CHAPTER 1

Chapter 4Consolidated Financial Statements and Outside OwnershipChapter OutlineI.Outside ownership may be present within any business combination.A.Complete ownership of a subsidiary is not a prerequisite for consolidationonly enough voting shares need be owned so that the acquiring company has the ability to control the decisionmaking process of the acquired company.B.Any ownership interest in a subsidiary company by a party unrelated to the acquiring company is termed a noncontrolling interest.

II.Valuation of subsidiary assets and liabilities poses a challenge when a noncontrolling interest is present. A. The accounting emphasis is placed on the entire entity that results from the business combination when control has been obtained. The parent company that controls its subsidiary must consolidate 100% of subsidiary assets, liabilities, revenues, and expense are consolidated even when its ownership is less than 100%.B. The consolidated valuation basis for a newly acquired subsidiary is the acquisition-date fair value of the company (most frequently determined by the consideration transferred and the fair value of the noncontrolling interest); specific subsidiary assets and liabilities are measured at their acquisition-date fair values.C. The noncontrolling interest balance is reported in the parents consolidated financial statements as a component of stockholders' equity.

III.Consolidations involving a noncontrolling interestsubsequent to the date of acquisitionA.Four noncontrolling interest figures are determined for reporting purposes1.Beginning of year balance sheet amount2.Net income attributable to noncontrolling interest3.Dividends declared by subsidiary during the period attributable to the noncontrolling interest4.End of year balance sheet amountB.Noncontrolling interest balances are accumulated in a separate column in the consolidation worksheet1.The beginning of year figure is entered on the worksheet as a component of Entries S and A2.The net income attributable to the noncontrolling interest is established by a columnar entry that simultaneously reports the balance in both the consolidated income statement and the noncontrolling interest column3.Dividends declared to these outside owners are reflected by extending the subsidiary's Dividends declared balance (after eliminating intra-entity transfers) into the noncontrolling interest column as a reduction4.The end of year noncontrolling interest total is the summation of the three items above and is reported in stockholders' equity.

IV.Step acquisitionsA.An acquiring company may make several different purchases of a subsidiary's stock in order to gain controlB.Upon attaining control, all of the parents previous investments in the subsidiary are adjusted to fair value and a gain or loss recognized as appropriateC. Upon attaining control, the valuation basis for the subsidiary is established at its total fair value (the sum of the fair values of the controlling and noncontrolling interests)D. Post-control subsidiary stock acquisitions by the parent are considered transactions with current owners of the consolidated entity. Thus such post-control stock acquisitions neither result in gains or losses nor provide a basis for subsidiary asset remeasurement to fair value. The difference between the sale proceeds and the carrying value of the shares sold (equity method) is recorded as an adjustment to the parents additional paid in capital.

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

Answer to Discussion Question: Do you think the FASB made the correct decision in requiring consolidated financial statements to recognize all subsidiarys assets and liabilities at fair value regardless of the percentage ownership acquired by the parent?

As the quotes from the five accounting professionals illustrate, the decision to require the revaluation of 100% of a newly controlled subsidiarys assets and liabilitiesregardless of percentage ownershipwas not without some controversy. Students can use the quotes to discuss cost-benefit issues, relevance of capturing the underlying economics, use of hypothetical transactions in financial reporting, potential for abuse, etc. The requirement to value all acquisition date subsidiary assets at 100% fair value thus provides a useful vehicle for the class to discuss the many issues surrounding standard setters decisions.

Answer to Discussion Question: DOES GAAP UNDERVALUE POST-CONTROL STOCK ACQUISITIONS?

From the Berkshire Hathaway 2012 annual 10-K report:

We have owned a controlling interest in Marmon Holdings, Inc. (Marmon) since 2008. In the fourth quarter of 2012, pursuant to the terms of the 2008 Marmon acquisition agreement, we acquired an additional 10% of the outstanding shares of Marmon held by noncontrolling interests for aggregate consideration of approximately $1.4 billion. Approximately $800 million of the consideration was paid in the fourth quarter of 2012, and the remainder is payable in March 2013. In the fourth quarter of 2010, we acquired 16.6% of Marmons outstanding common stock for approximately $1.5 billion. As a result of these acquisitions, our ownership interest in Marmon has increased to approximately 90%.

These purchases were accounted for as acquisitions of noncontrolling interests. The differences between the consideration paid or payable and the carrying amounts of the noncontrolling interests acquired were recorded as reductions in Berkshires shareholders equity of approximately $700 million in 2012 and $614 million in 2010. We are contractually required to acquire substantially all of the remaining noncontrolling interests of Marmon no later than March 31, 2014, for an amount that will be based on Marmons future operating results.

On the date control is established, the new subsidiarys valuation basis is established. Subsequent acquisitions of any remaining portions of the noncontrolling interests do not establish a new valuation basis for the subsidiary. In the Berkshire case, the new valuation basis for Marmon was established in 2008 when its 64% control was acquired. Berkshire then increases Marmons consolidated carrying amount as Marmon earns income, not by subsequent purchases of Marmons noncontrolling shares.

Berkshires payments for its post-control equity acquisitions (16% and 10%) were in excess of Marmons proportionate carrying amounts. Because these transactions were with owners (not outside parties), no gain or loss is recorded. Berkshire reduces its paid-in capital the for excess of the purchase price over the carrying amount. The accounting is similar to retirement of stock for a payment in excess of the companys proportionate carrying amount.

Mr.Buffett may be correct that the current market value of Marmon is $4.6 bilion more that its carrying amount. However, GAAP does not, in general, record unrealized increases in a firms market value as increases in reported asset amounts.

Answers to Questions1."Noncontrolling interest" refers to an equity interest that is held in a member of a business combination by an unrelated (outside) party.

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

3.A control premium is the portion of an acquisition price (above currently traded market values) paid by a parent company to induce shareholders to sell a sufficient number of shares to obtain control. The extra payment typically becomes part of the goodwill acquired in the acquisition attributable to the parent company.4.Current accounting standards require the noncontrolling interest to appear in the stockholders' equity section. The noncontrolling interest's share of the subsidiarys net income is shown as an allocated component of consolidated net income. 5.The ending noncontrolling interest is determined on a consolidation worksheet by adding the four components found in the noncontrolling interest column: (1) the beginning balance of the subsidiarys book value, (2) the noncontrolling interest share of the adusted acquisition-date excess fair over book value allocation, (3) its share of current year net income, (4) less dividends declared to these outside owners. 6.Allsports should remove the pre-acquisition revenues and expenses from the consolidated totals. These amounts were earned (incurred) prior to ownership by Allsports and therefore should are not earnings for the current parent company owners.7.Following the second acquisition, consolidation is appropriate. Once Tree gains control, the 10% previous ownership is included at fair value as part of the total consideration transferred by Tree in the acquisition.8.When a company sells a portion of an investment, it must remove the carrying value of that portion from its investment account. The carrying value is based upon application of the equity method. Thus, if either the initial value method or the partial equity method has been used, Duke must first restate the account to the equity method before recording the sales transaction. The same method is applied to the operations of the current period occurring prior to the time of sale. 9.Unless control is surrendered, the acquisition method views the sale of subsidiary's stock as a transaction with its owners. Thus, no gain or loss is recognized. The difference between the sale proceeds and the carrying value of the shares sold (equity method) is accounted for as an adjustment to the parents additional paid in capital.10.The accounting method choice for the remaining shares depends upon the current relationship between the two firms. If Duke retains control, consolidation is still required. However, if the parent now can only significantly influence the decisionmaking process, the equity method is applied. A third possibility is Duke may have lost the power to exercise even significant influence. The fair value method then is appropriate.

Answers to Problems

1.C

2.AAt the date control is obtained, the parent consolidates subsidiary assets at fair value ($549,000 in this case) regardless of the parents percentage ownership.

3.DIn consolidating the subsidiary's figures, all intra-entity balances must be eliminated in their entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it.

