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Chapter 11

CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND


CORPORATE JOINT VENTURES

Answers to Questions

1 Parent-company theory is implemented under the assumptions that the consolidated statements will
benefit significantly for the parent stockholders and not the noncontrolling stockholders, hence it poses
problems in the case of less-than-100 percent-owned subsidiaries. Noncontrolling interest is viewed as
liability under the parent-company theory and similarly, the noncontrolling interest share is viewed as an
expense.

2 Under the parent-company theory, goodwill is calculated based on the % of ownerships against its
underlying equity and under the entity theory goodwill is calculated based on a 100% of implied fair value
of ownership. This means the amount of goodwill will be different. For example, A purchased 80% of B
for $500,000 when Bs equity is at $400,000. Assuming there are no fair value to book value difference of
Bs net assets, goodwill is calculated as follows:
Parent-company theory
Goodwill = $500,000 (80% * $400,000) = $180,000
Entity theory
Goodwill = ($500,000 / 80%) - $400,000 = $225,000

3 There are three similar relationships under the three different theories:
a. If book value of net assets is equal to the fair value, and investments is made at book value,
then the income statement amounts should be the same under the entity theory as under the
traditional theory.
b. The income statement amounts should also be the same under parent-company theory as
under traditional theory if no intercompany transactions occur.
c. If the ownerships is at 100%, the income statement amounts for all three theories should be
the same.

4 Consolidated assets are equal to their fair values under entity theory only when the book values of parent
assets are equal to their fair values. Otherwise, consolidated assets are not equal to their fair values under
either parent company or entity theories.

5 The valuation of the noncontrolling interest at book value might overstate the equity of noncontrolling
shareholders because of the limited marketability of shares held by noncontrolling stockholders and
because of the limited ability of noncontrolling stockholders to share in management through their voting
rights. Valuation of the noncontrolling interest at book value also overstates or understates the
noncontrolling interest unless the subsidiary assets are recorded at fair values.

6 Consolidated net income under parent company theory and income to the controlling stockholders under
entity theory should be the same. This is illustrated in Exhibit 115, which shows different income
statement amounts for cost of sales, operating expenses, and income allocated to noncontrolling
stockholders, but the same income to controlling stockholders. Note that consolidated net income under
parent company and traditional theories reflects income to controlling stockholders.

7 Income to the parent stockholders under the equity method of accounting is the same as income to the
controlling stockholders under entity theory. But income to controlling stockholders is not identified as
consolidated net income as it would be under parent company or traditional theories.

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11-2 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

8 Consolidated income statement amounts under entity theory are the same as under traditional theory when
subsidiary investments are made at book value because traditional theory follows entity theory in
eliminating the effects of intercompany transactions from consolidated financial statements.

9 Traditional theory corresponds to entity theory in matters relating to unrealized and constructive gains and
losses from intercompany transactions. In other words, unrealized and constructive gains and losses are
allocated between controlling and noncontrolling interests in the same manner under these two theories.

10 Push-down accounting simplifies the consolidation process. The push-down adjustments are recorded in
the subsidiarys separate books at the time of the business combination; thus, it is not necessary to allocate
the unamortized fair values in the consolidation working papers.

11 A joint venture is an entity that is owned, operated, and jointly controlled by a small group of investor-
venturers to operate a business for the mutual benefit of the venturers. Some joint ventures are organized
as corporations, while others are organized as partnerships or undivided interests. Each venturer typically
participates in important decisions of a joint venture irrespective of ownership percentage.

12 Investors in corporate joint ventures use the equity method of accounting and reporting for their
investment earnings and investment balances as required by GAAP. The cost method would be used only
if the investor could not exercise significant influence over the corporate joint venture. Alternatively,
investors in unincorporated joint ventures use the equity method of accounting and reporting or
proportional consolidation for undivided interests specified as a special industry practice.

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Chapter 11 11-3

SOLUTIONS TO EXERCISES

Solution E11-1

1 A 5 B
2 A 6 C
3 C 7 D
4 A

Solution E11-2

1 B 4 D
2 B 5 C
3 D

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11-4 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-3

1 c
Total value of Sit implied by purchase price $1,800,000
($1,440,000/.8)
Noncontrolling interest percentage 20%
Noncontrolling interest $360,000

2 a
Only the parents percentage of unrealized profits from upstream sales
is eliminated under parent company theory.

