adv. acc10e

Advanced Accounting Solution Manual

10th Edition

2009 Pearson Education, Inc. publishing as Prentice Hall 1-1

Chapter 1

BUSINESS COMBINATIONS Answers to Questions 1 A business combination is a union of business entities in which two or more previously separate and

independent companies are brought under the control of a single management team. FASB Statement No. 141R describes three situations that establish the control necessary for a business combination, namely, when one or more corporations become subsidiaries, when one company transfers its net assets to another, and when each combining company transfers its net assets to a newly formed corporation.

2 The dissolution of all but one of the separate legal entities is not necessary for a business combination. An

example of one form of business combination in which the separate legal entities are not dissolved is when one corporation becomes a subsidiary of another. In the case of a parent-subsidiary relationship, each combining company continues to exist as a separate legal entity even though both companies are under the control of a single management team.

3 A business combination occurs when two or more previously separate and independent companies are

brought under the control of a single management team. Merger and consolidation in a generic sense are frequently used as synonyms for the term business combination. In a technical sense, however, a merger is a type of business combination in which all but one of the combining entities are dissolved and a consolidation is a type of business combination in which a new corporation is formed to take over the assets of two or more previously separate companies and all of the combining companies are dissolved.

4 Goodwill arises in a business combination accounted for under the acquisition method when the cost of the

investment (fair value of the consideration transferred) exceeds the fair value of identifiable net assets acquired. Under FASB Statement No. 142, goodwill is no longer amortized for financial reporting purposes and will have no effect on net income, unless the goodwill is deemed to be impaired. If goodwill is impaired, a loss will be reocnized.

5 A bargain purchase occurs when the acquisition price is less than the fair value of the identifiable net assets

acquired. The acquirer records the gain from a bargain purchase amount as an extraordinary gain during the period of the acquisition, under FASB Statement No. 141R.

1-2 Business Combinations

2009 Pearson Education, Inc. publishing as Prentice Hall

SOLUTIONS TO EXERCISES Solution E1-1 1 a 2 b 3 a 4 a 5 d Solution E1-2 [AICPA adapted] 1 a Plant and equipment should be recorded at the $55,000 fair value. 2 c Investment cost $800,000 Less: Fair value of net assets Cash $ 80,000 Inventory 190,000 Property and equipment net 560,000 Liabilities (180,000) 650,000 Goodwill $150,000 Solution E1-3 Stockholders equity Pillow Corporation on January 3 Capital stock, $10 par, 300,000 shares outstanding $3,000,000 Additional paid-in capital [$200,000 + $1,500,000 $5,000] 1,695,000 Retained earnings 600,000 Total stockholders equity $5,295,000 Entry to record combination Investment in Sleep-bank 3,000,000 Capital stock, $10 par 1,500,000 Additional paid-in capital 1,500,000 Investment expense 10,000 Additional paid-in capital 5,000 Cash 15,000 Check: Net assets per books $3,800,000 Goodwill 1,510,000 Less: Expense of direct costs (10,000) Less: Issuance of stock (5,000) $5,295,000

Chapter 1 1-3


Solution E1-4 Journal entries on IceAges books to record the acquisition Investment in Jester 2,550,000

Common stock, $10 par 1,200,000 Additional paid-in capital 1,350,000

To record issuance of 120,000 shares of $10 par common stock with a fair value of $2,550,000 for the common stock of Jester in a business combination.

Additional paid-in capital 15,000 Investment expenses 45,000 Other assets 60,000 To record costs of registering and issuing securities as a reduction of paid-

in capital, and record direct and indirect costs of combination as expenses.

Current assets 1,100,000 Plant assets 2,200,000 Liabilities 300,000 Investment in Jester 3,000,000 To record allocation of the $2,550,000 cost of Jester Company to identifiable

assets and liabilities according to their fair values, computed as follows:

Cost $2,550,000 Fair value acquired 3,000,000 Bargain purchase amount $ 450,000 Investment in Jester 450,000 Gain from bargain purchase 450,000 To record gain from bargain purchase.



Solution E1-5 Journal entries on the books of Danders Corporation to record merger with Harrison Corporation Investment in Harrison 530,000 Common stock, $10 par 180,000 Additional paid-in capital 150,000 Cash 200,000

To record issuance of 18,000 common shares and payment of cash in the acquisition of Harrison Corporation in a merger.

Investment expenses 70,000 Additional paid-in capital 30,000 Cash 100,000

To record costs of registering and issuing securities and additional direct costs of combination. Cash 40,000 Inventories 100,000 Other current assets 20,000 Plant assets net 280,000 Goodwill 160,000 Current liabilities 30,000 Other liabilities 40,000 Investment in Harrison 530,000

To record allocation of cost to assets received and liabilities assumed on the basis of their fair values and to goodwill computed as follows:

Cost of investment $530,000 Fair value of assets acquired 370,000 Goodwill $160,000

Chapter 1 1-5


SOLUTIONS TO PROBLEMS Solution P1-1 Preliminary computations Fair Value: Cost of investment in Sain at January 2 (30,000 shares $20) $600,000 Book value (440,000) Excess fair value over book value $160,000 Excess allocated to: Current assets $ 40,000 Remainder to goodwill 120,000 Excess fair value over book value $160,000 Note: $25,000 direct costs of combination are expensed. The excess fair value of Pines buildings is not considered.

Pine Corporation Balance Sheet at January 2, 2009

Assets Current assets ($130,000 + $60,000 + $40,000 excess - $40,000 direct costs) $ 190,000 Land ($50,000 + $100,000) 150,000 Buildings net ($300,000 + $100,000) 400,000 Equipment net ($220,000 + $240,000) 460,000 Goodwill 120,000 Total assets $1,320,000 Liabilities and Stockholders Equity Current liabilities ($50,000 + $60,000) $ 110,000 Common stock, $10 par ($500,000 + $300,000) 800,000 Additional paid-in capital [$50,000 + ($10 30,000 shares) $15,000 costs of issuing and registering securities]

335,000

Retained earnings (subtract $25,000 expensed direct cost) 75,000 Total liabilities and stockholders equity $1,320,000



Solution P1-2 Preliminary computations Fair Value: Cost of acquiring Seabird $825,000 Fair value of assets acquired and liabilities assumed 670,000 Goodwill from acquisition of Seabird $155,000

Pelican Corporation Balance Sheet

at January 2, 2009

Assets Current assets Cash [$150,000 + $30,000 - $140,000 expenses paid] $ 40,000 Accounts receivable net [$230,000 + $40,000 fair value] 270,000 Inventories [$520,000 + $120,000 fair value] 640,000 Plant assets Land [$400,000 + $150,000 fair value] 550,000 Buildings net [$1,000,000 + $300,000 fair value] 1,300,000 Equipment net [$500,000 + $250,000 fair value] 750,000 Goodwill 155,000 Total assets $3,705,000 Liabilities and Stockholders Equity Liabilities Accounts payable [$300,000 + $40,000] $ 340,000 Note payable [$600,000 + $180,000 fair value] 780,000 Stockholders equity Capital stock, $10 par [$800,000 + (33,000 shares $10)] 1,130,000 Other paid-in capital [$600,000 - $40,000 + ($825,000 - $330,000)] 1,055,000 Retained earnings (subtract $100,000 expensed direct costs) 400,000 Total liabilities and stockholders equity $3,705,000

Chapter 1 1-7


Solution P1-3 Persis issues 25,000 shares of stock for Sinecos outstanding shares 1a Investment in Sineco 750,000 Capital stock, $10 par 250,000 Other paid-in capital 500,000

To record issuance of 25,000, $10 par shares with a market price of $30 per share in a business combination with Sineco.

Investment expenses 30,000 Other paid-in capital 20,000 Cash 50,000

To record costs of combination in a business combination with Sineco.

Cash 10,000 Inventories 60,000 Other current assets 100,000 Land 100,000 Plant and equipment net 350,000 Goodwill 180,000 Liabilities 50,000 Investment in Sineco 750,000

To record allocation of investment cost to identifiable assets and liabilities according to their fair values and the remainder to goodwill. Goodwill is computed: $750,000 cost - $570,000 fair value of net assets acquired.

1b Persis Corporation Balance Sheet January 2, 2009 (after business combination) Assets Cash [$70,000 + $10,000] $ 80,000 Inventories [$50,000 + $60,000] 110,000 Other current assets [$100,000 + $100,000] 200,000 Land [$80,000 + $100,000] 180,000 Plant and equipment net [$650,000 + $350,000] 1,000,000 Goodwill 160,000 Total assets $1,750,000 Liabilities and Stockholders Equity Liabilities [$200,000 + $50,000] $ 250,000 Capital stock, $10 par [$500,000 + $250,000] 750,000 Other paid-in capital [$200,000 + $500,000 - $20,000] 680,000 Retained earnings (subtract $30,000 direct costs) 70,000 Total liabilities and stockholders equity $1,750,000



Solution P1-3 (continued) Persis issues 15,000 shares of stock for Sinecos outstanding shares 2a Investment in Sineco (15,000 shares $30) 450,000 Capital stock, $10 par 150,000 Other paid-in capital 300,000

To record issuance of 15,000, $10 par common shares with a market price of $30 per share.

