Advance Acc

ADVANCE ACC

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CHAPTER 4CONSOLIDATED FINANCIAL STATEMENTSAND OUTSIDE OWNERSHIPAnswers to Questions1. "Noncontrolling interest" refers to an equity interest that is held in a member of abusiness combination by an unrelated (outside) party.2. a. Acquisition method = $220,000 (fair value)b. Purchase method = $208,000 (all of the book value plus 80 percent of the $60,000difference between fair value and book value)3. A control premium is the portion of an acquisition price (above currently traded marketvalues) paid by a parent company to induce shareholders to sell a sufficient number ofshares to obtain control. The extra payment typically becomes part of the goodwillacquired in the acquisition attributable to the parent company.4. In practice, noncontrolling interest figures will appear in various locations withinconsolidated financial statements. The end of year balance can be found in the liabilitysection, in the stockholders' equity section, or between these two. The noncontrollinginterest's share of net income can be shown as a reduction on either the incomestatement or the statement of retained earnings. Based on current practice, thistextbook reports the ending balance between consolidated liabilities and stockholders'equity with the income allocation shown as a reduction on the income statement.5. The ending noncontrolling interest can be determined on a consolidation worksheet byadding the components found in the noncontrolling interest column: the beginningbalance plus allocation of current year net income less dividends paid to these outsideowners. The ending balance can also be determined (at this point in the exploration ofconsolidated financial statements) by multiplying the outside ownership percentage bythe subsidiary's ending book value. In subsequent chapters, this calculation must bealtered because of various adjustments made within the consolidation process.6. Allsports should remove the pre-acquisition revenues and expenses from theconsolidated totals. These amounts have been earned (incurred) prior to ownership byAllsports and therefore should not be reported as earnings for the current parentcompany owners.7. In previous years, Tree has appropriately utilized the market-value method in accountingfor its investment in Limb. Now, following a second acquisition, consolidation hasbecome applicable. These two methods are not considered to be comparable.Therefore, at the point in time that Tree begins to produce consolidated statements, allprevious financial reports must be restated as if the equity method had been appliedsince the date of the first acquisition. This handling presents the reader of the financialstatements with figures that are more comparable from year to year.8. When a company sells a portion of an investment, a gain or loss is recognized based onthe difference between the proceeds received and the book value of the investment (onMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-2 Solutions Manualthe portion sold). The correct book value is determined based upon the consistentapplication of the equity method. Thus, if either the Initial value method or the partialequity method has been used, Duke must first restate the account to the equity methodbefore recording the sales transaction. This same method is also 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'sstock as a treasury stock transaction. Thus, no gain or loss can be recognized.10. The accounting method choice for the remaining shares depends upon the currentrelationship between the two firms. If Duke retains control, consolidation is still required.However, if the parent now can only significantly influence the decision-making process,the equity method is applied. A third possibility is Duke may have lost the power toexercise even significant influence. The market-value method then is appropriate.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-3

Answers to Problems1. D The acquisition method consolidates assets at fair value at acquisition dateregardless of the parent’s percentage ownership.2. D In consolidating the subsidiary's figures, all intercompany balances mustbe eliminated in their entirety for external reporting purposes. Even thoughthe subsidiary is less than fully owned, the parent nonetheless controls it.3. C An 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, 2009 ............................................... $45,000Amortization for 2 years (10 year life) ............................................ (9,000)Patent reported amount December 31, 2010 ................................. $36,0004. A Plaster building................................................................................ $510,000Turner building acquisition-date fair value $300,000Amortization for 3 years (10-year life) (90,000) 210,000Consolidated buildings .................................................................. $720,000-ORPlasterbuilding................................................................................ $510,000Turner building 12/31/11 $182,000Excess acquisition-date fair value allocation 40,000Excess amortization for 3 years (10-year life) (12,000) 210,000Consolidated buildings .................................................................. $720,000

5. C Hygille expense ............................................................................... $621,000Nuyt expenses ................................................................................. 714,000Excess fair value amortization (70,000 ÷ 10 yrs) .......................... 7,000Consolidated expenses .................................................................. $1,342,0006. B Combined revenues ........................................................................ $1,100,000Combined expenses ........................................................................ (700,000)Excess acquisition-date fair value amortization ........................... (15,000)Consolidated net income ................................................................ $385,000Less: noncontrolling interest ($85,000 × 40%).............................. (34,000)Consolidated net income to controlling interest .......................... $351,0007. C8. BMcGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-4 Solutions Manual

9. A Amie, Inc. Fair value at January 1, 2007:30% 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 .............................................................. $560,000Net assets' fair value ....................................................................... 500,000Goodwill .......................................................................................... $60,00010. C11. A Fair value of noncontrolling interest on April 1 ............................ $165,00030% of net income for 9 months (¾ year × $240,000 × 30%) ....... 54,000

Noncontrolling interest December 31 ............................................ $219,00012. B Combined revenues ........................................................................ $1,300,000Combined expenses ........................................................................ (800,000)Trademark amortization .................................................................. (6,000)Patented technology amortization ................................................. (8,000)Consolidated net income ................................................................ $486,00013. C Subsidiary income ($100,000 – $14,000 excess amortizations) .. $86,000Noncontrolling interest percentage ............................................... 40%Noncontrolling interest in subsidiary income............................... $34,400Fair value of noncontrolling interest at acquisition date ............. $180,00040% change in Scott book value since acquisition ...................... 52,000Excess fair value amortization ($14,000 × 40%)............................ (5,600)40% current year income ................................................................ 34,400Noncontrolling interest at end of year ........................................... $260,80014. A Michael trademark balance ............................................................. $260,000Scott trademark balance ................................................................. 200,000Excess fair value ............................................................................. 60,000Two years amortization (10-year life) ............................................. (12,000)Consolidated trademarks ............................................................... $508,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-5

15. 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%) ................................. $10,000Park current assets ......................................................................... $70,000Strand current assets ...................................................................... 20,000Excess inventory fair value ............................................................ 15,000Consolidated current assets .......................................................... $105,00016. D Park noncurrent assets ................................................................... $90,000Strand noncurrent assets ............................................................... 40,000Excess fair value to goodwill ......................................................... 10,000Consolidated noncurrent assets .................................................... $140,00017. B Add the two book values and include 10% (the $6,000 current portion) ofthe loan taken out by Park to acquire Strand.18. B Add the two book values and include 90% (the $54,000 noncurrent portion)of the loan taken out by Polk to acquire Strand.19. C Park stockholders' equity ............................................................... $80,000Noncontrolling interest at fair value (20% × $75,000) ................... 15,000Total stockholders' equity .............................................................. $95,00020. (15 minutes) (Compute consolidated income and noncontrolling interests)2009 2010Harrison income ............................................................ $220,000 $260,000Starr income .................................................................. 70,000 90,000Excess fair value amortization ..................................... (8,000) (8,000)Consolidated net income .............................................. $282,000 $342,000Starr fair value ................................................................................. $1,200,000

Fair value of consideration transferred ......................................... 1,125,000Noncontrolling interest fair value .................................................. $75,000Noncontrolling interest fair value January 1, 2009 (above) .......... $75,0002009 income to NCI ([$70,000 – $8,000] × 10%) ................................ 6,2002009 dividends to NCI .................................................................... (3,000)Noncontrolling interest reported value December 31, 2009 ........ 78,2002010 income to NCI ([$90,000 – $8,000] × 10%) ................................ 8,2002010 dividends to NCI .................................................................... (3,000)Noncontrolling interest reported value December 31, 2010 $83,400McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-6 Solutions Manual

21. (40 minutes) (Several valuation and income determination questions for abusiness combination involving a noncontrolling interest.)a. Business combinations are recorded generally at the fair value of theconsideration transferred by the acquiring firm plus the acquisition-date fairvalue of the noncontrolling interest.Patterson’s consideration transferred ($31.25 × 80,000 shares) ......... $2,500,000Noncontrolling interest fair value ($30.00 × 20,000 shares) ................. $600,000Soriano’s total fair value 1/1/09 ........................................................... $3,100,000b. Each identifiable asset acquired and liability assumed in a businesscombination should initially be reported at its acquisition-date fair value.c. In periods subsequent to acquisition, the subsidiary’s assets and liabilities arereported at their acquisition-date fair values adjusted for amortization anddepreciation. Except for certain financial items, they are not continuallyadjusted for changing fair values.d. Soriano’s total fair value 1/1/09 ........................................................... $3,100,000