3 b
Subsidiarys income of $400,000 10% noncontrolling $ 40,000
interest
Less: Patent amortization ($140,000/10 years 10%) (1,400)
Noncontrolling interest share $ 38,600

4 a
Implied fair value $1,680,000 = patents at acquisition
Book value of 100% of identifiable net assets $1,680,000
Add: Patents at acquisition ($108,000/90%) 120,000
Total implied value 1,800,000
Percent acquired 80%
Purchase price under entity theory $1,440,000

5 b
Purchase price ($1,680,000 80%) = patents at acquisition
Book value $1,680,000 80% = underlying equity $1,344,000
Add: Patents at acquisition ($108,000/90%) 120,000
Purchase price (traditional theory) $1,464,000

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Chapter 11 11-5

Solution E11-4

1 Goodwill
Parent company theory
Cost of investment in Sad $ 500,000
Fair value acquired ($400,000 80%) 320,000
Goodwill $ 180,000
Entity theory
Implied value based on purchase price ($500,000/.8) $ 625,000
Fair value of Sads net assets 400,000
Goodwill $ 225,000

2 Noncontrolling interest
Parent company theory
Book value of Sads net assets $ 260,000
Noncontrolling interest percentage 20%
Noncontrolling interest $ 52,000
Entity theory
Total valuation of Sad $ 625,000
Noncontrolling interest percentage 20%
Noncontrolling interest $ 125,000

3 Total assets
Parent company theory
Pod Sad Adjustment Total
Current assets $ 20,000 $ 50,000 $ 40,000 80% $ 102,000
Plant assets net 480,000 250,000 110,000 80% 818,000
Goodwill 180,000
$500,000 $300,000 $1,100,000

Entity theory
Current assets $ 20,000 $ 50,000 $ 40,000 100% $ 110,000
Plant assets net 480,000 250,000 110,000 100% 840,000
Goodwill 225,000
$500,000 $300,000 $1,175,000

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11-6 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-5

1 Goodwill under entity theory $ 40,000


Undervalued plant assets $ 50,000
Excess over book value $ 90,000
Implied fair value (cost of interest $280,000 / 80%) $350,000
Book value of equity at 100% $260,000

Cost of 80% of interests $280,000


Underlying equity (80% x book value of equity) $208,000
Excess over book value $ 72,000
Undervalued plant assets (80% x $50,000) $(25,000)
Alllocated to goodwill under parent company theory $ 47,000

2 Preliminary computations

Ping's portion of Singh's income (80% x $50,000) $ 40,000


Depreciation of excess (5 years x 80%) $ (4,000)
Income from Singh $ 36,000

Equity theory
Ping's separate income $200,000
Income from Singh $ 36,000
Consolidated net income $236,000

Singh separate income $ 50,000


Depreciation of excess (10 years) $ (5,000)
Singh's income $ 45,000
Noncontrolling interest share (20%) $ 9,000

Parent company theory


Ping's separate income $200,000
Income from Singh $ 36,000
Consolidated net income $236,000

Noncontrolling interest share (20% x $50,000 Singh's


separate income) $ 10,000

Solution E11-6
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Chapter 11 11-7

Preliminary computation

Interest acquired in Sal: 36,000 shares 40,000 shares = 90%

1 Sals net assets under entity theory

Implied value from purchase price: $900,000/90% interest $1,000,000

2 Goodwill

a Entity theory
Implied value $1,000,000
Less: Fair value and book value of net assets 855,000
Goodwill $ 145,000

b Parent company theory


Cost of 90% interest $ 900,000
Fair values of net assets acquired ($855,000 90%) 769,500
Goodwill $ 130,500

c Traditional theory (same as parent theory) $ 130,500

3 Investment income from Sal

Income from Sal ($40,000 1/2 year 90% interest) $ 18,000

4 Noncontrolling interest under entity theory

Imputed value of Sal at July 1, 2012 $1,000,000


Add: Income for 1/2 year 20,000
1,020,000
Noncontrolling percentage 10%
Noncontrolling interest $ 102,000

Alternatively, $100,000 noncontrolling interest at July 1, plus $2,000


share of reported income = $102,000

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11-8 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-7

1 Parent company theory

Combined separate incomes of Pal and Sal $800,000


Less: Pals share of unrealized profits from upstream
inventory sales ($30,000 80%) (24,000)
Less: Noncontrolling interest share ($300,000 20%) (60,000)
Consolidated net income $716,000

2 Entity theory

Combined separate incomes $800,000


Less: Unrealized profits from upstream sales (30,000)
Total consolidated income $770,000

