Test bank advanced accounting 10e by beams chapter 11

To download more slides, ebook, solutions and test bank, visit

Chapter 11 Test Bank
CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND
CORPORATE JOINT VENTURES

Multiple Choice Questions

Use the following information in answering Questions 1 and 2.
Pasfield Corporation acquired a 90% interest in Santini Corporation
for $90,000 cash on January 1, 2005. The following information is
available for Santini at that time.

Current assets
Plant assets
Liabilities
Net assets
LO1
1.

(
$

$
(
$

Fair
Value
Difference
50,000

$
10,000
75,000
15,000
50,000 )
0
75,000

Under the entity theory, a consolidated balance sheet prepared
immediately after the business combination will show goodwill
of
a.
b.
c.
d.

LO1
2.

$

Book
Value
40,000
60,000
50,000 )
50,000

$15,000.
$22,500.

$25,000.
$32,500.

Under the entity theory, a consolidated balance sheet prepared
immediately after the business combination will show minority
interest of
a.
b.
c.
d.

$ 5,000.
$ 7,500.
$ 9,000.
$10,000.

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-1


To download more slides, ebook, solutions and test bank, visit

LO1
3.

Paroz Corporation acquired a 70% interest in Sandberg
Corporation for $900,000 when Sandberg’s stockholders’ equity
consisted of $600,000 of Capital Stock and $600,000 of Retained
Earnings. The fair values of Sandberg’s net assets were equal
to their recorded book values. At the time of acquisition,

Pratt will record
a. goodwill for $60,000 under the parent company theory.
b. goodwill for $85,714 under the entity theory.
c. investment in Sandberg for $1,285,714 under the entity
theory.
d. investment in Sandberg for $900,000 under the entity and
parent company theories.

Use the following information for Questions 4, 5, and 6.
Pascoe Corporation paid $450,000 for a 90% interest in Sarabet
Corporation on January 1, 2005, when Sarabet’s stockholders’ equity
consisted of $250,000 Common Stock and $50,000 Retained Earnings. The
book values and fair values of Shelby’s assets and liabilities were
equal when Pascoe acquired its interest.
The separate incomes of Pascoe and Sarabet for 2005 were $600,000 and
$100,000, respectively. Dividends declared and paid during 2005 were
$250,000 for Pascoe and $50,000 for Sarabet. Pascoe uses the entity
theory in consolidating its financial statements with those of
Sarabet.
LO1
4.
Goodwill was reported in the December 31, 2005 consolidated
balance sheet at
a.
b.
c.
d.

LO1
5.

$170,000.
$180,000.
$200,000.
$210,000.

Minority interest income was reported in the 2005 consolidated
income statement at
a.
b.
c.
d.

$ 5,000.
$ 6,000.
$ 8,000.
$10,000.

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-2


To download more slides, ebook, solutions and test bank, visit

LO1
6.

Pascoe’s income from Sarabet under the equity method for 2005
was
a.

b.
c.
d.

$ 72,000.
$ 87,500.
$ 90,000.
$100,000.

Use the following information for Questions 7, 8, 9, and 10.
Paris Corporation purchased 80% of the outstanding voting common
stock of Sanders Corporation on January 1, 2005, at a cost of
$400,000. The stockholders’ equity of Sanders Corporation on this
date consisted of $200,000 of Capital Stock and $100,000 of Retained
Earnings. Book values were equal to fair values except for land and
inventory. The book value of Sanders’ land was $10,000, and fair
value was $22,000. The book value of Sanders’ inventory was $30,000,
and fair value was $25,000.
LO1
7.

What amount of goodwill was reported under the parent company
theory?
a.
b.
c.
d.

LO1
8.

What amount of goodwill was reported under the entity theory?
a.
b.
c.
d.

LO1
9.

$148,000.
$153,000.
$154,400.
$160,000.

$185,000.
$191,250.
$193,000.
$200,000.

At what amount was consolidated Land account stated under the
parent company and entity theories, respectively, if Paris’s
land account had a book value of $50,000 and a fair value of
$70,000?
a.
b.
c.
d.