Soriano’s net assets book value ......................................................... 1,290,000Excess acquisition-date fair value over book value .......................... $1,810,000Adjustments from book to fair values .................................................Buildings and equipment .................................... (250,000)Trademarks ........................................................... 200,000Patented technology ............................................ 1,060,000Unpatented technology ....................................... 600,000 1,610,000Goodwill .......................................................................................... $ 200,000e. Combined revenues .............................................................................. $4,400,000Combined expenses ............................................................................. (2,350,000)Building and equipment excess depreciation .................................... 50,000Trademark excess amortization .......................................................... (20,000)Patented technology amortization ...................................................... (265,000)Unpatented technology amortization .................................................. (200,000)Consolidated net income ..................................................................... $1,615,000To noncontrolling interest:Soriano’s revenues ......................................................................... $1,400,000Soriano’s expenses ......................................................................... (600,000)Total excess amortization expenses (above) ................................ (435,000)Soriano’s adjusted net income ...................................................... $365,000Noncontrolling interest percentage ownership ............................ 20%Noncontrolling interest share of consolidated net income ......... $73,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-7

To controlling interest:

Consolidated net income ................................................................ $1,615,000Noncontrolling interest share of consolidated net income ......... (73,000)Controlling interest share of consolidated net income................ $1,542,000-ORPatterson’srevenues ...................................................................... $3,000,000Patterson’s expenses...................................................................... 1,750,000Patterson’s separate net income ................................................... $1,250,000Patterson’s share of Soriano’s adjusted net income(80% × $365,000) ................................................................... 292,000Controlling interest share of consolidated net income................ $1,542,000f. Fair value of noncontrolling interest January 1, 2009 ....................... $600,0002009 income .......................................................................................... 73,000Dividends (20% × $30,000) ................................................................... (6,000)Noncontrolling interest December 31, 2009 ....................................... $ 667,000g. If Soriano’s acquisition-date total fair value was $2,250,000, then a bargainpurchase has occurred.Soriano’s total fair value 1/1/09 ........................................................... $2,250,000Collective fair values of Soriano’s net assets .................................... $2,300,000Bargain purchase ................................................................................. $50,000The acquisition method requires that the subsidiary assets acquired andliabilities assumed be recognized at their acquisition date fair valuesregardless of the assessed fair value. Therefore, none of Soriano’s identifiableassets and liabilities would change as a result of the assessed fair value.When a bargain purchase occurs, however, no goodwill is recognized.

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22. (20 Minutes) (Determine consolidated income balances, includes a mid-yearacquisition)a. Acquisition-date total fair value .......................... $594,000Book value of net assets ...................................... (400,000)Fair value in excess of book value ..................... $194,000 Annual ExcessExcess fair value assigned to Life AmortizationsPatent .......................................................... 140,000 5 years $28,000Land .......................................................... 10,000Buildings ......................................................... 30,000 10 years 3,000Goodwill .......................................................... 14,000Total .......................................................... -0- $31,000Consolidated figures following January 1 acquisition date:Combined revenues ............................................................................. $1,500,000Combined expenses ............................................................................. (1,031,000)Consolidated net income ..................................................................... 469,000NCI in Sawyer’s income ([200,000 – 31,000] × 30%) .............................. (50,700)Controlling interest in consolidated net income ............................... $418,300b. Consolidated figures following April 1 acquisition date:Combined revenues (1) ......................................................................... $1,350,000Combined expenses (2) ........................................................................ (923,250)Consolidated net income .................................................................... $426,750Noncontrolling interest in subsidiary income (3) ............................... (38,025)Controlling interest in consolidated net income ............................... $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 expensesplus $23,250 amortization expenses for 9 months(3) ($200,000 – 31,000) adjusted subsidiary income × 30% × ¾ year


23. (15 minutes) Consolidated figures with noncontrolling interestFair value of company (given) $60,000Book value (10,000)Fair value in excess of book value 50,000to machine ($50,000 – $10,000) 40,000 ÷ 10 = $4,000 per yearto process trade secret $10,000 ÷ 4 = 2,500 per year$6,500 per yearConsolidated figures:Noncontrolling interest in subsidiary income= 40% ($50,000 revenues less $26,500 expenses) = $9,400End-of-year noncontrolling interest:Beginning balance (40% $60,000) $24,000Income allocation 9,400Dividend reduction (40% $5,000) (2,000)End-of-year noncontrolling interest $31,400Machine (net) = $45,000 ($9,000 book value plus $40,000 excessallocation less $4,000 excess depreciation for one year).Process trade secret (net) = $10,000 – $2,500 = $7,50024. (20 Minutes) (Determine consolidated balances for a step acquisition).a. Amsterdam fair value implied by price paid by Morey$560,000 ÷ 70% = $800,000b. Revaluation gain1/1 equity investment in Amsterdam (book value) $178,00025% income for 1st 6 months 8,750Investment book value at 6/30 186,750Fair value of investment 200,000Gain on revaluation to fair value $13,250c. Goodwill at 12/31Fair 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 interest5% fair value balance at 6/30 $40,0005% Income from 6/30 to 12/31 1,7505% dividends (1,000)Noncontrolling interest 12/31 $40,750McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-10 Solutions Manual

25. (30 Minutes) (Reporting the sale of a portion of an investment in a subsidiary.)a. The 1,000 shares sold are reported using the equity method for the

January 1, 2011 until October 1, 2011 period. This stock represents 10percent of the outstanding shares of Santana. An accrual of $9,000 isrecorded by Girardi (10% × $120,000 × ¾ year) reduced by $1,500 inamortization expense as computed below. Therefore, an "Equity Incomefrom Sold Shares of Santana" in the amount of $7,500 will appear in the2011 consolidated income statement. The consolidation will nowinclude all of Santana's accounts with the 40% noncontrolling interestrecognized.Santana fair value 1/1/09 .......................................... $1,100,000Santana book value .................................................. (1,030,000)Patent ......................................................................... $70,000Life of patent .............................................................. 5 yearsAnnual amortization .................................................. $14,0009-months amortization for the 1,000 shares sold:Annual amortization .................................................. $14,000Time period involved ................................................ ¾ yearAmortization for nine months .................................. $10,500Shares sold—1,000 out of 7,000 .............................. 1/7Amortization relating to sold shares ....................... $1,500b. As long as control is maintained, the acquisition method considerstransactions in the stock of a subsidiary, whether purchases or sales,as transactions in the equity of the consolidated entity.Investment Book Value 10/1/111/1/11 balance (given—equity method) ................... $1,085,000Recognition of 1/1/11–10/1/11 period:Income accrual ($120,000 × 70% × ¾) ................ 63,000Dividends ($40,000 × 70% × ¾) ........................... (21,000)Amortization ($14,000 × ¾) .................................. (10,500)Correct investment book value—10/1/11 ................. $1,116,500Computation of Income Effect—Sales Transaction10/1/11 book value (above) ....................................... $1,116,500Portion of investment sold (1,000/7,000 shares) .... 1/7Book value of investment sold ................................ $159,500Proceeds .................................................................... 191,000Credit to Girardi’s additional paid-in capital ........... $ 31,500c. Because Girardi continues to hold 6,000 shares of Santana, control isstill maintained and consolidated financial statements would be

appropriate with a noncontrolling interest of 40 percent.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-11

