Sof ( 100)
Sof s st ockhol der s equi t y December 31 1, 280
Noncont r ol l i ng i nt er est per cent age 20%
Noncont r ol l i ng i nt er est at book val ue
Add: 20%Goodwi l l
Noncont r ol l i ng i nt er est December 31
$ 256
110
$ 366

5 Dividends payable at December 31, 2011

Di vi dends payabl e t o st ockhol der s of Pob $ 180

Di vi dends payabl e t o noncont r ol l i ng st ockhol der s ( $50 20%)
10
Di vi dends payabl e t o st ockhol der s out si de t he
Consol i dat ed ent i t y $ 190


3-8 An Introduction to Consolidated Financial Statements

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E3-9 (in thousands)

Pas Corporation and Subsidiary
Par t i al Bal ance Sheet
at December 31, 2011

Stockholders equity:
Capi t al st ock, $10 par $600
Addi t i onal pai d- i n capi t al 100
Ret ai ned ear ni ngs 130
Equi t y of cont r ol l i ng st ockhol der s 830
Noncont r ol l i ng i nt er est 82
Tot al st ockhol der s equi t y $912


Supporting computations
Comput at i on of consol i dat ed r et ai ned ear ni ngs:
Pas s December 31, 2010 r et ai ned ear ni ngs $ 70
Add: Pas s r epor t ed i ncome f or 2011 110
Less: Pas s di vi dends ( 50)
Consol i dat ed r et ai ned ear ni ngs December 31, 2011 $130

Computation of noncontrolling interest at December 31, 2011
Sal s December 31, 2010 st ockhol der s equi t y $400
I ncome l ess di vi dends f or 2011 ( $40 - $30) 10
Sal s December 31, 2011 st ockhol der s equi t y 410
Noncont r ol l i ng i nt er est per cent age 20%
Noncont r ol l i ng i nt er est December 31, 2011 $ 82

Chapter 3 3-9

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E3-10

Pek Corporation and Subsidiary
Consol i dat ed I ncome St at ement
f or t he year ended December 31, 2013
( i n t housands)
Sal es $4, 200
Cost of goods sol d 2, 200
Gr oss pr of i t 2, 000
Deduct : Oper at i ng expenses 1, 110
Consol i dat ed net i ncome 890
Deduct : Noncont r ol l i ng i nt er est shar e 29
Cont r ol l i ng i nt er est shar e $ 861

Supporting computations

I nvest ment cost J anuar y 1, 2011 ( 90%i nt er est ) $ 1, 620
I mpl i ed t ot al f ai r val ue of Sl o ( $1, 620 / 90%) $ 1, 800
Sl o s Book val ue acqui r ed ( 100%) ( 1, 400)
Excess of f ai r val ue over book val ue $ 400

Excess allocated to:
I nvent or i es ( sol d i n 2011) $ 60
Equi pment ( 4 year s r emai ni ng usef ul l i f e) 40
Goodwi l l 300
Excess of f ai r val ue over book val ue $ 400


Operating expenses:
Combi ned oper at i ng expenses of Pek and Sl o $1, 100
Add: Depr eci at i on on excess al l ocat ed t o equi pment
( $40/ 4 year s) 10
Consol i dat ed oper at i ng expenses $1, 110

3-10 An Introduction to Consolidated Financial Statements

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
SOLUTIONS TO PROBLEMS

Solution P3-1

1 Pen Corporation and Subsidiary
Consol i dat ed Bal ance Sheet
at December 31, 2011
( i n t housands)

Assets
Cash ( $64 + $36) $ 100
Account s r ecei vabl e ( $90 + $68 - $10) 148
I nvent or i es ( $286 + $112) 398

Equi pment net ( $760 + $350)
1, 110
Tot al asset s $1, 756

Liabilities and Stockholders Equity
Liabilities:
Account s payabl e ( $80 + $66 - $10) $ 136
Stockholders equity:
Common st ock, $10 par 920
Ret ai ned ear ni ngs 600

Noncont r ol l i ng i nt er est ( $300 + $200) 20%
100
Tot al l i abi l i t i es and st ockhol der s equi t y $1, 756