$69,600

$72,000
$72,000
$92,000

and
and
and
and

$72,000.
$72,000.
$92,000.
$72,000.

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-3


To download more slides, ebook, solutions and test bank, visit

LO1
10.

If Paris’s inventory account had a book value of $40,000 and a
fair value of $44,000, what was the amount stated on the
consolidated balance sheet for inventories under the parent
theory of consolidation?
a.
b.
c.

d.

LO2
11.

The SEC requires push-down accounting for SEC filings of
subsidiaries when the subsidiary has no substantial publiclyheld debt or preferred stock outstanding and
a.
b.
c.
d.

LO2
12.

$65,000.
$66,000.
$69,000.
$70,000.

the
the
the
the

parent
parent
parent
parent

has
has
has
has

substantial
substantial
substantial
substantial

ownership
ownership
ownership
ownership

(5% or greater).
(20% or greater).
(50% or greater).
(97% or greater).

In practice, push-down accounting
a. must use the cost method to report goodwill.
b. revalues the subsidiary assets on a proportional basis.
c. requires neither a new basis of accounting nor a new
reporting basis.
d. requires a deferred credit for goodwill.

LO2
13.

Companies that use push-down accounting
a. must use the parent company theory approach.
b. must use the entity theory approach.
c. may use either the parent company or entity theory
approach.
d. shall use neither the parent company nor entity theory
approach.

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-4


To download more slides, ebook, solutions and test bank, visit

LO2
14.

A parent company acquired 100% of the outstanding common stock
of another corporation. The parent is going to use push-down
accounting. The fair market value of each of the acquired
corporation’s assets is lower than its respective book value.
The fair market value of each of the acquired corporation’s
liabilities is higher than its respective book value. The
corporation has a deficit in the Retained Earnings account.
Which one of the following statements is correct?
a. The push-down capital account will have a credit balance
after this transaction is posted.
b. The push-down capital account will have a debit balance
after this transaction is posted.
c. The push-down capital account will have either a debit or a

credit balance depending upon whether the asset adjustments
exceed the liability adjustments, or vice versa.
d. Subsidiary retained Earnings will have a deficit balance
after this transaction is posted.

LO3
15.

Earth Company, Fire Incorporated, and Wind Incorporated created
a joint venture to market their products on the internet. Earth
owns 40% of the stock. Fire owns 45% of the stock and Wind owns
the remaining 15%.
Which firms should report their joint
venture investments using the equity method?
a.
b.
c.
d.

LO3
16.

Anthony and Cleopatra create a joint venture to distribute
artifacts.
Anthony contributes 70% and Cleopatra 30% of the
cash for assets purchased from Tomb Company. How would Anthony
report information about Cleopatra on Anthony’s financial
statements?
a.
b.

c.
d.

LO3
17.

Earth.
Fire.
Earth and Fire.
Earth, Fire and Wind.

Not at all.
In a footnote.
As a liability.
As a noncontrolling interest.

If a joint venturer holds a 60% interest in a subsidiary
a.
b.
c.
d.

the equity method must be used.
either the equity or cost method may be used.
the cost method must be used.
proportionate consolidation must be used.
©2009 Pearson Education, Inc. publishing as Prentice Hall
11-5

To download more slides, ebook, solutions and test bank, visit

LO4
18.

A company’s variable interest entities (VIEs)
a.
b.
c.
d.

LO4
19.

will have ownership control and financial control.
may have no ownership control but financial control.
does not require ownership control or financial control.
does not have to be an entity.

An enterprise
(VIE) if

shall

consolidate

a

variable

interest

entity

I. that enterprise has a variable interest that will absorb a
majority of the VIE’s expected losses.
II. that enterprise will receive a majority of a VIE’s expected
returns.
a.
b.
c.
d.
LO5
20.

I. only
II. only
either I or II
neither I or II is necessary

If a company pays more for a variable interest entity (VIE)than
the fair value of the net assets
a. an extraordinary loss is recorded.
b. goodwill is recorded if the VIE is defined as a business.
c. a deferred credit is recorded and amortized over the useful
life.
d. a write-down is taken in all situations.