Income allocated to controlling stockholders ($500,000 +


[$270,000 80%]) $716,000

Income allocated to noncontrolling stockholders


($300,000 - $30,000) 20% $ 54,000

Solution E11-8

1 Parent company theory

Cost to investment (80%) $ 280,000


Underlying equity [80% x (common stock + retained
earnings)] $ 200,000
Excess of book value $ 80,000
Allocate excess to
Accounts receivables (80% x $50,000) $ 40,000
Inventory (80% x $20,000) $ 16,000
Plant assets (80% x $20,000) $ 16,000

Goodwill $ 8,000

Excess of book value $ 80,000


Less: Retained earnings $(50,000)
Push down capital $ 30,000

2 Entity theory

Implied fair value of cost to investment ($280,000 /


80%) $ 350,000
Book value of equity $ 250,000
Excess of book value $ 100,000
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Chapter 11 11-9

Allocate excess to
Accounts receivable $ 50,000
Inventory $ 20,000
Plant asssets $ 20,000

Goodwill $ 10,000

Excess of book value $100,000


Less: Retained earnings $(50,000)
Push down capital $ 50,000

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11-10 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-9 [Push-down accounting]

1 Push down under parent company theory


Retained earnings 800,000
Inventories 90,000
Land 450,000
Buildings net 270,000
Goodwill 360,000
Equipment 180,000
Other liabilities 90,000
Push down equity 1,700,000
To record revaluation of 90% of the net assets and elimination of
retained earnings as a result of a business combination with Pin
Corporation. Push down equity = ($600,000 fair value -- book value
differential 90%) + $360,000 goodwill + $800,000 retained
earnings.

2 Push down under entity theory


Retained earnings 800,000
Inventories 100,000
Land 500,000
Buildings net 300,000
Goodwill 400,000
Equipment net 200,000
Other liabilities 100,000
Push down equity 1,800,000
To record revaluation of 100% of the net assets and elimination of
retained earnings as a result of a business combination with Pin.
Push down equity = $600,000 fair value -- book value differential +
$400,000 goodwill + $800,000 retained earnings.

Solution E11-10

It is stated that all venturers have control over the corporation, this means
that each of the investments are to be consolidated using one line
consolidation, thus equity method is used.

Under equity method, the corporates income will be distributed in accordance


to the proportion of ownership:

Preliminary
computations
Retained earnings - beginning $ 500,000
Add: Net income for the year $ 300,000
Less: Dividend $ (50,000)
Retained earnings - ending $ 750,000
Common stock $8,000,000
Total stockholders' equity on December 31, 2014 $8,750,000

40% 25% 20% 15%


Corporate net $ 300,000
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Chapter 11 11-11

income
Stockholders'
equity $8,750,000
$ $
Income from Mill $ 120,000 $ 75,000 60,000 45,000
Investment on December 31, $ $1,312,50
2014 $ 3,500,000 $2,187,500 1,750,000 0

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11-12 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-11

In general, VIE accounting follows normal consolidation principles.


Under that approach, the noncontrolling interest share would be 90% of VIE
earnings, or $900,000. However, the intercompany fees must be allocated to the
primary beneficiary, not to noncontrolling interests. Therefore, in this case,
noncontrolling interest share would be 90% of $920,000, or $828,000.

Solution E11-12

As primary beneficiary, Pal must include Pot in its consolidated


financial staements. Additionally, Pal must make the following disclosures:
(a) the nature, purpose, size, and activities of the variable interest entity,
(b) the carrying amount and classification of consolidated assets that are
collateral for the variable interest entitys obligations, and (c) lack of
recourse if creditors (or beneficial interest holders) of a consolidated
variable interest entity have no recourse to the general credit of the primary
beneficiary.

Den will not consolidate Pot, since they are not the primary beneficiary. As
in traditional consolidations, only one firm consolidates a subsidiary.
However, since Den has a significant interest in Pot, they must disclose: (a)
the nature of its involvement with the variable interest entity and when that
involvement began, (b) the nature, purpose, size, and activities of the
variable interest entity, and (c) the enterprises maximum exposure to loss as
a result of its involvement with the variable interest entity. Den accounts
for the investment using the equity method.

Solution E11-13

According to GAAP, if an enterprise absorbs a majority of a variable


interest entitys expected losses and another receives a majority of expected
residual returns, the enterprise absorbing the losses is the primary
beneficiary and if condition one is also met. Laura meets condition one, since
as CEO, she had the power over economic decisions. Laura must consolidate the
variable interest entity. The contractual arrangement makes Laura the primary
beneficiary.

