Chapter 3 Advanced Accounting

Chapter 3
AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS
Answers to Questions
1 A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a
controlling financial interest (generally over 50 percent) of its outstanding voting stock.
2 Amounts assigned to identifiable assets and liabilities in excess of recorded amounts on the books of the
subsidiary are not recorded separately by the parent. Instead, the parent records the fair value/purchase
price of the interest acquired in an investment account. The assignment to identifiable asset and liability
accounts is made through working paper entries when the parent and subsidiary financial statements are
consolidated.
3 The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the
purchase price of the subsidiary is greater than the book value of the subsidiary’s net assets. If the parent
had acquired an 80 percent interest and the implied fair value of the subsidiary was greater than the book
value of the subsidiary’s net assets, the land would still appear in the consolidated balance sheet at
$100,000. Under GAAP, the noncontrolling interest is also reported based on fair values at the acquisition
date.
4 Parent company—a corporation that owns a controlling interest in the outstanding voting stock of another
corporation (its subsidiary).
Subsidiary company—a corporation that is controlled by a parent that owns a controlling interest in its
outstanding voting stock, either directly or indirectly.
Affiliates—companies that are controlled by a single management team through parent-subsidiary
relationships. (Although the term affiliate is a synonym for subsidiary, the parent is included in the total
affiliation structure.) In many annual reports, the term includes all investments accounted for by the
equity method.
Associates—companies that are controlled through parent-subsidiary relationships or whose operations
can be significantly influenced through equity investments of 20 percent to 50 percent.
5 A noncontrolling interest is the equity interest in a subsidiary that is owned by stockholders outside of the
affiliation structure. In other words, it is the equity interest in a subsidiary (recorded at fair value) that is
not held by the parent or subsidiaries of the parent.
6 Under GAAP, a subsidiary will not be consolidated if control does not rest with the majority owner, such
as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under
severe foreign exchange restrictions or other governmentally imposed uncertainties.
7 Consolidated financial statements are intended primarily for the stockholders and creditors of the parent,
according to GAAP.
8 The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of
the outstanding capital stock of the parent.
9 Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or a
consolidation accounted for as an acquisition. But goodwill from consolidation would not appear in the
general ledger of a parent or its subsidiary. Goodwill is entered in consolidation working papers when the
reciprocal investment and equity amounts are eliminated. Working paper entries affect consolidated
financial statements, but they are not entered in any general ledger.
Copyright © 2018 Pearson Education, Inc.

3-1
3-2 An Introduction to Consolidated Financial Statements
10 The parent’s investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is
consolidated. It would appear in the parent’s separate balance sheet under the heading “investments” or
“other assets.” Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as
investments or other assets. They are accounted for under the equity method if the parent can exercise
significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost
method.
11 Parent’s books: Reciprocal accounts on subsidiary’s books:

Investment in subsidiary Capital stock and retained earnings
Sales Purchases
Accounts receivable Accounts payable
Interest income Interest expense
Dividends receivable Dividends payable
Advance to subsidiary Advance from parent
12 Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order
to show the financial position and results of operations of the total economic entity that is under the
control of a single management team. Sales by a parent to a subsidiary are internal transactions from the
viewpoint of the economic entity and the same is true of interest income and interest expense and rent
income and rent expense arising from intercompany transactions. Similarly, receivables from and
payables to affiliates do not represent assets and liabilities of the economic entity for which consolidated
financial statements are prepared.
13 The stockholders’ equity of a parent under the equity method is the same as the consolidated
stockholders’ equity of a parent except for noncontrolling interest. Consolidated balance sheets disclose
noncontrolling interest for subsidiaries that are not wholly owned.
14 No. The amounts that appear in the parent’s statement of retained earnings under the equity method and
the amounts that appear in the consolidated statement of retained earnings are identical, assuming that the
noncontrolling interest is included as a separate component of stockholders’ equity.
15 Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total
income to the consolidated entity between controlling and noncontrolling stockholders. From the
viewpoint of the controlling interest (the stockholders of the parent), income attributable to
noncontrolling interest has the same effect on consolidated net income as an expense. This is because
consolidated net income is income to all stockholders. Alternatively, you can view total consolidated net
income as being allocated to the controlling and noncontrolling interests.
16 The computation of noncontrolling interest is comparable to the computation of retained earnings. It is