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-6

To download more slides, ebook, solutions and test bank, visit

LO1
Exercise 1
On July 1, 2004, Parslow Corporation acquired a 75% interest in
Sanderson Corporation for $150,000. Sanderson’s net assets on this
date had a book value of $140,000 and a fair value of $160,000. The
excess of fair value over book value at acquisition was due to
understated plant assets with a remaining useful life of five years
from July 1, 2004. Separate incomes of Parslow and Sanderson for 2005
were $400,000 and $20,000, respectively.

Required:
1. Compute goodwill at July 1, 2004 under the parent company theory
and the entity theory.
2. Determine consolidated net income and minority interest income
for 2005 under the parent company theory and the entity theory.
LO1
Exercise 2
Partel Corporation purchased 75% of Sandford Corporation on January
1, 2005, for $230,000. Balance sheets for the two companies on this
date, prepared just prior to the purchase, are provided below.
Partel
Book
Values
Cash
Inventory
Buildings

&
net
Total assets

Sandford
Fair
Values

$

330,000 $
270,000
500,000

10,000 $
70,000
120,000

10,000
90,000
190,000

$

1,100,000 $

200,000 $

290,000

$

300,000
800,000
1,100,000 $

95,000
105,000
200,000

equipment-

Common stock
Retained earnings
Total equities

Sandford
Book
Values

$

Required:
Prepare one consolidated balance sheet using the proprietary (prorata) theory of consolidation, and, prepare a second consolidated
balance sheet using the parent company theory of consolidation.
©2009 Pearson Education, Inc. publishing as Prentice Hall
11-7


To download more slides, ebook, solutions and test bank, visit

LO1
Exercise 3
Pashley Corporation purchased 75% of Sargent Corporation on January
1, 2005, for $115,000. Balance sheets for the two companies on this
date, prepared just prior to the purchase, are provided below.
Sargent
Book
Values

Pashley
Book
Values
Cash
Inventory
Buildings
&
net
Total assets

$

165,000 $
135,000
250,000

5,000 $
35,000
60,000

5,000
45,000
95,000

$

550,000 $

100,000 $

145,000

$

150,000 $
400,000
550,000 $

47,500
52,500
100,000

equipment-

Common stock
Retained earnings
Total equities

Sargent
Fair

Values

$

Required:
Prepare a consolidated
consolidation.

balance

sheet

using

the

entity

theory

of

LO1
Exercise 4
Patane Corporation acquired 80% of the outstanding voting common stock
of Sanlon Corporation on January 1, 2005, for $500,000. Sanlon
Corporation’s stockholders’ equity at this date consisted of $250,000
in Capital Stock and $100,000 in Retained Earnings. The fair value of
Sanlon’s assets was equal to the book value of the assets except for
land with a fair value $40,000 greater than its book value, and

marketable securities with a fair value $50,000 greater than its book
value. Sanlon also had a valuable patent with a fair value of $25,000
and a book value of zero because its development costs were expensed
as incurred. The fair value of Sanlon’s liabilities is $10,000 higher
than the $40,000 book value.
Required:
Calculate the amount of goodwill under the parent company and entity
theories of consolidation.
©2009 Pearson Education, Inc. publishing as Prentice Hall
11-8


To download more slides, ebook, solutions and test bank, visit

LO1
Exercise 5
On January 1, 2005, Parton Corporation acquired an 80% interest in
Sandra Corporation for $184,000. Sandra’s net assets on this date had
a book value of $160,000 and a fair value of $210,000. The excess of
fair value over book value at acquisition was attributable to $20,000
of understated plant assets with a remaining useful life of five
years from January 1, 2005, and $30,000 to an understated patent with
a remaining economic life of six years from January 1, 2005. Separate
incomes of Parton and Sandra for 2005 were $300,000 and $50,000,
respectively.

