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CHAPTER 4
CONSOLIDATED FINANCIAL STATEMENTS
AND OUTSIDE OWNERSHIP
Chapter Outline
I. Outside ownership may be present within any business combination
A. Complete ownership of a subsidiary is not a prerequisite for consolidationonly
enough voting shares need be owned so that the acquiring company has the ability
to control the decision-making process of the acquired company
B. Any ownership retained in a subsidiary corporation by a party unrelated to the
acquiring company is termed a noncontrolling interest

II. Valuation of subsidiary assets and liabilities poses a problem when a noncontrolling
interest is present follows the acquisition method (Economic Unit Concept) SFAS 141R
and SFAS 160
1. The accounting emphasis is placed on the entire entity that results from the
business combination as measured by the sum of the acquisition-date fair values
of the controlling and noncontrolling interests.
2. Valuation of subsidiary accounts is based on the acquisition-date fair value of the
company (frequently determined by the consideration transferred and the fair
value of the noncontrolling interest); specific subsidiary assets and liabilities are
consolidated at their fair values
3. The noncontrolling interest balance is reported as a component of stockholders'
equity

III. Consolidations involving a noncontrolling interestsubsequent to the date of acquisition


A. According to the parent company concept, all noncontrolling interest amounts are
calculated in reference to the book value of the subsidiary company
B. Only four noncontrolling interest figures are determined for reporting purposes
1. Beginning of year balance
2. Interest in subsidiarys current income
3. Dividends paid during the period
4. End of year balance
C. Noncontrolling interest balances are accumulated in a separate column in the
consolidation worksheet
1. The beginning of year figure is recorded on the worksheet as a component of
Entries S and A
2. The noncontrolling interest's share of the subsidiary's income is established by a
columnar entry that simultaneously reports the balance in both the consolidated
income statement and the noncontrolling interest column
3. Dividends paid to these outside owners are reflected by extending the
subsidiary's Dividends Paid balance (after eliminating intercompany transfers)
into the noncontrolling interest column as a reduction

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4. The end of year noncontrolling interest total is the summation of the three items
above and is reported (in this book) between consolidated liabilities and
stockholders' equity

IV. Step acquisitions


A. An acquiring company may make several different purchases of a subsidiary's stock
in order to gain control
B. Upon attaining control, all of the parents previous investments in the subsidiary are
adjusted to fair value and a gain or loss recognized as appropriate
C. Upon attaining control, the valuation basis for the subsidiary is established at its total
fair value (the sum of the fair values of the controlling and noncontrolling interests)

Vl. Sales of subsidiary stock


A. The proper book value must be established within the parent's Investment account
so that the sales transaction can be correctly recorded
B. The investment balance is adjusted as if the equity method had been applied during
the entire period of ownership
C. If only a portion of the shares are being sold, the book value of the investment
account must be reduced based on either a FIFO or a weighted-average cost flow
assumption
D. If the parent maintains control, any difference between the proceeds of the sale and
the equity-adjusted book value of the share sold is recognized as an adjustment to
additional paid-in capital.
E. If the parent loses control with the sale of the subsidiary shares, the difference
between the proceeds of the sale and the equity-adjusted book value of the share
sold is recognized as a gain or loss.
F. Any interest retained by the parent company should be accounted for by either
consolidation, the equity method, or the fair value method depending on the
influence remaining after the sale.

Learning Objectives
Upon completion of Chapter Four, "Consolidated Financial Statements and Outside
Ownership," students should be able to fulfill each of the following learning objectives:

1. Realize that complete ownership is not a prerequisite for the formation of a business
combination.
2. Understand the meaning of the term "noncontrolling interest.
3. Explain the rationale underlying the acquisition method for accounting for the
noncontrolling interest.
4. Identify appropriate balance sheet placements for the components of the noncontrolling
interest in consolidated financial statements.
5. Identify and calculate the four noncontrolling interest figures that must be included within
the consolidation process and be able to enter each balance on a consolidation
worksheet.

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6. Carry out a consolidation when a step acquisition has taken place.


7. Record the sale of a subsidiary (or a portion of its shares) when the parent has been
applying either the Initial value method, the equity method, or the partial equity method.
8. Select an appropriate method by which to account for any shares remaining after the sale
of a portion of an investment in a subsidiary company.

Answers to Questions
1. "Noncontrolling interest" refers to an equity interest that is held in a member of a
business combination by an unrelated (outside) party.

2. a. Acquisition method = $220,000 (fair value)


b. Purchase method = $208,000 (all of the book value plus 80 percent of the $60,000
difference between fair value and book value)

3. A control premium is the portion of an acquisition price (above currently traded market
values) paid by a parent company to induce shareholders to sell a sufficient number of
shares to obtain control. The extra payment typically becomes part of the goodwill
acquired in the acquisition attributable to the parent company.

4. In practice, noncontrolling interest figures will appear in various locations within


consolidated financial statements. The end of year balance can be found in the liability
section, in the stockholders' equity section, or between these two. The noncontrolling
interest's share of net income can be shown as a reduction on either the income
statement or the statement of retained earnings. Based on current practice, this textbook
reports the ending balance between consolidated liabilities and stockholders' equity with
the income allocation shown as a reduction on the income statement.

5. The ending noncontrolling interest can be determined on a consolidation worksheet by


adding the components found in the noncontrolling interest column: the beginning
balance plus allocation of current year net income less dividends paid to these outside
owners. The ending balance can also be determined (at this point in the exploration of
consolidated financial statements) by multiplying the outside ownership percentage by
the subsidiary's ending book value. In subsequent chapters, this calculation must be
altered because of various adjustments made within the consolidation process.

6. Allsports should remove the pre-acquisition revenues and expenses from the
consolidated totals. These amounts have been earned (incurred) prior to ownership by
Allsports and therefore should not be reported as earnings for the current parent
company owners.

7. In previous years, Tree has appropriately utilized the market-value method in accounting
for its investment in Limb. Now, following a second acquisition, consolidation has
become applicable. These two methods are not considered to be comparable.
Therefore, at the point in time that Tree begins to produce consolidated statements, all
previous financial reports must be restated as if the equity method had been applied
since the date of the first acquisition. This handling presents the reader of the financial
statements with figures that are more comparable from year to year.

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8. When a company sells a portion of an investment, a gain or loss is recognized based on


the difference between the proceeds received and the book value of the investment (on
the portion sold). The correct book value is determined based upon the consistent
application of the equity method. Thus, if either the Initial value method or the partial
equity method has been used, Duke must first restate the account to the equity method
before recording the sales transaction. This same method is also applied to the
operations of the current period occurring prior to the time of sale.

9. Unless control is surrendered, the acquisition method views the sale of subsidiary's
stock as a treasury stock transaction. Thus, no gain or loss can be recognized.

10. The accounting method choice for the remaining shares depends upon the current
relationship between the two firms. If Duke retains control, consolidation is still required.
However, if the parent now can only significantly influence the decision-making process,
the equity method is applied. A third possibility is Duke may have lost the power to
exercise even significant influence. The market-value method then is appropriate.

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Answers to Problems

1. D The acquisition method consolidates assets at fair value at acquisition date


regardless of the parents percentage ownership.

2. D In consolidating the subsidiary's figures, all intercompany balances must


be eliminated in their entirety for external reporting purposes. Even
though the subsidiary is less than fully owned, the parent nonetheless
controls it.

3. C An asset acquired in a business combination is initially valued at 100%


acquisition-date fair value and subsequently amortized its useful life.
Patent fair value at January 1, 2009 .............................................. $45,000
Amortization for 2 years (10 year life) ........................................... (9,000)
Patent reported amount December 31, 2010 ................................ $36,000

4. A Plaster building .............................................................................. $510,000


Turner building acquisition-date fair value $300,000
Amortization for 3 years (10-year life) (90,000) 210,000
Consolidated buildings ................................................................. $720,000

-OR-

Plaster building .............................................................................. $510,000


Turner building 12/31/11 $182,000
Excess acquisition-date fair value allocation 40,000
Excess amortization for 3 years (10-year life) (12,000) 210,000
Consolidated buildings ................................................................. $720,000

5. C Hygille expense .............................................................................. $621,000


Nuyt expenses ................................................................................ 714,000
Excess fair value amortization (70,000 10 yrs) .......................... 7,000
Consolidated expenses ................................................................. $1,342,000

6. B Combined revenues ....................................................................... $1,100,000


Combined expenses ...................................................................... (700,000)
Excess acquisition-date fair value amortization .......................... (15,000)
Consolidated net income ............................................................... $385,000
Less: noncontrolling interest ($85,000 40%) ............................. (34,000)
Consolidated net income to controlling interest ......................... $351,000

7. C

8. B

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9. A Amie, Inc. Fair value at January 1, 2007:


30% previously owned fair value (30,000 shares $5) ................ $150,000
60% new shares acquired (60,000 shares $6) ............................ 360,000
10% NCI fair value (10,000 shares $5) ........................................ 50,000
Acquisition-date fair value ............................................................. $560,000
Net assets' fair value ...................................................................... 500,000
Goodwill ......................................................................................... $60,000

10. C

11. A Fair value of noncontrolling interest on April 1 ........................... $165,000


30% of net income for 9 months ( year $240,000 30%) ....... 54,000
Noncontrolling interest December 31 ........................................... $219,000

12. B Combined revenues ....................................................................... $1,300,000


Combined expenses ...................................................................... (800,000)
Trademark amortization ................................................................. (6,000)
Patented technology amortization ................................................ (8,000)
Consolidated net income ............................................................... $486,000

13. C Subsidiary income ($100,000 $14,000 excess amortizations) .. $86,000


Noncontrolling interest percentage .............................................. 40%
Noncontrolling interest in subsidiary income .............................. $34,400
Fair value of noncontrolling interest at acquisition date ............ $180,000
40% change in Scott book value since acquisition ..................... 52,000
Excess fair value amortization ($14,000 40%) ........................... (5,600)
40% current year income ............................................................... 34,400
Noncontrolling interest at end of year .......................................... $260,800

14. A Michael trademark balance ............................................................ $260,000


Scott trademark balance ................................................................ 200,000
Excess fair value ............................................................................ 60,000
Two years amortization (10-year life) ............................................ (12,000)
Consolidated trademarks .............................................................. $508,000

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15. A Acquisition-date fair value ($60,000 80%) .................................. $75,000


Strand's book value ...................................................................... (50,000)
Fair value in excess of book value ............................................... $25,000
Excess assigned to inventory (60%) ................................$15,000
Excess assigned to goodwill (40%) .................................$10,000
Park current assets ........................................................................ $70,000
Strand current assets..................................................................... 20,000
Excess inventory fair value ........................................................... 15,000
Consolidated current assets ......................................................... $105,000

16. D Park noncurrent assets .................................................................. $90,000


Strand noncurrent assets .............................................................. 40,000
Excess fair value to goodwill ........................................................ 10,000
Consolidated noncurrent assets ................................................... $140,000

17. B Add the two book values and include 10% (the $6,000 current portion) of
the loan taken out by Park to acquire Strand.

18. B Add the two book values and include 90% (the $54,000 noncurrent portion)
of the loan taken out by Polk to acquire Strand.

19. C Park stockholders' equity .............................................................. $80,000


Noncontrolling interest at fair value (20% $75,000) .................. 15,000
Total stockholders' equity ............................................................. $95,000

20. (15 minutes) (Compute consolidated income and noncontrolling interests)

2009 2010
Harrison income ............................................................ $220,000 $260,000
Starr income .................................................................. 70,000 90,000
Excess fair value amortization ..................................... (8,000) (8,000)
Consolidated net income .............................................. $282,000 $342,000

Starr fair value ................................................................................ $1,200,000


Fair value of consideration transferred ........................................ 1,125,000
Noncontrolling interest fair value ................................................. $75,000

Noncontrolling interest fair value January 1, 2009 (above) .......... $75,000


2009 income to NCI ([$70,000 $8,000] 10%)................................ 6,200
2009 dividends to NCI ................................................................... (3,000)
Noncontrolling interest reported value December 31, 2009 ........ 78,200
2010 income to NCI ([$90,000 $8,000] 10%)................................ 8,200
2010 dividends to NCI ................................................................... (3,000)
Noncontrolling interest reported value December 31, 2010 $83,400

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21. (40 minutes) (Several valuation and income determination questions for a
business combination involving a noncontrolling interest.)

a. Business combinations are recorded generally at the fair value of the


consideration transferred by the acquiring firm plus the acquisition-date fair
value of the noncontrolling interest.

Pattersons consideration transferred ($31.25 80,000 shares) ......... $2,500,000


Noncontrolling interest fair value ($30.00 20,000 shares) ................ $600,000
Sorianos total fair value 1/1/09 .......................................................... $3,100,000

b. Each identifiable asset acquired and liability assumed in a business


combination should initially be reported at its acquisition-date fair value.

c. In periods subsequent to acquisition, the subsidiarys assets and liabilities are


reported at their acquisition-date fair values adjusted for amortization and
depreciation. Except for certain financial items, they are not continually
adjusted for changing fair values.

d. Sorianos total fair value 1/1/09 .......................................................... $3,100,000


Sorianos net assets book value ........................................................ 1,290,000
Excess acquisition-date fair value over book value.......................... $1,810,000
Adjustments from book to fair values ................................................
Buildings and equipment .................................... (250,000)
Trademarks........................................................... 200,000
Patented technology ............................................ 1,060,000
Unpatented technology ....................................... 600,000 1,610,000
Goodwill ......................................................................................... $ 200,000

e. Combined revenues ............................................................................ $4,400,000


Combined expenses ............................................................................ (2,350,000)
Building and equipment excess depreciation ................................... 50,000
Trademark excess amortization ......................................................... (20,000)
Patented technology amortization ..................................................... (265,000)
Unpatented technology amortization ................................................. (200,000)
Consolidated net income .................................................................... $1,615,000

To noncontrolling interest:
Sorianos revenues ........................................................................ $1,400,000
Sorianos expenses ........................................................................ (600,000)
Total excess amortization expenses (above) ............................... (435,000)
Sorianos adjusted net income...................................................... $365,000
Noncontrolling interest percentage ownership ........................... 20%
Noncontrolling interest share of consolidated net income ......... $73,000

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To controlling interest:
Consolidated net income ............................................................... $1,615,000
Noncontrolling interest share of consolidated net income ......... (73,000)
Controlling interest share of consolidated net income ............... $1,542,000

-OR-

Pattersons revenues ..................................................................... $3,000,000


Pattersons expenses..................................................................... 1,750,000
Pattersons separate net income................................................... $1,250,000
Pattersons share of Sorianos adjusted net income
(80% $365,000) .................................................................. 292,000
Controlling interest share of consolidated net income ............... $1,542,000

f. Fair value of noncontrolling interest January 1, 2009....................... $600,000


2009 income ......................................................................................... 73,000
Dividends (20% $30,000) .................................................................. (6,000)
Noncontrolling interest December 31, 2009....................................... $ 667,000

g. If Sorianos acquisition-date total fair value was $2,250,000, then a bargain


purchase has occurred.

Sorianos total fair value 1/1/09 .......................................................... $2,250,000


Collective fair values of Sorianos net assets ................................... $2,300,000
Bargain purchase ................................................................................ $50,000

The acquisition method requires that the subsidiary assets acquired and
liabilities assumed be recognized at their acquisition date fair values
regardless of the assessed fair value. Therefore, none of Sorianos identifiable
assets and liabilities would change as a result of the assessed fair value.
When a bargain purchase occurs, however, no goodwill is recognized.

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22. (20 Minutes) (Determine consolidated income balances, includes a mid-year


acquisition)

a. Acquisition-date total fair value ......................... $594,000


Book value of net assets ..................................... (400,000)
Fair value in excess of book value .................... $194,000 Annual Excess
Excess fair value assigned to Life Amortizations
Patent ......................................................... 140,000 5 years $28,000
Land ......................................................... 10,000
Buildings ....................................................... 30,000 10 years 3,000
Goodwill ........................................................ 14,000
Total ......................................................... -0- $31,000

Consolidated figures following January 1 acquisition date:


Combined revenues ........................................................................... $1,500,000
Combined expenses ............................................................................ (1,031,000)
Consolidated net income .................................................................... 469,000
NCI in Sawyers income ([200,000 31,000] 30%) ............................. (50,700)
Controlling interest in consolidated net income .............................. $418,300

b. Consolidated figures following April 1 acquisition date:


Combined revenues (1) ....................................................................... $1,350,000
Combined expenses (2) ....................................................................... (923,250)
Consolidated net income ................................................................... $426,750
Noncontrolling interest in subsidiary income (3) .............................. (38,025)
Controlling interest in consolidated net income .............................. $388,725

(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues


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

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23. (15 minutes) Consolidated figures with noncontrolling interest

Fair value of company (given) $60,000


Book value (10,000)
Fair value in excess of book value 50,000
to machine ($50,000 $10,000) 40,000 10 = $4,000 per year
to process trade secret $10,000 4 = 2,500 per year
$6,500 per year
Consolidated figures:

Noncontrolling interest in subsidiary income


= 40% ($50,000 revenues less $26,500 expenses) = $9,400
End-of-year noncontrolling interest:
Beginning balance (40% $60,000) $24,000
Income allocation 9,400
Dividend reduction (40% $5,000) (2,000)
End-of-year noncontrolling interest $31,400
Machine (net) = $45,000 ($9,000 book value plus $40,000 excess
allocation less $4,000 excess depreciation for one year).
Process trade secret (net) = $10,000 $2,500 = $7,500