2 Consolidated net income for 2012

Pen s separ at e i ncome $340
Add: I ncome f r omSut 180
Consol i dat ed net i ncome $520
Noncont r ol l i ng i nt er est shar e ( 20%x $180, 000) $ 36
Cont r ol l i ng i nt er est shar e ( 80%) $484


Chapter 3 3-11

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P3-2 (in thousands)

1 Schedule to allocate fair value/book value differential

Cost of i nvest ment i n Set $350
I mpl i ed f ai r val ue of Set ( $350 / 70%) $500
Book val ue of Set ( 220)
Excess f ai r val ue over book val ue $280
Excess al l ocat ed:
Fai r Val ue Book Val ue Al l ocat i on
I nvent or i es ( $100 - $60) $ 40
Land ( $120 - $100) 20

Bui l di ngs net
( $180 - $140) 40

Equi pment net
( $60 - $80) ( 20)
Ot her l i abi l i t i es ( $80 - $100) 20
Al l ocat ed t o i dent i f i abl e net asset s 100
Goodwi l l f or t he r emai nder 180
Excess f ai r val ue over book val ue $280


2 Par Corporation and Subsidiary
Consol i dat ed Bal ance Sheet
at J anuar y 1, 2011

Assets
Current assets:
Cash ( $70 + $40) $110

Recei vabl es net ( $160 + $60)
220
I nvent or i es ( $140 + $60 + $40) 240 $ 570

Property, plant and equipment:
Land ( $200 + $100 + $20) $320

Bui l di ngs net ( $220 + $140 + $40)
400

Equi pment net ( $160 + $80 - $20)
220 940
Goodwill (from consolidation) 180
Tot al asset s $1, 690

Liabilities and Stockholders Equity
Liabilities:
Account s payabl e ( $180 + $160) $ 340
Ot her l i abi l i t i es ( $20 + $100 - $20) 100 $ 440

Stockholders equity:
Capi t al st ock $1, 000
Ret ai ned ear ni ngs 100
Equi t y of cont r ol l i ng st ockhol der s 1, 100
Noncont r ol l i ng i nt er est * 150 1, 250
Tot al l i abi l i t i es and st ockhol der s equi t y $1, 690

* 70%of i mpl i ed f ai r val ue of $500 = $150.


3-12 An Introduction to Consolidated Financial Statements

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P3-3 (in thousands)

Cost of i nvest ment i n Sof J anuar y 1, 2011 $5, 400
I mpl i ed f ai r val ue of Sof ( $5, 400 / 80%) $6, 750
Book val ue of Sof 5, 000
Excess of f ai r val ue over book val ue $1, 750

Schedule to Allocate Fair Value Book Value Differential

Fai r Val ue
- Book Val ue



Al l ocat i on
Cur r ent asset s $1, 000 $1, 000
Equi pment 2, 000 2, 000

Bar gai n pur chase * ( 1, 250)
Excess f ai r val ue over book val ue $1, 750

* Af t er r ecogni zi ng acqui r ed asset s and l i abi l i t i es at f ai r val ues, we ar e
l ef t wi t h a negat i ve excess of $1, 250. Under GAAP, t hi s di f f er ence i s r ecor ded
as a gai n i n t he consol i dat ed i ncome st at ement i n t he year of acqui si t i on. The
gai n i s at t r i but abl e ent i r el y t o t he cont r ol l i ng i nt er est , and i s r ecor ded on
t he par ent s books by a debi t t o t he I nvest ment account and a cr edi t t o a Gai n
f r ombar gai n Pur chase account . An al t er nat i ve cal cul at i on of t hi s amount t akes
t he di f f er ence bet ween t he f ai r val ues of t he net asset s ( $8, 000) and t hei r
f ai r val ue i mpl i ed by t he acqui si t i on pr i ce ( $6, 750) , whi ch equal s $1, 250.

Solution P3-4 (in thousands)

Noncont r ol l i ng i nt er est of $130 ( f ai r val ue) pl us $520 ( f ai r val ue of Pam s
i nvest ment ) equal s t ot al f ai r val ue of $650. Ther ef or e, Pam s i nt er est i s 80%
( $520 / $650) , and noncont r ol l i ng i nt er est i s 20%( $130 / $650) .