Investment expense 30,000 Other paid-in capital 20,000 Cash 50,000

To record costs of combination in the acquisition of Sineco. Cash 10,000 Inventories 60,000 Other current assets 100,000 Land 100,000 Plant and equipment net 350,000 Liabilities 50,000 Investment in Sineco 570,000

To record Sinecos net assets at fair values. Investment in Sineco 120,000 Gain on bargain purchase 120,000

To record gain on bargain purchase and adjust Investment in Sineco to reflect total fair value.

Fair value of net assets acquired $570,000 Investment cost (Fair value of consideration) 450,000 Gain on Bargain Purchase $120,000 2b Persis Corporation Balance Sheet January 2, 2009 (after business combination) Assets Cash [$70,000 + $10,000] $ 80,000 Inventories [$50,000 + $60,000] 110,000 Other current assets [$100,000 + $100,000] 200,000 Land [$80,000 + $100,000] 180,000 Plant and equipment net [$650,000 + $350,000] 1,000,000 Total assets $1,570,000 Liabilities and stockholders equity Liabilities [$200,000 + $50,000] $ 250,000 Capital stock, $10 par [$500,000 + $150,000] 650,000 Other paid-in capital [$200,000 + $300,000 - $20,000] 480,000 Retained earnings (subtract $30,000 direct costs

and add $120,000 Gain from bargain purchase) 190,000

Total liabilities and stockholders equity $1,570,000

Chapter 1 1-9


Solution P1-4 1 Schedule to allocate investment cost to assets and liabilities Investment cost (fair value), January 1 $300,000 Fair value acquired from Sen ($360,000 100%) 360,000 Excess fair value over cost (bargain purchase gain) $ 60,000 Allocation: Allocation Cash $ 10,000 Receivables net 20,000 Inventories 30,000 Land 100,000 Buildings net 150,000 Equipment net 150,000 Accounts payable (30,000) Other liabilities (70,000) Gain on bargain purchase (60,000) Totals $ 300,000 2 Phule Corporation Balance Sheet at January 1, 2009 (after combination) Assets Liabilities Cash $ 25,000 Accounts payable $ 120,000 Receivables net 60,000 Note payable (5 years) 200,000 Inventories 150,000 Other liabilities 170,000 Land 145,000 Liabilities 490,000 Buildings net 350,000 Equipment net 330,000 Stockholders Equity Capital stock, $10 par 300,000 Other paid-in capital 100,000 Retained earnings* 170,000 Stockholders equity 510,000 Total assets $1,060,000 Total equities $1,060,000 * Retained earnings reflects the $60,000 gain on the bargain purchase.



Solution P1-5 1 Journal entries to record the acquisition of Dawn Corporation Investment in Dawn 2,500,000 Capital stock, $10 par 1,000,000 Other paid-in capital 1,000,000 Cash 500,000

To record acquisition of Dawn for 100,000 shares of common stock and $500,000 cash.

Investment expense 100,000 Other paid-in capital 50,000 Cash 150,000

To record payment of costs to register and issue the shares of stock ($50,000) and other costs of combination ($100,000).

Cash 240,000 Accounts receivable 360,000 Notes receivable 300,000 Inventories 500,000 Other current assets 200,000 Land 200,000 Buildings 1,200,000 Equipment 600,000 Accounts payable 300,000 Mortgage payable, 10% 600,000 Investment in Dawn 2,700,000

To record the net assets of Dawn at fair value. Investment in Dawn 200,000 Gain on bargain purchase 200,000 To adjust Investment account to total fair value and recognize

the gain from the bargain purchase.

Gain on Bargain Purchase Calculation

Acquisition price $2,500,000 Fair value of net assets acquired 2,700,000 Gain on bargain purchase $ 200,000

Chapter 1 1-11


Solution P1-5 (continued) 2 Celistia Corporation

Balance Sheet at January 2, 2009

(after business combination)

Assets Current Assets Cash $ 2,590,000 Accounts receivable net 1,660,000 Notes receivable net 1,800,000 Inventories 3,000,000 Other current assets 900,000 $ 9,950,000 Plant Assets Land $ 2,200,000 Buildings net 10,200,000 Equipment net 10,600,000 23,000,000 Total assets $32,950,000 Liabilities and Stockholders Equity Liabilities Accounts payable $ 1,300,000 Mortgage payable, 10% 5,600,000 $ 6,900,000 Stockholders Equity Capital stock, $10 par $11,000,000 Other paid-in capital 8,950,000 Retained earnings* 6,000,000 26,050,000 Total liabilities and stockholders equity $32,950,000 * Subtract $100,000 direct combination costs and add $200,000 gain on bargain purchase.



RESEARCH CASE

1. Journal entry to record the acquisition (in millions of $) Investment in Target 50,000 Common stock, $0.10 par 100 Additional paid-in capital 49,900

To record acquisition of Target for 1 billion shares of common stock having a fair value of $50 per share.

Cash 240,000 Accounts receivable 360,000 Notes receivable 300,000 Inventories 500,000 Other current assets 200,000 Land 190,000 Buildings 1,140,000 Equipment 570,000 Accounts payable 300,000 Mortgage payable, 10% 600,000 Investment in Target 2,600,000

Assign the excess of fair value over book value of assets and liabilities as shown in the following allocation schedule:

Acquisition price $50,000 Excess fair value of assets acquired Inventory (10%) 625 Land (20%) 987 Buildings and improvements (20%) 3,222 Fixtures and equipment (20%) 711 Computer hardware and software (20%) 438 21,859 Goodwill $ 28,141

Chapter 1 1-13


2. Consolidated Balance Sheet at January 31, 2007

(millions, except footnotes) WAL-MART TARGET DR CR

CONSOLI-DATED

Assets Cash and cash equivalents 7,373 813 8,186 Accounts receivable, net 2,840 6,194 9,034 Inventory 33,685 6,254 625 40,564 Other current assets 2,690 1,445 4,135

Total current assets 46,588 14,706 61,294 Property and equipment Land 18,612 4,934 987 24,533 Buildings and improvements 64,052 16,110 3,222 83,384 Fixtures and equipment 25,168 3,553 711 29,432 Computer hardware and software 2,188 438 2,626 Construction-in-progress 1,596 1,596 Transportation equipment 1,966 1,966 Accumulated depreciation (24,408) (6,950) (31,358)

Property and equipment, net 85,390 21,431 106,821 Property Under Capital Lease 5,392 5,392 Less: Accumulated amortization (2,342) (2,342) Property Under Lease - net 3,050 3,050 Goodwill 13,759 28,141 41,900 Investment in Target 50,000 50,000 0 Other non-current assets 2,406 1,212 3,618

Total assets 201,193 37,349 238,542

Liabilities and shareholders' investment Commercial Paper 2,570 2,570 Accounts payable 28,090 6,575 34,665 Accrued and other current liabilities 14,675 2,758 17,433 Income taxes payable 706 422 1,128 Current portion of long-term debt and notes payable 5,428 1,362 6,790 Current obligations capital leases 285 285 Total current liabilities 51,754 11,117 62,871 Long-term debt 27,222 8,675 35,897 Long term capital leases 3,513 3,513 Deferred income taxes 4,971 577 5,548 Noncontrolling Interest 2,160 2,160 Other non-current liabilities 1,347 1,347 Shareholders' investment Common stock 513 72 72 513 Additional paid-in-capital 52,734 2,387 2,387 52,734 Retained earnings 55,818 13,417 13,417 55,818 Accumulated other comprehensive income (loss) 2,508 (243) 2,265 Total shareholders' investment 111,573 15,633 127,206

Total liabilities and shareholders' investment 201,193 37,349 50,000 50,000 238,542


Chapter 2

STOCK INVESTMENTS INVESTOR ACCOUNTING AND REPORTING Answers to Questions 1 Only the investors accounts are affected when outstanding stock is acquired from existing stockholders.

The investor records the investment at its cost. Since the investee company is not a party to the transaction, its accounts are not affected.

Both investor and investee accounts are affected when unissued stock is acquired directly from the investee. The investor records the investment at its cost and the investee adjusts its asset and owners equity accounts to reflect the issuance of previously unissued stock.

2 Goodwill arising from an equity investment of 20 percent or more is not recorded separately from the

investment account. Under the equity method, the investment is presented on one line of the balance sheet in accordance with the one-line consolidation concept.

3 Dividends received from earnings accumulated before an investment is acquired are treated as decreases in

the investment account balance under the fair value/cost method. Such dividends are considered a return of a part of the original investment.

4 The equity method of accounting for investments increases the investment account for the investors share

of the investees income and decreases it for the investors share of the investees losses and for dividends received from the investee. In addition, the investment and investment income accounts are adjusted for amortization of any investment cost-book value differentials related to the interest acquired. Adjustments to the investment and investment income accounts are also needed for unrealized profits and losses from transactions between the investor and investee companies. A fair value adjustment is optional under SFAS No. 159.