24. (20 Minutes) (Determine consolidated balances for a step acquisition).

a. Amsterdam fair value implied by price paid by Morey


$560,000 70% = $800,000
b. Revaluation gain
1/1 equity investment in Amsterdam (book value) $178,000
25% income for 1st 6 months 8,750
Investment book value at 6/30 186,750
Fair value of investment 200,000
Gain on revaluation to fair value $13,250
c. Goodwill at 12/31
Fair value of Amsterdam at 6/30 $800,000
Book value at 6/30 (700,000 + [70,000 2]) 735,000
Excess fair value $65,000
Allocation to goodwill (no impairment) $65,000
d. Noncontrolling interest
5% fair value balance at 6/30 $40,000
5% Income from 6/30 to 12/31 1,750
5% dividends (1,000)
Noncontrolling interest 12/31 $40,750

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25. (30 Minutes) (Reporting the sale of a portion of an investment in a subsidiary.)


a. The 1,000 shares sold are reported using the equity method for the
January 1, 2011 until October 1, 2011 period. This stock represents 10
percent of the outstanding shares of Santana. An accrual of $9,000 is
recorded by Girardi (10% $120,000 year) reduced by $1,500 in
amortization expense as computed below. Therefore, an "Equity Income
from Sold Shares of Santana" in the amount of $7,500 will appear in the
2011 consolidated income statement. The consolidation will now
include all of Santana's accounts with the 40% noncontrolling interest
recognized.
Santana fair value 1/1/09 .......................................... $1,100,000
Santana book value ................................................. (1,030,000)
Patent ........................................................................ $70,000
Life of patent ............................................................ 5 years
Annual amortization ................................................. $14,000
9-months amortization for the 1,000 shares sold:
Annual amortization ................................................. $14,000
Time period involved ............................................... year
Amortization for nine months ................................. $10,500
Shares sold1,000 out of 7,000 .............................. 1/7
Amortization relating to sold shares ...................... $1,500
b. As long as control is maintained, the acquisition method considers
transactions in the stock of a subsidiary, whether purchases or sales,
as transactions in the equity of the consolidated entity.

Investment Book Value 10/1/11


1/1/11 balance (givenequity method) .................. $1,085,000
Recognition of 1/1/1110/1/11 period:
Income accrual ($120,000 70% ) ................ 63,000
Dividends ($40,000 70% ) .......................... (21,000)
Amortization ($14,000 ) ................................. (10,500)
Correct investment book value10/1/11 ................. $1,116,500
Computation of Income EffectSales Transaction
10/1/11 book value (above) ...................................... $1,116,500
Portion of investment sold (1,000/7,000 shares) .... 1/7
Book value of investment sold ............................... $159,500
Proceeds ................................................................... 191,000
Credit to Girardis additional paid-in capital .......... $ 31,500

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c. Because Girardi continues to hold 6,000 shares of Santana, control is


still maintained and consolidated financial statements would be
appropriate with a noncontrolling interest of 40 percent.

26. (35 Minutes) (Consolidation entries and the effect of different investment
methods)
a. From the original fair value allocation, $30,000 is assigned based on the
fair value of the patent. With a 5-year life, excess amortization will be
$6,000 per year.
Because the equity method is in use, no Entry *C is required.
Entry S
Common Stock (Bandmor) ........................... 300,000
Retained Earnings, 1/1/11(Bandmor) ............ 268,000
Investment in Bandmor (70%) ................. 397,600
Noncontrolling Interest in Bandmor, 1/1/11 170,400
(To eliminate stockholders' equity accounts of subsidiary and
recognize outside ownership. Retained earnings figure includes 2009
and 2010 income and dividends.)
Entry A
Patent ............................................................. 18,000
Goodwill ......................................................... 190,000
Investment in Bandmor ............................ 145,600
Noncontrolling Interest in Bandmor (30%) 62,400
(To recognize unamortized portions of acquisition-date fair value
allocations. Patent has undergone two years amortization)
Entry I
Equity in Subsidiary Earnings ...................... 72,800
Investment in Bandmor ............................ 72,800
(To eliminate intercompany income balance. Equity accrual of
$72,800 [70% ($110,000 6,000 amortization)] has been recorded)
Entry D
Investment in Bandmor ................................. 42,000
Dividends Paid .......................................... 42,000
(To eliminate current intercompany dividend transfers70% of
$60,000)
Entry E
Amortization Expense .................................... 6,000
Patent ......................................................... 6,000
(To recognize amortization for current year)

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

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26. (continued)
b. If the initial value method had been applied, the parent would have
recorded only the dividends received as income rather than an equity
accrual. Therefore, Entry *C is needed to adjust the parent's beginning
retained earnings for 2011 to the equity method. During 2009 and 2010,
the subsidiary earned a total net income of $171,000 but paid dividends
of only $83,000. The parent's share of the difference is $61,600 (70% of
$88,000 [$171,000 - $83,000]). In addition, the parents 70% share of
excess amortization expense for two years must also be included
($8,400 = 2 years $6,000 per year 70%). The net amount to be
recognized is $53,200 ($61,600 - $8,400).
ENTRY *C
Investment in Bandmor ................................. 53,200
Retained Earnings, 1/1/11 ........................ 53,200
c. If the partial equity method had been applied, only the excess
amortization expenses for the previous two years would have been
omitted from the parent's retained earnings. As shown above, that
figure is $8,400 (2 years $6,000 per year 70%).
ENTRY *C
Retained Earnings, 1/1/11 ............................. 8,400
Investment in Bandmor ............................ 8,400
d. Noncontrolling interest in Bandmor's income2011
[($110,000 6,000) 30%] ............................. $31,200

Noncontrolling interest fair value January 1, 2009 $210,000


Adjustments to original basis:
2009 Net Income to NCI ..................................... $20,700
Dividends paid .......................................... (11,700) 9,000

2010 Net income to NCI .................................... $27,000


Dividends paid .......................................... (13,200) 13,800

2011 Net income to NCI ..................................... $31,200


Dividends paid .......................................... (18,000) 13,200
Noncontrolling interest in Bandmor 12/31/11 .... $246,000
OR

Worksheet adjustment S .................................................... $170,400


Worksheet adjustment A .................................................... $62,400
2009 income to noncontrolling interest ........................... 31,200
2009 dividends to noncontrolling interest ....................... (18,000)
Noncontrolling interest in Bandmor 12/31/11 ................... $246,000

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4-16 Solutions Manual
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27. (45 Minutes) (Asks about several consolidated balances and consolidation
process. Includes the different accounting methods to record investment.)
a. Schedule 1Fair Value Allocation and Excess Amortizations
Consideration transferred by Miller ........ $664,000
Noncontrolling interest fair value ............ 166,000
Taylors fair value...................................... $830,000
Taylors book value................................... (600,000)
Fair value in excess of book value ......... 230,000 Annual Excess
Life Amortizations
Excess fair value assigned to buildings 80,000
20 years $4,000
Goodwill ................................................... $150,000 indefinite -0-
Total ...................................................... $4,000
b. $150,000 (see schedule 1 above)
c. Entry (S)
Common Stock (Taylor) ...................................... 300,000
Additional Paid-in Capital (Taylor) ..................... 90,000
Retained Earnings (Taylor) ................................. 210,000
Investment in Taylor Company (80%) ........... 480,000
Noncontrolling interest in Taylor (20%) ....... 120,000

Entry (A)
Buildings ............................................................. 80,000
Goodwill .............................................................. 150,000
Investment in Taylor Company (80%) ........... 184,000
Noncontrolling interest in Taylor (20%) ....... 46,000

d. (1) Equity Method


Income accrual (80%) .................................... $56,000
Excess amortization expense ....................... (3,200)
Investment income ................................... $52,800
(2) Partial Equity Method
Income accrual (80%) .................................... $56,000
(3) Initial Value Method
Dividends received (80%) .............................. $8,000
e. Equity Method
Initial fair value paid ............................................ $664,000
Income accrual 20092011 ($260,000 80%) .... 208,000
Dividends 20092011 ($45,000 80%) ............... (36,000)
Excess Amortizations 20092011 ($3,200 3) .. (9,600)
Investment in Taylor12/31/11 ..................... $826,400

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-17
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27. (continued)

Partial Equity Method


Investment in Taylor12/31/11 = $836,000 (initial value paid plus income
accrual of $208,000 less dividends of $36,000 [no excess amortizations])
Initial Value Method
Investment in Taylor12/31/11 = $664,000 (original value paid)

f. Using the acquisition method, the allocation will be the total difference
($80,000) between the buildings' book value and fair value. Based on a
20 year life, annual excess amortization is $4,000.
Miller book valuebuildings ............................. $800,000
Taylor book valuebuildings ............................ 300,000
Allocation ............................................................ 80,000
Excess Amortizations for 20092010 ($4,000 2) (8,000)
Consolidated buildings account ............. $1,172,000
g. Acquisition-date fair value allocated to goodwill
(see schedule 1 above) .................................. $150,000
h. If the parent has been applying the equity method, the stockholders'
equity accounts on its books will already represent consolidated totals.
The common stock and additional paid-in capital figures to be reported
are the parent balances only. As to retained earnings, the equity method
will properly record all subsidiary income and amortization so that the
parent balance is also a reflection of the consolidated total.