Tot al f ai r val ue $ 650
Book val ue of Sap ( 520)
Excess f ai r val ue over book val ue $ 130

Excess allocated to

Fai r Val ue - Book Val ue
Pl ant asset s net
$420 - $400 $ 20
Goodwi l l 110
Tot al $ 130


Chapter 3 3-13

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P3-5

Pal Corporation and Subsidiary
Consol i dat ed Bal ance Sheet
at December 31, 2011
(in thousands)
Assets
Cur r ent asset s $ 680
Pl ant asset s 1, 660
Goodwi l l 400
$2, 740
Equities
Li abi l i t i es $1, 320
Capi t al st ock 600
Ret ai ned ear ni ngs 820
$2, 740

Supporting computations
Sor s net i ncome ( $800 - $600 - $100) $ 100
Less: Excess al l ocat ed t o i nvent or i es t hat wer e sol d i n 2011 ( 40)
Less: Depr eci at i on on excess al l ocat ed t o pl ant
asset s ( $80 / 4 year s) ( 20)
I ncome f r omSor $ 40

Pl ant asset s ( $1, 000 + $600 + $80 - $20) $1, 660

Pal s r et ai ned ear ni ngs:
Begi nni ng r et ai ned ear ni ngs $ 680
Add: Oper at i ng i ncome 200
Add: I ncome f r omSor 40
Deduct : Di vi dends ( 100)
Ret ai ned ear ni ngs December 31, 2011 $ 820


3-14 An Introduction to Consolidated Financial Statements

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P3-6

Per Corporation and Subsidiary
Consol i dat ed Bal ance Sheet Wor ki ng Paper s
at December 31, 2011
( i n t housands)
Per
per books
Si m
per books
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
Bal ance Sheet
Cash $ 84 $ 40 $ 124
Recei vabl es net
100 260 b 18 342
I nvent or i es 700 100 800
Land 300 400 700
Equi pment net
1, 200 200 1, 400
I nvest ment i n Si m 918 a 918
Goodwi l l a 200 200
Tot al asset s
$3, 302 $1, 000 $3, 566
Account s payabl e $ 820 $ 160 $ 980
Di vi dends payabl e 120 20 b 18 122
Capi t al st ock 2, 000 600 a 600 2, 000
Ret ai ned ear ni ngs 362 220 a 220 362
Noncont r ol l i ng i nt er est a 102 102
Tot al equi t i es $3, 302 $1, 000 $3, 566

a To el i mi nat e r eci pr ocal i nvest ment and equi t y account s, r ecor d goodwi l l ( $200) , and
ent er noncont r ol l i ng i nt er est [ ( $820 equi t y + $200 goodwi l l ) 10%) ] .
b To el i mi nat e r eci pr ocal di vi dends r ecei vabl e ( i ncl uded i n r ecei vabl es net ) and
di vi dends payabl e amount s ( $20 di vi dends 90%) .


Chapter 3 3-15

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P3-7 (in thousands)

Preliminary computations
Cost of 80%i nvest ment J anuar y 3, 2011 $560
I mpl i ed t ot al f ai r val ue of Sl e ( $560 / 80%) $700
Book val ue of Sl e ( 500)
Excess f ai r val ue over book val ue on J anuar y 3 = Goodwi l l $200

1 Noncontrolling interest share of income:

Sl e s net i ncome $100 20%noncont r ol l i ng i nt er est
$ 20

2 Current assets:
Combi ned cur r ent asset s ( $408 + $150) $558

Less: Di vi dends r ecei vabl e ( $20 80%)
( 16)
Cur r ent asset s $542

3 I ncome f r omSl e: None I nvest ment i ncome i s el i mi nat ed i n consol i dat i on.

4 Capi t al st ock: $1, 000 Capi t al st ock of t he par ent , Por Cor por at i on.

5 I nvest ment i n Sl e: None The i nvest ment account i s el i mi nat ed.

6 Excess of f ai r val ue over book val ue $200

7 Cont r ol l i ng shar e of consol i dat ed net i ncome: Equal s Por s
net i ncome, or :

Consol i dat ed sal es $1, 200
Less: Consol i dat ed cost of goods sol d ( 740)
Less: Consol i dat ed expenses ( 160)
Consol i dat ed net i ncome $ 300
Less: Noncont r ol l i ng i nt er est shar e ( 20)
Cont r ol l i ng shar e $ 280