4. CAn asset acquired in a business combination is initially valued at 100% acquisition-date fair value and subsequently amortized its useful life.Patent fair value at January 1, 2014$45,000Amortization for 2 years (10 year remaining life)(9,000)Patent reported amount December 31, 2015$36,000

5.C

6.BCombined revenues $1,100,000 Combined expenses(700,000)Excess acquisition-date fair value amortization(15,000)Consolidated net income$385,000 Less: noncontrolling interest share ($85,000 40%)(34,000)Consolidated net income to Chamberlain Corporation$351,000

7. CConsideration transferred by Pride$540,000Noncontrolling interest fair value60,000Star acquisition-date fair value$600,000Star book value420,000Excess fair over book value$180,000

Amort. to equipment (8 year remaining life)$ 80,000$10,000 to customer list (4 year remaining life)100,00025,000$35,000

Combined revenues$783,000Combined expenses$545,000Excess fair value amortization35,000580,000Consolidated net income$203,000

8. A Under the equity method, consolidated RE = parents RE.

9.B

10. AAmie, Inc. fair value at July 1, 2015:30% previously owned fair value (30,000 shares $5) $150,00060% new shares acquired (60,000 shares $6) 360,00010% NCI fair value (10,000 shares $5) 50,000Acquisition-date fair value$560,000 Net assets' fair value500,000 Goodwill$60,000

11. C

12. BFair value of 30% noncontrolling interest on April 1$165,000 30% of net income for remainder of year ($240,000 30%)72,000 Noncontrolling interest December 31$237,000

13. CProceeds of $80,000 less $64,000 ( $192,000) book value = $16,000Control is maintained so excess proceeds go to APIC.

14. BCombined revenues$1,300,000 Combined expenses(800,000)Trademark amortization(6,000)Patented technology amortization(8,000)Consolidated net income $486,000

15. CSubsidiary net income ($100,000 $14,000 excess amortizations)$86,000 Noncontrolling interest percentage40%Net income attributable to noncontrolling interest$34,400 Fair value of noncontrolling interest at acquisition date$200,00040% change in previous year Solar book value ($530,000 $400,000) 40%52,00040% of excess fair value amortizationyear one(5,600)Net income attributable to noncontrolling interest (above)34,400Noncontrolling interest at end of year$280,800

16. AWest trademark balance$260,000 Solar trademark balance200,000 Acquisition-date fair value allocation60,000 Excess fair value amortization for two years(12,000)Consolidated trademarks$508,000

17. A Acquisition-date fair value ($60,000 80%)$75,000Strand's book value (50,000)Fair value in excess of book value $25,000Excess assigned to inventory (60%) $15,000Excess assigned to goodwill (40%) $10,000

Park current assets$70,000 Strand current assets20,000 Excess inventory fair value 15,000 Consolidated current assets$105,000

18. DPark noncurrent assets$90,000 Strand noncurrent assets40,000 Excess fair value to goodwill 10,000 Consolidated noncurrent assets$140,000

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

20.BAdd the two book values and include 90% (the $54,000 noncurrent portion) of the loan taken out by Park to acquire Strand.

21. CPark stockholders' equity$80,000 Noncontrolling interest at fair value (20% $75,000)15,000 Total stockholders' equity$95,000

22.(15 minutes) (Compute consolidated net income and noncontrolling interest)2014 2015 a.Harrison net income$220,000 $260,000 Starr net income70,000 90,000 Acquisition-date excess fair value amortization(8,000)(8,000)Consolidated net income$282,000 $342,000 b.Starr fair value$1,200,000 Fair value of consideration transferred1,125,000 Noncontrolling interest fair value$75,000 Noncontrolling interest fair value January 1, 2014 (above)$75,000 2014 income to NCI ([$70,000 $8,000] 10%)6,200 2014 dividends to NCI (3,000) Noncontrolling interest reported value December 31, 201478,200 2015 net income attributable to NCI ([$90,000 $8,000] 10%)8,200 2015 dividends to NCI (3,000) Noncontrolling interest reported value December 31, 2015$83,400

23. (30 minutes) (Consolidated balances, allocation of consolidated net income to controlling and noncontrolling interest, calculation of noncontrolling interest).

a. Stayers technology processes: Acquisition-date fair value (20 year remaining life)$1,000,0002015 amortization (50,000)Technology processes 12/31/15$ 950,000

b. Stayers building:Acquisition-date fair value (10 year remaining life)$345,0002015 depreciation (34,500)Building 12/31/15$310,500 -or- $175,500 + $150,000 $15,000 = $310,500

c. Controlling interest in consolidated net income:

Net incomeJohnsonville$650,000 Net incomeStayer adjusted for excess fair value amortization (see part d below) 285,000 Consolidated net income 935,000 Less: net income attributable to noncontrolling interest (see part d below) (57,000) Net income attributable to Johnsonville Co.$878,000

-OR-

Johnsonvilles separate net income$650,000Stayers reported net income350,000Excess fair value amortization: Technology processes (50,000) Building ($345,000 $195,000) 10 years(15,000)Stayers adjusted net income285,000Johnsonvilles ownership percentage80% 228,000Net income attributable to Johnsonville Co.$878,000d. Net income attributable to noncontrolling interest:Stayers reported net income350,000Excess fair value amortization: Technology processes (50,000) Building ($345,000 $195,000) 10 years(15,000)Stayers adjusted net income285,000Noncontrolling interest percentage20%Net income attributable to noncontrolling interest$57,000

23. (continued)e. Noncontrolling interest: Acquisition-date balance 1/1/15Total Stayer fair value ($3,000,000 80%)$3,750,000Noncontrolling interest percentage20%Noncontrolling interest acquisition-date fair value $750,000Net income attributable to noncontrolling interest57,000Noncontrolling interest share of Stayer dividends (20% $50,000) (10,000)Noncontrolling interest 12/31/15$ 797,000

24. (40 minutes) (Several valuation and income determination questions for a business combination involving a noncontrolling interest.)

a. Business combinations are recorded generally at the fair value of the consideration transferred by the acquiring firm plus the acquisition-date fair value of the noncontrolling interest.

Pattersons consideration transferred ($31.25 80,000 shares)$2,500,000Noncontrolling interest fair value ($30.00 20,000 shares) 600,000Sorianos total fair value January 1$3,100,000

b. Each identifiable asset acquired and liability assumed in a business combination is initially reported at its acquisition-date fair value.

c. In periods subsequent to acquisition, the subsidiarys assets and liabilities are reported at their book values adjusted for acquisition-date fair value allocations and for subsequent amortization and depreciation on those allocations. Except for certain financial items, the subsidiarys assets and liabilities are not continually adjusted for changing fair values.

d. Sorianos total fair value January 1$3,100,000Sorianos net assets book value 1,290,000Excess acquisition-date fair value over book value$1,810,000Adjustments from book to fair valuesBuildings and equipment(250,000)Trademarks200,000Patented technology1,060,000Unpatented technology 600,000 1,610,000Goodwill$ 200,000

e.Combined revenues$4,400,000 Combined expenses(2,350,000)Building and equipment excess depreciation50,000Trademark excess amortization(20,000)Patented technology amortization(265,000)Unpatented technology amortization(200,000)Consolidated net income$1,615,000 24. (continued)To noncontrolling interest:Sorianos revenues$1,400,000Sorianos expenses(600,000)Total excess amortization expenses (above)(435,000)Sorianos adjusted net income$ 365,000Noncontrolling interest percentage ownership20% Net income attributable to noncontrolling interest$ 73,000

To controlling interest:Consolidated net income$1,615,000 Net income attributable to noncontrolling interest(73,000)Net income attributable to Patterson$1,542,000

-OR-Pattersons revenues$3,000,000Pattersons expenses1,750,000Pattersons separate net income$1,250,000Pattersons share of Sorianos adjusted net income(80% $365,000)292,000Consolidated net income attributable to Patterson$1,542,000

f. Fair value of noncontrolling interest January 1$ 600,000Net income attributable to noncontrolling interest73,000 Dividends (20% $30,000) (6,000)Noncontrolling interest December 31$ 667,000

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

Collective fair values of Sorianos net assets$2,900,000Sorianos total fair value January 1$2,250,000Bargain purchase$ 650,000

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

25. (30 minutes) Step acquisition.

a.Investment in Sellinger445,000Cash415,000Additional paid-in capital30,000

Acquisition-date fair value ($1,141,000 .7)$1,630,000Sellinger net income 2014340,000Excess fair value amortization 2014(40,000)Sellinger dividends 2014(150,000)Acquisition-date adjusted subsidiary value 12/31/141,780,000Percent acquired 1/1/150.25Acquisition-date based value of newly acquired shares$ 445,000Acquisition price for 25% interest415,000Credit to Palkas APIC$ 30,000

b.Initial value for 70% acquisition$1,141,00070% of adjusted 2014 subsidiary net income ($340,000 $40,000)210,00070% of subsidiary dividends 2014(105,000)Adjusted fair value of newly acquired shares445,00095% of adjusted subsidiary 2015 net income ($440,000 $40,000)380,00095% of subsidiary dividends 2015(171,000)Investment in Sellinger 12/31/15$1,900,000