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28. (20 Minutes) (A variety of consolidated balances-midyear acquisition)


Book value of Reckers, 1/1
(stockholders' equity accounts) .............. $1,400,000
Increase in book value:
Net Income (revenues less cost of
goods sold and expenses) ................. $120,000
Dividends ............................................ (20,000)
Change during year ................................. $100,000
Change during first six months of year 50,000
Book value of Reckers, 7/1 (acquisition date) $1,450,000
Consideration transferred by Kaplan ........... $1,360,000
Noncontrolling interest fair value ................ 300,000
Reckers fair value (given) ............................. $1,630,000
Book value of Reckers ................................... (1,450,000)
Fair value in excess of book value ................ $180,000 Annual Excess
Excess fair value assigned Life Amortizations
Trademarks ................................................. 150,000 5 years $30,000
Goodwill ...................................................... $60,000 indefinite -0-
Total ......................................................... $30,000
CONSOLIDATION TOTALS:
Sales (1) $1,050,000
Cost of goods sold (2) 540,000
Operating expenses (3) 265,000
Net Income $245,000
Noncontrolling Interest in sub. Income (4) $9,000
(1) $800,000 Kaplan revenues plus $250,000 (post-acquisition subsidiary
revenue)
(2) $400,000 Kaplan COGS plus $140,000 (post-acquisition subsidiary COGS)
(3) $200,000 Kaplan operating expenses plus $50,000 (post-acquisition
subsidiary operating expenses) plus year excess amortization of $15,000
(4) 20% of post-acquisition subsidiary income less excess fair value
amortization [20% (120,000 30,000) year] = $9,000
Retained Earnings, 1/1 = $1,400,000 (the parents balance because the
subsidiary was acquired during the current year)
Trademark = $935,000 (add the two book values and the excess fair
value allocation after taking one-half year excess amortization)
Goodwill = $60,000 (the original allocation)

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-19
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29. (25 Minutes) (A variety of consolidated questions and balances)


a. Nascent applies the initial value method because the original price of
$414,000 is still in the Investment in Sea-Breeze account. In addition, the
Investment Income account is equal to 60 percent of the dividends paid
by the subsidiary during the year.
b. Consideration transferred in acquisition $414,000
Noncontrolling interest fair value ............ 276,000
Sea-Breeze fair value 1/1/09 .................... $690,000
Sea-Breeze book value 1/1/09 550,000
Excess fair value over book value $140,000
Excess fair assignments: Annual Excess
Life Amortizations
Buildings .............................................. 60,000 6 years $10,000
Equipment ............................................ (20,000) 4 years (5,000)
Patent ................................................... 100,000 10 years 10,000
Total .................................................... -0- $15,000
c. If the equity method had been applied, the Investment Income account
would show the basic equity accrual less amortization: 60% of (the
subsidiary's income of $90,000 less $15,000 excess fair value
amortization) = $45,000.
d. The initial value method recognizes neither the increase in the
subsidiary's book value nor the excess amortization expenses for prior
years. At the acquisition date, the subsidiarys book value was $550,000
as indicated by the assets less liabilities. At the beginning of the current
year, the book value of the subsidiary is $780,000 as indicated by
beginning stockholders' equity balances.
Increase in book value during prior years
($780,000 $550,000) .......................................................... $230,000
Less excess amortization ........................................................ (45,000)
Net increase in book value ....................................................... $185,000
Ownership ................................................................................ 60%
Increase required in parent's retained earnings, 1/1/12 ........ $111,000
Parent's retained earnings, 1/1/12 as reported ...................... 700,000
Parents share of consolidated retained earnings, 1/1/12 ...... $811,000
e. Consolidated net income and allocation
Revenues (add book values) $900,000
Expenses (add book values and excess amortization) (635,000)
Consolidated net Income $265,000
Noncontrolling interest in consolidated net income
($90,000 15,000) 40% 30,000
Controlling interest in consolidated net income $235,000

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29. (continued)

f. Consolidated buildings, 1/1/09 (subsidiary):


Book value ........................................................................... $300,000
Acquisition-date fair-value allocation ............................... 60,000
Consolidation figure ........................................................... $360,000
g. Consolidated buildings, 12/31/12:
Parent's book value ............................................................ $700,000
Subsidiary's book value ..................................................... 200,000
Original allocation .............................................................. 60,000
Amortization ($10,000 4 years) ........................................ (40,000)
Consolidated balance ......................................................... $920,000

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-21
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30. Acquisition Method Consolidated Balances

Adjustments
December 31, 2010 Pierson Steele & Eliminations NCI Consolidated
Revenues (1,843,000) (675,000) (2,518,000)
Cost of goods sold 1,100,000 322,000 1,422,000
Depreciation expense 125,000 120,000 245,000
Amortization expense 275,000 11,000 (E) 80,000 366,000
Interest expense 27,500 7,000 34,500
Equity in Steele Income (121,500) (I)121,500 -0-
Separate company
net income (437,000) (215,000)
Consolidated net income (450,500)
NCI in Steele Income (13,500) (13,500)
Controlling interest in CNI (437,000)

Retained Earnings 1/1 (2,625,000) (395,000) (S)395,000 (2,625,000)


Net Income (437,000) (215,000) (437,000)
Dividends paid 350,000 25,000 (D) 22,500 2,500 350,000
Retained Earnings 12/31 (2,712,000) (585,000) (2,712,000)

Current Assets 1,204,000 430,000 1,634,000


Investment in Steele 1,854,000 (D) 22,500 (S)769,500
(A)985,500 -0-
(I) 121,500
Customer base -0- -0- (A)720,000 (E) 80,000 640,000
Buildings and Equipment 931,000 863,000 1,794,000
Copyrights 950,000 107,000 1,057,000
Goodwill (A)375,000 375,000
Total Assets 4,939,000 1,400,000 5,500,000

Accounts Payable (485,000) (200,000) (685,000)


Notes Payable (542,000) (155,000) (697,000)
NCI in Steele (S) 85,500
(A)109,500 (195,000)
(206,000) (206,000)
Common Stock (900,000) (400,000) (S)400,000 (900,000)
Additional Paid-In Capital (300,000) (60,000) (S) 60,000 (300,000)
Retained Earnings 12/31 (2,712,000) (585,000) (2,712,000)
Total Liab. and SE (4,939,000) (1,400,000) (5,500,000)

Fair value of Steele Company (1,710,000 90%) $1,900,000


Carrying amount acquired 725,000
Excess fair value 1,175,000
to customer base 800,000
to goodwill $375,000

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30. (Continued)
Controlling Noncontrolling
Interest Interest
Fair value at acquisition date $1,710,000 $190,000
Relative fair values of identifiable net assets
90% and 10% of $1,525,000 (acquisition date
recorded fair value plus customer base) 1,372,500 152,500
Goodwill $337,500 $37,500

b. If the fair value of the noncontrolling interest was $152,500, both goodwill and
the noncontrolling interest balance would be reduced equally by $37,500 as
follows:

Fair value of Steele Company (1,710,000 + 152,500) $1,862,500


Carrying amount acquired 725,000
Excess fair value 1,137,500
to customer base 800,000
to goodwill $337,500

Noncontrolling interest balance beginning of year $(157,500)


Noncontrolling interest in consolidated net income (13,500)
Dividends paid to noncontrolling interest 2,500
Noncontrolling interest end of year $168,500

Controlling Noncontrolling
Interest Interest
Fair value at acquisition date $1,710,000 $152,500
Relative fair values of identifiable net assets
90% and 10% of $1,525,000 (acquisition date
recorded fair value plus customer base) 1,372,500 152,500
Goodwill $337,500 -0-

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-23
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31. (60 Minutes) (Consolidation worksheet and income statement with parent
using initial value method. Also consolidated balances with a control
premium paid by parent.)

a. Fair Value Allocation and Amortization


Consideration transferred by Krause............ $504,000
Noncontrolling interest fair value ................. 126,000
Leahy total fair value 1/1/09 ........................... $630,000
Leahy book value 1/1/09 ................................ (380,000)
Fair value in excess of book value ............... $250,000 Annual Excess
Life Amortizations
Excess price allocated to undervalued
Building ................................................ 45,000 5 years $9,000
Trademark .......................................... 60,000 10 years 6,000
Goodwill .................................................... $145,000 $15,000
Explanation of Consolidation Entries Found on Worksheet
Entry *C: Convert the parents 1/1/10 retained earnings balance from the
cash basis to the accrual basis.
Entry S: Eliminates stockholders' equity accounts of subsidiary while
recognizing noncontrolling interest balance (20%) as of the beginning of
the current year.
Entry A: Recognizes acquisition-date fair value allocations less 1 year
amortization for building and trademark and increases beginning
balance of the noncontrolling interest for its share.
Entry I: Eliminates Intercompany dividend payments recorded as income
by parent.
Entry E: Recognizes amortization expense for current year.
Columnar EntryRecognizes noncontrolling interest's share of
subsidiary's net income ($90,000 15,000) 20%).