5 The equity method is referred to as a one-line consolidation because the investment account is reported on

one line of the investors balance sheet and investment income is reported on one line of the investors income statement (except when the investee has extraordinary or cumulative-effect type adjustments). In addition, the investment income is computed such that the parent companys income and stockholders equity are equal to the consolidated net income and consolidated stockholders equity that would result if the statements of the investor and investee were consolidated.

6 If the equity method of accounting is applied correctly, the income of the parent company will generally

equal the controlling interest share of consolidated net income. 7 The difference in the equity method and consolidation lies in the detail reported, but not in the amount of

income reported. The equity method reports investment income on one line of the income statement whereas the details of revenues and expenses are reported in the consolidated income statement.

8 The investment account balance of the investor will equal underlying book value of the investee if (a) the

equity method is correctly applied, (b) the investment was acquired at book value which was equal to fair value, the pooling method was used, or the cost-book value differentials have all been amortized, and (c) there have been no intercompany transactions between the affiliated companies that have created investment account-book value differences.

9 The investment account balance must be converted from the cost to the equity method when acquisitions

increase the interest held to 20 percent or more. The amount of the adjustment is the difference between the investment income reported under the cost method in prior years and the income that would have been reported if the equity method of accounting had been used. Changes from the cost to the equity method of accounting for equity investments are changes in the reporting entity that require restatement of prior years financial statements when the effect is material.

2-2 Stock Investments Investor Accounting and Reporting


10 The one-line consolidation is adjusted when the investees income includes extraordinary items, gains or losses from discontinued operations, or cumulative-effect type adjustments. In this case, the investors share of the investees ordinary income is reported as investment income under a one-line consolidation, but the investors share of extraordinary items, cumulative-effect type adjustments, and gains and losses from discontinued operations is combined with similar items of the investor.

11 The remaining 15 percent interest in the investee is accounted for under the fair value/cost method, and the

investment account balance immediately after the sale becomes the new cost basis. 12 Yes. When an investee has preferred stock in its capital structure, the investor has to allocate the investees

income to preferred and common stockholders. Then, the investor takes up its share of the investees income allocated to common stockholders in applying the equity method. The allocation is not necessary when the investee has only common stock outstanding.

13 Goodwill impairment losses are calculated by business reporting units. For each reporting unit, the

company must first determine the fair values of net assets. The fair value of the reporting unit is the amount at which it could be purchased in a current market transaction. This may be based on market prices, discounted cash flow analyses, or similar current transactions. This is done in the same manner as is done to originally record a combination. Any excess measured fair value is the fair value of goodwill. The company then compares the goodwill fair value estimate to the carrying value of goodwill to determine if there has been an impairment during the period.

14 Yes. Impairment losses for subsidiaries are computed as outlined in the solution to question 13. Companies

compare fair values to book valuers for equity method investments as a whole. Firms may recognize impairments for equity method investments as a whole, but perform no separate goodwill impairment.

15 Initial impairment losses recorded upon adoption of SFAS 142 are treated as the cumulative effect of an

accounting change. Impairment losses resulting from subsequent annual reviews are included in the calculation of income from operations.

16 17 18

Chapter 2 2-3


19 SOLUTIONS TO EXERCISES Solution E2-1 1 d 2 c 3 c 4 d 5 b Solution E2-2 [AICPA adapted] 1 d 2 b 3 d 4 b Grades investment is reported at its $300,000 cost because the equity

method is not appropriate and because Grades share of Mediums income exceeds dividends received since acquisition [($260,000 15%) > $20,000].

5 c Dividends received from Zafacon for the two years were $10,500 ($70,000

15% - all in 2009), but only $9,000 (15% of Zafacons income of $60,000 for the two years) can be shown on Torquels income statement as dividend income from the Zafacon investment. The remaining $1,500 reduces the investment account balance.

6 c [$50,000 + $150,000 + ($300,000 10%)] 7 a 8 d Investment balance January 2 $250,000 Add: Income from Pod ($100,000 30%) 30,000 Investment in Pod December 31 $280,000 Solution E2-3 1 Bowmans percentage ownership in Trevor Bowmans 20,000 shares/(60,000 + 20,000) shares = 25% 2 Goodwill Investment cost $500,000 Book value ($1,000,000 + $500,000) 25% (375,000) Goodwill $125,000 Solution E2-4 Income from Medley for 2009 Share of Medleys income ($200,000 1/2 year 30%) $ 30,000



Solution E2-5 1 Income from Oakey Share of Oakeys reported income ($800,000 30%) $ 240,000 Less: Excess allocated to inventory (100,000) Less: Depreciation of excess allocated to building

($200,000/4 years) (50,000)

Income from Oakey $ 90,000 2 Investment account balance at December 31 Cost of investment in Oakey $2,000,000 Add: Income from Oakey 90,000 Less: Dividends ($200,000 x 30%) (60,000) Investment in Oakey December 31 $2,030,000 Alternative solution Underlying equity in Oakey at January 1 ($1,500,000/.3) $5,000,000 Income less dividends 600,000 Underlying equity December 31 5,600,000 Interest owned 30% Book value of interest owned December 31 1,680,000 Add: Unamortized excess 350,000 Investment in Oakey December 31 $2,030,000 Solution E2-6 Journal entry on Martins books Investment in Neighbors ($300,000 x 40%) 120,000 Loss from discontinued operations 20,000 Income from Kelly 140,000 To recognize income from 40% investment in Neighbors.

Chapter 2 2-5


Solution E2-7 1 a Dividends received from Bennett ($120,000 15%) $ 18,000 Share of income since acquisition of interest 2008 ($20,000 15%) (3,000) 2009 ($80,000 15%) (12,000) Excess dividends received over share of income $ 3,000 Investment in Bennett January 3, 2008 $ 50,000 Less: Excess dividends received over share of income (3,000) Investment in Bennett December 31, 2009 $ 47,000 2 b Cost of 10,000 of 40,000 shares outstanding $1,400,000 Book value of 25% interest acquired ($4,000,000

stockholders equity at December 31, 2008 +

$1,400,000 from additional stock issuance) 25% 1,350,000 Excess fair value over book value(goodwill) $ 50,000 3 d The investment in Monroe balance remains at the original

cost.

4 c Income before extraordinary item $ 200,000 Percent owned 40% Income from Krazy Products $ 80,000 Solution E2-8 Preliminary computations Cost of 40% interest January 1, 2008 $2,400,000 Book value acquired ($4,000,000 40%) (1,600,000) Excess fair value over book value $ 800,000 Excess allocated to Inventories $100,000 40% $ 40,000 Equipment $200,000 40% 80,000 Goodwill for the remainder 680,000 Excess fair value over book value $ 800,000 Raythons underlying equity in Treaton ($5,500,000 40%) $2,200,000 Add: Goodwill 680,000 Investment balance December 31, 2012 $2,880,000 Alternative computation Raythons share of the change in Treatons stockholders equity ($1,500,000 40%) $ 600,000 Less: Excess allocated to inventories ($40,000 100%) (40,000) Less: Excess allocated to equipment ($80,000/4 years 4 years) (80,000) Increase in investment account 480,000 Original investment 2,400,000 Investment balance December 31, 2012 $2,880,000



Solution E2-9 1 Income from Runner Share of income to common ($400,000 - $30,000 preferred dividends) 30% $ 111,000 2 Investment in Runner December 31, 2009 NOTE: The $50,000 direct costs of acquiring the investment

must be expensed when incurred. They are not a part of the cost of the investment.

Investment cost $1,200,000 Add: Income from Runner 111,000 Less: Dividends from Runner ($200,000 dividends - $30,000 dividends to preferred) 30% (51,000) Investment in Runner December 31, 2009 $1,260,000 Solution E2-10 1 Income from Tree ($300,000 $200,000) 25% Investment income October 1 to December 31 $ 25,000 2 Investment balance December 31 Investment cost October 1 $ 600,000 Add: Income from Tree 25,000 Less: Dividends --- Investment in Tree at December 31 $ 625,000

Chapter 2 2-7


Solution E2-11 Preliminary computations Goodwill from first 10% interest: Cost of investment $ 50,000 Book value acquired ($420,000 10%) (42,000) Excess fair value over book value $ 8,000 Goodwill from second 10% interest: Cost of investment $ 100,000 Book value acquired ($500,000 10%) (50,000) Excess fair value over book value $ 50,000 1 Correcting entry as of January 2, 2009 to

convert investment to the equity basis

Accumulated gain/loss on stock available for Sale

50,000

Valuation allowance to record SAS at fair value

50,000

To remove the valuation allowance entered on December 31, 2009 under the fair value method for an available for sale security.