26. (35 Minutes) (Consolidation entries and the effect of different investmentmethods)a. From the original fair value allocation, $30,000 is assigned based on thefair value of the patent. With a 5-year 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, 1/1/11(Bandmor) ........... 268,000Investment in Bandmor (70%) ................. 397,600Noncontrolling Interest in Bandmor, 1/1/11 170,400(To eliminate stockholders' equity accounts of subsidiary andrecognize outside ownership. Retained earnings figure includes2009 and 2010 income and dividends.)Entry APatent .............................................................. 18,000Goodwill ......................................................... 190,000Investment in Bandmor ............................ 145,600Noncontrolling Interest in Bandmor (30%) 62,400(To recognize unamortized portions of acquisition-date fair valueallocations. Patent has undergone two years amortization)Entry IEquity in Subsidiary Earnings ...................... 72,800Investment in Bandmor ............................ 72,800(To eliminate intercompany income balance. Equity accrual of$72,800 [70% × ($110,000 – 6,000 amortization)] has been recorded)Entry DInvestment in Bandmor ................................. 42,000Dividends Paid .......................................... 42,000(To eliminate current intercompany dividend transfers—70% of$60,000)Entry EAmortization Expense .................................... 6,000Patent ......................................................... 6,000(To recognize amortization for current year)Entry PAccounts Payable .......................................... 22,000Accounts Receivable ............................... 22,000(To eliminate intercompany payable/receivable balance)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-12 Solutions Manual

26. (continued)b. If the initial value method had been applied, the parent would haverecorded only the dividends received as income rather than an equityaccrual. Therefore, Entry *C is needed to adjust the parent's beginningretained earnings for 2011 to the equity method. During 2009 and 2010,the subsidiary earned a total net income of $171,000 but paid dividendsof only $83,000. The parent's share of the difference is $61,600 (70% of$88,000 [$171,000 - $83,000]). In addition, the parent’s 70% share ofexcess amortization expense for two years must also be included($8,400 = 2 years × $6,000 per year × 70%). The net amount to berecognized is $53,200 ($61,600 - $8,400).ENTRY *CInvestment in Bandmor ................................. 53,200Retained Earnings, 1/1/11 ........................ 53,200c. If the partial equity method had been applied, only the excessamortization expenses for the previous two years would have beenomitted from the parent's retained earnings. As shown above, thatfigure is $8,400 (2 years × $6,000 per year × 70%).ENTRY *CRetained Earnings, 1/1/11 ............................. 8,400Investment in Bandmor ............................ 8,400d. Noncontrolling interest in Bandmor's income—2011[($110,000 – 6,000) × 30%] ............................. $31,200Noncontrolling interest fair value January 1, 2009 $210,000Adjustments to original basis:2009 Net Income to NCI...................................... $20,700Dividends paid .......................................... (11,700) 9,0002010 Net income to NCI ..................................... $27,000Dividends paid .......................................... (13,200) 13,8002011 Net income to NCI...................................... $31,200Dividends paid .......................................... (18,000) 13,200Noncontrolling interest in Bandmor 12/31/11 .... $246,000–OR–Worksheet adjustment S .................................................... $170,400Worksheet adjustment A .................................................... $62,4002009 income to noncontrolling interest ........................... 31,2002009 dividends to noncontrolling interest ....................... (18,000)Noncontrolling interest in Bandmor 12/31/11 ................... $246,000


27. (45 Minutes) (Asks about several consolidated balances and consolidationprocess. Includes the different accounting methods to record investment.)a. Schedule 1—Fair Value Allocation and Excess AmortizationsConsideration transferred by Miller ......... $664,000Noncontrolling interest fair value ............. 166,000Taylor’s fair value ....................................... $830,000Taylor’s book value .................................... (600,000)Fair value in excess of book value .......... 230,000 Annual ExcessLife AmortizationsExcess fair value assigned to buildings 80,00020 years $4,000Goodwill ..................................................... $150,000 indefinite -0-Total ....................................................... $4,000b. $150,000 (see schedule 1 above)c. Entry (S)Common Stock (Taylor) ...................................... 300,000Additional Paid-in Capital (Taylor) ..................... 90,000Retained Earnings (Taylor) ................................. 210,000Investment in Taylor Company (80%) .......... 480,000Noncontrolling interest in Taylor (20%) ....... 120,000Entry (A)Buildings .............................................................. 80,000Goodwill ............................................................... 150,000Investment in Taylor Company (80%) .......... 184,000Noncontrolling interest in Taylor (20%) ....... 46,000d. (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%) .............................. $8,000e. Equity MethodInitial fair value paid ............................................. $664,000Income accrual 2009–2011 ($260,000 × 80%) ... 208,000Dividends 2009–2011 ($45,000 × 80%) .............. (36,000)Excess Amortizations 2009–2011 ($3,200 × 3) . (9,600)Investment in Taylor—12/31/11 .................... $826,400McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-14 Solutions Manual

27. (continued)Partial Equity Method

Investment in Taylor—12/31/11 = $836,000 (initial value paid plus incomeaccrual of $208,000 less dividends of $36,000 [no excess amortizations])Initial Value MethodInvestment in Taylor—12/31/11 = $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 a20 year life, annual excess amortization is $4,000.Miller book value—buildings .............................. $800,000Taylor book value—buildings ............................ 300,000Allocation ............................................................. 80,000Excess Amortizations for 2009–2010 ($4,000 × 2) (8,000)Consolidated buildings account ............. $1,172,000g. Acquisition-date fair value allocated to goodwill(see schedule 1 above) ................................. $150,000h. 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 paid-in capital figures to be reportedare the parent balances only. As to retained earnings, the equity methodwill properly record all subsidiary income and amortization so that theparent balance is also a reflection of the consolidated total.McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-15

28. (20 Minutes) (A variety of consolidated balances-midyear acquisition)Book value of Reckers, 1/1(stockholders' equity accounts) .............. $1,400,000Increase in book value:Net Income (revenues less cost ofgoods sold and expenses) .................. $120,000Dividends .............................................. (20,000)Change during year ................................... $100,000Change during first six months of year 50,000Book value of Reckers, 7/1 (acquisition date) $1,450,000Consideration transferred by Kaplan ........... $1,360,000Noncontrolling interest fair value ................. 300,000Reckers’ fair value (given) .............................. $1,630,000Book value of Reckers .................................... (1,450,000)

Fair value in excess of book value................. $180,000 Annual ExcessExcess fair value assigned Life AmortizationsTrademarks .................................................. 150,000 5 years $30,000Goodwill ....................................................... $60,000 indefinite -0-Total .......................................................... $30,000CONSOLIDATION TOTALS:_ Sales (1) $1,050,000_ Cost of goods sold (2) 540,000_ Operating expenses (3) 265,000_ Net Income $245,000_ Noncontrolling Interest in sub. Income (4) $9,000(1) $800,000 Kaplan revenues plus $250,000 (post-acquisition subsidiaryrevenue)(2) $400,000 Kaplan COGS plus $140,000 (post-acquisition subsidiary COGS)(3) $200,000 Kaplan operating expenses plus $50,000 (post-acquisitionsubsidiary operating expenses) plus ½ year excess amortization of $15,000(4) 20% of post-acquisition subsidiary income less excess fair valueamortization [20% × (120,000 – 30,000) × ½ year] = $9,000_ Retained Earnings, 1/1 = $1,400,000 (the parent’s balance because thesubsidiary was acquired during the current year)_ Trademark = $935,000 (add the two book values and the excess fairvalue allocation after taking one-half year excess amortization)_ Goodwill = $60,000 (the original allocation)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-16 Solutions Manual

29. (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, theInvestment Income account is equal to 60 percent of the dividends paidby the subsidiary during the year.b. Consideration transferred in acquisition . $414,000Noncontrolling interest fair value ............. 276,000Sea-Breeze fair value 1/1/09 ..................... $690,000Sea-Breeze book value 1/1/09 550,000Excess fair value over book value $140,000Excess fair assignments: Annual ExcessLife AmortizationsBuildings ............................................... 60,000 6 years $10,000

Equipment ............................................. (20,000) 4 years (5,000)Patent ..................................................... 100,000 10 years 10,000Total ..................................................... -0- $15,000c. If the equity method had been applied, the Investment Income accountwould show the basic equity accrual less amortization: 60% of (thesubsidiary's income of $90,000 less $15,000 excess fair valueamortization) = $45,000.d. The initial value method recognizes neither the increase in thesubsidiary's book value nor the excess amortization expenses for prioryears. At the acquisition date, the subsidiary’s book value was $550,000as indicated by the assets less liabilities. At the beginning of the currentyear, the book value of the subsidiary is $780,000 as indicated bybeginning 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, 1/1/12 ........ $111,000Parent's retained earnings, 1/1/12 as reported ....................... 700,000Parent’s share of consolidated retained earnings, 1/1/12 ...... $811,000e. 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_ Noncontrolling interest in consolidated net income($90,000 – 15,000) × 40% 30,000_ Controlling interest in consolidated net income $235,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-17