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31. a. (continued) KRAUSE CORPORATION AND LEAHY, INC.


Consolidation Worksheet
For Year Ending December 31, 2010
Krause Leahy Consolidation Entries Noncontrolling Consolidated
Accounts Corporation Inc. Debit Credit Interest Totals
Sales (584,000) (250,000) (834,000)
Cost of goods sold 194,000 95,000 289,000
Operating expenses 246,000 65,000 (E) 15,000 326,000
Dividend income (16,000) ______ (I) 16,000 -0-
Separate company net income (160,000) (90,000)
Consolidated net income 219,000
NCI in Leahy's income (15,000) 15,000
Krauses interest in consolidated income (204,000)

Retained earnings, 1/1 (700,000) (350,000) (S)350,000 (*C) 44,000 (744,000)


Net income (above) (160,000) (90,000) (204,000)
Dividends paid 70,000 20,000 (I) 16,000 4,000 70,000
Retained earnings, 12/31 (790,000) (420,000) (878,000)

Current assets 296,000 191,000 487,000


Investment in Leahy 504,000 (*C) 44,000 (S)360,000 -0-
(A)188,000
Buildings and equipment (net) 680,000 390,000 (A) 36,000 (E) 9,000 1,097,000
Trademarks 100,000 144,000 (A) 54,000 (E) 6,000 292,000
Goodwill 0 0 (A)145,000 145,000
Total assets 1,580,000 725,000 2,021,000

Liabilities (470,000) (205,000) (675,000)


Common stock (320,000) (100,000) (S)100,000 (320,000)
Retained earnings, 12/31 (above) (790,000) (420,000) (878,000)
NCI in Leahy, 1/1 (S) 90,000
(A) 47,000 (137,000)
NCI in Leahy, 12/31 148,000 (148,000)
Total liabilities and equities (1,580,000) (725,000) (2,021,000)

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31. (continued)
b. KRAUSE CORPORATION AND LEAHY, INC.
Consolidated Income Statement
For Year Ending December 31, 2010
Sales $834,000
Cost of goods sold $289,000
Operating expenses 326,000
Total expenses 615,000
Consolidated net income $219,000
To 20% noncontrolling interest $15,000
To controlling interest $204,000
Consolidated Net income $219,000

c. Consideration transferred by Krause for 80% of Leahy $504,000


Noncontrolling interest fair value ($4.85 20,000 shares) 97,000
Leahy fair value $601,000
Fair value of Leahys underlying net assets 485,000
Goodwill $116,000

If the noncontrolling interest fair value was $4.85 per share at the acquisition
date, then goodwill declines to $116,000 and the noncontrolling interest total
would also decline from $149,000 to 120,000). Worksheet entries (S) and (A)
assuming a $4.85 noncontrolling interest acquisition-date fair value:

(S) Common stock-Leahy 100,000


Retained earnings- Leahy 1/1 350,000
Investment in Leahy 360,000
Noncontrolling interest 90,000

(A) Buildings and equipment (net) 36,000


Trademarks 54,000
Investment in Leahy 72,000
Noncontrolling interest 18,000
Goodwill 116,000
Investment in Leahy 116,000

Controlling Noncontrolling
Interest Interest
Fair value at acquisition date $504,000 $97,000
Relative fair values of identifiable net assets
80% and 20% of $485,000 (acquisition date
fair value of net identifiable assets) 388,000 97,000
Goodwill $116,000 -0-

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32. (40 Minutes) (Determine consolidated balances.)

Acquisition-date subsidiary fair value (given).... $850,000


Book value of subsidiary (given) ....................... (600,000)
Fair value in excess of book value ..................... $250,000
Allocations to specific accounts based on difference
between fair value and book value
Land ................................................................ $165,000
Buildings and equipment .............................. (25,000)
Copyright ........................................................ 100,000
Notes payable ................................................. 10,000 250,000
Total ...................................................... -0-

Annual excess amortizations:


Buildings and equipment [$(25,000) 10 years] $(2,500)
Copyright ($100,000 20 years) 5,000
Notes payable ($10,000 8 years) 1,250
Total $3,750

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

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

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32. (continued) Acquisition Method


Consolidation Entries Noncontrolling Consolidated
Accounts Father Sam Debit Credit Interest Totals
Revenues .......................................... (1,360,000) (540,000) (1,900,000)
Cost of goods sold .......................... 700,000 385,000 1,085,000
Depreciation expense ..................... 260,000 10,000 (E) 2,500 267,500
Amortization expense ..................... -0- 5,000 (E) 5,000 10,000
Interest expense .............................. 44,000 5,000 (E) 1,250 50,250
Equity in income of Sam ................ (105,000) -0- (I) 105,000 -0-
Separate company net income ...... (461,000) (135,000)
Consolidated net income ................ (487,250)
Noncontrolling interest in Sam's income (26,250) 26,250
Controlling interest in CNI ............. (461,000)
Retained earnings 1/1 .................... (1,265,000) (440,000) (S) 440,000 (1,265,000)
Net income (above) ......................... (461,000) (135,000) (461,000)
Dividends paid ................................ 260,000 65,000 (D) 52,000 13,000 260,000
Retained earnings 12/31 .......... (1,466,000) (510,000) (1,466,000)
Current assets ................................. 965,000 528,000 1,493,000
Investment in Sam .......................... 733,000 (D) 52,000 (S) 480,000
(I) 105,000
(A) 200,000 -0-
Land .................................................. 292,000 60,000 (A) 165,000 517,000
Buildings and equipment (net) ....... 877,000 265,000 (E) 2,500 (A) 25,000 1,119,500
Copyright ......................................... -0- 95,000 (A) 100,000 (E) 5,000 190,000
Total assets ............................... 2,867,000 948,000 3,319,500
Accounts payable ........................... (191,000) (148,000) (339,000)
Notes payable .................................. (460,000) (130,000) (A) 10,000 (E) 1,250 (581,250)
NCI in Sam 1/1 .................................. (S) 120,000
NCI in Sam 12/31 (A) 50,000 (170,000)
...................................................... (183,250) (183,250)
Common stock ................................ (300,000) (100,000) (S) 100,000 (300,000)
Additional paid-in capital ................ (450,000) (60,000) (S) 60,000 (450,000)
Retained earnings 12/31 (above) (1,466,000) (510,000) (1,466,000)
Total liab. and stockholders' equity (2,867,000) (948,000) (3,319,500)

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33. (55 Minutes) (Consolidated worksheet)

a. Consideration transferred by Adams $603,000


Noncontrolling interest fair value 67,000
Acquisition-date total fair value $670,000
Book value of Barstow (CS + RE 12/31/09) (460,000)
Excess fair value over book value $210,000
Annual Excess
Life Amortizations
Land $30,000
Buildings (20,000) 10 years ($2,000)
Equipment 40,000 5 years 8,000
Patents 50,000 10 years 5,000
Notes payable 20,000 5 years 4,000
120,000
Goodwill $90,000 indefinite -0-
Total $15,000
b. Because investment income is exactly 90 percent of Barstow's reported
earnings, Adams apparently is applying the partial equity method.
Explanation of Consolidation Entries Found on Worksheet
Entry *CConverts Adams's financial records from the partial equity
method to the equity method by recognizing amortization for 2010. Total
expense was $15,000 but only 90 percent (or $13,500) applied to the parent.
Entry SEliminates subsidiary's stockholders' equity while recording
noncontrolling interest balance as of January 1, 2011.
Entry ARecords unamortized allocation balances as of January 1, 2011.
The acquisition method attributes 10 percent of these amounts to the non-
controlling interest.
Entry IEliminates intercompany income accrual for 2011.
Entry DEliminates intercompany dividend transfers.
Entry ERecords amortization expense for current year.
Columnar EntryRecognizes noncontrolling interest's share of Barstow's
net income as follows:
Noncontrolling Interest in Barstow's Income (Columnar Entry)
Barstow reported income ............................................................. $120,000
Excess amortization expenses 2011 ............................................. (15,000)
Adjusted income of Barstow ................................................... $105,000
Noncontrolling interest ownership .............................................. 10%
Noncontrolling interest in Barstow's income ........................ $10,500

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33. b. (continued) ADAMS CORPORATION AND BARSTOW, INC.