26. (20 Minutes) (Determine consolidated income balances, includes a mid-year acquisition)

a.Acquisition-date total fair value $594,000Book value of net assets(400,000)Fair value in excess of book value $194,000 Excess fair value assigned to specific RemainingAnnual excessaccounts based on fair valuelifeamortizationsPatent 140,000 5 years$28,000Land 10,000Buildings 30,000 10 years 3,000Goodwill14,000Total-0-$31,000Consolidated figures following January 1 acquisition date:Combined revenues $1,500,000Combined expenses(1,031,000)Consolidated net income469,000Net income to noncontrolling interest ([200,000 31,000] 30%) (50,700)Net income attributable to Parker, Inc.$ 418,300

b.Consolidated figures following April 1 acquisition date:Combined revenues (1)$1,350,000Combined expenses (2) (923,250)Consolidated net income $ 426,750Net income attributable to noncontrolling interest (3) (38,025)Net income attributable to Parker, Inc$ 388,725

(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues (2) $600,000 Parker expenses plus $300,000 of post-acquisition Sawyer expenses plus $23,250 amortization expenses for 9 months(3) ($200,000 31,000) adjusted subsidiary net income 30% year

27.(15 minutes) Consolidated figures with noncontrolling interest Fair value of company (given) $60,000Book value (10,000)Fair value in excess of book value50,000 to machine ($50,000 $10,000) 40,000 10 = $4,000 per year to process trade secret$10,000 4 = 2,500 per year$6,500 per yearConsolidated figures: Net income attributable to noncontrolling interest = 40% ($50,000 revenues less $26,500 expenses) = $9,400 End-of-year noncontrolling interest:Beginning balance (40% $60,000)$24,000Net income allocation (from above)9,400Dividend reduction (40% $5,000) (2,000)End-of-year noncontrolling interest$31,400 Machine (net) = $45,000 ($9,000 book value plus $40,000 excess allocation less $4,000 excess depreciation for one year). Process trade secret (net) = $10,000 $2,500 = $7,500

28. (45 minutes) Noncontrolling interest in the presence of a control premium.

a. Goodwill allocation:ParflexNCI Acquisition-date fair value $344,000$36,000Share of identifiable net assets ($324,000 + $18,000)307,80034,200Goodwill allocation$36,200$1,800

b.Investment in EagleInitial value$344,000Change in Eagles RE 90%($341,000 $174,000) 90%150,300Excess amortization (3 years) 90% (5,400)Investment in Eagle 12/31/15$488,900-OR-

Investment in EagleInitial value$344,0002013-2014 change in Eagles RE 90%($278,000 $174,000) 90%93,600Excess fair value amortization(3,600)Equity income 2015 (below)79,200Eagle 2015 dividends 90% (24,300)Investment in Eagle 12/31/15$488,900

Equity in Eagles earnings:Eagles reported 2015 net income$90,000Excess equipment amortization(2,000)Adjusted net income$88,000Parflex ownership share 90%Equity in Eagles earnings$79,200

28. continued

c. December 31, 2015 ParflexEagleAdjustments NCIConsolidated

Sales (862,000)(366,000)(1,228,000)

Cost of goods sold 515,000 209,000 724,000

Depreciation expense191,200 67,000 E2,000 260,200

Equity in Eagle's earnings(79,200)0 I 79,200 0

Separate company net income(235,000)(90,000)

Consolidated net income(243,800)

to noncontrolling interest(8,800)8,800

to Parflex Corporation(235,000)

Retained earnings, 1/1 (500,000)(278,000)S278,000 (500,000)

Net income (above) (235,000)(90,000)(235,000)

Dividends declared 130,000 27,000 24,300 D2,700 130,000

Retained earnings, 12/31 (605,000)(341,000)(605,000)

Cash and receivables 135,000 82,000 217,000

Inventory 255,000 136,000 391,000

Investment in Eagle 488,900 0 D24,300 385,200 S-0-

12,600 A1

36,200A2

79,200 I

Property & equipment (net)964,000 328,000 A114,000 2,000 E1,304,000

GoodwillA238,000 38,000

Total assets 1,842,900 546,000 1,950,000

Liabilities (722,900)(55,000)(777,900)

Common stock (515,000)(150,000)S150,000 (515,000)

NCI 1/142,800 S

1,400 A1

1,800 A2(46,000)

NCI 12/31(52,100) (52,100)

Retained earnings, 12/31 (605,000)(341,000)(605,000)

Total liabilities and equities (1,842,900)(546,000)585,500 585,500 (1,950,000)

29.(25 Minutes) (Determine consolidated balances for a step acquisition).a.Amsterdam fair value implied by price paid by Morey$560,000 70% = $800,000 b. Revaluation gain:1/1 equity investment in Amsterdam (book value)$178,00025% net income for 1st 6 months8,750Investment book value at 6/30186,750Fair value of investment at 6/30 (25% $800,000)200,000Gain on revaluation to fair value$ 13,250c.Goodwill at 12/31:Fair value of Amsterdam at 6/30$800,000Book value at 6/30 (700,000 + [70,000 2])735,000Excess fair value$ 65,000Allocation to goodwill (no impairment)$ 65,000d.Noncontrolling interest:5% fair value balance at 6/30$40,0005% subsidiary net income from 6/30 to 12/311,7505% subsidiary dividends(1,000)Noncontrolling interest 12/31$40,750

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

a.Posada records an accrual of $7,950 (see computation below) as "Equity Income from Sold Shares of Sabathia" for the January 1, 2015 to October 1, 2015 period which will appear in the 2015 consolidated income statement. The consolidation will continue to include all of Sabathia's accounts but now recognizing a 40% noncontrolling interest.

Sabathia fair value 1/1/13 $1,200,000Sabathia book value (1,130,000)Patent $70,000Remaining life of patent 5 yearsAnnual amortization $14,000

Posadas share of Sabathias net income accruing to shares sold:Sabathia's net income$120,000Excess patent fair value amortization(14,000)Sabathia's adjusted net income106,000Fraction of year held9/12Sabathias adjusted net income for 9 months79,500Percentage owned by Posada70%Posadas share of Sabathias 9 month net income 55,650Shares sold1,000 out of 7,000 1/7Posadas income for shares sold $7,950

b. As long as control is maintained, the acquisition method considers transactions in the stock of a subsidiary, whether purchases or sales, as transactions in the equity of the consolidated entity. Posadas investment book value 10/1/151/1/15 balance (givenequity method) $1,085,000Recognition of 1/1/1510/1/15 period:Income accrual ($120,000 70% ) 63,000Dividends ($40,000 70% ) (21,000)Amortization ($14,000 70% ) (7,350)Pre-sale investment book value10/1/15$1,119,650

Computation of income effectsale transaction10/1/15 book value (above) $1,119,650Portion of investment sold (1,000/7,000 shares) 1/7Book value of investment sold $ 159,950Proceeds 191,000Credit to Posadas additional paid-in capital $ 31,050

c.Because Posada continues to hold 6,000 shares of Sabathia, control is still maintained and consolidated financial statements would be appropriate with a noncontrolling interest of 40 percent.

31.(35 Minutes) (Consolidation entries and the effect of different investment methods)

a.From the original fair value allocation, $30,000 is assigned based on the fair value of the patent. With a 5year remaining life, excess amortization will be $6,000 per year.

Because the equity method is in use, no Entry *C is required.

Entry SCommon stock (Bandmor) 300,000Retained earnings, 1/1/15 (Bandmor) 268,000Investment in Bandmor (70%) 397,600Noncontrolling interest in Bandmor, 1/1/15170,400(To eliminate stockholders' equity accounts of subsidiary and recognize outside ownership. Retained earnings figure includes 2013 and 2014 net income and dividends.)