Required:
1. Compute goodwill at January 1, 2005 under the parent company
theory and the entity theory.
2. Determine consolidated net income and minority interest income

for 2005 under the parent company theory and the entity theory.

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-9


To download more slides, ebook, solutions and test bank, visit

LO2
Exercise 6
Partridge Corporation purchased an 80% interest in Sandy Corporation
for $840,000 on January 1, 2005. Sandy's balance sheet book values
and accompanying fair values on this date are shown below.

Book
Value
Cash

$

Fair
Value

30,000

$ 30,000

Receivables

200,000

200,000

Inventory

300,000

360,000

50,000

90,000

250,000

300,000

Land
Plant assets-net
Total Assets

$

830,000

$980,000

Current liabilities

$

180,000

$180,000

Other liabilities

120,000

100,000

Common Stock

400,000

Retained Earnings

130,000

Total Liab. & Equity

$

Entity
Theory
PushDown
Balance
Sheet

Parent

Company
Theory
PushDown
Balance
Sheet

830,000

Required
Complete the push-down columns of Sandy Corporation’s restructured
balance sheet using entity theory and parent company theory.

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-10


To download more slides, ebook, solutions and test bank, visit

LO2
Exercise 7
Party Corporation acquired an 80% interest in Sang Corporation on
January 1, 2005 for $20,000. Balance sheet and fair value information
on this date is summarized as follows:

Current assets
Land and Building-net
Equipment
Total assets

$

Liabilities
Capital stock
Retained earnings
Total liab. & equity

$

$

$

Party
Book
Value
15,000 $
35,000
8,000
58,000 $
27,000 $
18,000
13,000
58,000 $

Sang
Book
Value
9,000 $
7,000
4,000

20,000 $

Sang
Fair
Value
9,000
7,000
6,000
22,000

10,000
4,000
6,000
20,000

10,000

Required:
1. Prepare an entry on the books of Sang Corporation to record the
push-down adjustment under parent company theory.
2. Prepare an entry on the books of Sang Corporation to record a
push-down adjustment under entity theory.

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-11


To download more slides, ebook, solutions and test bank, visit

LO2

Exercise 8
Pascal Corporation paid $225,000 for a 70% interest in Sank
Corporation on January 1, 2005. On that date, Sank’s balance sheet
accounts, at book value and fair value, were as follows:

Book Value
Assets
Cash
Accounts receivable-net
Inventories
Property, plant, and equipment-net
Total assets
Equities
Accounts payable
Common stock
Retained earnings
Total liab. & equity

$

$

$

$

Fair Value

25,000 $
45,000

40,000
140,000
250,000 $

25,000
55,000
60,000
125,000
265,000

40,000 $
120,000
90,000
250,000

40,000

Required:
Prepare a balance sheet for Sank Corporation immediately after the
acquisition transaction by using push-down accounting under the
parent company theory.

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-12


To download more slides, ebook, solutions and test bank, visit

LO3
Exercise 9

Patch Corporation has a 50% undivided interest in Saric Corporation, a
joint venture. Patch accounts for its interest in Saric by the equity
method and also prepares consolidated financial statements for
external reporting purposes. Patch follows specialized industry
practices and uses proportionate consolidation for its interest in
Saric. Separate financial statements for Patch and Saric are as
follows:

Cash
$
Accounts receivable
Inventories
Land
Plant, property, equipment
Total assets
$
Accounts payable
Common stock
Retained earnings
Venture capital
Total liab. & equity

$

$

Patch
30,000 $
70,000
80,000

116,000
200,000
496,000 $

Saric
18,000
42,000
72,000
140,000
248,000
520,000

24,000 $
200,000
272,000

20,000
220,000

496,000 $

Consolidation

280,000
520,000

Required:
Prepare the consolidated balance sheet for Patch Corporation and its
undivided interest in Saric Corporation.