8 Consol i dat ed r et ai ned ear ni ngs December 31, 2011: $404 Equal s Por s
begi nni ng r et ai ned ear ni ngs.

9 Consolidated retained earnings December 31, 2012
Equal t o Por s endi ng r et ai ned ear ni ngs:
Begi nni ng r et ai ned ear ni ngs $404
Add: Cont r ol l i ng shar e of consol i dat ed net i ncome 280
Less: Por s di vi dends f or 2012 ( 120)
Endi ng r et ai ned ear ni ngs $564

10 Noncontrolling interest December 31, 2012
Sl e s capi t al st ock and r et ai ned ear ni ngs $600
Add: Net i ncome 100
Less: Di vi dends ( 50)
Sl e s equi t y December 31, 2012 at f ai r val ue 650
Noncont r ol l i ng i nt er est per cent age 20%
Noncont r ol l i ng i nt er est December 31, 2012 usi ng book val ue $130
Add: Noncont r ol l i ng i nt er est shar e of Goodwi l l 40
Noncont r ol l i ng i nt er est December 31, 2012 at f ai r val ue $170

3-16 An Introduction to Consolidated Financial Statements

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P3-8 [ AI CPA adapt ed]

Preliminary computations Saw Sun
I nvest ment cost :
Saw ( 1, 000 shar es 80%) $140
112, 000
Sun ( 3, 000 shar es 70%) $80
168, 000
I mpl i ed t ot al f ai r val ues:
Saw ( $112, 000 / 80%) 140, 000
Sun ( $168, 000 / 70%) 240, 000
Book val ue
Saw 140, 000
Sun 240, 000
Excess f ai r val ue over book val ue at acqui si t i on 0 0

1 a. Journal entries to account for investments


January 1, 2011 Acquisition of investments

I nvest ment i n Saw ( 80%) 112, 000
Cash 112, 000
To r ecor d acqui si t i on of 800 shar es of
Saw common st ock at $140 per shar e.
I nvest ment i n Sun ( 70%) 168, 000
Cash 168, 000
To r ecor d acqui si t i on of 2, 100 shar es of
Sun common st ock at $80 per shar e.

b. During 2011 Dividends from subsidiaries

Cash 25, 600
I nvest ment i n Saw ( 80%) 25, 600

To r ecor d di vi dends r ecei ved f r omSaw ( $32, 000 80%) .
Cash 12, 600
I nvest ment i n Sun ( 70%) 12, 600

To r ecor d di vi dends r ecei ved f r omSun ( $18, 000 70%) .

c. December 31, 2011 Share of income or loss

I nvest ment i n Saw ( 80%) 57, 600
I ncome f r omSaw 57, 600

To r ecor d i nvest ment i ncome f r omSaw ( $72, 000 80%) .
Loss f r omSun 16, 800
I nvest ment i n Sun ( 70%) 16, 800

To r ecor d i nvest ment l oss f r omSun ( $24, 000 70%) .


Chapter 3 3-17

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P3-8 ( cont i nued)

2 Noncontrolling interest December 31, 2011 *
Saw Sun
Common st ock $100, 000 $120, 000
Capi t al i n excess of par 40, 000
Ret ai ned ear ni ngs 80, 000 38, 000
Equi t y December 31 180, 000 198, 000
Noncont r ol l i ng i nt er est per cent age 20% 30%
Noncont r ol l i ng i nt er est December 31 $36, 000 $59, 400

* Fai r val ue equal s book val ue.

3 Consolidated retained earnings December 31, 2011

Consol i dat ed r et ai ned ear ni ngs i s r epor t ed at $609, 200, equal t o t he
r et ai ned ear ni ngs of Pod Cor por at i on, t he par ent , at December 31, 2011.

4 Investment balance December 31, 2011:
Saw Sun
I nvest ment cost J anuar y 1 $112, 000 $168, 000
Add ( deduct ) : I ncome ( l oss) 57, 600 ( 16, 800)
Deduct : Di vi dends r ecei ved ( 25, 600) ( 12, 600)
I nvest ment bal ances December 31 $144, 000 $138, 600

Check: I nvest ment bal ances shoul d be equal t o t he under l yi ng book val ue

Saw $180, 000 80%= $144, 000

Sun $198, 000 70%= $138, 600

Af t er consol i dat i on, t he I nvest ment bal ances ar e $0.