Entry A Patent 18,000Goodwill 190,000Investment in Bandmor 145,600Noncontrolling interest in Bandmor (30%)62,400(To recognize unamortized portions of acquisition-date fair value allocations. No control premium, so goodwill is allocated proportionately. Patent has undergone two years amortization)

Entry IEquity in Bandmor earnings 72,800Investment in Bandmor 72,800(To eliminate intra-entity income balance. Equity accrual of $72,800 [70% ($110,000 6,000 amortization)] has been recorded)

Entry DInvestment in Bandmor 42,000Dividends declared 42,000(To eliminate current intra-entity dividend transfers70% of $60,000)

Entry EAmortization expense6,000Patent6,000 (To recognize amortization for current year)

Entry PAccounts payable 22,000Accounts receivable 22,000(To eliminate intra-entity payable/receivable balance)

31. (continued)

b.If the initial value method had been applied, the parent would have recorded only the subsidiary dividends declared as income rather than an equity accrual. Therefore, Entry *C is needed to adjust the parent's beginning retained earnings for 2015 to the equity method. During 2013 and 2014, the subsidiary earned a total net income of $171,000 but declared dividends of only $83,000. The parent's share of the difference is $61,600 (70% of $88,000 [$171,000 $83,000]). In addition, the parents 70% share of excess amortization expense for two years must also be included ($8,400 = 2 years $6,000 per year 70%). The net amount to be recognized is $53,200 ($61,600 $8,400).

ENTRY *CInvestment in Bandmor 53,200Retained earnings, 1/1/15 53,200

c.If the partial equity method had been applied, only the excess amortization expenses for the previous two years would have been omitted from the parent's retained earnings. As shown above, that figure is $8,400 (2 years $6,000 per year 70%).

ENTRY *CRetained earnings, 1/1/15 8,400Investment in Bandmor 8,400

d.Net income attributable to noncontrolling interest2015[($110,000 6,000) 30%] $31,200

Noncontrolling interest (NCI) fair value January 1, 2013$210,000Adjustments to original basis:2013NI to noncontrolling interest$20,700Dividends to NCI(11,700)9,0002014NI to noncontrolling interest$27,000Dividends to NCI(13,200)13,8002015Net income to noncontrolling interest$31,200Dividends to NCI(18,000) 13,200Noncontrolling interest in Bandmor 12/31/15$246,000

OR

Worksheet adjustment S$170,400Worksheet adjustment A62,4002015 net income attributable to noncontrolling interest31,2002015 dividends to noncontrolling interest (18,000)Noncontrolling interest in Bandmor 12/31/15$246,000

32.(45 Minutes) (Asks about several consolidated balances and consolidation process. Includes the different accounting methods to record investment.)

a.Schedule 1Fair Value Allocation and Excess Amortizations

Consideration transferred by Miller $664,000Noncontrolling interest fair value166,000Taylors fair value$830,000Taylors book value(600,000)Fair value in excess of book value 230,000 Excess fair value assigned to specific RemainingAnnual excessaccounts based on fair valuelifeamortizationsExcess fair value assigned to buildings80,00020 years$4,000Goodwill $150,000indefinite -0-Total $4,000

b.$150,000 (see schedule 1 above)

c.Entry (S)Common stock (Taylor) 300,000Additional paidin capital (Taylor) 90,000Retained earnings (Taylor) 210,000Investment in Taylor Company (80%) 480,000Noncontrolling interest in Taylor (20%) 120,000Entry (A)no control premiumBuildings 80,000Goodwill 150,000Investment in Taylor Company (80%) 184,000Noncontrolling interest in Taylor (20%) 46,000

d.(1) Equity methodIncome accrual (80%) $56,000Excess amortization expense (3,200)Investment income $52,800

(2)Partial equity methodIncome accrual (80%) $56,000

(3)Initial value methodDividends received (80%) $8,000

32. (continued)

e.(1) Equity methodInitial fair value paid$664,000Income accrual 20132015 ($260,000 80%) 208,000Dividends 20132015 ($45,000 80%) (36,000)Excess amortizations 20132015 ($3,200 3) (9,600)Investment in Taylor12/31/15 $826,400

(2) Partial Equity MethodInvestment in Taylor12/31/15 = $836,000 (initial value paid plus income accrual of $208,000 less dividends of $36,000 [no excess amortizations])

(3) Initial Value MethodInvestment in Taylor12/31/15 = $664,000 (original value paid)

f.Using the acquisition method, the allocation will be the total difference ($80,000) between the buildings' book value and fair value. Based on a 20 year remaining life, annual excess amortization is $4,000.

Miller book valuebuildings $800,000Taylor book valuebuildings 300,000Allocation 80,000Excess amortizations for 20132014 ($4,000 2) (8,000)Consolidated buildings account $1,172,000

g.Acquisition-date fair value allocated to goodwill(see schedule 1 above) $150,000

h.If the parent has been applying the equity method, the stockholders' equity accounts on its books will already represent consolidated totals. The common stock and additional paidin capital figures to be reported are the parent balances only. As to retained earnings, the equity method will properly record all subsidiary net income and amortization so that the parent balance is also a reflection of the consolidated total.

33.(20 Minutes) (A variety of consolidated balances-midyear acquisition)

Consideration transferred by Karson (cash and contingent consideration)$1,360,000 Noncontrolling interest fair value 340,000Reilly fair value (given)$1,700,000Book value of Reilly (1,450,000)*Fair value in excess of book value$250,000 Excess fair value assigned to specific Remaining Annual excessaccounts based on fair valuelifeamortizations Trademarks 150,0005 years$30,000 Goodwill $100,000indefinite -0-Total $30,000*Reilly book value, January 1(Common stock + APIC + RE) $1,400,000 Increase in book value:Net income (revenues less cost of goods sold and expenses) $120,000Dividends (20,000)Change during year $100,000Change during first 6 months of year 50,000 Reilly book value, July 1 (acquisition date)$1,450,000

CONSOLIDATION TOTALS: Sales (1)$1,050,000 Cost of goods sold (2)540,000 Operating expenses (3)265,000 Consolidated net income $245,000 Net income attributable to noncontrolling interest (4) $9,000(1) $800,000 Karson revenues plus $250,000 (post-acquisition subsidiary revenue)(2) $400,000 Karson COGS plus $140,000 (post-acquisition subsidiary COGS) (3) $200,000 Karson operating expenses plus $50,000 (post-acquisition subsidiary operating expenses) plus year excess amortization of $15,000(4) 20% of post-acquisition subsidiary net income less excess fair value amortization [20% year (120,000 30,000)] = $9,000

Retained earnings, 1/1 = $1,400,000 (the parents balance because the subsidiary was acquired during the current year) Trademarks = $935,000 (add the two book values and the excess fair value allocation after taking onehalf year excess amortization) Goodwill = $100,000 (the original allocation)

34.(25 Minutes) (A variety of consolidated questions and balances)

a.Nascent applies the initial value method because the original price of $414,000 is still in the Investment in Sea-Breeze account. In addition, the Investment Income account is equal to 60 percent of the dividends declared by the subsidiary during the year.

b.Consideration transferred in acquisition$414,000Noncontrolling interest fair value276,000Sea-Breeze fair value 1/1/12$690,000Sea-Breeze book value 1/1/12550,000Excess fair value over book value$140,000Excess fair value assigned to specific Remaining Annual excess accounts based on fair valuelifeamortizationsBuildings60,0006 years$10,000Equipment(20,000)4 years(5,000)Patent100,00010 years 10,000Total -0-$15,000

c.If the equity method had been applied, the Investment Income account would show the basic equity accrual less amortization: 60% of (the subsidiary's net income of $90,000 less $15,000 excess fair value amortization) = $45,000.

d.The initial value method recognizes neither the increase in the subsidiary's book value nor the excess amortization expenses for prior years. At the acquisition date, the subsidiarys book value was $550,000 as indicated by the assets less liabilities. At the beginning of the current year, the book value of the subsidiary is $780,000 as indicated by beginning stockholders' equity balances.