29. (continued)f. Consolidated buildings, 1/1/09 (subsidiary):Book value ............................................................................. $300,000Acquisition-date fair-value allocation ................................ 60,000

Consolidation figure ............................................................ $360,000g. Consolidated buildings, 12/31/12:Parent's book value ............................................................. $700,000Subsidiary's book value ...................................................... 200,000Original allocation ............................................................... 60,000Amortization ($10,000 × 4 years) ........................................ (40,000)Consolidated balance .......................................................... $920,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-18 Solutions Manual

30. Acquisition Method Consolidated BalancesAdjustmentsDecember 31, 2010 Pierson Steele & Eliminations NCI ConsolidatedRevenues (1,843,000) (675,000) (2,518,000)Cost of goods sold 1,100,000 322,000 1,422,000Depreciation expense 125,000 120,000 245,000Amortization expense 275,000 11,000 (E) 80,000 366,000Interest expense 27,500 7,000 34,500Equity in Steele Income (121,500) (I)121,500 -0-Separate companynet income (437,000) (215,000)Consolidated net income (450,500)NCI in Steele Income (13,500) (13,500)Controlling interest in CNI (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 paid 350,000 25,000 (D) 22,500 2,500 350,000Retained Earnings 12/31 (2,712,000) (585,000) (2,712,000)Current Assets 1,204,000 430,000 1,634,000Investment in Steele 1,854,000 (D) 22,500 (S)769,500(A)985,500 -0-(I) 121,500Customer base -0- -0- (A)720,000 (E) 80,000 640,000Buildings and Equipment 931,000 863,000 1,794,000Copyrights 950,000 107,000 1,057,000Goodwill (A)375,000 375,000Total Assets 4,939,000 1,400,000 5,500,000Accounts Payable (485,000) (200,000) (685,000)Notes Payable (542,000) (155,000) (697,000)NCI in Steele (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) (5,500,000)

Fair value of Steele Company (1,710,000 ÷ 90%) $1,900,000Carrying amount acquired 725,000Excess fair value 1,175,000to customer base 800,000to goodwill $375,000


30. (Continued)Controlling NoncontrollingInterest InterestFair value at acquisition date $1,710,000 $190,000Relative fair values of identifiable net assets90% and 10% of $1,525,000 (acquisition daterecorded fair value plus customer base) 1,372,500 152,500Goodwill $337,500 $37,500b. If the fair value of the noncontrolling interest was $152,500, both goodwill andthe noncontrolling interest balance would be reduced equally by $37,500 asfollows:Fair value of Steele Company (1,710,000 + 152,500) $1,862,500Carrying amount acquired 725,000Excess fair value 1,137,500to customer base 800,000to goodwill $337,500Noncontrolling interest balance beginning of year $(157,500)Noncontrolling interest in consolidated net income (13,500)Dividends paid to noncontrolling interest 2,500Noncontrolling interest end of year $168,500Controlling NoncontrollingInterest InterestFair value at acquisition date $1,710,000 $152,500Relative fair values of identifiable net assets90% and 10% of $1,525,000 (acquisition daterecorded fair value plus customer base) 1,372,500 152,500Goodwill $337,500 -0-McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-20 Solutions Manual

31. (60 Minutes) (Consolidation worksheet and income statement with parentusing initial value method. Also consolidated balances with a controlpremium paid by parent.)a. Fair Value Allocation and AmortizationConsideration transferred by Krause ............ $504,000Noncontrolling interest fair value .................. 126,000Leahy total fair value 1/1/09 ............................ $630,000Leahy book value 1/1/09 ................................. (380,000)Fair value in excess of book value ................ $250,000 Annual ExcessLife AmortizationsExcess price allocated to undervaluedBuilding ................................................. 45,000 5 years $9,000

Trademark ........................................... 60,000 10 years 6,000Goodwill ...................................................... $145,000 $15,000Explanation of Consolidation Entries Found on WorksheetEntry *C: Convert the parent’s 1/1/10 retained earnings balance from thecash basis to the accrual basis.Entry S: Eliminates stockholders' equity accounts of subsidiary whilerecognizing noncontrolling interest balance (20%) as of the beginning ofthe current year.Entry A: Recognizes acquisition-date fair value allocations less 1 yearamortization for building and trademark and increases beginningbalance of the noncontrolling interest for it’s share.Entry I: Eliminates Intercompany dividend payments recorded as incomeby parent.Entry E: Recognizes amortization expense for current year.Columnar Entry—Recognizes noncontrolling interest's share ofsubsidiary's net income ($90,000 – 15,000) × 20%).McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-21

31. a. (continued) KRAUSE CORPORATION AND LEAHY, INC.Consolidation WorksheetFor Year Ending December 31, 2010Krause Leahy Consolidation Entries Noncontrolling ConsolidatedAccounts Corporation Inc. Debit Credit Interest TotalsSales (584,000) (250,000) (834,000)Cost of goods sold 194,000 95,000 289,000Operating expenses 246,000 65,000 (E) 15,000 326,000Dividend income (16,000) ______ (I) 16,000 -0-Separate company net income (160,000) (90,000)Consolidated net income 219,000NCI in Leahy's income (15,000) 15,000Krause’s interest in consolidated income (204,000)Retained earnings, 1/1 (700,000) (350,000) (S)350,000 (*C) 44,000 (744,000)Net income (above) (160,000) (90,000) (204,000)Dividends paid 70,000 20,000 (I) 16,000 4,000 70,000Retained earnings, 12/31 (790,000) (420,000) (878,000)Current assets 296,000 191,000 487,000Investment in Leahy 504,000 (*C) 44,000 (S)360,000 -0-(A)188,000Buildings and equipment (net) 680,000 390,000 (A) 36,000 (E) 9,000 1,097,000Trademarks 100,000 144,000 (A) 54,000 (E) 6,000 292,000Goodwill 0 0 (A)145,000 145,000Total assets 1,580,000 725,000 2,021,000Liabilities (470,000) (205,000) (675,000)

Common stock (320,000) (100,000) (S)100,000 (320,000)Retained earnings, 12/31 (above) (790,000) (420,000) (878,000)NCI in Leahy, 1/1 (S) 90,000(A) 47,000 (137,000)NCI in Leahy, 12/31 148,000 (148,000)Total liabilities and equities (1,580,000) (725,000) (2,021,000)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-22 Solutions Manual

31. (continued)b. KRAUSE CORPORATION AND LEAHY, INC.Consolidated Income StatementFor Year Ending December 31, 2010Sales $834,000Cost of goods sold $289,000Operating expenses 326,000Total expenses 615,000Consolidated net income $219,000To 20% noncontrolling interest $15,000To controlling interest $204,000Consolidated Net income $219,000c. Consideration transferred by Krause for 80% of Leahy $504,000Noncontrolling interest fair value ($4.85 × 20,000 shares) 97,000Leahy fair value $601,000Fair value of Leahy’s underlying net assets 485,000Goodwill $116,000If the noncontrolling interest fair value was $4.85 per share at the acquisitiondate, then goodwill declines to $116,000 and the noncontrolling interest totalwould also decline from $149,000 to 120,000). Worksheet entries (S) and (A)assuming a $4.85 noncontrolling interest acquisition-date fair value:(S) Common stock-Leahy 100,000Retained earnings- Leahy 1/1 350,000Investment in Leahy 360,000Noncontrolling interest 90,000(A) Buildings and equipment (net) 36,000Trademarks 54,000Investment in Leahy 72,000Noncontrolling interest 18,000Goodwill 116,000Investment in Leahy 116,000Controlling NoncontrollingInterest InterestFair value at acquisition date $504,000 $97,000Relative fair values of identifiable net assets80% and 20% of $485,000 (acquisition date

fair value of net identifiable assets) 388,000 97,000Goodwill $116,000 -0-McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-23