Investment in Twizzle 8,000 Retained earnings 8,000 To adjust investment account to an equity basis

computed as follows:

Share of Twizzles income for 2009 $ 20,000 Less: Share of dividends for 2009 (12,000) $ 8,000 2 Income from Twizzle for 2009 Income from Twizzle on original 10% investment $ 10,000 Income from Twizzle on second 10% investment 10,000 Income from Twizzle $ 20,000



Solution E2-12 Preliminary computations Stockholders equity of Tall on December 31, 2008 $380,000 Sale of 12,000 previously unissued shares on January 1, 2009 250,000 Stockholders equity after issuance on January 1, 2009 $630,000 Cost of 12,000 shares to River $250,000 Book value of 12,000 shares acquired $630,000 12,000/36,000 shares 210,000 Excess fair value over book value $ 40,000 Excess is allocated as follows Buildings $60,000 12,000/36,000 shares $ 20,000 Goodwill 20,000 Excess fair value over book value $ 40,000 Journal entries on Rivers books during 2009 January 1 Investment in Tall 250,000 Cash 250,000 To record acquisition of a 1/3 interest in Tall. During 2009 Cash 30,000 Investment in Tall 30,000 To record dividends received from Tall ($90,000 1/3). December 31 Investment in Tall 38,000 Income from Tall 38,000 To record investment income from Tall computed as

follows:

Share of Talls income ($120,000 1/3) $ 40,000 Depreciation on building ($20,000/10 years) (2,000) Income from Tall $ 38,000

Chapter 2 2-9


Solution E2-13 1 Journal entries on BIPs books for 2009 Cash 30,000 Investment in Crown (30%) 30,000 To record dividends received from Crown

($100,000 30%).

Investment in Crown (30%) 60,000 Extraordinary loss (from Crown) 6,000 Income from Crown 66,000 To record investment income from Crown computed

as follows:

Share of income before extraordinary item $170,000 30% $ 51,000 Add: Excess fair value over cost realized

in 2009

$50,000 30% 15,000 Income from Crown before extraordinary

loss $ 66,000

2 Investment in Crown balance December 31, 2009 Investment cost $ 195,000 Add: Income from Crown after extraordinary loss 60,000 Less: Dividends received from Crown (30,000) Investment in Crown December 31 $225,000 Check: Investment balance is equal to underlying book value ($700,000 + $150,000 - $100,000) 30% = $225,000 3 BIP Corporation Income Statement for the year ended December 31, 2009 Sales $1,000,000 Expenses 700,000 Operating income 300,000 Income from Crown (before extraordinary item) 66,000 Income before extraordinary item 366,000 Extraordinary loss (net of tax effect) 6,000 Net income $ 360,000 Solution E2-14 1 Income from Water for 2009 Equity in income ($108,000 - $8,000 preferred) 40% $ 40,000 2 Investment in Water December 31, 2009 Cost of investment in Water common $ 290,000 Add: Income from Water 40,000 Less: Dividends * ($40,000 x 40%) (16,000) Investment in Water December 31 $ 314,000

* $48,000 toal dividends less $8,000 preferred dividend

Chapter 2 2-11


Solution E2-15 Since the total value of Steele has declined by $60,000 while the fair value of the net identifiable assets is unchanged, the $60,000 decline is the impairment in goodwill for the period. Assuming this is not the initial adoption of SFAS 142, the $60,000 impairment loss is deducted in calculating Parks income from continuing operations. Solution E2-16 Goodwill impairments are calculated at the business reporting unit level. Increases and decreases in fair values across business units are not offsetting. Flash must report an impairment loss of $5,000 in calculating 2009 income from continuing operations. SOLUTIONS TO PROBLEMS Solution P2-1 1 Goodwill Cost of investment in Telly on April 1 $ 343,000 Book value acquired: Net assets at December 31 $1,000,000 Add: Income for 1/4 year ($120,000 25%) 30,000 Less: Dividends paid March 15 (20,000) Book value at April 1 1,010,000 Interest acquired 30% 303,000 Goodwill from investment in Telly $ 40,000 2 Income from Telly for 2009 Equity in income before extraordinary item ($120,000 3/4 year 30%) $ 27,000 Extraordinary gain from Telly ($40,000 30%) 12,000 Income from Telly $ 39,000 3 Investment in Telly at December 31, 2009 Investment cost April 1 $ 343,000 Add: Income from Telly plus extraordinary gain 39,000 Less: Dividends ($20,000 3 quarters) 30% (18,000) Investment in Shelly December 31 $ 364,000 4 Equity in Tellys net assets at December 31, 2009 Tellys stockholders equity January 1 $1,000,000 Add: Net income 160,000 Less: Dividends (80,000) Tellys stockholders equity December 31 1,080,000 Investment interest 30% Equity in Tellys net assets $ 324,000 5 Extraordinary gain for 2009 to be reported by Ritter Tellys extraordinary gain 30% $ 12,000



Solution P2-2 1 Cost method Investment in Siegel July 1, 2009 (at cost) $110,000 Dividends charged to investment (2,400) Investment in Siegel balance at December 31,

2009 $107,600

July 1, 2009 Investment in Siegel 110,000 Cash 110,000 To record initial investment for 80% interest. November 1, 2009 Cash 6,400 Dividend income 6,400 To record receipt of dividends ($8,000 80%). December 31, 2009 Dividend income 2,400 Investment in Siegel 2,400 To reduce investment for dividends in excess of

earnings ($8,000 dividends - $5,000 earnings) 80%.

2 Equity method Investment in Siegel July 1, 2009 $110,000 Add: Share of reported income 4,000 Deduct: Dividends charged to investment (6,400) Deduct: Excess Depreciation (1,100) Investment in Siegel balance at December 31,

2009

$106,500 July 1, 2009 Investment in Siegel 110,000 Cash 110,000 To record initial investment for 80% interest

of Siegel. November 1, 2009 Cash 6,400 Investment in Siegel 6,400 To record receipt of dividends ($8,000 80%). December 31, 2009 Investment in Siegel 2,900 Income from Siegel 2,900 To record income from Siegel computed as follows:

Share of Siegels income ($10,000 1/2 year 80%) less excess depreciation ($22,000/10 years 1/2 year).

Chapter 2 2-13


Solution P2-3 Preliminary computations Cost of investment in Zelda $331,000 Book value acquired ($1,000,000 30%) 300,000 Excess fair value over book value $ 31,000 Excess allocated Undervalued inventories ($30,000 30%) $ 9,000 Overvalued building (-$60,000 30%) (18,000) Goodwill for the remainder 40,000 Excess fair value over book value $ 31,000 1 Income from Zelda Share of Zeldas reported income ($100,000 30%) $ 30,000 Less: Excess allocated to inventories sold in 2009 (9,000) Add: Amortization of excess allocated to overvalued building $18,000/10 years 1,800 Income from Zelda 2009 $ 22,800 2 Investment balance December 31, 2009 Cost of investment $331,000 Add: Income from Zelda 22,800 Less: Share of Zeldas dividends ($50,000 30%) (15,000) Investment in Zelda balance December 31 $338,800 3 Vatters share of Zeldas net assets Share of stockholders equity ($1,000,000 + $100,000 income - $50,000 dividends) 30% $315,000



Solution P2-4 Preliminary computations Investment cost of 40% interest $380,000 Book value acquired [$500,000 + ($100,000 1/2 year)] 40% 220,000 Excess fair value over book value $160,000 Excess allocated Land $30,000 40% $ 12,000 Equipment $50,000 40% 20,000 Remainder to goodwill 128,000 Excess fair value over book value $160,000 July 1, 2009 Investment in Dormer 380,000 Cash 380,000 To record initial investment for 40% interest in Dormer. November 2009 Cash (other receivables) 20,000 Investment in Dormer 20,000 To record receipt of dividends ($50,000 40%). December 31, 2009 Investment in Dormer 20,000 Income from Dormer 20,000 To record share of Dormers income ($100,000 1/2 year 40%). December 31, 2009 Income from Dormer 2,000 Investment in Dormer 2,000 To record depreciation on excess allocated to Undervalued equipment ($20,000/5 years 1/2 year).

Chapter 2 2-15


Solution P2-5 1 Schedule to allocate fair value book value differentials Investment cost January 1 $1,680,000 Book value acquired ($3,900,000 net assets 30%) 1,170,000 Excess fair value over book value $ 510,000 Allocation of excess Fair Value Percent Book Value Acquired Allocation Inventories $200,000 30% $ 60,000 Land 800,000 30% 240,000 Buildings net 500,000 30% 150,000 Equipment net (700,000) 30% (210,000) Bonds payable (100,000) 30% (30,000) Assigned to identifiable net assets 210,000 Remainder to goodwill 300,000 Excess fair value over book value $ 510,000 2 Income from Tremor for 2009 Equity in income ($1,200,000 30%) $ 360,000 Less: Amortization of differentials Inventories (sold in 2009) (60,000) Buildings net ($150,000/10 years) (15,000) Equipment net ($210,000/7 years) 30,000 Bonds payable ($30,000/5 years) 6,000 Income from Tremor $ 321,000 3 Investment in Tremor balance December 31, 2009 Investment cost $1,680,000 Add: Income from Tremor 321,000 Less: Dividends ($600,000 30%) (180,000) Investment in Tremor December 31 $1,821,000 Check: Underlying equity ($4,500,000 30%) $1,350,000 Unamortized excess: Land 240,000 Buildings net ($150,000 - $15,000) 135,000 Equipment net ($210,000 - $30,000) (180,000) Bonds payable ($30,000 - $6,000) (24,000) Goodwill 300,000 Investment in Tremor account $1,821,000



