Chapter 5 : Advanced Accounting

Problem

On January 1, 20X8, Vector Company acquired 80 percent of Scalar Company's ownership

on for $120,000 cash. At that date, the fair value of the non-controlling interest was $30,000.

The book value of Scalar's net assets at acquisition was $125,000. The book values and fair

values of Scalar's assets and liabilities were equal, except for buildings and equipment, which

were worth $15,000 more than book value. Buildings and equipment are depreciated on a 10-

year basis. Although goodwill is not amortized, the management of Vector concluded at

December 31, 20X8, that goodwill from its acquisition of Scalar shares had been impaired

and the correct carrying amount was $5,000. Goodwill and goodwill impairment were

assigned proportionately to the controlling and non-controlling shareholders. No additional

impairment occurred in 20X9.

Trial balance data for Vector and Scalar on December 31, 20X9, are as follows:

Required:

a. Provide all eliminating entries needed to prepare a three-part consolidation worksheet

as of December 31, 20X9.

b. Prepare a three-part consolidation worksheet for 20X9 in good form.

Chapter 5 : Advanced Accounting

Solution:

Primary Computations
At Acquisition Date January 1, 2008
1- Fair Value of Consideration Transferred
From Controlling 120,000
From Non-Controlling 30,000
150,000

2- Book Value Of Net Assets Received

Given 125,000

3- Excess Of Fair Value Over Book Value 25,000

Allocated To: Years Amortization
Under Valued Building & Equipment 15,000 10 1500
Goodwill 10,000 0 0
25,000 1,500

At Consolidation Date December 31, 2009

5- Income from Scalar
Reported Net Income of Scalar 24,000
( × ) Controlling Interest Percentage 80%
19,200

6- NCI in Net Income Of Scalar

Adjusted Net Income 24,000
( × ) Non-Controlling Interest Percentage 20%
4,800

7- Dividends From Scalar

Scalar Dividends 10,000
(×) Controlling Interest Percentage 80%
8,000

8- NCI Share of Scalar Dividends

Scalar Dividends 10,000
(×) Controlling Interest Percentage 20%
2,000
Chapter 5 : Advanced Accounting

a. eliminating entries needed to prepare a full set of consolidated financial statements for

20X5.
Basic Elimination Entry
Common Stock 100,000
Retained Earnings 50,000
Income From Scalar 19,200
NCI in NI of Scalar 4,800
Dividends Decleard 10,000
Investment In Bromze 131,200
NCI in NA of Scalar 32,800

Amortization excess value reclassification

Depreciation Expenses 1,500
Income from Scalar 1,200
NCI in NI of Scalar 300

Excess value reclassification

Building and Equipment` 15,000
Goodwill 5,000
Accumulated Depreciation 3,000
Investment in Scalar 13,600
NCI in NA of Scalar 3,400

Elimination of Intercompany accounts

Chapter 5 : Advanced Accounting

b. Work Sheet
Chapter 5 : Advanced Accounting

Self Study Problem:

Magellan Corporation acquired 80 percent ownership of Dipper Corporation on January 1,

20X8, for $200,000. At that date, Dipper reported common stock outstanding of $75,000 and

retained earnings of $150,000. The fair value of the non-controlling interest was $50,000. The

differential is assigned to equipment, which had a fair value $25,000 greater than book value

and a remaining economic life of five years at the date of the business combination. Canton

Dipper reported net income of $40,000 and paid dividends of $20,000 in 20X8.

Required:

1) Provide the journal entries recorded by Magellan during 20X8 on its books if it accounts for

its investment in Dipper using the equity method.

2) Give the eliminating entries needed at December 31, 20X8, to prepare consolidated

financial statements.

1)
Chapter 5 : Advanced Accounting

2)