32. (40 Minutes) (Determine consolidated balances.)Acquisition-date subsidiary fair value (given) ... $850,000Book value of subsidiary (given) ........................ (600,000)Fair value in excess of book value ..................... $250,000Allocations to specific accounts based on differencebetween fair value and book valueLand ................................................................ $165,000Buildings and equipment .............................. (25,000)Copyright ........................................................ 100,000Notes payable ................................................. 10,000 250,000Total ....................................................... -0-Annual excess amortizations:Buildings and equipment [$(25,000) ÷ 10 years] $(2,500)Copyright ($100,000 ÷ 20 years) 5,000Notes payable ($10,000 ÷ 8 years) 1,250Total $3,750Consolidated Totals:_ Revenues = $1,900,000 (add the two book values)_ Cost of goods sold = $1,085,000 (add the two book values)_ Depreciation expense = $267,500 (add the two book values less $2,500excess adjustment)_ Amortization expense = $10,000 (add the two book values plus $5,000excess adjustment)_ Interest expense = $50,250 (add the two book values plus $1,250 excessadjustment)_ Equity in income of Sam = -0- (eliminated so that the individual revenuesand expenses of the subsidiary can be included in the consolidatedfigures)_ Net income = $487,250 (revenues less expenses)_ Retained earnings, 1/1 = $1,265,000 (parent company balance; subsidiary'soperations prior to acquisition do not affect consolidated figures)_ Noncontrolling interest in income of subsidiary = $26,250 ($135,000reported income of the subsidiary less $3,750 amortization expensemultiplied by 20 percent outside ownership)_ Dividends paid = $260,000 (parent company balance; subsidiary'spayments to parent are intercompany, payments to outside owners

decrease noncontrolling interest balance)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-24 Solutions Manual

32. (continued)_ Retained earnings, 12/31 = $1,466,000 (consolidated balance on 1/1/09 plusconsolidated net income less noncontrolling interest in subsidiary'sincome less consolidated dividends)_ Current assets = $1,493,000 (add the two book values)_ Investment in Sam = -0- (eliminated so that the individual assets andliabilities of the subsidiary can be included in the consolidated figures)_ Land = $517,000 (add the book values plus the $165,000 excess allocation)_ Buildings and equipment (net) = $1,119,500 (add the book values less the$25,000 allocation [asset was overvalued] plus the excess amortization)_ Copyright = $190,000 (book value + $100,000 excess allocation lessamortization for the year)_ Total assets = $3,319,500_ Accounts payable = $339,000 (add book values)_ Notes payable = $581,250 (add the book values less $10,000 excessallocation plus amortization)_ Noncontrolling interest in subsidiary = $183,250 (20% of fair value as of1/1/09 [$170,000] plus noncontrolling interest in income of subsidiary[$26,250] less dividends paid to outside owners [$13,000])_ Common stock = $300,000 (parent company balance)_ Additional paid-in capital = 450,000 (parent company balance)_ Retained earnings, 12/31 = $1,466,000 (computed above)_ Total liabilities and equities = $3,319,500McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-2532. (continued) Acquisition MethodConsolidation Entries Noncontrolling ConsolidatedAccounts Father Sam Debit Credit Interest TotalsRevenues ........................................ (1,360,000) (540,000) (1,900,000)Cost of goods sold ......................... 700,000 385,000 1,085,000Depreciation expense .................... 260,000 10,000 (E) 2,500 267,500Amortization expense .................... -0- 5,000 (E) 5,000 10,000Interest expense ............................. 44,000 5,000 (E) 1,250 50,250Equity in income of Sam ............... (105,000) -0- (I) 105,000 -0-Separate company net income ...... (461,000) (135,000)

Consolidated net income ............... (487,250)Noncontrolling interest in Sam's income (26,250) 26,250Controlling interest in CNI ............ (461,000)Retained earnings 1/1 ................... (1,265,000) (440,000) (S) 440,000 (1,265,000)Net income (above) ....................... (461,000) (135,000) (461,000)Dividends paid ............................... 260,000 65,000 (D) 52,000 13,000 260,000Retained earnings 12/31 .......... (1,466,000) (510,000) (1,466,000)Current assets ............................... 965,000 528,000 1,493,000Investment in Sam ......................... 733,000 (D) 52,000 (S) 480,000(I) 105,000(A) 200,000 -0-Land ............................................... 292,000 60,000 (A) 165,000 517,000Buildings and equipment (net) ...... 877,000 265,000 (E) 2,500 (A) 25,000 1,119,500Copyright ....................................... -0- 95,000 (A) 100,000 (E) 5,000 190,000Total assets .............................. 2,867,000 948,000 3,319,500Accounts payable .......................... (191,000) (148,000) (339,000)Notes payable ................................ (460,000) (130,000) (A) 10,000 (E) 1,250 (581,250)NCI in Sam 1/1 ................................ (S) 120,000NCI in Sam 12/31 (A) 50,000 (170,000)................................................... (183,250) (183,250)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) (1,466,000) (510,000) (1,466,000)Total liab. and stockholders' equity (2,867,000) (948,000) (3,319,500)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-26 Solutions Manual

33. (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 12/31/09) (460,000)Excess fair value over book value $210,000Annual ExcessLife AmortizationsLand $30,000 — —Buildings (20,000) 10 years ($2,000)Equipment 40,000 5 years 8,000Patents 50,000 10 years 5,000Notes payable 20,000 5 years 4,000120,000Goodwill $90,000 indefinite -0-Total $15,000

b. Because investment income is exactly 90 percent of Barstow's reportedearnings, Adams apparently is applying the partial equity method.Explanation of Consolidation Entries Found on WorksheetEntry *C—Converts Adams's financial records from the partial equitymethod to the equity method by recognizing amortization for 2010. Totalexpense was $15,000 but only 90 percent (or $13,500) applied to the parent.Entry S—Eliminates subsidiary's stockholders' equity while recordingnoncontrolling interest balance as of January 1, 2011.Entry A—Records unamortized allocation balances as of January 1, 2011.The acquisition method attributes 10 percent of these amounts to the noncontrollinginterest.Entry I—Eliminates intercompany income accrual for 2011.Entry D—Eliminates intercompany dividend transfers.Entry E—Records amortization expense for current year.Columnar Entry—Recognizes noncontrolling interest's share of Barstow'snet income as follows:Noncontrolling Interest in Barstow's Income (Columnar Entry)Barstow reported income .............................................................. $120,000Excess amortization expenses 2011 ............................................. (15,000)Adjusted income of Barstow .................................................... $105,000Noncontrolling interest ownership ............................................... 10%Noncontrolling interest in Barstow's income ......................... $10,500McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-2733. b. (continued) ADAMS CORPORATION AND BARSTOW, INC.Consolidation Worksheet-Acquisition MethodFor Year Ending December 31, 2011 Noncontrolling ConsolidatedAdams Corp. Barstow Inc. Debit Credit Interest TotalsRevenues (940,000) (280,000) (1,220,000)Cost of goods sold 480,000 90,000 570,000Depreciation expense 100,000 55,000 (E) 6,000 161,000Amortization expense (E) 5,000 5,000Interest expense 40,000 15,000 (E) 4,000 59,000Investment income (108,000) (I) 108,000 -0-Separate company net income (428,000) (120,000)Consolidated net income (425,000)

Income to noncontrolling interest (10,500) 10,500Income to controlling interest (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 paid 110,000 70,000 (D) 63,000 7,000 110,000Retained earnings, 12/31 (1,685,000) (390,000) (1,658,000)Current assets 610,000 250,000 860,000Investment in Barstow 702,000 (D) 63,000 (*C) 13,500 -0-(S) 468,000(A) 175,500(I) 108,000Land 380,000 150,000 (A) 30,000 560,000Buildings 490,000 250,000 (E) 2,000 (A) 18,000 724,000Equipment 873,000 150,000 (A) 32,000 (E) 8,000 1,047,000Patents (A) 45,000 (E) 5,000 40,000Goodwill (A) 90,000 90,000Total assets 3,055,000 800,000 3,321,000Notes 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) (3,321,000)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-28 Solutions Manual