Solution P2-6 1 Income from Stapleton Investment in Stapleton July 1, 2009 at cost $96,000 Book value acquired ($130,000 60%) 78,000 Excess fair value over book value $18,000 Paulys share of Stapletons income for 2009 ($20,000 1/2 year 60%) $ 6,000 Less: Excess Depreciation ($18,000/10 years 1/2 year) 900 Income from Stapleton for 2009 $ 5,100 2 Investment balance December 31, 2009 Investment cost July 1 $96,000 Add: Income from Stapleton 5,100 Less: Dividends ($12,000 60%) (7,200) Investment in Stapleton December 31 $93,900 Solution P2-7

Dill Corporation Partial Income Statement

for the year ended December 31, 2011 Investment income Income from Larkspur (equity basis) $45,000 Income before extraordinary item 45,000 Extraordinary gain Share of Larkspurs operating loss carryforward 30,000 Net income $75,000

Chapter 2 2-17


Solution P2-8 1 Investment income 2011 Income from 10% investment: Share of income ($70,000 10%) 1 year $7,000 Less: Excess depreciation ($20,000 - $15,000) 10% 1 year (500) $ 6,500 Income from 20% investment: Share of income ($70,000 20%) 1/2 year $7,000 Less: Excess depreciation ($50,000 - $47,000) 10% 1/2 year (150) 6,850 Investment income $13,350 2 Prior period adjustment and other journal entries to record additional

purchase of Brady stock The 10% interest is converted to the equity method as of January 1, 2011

with the following entry: Investment in Brady 4,000 Retained earnings 4,000

The adjustment is equal to $50,000 retained earnings increase for 2008 and 2009 times 10% interest, less excess depreciation of $1,000 for 2008 and 2009.

Unrealized gains on available for sale 5,000 Valuation allowance - available for sale 5,000

This entry reverses the cumulative fair value adjustment made in prior periods. Since the security was available for sale rather than a trading security, the adjustment has had no impact on prior income statements.

Investment in Brady 50,000 Cash 50,000 Record the purchase of the additional 20% interest in Brady. 3 Investment in Brady at December 31, 2011 Share of Bradys underlying equity at December 31, 2011 * ($290,000 stockholders equity 30%) $87,000 Add: Unamortized equipment excess on 10% interest 3,000 Add: Unamortized equipment excess on 20% interest 2,550 Investment account balance December 31 $92,550

* Equity at 1/1/2008 $150,000 2008 Net income - Dividedns 20,000 2009 Net income - Dividends 30,000 2010 net income - Dividends 40,000 2011 net income - Dividends 50,000 Total Brady equity at 12/31/2011 $290,000

4 Adjustment for Hazels purchase of additional stock from Brady

Hazel increases its investment in Brady account by $70,000, the amount of the additional investment. The new balance of the investment in Brady account will be $162,550.



Solution P2-9 Preliminary computations Investment cost of 90% interest in Sigma $1,980,000 Implied total fair value of sigma ($1,980,000 / 90%) $2,200,000 Book value($2,525,000 + $125,000) (2,650,000) Excess book value over fair value $ (450,000) Excess allocated Overvalued plant assets $ (500,000) Undervalued inventories 50,000 Excess book value over fair value $ (450,000) 1 Investment income for 2009 Share of reported income ($250,000 1/2 year 90%) $ 112,500 Add: Depreciation on overvalued plant assets (($500,000 x 90%) / 9 years) 1/2 year 25,000 Less: 90% of Undervaluation allocated to inventories (45,000) Income from Sigma 2009 $ 92,500 2 Investment balance at December 31, 2010 Underlying book value of 90% interest in Sigma (Sigmas December 31, 2010 equity of $2,700,000 90%) $2,430,000 Less: Unamortized overvaluation of plant assets ($50,000 per year 7 1/2 years) (375,000) Investment balance December 31, 2010 $2,055,000 3 Journal entries to account for investment in 2011 Cash (or Dividends receivable) 135,000 Investment in Sigma 135,000 To record receipt of dividends ($150,000 90%). Investment in Sigma 230,000 Income from Sigma 230,000

To record income from Sigma computed as follows: Provos share of Sigmas reported net income ($200,000 90%) plus $50,000 amortization of overvalued plant assets.

Check: Investment balance December 31, 2010 of $2,055,000 + $230,000 income from Sigma - $135,000 dividends = $2,150,000 balance December 31, 2011 Alternatively, Sigmas underlying equity ($2,000,000 paid-in capital + $750,000 retained earnings) 90% interest - $325,000 unamortized excess allocated to plant assets = $2,150,000 balance December 31, 2011.

Chapter 2 2-19


Solution P2-10 1 Market price of $12 for Creapes shares Cost of investment in Tantani (40,000 shares $12) The $40,000 direct costs must be

expensed. $ 480,000

Book value acquired ($1,000,000 net assets 40%) 400,000 Excess fair value over book value $ 80,000 Allocation of excess Fair Value Percent Book Value Acquired Allocation Inventories $ 100,000 40% $ 40,000 Land 200,000 40% 80,000 Buildings net (200,000) 40% (80,000) Equipment net 100,000 40% 40,000 Assigned to identifiable net assets 80,000 Remainder assigned to goodwill 0 Total allocated $ 80,000 2 Market price of $8 for Creapes shares Cost of investment in Tantani (40,000 shares $8) Other direct costs are $0 $ 320,000 Book value acquired ($1,000,000 net assets 40%) 400,000 Excess book value over fair value $ (80,000) Excess allocated to Fair Value Percent Book Value Acquired Allocation Inventories $100,000 40% $40,000 Land 200,000 40% 80,000 Buildings net (200,000) 40% (80,000) Equipment net 100,000 40% 40,000 Bargain purchase (160,000) $(80,000)



Solution P2-11 1 Income from Spandix 2008 Prudys share of Spandixs income for 2008 $40,000 1/2 year 15% $ 3,000 2 Investment in Spandix balance December 31, 2008 Investment in Spandix at cost $ 48,750 Add: Income from Spandix 3,000 Less: Dividends from Spandix November 1 ($15,000 15%) (2,250) Investment in Spandix balance December 31 $ 49,500 3 Income from Spandix 2009 Prudys shares of Spandixs income for 2009: $60,000 income 15% interest 1 year $ 9,000 $60,000 income 30% interest 1 year 18,000 $60,000 income 45% interest 1/4 year 6,750 Prudys share of Spandixs income for 2009 $ 33,750 4 Investment in Spandix December 31, 2009 Investment balance December 31, 2008 (from 2) $ 49,500 Add: Additional investments ($99,000 + $162,000) 261,000 Add: Income for 2009 (from 3) 33,750 Less: Dividends for 2009 ($15,000 45%) + ($15,000 90%) (20,250) Investment in Spandix balance at December 31 $324,000 Alternative solution Investment cost ($48,750 + $99,000 + $162,000) $309,750 Add: Share of reported income 2008 $40,000 1/2 year 15% $ 3,000 2009 $60,000 1 year 45% 27,000 2009 $60,000 1/4 year 45% 6,750 36,750 Less: Dividends 2008 $15,000 15% $ 2,250 2009 $15,000 45% 6,750 2009 $15,000 90% 13,500 (22,500) Investment in Spandix $324,000

Note: Since Prudys investment in Spandix consisted of 9,000 shares (a 45% interest) on January 1, 2009, Prudy correctly used the equity method of accounting for the 15% investment interest held during 2008. The alternative of reporting income for 2008 on a fair value/cost basis and recording a prior period adjustment for 2009 is not appropriate in view of the overwhelming evidence of an ability to exercise significant influence by the time 2008 income is recorded.

Chapter 2 2-21


Solution P2-12 Income from Sassy 2008 2009 2010 2011 Total As reported $40,000 $32,000 $52,000 $48,000 $172,000 Correct amounts 20,000a 32,000b 52,000c 48,000d 152,000 Overstatement $20,000 $ -0- $ -0- $ -0- $ 20,000 a($100,000 1/2 year 40%) b($80,000 40%) c($130,000 40%) d($120,000 40%) 1 Investment in Sassy balance December 31, 2011 Investment in Sassy per books December 31 $400,000 Less: Overstatement 20,000 Correct investment in Sassy balance December 31 $380,000 Check Underlying equity in Sassy ($900,000 40%) $360,000 Add: Goodwill ($300,000-(700,000 40%)) 20,000 Investment balance $380,000 2 Correcting entry (before closing for 2011) Retained earnings 20,000 Investment in Sassy 20,000 To record investment and retained earnings accounts for prior errors.