computed:
Noncontrolling interest beginning of the period

Add: Income attributable to noncontrolling
interest
Deduct: Noncontrolling interest dividends
Deduct: Noncontrolling interest of amortization of
excess of fair value over book value
Add: Noncontrolling interest of amortization of
excess of book value over fair value
Noncontrolling interest end of the period
17 It is acceptable to consolidate the annual financial statements of a parent and a subsidiary with different
fiscal periods, provided that the dates of closing are not more than three months apart. Any significant
developments that occur in the intervening three-month period should be disclosed in notes to the
financial statements. In the situation described, it is acceptable to consolidate the financial statements of

Chapter 3 3-3
the subsidiary with an October 31 closing date with the financial statements of the parent with a
December 31 closing date.
18 The acquisition of shares from noncontrolling stockholders is not a business combination. It is not
possible, by definition, to acquire a controlling interest from noncontrolling stockholders. Increasing a
controlling interest is the same as making an additional investment. Acquisition of additional subsidiary
stock is recorded by increasing the investment account and reducing the noncontrolling interest account.
SOLUTIONS TO EXERCISES
Solution E3-1 Solution E3-2
1 b 1 d
2 c 2 b
3 d 3 d
4 d 4 d
5 a 5 a
6 b
7 c
Solution E3-3 [AICPA adapted]
1 c Advance to Hill $75,000 + receivable from Ward $200,000 = $275,000
2 a Zero, goodwill has an indeterminate life and is not amortized.
3 a Pop accounts for Sap using the equity method, therefore,

consolidated retained earnings is equal to Pop’s retained earnings, or
$2,480,000.
Solution E3-4 (in thousands)
1 Implied fair value of Son ($3,600 / 90%) $4,000

Less: Book value of Son (3,600)
Excess fair value over book value $ 400
Equipment undervalued 120
Goodwill at January 1, 2016 $ 280
Goodwill at December 31, 2016 = Goodwill from consolidation $ 280
Since goodwill is not amortized
2 Consolidated net income
Pop’s reported net income $1,960

Less: Correction to income from Son for
depreciation on excess allocated
to equipment [($120,000/3 years)x 90%] (36)
Controlling share of consolidated net income $1,924
Noncontrolling share of consolidated net income

[$400,000 - $40,000 depreciation] x 10% $ 36
Controlling share of consolidated net income 1,924

Consolidated net income $1,960

Chapter 3 3-5
1 $2,400, the dividends of Pam
2 $1,320, equal to $1,200 dividends payable of Pam plus $120 (30% of $400)
dividends payable to noncontrolling interests of Sun.
Preliminary computation
Cost of Son stock (Fair value) $10,000
Fair value of Son’s identifiable net assets 8,000
Goodwill $ 2,000
1 Journal entry to record push down values
Inventories 160
Land 400
Buildings — net 1,200
Equipment — net 640
Goodwill 2,000
Retained earnings 1,680
Note payable 80
Push-down capital 6,000
2 Son Corporation
Balance Sheet
January 1, 2016
(in thousands)
Assets
Cash $ 560
Accounts receivable 640
Inventories 800
Land 1,600
Buildings — net 4,000
Equipment — net 2,400
Goodwill 2,000
Total assets $12,000
Liabilities
Accounts payable $ 800
Note payable 1,200
Total liabilities 2,000
Stockholders’ equity
Capital stock $ 4,000
Push-down capital 6,000
Total stockholders’ equity 10,000
Total liabilities and stockholders’ equity $12,000