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Chapter 11 11-13

SOLUTION TO PROBLEMS

Solution P11-1
Preliminary Computations

Total stockhoolders' equity $ 450,000


Less: Preferred stock 1,000 shares
call $105 $(105,000)
Common stockholders' equity $ 345,000

Sung's income for common ($50,000 -


$10,000) $ 40,000
Pom's portion of Sung's separate
income $ 36,000
Less:
Realization of accounts receivable $ (9,000)
Realization of inventories $ (18,000)
Realization of plant assets $ (1,800)
Add: Realization of other current
assets $ 9,000
Income from Sung - common $ 16,200

1.
Parent company theory
Cost of investment 360,000
Underlying equity (90% x $345,000) $ 310,500
Excess over book value $ 49,500
Allocate excess to:
Accounts
receivables $ 9,000
Inventories $18,000
Other current
assets $(9,000)
Plant
assets $18,000
Total excess
allocated $ 36,000
Goodwill $ 13,500

Preferred stock -
Sung (-SE) $ 100,000
Retained earnings (-
SE) $ 5,000
Noncontrolling interest -
preferred (+SE) $ 105,000
To reclassify referred stock to
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11-14 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

noncontrolling interest

Income from Sung - common (-SE) $ 16,200


Dividends (-SE) $ 9,000
Investment in Sung (-A) $ 7,200
To eliminate income from Sung

Noncontrolling interest share - common (-


SE) $ 5,000
Dividends (-
SE) $ 1,000
Noncontrolling interest - common
(+SE) $ 4,000
To record noncontrolling interest share
( 10% x Sung's separate income $50,000)

Common stock (-SE) $ 220,000


Retained earnings (-
SE) $ 125,000
Unamortized excess
(+A) $ 49,500
Investment in Sung $ 360,000
Noncontrolling interest - common* $ 34,500
To eliminate equity accounts Under parent company theory, 10% of
excess is allocated to noncontrolling interest

Cost of Sales (E,


-SE) $ 18,000
Operating expense (E,
-SE) $ 9,000
Plant assets (+A) $ 18,000
Goodwill (+A) $ 13,500
Unamortized excess (-A) $ 49,500
Other current assets (-A) $ 9,000
To eliminate unamortized excess and allocate to net assets and
goodwill

2.

Entity theory
Implied fair value of cost of investment $ 400,000
Stockholders' equity $ 345,000
Excess over book value $ 55,000
Allocate excess to:
Accounts receivables $ 10,000

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Chapter 11 11-15

Inventories $ 20,000
Other current assets $(10,000)
Plant assets $ 20,000
Total excess allocated $ 40,000
Goodwill $ 15,000

All workpaper entries are the same with parent company theory, except for
these two:
Common stock (-SE) $ 220,000
Retained earnings (-SE) $ 125,000
Unamortized excess (+A) $ 55,000
Investment in Sung $ 360,000
Noncontrolling interest -
common $ 40,000
To eliminate equity accounts

Cost of Sales (E, -SE) $ 20,000


Operating expense (E, -SE) $ 10,000
Plant assets (+A) $ 20,000
Goodwill (+A) $ 15,000
Unamortized excess (-A) $ 55,000
Other current assets (-A) $ 10,000

To eliminate unamortized excess and allocate to net assets and goodwill

Solution P11-2

Preliminary calculations
Pus has control, so Pus needs to record using equity
method:

Income from Tod (50% x Tod's net


income) $ 15,000

Investment in Tod - beginning $300,000


Income from Tod $ 15,000
Investment in Tod - ending $315,000

Venture capital - beginning $600,000


Tod's net income $ 30,000
Venture capital - ending $630,000

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11-16 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Pus and Ventures


Proportional Consolidation Workpaper
For the year end December 31, 2014

Pus Tod Proportionate


Consolidation
Income Statement
Revenue
Sales $ 300,000 $ 130,000 $ 365,000
Income from Tod $ 15,000 $ 15,000
Total revenue $ 315,000 $ 130,000 $ 380,000
Expenses including
COGS $(100,000) $(100,000) $(150,000)
Net income $ 215,000 $ 30,000 $ 230,000

Balance Sheet
Other assets $ 800,000 $680,000 $1,140,000
Investment in Tod $ 315,000 $ 315,000
$
Total assets 1,115,000 $680,000 $1,455,000

Other liabilities $120,000 $ 50,000 $ 145,000


Common stock $500,000
Retained earnings $495,000
Venture Capital $630,000 $ 315,000
Total Liabilities $
and Equity 1,115,000 $680,000 $1,455,000

Solution P11-3

Parent company theory


1a Income from Sin for 2012 ($180,000 70%) $126,000

1b Goodwill at December 31, 2012 $140,000


($1,190,000 cost - $1,050,000 fair value)