Solution P2-13 1 Schedule to allocate excess cost over book value Investment cost (14,000 shares $13) $10,000 direct costs

must be expensed. $182,000

Book value acquired $190,000 70% 133,000 Excess fair value over book value $ 49,000 Excess allocated Interest Fair Value Book Value Acquired = Allocation Inventories $ 50,000 $60,000 70% $ (7,000) Land 50,000 30,000 70% 14,000 Equipment net 135,000 95,000 70% 28,000 Remainder to goodwill 14,000 Excess fair value over book value $ 49,000 2 Investment income from Samaritan Share of Samaritans reported income $60,000 70% $ 42,000 Add: Overvalued inventory items 7,000 Less: Depreciation on undervalued equipment ($28,000/4 years) 3/4 year (5,250) Investment income from Samaritan $ 43,750 3 Investment in Samaritan account at December 31, 2008 Investment cost $182,000 Add: Income from Samaritan 43,750 Less: Dividends received (14,000 shares $2) (28,000) Investment in Samaritan balance December 31 $197,750 Check Underlying equity at December 31, 2008 ($210,000 70%)* $147,000 Add: Unamortized excess of cost over book value Land 14,000 Equipment 22,750 Goodwill 14,000 Investment balance $197,750

* $100,000 (C/S) + $70,000 (R/E) + $80,000 (current earnings) -$40,000 (Dividends) = $210,000


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 allocated 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 allocation 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 is equal to or greater than the total fair value of the subsidiary. If the parent had acquired an 80 percent interest and the purchase price was equal to or greater than the fair value of the interest acquired, the land would still appear in the consolidated balance sheet at $100,000. Under SFAS No. 141R, the noncontrolling interest is also reported based on fair values at the acquisition date.

4 Parent companya corporation that owns a controlling interest in the outstanding voting stock of another

corporation (its subsidiary). Subsidiary companya corporation that is controlled by a parent company that owns a

controlling interest in its outstanding voting stock, either directly or indirectly. Affiliated companiescompanies that are controlled by a single management team through

parent-subsidiary relationships. (Although the term affiliate is a synonym for subsidiary, the parent company is included in the total affiliation structure.)

Associated companiescompanies 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 company 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 company or subsidiaries of the parent company.

6 Under the provisions of FASB Statement No. 94, Consolidation of All Majority-owned Subsidiaries, a

subsidiary will not be consolidated if control is temporary or 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 restrictions.

7 Consolidated financial statements are intended primarily for the stockholders and creditors of the parent

company, according to SFAS No. 160 (and ARB No. 51). 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 company. 9 Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or

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

3-2 An Introduction to Consolidated Financial Statements


10 The parent companys investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is consolidated. It would appear in the parent companys separate balance sheet under the heading investments or other assets. Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as investments or other assets. They are accounted for under the equity method if the parent can exercise significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost method.

11 Parents books: Reciprocal accounts on subsidiarys books: Investment in subsidiary Capital stock and retained earnings Sales Purchases Accounts receivable Accounts payable Interest income Interest expense Dividends receivable Dividends payable Advance to subsidiary Advance from parent 12 Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order to

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

13 The stockholders equity of a parent company under the equity method is the same as the consolidated

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

14 No. The amounts that appear in the parent companys 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 company), 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 the parent company stockholders. Alternatively, you can view total consolidated net income as being allocated to the controlling and noncontrolling interests.

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

computed: Noncontrolling interest beginning of the period XX Add: Income attributable to noncontrolling interest XX Deduct: Noncontrolling interest dividends XX Noncontrolling interest end of the period XX 17 It is acceptable to consolidate the annual financial statements of a parent company 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 the subsidiary with an October 31 closing date with the financial statements of the parent with a December 31 closing date.

Chapter 3 3-3


18 The acquisition of shares held by noncontrolling stockholders does not constitute a business combination.

Rather, it must be accounted for as a treasury stock transaction. It is not possible, by definition, to acquire a controlling interest from noncontrolling stockholders.

SOLUTIONS TO EXERCISES Solution E3-1 Solution E3-2 1 b 1 d 2 c 2 b 3 d 3 d 4 d 4 d 5 b 5 a 6 a 6 d 7 c Solution E3-3 [AICPA adapted] 1 c Advance to Hill $75,000 + receivable from Ward $200,000 = $275,000 2 a Goodwill has an indeterminate life and is not amortized. 3 a Owen accounts for Sharp using the equity method, therefore,

consolidated retained earnings is equal to Owens retained earnings, or $1,240,000.

4 d All intercompany receivables and payables are eliminated. Solution E3-4 1 Implied fair value of Santa Maria ($900,000 / 90%) $1,000,000 Less: Book value of Santa Maria (900,000) Excess fair value over book value $ 100,000 Equipment undervalued 30,000 Goodwill at January 1, 2009 $ 70,000 Goodwill at December 31, 2009 = Goodwill from consolidation $ 70,000 Since goodwill is not amortized 2 Consolidated net income Pintos reported net income $490,000 Less: Correction for depreciation on excess allocated to equipment ($30,000/3 years) (10,000) Consolidated net income $480,000 Solution E3-5 1 $600,000, the dividends of Panderman 2 $330,000, equal to $300,000 dividends payable of Panderman plus $30,000

(30% of $100,000) dividends payable to noncontrolling interests of Sadisman.

Chapter 3 3-5


Solution E3-6 Preliminary computation Cost of Slider stock (Fair value) $1,250,000 Book value of Slider 1,000,000 Goodwill $ 250,000 1 Journal entry to record push down values Inventories 20,000 Land 50,000 Buildings net 150,000 Equipment net 80,000 Goodwill 250,000 Retained earnings 210,000 Note payable 10,000 Push-down capital 750,000 2 Slider Corporation Balance Sheet January 1, 2010 (in thousands) Assets Cash $ 70 Accounts receivable 80 Inventories 100 Land 200 Buildings net 500 Equipment net 300 Goodwill 250 Total assets $1,500 Liabilities Accounts payable $ 100 Note payable 150 Total liabilities 250 Stockholders equity Capital stock $ 500 Push-down capital 750 Total stockholders equity 1,250 Total liabilities and stockholders equity $1,500



Solution E3-7 1 Pasture Corporation and Subsidiary Consolidated Income Statement for the year 2010 (in thousands) Sales ($1,000 + $400) $1,400 Less: Cost of sales ($600 + $200) (800) Gross profit 600 Less: Depreciation expense ($50 + $40) (90) Other expenses ($199 + $90) (289) Total consolidated income 221 Less: Noncontrolling interest share ($70 30%) (21) Controlling interest share of cnsolidated net income $ 200 2 Pasture Corporation and Subsidiary Consolidated Income Statement for the year 2010 (in thousands) Sales ($1,000 + $400) $1,400 Less: Cost of sales ($600 + $200) (800) Gross profit 600 Less: Depreciation expense ($50,000 + $40,000 - $6,000) (84) Other expenses ($199,000 + $90,000) (289) Total consolidated income 227 Less: Noncontrolling interest share

[($70 30%)+ ($6 depreciation x 30%)] (22.8)

Controlling interest share of cnsolidated net income $ 204.2 Supporting computations Depreciation of excess allocated to overvalued equipment: $30/5 years = $6

Chapter 3 3-7


Solution E3-8 1 Capital stock The capital stock appearing in the consolidated balance sheet at

December 31, 2009 is $1,800,000, the capital stock of Poball, the parent company. 2 Goodwill at December 31, 2009 Investment cost at January 2, 2009 (80% interest) $700,000 Implied total fair value of Softcan ($700,000 / 80%) $875,000 Book value of Softcan(100%) (600,000) Excess is considered goodwill since no other fair value

information is given. $275,000

3 Consolidated retained earnings at December 31, 2009 Poballs retained earnings January 2 (equal to beginning consolidated retained earnings $800,000 Add: Net income of Poball (equal to controlling share of

consolidated net income) 300,000

Less: Dividends declared by Poball (180,000) Consolidated retained earnings December 31 $920,000 4 Noncontrolling interest at December 31, 2009 Capital stock and retained earnings of Softcan on

January 2 $600,000

Add: Softcans net income 90,000 Less: Dividends declared by Softcan (50,000) Softcans stockholders equity December 31 640,000 Noncontrolling interest percentage 20% Noncontrolling interest December 31 $128,000 5 Dividends payable at December 31, 2009 Dividends payable to stockholders of Poball $ 90,000 Dividends payable to noncontrolling stockholders ($25,000

20%) 5,000

Dividends payable to stockholders outside the Consolidated entity $ 95,000



Solution E3-9

Paskey Corporation and Subsidiary Partial Balance Sheet at December 31, 2010

Stockholders equity: Capital stock, $10 par $300,000 Additional paid-in capital 50,000 Retained earnings 65,000 Equity of controlling stockholders 415,000 Noncontrolling interest 41,000 Total stockholders equity $456,000 Supporting computations Computation of consolidated retained earnings: Paskeys December 31, 2009 retained earnings $ 35,000 Add: Paskeys reported income for 2010 55,000 Less: Paskeys dividends (25,000) Consolidated retained earnings December 31, 2010 $ 65,000 Computation of noncontrolling interest at December 31, 2010 Salams December 31, 2009 stockholders equity $200,000 Income less dividends for 2010 ($20,000 - $15,000) 5,000 Salams December 31, 2010 stockholders equity 205,000 Noncontrolling interest percentage 20% Noncontrolling interest December 31, 2010 $ 41,000