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-13


To download more slides, ebook, solutions and test bank, visit

LO4 & LO5
Exercise 10
On January 1, 2005, Alford Corporation and Bancroft Inc. decided to
set up a syndicate called Showtime to conduct.
The partners agreed
to a 50%-50% split of Showtime’s profits, but Alford will absorb all
losses. After the partners contributed $15,000 each on January 1,
2005, no journal entries were made for Alford or Bancroft during the
year to report Showtime activities.
During the year, Showtime sold
$110,000 of tickets for five shows at $25 per ticket and performers
were paid $60,000 in advance with one show remaining to be performed
next year. Market value was assumed to be cash present value.
On
December 31, 2005 year-end, worksheet financial statements for Alford
and Bancroft were as follows:

Alford Corporation, Bancroft Inc. and Showtime Affiliate
Financial Statement Working Papers
on December 31, 2005
Alford
Bancroft
Showtime
INCOME STATEMENT

23,680
$15,000
Sales
$
$88,000
Cost of Sales
Other Expenses
Net income
Retained
Earnings 1/1
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Accounts
Receivable-net

(
(

(

9,200)
2,300)

4,700)

4,000)

48,000

12,180

6,300

40,000

11,000

3,000

12,180

6,300

3,000)

(
(

(

40,000

2,000)

20,180

$ 7,300

40,000

2,000

1,900

80,000

22,000

15,500

Inventories

14,000

8,000

Land
Equipment and
Buildings-net
Investment in
Showtime
TOTAL ASSETS

27,000

27,000

61,080

33,000

15,000

15,000
$100,400

$

$

141,080

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-14

$80,000


To download more slides, ebook, solutions and test bank, visit

LIAB. & EQUITY
Liabilities
Capital
Stock/Partnership
Retained

Earnings
12/31 Noncontrol.
Interest
TOTAL LIAB. &
EQUITY

90,900

83,100

10,000

30,000

10,000

30,000

20,180

7,300

40,000

141,080

$100,400

$80,000

$

Required:
1.Prepare a balance sheet for Alford as of December 31, 2005.
2.Prepare a balance sheet for Bancroft as of December 31, 2005.

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-15


To download more slides, ebook, solutions and test bank, visit

SOLUTIONS
Multiple Choice Questions
1.

c

Imputed value of Santini ($90,000/90%)
Less: Fair value of net assets acquired
Goodwill

2.

$
$

100,000
75,000
25,000

d

Imputed value of Santini ($90,000/90%)
Minority interest percentage
Minority interest

3.

d

4.

c

$
$

100,000
10%
10,000

The investment is recorded at cost

Imputed value of Sarabet ($450,000/90%)
Less: Total underlying book value
Total amount of implied goodwill
Majority percentage acquired
Goodwill under contemporary theory

$
$
$

500,000
300,000
200,000
90%
180,000

Under contemporary theory the amount of goodwill recorded would be
$180,000; however, under pure entity theory, the amount of goodwill
will be $200,000.

5.

d

Sarabet’s separate income
Minority percentage
Minority interest income

6.

$
$

100,000
10%
10,000

c

Sarabet’s separate income
Majority percentage
Income from Sarabet to Pascoe

$
$

100,000
90%
90,000

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-16


To download more slides, ebook, solutions and test bank, visit

7.

c

Purchase price of 80% interest
Less: Book value acquired ($300,000 x 80%)
Excess of cost over book value
Less: Excess allocated to land ($12,000 x 80%)
Plus: Excess allocated to inventory ($5,000 x 80%)
Remainder allocated to goodwill

8.

c

9.

a

$
$
(
$

400,000
240,000
160,000
9,600 )
4,000
154,400

$154,400/80% = $193,000

Under the parent company theory, the Land account on the consolidated
balance sheet would be the sum of the book value of the parent’s Land
account balance of $50,000 plus the book value of the Land account on
the subsidiary’s books of $10,000 plus 80% of the $12,000 excess of
the fair value in excess of book value of $9,600, for a total of
$69,600. Under the entity theory, the land would be valued at the
book value of the parent of $50,000 plus the full fair value of the

subsidiary’s land which is $22,000 for a total of $72,000.
10.