1c Consolidated net income for 2012

Pals separate income $600,000


Add: Income from Sin 126,000 $726,000

1d Noncontrolling interest share for 2012

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Chapter 11 11-17

Net income of Sin of $180,000 30% $ 54,000

1e Noncontrolling interest December 31, 2012

Sins stockholders equity $1,580,000 30% $474,000

Entity theory

2a Income from Sin for 2012 ($180,000 70%) $126,000

2b Goodwill at December 31, 2012

Imputed value ($1,190,000/70%) $1,700,000


Fair value of Sins net assets 1,500,000
Goodwill $ 200,000

2c Total consolidated income for 2012

Income to controlling stockholders ($600,000 + $126,000) $726,000


Add: Noncontrolling interest share ($180,000 30%) 54,000
Total consolidated income $780,000

2d Noncontrolling interest share (computed in 2c above) $ 54,000

2e Noncontrolling interest at December 31, 2012

(Book equity $1,580,000 + $200,000 goodwill) 30% $534,000

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11-18 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-4

Preliminary computations
Parent company theory
Investment in Sam $2,240,000
Fair value of 80% interest acquired ($2,400,000 80%) 1,920,000
Goodwill $ 320,000

Entity Theory
Implied value of Sam ($2,240,000/.8) $2,800,000
Fair value of identifiable net assets 2,400,000
Goodwill $ 400,000

Pit used an incomplete equity method in accounting for its investment in Sam.
It ignored the intercompany upstream sales of inventory. Income from Sam on an
equity basis would be:
Share of Sams income ($500,000 .8) $ 400,000
Less: Unrealized profits in ending inventory from
upstream sale ($80,000 50% 80%) (32,000)
Income from Sam $ 368,000

Pit Corporation and Subsidiary


Comparative Consolidated Income Statements
for the year ended December 31, 2012
(in thousands)
Parent
Traditional Company Entity
Theory Theory Theory
Sales($10,000 - $230) $9,770 $9,770 $9,770
Less: Cost of sales
($5,750 - $230 + $32) (5,552)
($5,750 - $230 + $40) (5,560) (5,560)
Gross profit 4,210 4,218 4,210

Expenses (2,000) (2,000) (2,000)

Noncontrolling interest share


$500 20% (100)
($500 - $40) x 20% (92)
Consolidated net income $2,118 $ 2,118 ________
Total consolidated income $ 2,210
Allocated to controlling
Stockholders $ 2,118
Allocated to noncontrolling
Stockholders
($500 - $40) 20% $ 92

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Chapter 11 11-19

Solution P11-4 (continued)

Pit Corporation and Subsidiary


Comparative Statements of Retained Earnings
for the year ended December 31, 2012
(in thousands)

Parent
Traditional Company Entity
Theory Theory Theory
Retained earnings December 31, 2011 $ 3,600 $ 3,600 $ 3,600
Add: Consolidated net income 2,118 2,118
Add: Net income to controlling 2,118
stockholders
5,718 5,718 5,718
Less: Dividends to controlling (1,200) (1,200) (1,200)
stockholders
Retained earnings December 31, 2012 $ 4,518 $ 4,518 $ 4,518

Pit Corporation and Subsidiary


Comparative Consolidated Balance Sheets
at December 31, 2012
(in thousands)

Parent
Traditional Company Entity
Theory Theory Theory
Assets
Cash $ 1,108 $ 1,108 $ 1,108
Accounts receivable 1,200 1,200 1,200
Inventory 1,960 1,968 1,960
Land 2,800 2,800 2,800
Buildings net 8,400 8,400 8,400
Goodwill 320 320 400
Total assets $ 15,788 $ 15,796 $ 15,868

Liabilities
Accounts payable $ 2,758 $ 2,758 $ 2,758
Noncontrolling interest 520
Total liabilities 2,758 3,278 2,758

Stockholders equity
Capital stock 8,000 8,000 8,000
Retained earnings 4,518 4,518 4,518
Noncontrolling interest 512 592
Total stockholders equity 13,030 12,518 13,110
Total equities $ 15,788 $ 15,796 $ 15,868

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11-20 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-5

Pad Corporation and Subsidiary


Comparative Balance Sheets
at December 31, 2012

Traditional Entity
Theory Theory
Assets
Cash $ 70,000 $ 70,000
Receivables net 110,000 110,000
Inventories 120,000 120,000
Plant assets net 300,000 300,000
Goodwill 40,000 50,000
Total assets $640,000 $650,000

Liabilities
Accounts payable $ 95,000 $ 95,000
Other liabilities 25,000 25,000
Total liabilities 120,000 120,000