Chapter 3 3-9


Solution E3-10

Peekos Corporation and Subsidiary Consolidated Income Statement

for the year ended December 31, 2011 (in thousands)

Sales $2,100 Cost of goods sold 1,100 Gross profit 1,000 Deduct: Operating expenses 560 Total consolidated income 440 Deduct: Noncontrolling interest share 14 Controlling interest share of consolidated net income $ 426 Supporting computations Investment cost January 2, 2009 (90% interest) $ 810 Implied total fair value of Slogger ($810,000 / 90%) $ 900 Sloggers Book value acquired (100%) (700) Excess of fair value over book value $ 200 Excess allocated to: Inventories (sold in 2009) $ 30 Equipment (4 years remaining use life) 40 Goodwill 130 Excess of fair value over book value $ 200 Operating expenses: Combined operating expenses of Peekos and Slogger $ 550 Add: Depreciation on excess allocated to equipment ($40,000/4 years) 10 Consolidated operating expenses $ 560



SOLUTIONS TO PROBLEMS Solution P3-1 1 Pennyvale Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2009

Assets

Cash ($32,000 + $18,000) $ 50,000 Accounts receivable ($45,000 + $34,000 - $5,000) 74,000 Inventories ($143,000 + $56,000) 199,000 Equipment net ($380,000 + $175,000) 555,000 Total assets $878,000 Liabilities and Stockholders Equity Liabilities: Accounts payable ($40,000 + $33,000 - $5,000) $ 68,000 Stockholders equity: Common stock, $10 par 460,000 Retained earnings 300,000 Noncontrolling interest ($150,000 + $100,000) 20% 50,000 Total liabilities and stockholders equity $878,000 2 Consolidated net income for 2010 Pennyvales separate income $170,000 Add: Income from Sutherland Sales ($90,000 80%) 90,000 Consolidated net income $260,000 Noncontrolling interest share (20% x $90,000) $ 18,000 Controlling interest share (80%) $242,000

Chapter 3 3-11


Solution P3-2 1 Schedule to allocate fair value/book value differential Cost of investment in Setting $175,000 Implied fair value of Setting ($175,000 / 70%) $250,000 Book value of Setting (110,000) Excess fair value over book value $140,000 Excess allocated: Fair Value Book Value Allocation Inventories ($50,000 - $30,000) $ 20,000 Land ($60,000 - $50,000) 10,000 Buildings net ($90,000 - $70,000) 20,000 Equipment net ($30,000 - $40,000) (10,000) Other liabilities ($40,000 - $50,000) 10,000 Allocated to identifiable net assets 50,000 Goodwill for the remainder 90,000 Excess fair value over book value $140,000 2 Parlor Corporation and Subsidiary Consolidated Balance Sheet at January 1, 2009 Assets Current assets: Cash ($35,000 + $20,000) $ 55,000 Receivables net ($80,000 + $30,000) 110,000 Inventories ($70,000 + $30,000 + $20,000) 120,000 $285,000 Property, plant and equipment: Land ($100,000 + $50,000 + $10,000) $160,000 Buildings net ($110,000 + $70,000 + $20,000) 200,000 Equipment net ($80,000 + $40,000 - $10,000) 110,000 470,000 Goodwill (from consolidation) 90,000 Total assets $845,000 Liabilities and Stockholders Equity Liabilities: Accounts payable ($90,000 + $80,000) $170,000 Other liabilities ($10,000 + $50,000 - $10,000) 50,000 $220,000 Stockholders equity: Capital stock $500,000 Retained earnings 50,000 Equity of controlling stockholders 550,000 Noncontrolling interest * 75,000 625,000 Total liabilities and stockholders equity $845,000 * 70% of implied fair value of $250,000 = $75,000.



Solution P3-3 Cost of investment in Softback Books January 1, 2009 $2,700,000 Implied fair value of Softback ($2,700,000 / 80%) $3,375,000 Book value of Softback 2,500,000 Excess of fair value over book value $ 875,000 Schedule to Allocate Fair Value Book Value Differential Fair Value

- Book Value

Allocation

Current assets $ 500,000 $ 500,000 Equipment 1,000,000 1,000,000 Other plant assets Bargain purchase * (625,000) Excess fair value over book value $875,000 * After recognizing acquired assets and liabilities at their fair values, we are left with a negative excess of $625,000. Under SFAS No. 141R, 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 parents 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 ($4,000,000) and their fair value implied by the acquisition price ($3,375,000), which equals $625,000. Solution P3-4 Noncontrolling interest of $65,000 (its fair value) plus $260,000 (fair value of Pharms investment) equals total fair value of $325,000. Therefore, Pharms interest is 80% ($260,000 / $325,000), and noncontrolling interest is 20% ($65,000 / $325,000). Total fair value $ 325,000 Book value of Specht (260,000) Excess fair value over book value $ 65,000 Excess allocated to Fair Value - Book Value Plant assets net $210,000 - $200,000 $ 10,000 Goodwill 55,000 Total $ 65,000

Chapter 3 3-13


Solution P3-5

Palmer Corporation and Subsidiary Consolidated Balance Sheet

at December 31, 2009 (in thousands)

Assets Current assets $ 340 Plant assets 830 Goodwill 200 $1,370 Equities Liabilities $ 660 Capital stock 300 Retained earnings 410 $1,370 Supporting computations Sorrels net income ($400 - $300 - $50) $ 50 Less: Excess allocated to inventories that were sold in 2009 (20) Less: Depreciation on excess allocated to plant assets ($40 /4 years) (10) Income from Sorrel $ 20 Plant assets ($500 + $300 + $40 - $10) $ 830 Palmers retained earnings: Beginning retained earnings $ 340 Add: Operating income 100 Add: Income from Sorrel 20 Deduct: Dividends (50) Retained earnings December 31, 2009 $ 410



Solution P3-6

Perry Corporation and Subsidiary Consolidated Balance Sheet Working Papers


Perry per books

Sim per books

Adjustments and Eliminations

Consolidated Balance Sheet

Cash $ 42 $ 20 $ 62 Receivables net 50 130 b 9 171 Inventories 350 50 400 Land 150 200 350 Equipment net 600 100 700 Investment in Sim 459 a 459 Goodwill a 100 100 Total assets $1,651 $ 500 $1,783 Accounts payable $ 410 $ 80 $ 490 Dividends payable 60 10 b 9 61 Capital stock 1,000 300 a 300 1,000 Retained earnings 181 110 a 110 181 Noncontrolling interest a 51 51 Total equities $1,651 $ 500 $1,783 a To eliminate reciprocal investment and equity accounts, record goodwill ($100), and

enter noncontrolling interest [($410 equity + $100 goodwill) 10%)]. b To eliminate reciprocal dividends receivable (included in receivables net) and

dividends payable amounts ($10 dividends 90%).

Chapter 3 3-15


Solution P3-7 Preliminary computations Cost of 80% investment January 3, 2009 $280,000 Implied total fair value of Slender ($280,000 / 80%) $350,000 Book value of Slender (250,000) Excess fair value over book value on January 3 = Goodwill $100,000 1 Noncontrolling interest share of income: Slenders net income $50,000 20% noncontrolling interest $ 10,000 2 Current assets: Combined current assets ($204,000 + $75,000) $279,000 Less: Dividends receivable ($10,000 80%) (8,000) Current assets $271,000 3 Income from Slender: None Investment income is eliminated in

consolidation. 4 Capital stock: $500,000 Capital stock of the parent, Portly Corporation. 5 Investment in Slender: None The investment account is eliminated. 6 Excess of fair value over book value $100,000 7 Controlling share of consolidated net income: Equals

Portlys net income, or:

Consolidated sales $600,000 Less: Consolidated cost of goods sold (370,000) Less: Consolidated expenses (80,000) Consolidated net income $150,000 Less: Noncontrolling interest share (10,000) Controlling share of consolidated net income $140,000 8 Consolidated retained earnings December 31, 2009: $200,000 Equals

Portlys beginning retained earnings. 9 Consolidated retained earnings December 31, 2010 Equal to Portlys ending retained earnings: Beginning retained earnings $200,000 Add: Controlling share of consolidated net income 140,000 Less: Portlys dividends for 2010 (60,000) Ending retained earnings $280,000 10 Noncontrolling interest December 31, 2010 Slenders capital stock and retained earnings $300,000 Add: Net income 50,000 Less: Dividends (25,000) Slenders equity December 31, 2010 at fair value 325,000 Noncontrolling interest percentage 20% Noncontrolling interest December 31, 2010 using book value $ 65,000 Add: Noncontrolling interest share of Goodwill 20,000 Noncontrolling interest December 31, 2010 at fair value $ 85,000



Solution P3-8 [AICPA adapted] Preliminary computations Meadow Van Investment cost: Meadow (1,000 shares 80%) $70 56,000 Van (3,000 shares 70%) $40 84,000 Implied total fair values: Meadow ($56,000 / 80%) 70,000 Van ($84,000 / 70%) 120,000 Book value Meadow ($70,000 80%) 70,000 Van ($120,000 70%) 120,000 Excess fair value over book value at acquisition 0 0 1 Journal entries to account for investments January 1, 2009 Acquisition of investments Investment in Meadow (80%) 56,000 Cash 56,000 To record acquisition of 800 shares of

Meadow common stock at $70 per share. Investment in Van (70%) 84,000 Cash 84,000 To record acquisition of 2,100 shares of

Van common stock at $40 per share. During 2006 Dividends from subsidiaries Cash 12,800 Investment in Meadow (80%) 12,800 To record dividends received from Meadow ($16,000 80%). Cash 6,300 Investment in Van (70%) 6,300 To record dividends received from Van ($9,000 70%). December 31, 2009 Share of income or loss Investment in Meadow (80%) 28,800 Income from Meadow 28,800 To record investment income from Meadow ($36,000 80%). Loss from Van 8,400 Investment in Van (70%) 8,400 To record investment loss from Van ($12,000 70%).