3-18 An Introduction to Consolidated Financial Statements

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P3-9

Preliminary computations (in thousands)
Cost of 90%i nvest ment J anuar y 1, 2011 $7, 200
I mpl i ed t ot al f ai r val ue of Son ( $7, 200 / 90%) $8, 000
Book val ue of Son ( 5, 400)
Excess f ai r val ue over book val ue on J anuar y 1 $2, 600
Al l ocat i on t o equi pment $1, 600
Remai nder i s Goodwi l l $1, 000
Addi t i onal annual depr eci at i on on equi pment ( $1, 600 / 8 year s) $ 200

Pan Corporation and Subsidiary
Consol i dat ed Bal ance Sheet Wor ki ng Paper s
at December 31, 2011
( i n t housands)


Pan
90%
Son
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
Bal ance Sheet
Cash $ 600 $ 400 $ 1, 000
Recei vabl es net
1, 200 800 2, 000
Di vi dends r ecei vabl e 180 b 180
I nvent or y 1, 400 1, 200 2, 600
Land 1, 200 1, 400 2, 600
Bui l di ngs net
4, 000 2, 000 6, 000
Equi pment net
3, 000 1, 600 a 1, 400 6, 000
I nvest ment i n Son 7, 560 a 7, 560
Goodwi l l a 1, 000 1, 000
Tot al asset s
$19, 140 $7, 400 $21, 200
Account s payabl e $ 600 $1, 200 $ 1, 800
Di vi dends payabl e 1, 000 200 b 180 1, 020
Capi t al st ock 14, 000 4, 000 a 4, 000 14, 000
Ret ai ned ear ni ngs 3, 540 2, 000 a 2, 000 3, 540
Noncont r ol l i ng i nt er est a 840 840
Tot al equi t i es $19, 140 $7, 400 $21, 200

a To el i mi nat e r eci pr ocal i nvest ment and equi t y account s, ent er unamor t i zed excess
al l ocat ed t o equi pment , r ecor d goodwi l l , and ent er noncont r ol l i ng i nt er est ( at f ai r
val ue) .
b To el i mi nat e r eci pr ocal di vi dends r ecei vabl e and di vi dends payabl e amount s.


Chapter 3 3-19

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P3-10

1 Purchase price of investment in Sun (in thousands)

Under l yi ng book val ue of i nvest ment i n Sun:
Equi t y of Sun J anuar y 1, 2011 $440
Add: Excess i nvest ment f ai r val ue over book val ue:
Goodwi l l at December 31, 2015 120
Fai r val ue of Sun J anuar y 1, 2011 $560

Pur chase pr i ce of 80%i nvest ment at f ai r val ue( $560 x 80%) $448

2 Suns stockholders equity on December 31, 2015 (in thousands)

20%noncont r ol l i ng i nt er est at f ai r val ue $124
20%goodwi l l ( 24)
20%noncont r ol l i ng i nt er est s equi t y at book val ue $100
Tot al equi t y = Noncont r ol l i ng i nt er est s equi t y $100 / 20%= $500

3 Pans investment in Sun account balance at December 31, 2015
( i n t housands)
Under l yi ng book val ue i n Sun December 31, 2015

( $500 80%)
$400
Add: 80%of Goodwi l l December 31, 2015
( 20%i s at t r i but abl e t o t he noncont r ol l i ng i nt er est )

96
I nvest ment i n Sun December 31, 2015 $496

Al t er nat i ve sol ut i on:
I nvest ment cost J anuar y 1, 2011 $448
Add: 80%of Sun s i ncr ease si nce acqui si t i on

( $500 - $440) 80%
48
I nvest ment i n Sun December 31, 2015 $496

4 Pans capital stock and retained earnings December 31, 2015
( i n t housands)
Capi t al st ock $800
Ret ai ned ear ni ngs $ 60

Amount s ar e equal t o capi t al st ock and r et ai ned ear ni ngs shown i n t he
consol i dat ed bal ance sheet .