Solution E3-7
1 Pam Corporation and Subsidiary

Consolidated Income Statement
for the year 2017
(in thousands)
Sales ($4,000 + $1,600) $5,600
Less: Cost of sales ($2,400 + $800) (3,200)
Gross profit 2,400
Less: Depreciation expense ($200 + $160) (360)
Other expenses ($796 + $360) (1,156)
Consolidated net income 884
Less: Noncontrolling interest share ($280 ´ 30%) (84)
Controlling interest share of cnsolidated net income $ 800

for the year 2017
(in thousands)
Sales ($4,000 + $1,600) $5,600
Less: Cost of sales ($2,400 + $800) (3,200)
Gross profit 2,400
Less: Depreciation expense ($200 + $160 - $24) (336)
Other expenses ($796 + $360) (1,156)
Less: Noncontrolling interest share
[($280 ´ 30%)+ ($24 depreciation x 30%)] (91.2)
Controlling interest share of consolidated net income $ 816.8
Supporting computations
Depreciation of excess allocated to overvalued equipment:

$120/5 years = $24

Chapter 3 3-7
1 Capital stock
The capital stock appearing in the consolidated balance sheet at

December 31, 2016 is $3,600, the capital stock of Pop,the parent
company.
2 Goodwill at December 31, 2016
Investment cost at January 2, 2016 (80% interest) $1,400

Implied total fair value of Son ($1,400 / 80%) $1,750
Book value of Son(100%) (1,200)
Excess is considered goodwill since no other fair value
information is given. $ 550
3 Consolidated retained earnings at December 31, 2016
Pop’s retained earnings January 2 (equal to

beginning consolidated retained earnings $1,600
Add: Net income of Pop (equal to controlling share of
consolidated net income) 600
Less: Dividends declared by Pop (360)
Consolidated retained earnings December 31 $1,840
4 Noncontrolling interest at December 31, 2016
Capital stock and retained earnings of Son on

January 2 $1,200
Add: Son’s net income 180
Less: Dividends declared by Son (100)
Son’s stockholders’ equity December 31 1,280
Noncontrolling interest percentage 20%
Noncontrolling interest at book value $ 256
Add: 20% Goodwill 110
Noncontrolling interest December 31 $ 366
5 Dividends payable at December 31, 2016
Dividends payable to stockholders of Pop $ 180

Dividends payable to noncontrolling stockholders ($50 ´ 20%) 10
Dividends payable to stockholders outside the
Consolidated entity $ 190

Pam Corporation and Subsidiary

Partial Balance Sheet
at December 31, 2016
Stockholders’ equity:
Capital stock, $10 par $1,200
Additional paid-in capital 200
Retained earnings 260
Equity of controlling stockholders 1,660
Noncontrolling interest 164
Total stockholders’ equity $1,824
Computation of consolidated retained earnings:
Pam’s December 31, 2015 retained earnings $ 140
Add: Pam’s reported income for 2016 220
Less: Pam’s dividends (100)
Consolidated retained earnings December 31, 2016 $ 260
Computation of noncontrolling interest at December 31, 2016

Sun’s December 31, 2015 stockholders’ equity $800
Income less dividends for 2016 ($80 - $60) 20
Sun’s December 31, 2016 stockholders’ equity 820
Noncontrolling interest December 31, 2016 $164

Chapter 3 3-9
Solution E3-10
Pop Corporation and Subsidiary

for the year ended December 31, 2018
(in thousands)
Sales $4,200
Cost of goods sold 2,200
Gross profit 2,000
Deduct: Operating expenses 1,110
Deduct: Noncontrolling interest share 29
Controlling interest share $ 861
Investment cost January 1, 2016 (90% interest) $ 1,620

Implied total fair value of Son ($1,620 / 90%) $ 1,800
Son’s Book value acquired (100%) (1,400)
Excess of fair value over book value $ 400
Excess allocated to:

Inventories (sold in 2016) $ 60
Equipment (4 years remaining useful life) 40
Goodwill 300
Excess of fair value over book value $ 400
Operating expenses:
Combined operating expenses of Pop and Son $1,100
Add: Depreciation on excess allocated to equipment
($40/4 years) 10
Consolidated operating expenses $1,110