34. (25 minutes) (Consolidated balances after a mid-year acquisition)a. Investment account balance indicates the initial value method.Consideration transferred ........................ $526,000Noncontrolling interest fair value ............ 300,000Duncan acquisition-date fair value .......... 826,000Book value of Duncan (below) .................. (765,000)Fair value in excess of book value .......... $61,000Excess assigned Annual Excessbased on fair value: Life AmortizationsEquipment ........................................ (30,000) 5 years $(6,000)Goodwill .......................................... $91,000 indefinite -0-Total ...................................................... $(6,000)Amortization for 9 months .................. $(4,500)Acquisition-Date Subsidiary Book ValueBook value of Duncan, 1/1/09 (CS + 1/1 RE) ........... $740,000Increase in book value-net income (dividendswere paid after acquisition) ................................ $100,000Time prior to purchase (3 months) .......................... × ¼ 25,000Book value of Duncan, 4/1/09 (acquisition date) .... $765,000Consolidated Income Statement:Revenues (1) $825,000Cost of goods sold (2) $405,000

Operating expenses (3) 214,500 619,500Consolidated net income 205,500Noncontrolling interest in CNI (4) 28,200Controlling interest in CNI $177,300(1) $900,000 combined revenues less $75,000 (preacquisition subsidiaryrevenue)(2) $440,000 combined COGS less $35,000 (preacquisition subsidiaryCOGS)(3) $234,000 combined operating expenses less $15,000 (preacquisitionsubsidiary operating expenses) less nine month excess overvaluedequipment depreciation reduction of $4,500(4) 40% of post-acquisition subsidiary income less excess amortizationb. Goodwill = $91,000 (original allocation)Equipment = $774,500 (add the two book values less $30,000reduction to fair value plus $4,500 nine months excessamortization)Common Stock = $630,000 (parent company balance only)Buildings = $1,124,000 (add the two book values)Dividends Paid = $80,000 (parent company balance only)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-29

35. (40 minutes) Determine consolidated balance for a mid-year acquisition.a. Consideration transferred by Truman .......... $720,000Noncontrolling interest fair value ................. 290,000Atlanta’s acquisition-date total fair value ...... $1,010,000Book value of Atlanta ...................................... (840,000)Fair value in excess of book value................. $170,000 Annual ExcessExcess fair value assigned Life AmortizationsPatent ......................................................... 100,000 5 years $20,000Goodwill ....................................................... $70,000 indefinite -0-Total .......................................................... $20,000b. Controlling NoncontrollingInterest InterestFair values at acquisition date $720,000 $290,000Relative fair values of identifiable net assets70% and 30% of $940,000 (acquisition datebook value plus patent = net asset fair value) 658,000 282,000Goodwill $62,000 $8,000c. Initial value at acquisition date $720,000Truman’s share of Atlanta’s income for half year([$120,000 – 20,000 amortization × ½ year] × 70%) 35,000Dividends 2009 ($80,000 × ½ year × 70%) (28,000)Investment account balance 12/31/09 $727,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009

4-30 Solutions Manual35. (continued)d. Consolidated WorksheetTruman AtlantaAdjustments &Eliminations NCI Cons.Revenues (670,000) (400,000) (S)200,000 (870,000)Operating Expenses 402,000 280,000 (E) 10,000 (S)140,000 552,000Income of subsidiary (35,000) (I) 35,000 0Separate company net income (303,000) (120,000)Consolidated net income (318,000)NCI in Atlanta's income (15,000) 15,000Controlling interest in CNI (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 paid 145,000 80,000 (S) 40,000 12,000(D) 28,000 145,000Retained earnings, 12/31 (981,000) (540,000) (981,000)Current assets 481,000 390,000 871,000Investment in Atlanta 727,000 (D) 28,000 (S)588,000 0(I) 35,000(A)132,000Land 388,000 200,000 588,000Buildings 701,000 630,000 1,331,000Patent (A) 100,000 (E) 10,000 90,000Goodwill (A) 70,000 70,000Total assets 2,297,000 1,220,000 2,950,000Liabilities (816,000) (360,000) (1,176,000)Common stock (95,000) (300,000) (S) 300,000 (95,000)Additional paid-in capital (405,000) (20,000) (S) 20,000 (405,000)Retained earnings, 12/31 (981,000) (540,000) (981,000)Noncontrolling interest, 7/1(A) 38,000(S)252,000 (290,000)Noncontrolling interest, 12/31 293,000 (293,000)Total liabilities andstockholders' equity (2,297,000) (1,220,000) 1,263,000 1,263,000 (2,950,000)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-31

36. (60 minutes) (Consolidated statements for a step acquisition)a. Fair value of Sysinger 1/1/10 (given) $1,750,000Book value of Sysinger 1/1/10 (CS + APIC + RE) 1,300,000Excess fair value over book value 450,000To customer contract (4 year life) 400,000To goodwill $50,000b. Equity in earnings of Sysinger2010 income (150,000 × 95%) $142,500Amortization (100,000 × 95%) (95,000)Equity in earnings of Sysinger $47,500Revaluation of 15% block to fair valueConsideration transferred $184,5002009 Income (100,000 × 15%) 15,0002009 dividends (30,000 × 15%) (4,500)

Book value at 1/1/10 195,000Fair value at 1/1/10 262,500Gain on revaluation $67,500Investment account balance 12/31/10Fair value at 1/1/10 (15% block) $262,500Consideration transferred 1/1/10 (80% block) 1,400,000Equity earnings 20102010 income (95% × 150,000) 142,500Customer contract amortization (95,000) 47,500Dividends 2010 (40,000 × 95%) (38,000)Investment in Sysinger 12/31/10 $1,672,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-32 Solutions Manual36. (Continued) c. Allan and SysingerConsolidation WorksheetFor Year Ending December 31, 2010Allan Sysinger Consolidation Entries Noncontrolling ConsolidatedAccounts Company Company Debit Credit Interest TotalsRevenues (931,000) (380,000) (1,311,000)Operating expenses 615,000 230,000 (E)100,000 945,000Equity 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)NCI in Sysinger’s income (2,500) 2,500Allan’s share of CNI (431,000)Retained earnings, 1/1 (965,000) (600,000) (S) 600,000 (965,000)Net income (431,000) (150,000) (431,000)Dividends paid 140,000 40,000 (D) 38,000 2,000 140,000Retained earnings 12/31 (1,256,000) (710,000) (1,256,000)Current assets 288,000 540,000 828,000Investment in Sysinger 1,672,000 -0- (D) 38,000 (S)1,235,000 -0-(I) 47,500(A) 427,500Property, plant, and equipment 826,000 590,000 1,416,000Patented technology 850,000 370,000 1,220,000Customer contract -0- -0- (A) 400,000 (E) 100,000 300,000Goodwill -0- (A) 50,000 50,000Total assets 3,636,000 1,500,000 3,814,000Liabilities (1,300,000) (90,000) (1,390,000)Common stock (900,000) (500,000) (S) 500,000 (900,000)Additional paid-in 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) 1,935,500 1,935,500 (3,814,000)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-33

37. (60 minutes) (Step acquisition—control 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, 2009.Subsequent acquisitions are valued consistent with this initial value afteradjusting the investment for subsidiary income and other changes.Because subsequent acquisitions are considered as transactions in the parent’sown equity, no gains or losses are recorded. Differences in cash paid and theunderlying value are recorded as adjustments to APIC.Fair value of Keane Company 1/1/09 ($573,000 ÷ 60%) $955,000Keane income 2009 150,000Excess fair value amortization for copyright (20,000)*Keane dividends 2009 (80,000)Initial fair value adjusted to 1/1/10 $1,005,000Percent acquired in step acquisition 30%Value assigned to 30% acquisition 301,500Cash paid for the 30% acquisition 300,000Credit to APIC from 30% step acquisition $1,500*Fair value of Keane Company 1/1/09 ($573,000 ÷ 60%) $955,000Book value of Keane Company 1/1/09 (given) 810,000Excess fair value over book value 145,000To copyright (6 year life) 120,000To goodwill $25,000Entry to record 30% additional investment in Keane:1/1/10 Investment in Keane 301,500Cash 300,000APIC from step acquisition 1,500b. Investment in Keane Company 1/1/09 $573,0002009 Equity earnings [60% × (150,000 – 20,000)] 78,0002009 Dividends received (60% × $80,000) (48,000)Additional acquisition of 30% interest 301,5002010 Equity earnings [90% × (180,000 – 20,000)] 144,0002010 Dividends received (90% × $60,000) (54,000)Investment in Keane Company 12/31/10 $994,500McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-34 Solutions Manual37. (continued) part c. BRETZ, INC. AND KEANE COMPANYConsolidation WorksheetYear Ending December 31, 2010Consolidation Entries Noncontrolling ConsolidatedAccounts Bretz, Inc. Keane Co. Debit Credit Interest TotalsRevenues (402,000) (300,000) (702,000)Operating expenses 200,000 120,000 (E) 20,000 340,000Equity in Keane’s income (144,000) (I) 144,000Separate company net income (346,000) (180,000Consolidated net income (362,000)NCI in Keane’s income (16,000) 16,000