Increase in book value during prior years ($780,000 $550,000)$230,000Less excess amortization (45,000)Net increase in book value$185,000Ownership 60%Increase required in parent's retained earnings, 1/1/15 $111,000Parent's retained earnings, 1/1/15 as reported 700,000Parents share of consolidated retained earnings, 1/1/15$811,000

e.Consolidated net income and allocation Revenues (add book values) $900,000 Expenses (add book values and excess amortization)(635,000) Consolidated net Income $265,000 Net income attributable to noncontrolling interest($90,000 15,000) 40% 30,000 Net income attributable to Nascent, Inc. $235,000

34. (continued)

f.Consolidated buildings, 1/1/12 (subsidiary):Book value$300,000Acquisition-date fair-value allocation 60,000Consolidation figure $360,000

g.Consolidated buildings, 12/31/15:Parent's book value $700,000Subsidiary's book value 200,000Original allocation 60,000Amortization ($10,000 4 years) (40,000)Consolidated balance $920,000

35. (Acquisition Method Consolidated Balances)

Adjustments

December 31, 2015PalomaSan Marco & EliminationsNCIConsolidated

Revenues(1,843,000)(675,000)(2,518,000)

Cost of goods sold1,100,000 322,000 1,422,000

Depreciation expense125,000 120,000 245,000

Amortization expense275,000 11,000 (E) 80,000 366,000

Interest expense27,500 7,000 34,500

Equity in San Marco Income (121,500)(I)121,500 -0-

Separate company net income(437,000)(215,000)

Consolidated net income(450,500)

To noncontrolling interest(13,500)(13,500)

To Paloma Company(437,000)

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

Net Income(437,000)(215,000)(437,000)

Dividends declared350,000 25,000 (D) 22,500 2,500 350,000

Retained Earnings 12/31(2,712,000)(585,000)(2,712,000)

Current Assets1,204,000 430,000 1,634,000

Investment in San Marco1,854,000 (D) 22,500 (S)769,500

(A)985,500 -0-

(I) 121,500

Customer base -0- -0-(A)720,000 (E) 80,000 640,000

Buildings and Equipment931,000 863,000 1,794,000

Copyrights950,000 107,000 1,057,000

Goodwill(A)375,000 375,000

Total Assets4,939,000 1,400,000 5,500,000

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

Notes Payable(542,000)(155,000)(697,000)

NCI in San Marco(S) 85,500

(A)109,500 (195,000)

(206,000)(206,000)

Common Stock(900,000)(400,000)(S)400,000 (900,000)

Additional Paid-In Capital(300,000)(60,000)(S) 60,000 (300,000)

Retained Earnings 12/31(2,712,000)(585,000)(2,712,000)

Total Liab. and SE(4,939,000)(1,400,000)2,174,0002,174,000(5,500,000)

35. (Continued)ControllingNoncontrollingInterestInterestFair value at acquisition date$1,710,000$190,000Relative fair values of identifiable net assets 90% and 10% of $1,525,000 (acquisition date recorded fair value plus customer base)1,372,500152,500Goodwill$337,500$37,500

b.If the acquisition-date fair value of the noncontrolling interest was $167,500, both goodwill (NCI portion) and the noncontrolling interest balance would be reduced equally by $22,500 as follows:

Fair value of San Marco Company (1,710,000 + 167,500)$1,877,500Carrying amount acquired725,000 Excess fair value 1,152,500to customer base 800,000to goodwill$352,500

Noncontrolling interest balance beginning of year*$(172,500)Net income attributable to noncontrolling interest(13,500)Dividends declared to noncontrolling interest 2,500Noncontrolling interest end of year $(183,500)

* NCI at beginning of year Common stock-subsidiary$400,000 APIC-subsidiary60,000 Retained earnings-subsidiary 1/1 395,000Total$855,000 Noncontrolling interest percentage 10%Noncontrolling share of subsidiary book value85,500 Noncontrolling share of 1/1 customer base excess72,000 Noncontrolling share of goodwill (below) 15,000Noncontrolling interest 1/1$172,500

ControllingNoncontrollingInterestInterestFair value at acquisition date$1,710,000$167,500Relative fair values of identifiable net assets 90% and 10% of $1,525,000 (acquisition date recorded fair value plus customer base)1,372,500152,500Goodwill$ 337,500$15,000

36. (60 Minutes) (Consolidation worksheet and income statement with parent using initial value method. Also consolidated balances with a control premium paid by parent.)

a.Fair Value Allocation and AmortizationConsideration transferred by Holtz$576,000Noncontrolling interest fair value 144,000Devine total fair value 1/1/14$720,000Devine book value 1/1/14 (326,500)Fair value in excess of book value $393,500Excess fair value assigned to specific Remaining Annual excessaccounts based on fair value:lifeamortizationsBuilding 85,5005 years$17,100Trademark 64,00010 years 6,400Goodwill$244,000indefinite -0-$23,500

Explanation of Consolidation Entries Found on Worksheet

Entry *C: Convert the parents 1/1/15 retained earnings balance from the initial value method to the accrual basis.Change in subsidiary RE from 1/1/14 to 1/1/15$70,000Excess amortization for 2014 23,500Adjusted subsidiary RE increase$46,500Percentage ownership by parent80%*C conversion entry$37,200

Entry S: Eliminates stockholders' equity accounts of subsidiary while recognizing noncontrolling interest balance (20%) as of the beginning of the current year.

Entry A: Recognizes acquisition-date fair value allocations less one year of amortization for building and trademark and increases beginning balance of the noncontrolling interest for its share.

Entry I: Eliminates Intra-entity dividends declared by subsidiary and recorded as income by parent.

Entry E: Recognizes amortization expense for current year.

Columnar entryRecognizes net income attributable to noncontrolling interest [($97,000 $23,500) 20%].

Chapter 04 - Consolidated Financial Statements and Outside Ownership

Chapter 04 - Consolidated Financial Statements and Outside Ownership

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2004Hoyle, Schaefer, Doupnik, Fundamentals of Advanced Accounting, 1/e 4-264-26Copyright 2015 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.4-1Copyright 2015 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.36. a. (continued)HOLTZ CORPORATION AND DEVINE, INC.Consolidation WorksheetFor Year Ending December 31, 2015

HoltzDevine Consolidation EntriesNoncontrolling ConsolidatedAccountsCorporationInc.DebitCreditInterestTotalsSales(641,000) (399,000) (1,040,000)Cost of goods sold 198,000 176,000374,000Operating expenses 273,000 126,000 (E) 23,500422,500Dividend income (16,000) ___ _-0-(I) 16,000-0-Separate company net income(186,000) (97,000)Consolidated net income(243,500) NI attributable to noncontrolling interest(14,700) 14,700 NI attributable to Holtz Corp.(228,800)

Retained earnings, 1/1 (762,000) (296,500) (S) 296,500(*C) 37,200(799,200)Net income (above) (186,000) (97,000)(228,800)Dividends declared 70,000 20,000(I) 16,0004,000 70,000Retained earnings, 12/31(878,000) (373,500)(958,000)

Current assets 121,000120,500241,500Investment in Devine 576,000-0-(*C) 37,200(S)317,200 -0-(A)296,000Buildings and equipment (net) 887,000335,000(A) 68,400 (E) 17,1001,273,300Trademarks 149,000236,000(A) 57,600(E) 6,400436,200Goodwill-0--0-(A)244,000 244,000Total assets 1,733,000691,5002,195,000

Liabilities (535,000) (218,000)(753,000)Common stock (320,000) (100,000) (S)100,000(320,000)Retained earnings, 12/31 (above) (878,000)(373,500)(958,000)NCI in Devine, 1/1 (S) 79,300(A) 74,000(153,300)NCI in Devine, 12/31 (164,000) (164,000)Total liabilities and equities (1,733,000) (691,500)843,200843,200(2,195,000)

36. (continued)b. HOLTZ CORPORATION AND DEVINE, INC.Consolidated Income StatementFor Year Ending December 31, 2015Sales$1,040,000Cost of goods sold$374,000Operating expenses422,500Total expenses796,500Consolidated net income$243,500To 20% noncontrolling interest $14,700To Holtz Corporation$228,800

c.Consideration transferred by Holtz for 80% of Devine$576,000Noncontrolling interest fair value ($4.76 20,000 shares)95,200Devine fair value$671,200Fair value of Devines underlying net assets476,000Goodwill$195,200

If the noncontrolling interest fair value was $4.76 per share at the acquisition date, then goodwill declines to $195,200. The noncontrolling interest total would also decline from $164,000 to $115,200.