SOLUTIONS TO PROBLEMS
Solution P3-1

Consolidated Balance Sheet
(in thousands)
Assets
Cash ($128 + $72) $ 200
Accounts receivable ($180 + $136 - $20) 296
Inventories ($572 + $224) 796
Equipment — net ($1,520 + $700) 2,220
Total assets $3,512
Liabilities and Stockholders’ Equity

Liabilities:
Accounts payable ($160 + $132 - $20) $ 272
Common stock, $10 par 1,840
Noncontrolling interest ($600 + $400) ´ 20% 200
2 Consolidated net income for 2017
Pam’s separate income $ 680

Add: Income from Sun 360
Noncontrolling interest share (20% x $360,000) $ 72
Controlling interest share (80%) $ 968

Chapter 3 3-11
Solution P3-2 (in thousands)
1 Schedule to allocate fair value/book value differential
Cost of investment in Son $ 350

Implied fair value of Son ($350 / 70%) $ 500
Book value of Son (220)
Excess allocated:
Fair Value Book Value Allocation
Inventories ($100 - $60) $ 40
Land ($120 - $100) 20
Buildings — net ($180 - $140) 40
Equipment — net ($60 - $80) (20)
Other liabilities ($80 - $100) 20
Allocated to identifiable net assets 100
Goodwill for the remainder 180
Excess fair value over book value $280
2 Pop Corporation and Subsidiary

at January 1, 2016
Assets
Current assets:
Cash ($70 + $40) $110
Receivables — net ($160 + $60) 220
Inventories ($140 + $60 + $40) 240 $ 570
Property, plant and equipment:

Land ($200 + $100 + $20) $320
Buildings — net ($220 + $140 + $40) 400
Equipment — net ($160 + $80 - $20) 220 940
Goodwill (from consolidation) 180
Total assets $1,690
Liabilities and Stockholders’ Equity

Liabilities:
Accounts payable ($180 + $160) $ 340
Other liabilities ($20 + $100 - $20) 100 $ 440
Capital stock $1,000
Retained earnings 100
Equity of controlling stockholders 1,100
Noncontrolling interest * 150 1,250
* 30% of implied fair value of $500 = $150.

Cost of investment in Sun January 1, 2016 $10,800

Implied fair value of Sun ($10,800 / 80%) $13,500
Book value of Sun 10,000
Excess of fair value over book value $ 3,500
Schedule to Allocate Fair Value — Book Value Differential
Fair Value
- Book Allocation
Value
Current assets $2,000 $2,000
Equipment 4,000 4,000
Bargain purchase
gain* (2,500)
Excess fair value over book value $3,500
*After recognizing acquired assets and liabilities at fair values, we are left
with a negative excess of $2,500. Under GAAP, this difference is recorded as a
gain in the consolidated income statement in the year of acquisition. The gain
is attributable entirely to the controlling interest, and is recorded on the
parent’s books by a debit to the Investment account and a credit to a Gain
from bargain Purchase account. An alternative calculation of this amount takes
the difference between the fair values of the net assets ($16,000) and their
fair value implied by the acquisition price ($13,500), which equals $2,500.
Noncontrolling interest of $260 (fair value) plus $1,040 (fair value of Pam’s
investment) equals total fair value of $1,300. Therefore, Pam’s interest is
80% ($1,040 / $1,300), and noncontrolling interest is 20% ($260 / $1,300).
Total fair value $1,300

Book value of Sun (1,040)
Excess allocated to
Fair Value - Book Value

Plant assets — net $840 - $800 $ 40
Goodwill 220
Total $ 260

Chapter 3 3-13
Solution P3-5

(in thousands)
Assets
Current assets $ 2,720
Plant assets 6,640
Goodwill 1,600
$10,960
Equities
Liabilities $ 5,280
Capital stock 2,400
$10,960
Son’s net income ($3,200 - $2,400 - $400) $ 400
Less: Excess allocated to inventories that were sold in 2016 (160)
Less: Depreciation on excess allocated to plant
assets ($320 /4 years) (80)
Income from Son $ 160
Plant assets ($4,000 + $2,400 + $320 - $80) $6,640
Pop’s retained earnings:

Beginning retained earnings $2,720
Add: Operating income 800
Add: Income from Son 160
Deduct: Dividends (400)
Retained earnings December 31, 2016 $3,280

Solution P3-6

Consolidated Balance Sheet Working Papers
(in thousands)
Pam Sun Adjustments and Consolidated
per books per books Eliminations Balance Sheet
Cash $ 168 $ 80 $ 248
Receivables — net 200 520 b 36 684
Inventories 1,400 200 1,600
Land 600 800 1,400
Equipment — net 2,400 400 2,800
Investment in Sun 1,836 a 1,836
Goodwill ______ ______ a 400 400
Total assets $6,604 $2,000 $7,132
Accounts payable $1,640 $ 320 $1,960
Dividends payable 240 40 b 36 244
Capital stock 4,000 1,200 a 1,200 4,000
Retained earnings 724 440 a 440 724
Noncontrolling interest ______ ______ a 204 204
Total equities $6,604 $2,000 $7,132
a To eliminate reciprocal investment and equity accounts, record goodwill ($400),

and enter noncontrolling interest [($1,640 equity + $400 goodwill) ´ 10%)].
b To eliminate reciprocal dividends receivable (included in receivables — net) and
dividends payable amounts ($40 dividends ´ 90%).

Chapter 3 3-15
Preliminary computations
Cost of 80% investment January 3, 2016 $1,120
Implied total fair value of Son ($1,120 / 80%) $1,400
Book value of Son (1,000)
Excess fair value over book value on January 3 = Goodwill $ 400
1 Noncontrolling interest share of income:

Son’s net income $200 ´ 20% noncontrolling interest $ 40
2 Current assets:
Combined current assets ($816 + $300) $1,116
Less: Dividends receivable ($40 ´ 80%) (32)
Current assets $1,084
3 Income from Son: None Investment income is eliminated in consolidation.
4 Capital stock: $2,000 Capital stock of the parent, Pop Corporation.
5 Investment in Son: None The investment account is eliminated.
6 Excess of fair value over book value $400
7 Controlling share of consolidated net income: Equals Pop’s

net income, or:
Consolidated sales $ 2,400
Less: Consolidated cost of goods sold (1,480)
Less: Consolidated expenses (320)
Consolidated net income $ 600
Less: Noncontrolling interest share (40)
Controlling share $ 560
8 Consolidated retained earnings December 31, 2016: $808 Equals Pop’s

beginning retained earnings.
9 Consolidated retained earnings December 31, 2017

Equal to Pop’s ending retained earnings:
Beginning retained earnings $ 808
Add: Controlling share of consolidated net income 560
Less: Pop’s dividends for 2017 (240)
Ending retained earnings $1,128
10 Noncontrolling interest December 31, 2017

Son’s capital stock and retained earnings $1,200
Add: Net income 200
Less: Dividends (100)
Son’s equity December 31, 2017 at fair value 1,300
Noncontrolling interest December 31, 2017 using book value $ 260
Add: Noncontrolling interest share of Goodwill 80
Noncontrolling interest December 31, 2017 at fair value $ 340

Solution P3-8 [AICPA adapted]
Preliminary computations Son Sam

Investment cost:
Son (2,000 shares ´ 80%) ´ $280 448,000
Sam (6,000 shares ´ 70%) ´ $160 672,000
Implied total fair values:
Son ($448,000 / 80%) 560,000
Sam ($672,000 / 70%) 960,000
Book value
Son 280,000
Sam 480,000
Excess fair value over book value at acquisition
Goodwill $280,000 $480,000
1 a. Journal entries to account for investments
January 1, 2016 — Acquisition of investments