3-20 An Introduction to Consolidated Financial Statements

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P3-11

Preliminary computations (in thousands)
Cost of 70%i nvest ment i n St u $1, 400
I mpl i ed f ai r of St u( $1, 400 / 70%) $2, 000
Book val ue of St u ( 100%) 1, 600
Excess $ 400
Excess al l ocat ed:
I nvent or i es $ 40
Pl ant asset s 160
Goodwi l l 200
Excess $ 400

I nvest ment bal ance at J anuar y 1, 2011 $1, 400
Shar e of St u s r et ai ned ear ni ngs i ncr ease ( $120 70%)
84
Less: Amor t i zat i on
70%of excess al l ocat ed t o i nvent or i es ( sol d i n 2011) ( 28)
70%of excess al l ocat ed t o pl ant asset s ( $160 / 8 year s) ( 14)
I nvest ment bal ance at December 31, 2011 $1, 442

Noncont r ol l i ng i nt er est at December 31
30%of St u s book val ue at December 31 ( $1, 720 x 30%) $516
30%of Goodwi l l 60
30%Unamor t i zed excess f or pl ant asset s
30%x ( $160 - $20 amor t i zat i on) 42
Noncont r ol l i ng at December 31 ( f ai r val ue) $618

Pop Corporation and Subsidiary
Consol i dat ed Bal ance Sheet Wor ki ng Paper s
at December 31, 2011
( i n t housands)

Pop
70%
St u
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
Bal ance Sheet
Cash $ 120 $ 40 $ 160
Account s r ecei vabl e net
880 400 1, 280
Account s r ecei vabl e Pop
20 b 20
Di vi dends r ecei vabl e 14 c 14
I nvent or i es 1, 000 640 1, 640
Land 200 300 500
Pl ant asset s net
1, 400 700 a 140 2, 240
I nvest ment i n St u 1, 442 a 1, 442
Goodwi l l a 200 200
Asset s
$5, 056 $2, 100 $6, 020

Account s payabl e $ 600 $ 160 $ 760
Account payabl e t o St u 20 b 20
Di vi dends payabl e 80 20 c 14 86
Long- t er mdebt 1, 200 200 1, 400
Capi t al st ock 2, 000 1, 000 a 1, 000 2, 000
Ret ai ned ear ni ngs 1, 156 720 a 720 1, 156
Noncont r ol l i ng i nt er est
( $2, 060, 000 30%)

a 618

618
Equi t i es $5, 056 $2, 100 $6, 020


Chapter 3 3-21

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P3-12

Preliminary computations (in thousands)
80%I nvest ment i n Samat cost J anuar y 1, 2011 $ 1, 520
I mpl i ed t ot al f ai r val ue of Sam( $1, 520 / 80%) $ 1, 900
Sambook val ue 1, 800
Excess f ai r val ue over book val ue r ecor ded as goodwi l l $ 100

Sam
Di vi dends
Sam
Net I ncome
80%of
Net I ncome
2011 $ 80 $160 $128
2012 100 200 160
2013 120 240 192
$300 $600 $480

1 Sam s di vi dends f or 2012 ( $80 / 80%) $ 100

2 Sam s net i ncome f or 2012 ( $160 / 80%) $ 200

3 Goodwi l l December 31, 2012
$ 100

4 Noncontrolling interest share of income 2013

Sam s i ncome f or 2013
( $96 di vi dends r ecei ved/ 80%) 2

$ 240
Noncont r ol l i ng i nt er est per cent age 20%
Noncont r ol l i ng i nt er est shar e $ 48

5 Noncontrolling interest December 31, 2013
Equi t y of SamJ anuar y 1, 2011 $1, 800
Add: I ncome f or 2011, 2012 and 2013 600
Deduct : Di vi dends f or 2011, 2012 and 2013 ( 300)
Equi t y book val ue of SamDecember 31, 2013 2, 100
Goodwi l l 100
Equi t y f ai r val ue of SamDecember 31, 2013 $2, 200
Noncont r ol l i ng i nt er est per cent age 20%
Noncont r ol l i ng i nt er est December 31, 2013 $ 440

6 Controlling share of consolidated net income for 2013
Pen s separ at e i ncome $ 560
Add: I ncome f r omSam 192
Cont r ol l i ng shar e of consol i dat ed net i ncome $ 752

Pen s net i ncome $560
Sam s net i ncome 240
Consol i dat ed net i ncome $800
Less: Noncont r ol l i ng i nt er est shar e ( $240 x 20%) 48
Cont r ol l i ng i nt er est shar e $752