Bretz’s share of CNI (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 paid 143,000 60,000 (D) 54,000 6,000 143,000Retained earnings, 12/31 (1,000,000) (620,000) (1,000,000)Current assets 224,000 190,000 414,000Investment in Keane Company 994,500 (S) 792,000 0(D)54,000 (A) 112,500(I) 144,000Trademarks 106,000 600,000 706,000Copyrights 210,000 300,000 (A)100,000 (E) 20,000 590,000Equipment (net) 380,000 110,000 490,000Goodwill (A) 25,000 25,000Total assets 1,914,500 1,200,000 2,225,000Liabilities (453,000) (200,000) (653,000)Common stock (400,000) (300,000) (S)300,000 (400,000)Additional paid-in 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)(A) 12,500 (100,500)Non-controlling interest 12/31 (S) 88,000 110,500 (110,500)Total liabilities and equities (1,914,500) (1,200,000) 1,223,000 1,223,000 (2,225,000)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-35

38. (30 Minutes) (Determine consolidated balances when parent uses equitymethod. Includes sale of a portion of the investment)Purchase Price Allocation and Excess AmortizationsPurchase price .......................................... $250,000Book value acquired($230,000 × 70%) .................................. 161,000Price in excess of book value .................. $89,000 Annual ExcessAllocation based on fair value .................. Life AmortizationsLand ($10,000 × 70%) $7,000Equipment ($68,000 × 70%) 47,600 14 yrs. $3,400Liabilities ($20,000 × 70%) 14,000 10 yrs. 1,40068,600Goodwill ..................................................... $20,400 indefinite -0-Total .......................................................... $4,800The parent uses the equity method: Investment income of $44,200 =$49,000 (70% × $70,000) less $4,800 amortization expense.Bon Air CreedmoorAdjustments &Eliminations NCI ConsolidatedRevenues (694,800) (250,000) (944,800)Operating expenses 630,000 180,000 (E) 4,800 814,800Investment income (44,200) -0- (I) 44,200 -0-Noncontrolling int(E)erestin Creedmoor income (21,000) 21,000Net income (109,000) (70,000) (109,000)Retained earnings, 1/1/09 (760,000) (260,000) (S)260,000 (760,000)

Net income (109,000) (70,000) (109,000)Dividends paid 68,000 10,000 (D) 7,000 3,000 68,000Retained earnings, 12/31/09 (801,000) (320,000) (801,000)Current assets 72,000 120,000 192,000Investment in Creedmoor 321,800 -0- (D) 7,000 (S)210,000(I) 44,200 -0-(A)74,600Land 241,000 50,000 (A) 7,000 298,000Buildings (net) 289,000 200,000 489,000Equipment (net) 165,200 40,000 (A)37,400 3,400 239,200Goodwill -0- -0- (A)20,400 20,400Total assets 1,089,000 410,000 1,238,600Liabilities (180,000) (50,000) (A) 9,800 (E) 1,400 (221,600)Common stock (50,000) (40,000) (S) 40,000 (50,000)Additional paid-in capital (58,000) -0- (58,000)Noncontrolling interest 1/1/09 (S)90,000 (90,000)Noncontrolling interest12/31/09 108,000 (108,000)Retained earnings, 12/31/09 (801,000) (320,000) (801,000)Total liabilities and equities ( 1 , 089,000) (410,000) 430,600 430,600 (1,238,600)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-36 Solutions Manual

39. (50 Minutes) (A variety of questions and consolidated balances forcombination where parent applies equity method)a. Equity accrual (60% × $70,000) .............................................. $42,000Excess amortizations (below) ................................................ (5,600)Equity income (parent uses equity method) .................... $36,400Purchase Price Allocation and Excess AmortizationsPurchase price .......................................... $400,000Book value acquired (60% of$470,000 [assets minus liabilities]) .... 282,000Price in excess of book value .................. $118,000Excess price assigned to specific ............ Annual Excessaccounts based on fair value .................... Life AmortizationsEquipment (overvalued)([$30,000] × 60%) .................................. (18,000) 10 yrs. $(1,800)Buildings ($155,000 × 60%) ................. 93,000 15 yrs. 6,200Bonds payable ($20,000 × 60%) ........... 12,000 10 yrs. 1,200Goodwill ..................................................... $31,000 indefinite -0-Total ...................................................... $5,600b. No adjustment to the parent's retained earnings is needed because thecompany is applying the equity method.c. $5,600—see a.d. $28,000—40% of $70,000 reported income figuree. Watson CorporationConsolidated Income StatementFor the Year Ended December 31, 2009

Revenues $920,000Operating expenses 695,600Combined entity net income 224,400Noncontrolling interest in Houston income 28,000Consolidated net income $196,400Remainingf. Excess Amortizations AllocationsAllocations (see a) for 4 years 12/31/09Equipment (18,000) (7,200) (10,800)Buildings 93,000 24,800 68,200Bonds payable 12,000 4,800 7,200Goodwill 31,000 -0- 31,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-37

39. (continued)g. Noncontrolling interest, 1/1/08 (40% of book value of $630,000) $252,000Noncontrolling interest in subsidiary's income (see e) ........... 28,000Noncontrolling interest in subsidiary's dividends .................... (16,000)(40% × $40,000)Noncontrolling interest in subsidiary, 12/31/09 ........................ $264,000h. Watson CorporationConsolidated Balance SheetDecember 31, 2009Current assets $475,000 Current liabilities $560,000Bonds Payable 462,800Equipment (net) 909,200 Noncontrolling interest 264,000Buildings (net) 1,001,200 Common stock 310,000Goodwill 31,000 Retained earnings 819,600Total assets $2,416,400 Total liabilities and equity $2,416,40040. (40 Minutes) (Determine consolidated balances, parent has applied the costmethod)Acquisition price ............................................ $1,400,000Book value acquired (see Schedule 1)($1,120,000 × 80%) .......................................... 896,000Cost in excess of book value ........................ $504,000Annual ExcessExcess cost allocated to buildings based Life Amortizationson fair value ($80,000 × 80%) ......................... 64,000 10 years $6,400Unpatented technology ($550,000 × 80%) .... 440,000 10 years 44,000

Total .......................................................... $ -0- $50,400Schedule 1—Book Value of Morning (January 1, 2006)Book value, January 1, 2009(stockholders' equity accounts) .............. $1,500,0002008 Increase in book value .......................... $200,0002007 Increase in book value .......................... 100,0002006 Increase in book value .......................... 80,000 380,000Book value, January 1, 2006 .......................... $1,120,000Revenues = $1,384,000 (add the two book values)Expenses = $550,400 (add the two book values and then include $50,400excess amortization expenses for the year as computed above)Noncontrolling interest in subsidiary's net income = $80,000 (20% ofsubsidiary's reported income of $400,000)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-38 Solutions Manual

40. (continued)Net Income = $753,600 (consolidated revenues less both consolidatedexpenses and the noncontrolling interest's share of net income)Retained earnings, 1/1/09 = $1,952,800 (the cost method is in use becausethe original purchase price is still in the Investment account. Thus, the$380,000 increase in book value for the three previous years [income of$680,000 less dividends paid of $300,000] multiplied by the 80 percentownership gives an equity accrual of $304,000. Excess amortization forthese same three years totals $151,200 ($50,400× 3). Therefore, theparent's retained earnings must be increased by the net amount[$152,800 or $304,000 – $151,200])Dividends paid = $380,000 (the parent company balance only)Retained earnings, 12/31/09 = $2,326,400 (beginning balance plus netincome less dividends paid)Cash = $500,000 (add book values)Receivables = $1,000,000 (add book values after removing $100,000intercompany balance)Inventory = $900,000 (add book values)Investment in Morning = -0- (balance is removed so that subsidiary's assetsand liabilities can be included in the consolidated figures)