Consolidation Worksheet-Acquisition Method
For Year Ending December 31, 2011 Noncontrolling Consolidated
Adams Corp. Barstow Inc. Debit Credit Interest Totals
Revenues (940,000) (280,000) (1,220,000)
Cost of goods sold 480,000 90,000 570,000
Depreciation expense 100,000 55,000 (E) 6,000 161,000
Amortization expense (E) 5,000 5,000
Interest expense 40,000 15,000 (E) 4,000 59,000
Investment income (108,000) (I) 108,000 -0-
Separate company net income (428,000) (120,000)
Consolidated net income (425,000)
Income to noncontrolling interest (10,500) 10,500
Income to controlling interest (414,500)
Retained earnings, 1/1 (1,367,000) (340,000) (C*) 13,500 (1,353,500)
(S) 340,000
Net income (428,000) (120,000) (414,500)
Dividends paid 110,000 70,000 (D) 63,000 7,000 110,000
Retained earnings, 12/31 (1,685,000) (390,000) (1,658,000)
Current assets 610,000 250,000 860,000
Investment in Barstow 702,000 (D) 63,000 (*C) 13,500 -0-
(S) 468,000
(A) 175,500
(I) 108,000
Land 380,000 150,000 (A) 30,000 560,000
Buildings 490,000 250,000 (E) 2,000 (A) 18,000 724,000
Equipment 873,000 150,000 (A) 32,000 (E) 8,000 1,047,000
Patents (A) 45,000 (E) 5,000 40,000
Goodwill (A) 90,000 90,000
Total assets 3,055,000 800,000 3,321,000
Notes payable (860,000) (230,000) (A) 16,000 (E) 4,000 (1,078,000)
Common stock (510,000) (180,000) (S) 180,000 (510,000)
Retained earnings, 12/31 (1,685,000) (390,000) (1,658,000)
(S) 52,000
Noncontrolling interest (A) 19,500 (71,500)
(75,000) (75,000)

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Total liabilities and stockholders' equity (3,055,000) (800,000) (3,321,000)

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34. (25 minutes) (Consolidated balances after a mid-year acquisition)


a. Investment account balance indicates the initial value method.
Consideration transferred ....................... $526,000
Noncontrolling interest fair value ........... 300,000
Duncan acquisition-date fair value ......... 826,000
Book value of Duncan (below) ................. (765,000)
Fair value in excess of book value ......... $61,000
Excess assigned Annual Excess
based on fair value: Life Amortizations
Equipment....................................... (30,000) 5 years $(6,000)
Goodwill ......................................... $91,000 indefinite -0-
Total ..................................................... $(6,000)
Amortization for 9 months ................. $(4,500)
Acquisition-Date Subsidiary Book Value
Book value of Duncan, 1/1/09 (CS + 1/1 RE) ........... $740,000
Increase in book value-net income (dividends
were paid after acquisition) ............................... $100,000
Time prior to purchase (3 months) ......................... 25,000
Book value of Duncan, 4/1/09 (acquisition date) ... $765,000
Consolidated Income Statement:
Revenues (1) $825,000
Cost of goods sold (2) $405,000
Operating expenses (3) 214,500 619,500
Consolidated net income 205,500
Noncontrolling interest in CNI (4) 28,200
Controlling interest in CNI $177,300
(1) $900,000 combined revenues less $75,000 (preacquisition subsidiary
revenue)
(2) $440,000 combined COGS less $35,000 (preacquisition subsidiary
COGS)
(3) $234,000 combined operating expenses less $15,000 (preacquisition
subsidiary operating expenses) less nine month excess overvalued
equipment depreciation reduction of $4,500
(4) 40% of post-acquisition subsidiary income less excess amortization
b. Goodwill = $91,000 (original allocation)
Equipment = $774,500 (add the two book values less $30,000
reduction to fair value plus $4,500 nine months excess
amortization)
Common Stock = $630,000 (parent company balance only)
Buildings = $1,124,000 (add the two book values)
Dividends Paid = $80,000 (parent company balance only)

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35. (40 minutes) Determine consolidated balance for a mid-year acquisition.

a. Consideration transferred by Truman ......... $720,000


Noncontrolling interest fair value ................ 290,000
Atlantas acquisition-date total fair value ..... $1,010,000
Book value of Atlanta ..................................... (840,000)
Fair value in excess of book value ................ $170,000 Annual Excess
Excess fair value assigned Life Amortizations
Patent ........................................................ 100,000 5 years $20,000
Goodwill ...................................................... $70,000 indefinite -0-
Total ......................................................... $20,000

b. Controlling Noncontrolling
Interest Interest
Fair values at acquisition date $720,000 $290,000
Relative fair values of identifiable net assets
70% and 30% of $940,000 (acquisition date
book value plus patent = net asset fair value) 658,000 282,000
Goodwill $62,000 $8,000

c. Initial value at acquisition date $720,000


Trumans share of Atlantas income for half year
([$120,000 20,000 amortization year] 70%) 35,000
Dividends 2009 ($80,000 year 70%) (28,000)
Investment account balance 12/31/09 $727,000

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35. (continued)
d. Consolidated Worksheet
Adjustments &
Truman Atlanta Eliminations NCI Cons.

Revenues (670,000) (400,000) (S)200,000 (870,000)


(E)
Operating Expenses 402,000 280,000 10,000 (S)140,000 552,000
Income of subsidiary (35,000) (I) 35,000 0
Separate company net income (303,000) (120,000)
Consolidated net income (318,000)
NCI in Atlanta's income (15,000) 15,000
Controlling interest in CNI (303,000)

(S)
Retained earnings, 1/1 (823,000) (500,000) 500,000 (823,000)
Net income (above) (303,000) (120,000) (303,000)
Dividends paid 145,000 80,000 (S) 40,000 12,000
(D) 28,000 145,000
Retained earnings, 12/31 (981,000) (540,000) (981,000)

Current assets 481,000 390,000 871,000


Investment in Atlanta 727,000 (D) 28,000 (S)588,000 0
(I) 35,000
(A)132,00
0
Land 388,000 200,000 588,000
Buildings 701,000 630,000 1,331,000
(A)
Patent 100,000 (E) 10,000 90,000
(A)
Goodwill 70,000 70,000
Total assets 2,297,000 1,220,000 2,950,000

Liabilities (816,000) (360,000) (1,176,000)


(S)
Common stock (95,000) (300,000) 300,000 (95,000)
Additional paid-in capital (405,000) (20,000) (S) 20,000 (405,000)
Retained earnings, 12/31 (981,000) (540,000) (981,000)
(A)
38,000 (290,000
Noncontrolling interest, 7/1 (S)252,000 )
Noncontrolling interest, 12/31 293,000 (293,000)
Total liabilities and (1,220,000
stockholders' equity (2,297,000) ) 1,263,000 1,263,000 (2,950,000)

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36. (60 minutes) (Consolidated statements for a step acquisition)

a. Fair value of Sysinger 1/1/10 (given) $1,750,000


Book value of Sysinger 1/1/10 (CS + APIC + RE) 1,300,000
Excess fair value over book value 450,000
To customer contract (4 year life) 400,000
To goodwill $50,000

b. Equity in earnings of Sysinger


2010 income (150,000 95%) $142,500
Amortization (100,000 95%) (95,000)
Equity in earnings of Sysinger $47,500

Revaluation of 15% block to fair value


Consideration transferred $184,500
2009 Income (100,000 15%) 15,000
2009 dividends (30,000 15%) (4,500)
Book value at 1/1/10 195,000
Fair value at 1/1/10 262,500
Gain on revaluation $67,500

Investment account balance 12/31/10


Fair value at 1/1/10 (15% block) $262,500
Consideration transferred 1/1/10 (80% block) 1,400,000
Equity earnings 2010
2010 income (95% 150,000) 142,500
Customer contract amortization (95,000) 47,500
Dividends 2010 (40,000 95%) (38,000)
Investment in Sysinger 12/31/10 $1,672,000

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36. (Continued) c. Allan and Sysinger