Worksheet entries (S), (A1) and (A2) assuming a $4.76 noncontrolling interest acquisition-date fair value:

(S)Common stock-Devine100,000Retained earnings- Devine 1/1296,500Investment in Devine317,200Noncontrolling interest 79,300

(A1)Buildings and equipment (net)68,400Trademarks57,600Investment in Devine100,800Noncontrolling interest 25,200 (A2)Goodwill195,200Investment in Devine195,200

ControllingNoncontrollingInterest InterestFair value at acquisition date$576,000$95,200Relative fair values of identifiable net assets 80% and 20% of $476,000 (acquisition date fair value of net identifiable assets)380,80095,200Goodwill$195,200-0-

37. (40 Minutes) (Determine consolidated balances.)

Acquisition-date subsidiary fair value (given)$1,003,400Book value of subsidiary (given) (690,000)Fair value in excess of book value $313,400Allocations to specific accounts based on difference between fair value and book valueLand $225,000Buildings and equipment (24,000)Copyright 94,000Notes payable 18,400 313,400Total-0-

Annual excess amortizations:Buildings and equipment [$(24,000) 10 years] $(2,400)Copyright ($94,000 20 years) 4,700 Notes payable ($18,400 8 years) 2,300 Total $4,600

Consolidated Totals: Revenues = $2,079,880 (add the two book values) Cost of goods sold = $1,206,000 (add the two book values) Depreciation expense = $283,200 (add the two book values less $2,400 excess adjustment) Amortization expense = $10,800 (add the two book values plus $4,700 excess adjustment) Interest expense = $63,600 (add the two book values plus $2,300 excess adjustment) Equity in income of Sierra = -0 (eliminated so that the individual revenues and expenses of the subsidiary can be included in the consolidated figures) Consolidated net income = $516,280 (revenues less expenses) Net income attributable to noncontrolling interest = $44,280 ($226,000 reported subsidiary net income less $4,600 net excess amortization expense multiplied by 20 percent outside ownership) Net income to Padre Company = $472,000 ($516,280 consolidated net income less noncontrolling interest share of $44,280) Retained earnings, 1/1 = $1,275,000 (parent company balance only) Dividends declared = $260,000 (parent company balance; subsidiary's declarations to parent are intra-entity, declarations to outside owners decrease noncontrolling interest balance)

37. (continued) Retained earnings, 12/31 = $1,487,000 (consolidated balance on 1/1 plus net income to Padre Co. less Padres dividends declared) or simply the parents RE because parent employs the equity method. Current assets = $1,620,860 (add the two book values) Investment in Sierra = -0- (eliminated so that the individual assets and liabilities of the subsidiary can be included in the consolidated figures) Land = $650,000 (add the book values plus the $225,000 excess allocation) Buildings and equipment (net) = $1,162,800 (add the book values less the $24,000 allocation [asset was overvalued] plus the excess amortization) Copyright = $205,200 (book value plus $94,000 excess allocation less amortization for the year) Total assets = $3,638,860 Accounts payable = $469,000 (add book values) Notes payable = $700,900 (add the book values less $18,400 excess allocation plus amortization) Noncontrolling interest in subsidiary = $231,960 (20% of fair value as of 1/1 [$200,680] plus net income attributable to noncontrolling interest [$44,280] less dividends declared to outside owners [$13,000]) Common stock = $300,000 (parent company balance) Additional paidin capital = 450,000 (parent company balance) Retained earnings, 12/31 = $1,487,000 (computed above) Total liabilities and equities = $3,638,860

37. (continued) Acquisition Method Consolidation EntriesNoncontrollingConsolidatedAccountsPadreSierraDebitCreditInterestTotalsRevenues(1,394,980) (684,900)(2,079,880)Cost of goods sold774,000432,0001,206,000Depreciation expense274,00011,600(E) 2,400283,200Amortization expense-0-6,100(E) 4,70010,800Interest expense52,1009,200(E) 2,30063,600Equity in income of Sierra (177,120) -0-(I) 177,120 -0-Separate company net income(472,000) (226,000) Consolidated net income(516,280) NI to noncontrolling interest (44,280) 44,280 NI to Padre Company (472,000)Retained earnings 1/1 (1,275,000) (530,000) (S) 530,000(1,275,000)Net income (above) (472,000) (226,000)(472,000)Dividends declared 260,000 65,000(D) 52,000 13,000 260,000Retained earnings 12/31 (1,487,000) (691,000)(1,487,000)Current assets 856,160764,7001,620,860Investment in Sierra 927,840(D) 52,000(S) 552,000(I) 177,120(A) 250,720-0-Land 360,00065,000(A) 225,000 650,000Buildings and equipment (net) 909,000275,400(E) 2,400(A) 24,0001,162,800Copyright -0- 115,900 (A) 94,000(E) 4,700 205,200Total assets 3,053,0001,221,0003,638,860Accounts payable (275,000) (194,000)(469,000)Notes payable (541,000)(176,000) (A) 18,400(E) 2,300(700,900)NCI in Sierra 1/1(S) 138,000 NCI in Sierra 12/31(A) 62,680(200,680)(231,960)(231,960)Common stock (300,000)(100,000) (S) 100,000(300,000)Additional paid-in capital (450,000)(60,000) (S) 60,000(450,000)Retained earnings 12/31(above) (1,487,000) (691,000) (1,487,000)Total liab. and stockholders' equity (3,053,000) (1,221,000)1,265,9201,265,920(3,638,860)

38.(55 Minutes) (Consolidated worksheet)

a.Consideration transferred by Adams$603,000Noncontrolling interest fair value 67,000Acquisition-date total fair value $670,000Book value of Barstow (CS + RE 12/31/13)(460,000)Excess fair value over book value210,000Excess fair value assigned to specific Remaining Annual excessaccounts based on fair valuelifeamortizationsLand $30,000 Buildings (20,000)10 years($2,000)Equipment 40,000 5 years8,000Patents 50,00010 years5,000Notes payable 20,000 5 years4,000 120,000Goodwill $90,000indefinite -0-Total $15,000

b. Because investment income is exactly 90 percent of Barstow's reported earnings, Adams apparently is applying the partial equity method.

c. d. Explanation of Consolidation Entries Found on WorksheetEntry *CConverts Adams's financial records from the partial equity method to the equity method by recognizing amortization for 2014. Total expense was $15,000 but only 90 percent (or $13,500) applied to the parent.Entry SEliminates subsidiary's stockholders' equity while recording noncontrolling interest balance as of January 1, 2015.Entry ARecords unamortized allocation balances as of January 1, 2015. The acquisition method attributes 10 percent of these amounts to the noncontrolling interest.Entry IEliminates intra-entity income accrual for 2015.Entry DEliminates intra-entity dividend transfers.Entry ERecords amortization expense for current year.Columnar EntryRecognizes noncontrolling interest's share of consolidated net income as follows:

Net income attributable to noncontrolling interest (Columnar Entry)Barstow reported net income $120,000Excess amortization expenses 2015 (15,000)Adjusted net income of Barstow $105,000Noncontrolling interest ownership 10%

Net income attributable to noncontrolling interest$ 10,500McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2004Hoyle, Schaefer, Doupnik, Fundamentals of Advanced Accounting, 1/e 4-264-34Copyright 2015 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

4-33Copyright 2015 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.38. c. and d. (continued)ADAMS CORPORATION AND BARSTOW, INC.Consolidation Worksheet-Acquisition MethodFor Year Ending December 31, 2015 Noncontrolling ConsolidatedAdams Corp.Barstow Inc.DebitCreditInterestTotalsRevenues(940,000) (280,000)(1,220,000)Cost of goods sold480,00090,000570,000Depreciation expense100,00055,000(E) 6,000161,000Amortization expense (E) 5,0005,000Interest expense40,00015,000(E) 4,00059,000Investment income (108,000)-0-(I) 108,000 -0-Separate company net income(428,000)(120,000) Consolidated net income (425,000) NI to noncontrolling interest (10,500) 10,500 NI to Adams Corporation(414,500)Retained earnings, 1/1 (1,367,000)(340,000)(C*) 13,500(1,353,500)(S) 340,000Net income(428,000)(120,000)(414,500)Dividends declared 110,000 70,000(D) 63,0007,000 110,000Retained earnings, 12/31 (1,685,000)(390,000)(1,658,000)Current assets 610,000250,000860,000Investment in Barstow 702,000(D) 63,000 (*C) 13,500-0-(S) 468,000(A) 175,500(I) 108,000Land 380,000150,000(A) 30,000 560,000Buildings 490,000250,000(E) 2,000 (A) 18,000724,000Equipment 873,000150,000(A) 32,000 (E) 8,0001,047,000Patents -0--0- (A) 45,000 (E) 5,00040,000Goodwill -0--0- (A) 90,000 90,000Total assets 3,055,000 800,0003,321,000Notes payable (860,000)(230,000)(A) 16,000 (E) 4,000(1,078,000)Common stock (510,000)(180,000)(S) 180,000(510,000)Retained earnings, 12/31(1,685,000)(390,000)(1,658,000)(S) 52,000Noncontrolling interest(A) 19,500(71,500) (75,000)(75,000)Total liabilities and stockholders' equity (3,055,000)(800,000)934,500934,500(3,321,000)

39. (25 minutes) (Consolidated balances after a mid-year acquisition)

a.Investment account balance indicates the initial value method.