Stockholders equity
Capital stock 300,000 300,000
Retained earnings 194,000 194,000
Noncontrolling interest
($150,000 - $20,000) 20% 26,000
($150,000 + $50,000 - $20,000) 20% 36,000
Total stockholders equity 520,000 530,000
Total equities $640,000 $650,000

Supporting computations Traditional Entity


Theory Theory
Cost or imputed value $128,000 $160,000
Book value of 80% 88,000
Book value of 100% 110,000
Goodwill $ 40,000 $ 50,000

Investment cost $128,000


Add: 80% of retained earnings increase
($50,000 - $10,000) 80% 32,000
Less: 80% of $20,000 unrealized profits (16,000)
Investment balance $144,000

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Chapter 11 11-21

Solution P11-6 [AICPA adapted]

1 P carries its investment in S on a cost basis. This is evidenced by the


appearance of dividend revenue in P Companys income statement and by
the absence of income from subsidiary.

2 P holds 1,400 shares of S. P Companys percentage ownership is 70%, as


determined by the relationship of P Companys dividend revenues and S
Companys dividends paid ($11,200/$16,000). S has 2,000 outstanding
shares ($200,000/$100) and P holds 70% of these, or 1,400 shares.

3 S Companys retained earnings at acquisition were $100,000.

Imputed value of S ($245,000 cost/70%) $ 350,000


Less: Patents (applicable to 100%) (50,000)
Book value and fair value of Ss identifiable net assets 300,000
Less: Capital stock (200,000)
Retained earnings $ 100,000

4 The nonrecurring loss is a constructive loss on the purchase of P bonds


by S Company.

Working paper entry:


Mortgage bonds payable (5%) 100,000
Loss on retirement of P bonds 3,000
P bonds owned 103,000
To eliminate intercompany bond investment and bonds payable and to
recognize a loss on the constructive retirement of P bonds.

5 Intercompany sales P to S are $240,000 computed as follows:

Combined sales ($600,000 + $400,000) $1,000,000


Less: Consolidated sales 760,000
Intercompany sales $ 240,000

6 Yes, there are other intercompany debts:


Intercompany
Combined Consolidated Balances
Cash and receivables $143,000 $97,400 $ 45,600
Current payables 93,000 53,000 40,000
Dividends payable 18,000 12,400 5,600

S Company owes P Company $40,000 on intercompany purchases and P Company


owes S Company $5,600 dividends.

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11-22 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-6 (continued)

7 Adjustment to determine consolidated cost of goods sold:

Consolidated Cost of Goods Sold


Combined cost of goods $640,000 $240,000 Intercompany purchases
Sold
Unrealized profit in Unrealized profit in
ending inventory 8,000 5,000 beginning inventory
403,000 To balance
$648,000 $648,000
Consolidated cost of
goods sold $403,000

Unrealized profit in ending inventory is equal to the combined less


consolidated inventories ($130,000 - $122,000).
Unrealized profit in beginning inventory is plugged as follows:
($640,000 + $8,000) - ($240,000 + $403,000) = $5,000

8 Noncontrolling interest share of $8,700 is computed as follows:

Net income of S $ 34,000


Less: Patent amortization ($50,000/10 years) 5,000
Adjusted income of S 29,000
Noncontrolling interest percentage 30%
Noncontrolling interest share $ 8,700

9 Noncontrolling interest of $117,000 at the balance sheet date is


computed:

Stockholders equity of S Company $360,000


Add: Unamortized patents 30,000
Equity of S plus unamortized patents 390,000
Noncontrolling interest percentage 30%
Noncontrolling interest on balance sheet date $117,000

10 Consolidated retained earnings

Retained earnings of P at end of year $200,000


Add: Ps share of increase in Ss retained earnings since
acquisition ($160,000 - $100,000) 70% 42,000
Less: Unrealized profit in Ss ending inventory (8,000)
Less: Ss patent amortization since acquisition
$20,000 70% (14,000)
Less: Loss on constructive retirement of Ps bonds (3,000)
Consolidated retained earnings end of year $217,000

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Chapter 11 11-23

Solution P11-7

1 Entry on Saps books at acquisition

Inventories 20,000
Land 25,000
Buildings net 90,000
Other liabilities 10,000
Goodwill 70,000
Retained earnings 80,000
Equipment net 15,000
Push-down capital 280,000
To push down fair value book value differentials.