Land = $1,300,000 (add book values)Buildings = $1,038,400 (add book values plus $64,000 allocation less fouryears of $6,400 annual excess amortization)Unpatented technology = $264,000 ($440,000 original allocation less fouryears of $44,000 annual amortization)Total assets = $5,002,400Liabilities = $720,000 (add book values after removing $100,000intercompany balance)Noncontrolling Interest in subsidiary, 12/31/09 = $356,000 (20% ofsubsidiary's beginning book value [$1,500,000] plus interest insubsidiary income [$80,000 as computed above] less 20% ofsubsidiary's dividends [$120,000])Common stock = $1,000,000 (parent company balance)Additional paid-in capital = $600,000 (parent company balance)Retained earnings, 12/31/09 = $2,326,400 (computed above)Total liabilities and equities = $5,002,400McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-39

40. (continued)Consolidated figures can also be determined through a worksheet as follows:Consolidation EntriesEntry *CInvestment in Morning ........................................ 152,800Retained Earnings, 1/1/09 Good ................... 152,800(To recognize Good's share of Morning's increase in book value during the2006-2008 period as well as the amortization expense for that same period.Because the original $1,400,000 is still the balance in the investment inMorning account, the parent is applying the cost method. Thus, 80% ofMorning's $380,000 increase in book value [$304,000] must be accrued.Excess amortizations of $151,200 [$50,400 per year for these three years] isalso recorded leaving a net adjustment of $152,800.)Entry SCommon Stock (Morning) .................................. 460,000Additional Paid-in Capital (Morning) ................. 40,000Retained Earnings, 1/1/09 (Morning) ................. 1,000,000Investment in Morning (80%) ........................ 1,200,000Noncontrolling Interest in Morning (20%) .... 300,000(To eliminate subsidiary's stockholders' equity accounts while recording theJanuary 1, 2009 balance of the noncontrolling interest.)Entry ABuildings ............................................................... 44,800

Unpatented technology ...................................... 308,000Investment in Morning ................................... 352,800(To recognize unamortized amounts paid in connection with acquisition ofMorning. Original allocations have undergone three previous years of excessamortizations.)Entry IDividend Income ................................................. 96,000Dividends Paid ............................................... 96,000(To eliminate intercompany income accounts.)Entry EOperating Expenses ........................................... 50,400Buildings ........................................................ 6,400Unpatented technology .................................. 44,000(To recognize amortization expenses for current year.)Entry PLiabilities ............................................................. 100,000Receivables .................................................... 100,000(To eliminate intercompany debt.)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-40 Solutions Manual40. (continued) GOOD AND MORNINGConsolidation WorksheetFor Year Ending December 31, 2009Consolidation Entries Noncontrolling ConsolidatedAccounts Good Morning Debit Credit Interest TotalsRevenues (884,000) (500,000) (1,384,000)Operating Expenses 400,000 100,000 (E) 50,400 550,400Dividend Income (96,000) -0- (I) 96,000 -0-NCI in Morning's income (20% × 400,000) -0- -0- (80,000) 80,000Net Income (580,000) (400,000) (753,600)Retained earnings, 1/1Good (1,800,000) (*C) 152,800 (1,952,800)Morning (1,000,000) (S)1,000,000 -0-Net income (above) (580,000) (400,000) (753,600)Dividends paid 380,000 120,000 (I) 96,000 24,000 380,000Retained earnings, 12/31 (2,000,000) (1,280,000) (2,326,400)Cash 300,000 200,000 500,000Receivables 700,000 400,000 (P) 100,000 1,000,000Inventory 400,000 500,000 900,000Investment in Morning 1,400,000 -0- (*C) 152,800 (S)1,200,000(A) 352,800 -0-Land 700,000 600,000 1,300,000Buildings 300,000 700,000 (A) 44,800 (E) 6,400 1,038,400Unpatented Technology -0- -0- (A) 308,000 (E) 44,000 264,000Total assets 3,800,000 2,400,000 5,002,400Liabilities (200,000) (620,000) (P) 100,000 (720,000)Common stock (1,000,000) (460,000) (S) 460,000 (1,000,000)Additional paid-in capital (600,000) (40,000) (S) 40,000 (600,000)Retained earnings, 12/31 (above) (2,000,000) (1,280,000) (2,326,400)

NCI in Morning, 1/1 -0- -0- (S) 300,000 (300,000)NCI in Morning, 12/31 -0- -0- (356,000) (356,000)Total liabilities and stockholders' equity (3,800,000) (2,400,000) (5,002,400)McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 4-41

Accounting Theory Research Case: Noncontrolling InterestIn deliberations prior to the issuance of SFAS 160, “Noncontrolling Interests inConsolidated Financial Statements,” the FASB consider three alternatives for displayingthe noncontrolling interest in the consolidated statement of financial position.What were these three alternatives?1. As a liability2. As equity3. In the “mezzanine” area between liabilities and owners’ equityWhat criteria did the FASB use to evaluate the desirability of each alternative?The FASB evaluated whether the classifications conformed to current definitions offinancial statement elements (assets, liabilities, or equity) as articulated in FASBConcept Statement No. 6.In what specific ways did FASB Concept Statement 6 affect the FASB’s evaluation ofthese alternatives?From SFAS 160 paragraphs 32-34If it required that the noncontrolling interest be reported in the mezzanine, theBoard would have had to create a new element—noncontrolling interest insubsidiaries—specifically for consolidated financial statements. The Boardconcluded that no compelling reason exists to create a new elementspecifically for consolidated financial statements to report the interests in asubsidiary held by owners other than the parent. The Board believes thatusing the existing elements of financial statements along with appropriatelabeling and disclosure provides financial information in the consolidatedfinancial statements that is representationally faithful, understandable, andrelevant to the entity’s owners, creditors, and other resource providers.The Board concluded that a noncontrolling interest in a subsidiary does notmeet the definition of a liability in the Board’s conceptual framework.Paragraph 35 of Concepts Statement 6 defines liabilities as “probable futuresacrifices of economic benefits arising from present obligations of a particularentity to transfer assets or provide services to other entities in the future as aresult of past transactions or events”The Board concluded that a noncontrolling interest represents the residualinterest in the net assets of a subsidiary within the consolidated group held byowners other than the parent. The noncontrolling interest, therefore, meets thedefinition of equity in Concepts Statement 6. Paragraph 49 of ConceptsStatement 6 defines equity (or net assets) as “the residual interest in theassets of an entity that remains after deducting its liabilities.”McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20094-42 Solutions Manual

Research and Communication Case

MemorandumTo: CFO, Allied Telecom CorporationRe: Surefire Cell Corporation Noncontrolling Interest ValuationYou are correct in observing that the newly created 10 percent noncontrollinginterest in your recent acquisition, Surefire Cell, must be valued for presentationin your consolidated financial statements. The acquisition-date fair value is therequired valuation basis for the noncontrolling interest—usually provided bymarket trading data. However, because the 10 percent shares do not appear tobe actively traded, a valuation alternative will need to be selectedAccording to SFAS 157, “Fair Value Measurements,” three main techniques areavailable for the noncontrolling interest valuation: the market approach, theincome approach, and the cost approach.The market approach involves obtaining fair values for similar assets orbusinesses that are comparable to Surefire Cell. This valuation technique isappropriate when such comparable firms with observable market values areavailable.The income approach values a firm by discounting the best available measures offuture benefits, typically cash flows or earnings. Often the income approachrequires both supportable assumptions and a sufficient number of inputs to createan accurate forecasting model.The cost approach looks to the replacement cost of the firm’s net assets (incurrent condition) to value the firm. This approach requires ready market pricesfor the firm’s assets and does not rely on estimates of future cash flows orearnings. As such it is often the least accurate valuation method.

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