Chapter 3 3-17


Solution P3-8 (continued) 2 Noncontrolling interest December 31, 2009 * Meadow Van Common stock $50,000 $60,000 Capital in excess of par 20,000 Retained earnings 40,000 19,000 Equity December 31 90,000 99,000 Noncontrolling interest percentage 20% 30% Noncontrolling interest December 31 $18,000 $29,700 * Fair value equals book value. 3 Consolidated retained earnings December 31, 2009 Consolidated retained earnings is reported at $304,600, equal to the

retained earnings of Todd Corporation, the parent, at December 31, 2009. 4 Investment balance December 31, 2009: Meadow Van Investment cost January 1 $56,000 $84,000 Add (deduct): Income (loss) 28,800 (8,400) Deduct: Dividends received (12,800) (6,300) Investment balances December 31 $72,000 $69,300 Check: Investment balances should be equal to the underlying book value Meadow $90,000 80% = $72,000 Van $99,000 70% = $69,300



Solution P3-9 Preliminary computations (in thousands) Cost of 90% investment January 1, 2009 $3,600 Implied total fair value of Snowdrop ($3,600 / 90%) $4,000 Book value of Snowdrop (2,700) Excess fair value over book value on January 1 $1,300 Allocation to equipment $ 800 Remainder is Goodwill $ 500 Additional annual depreciation on equipment ($800 / 8 years) $ 100

Pansy Corporation and Subsidiary Consolidated Balance Sheet Working Papers


Pansy 90%

Snowdrop Adjustments and Eliminations


Cash $ 300 $ 200 $ 500 Receivables net 600 400 1,000 Dividends receivable 90 B 90 Inventory 700 600 1,300 Land 600 700 1,300 Buildings net 2,000 1,000 3,000 Equipment net 1,500 800 a 700 3,000 Investment in Snowdrop 3,780 a 3,780 Goodwill a 500 500 Total assets $9,570 $3,700 $10,600 Accounts payable $ 300 $ 600 $ 900 Dividends payable 500 100 b 90 510 Capital stock 7,000 2,000 a 2,000 7,000 Retained earnings 1,770 1,000 a 1,000 1,770 Noncontrolling interest a 420 420 Total equities $9,570 $3,700 $10,600 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 Snaplock (in thousands) Underlying book value of investment in Snaplock: Equity of Snaplock January 1, 2009 $220 Add: Excess investment fair value over book value: Goodwill at December 31, 2013 60 Fair value of Snaplock January 1, 2009 $280 Purchase price of 80% investment at fair value $224 2 Snaplocks stockholders equity on December 31, 2013 (in thousands) 20% noncontrolling interest at fair value $ 62 20% goodwill (12)

20% noncontrolling interests equity at book value $ 50 Total equity = Noncontrolling interests equity $50 / 20% = $250 3 Pandoras investment in Snaplock account balance at December 31, 2013 (in thousands) Underlying book value in Snaplock December 31, 2013 ($250 80%) $200 Add: 80% of Goodwill December 31, 2013

(20% is attributable to the noncontrolling interest) 48

Investment in Snaplock December 31, 2013 $248 Alternative solution: Investment cost January 1, 2009 $224 Add: 80% of Snaplocks increase since acquisition ($250 - $220) 80% 24 Investment in Snaplock December 31, 2013 $248 4 Pandoras capital stock and retained earnings December 31, 2013 (in thousands) Capital stock $400 Retained earnings $ 30 Amounts are equal to capital stock and retained earnings shown in the

consolidated balance sheet.



Solution P3-11 Preliminary computations (in thousands) Cost of 70% investment in Stubb $ 670 Implied fair of Stubb ($700 / 70%) $1,000 Book value of Stubb (100%) 800 Excess $ 200 Excess allocated: Inventories $ 20 Plant assets 80 Goodwill 100 Excess $ 200 Investment balance at January 1, 2009 $ 700 Share of Stubbs retained earnings increase ($60 70%) 42 Less: Amortization 70% of excess allocated to inventories (sold in 2009) (14) 70% of excess allocated to plant assets ($80 /8 years) (7) Investment balance at December 31, 2009 $ 721 Noncontrolling interest at December 31 30% of Stubbs book value at December 31 ($860 x 30%) $258 30% of Goodwill 30 30% Unamortized excess for plant assets 30% x ($80 - $10 amortization)

21

Noncontrolling at December 31 (fair value) $309

Pope Corporation and Subsidiary Consolidated Balance Sheet Working Papers


Pope

70% Stubb

Adjustments and Eliminations


Cash $ 60 $ 20 $ 80 Accounts receivable net 440 200 640 Accounts receivable Pope 10 b 10 Dividends receivable 7 c 7 Inventories 500 320 820 Land 100 150 250 Plant assets net 700 350 a 70 1,120 Investment in Stubb 721 a 721 Goodwill a 100 100 Assets $2,528 $1,050 $3,010 Accounts payable $ 300 $ 80 $ 380 Account payable to Stubb 10 b 10 Dividends payable 40 10 c 7 43 Long-term debt 600 100 700 Capital stock 1,000 500 a 500 1,000 Retained earnings 578 360 a 360 578 Noncontrolling interest ($860,000 30%)

a 309

309

Equities $2,528 $1,050 $3,010

Chapter 3 3-21


Solution P3-12 Preliminary computations (in thousands) 80% Investment in Shasti at cost January 1, 2009 $ 760 Implied total fair value of Shasti ($760 / 80%) $ 950 Shasti book value 900 Excess fair value over book value recorded as goodwill $ 50 Shasti

Dividends Shasti

Net Income 80% of

Net Income 2009 $ 40 $ 80 $ 64 2010 50 100 80 2011 60 120 96 $150 $300 $240 1 Shastis dividends for 2010 ($40 / 80%) $ 50 2 Shastis net income for 2010 ($50 dividends 2) $ 100 3 Goodwill December 31, 2010 $ 40 4 Noncontrolling interest share of income 2011 Shastis income for 2011

($48 dividends received/80%) 2 $ 120

Noncontrolling interest percentage 20% Noncontrolling interest share $ 24 5 Noncontrolling interest December 31, 2011 Equity of Shasti January 1, 2009 $ 900 Add: Income for 2009, 2010 and 2011 300 Deduct: Dividends for 2009, 2010 and 2011 (150) Equity book value of Shasti December 31, 2011 1,050 Goodwill 50 Equity fair value of Shasti December 31, 2011 $1,100 Noncontrolling interest percentage 20% Noncontrolling interest December 31, 2011 $ 220 6 Controlling share of consolidated net income for 2011 Pendletons separate income $ 280 Add: Income from Shasti 96 Controlling share of consolidated net income $ 376



Solution P3-13 Preliminary computations 80% Investment in Sidney (cost) January 2, 2010 $300 Implied total fair value of Sidney ($300 / 80%) $375 Book value of Sidney (100%) (250) Excess fair value over book value $125 Excess allocated to Buildings (fair value $170 - book value $150) $ 20 Remainder to goodwill 105 Excess fair value over book value $125 Part 1 a Total current assets Cash ($50 + $20) $ 70 Other current assets ($150 + $80) 230 Total current assets $300 b Plant and equipment net of depreciation Land ($300 + $50) $350 Buildings net ($400 + $150) 550 Excess allocated to buildings 20 Plant and equipment net $920 c Common stock Par value of Peytons stock December 31, 2009 $600 Add: Par value of shares issued for Sidney 100 Common stock $700 d Additional paid-in capital Additional paid-in capital of Peyton December 31, 2009 $ 60 Add: Increase from shares issued from Sidney 200 Additional paid-in capital $260 e Retained earnings Consolidated retained earnings = Peytons retained earnings December 31, 2009 $140

Chapter 3 3-23


Solution P3-13 (continued) Part 2 a Income from Sidney 2010 Sidneys reported net income $ 40 Less: Depreciation on excess buildings ($20 /5 years) (4) Adjusted Net Income of Sidney $ 36.8 80% of Sidneys Net Income = Income from Sidney $ 28.8 b Investment in Sidney December 31, 2010 Cost January 2 $300 Add: Income from Sidney 28.8 Less: Dividends from Sidney ($20 80%) (16) Investment in Sidney December 31 $312.8

adv. acc10e

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