Investment in Son (80%) 448,000
Cash 448,000
To record acquisition of 1,600 shares of
Son common stock at $280 per share.
Investment in Sam (70%) 672,000
Cash 672,000
To record acquisition of 4,200 shares of
Sam common stock at $160 per share.
b. During 2016 — Dividends from subsidiaries

Cash 51,200
To record dividends received from Son ($64,000 ´ 80%).
Cash 25,200
To record dividends received from Sam ($36,000 ´ 70%).
c. December 31, 2016 — Share of income or loss

Income from Son 115,200
To record investment income from Son ($144,000 ´ 80%).
Loss from Sam 33,600
To record investment loss from Sam ($48,000 ´ 70%).

Chapter 3 3-17
Solution P3-8 (continued)

Son Sam
Common stock $200,000 $240,000
Capital in excess of par 80,000
Retained earnings 160,000 76,000
Equity December 31 360,000 396,000
Noncontrolling interest percentage 20% 30%
Noncontrolling interest December 31 $ 72,000 $118,800
Plus: Goodwill $280,000 x 20% 56,000
$480,000 x 30% 144,000
Noncontrolling interest December 31 $128,000 $262,800
3 Consolidated retained earnings December 31, 2016
Consolidated retained earnings is reported at $1,218,400, equal to the

retained earnings of Pop Corporation, the parent, at December 31, 2016.
4 Investment balance December 31, 2016:

Son Sam
Investment cost January 1 $448,000 $672,000
Add (deduct): Income (loss) 115,200 (33,600)
Deduct: Dividends received (51,200) (25,200)
Investment balances December 31 $512,000 $613,200
Check: Investment balances should be equal to the underlying book value

plus share of goodwill
Son ($360,000 ´ 80%) = $288,000 + ($280,000 x 80%) = $512,000
Sam ($396,000 ´ 70%) = $277,200 + ($480,000 x 70%) = $613,200
After consolidation, the Investment balances are $0.

Solution P3-9
Preliminary computations (in thousands)

Cost of 90% investment January 1, 2016 $14,400
Implied total fair value of Sun ($14,400 / 90%) $16,000
Book value of Sun (10,800)
Excess fair value over book value on January 1 $ 5,200
Allocation to equipment $ 3,200
Remainder is Goodwill $ 2,000
Additional annual depreciation on equipment ($3,200 / 8 years) $ 400

(in thousands)
90% Adjustments and Consolidated

Pan Son Eliminations Balance Sheet
Cash $ 1,200 $ 800 $ 2,000
Receivables — net 2,400 1,600 4,000
Dividends receivable 360 b 360
Inventory 2,800 2,400 5,200
Land 2,400 2,800 5,200
Buildings — net 8,000 4,000 12,000
Equipment — net 6,000 3,200 a 2,800 12,000
Investment in Sun 15,120 a 15,120
Goodwill _______ ________ a 2,000 2,000
Total assets $38,280 $ 14,800 $42,400
Accounts payable $ 1,200 $ 2,400 $ 3,600
Dividends payable 2,000 400 b 360 2,040
Capital stock 28,000 8,000 a 8,000 28,000
Retained earnings 7,080 4,000 a 4,000 7,080
Noncontrolling interest _______ ________ a 1,680 1,680
Total equities $38,280 $ 14,800 $42,400
a To eliminate reciprocal investment and equity accounts, enter unamortized excess

allocated to equipment, record goodwill, and enter noncontrolling interest (at
fair value).
b To eliminate reciprocal dividends receivable and dividends payable amounts.