Consolidation Worksheet
For Year Ending December 31, 2010
Allan Sysinger Consolidation Entries Noncontrolling Consolidated
Accounts Company Company Debit Credit Interest Totals
Revenues (931,000) (380,000) (1,311,000)
Operating expenses 615,000 230,000 (E)100,000 945,000
Equity earnings of Sysinger (47,500) -0- (I) 47,500 -0-
Gain on revaluation (67,500) -0- (67,500)
Separate company net income (431,000) (150,000)
Consolidated net income (433,500)
NCI in Sysingers income (2,500) 2,500
Allans share of CNI (431,000)
Retained earnings, 1/1 (965,000) (600,000) (S) 600,000 (965,000)
Net income (431,000) (150,000) (431,000)
Dividends paid 140,000 40,000 (D) 38,000 2,000 140,000
Retained earnings 12/31 (1,256,000) (710,000) (1,256,000)
Current assets 288,000 540,000 828,000
Investment in Sysinger 1,672,000 -0- (D) 38,000 (S)1,235,000 -0-
(I) 47,500
(A) 427,500
Property, plant, and equipment 826,000 590,000 1,416,000
Patented technology 850,000 370,000 1,220,000
Customer contract -0- -0- (A) 400,000 (E) 100,000 300,000
Goodwill -0- (A) 50,000 50,000
Total assets 3,636,000 1,500,000 3,814,000
Liabilities (1,300,000) (90,000) (1,390,000)
Common stock (900,000) (500,000) (S) 500,000 (900,000)
Additional paid-in capital (180,000) (200,000) (S) 200,000 (180,000))
Retained earnings 12/31 (1,256,000) (710,000) (1,256,000)
NCI in Sysinger, 1/1 -0- -0- (S) 65,000
(A) 22,500 (87,500)
NCI in Sysinger, 12/31 -0- -0- (88,000) (88,000)
Total liab. and stockholders' equity (3,636,000) (1,500,000) 1,935,500 1,935,500 (3,814,000)

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37. (60 minutes) (Step acquisitioncontrol previously acquired.)

a. According to the acquisition method, the valuation basis for a subsidiary is


established on the date control is obtained, in this case January 1, 2009.
Subsequent acquisitions are valued consistent with this initial value after
adjusting the investment for subsidiary income and other changes.

Because subsequent acquisitions are considered as transactions in the parents


own equity, no gains or losses are recorded. Differences in cash paid and the
underlying value are recorded as adjustments to APIC.

Fair value of Keane Company 1/1/09 ($573,000 60%) $955,000


Keane income 2009 150,000
Excess fair value amortization for copyright (20,000)*
Keane dividends 2009 (80,000)
Initial fair value adjusted to 1/1/10 $1,005,000
Percent acquired in step acquisition 30%
Value assigned to 30% acquisition 301,500
Cash paid for the 30% acquisition 300,000
Credit to APIC from 30% step acquisition $1,500

*Fair value of Keane Company 1/1/09 ($573,000 60%) $955,000


Book value of Keane Company 1/1/09 (given) 810,000
Excess fair value over book value 145,000
To copyright (6 year life) 120,000
To goodwill $25,000

Entry to record 30% additional investment in Keane:

1/1/10 Investment in Keane 301,500


Cash 300,000
APIC from step acquisition 1,500

b. Investment in Keane Company 1/1/09 $573,000


2009 Equity earnings [60% (150,000 20,000)] 78,000
2009 Dividends received (60% $80,000) (48,000)
Additional acquisition of 30% interest 301,500
2010 Equity earnings [90% (180,000 20,000)] 144,000
2010 Dividends received (90% $60,000) (54,000)
Investment in Keane Company 12/31/10 $994,500

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37. (continued) part c. BRETZ, INC. AND KEANE COMPANY


Consolidation Worksheet
Year Ending December 31, 2010

Consolidation Entries Noncontrolling Consolidated


Accounts Bretz, Inc. Keane Co. Debit Credit Interest Totals
Revenues (402,000) (300,000) (702,000)
Operating expenses 200,000 120,000 (E) 20,000 340,000
Equity in Keanes income (144,000) (I) 144,000
Separate company net income (346,000) (180,000
Consolidated net income (362,000)
NCI in Keanes income (16,000) 16,000
Bretzs share of CNI (346,000)
Retained earnings, 1/1 (797,000) (500,000) (S) 500,000 (797,000)
Net income (above) (346,000) (180,000) (346,000)
Dividends paid 143,000 60,000 (D) 54,000 6,000 143,000
Retained earnings, 12/31 (1,000,000) (620,000) (1,000,000)
Current assets 224,000 190,000 414,000
Investment in Keane Company 994,500 (S) 792,000 0
(D)54,000 (A) 112,500
(I) 144,000

Trademarks 106,000 600,000 706,000


Copyrights 210,000 300,000 (A)100,000 (E) 20,000 590,000
Equipment (net) 380,000 110,000 490,000
Goodwill (A) 25,000 25,000
Total assets 1,914,500 1,200,000 2,225,000
Liabilities (453,000) (200,000) (653,000)
Common stock (400,000) (300,000) (S)300,000 (400,000)
Additional paid-in capital (60,000) (80,000) (S) 80,000 (60,000)
APIC-step acquisition (1,500) (1,500)
Retained earnings,12/31 (1,000,000) (620,000) (1,000,000)
(A) 12,500 (100,500)
Non-controlling interest 12/31 (S) 88,000 110,500 (110,500)
Total liabilities and equities (1,914,500) (1,200,000) 1,223,000 1,223,000 (2,225,000)

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38. (30 Minutes) (Determine consolidated balances when parent uses equity
method. Includes sale of a portion of the investment)
Purchase Price Allocation and Excess Amortizations
Purchase price ......................................... $250,000
Book value acquired
($230,000 70%) ................................. 161,000
Price in excess of book value ................. $89,000 Annual Excess
Allocation based on fair value ................. Life Amortizations
Land ($10,000 70%) $7,000
Equipment ($68,000 70%) 47,600 14 yrs. $3,400
Liabilities ($20,000 70%) 14,000 10 yrs. 1,400
68,600
Goodwill ................................................... $20,400 indefinite -0-
Total ......................................................... $4,800
The parent uses the equity method: Investment income of $44,200 =
$49,000 (70% $70,000) less $4,800 amortization expense.
Adjustments &
Bon Air Creedmoor Eliminations NCI Consolidated
Revenues (694,800) (250,000) (944,800)
Operating expenses 630,000 180,000 (E) 4,800 814,800
Investment income (44,200) -0- (I) 44,200 -0-
Noncontrolling int(E)erest in
Creedmoor income (21,000) 21,000
Net income (109,000) (70,000) (109,000)

Retained earnings, 1/1/09 (760,000) (260,000) (S)260,000 (760,000)


Net income (109,000) (70,000) (109,000)
Dividends paid 68,000 10,000 (D) 7,000 3,000 68,000
Retained earnings, 12/31/09 (801,000) (320,000) (801,000)

Current assets 72,000 120,000 192,000


Investment in Creedmoor 321,800 -0- (D) 7,000 (S)210,000
(I) 44,200 -0-
(A)74,600
Land 241,000 50,000 (A) 7,000 298,000
Buildings (net) 289,000 200,000 489,000
Equipment (net) 165,200 40,000 (A)37,400 3,400 239,200
Goodwill -0- -0- (A)20,400 20,400
Total assets 1,089,000 410,000 1,238,600

Liabilities (180,000) (50,000) (A) 9,800 (E) 1,400 (221,600)


Common stock (50,000) (40,000) (S) 40,000 (50,000)
Additional paid-in capital (58,000) -0- (58,000)
Noncontrolling interest 1/1/09 (S)90,000 (90,000)
Noncontrolling interest
12/31/09 108,000 (108,000)
Retained earnings, 12/31/09 (801,000) (320,000) (801,000)

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Total liabilities and equities (1,089,000) (410,000) 430,600 430,600 (1,238,600)

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39. (50 Minutes) (A variety of questions and consolidated balances for


combination where parent applies equity method)
a. Equity accrual (60% $70,000) .............................................. $42,000
Excess amortizations (below) ................................................ (5,600)
Equity income (parent uses equity method) .................... $36,400
Purchase Price Allocation and Excess Amortizations
Purchase price ......................................... $400,000
Book value acquired (60% of
$470,000 [assets minus liabilities]) .... 282,000
Price in excess of book value ................. $118,000
Excess price assigned to specific ........... Annual Excess
accounts based on fair value ................... Life Amortizations
Equipment (overvalued)
([$30,000] 60%) ................................. (18,000) 10 yrs. $(1,800)
Buildings ($155,000 60%) ................ 93,000 15 yrs. 6,200
Bonds payable ($20,000 60%) .......... 12,000 10 yrs. 1,200
Goodwill ................................................... $31,000 indefinite -0-
Total ..................................................... $5,600
b. No adjustment to the parent's retained earnings is needed because the
company is applying the equity method.
c. $5,600see a.
d. $28,00040% of $70,000 reported income figure
e. Watson Corporation
Consolidated Income Statement
For the Year Ended December 31, 2009

Revenues $920,000
Operating expenses 695,600
Combined entity net income 224,400
Noncontrolling interest in Houston income 28,000
Consolidated net income $196,400

Remaining
f. Excess Amortizations Allocations
Allocations (see a) for 4 years 12/31/09
Equipment (18,000) (7,200) (10,800)
Buildings 93,000 24,800 68,200
Bonds payable 12,000 4,800 7,200
Goodwill 31,000 -0- 31,000