2 Sap Corporation
Balance Sheet
at January 1, 2012
Assets
Cash $ 30,000
Accounts receivable net 70,000
Inventories 80,000
Total current assets $180,000
Land $ 75,000
Buildings net 190,000
Equipment net 75,000
Total plant assets 340,000
Goodwill 70,000
Total assets $590,000

Liabilities And Stockholders Equity


Accounts payable $ 50,000
Other liabilities 60,000
Total liabilities $110,000
Capital stock $200,000
Push-down capital 280,000
Total stockholders equity 480,000
Total liabilities and stockholders
equity $590,000

3 If Sap reports net income of $90,000 under the new push-down system for
the calendar year 2012, Pays income from Sap will also be $90,000 under
a one-line consolidation.

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11-24 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-8

1 Parent company theory


Preliminary computation:
Cost of 80% interest in Son $3,000,000
Book value acquired ($2,000,000 80%) 1,600,000
Excess cost over book value acquired $1,400,000
Excess allocated to:
Inventories $1,600,000 80% $1,280,000
Equipment net $(500,000) 80% (400,000)
Goodwill for the remainder 520,000
Excess fair value over book value acquired $1,400,000

Entry on Sons books to reflect 80% push down:


Inventories 1,280,000
Goodwill 520,000
Retained earnings 1,200,000
Equipment net 400,000
Push-down capital 2,600,000

2 Entity theory
Preliminary computation:
Implied value of net assets ($3,000,000/.8) $3,750,000
Book value of net assets 2,000,000
Total excess $1,750,000
Excess allocated to:
Inventories $1,600,000
Equipment net (500,000)
Goodwill for remainder 650,000
Total excess $1,750,000

Entry on Sons books to reflect 100% push down:


Inventories 1,600,000
Goodwill 650,000
Retained earnings 1,200,000
Equipment 500,000
Push-down capital 2,950,000

3 Noncontrolling interest (Parent company theory)

Sons stockholders equity $2,000,000 20% $ 400,000

4 Noncontrolling interest (Entity theory)

Capital stock $ 800,000


Push-down capital 2,950,000
Stockholders equity 3,750,000
Noncontrolling interest percentage 20%
Noncontrolling interest $ 750,000

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Chapter 11 11-25

Solution P11-9

1 Push down under parent company theory

Buildings net 18,000


Equipment net 27,000
Goodwill 36,000
Retained earnings 20,000
Inventories 9,000
Push-down capital 92,000
To record revaluation of 90% of net assets and elimination of
retained earnings as a result of a business combination with Paw
Corporation.

2 Push down under entity theory

Buildings net 20,000


Equipment net 30,000
Goodwill 40,000
Retained earnings 20,000
Inventories 10,000
Push-down capital 100,000
To record revaluation of net assets imputed from purchase price of
90% interest acquired by Paw Corporation.

3 Sun Corporation
Comparative Balance Sheets
at January 1, 2012

Parent Company Theory Entity Theory


Assets
Cash $ 20,000 $ 20,000
Accounts receivable net 50,000 50,000
Inventories 31,000 30,000
Land 15,000 15,000
Buildings net 48,000 50,000
Equipment net 97,000 100,000
Goodwill 36,000 40,000
Total assets $297,000 $305,000

Liabilities and stockholders equity


Accounts payable $ 45,000 $ 45,000
Other liabilities 60,000 60,000
Capital stock 100,000 100,000
Push-down capital 92,000 100,000
Retained earnings 0 0
Total equities $297,000 $305,000

Copyright 2015 Pearson Education Limited


11-26 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-10Push down 90%--parent company theory


a Paw Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2012
90% Adjustments and Consolidated
Power Sun Eliminations Statements
Income Statement
Sales $ 310,800 $ 110,000 $ 420,800
Income from Sun 37,800 b 37,800
Cost of sales 140,000 * 33,000 * 173,000 *
Depreciation expense 29,000 * 24,200 * 53,200 *
Other operating exp. 45,000 * 11,000 * 56,000 *
Consolidated NI $ 138,600
Noncontrolling share e 4,000 4,000 *
Controlling share of NI $ 134,600 $ 41,800 $ 134,600
Retained Earnings
Retained earnings Paw $ 147,000 $ 147,000
Retained earnings Sun $ 0
Controlling share of NI 134,600 41,800 134,600
Dividends 60,000 * 10,000 * b 9,000
e 1,000 60,000 *
Retained earnings
December 31 $ 221,600 $ 31,800 $ 221,600
Balance Sheet
Cash $ 63,800 $ 27,000 a 8,000 $ 98,800
Accounts receivable 90,000 40,000 a 8,000 122,000
net
Dividends receivable 9,000 d 9,000
Inventories 20,000 35,000 55,000
Land 40,000 15,000 55,000
Buildings net 140,000 43,200 183,200
Equipment net 165,000 77,600 242,600
Investment in Sun 208,800 b 28,800
c 180,000
Goodwill 36,000 36,000
$ 736,600 $ 273,800 $ 792,600
Accounts payable $ 125,000 $ 20,000 $ 145,000
Dividends payable 15,000 10,000 d 9,000 16,000
Other liabilities 75,000 20,000 95,000
Capital stock 300,000 100,000 c 100,000 300,000
Push-down capital 92,000 c 92,000
Retained earnings 221,600 31,800 221,600
$ 736,600 $ 273,800