Chapter 3 3-19
Solution P3-10
1 Purchase price of investment in Sun (in thousands)
Underlying book value of investment in Sun:

Equity of Sun January 1, 2016 $1,760
Add: Excess investment fair value over book value:
Goodwill at December 31, 2020 480
Fair value of Sun January 1, 2016 $2,240
Purchase price of 80% investment at fair value($2,240 x 80%) $1,792
2 Sun’s stockholders’ equity on December 31, 2020 (in thousands)
20% noncontrolling interest at fair value $496

20% goodwill (96)
20% noncontrolling interest’s equity at book value $400
Total equity = Noncontrolling interest’s equity $400/20% = $2,000
3 Pam’s investment in Sun account balance at December 31, 2020

(in thousands)
Underlying book value in Sun December 31, 2020
($2,000 ´ 80%) $1,600
Add: 80% of Goodwill December 31, 2020
(20% is attributable to the noncontrolling interest) 384
Investment in Sun December 31, 2020 $1,984
Alternative solution:
Investment cost January 1, 2016 $1,792
Add: 80% of Sun’s increase since acquisition
($2,000 - $1,760) ´ 80% 192
Investment in Sun December 31, 2020 $1,984
4 Pam’s capital stock and retained earnings December 31, 2020

(in thousands)
Capital stock $3,200
Retained earnings $ 240
Amounts are equal to capital stock and retained earnings shown in the
consolidated balance sheet.

Solution P3-11

Cost of 70% investment in Son $2,800
Implied fair of Son($2,800 / 70%) $4,000
Book value of Son (100%) 3,200
Excess $ 800
Excess allocated:
Inventories $ 80
Plant assets 320
Goodwill 400
Excess $ 800
Investment balance at January 1, 2016 $2,800

Share of Son’s retained earnings increase ($240 ´ 70%) 168
Less: Amortization
70% of excess allocated to inventories (sold in 2016) (56)
70% of excess allocated to plant assets ($320 /8 years) (28)
Investment balance at December 31, 2016 $2,884
Noncontrolling interest at December 31

30% of Son’s book value at December 31 ($3,440 x 30%) $1,032
30% of Goodwill 120
30% Unamortized excess for plant assets
30% x ($320 - $40 amortization) 84
Noncontrolling at December 31 (fair value) $1,236

(in thousands)
70% Adjustments and Consolidated
Pop Son Eliminations Balance Sheet
Cash $ 240 $ 80 $ 320
Accounts receivable — net 1,760 800 2,560
Accounts receivable — Pop 40 b 40
Dividends receivable 28 c 28
Inventories 2,000 1,280 3,280
Land 400 600 1,000
Plant assets — net 2,800 1,400 a 280 4,480
Investment in Son 2,884 a 2,884
Goodwill _______ _______ a 400 400
Assets $10,112 $ 4,200 $12,040
Accounts payable $ 1,200 $ 320 $ 1,520

Account payable to Son 40 b 40
Dividends payable 160 40 c 28 172
Long-term debt 2,400 400 2,800
Capital stock 4,000 2,000 a 2,000 4,000
Retained earnings 2,312 1,440 a 1,440 2,312
Noncontrolling interest
($4,120,000 ´ 30%) _______ _______ a 1,236 1,236

Chapter 3 3-21
Equities $10,112 $ 4,200 $12,040

Solution P3-12

80% Investment in Sun at cost January 1, 2016 $ 6,080
Implied total fair value of Sun ($6,080 / 80%) $ 7,600
Sun book value 7,200
Excess fair value over book value recorded as goodwill $ 400
Sun Sun 80% of

Dividends Net Income Net Income
2016 $ 320 $ 640 $ 512
2017 400 800 640
2018 480 960 768
$1,200 $2,400 $1,920
1 Sun’s dividends for 2017 ($320 / 80%) $ 400
2 Sun’s net income for 2017 ($640 / 80%) $ 800
3 Goodwill — December 31, 2017 $ 400
4 Noncontrolling interest share of income — 2018

Sun’s income for 2018
($384 dividends received/80%) ´ 2 $ 960
Noncontrolling interest share $ 192

Equity of Sun January 1, 2016 $7,200
Add: Income for 2016, 2017 and 2018 2,400
Deduct: Dividends for 2016, 2017 and 2018 (1,200)
Equity book value of Sun December 31, 2018 8,400
Goodwill 400
Equity fair value of Sun December 31, 2018 $8,800
Noncontrolling interest December 31, 2018 $1,760
6 Controlling share of consolidated net income for 2018