Consideration transferred by Gibson$528,000Noncontrolling interest fair value 352,000Davis acquisition-date fair value 880,000Book value of Davis (see below)(765,000)Fair value in excess of book value $115,000Excess fair value assigned to specific Remaining Annual excessaccounts based on fair value:lifeamortizationsEquipment (overvalued)(30,000) 5 years$(6,000)Goodwill $145,000 indefinite -0-Total $(6,000)Amortization for 9 months $(4,500)

Acquisition-date subsidiary book value:Book value of Davis, 1/1/15 (CS + 1/1 RE) $740,000Increase in book value-net income (dividendswere declared after acquisition) $100,000Time prior to purchase (3 months) year 25,000Book value of Davis, 4/1/15 (acquisition date) $765,000

Consolidated income statement:Revenues (1)$825,000Cost of goods sold (2)$405,000Operating expenses (3)214,500619,500Consolidated net income205,500Net income attributable to noncontrolling interest (4)28,200Net income to Gibson Company$177,300(1) $900,000 combined revenues less $75,000 (preacquisition subsidiary revenue)(2) $440,000 combined COGS less $35,000 (preacquisition subsidiary COGS)(3) $234,000 combined operating expenses less $15,000 (preacquisition subsidiary operating expenses) less nine month excess overvalued equipment depreciation reduction of $4,500(4) 40% of post-acquisition subsidiary net income less excess amortization

b.Goodwill = $145,000 (original allocation)Equipment = $774,500 (add the two book values less $30,000 reduction to fair value plus $4,500 nine months excess amortization) Common stock = $630,000 (parent company balance only)Buildings = $1,124,000 (add the two book values)Dividends declared = $80,000 (parent company balance only)

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

a. Consideration transferred by Truman $720,000Noncontrolling interest fair value 290,000Atlantas acquisition-date total fair value$1,010,000Book value of Atlanta (840,000)Fair value in excess of book value$ 170,000 Excess fair value assigned to specific Remaining Annual excessaccounts based on fair valuelifeamortizations Patent 100,0005 years$20,000 Goodwill $ 70,000indefinite -0-Total $20,000

b. Goodwill allocation with control premiumControllingNoncontrollingInterestInterestFair values at acquisition date$720,000$290,000Relative fair values of identifiable net assets 70% and 30% of $940,000 (acquisition date book value plus patent = net asset fair value)658,000282,000Goodwill$ 62,000$ 8,000

c. Initial value at acquisition date$720,000 Trumans share of Atlantas net income for half year([$120,000 20,000 amortization year] 70%)35,000 Dividends 2015 ($80,000 year 70%)(28,000)Investment account balance 12/31/15$727,000

40. (continued)d. Consolidated Worksheet

TRUMAN COMPANY AND SUBSIDIARY ATLANTA COMPANYConsolidation WorksheetFor Year Ending December 31, 2015

TrumanAtlantaAdjustments & EliminationsNCICons.

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

Operating Expenses 402,000 280,000 (E) 10,000 (S)140,000 552,000

Net income of subsidiary (35,000) (I) 35,000 -0-

Separate company net income(303,000)(120,000)

Consolidated net income(318,000)

Net income attributable to NCI(15,000) 15,000

Net income attributable to Truman(303,000)

Retained earnings, 1/1 (823,000)(500,000)(S) 500,000 (823,000)

Net income (above) (303,000)(120,000)(303,000)

Dividends declared 145,000 80,000 (S) 40,000 12,000

(D) 28,000 145,000

Retained earnings 12/31 (981,000)(540,000)(981,000)

Current assets 481,000 390,000 871,000

Investment in Atlanta727,000 (D) 28,000 (S)588,000 -0-

(I) 35,000

(A1) 70,000

(A2) 62,000

Land 388,000 200,000 588,000

Buildings 701,000 630,000 1,331,000

Patent (A1)100,000 (E) 10,000 90,000

Goodwill(A2) 70,000 70,000

Total assets 2,297,000 1,220,000 2,950,000

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

Common stock (95,000)(300,000)(S) 300,000 (95,000)

Additional paidin capital (405,000)(20,000)(S) 20,000 (405,000)

Retained earnings 12/31 (981,000)(540,000)(981,000)

Noncontrolling interest 7/1(A1) 30,000

(A2) 8,000(S) 252,000 (290,000)

Noncontrolling interest 12/31 (293,000) (293,000)

Total liab. and equity (2,297,000)(1,220,000)1,263,000 1,263,000 (2,950,000)

41. (60 minutes) (Consolidated statements for a step acquisition)

a. Fair value of Sysinger 1/1/15 (given)$1,750,000 Book value of Sysinger 1/1/15 (CS + APIC + RE)1,300,000 Excess fair value over book value450,000 To customer contract (4 year remaining life)400,000 To goodwill$50,000

b.Equity in earnings of Sysinger2015 net income (150,000 95%)$142,500 Amortization (100,000 95%)(95,000)Equity in earnings of Sysinger$47,500

Revaluation of 15% block to fair valueConsideration transferred$184,500 2014 net income (100,000 15%)15,000 2014 dividends (30,000 15%) (4,500)Book value at 1/1/15195,000 Fair value at 1/1/15262,500 Gain on revaluation$67,500

Investment account balanceFair value at 1/1/15 (15% block)$262,500 Consideration transferred 1/1/15 (80% block)1,400,000 Equity earnings 2015Net income (95% 150,000)142,500Customer contract amortization(95,000)47,500Dividends (40,000 95%) (38,000)Investment in Sysinger 12/31/15$1,672,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2004Hoyle, Schaefer, Doupnik, Fundamentals of Advanced Accounting, 1/e 4-264-40Copyright 2015 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

4-37Copyright 2015 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

41. (Continued) c. Allan and SysingerConsolidation WorksheetFor Year Ending December 31, 2015 Allan Sysinger Consolidation Entries Noncontrolling ConsolidatedAccountsCompanyCompanyDebitCreditInterest TotalsRevenues(931,000)(380,000)(1,311,000)Operating expenses615,000230,000(E)100,000945,000Equity earnings of Sysinger(47,500)-0- (I) 47,500 -0-Gain on revaluation(67,500)-0-(67,500)Separate company net income (431,000)(150,000) Consolidated net income(433,500) NI attributable to noncontrolling interest(2,500) 2,500 NI attributable to Allan Company(431,000)Retained earnings, 1/1 (965,000) (600,000) (S) 600,000(965,000)Net income(431,000)(150,000)(431,000)Dividends declared 140,000 40,000(D) 38,0002,000 140,000 Retained earnings 12/31(1,256,000) (710,000)(1,256,000)Current assets 288,000 540,000828,000Investment in Sysinger1,672,000-0-(D) 38,000 (S)1,235,000-0-(I) 47,500(A) 427,500Property, plant, and equipment826,000 590,0001,416,000Patented technology 850,000 370,0001,220,000Customer contract-0--0-(A) 400,000 (E) 100,000300,000Goodwill-0- (A) 50,000 50,000Total assets 3,636,0001,500,0003,814,000Liabilities (1,300,000) (90,000)(1,390,000)Common stock (900,000)(500,000) (S) 500,000 (900,000)Additional paidin capital (180,000)(200,000) (S) 200,000 (180,000)Retained earnings 12/31(1,256,000)(710,000)(1,256,000)NCI in Sysinger, 1/1 -0--0-(S) 65,000(A) 22,500(87,500) NCI in Sysinger, 12/31-0--0-(88,000) (88,000) Total liab. and stockholders' equity (3,636,000) (1,500,000)1,935,5001,935,500(3,814,000)

42. (60 minutes) (Step acquisitioncontrol previously acquired.)

a. According to the acquisition method, the valuation basis for a subsidiary is established on the date control is obtained, in this case January 1, 2014. Subsequent acquisitions are valued consistent with this initial value after adjusting the investment for subsidiary net income and other changes.