Noncontrolling interest January 1 c 12,000


Noncontrolling interest December 31 _________ e 3,000 15,000
250,800 250,800 $ 792,600
* Deduct

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Chapter 11 11-27

Solution P11-10 (continued)Push down 100%--entity theory


b Paw Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2012
90% Adjustments and Consolidated
Paw Sun Eliminations Statements
Income Statement
Sales $ 310,800 $ 110,000 $ 420,800
Income from Sun 37,800 b 37,800
Cost of sales 140,000 * 32,000 * 172,000 *
Depreciation expense 29,000 * 25,000 * 54,000 *
Other operating exp. 45,000 * 11,000 * 56,000 *
Consolidated NI $ 138,800
Noncontrolling share e 4,200 4,200 *
Controlling share of NI $ 134,600 $ 42,000 $ 134,600
Retained Earnings
Retained earnings Paw $ 147,000 $ 147,000
Retained earnings Sun $ 0
Controlling share of NI 134,600 42,000 134,600
Dividends 60,000 * 10,000 * b 9,000
e 1,000 60,000 *
Retained earnings
December 31 $ 221,600 $ 32,000 $ 221,600
Balance Sheet
Cash $ 63,800 $ 27,000 a 8,000 $ 98,800
Accounts receivable 90,000 40,000 a 8,000 122,000
net
Dividends receivable 9,000 d 9,000
Inventories 20,000 35,000 55,000
Land 40,000 15,000 55,000
Buildings net 140,000 45,000 185,000
Equipment net 165,000 80,000 245,000
Investment in Sun 208,800 b 28,800
c 180,000
Goodwill 40,000 40,000
$ 736,600 $ 282,000 $ 800,800
Accounts payable $ 125,000 $ 20,000 $ 145,000
Dividends payable 15,000 10,000 d 9,000 16,000
Other liabilities 75,000 20,000 95,000
Capital stock 300,000 100,000 c 100,000 300,000
Push-down capital 100,000 c 100,000
Retained earnings 221,600 32,000 221,600
$ 736,600 $ 282,000

Noncontrolling interest January 1 c 20,000


Noncontrolling interest December 31 _________ e 3,200 23,200
259,000 259,000 $ 800,800
* Deduct

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11-28 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-11

Pep Corporation and Subsidiary


Proportionate Consolidation Working Papers
for the year ended December 31, 2011

Adjustments and Consolidated


Pep Jay 40% Eliminations Statements
Income Statement
Sales $ 800,000 $ 300,000 b 180,000 $ 920,000
Income from Jay 20,000 a 20,000
Cost of sales 400,000 * 150,000 * b 90,000 460,000 *
Depreciation expense 100,000 * 40,000 * b 24,000 116,000 *
Other expenses 120,000 * 60,000 * b 36,000 144,000 *
Net income $ 200,000 $ 50,000 $ 200,000

Retained Earnings
Retained earnings Pep $ 300,000 $ 300,000
Venture equity Jay $ 250,000 b 250,000
Net income 200,000 50,000 200,000
Dividends 100,000 * 100,000 *
Retained earnings/
Venture equity $ 400,000 $ 300,000 $ 400,000

Balance Sheet
Cash $ 100,000 $ 50,000 b 30,000 $ 120,000
Receivables net 130,000 30,000 b 18,000 142,000
Inventories 110,000 40,000 b 24,000 126,000
Land 140,000 60,000 b 36,000 164,000
Buildings net 200,000 100,000 b 60,000 240,000
Equipment net 300,000 180,000 b 108,000 372,000
Investment in Jay 120,000 a 20,000
b 100,000
$1,100,000 $ 460,000 $1,164,000

Accounts payable $ 120,000 $ 100,000 b 60,000 $ 160,000


Other liabilities 80,000 60,000 b 36,000 104,000
Common stock, $10 par 500,000 500,000
Retained earnings 400,000 400,000
Venture equity Jay 300,000 __________ __________
$1,100,000 $ 460,000 546,000 546,000 $1,164,000
* Deduct

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