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39. (continued)

g. Noncontrolling interest, 1/1/08 (40% of book value of $630,000) $252,000


Noncontrolling interest in subsidiary's income (see e) ............ 28,000
Noncontrolling interest in subsidiary's dividends .................... (16,000)
(40% $40,000)
Noncontrolling interest in subsidiary, 12/31/09 ........................ $264,000

h. Watson Corporation
Consolidated Balance Sheet
December 31, 2009

Current assets $475,000 Current liabilities $560,000


Bonds Payable 462,800
Equipment (net) 909,200 Noncontrolling interest 264,000
Buildings (net) 1,001,200 Common stock 310,000
Goodwill 31,000 Retained earnings 819,600
Total assets $2,416,400 Total liabilities and equity $2,416,400

40. (40 Minutes) (Determine consolidated balances, parent has applied the cost
method)

Acquisition price ........................................... $1,400,000


Book value acquired (see Schedule 1)
($1,120,000 80%) ......................................... 896,000
Cost in excess of book value ....................... $504,000
Annual Excess
Excess cost allocated to buildings based Life Amortizations
on fair value ($80,000 80%) ........................ 64,000 10 years $6,400
Unpatented technology ($550,000 80%) .... 440,000 10 years 44,000
Total ......................................................... $ -0- $50,400
Schedule 1Book Value of Morning (January 1, 2006)
Book value, January 1, 2009
(stockholders' equity accounts) .............. $1,500,000
2008 Increase in book value ......................... $200,000
2007 Increase in book value ......................... 100,000
2006 Increase in book value ......................... 80,000 380,000
Book value, January 1, 2006 ......................... $1,120,000
Revenues = $1,384,000 (add the two book values)
Expenses = $550,400 (add the two book values and then include $50,400
excess amortization expenses for the year as computed above)

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Noncontrolling interest in subsidiary's net income = $80,000 (20% of


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

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Total liabilities and equities = $5,002,400

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40. (continued)
Consolidated figures can also be determined through a worksheet as follows:
Consolidation Entries
Entry *C
Investment in Morning ........................................ 152,800
Retained Earnings, 1/1/09 Good ................... 152,800
(To recognize Good's share of Morning's increase in book value during the
2006-2008 period as well as the amortization expense for that same period.
Because the original $1,400,000 is still the balance in the investment in
Morning account, the parent is applying the cost method. Thus, 80% of
Morning's $380,000 increase in book value [$304,000] must be accrued.
Excess amortizations of $151,200 [$50,400 per year for these three years] is
also recorded leaving a net adjustment of $152,800.)
Entry S
Common Stock (Morning) .................................. 460,000
Additional Paid-in Capital (Morning) ................. 40,000
Retained Earnings, 1/1/09 (Morning) ................. 1,000,000
Investment in Morning (80%) ........................ 1,200,000
Noncontrolling Interest in Morning (20%) .... 300,000
(To eliminate subsidiary's stockholders' equity accounts while recording the
January 1, 2009 balance of the noncontrolling interest.)

Entry A
Buildings .............................................................. 44,800
Unpatented technology ...................................... 308,000
Investment in Morning .................................. 352,800
(To recognize unamortized amounts paid in connection with acquisition of
Morning. Original allocations have undergone three previous years of excess
amortizations.)
Entry I
Dividend Income ................................................. 96,000
Dividends Paid ............................................... 96,000
(To eliminate intercompany income accounts.)
Entry E
Operating Expenses ........................................... 50,400
Buildings ........................................................ 6,400
Unpatented technology .................................. 44,000
(To recognize amortization expenses for current year.)
Entry P
Liabilities ............................................................. 100,000
Receivables .................................................... 100,000
(To eliminate intercompany debt.)

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40. (continued) GOOD AND MORNING


Consolidation Worksheet
For Year Ending December 31, 2009
Consolidation Entries Noncontrolling Consolidated
Accounts Good Morning Debit Credit Interest Totals
Revenues (884,000) (500,000) (1,384,000)
Operating Expenses 400,000 100,000 (E) 50,400 550,400
Dividend Income (96,000) -0- (I) 96,000 -0-
NCI in Morning's income (20% 400,000) -0- -0- (80,000) 80,000
Net Income (580,000) (400,000) (753,600)
Retained earnings, 1/1
Good (1,800,000) (*C) 152,800 (1,952,800)
Morning (1,000,000) (S)1,000,000 -0-
Net income (above) (580,000) (400,000) (753,600)
Dividends paid 380,000 120,000 (I) 96,000 24,000 380,000
Retained earnings, 12/31 (2,000,000) (1,280,000) (2,326,400)
Cash 300,000 200,000 500,000
Receivables 700,000 400,000 (P) 100,000 1,000,000
Inventory 400,000 500,000 900,000
Investment in Morning 1,400,000 -0- (*C) 152,800 (S)1,200,000
(A) 352,800 -0-
Land 700,000 600,000 1,300,000
Buildings 300,000 700,000 (A) 44,800 (E) 6,400 1,038,400
Unpatented Technology -0- -0- (A) 308,000 (E) 44,000 264,000
Total assets 3,800,000 2,400,000 5,002,400

Liabilities (200,000) (620,000) (P) 100,000 (720,000)


Common stock (1,000,000) (460,000) (S) 460,000 (1,000,000)
Additional paid-in capital (600,000) (40,000) (S) 40,000 (600,000)
Retained earnings, 12/31 (above) (2,000,000) (1,280,000) (2,326,400)
NCI in Morning, 1/1 -0- -0- (S) 300,000 (300,000)
NCI in Morning, 12/31 -0- -0- (356,000) (356,000)
Total liabilities and stockholders' equity (3,800,000) (2,400,000) (5,002,400)

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009


Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-47
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Accounting Theory Research Case: Noncontrolling Interest


In deliberations prior to the issuance of SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, the FASB consider three alternatives for displaying
the noncontrolling interest in the consolidated statement of financial position.

What were these three alternatives?


1. As a liability
2. As equity
3. In the mezzanine area between liabilities and owners equity

What criteria did the FASB use to evaluate the desirability of each alternative?
The FASB evaluated whether the classifications conformed to current definitions of
financial statement elements (assets, liabilities, or equity) as articulated in FASB Concept
Statement No. 6.

In what specific ways did FASB Concept Statement 6 affect the FASBs evaluation of
these alternatives?
From SFAS 160 paragraphs 32-34
If it required that the noncontrolling interest be reported in the mezzanine, the
Board would have had to create a new elementnoncontrolling interest in
subsidiariesspecifically for consolidated financial statements. The Board
concluded that no compelling reason exists to create a new element
specifically for consolidated financial statements to report the interests in a
subsidiary held by owners other than the parent. The Board believes that using
the existing elements of financial statements along with appropriate labeling
and disclosure provides financial information in the consolidated financial
statements that is representationally faithful, understandable, and relevant to
the entitys owners, creditors, and other resource providers.

The Board concluded that a noncontrolling interest in a subsidiary does not


meet the definition of a liability in the Boards conceptual framework. Paragraph
35 of Concepts Statement 6 defines liabilities as probable future sacrifices of
economic benefits arising from present obligations of a particular entity to
transfer assets or provide services to other entities in the future as a result of
past transactions or events

The Board concluded that a noncontrolling interest represents the residual


interest in the net assets of a subsidiary within the consolidated group held by
owners other than the parent. The noncontrolling interest, therefore, meets the
definition of equity in Concepts Statement 6. Paragraph 49 of Concepts
Statement 6 defines equity (or net assets) as the residual interest in the
assets of an entity that remains after deducting its liabilities.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009


4-48 Solutions Manual
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Research and Communication Case

Memorandum
To: CFO, Allied Telecom Corporation
Re: Surefire Cell Corporation Noncontrolling Interest Valuation

You are correct in observing that the newly created 10 percent noncontrolling
interest in your recent acquisition, Surefire Cell, must be valued for presentation in
your consolidated financial statements. The acquisition-date fair value is the
required valuation basis for the noncontrolling interestusually provided by
market trading data. However, because the 10 percent shares do not appear to
be actively traded, a valuation alternative will need to be selected

According to SFAS 157, Fair Value Measurements, three main techniques are
available for the noncontrolling interest valuation: the market approach, the
income approach, and the cost approach.

The market approach involves obtaining fair values for similar assets or
businesses that are comparable to Surefire Cell. This valuation technique is
appropriate when such comparable firms with observable market values are
available.

The income approach values a firm by discounting the best available measures of
future benefits, typically cash flows or earnings. Often the income approach
requires both supportable assumptions and a sufficient number of inputs to create
an accurate forecasting model.

The cost approach looks to the replacement cost of the firms net assets (in
current condition) to value the firm. This approach requires ready market prices
for the firms assets and does not rely on estimates of future cash flows or
earnings. As such it is often the least accurate valuation method.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2009


Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-49