Because subsequent acquisitions are considered as transactions in the parents own equity, no gains or losses are recorded. Differences in cash paid and the underlying value are recorded as adjustments to APIC.

Fair value of Keane Company 1/1/14 ($573,000 60%)$955,000Keane net income 2014150,000Excess fair value amortization for copyright(20,000)*Keane dividends 2014(80,000)Initial fair value adjusted to 1/1/15$1,005,000Percent acquired in step acquisition 30%Value assigned to 30% acquisition301,500Cash paid for the 30% acquisition300,000Credit to APIC from 30% step acquisition$ 1,500

*Fair value of Keane Company 1/1/14 ($573,000 60%)$955,000 Book value of Keane Company 1/1/14 (given)810,000 Excess fair value over book value145,000 To copyright (6 year remaining life)120,000 To goodwill$25,000

Entry to record 30% additional investment in Keane:

1/1/15Investment in Keane301,500Cash300,000APIC from step acquisition1,500

b. Investment in Keane Company 1/1/14$573,0002014 Equity earnings [60% (150,000 20,000)]78,0002014 Dividends from Keane (60% $80,000)(48,000)Additional acquisition of 30% interest301,5002015 Equity earnings [90% (180,000 20,000)]144,0002015 Dividends from Keane (90% $60,000) (54,000)Investment in Keane Company 12/31/15$994,500

42. (continued) part c. BRETZ, INC. AND KEANE COMPANYConsolidation WorksheetYear Ending December 31, 2015

Consolidation EntriesNoncontrollingConsolidatedAccountsBretz, Inc.Keane Co.DebitCreditInterestTotalsRevenues (402,000) (300,000)(702,000)Operating expenses 200,000 120,000 (E) 20,000340,000Equity in Keanes income(144,000)(I) 144,000Separate company net income(346,000) (180,000)Consolidated net income (362,000) NI attributable to noncontrolling interest(16,000) 16,000 NI attributable to Bretz, Inc.(346,000)Retained earnings, 1/1(797,000)(500,000) (S) 500,000(797,000)Net income (above) (346,000)(180,000)(346,000)Dividends declared 143,00060,000 (D) 54,0006,000 143,000Retained earnings, 12/31(1,000,000) (620,000) (1,000,000)Current assets 224,000 190,000414,000Investment in Keane Company 994,500 (S) 792,0000(D)54,000(A) 112,500(I) 144,000Trademarks106,000600,000706,000Copyrights 210,000300,000 (A)100,000 (E) 20,000590,000Equipment (net) 380,000110,000490,000Goodwill (A) 25,000 25,000Total assets 1,914,500 1,200,0002,225,000Liabilities (453,000) (200,000)(653,000)Common stock (400,000)(300,000) (S)300,000(400,000)Additional paidin capital (60,000)(80,000) (S) 80,000(60,000)APIC-step acquisition(1,500)(1,500)Retained earnings,12/31 (1,000,000)(620,000)(1,000,000)Non-controlling interest 1/1(A) 12,500(S) 88,000(100,500)Non-controlling interest 12/31(110,500) (110,500)Total liabilities and equities (1,914,500) (1,200,000)1,223,0001,223,000(2,225,000)Accounting Theory Research Case: Noncontrolling Interest

In deliberations prior to the issuance of SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, the FASB considered three alternatives for displaying the noncontrolling interest in the consolidated balance sheet

What were these three alternatives?1. As a liability2. As equity3. In the mezzanine area between liabilities and owners equity

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

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

The Board concluded that a noncontrolling interest in a subsidiary does not meet the definition of a liability in the Boards conceptual framework. Paragraph 35 of Concepts Statement 6 defines liabilities as probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

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

RESEARCH CASE: COCA-COLAS ACQUISITION OF COCA-COLA ENTERPRISES1. How did Coca-Cola allocate the acquisition-date fair value of CCE among the assets acquired and liabilities assumed?Note 2 (Acquisitions and Divestitures) of Coca-Colas 2010 10-K shows the following allocation for the CCE acquisition:

Cash and cash equivalents $ 49Marketable securities 7Trade accounts receivable 1,194Inventories 696Other current assets 744Property, plant and equipment 5,385Bottlers' franchise rights with indefinite lives 5,100Other intangible assets 1,032Other noncurrent assets 261Total identifiable assets acquired 14,468Accounts payable and accrued expenses 1,826Loans and notes payable 266Long-term debt 9,345Pension and other postretirement liabilities 1,313Other noncurrent liabilities2,603Total liabilities assumed 15,353Net liabilities assumed (885)Goodwill 7,746Less: Noncontrolling interests 13Net assets acquired $ 6,848

2. What are employee replacement awards? How did Coca-Cola account for the replacement award value provided to the former employees of CCE?Employee replacement award represent various share-based payments to employees that the acquiring firm replaces with new awards based on its shares. The ASC requires that if replacement awards are based on past service, their fair value is included in consideration transferred. If the replacement award are for future service, their value is expensed as incurred. Coca-Cola followed the ASC for its replacement awards (10-K Note 2).3. How did Coca-Cola account for its 33 percent interest in CCE prior to the acquisition of the 67 percent not already owned by Coca-Cola?Coca-Cola used the equity method to account for its previous 33 percent investment in CCE (10-K page 53).4. Upon acquisition of the additional 67 percent interest, how did Coca-Cola account for the change in fair value of its original 33 percent ownership interest? We remeasured our equity interest in CCE to fair value upon the close of the transaction. As a result, we recognized a gain of approximately $4,978 million, which was classified in the line item other income (loss) net in our consolidated statement of income. (10-K Note 2).

Instapower: FASB ASC and IFRS Research Case1. What is the total consideration transferred by Q-Car to acquire its 90 percent controlling interest in InstaPower?Cash$60,000,000 Shares of Q-Car stock27,000,000 Contingency 10,000,000 Total consideration transferred$97,000,000The shares of Q-Car stock and the contingency are both measured at their acquisition-date fair values (ASC 805-30-30-7, ASC 805-30-25-5).

2. What values should Q-Car assign to identifiable assets and liabilities as part of the acquisition accounting?Cash$ 270,000Accounts receivable 800,000Land2,930,000Building19,000,000Machinery46,000,000Trademark8,000,000Research and development asset14,000,000Accounts payable(1,000,000) Total identifiable net asset fair value$90,000,000(ASC 805-20-30-1)

3. What is the acquisition-date value assigned to the 10 percent noncontrolling interest? What are the noncontrolling interest valuation alternatives available under IFRS?Under U.S. GAAP, the acquisition-date noncontrolling interest is measured at its fair value. In this case, there are no readily available market values for the noncontrolling shares so Q-Car has relied on other valuation techniques to arrive at an estimated fair value of $11,000,000. IFRS allows two alternative measures for the noncontrolling interest. The first is identical to the U.S. measure. The second alternative uses the noncontrolling interest percentage of the fair value of the subsidiarys identifiable net assets. In this case, the second alternative provides a value of $9,000,000 ($90,000,000 x 10%).4. Under U.S. GAAP, what amount should Q-Car recognize as goodwill from the acquisition? What alternative valuations are available for goodwill under IFRS?Goodwill under U.S. GAAP (ASC 805-30-30-1) and IFRS alternative 1 (IFRS 3 IN 8):Consideration transferred (above)$ 97,000,000Acquisition-date noncontrolling interest fair value 11,000,000Acquisition-date value assigned to subsidiary$108,000,000Net assets acquired fair value (above) 90,000,000Goodwill$ 18,000,000Goodwill under IFRS alternative 2:Consideration transferred (above)$ 97,000,000Acquisition-date NCI value assigned (above) 9,000,000Acquisition-date value assigned to subsidiary$106,000,000Net assets acquired fair value (above) 90,000,000Goodwill$ 16,000,000McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2004Hoyle, Schaefer, Doupnik, Fundamentals of Advanced Accounting, 1/e 4-264-44Copyright 2015 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

4-43Copyright 2015 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.