Pam’s separate income $2,240
Add: Income from Sun 768
Controlling share of consolidated net income $3,008
Pam’s net income $2,240

Sun’s net income 960
Less: Noncontrolling interest share ($960 x 20%) 192
Controlling interest share $3,008

Chapter 3 3-23
PR 3-1
ASC 805-10-20 Glossary: “Acquisition Date - The date on which
the acquirer obtains control of the acquiree.”
PR 3-2
ASC 810-10-50-1A:
A parent with one or more less-than-wholly-owned subsidiaries shall disclose
all of the following for each reporting period:
a. Separately, on the face of the consolidated financial statements, both
of the following:
1. The amounts of consolidated net income and consolidated

comprehensive income
2. The related amounts of each attributable to the parent and

the noncontrolling interest.
b. Either in the notes or on the face of the consolidated income

statement, amounts attributable to the parent for any of the following, if
reported in the consolidated financial statements:
1. Income from continuing operations
2. Discontinued operations
c. Either in the consolidated statement of changes in equity, if presented,

or in the notes to consolidated financial statements, a reconciliation at the
beginning and the end of the period of the carrying amount of total equity
(net assets), equity (net assets) attributable to the parent, and equity (net
assets) attributable to the noncontrolling interest. That reconciliation shall
separately disclose all of the following:
1. Net income
2. Transactions with owners acting in their capacity as owners,

showing separately contributions from and distributions to owners
3. Each component of other comprehensive income.
d. In notes to the consolidated financial statements, a separate schedule

that shows the effects of any changes in a parent’s ownership interest in a
subsidiary on the equity attributable to the parent.

Chapter 3 Advanced Accounting

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Chapter 3

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

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11 Parent’s books: Reciprocal accounts on subsidiary’s books:

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

Noncontrolling interest beginning of the period

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Solution E3-1 Solution E3-2

Solution E3-3 [AICPA adapted]

1 c Advance to Hill $75,000 + receivable from Ward $200,000 = $275,000

2 a Zero, goodwill has an indeterminate life and is not amortized.

3 a Pop accounts for Sap using the equity method, therefore,

Solution E3-4 (in thousands)

1 Implied fair value of Son ($3,600 / 90%) $4,000

2 Consolidated net income

Pop’s reported net income $1,960

Noncontrolling share of consolidated net income

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1 $2,400, the dividends of Pam

Solution E3-6 (in thousands)

1 Journal entry to record push down values

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1 Pam Corporation and Subsidiary

2 Pam Corporation and Subsidiary

Depreciation of excess allocated to overvalued equipment:

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The capital stock appearing in the consolidated balance sheet at

2 Goodwill at December 31, 2016

Investment cost at January 2, 2016 (80% interest) $1,400

3 Consolidated retained earnings at December 31, 2016

Pop’s retained earnings January 2 (equal to

4 Noncontrolling interest at December 31, 2016

Capital stock and retained earnings of Son on

5 Dividends payable at December 31, 2016

Dividends payable to stockholders of Pop $ 180

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Pam Corporation and Subsidiary

Computation of noncontrolling interest at December 31, 2016

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Pop Corporation and Subsidiary

Investment cost January 1, 2016 (90% interest) $ 1,620

Excess allocated to:

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1 Pam Corporation and Subsidiary

Liabilities and Stockholders’ Equity

2 Consolidated net income for 2017

Pam’s separate income $ 680

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1 Schedule to allocate fair value/book value differential

Cost of investment in Son $ 350

2 Pop Corporation and Subsidiary

Property, plant and equipment:

Liabilities and Stockholders’ Equity

* 30% of implied fair value of $500 = $150.

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Cost of investment in Sun January 1, 2016 $10,800

Schedule to Allocate Fair Value — Book Value Differential

Solution P3-4 (in thousands)

Total fair value $1,300

Fair Value - Book Value

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Pop Corporation and Subsidiary

Plant assets ($4,000 + $2,400 + $320 - $80) $6,640