b

Under the parent company theory, the Inventory account on the consolidated
balance sheet would be the sum of the book value of the parent’s Inventory
account balance of $40,000 plus the book value of the Inventory account on
the subsidiary’s books of $30,000 less 80% of the $5,000 excess of the book
value in excess of fair value, or ($4,000), for a total of $66,000.
11.

d

12.

b

13.

c

14.

b

15.

d

16.

d

17.

a

18.

b

19.

c

20.

b
©2009 Pearson Education, Inc. publishing as Prentice Hall
11-17


To download more slides, ebook, solutions and test bank, visit

Exercise 1
Requirement 1:
Parent company theory:
Cost of 75% interest on July 1, 2004
Book value acquired ($140,000 x 75%)

Excess cost over book value acquired
Excess:
Allocated to plant assets ($160,000 - $140,000) x 75%
Goodwill
Entity theory:
Total value implied by purchase price ($150,000/75%)
Book value
Excess implied value over book value
Excess:
Allocated to plant assets ($160,000-$140,000)
Goodwill
Or: ($30,000 goodwill)/75%

Requirement 2:
Combined separate incomes
$
Less: Depreciation on excess allocated to
plant assets: $15,000/5 years
(
$20,000/5 years
Less: Minority interest income
(
Consolidated net income
$

$

150,000
105,000
45,000

$
(
$

$

15,000 )
30,000

200,000
140,000
60,000

$

$

(

20,000 )
40,000

$

40,000

Parent
Theory
420,000

$

Entity
Theory
420,000

3,000 )
(

4,000 )

5,000 )
412,000

Total consolidated income

$

416,000

Income allocated to majority shareholders

$

412,000

Income allocated to minority shareholders

$

4,000

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-18


To download more slides, ebook, solutions and test bank, visit

Exercise 2
Requirement 1

Partel Corporation and Subsidiary
Consolidated Balance Sheet
January 1, 2005
(Proprietary Theory)
Assets
Cash ($330,000 - $230,000) + (75% x 10,000)
Inventories $270,000 + (75% x 90,000)
Buildings & equipment-net $500,000 + (75% x 190,000)
Goodwill ($230,000 paid – ($290,000 x 75%)
Total assets
Equity
Common stock
Retained earnings
Total equity

$

$

$
$

107,500
337,500
642,500
12,500
1,100,000

300,000
800,000
1,100,000

Requirement 2

Partel Corporation and Subsidiary
Consolidated Balance Sheet
January 1, 2005
(Parent Company Theory)
Assets
Cash ($330,000 - $230,000) + $10,000)
Inventories ($270,000 + $70,000) + (75% x 20,000)
Buildings &
Equip.-net ($500,000 + $120,000) + (75% x $70,000)
Goodwill ($230,000 paid – ($290,000 x 75%)
Total assets
Equity
Minority Interest ($200,000 x 25%)
Common stock

Retained earnings
Total equity

$

$

$

$

110,000
355,000
672,500
12,500
1,150,000

50,000
300,000
800,000
1,150,000

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-19


To download more slides, ebook, solutions and test bank, visit

Exercise 3

Pashley Corporation and Subsidiary
Consolidated Balance Sheet
January 1, 2005
(Entity Theory of Consolidation)
Assets
Cash ($165,000 - $115,000) + $5,000)
Inventories ($135,000 + $45,000)
Buildings & equipment-net ($250,000 + $95,000)
Goodwill ($115,000/75%) - $145,000 fair value
Total assets

$

$

55,000
180,000
345,000
8,333
588,333

Equity
Minority Interest
($45,000 excess of fair value over
book value x 25%) + (25% x $100,000 net book values) +
$
($8,333 goodwill x 25%)
Common stock
Retained earnings
Total equity

$

38,333
150,000
400,000
588,333

Exercise 4
Preliminary calculations:
Sanlon net assets at January 1, 2005:
($250,000 capital stock + $100,000 Retained
Earnings)
Plus: Book value of liabilities
Equals: Book value of assets
Book value of assets
Plus: Excess of land fair value over book value
Plus: Excess of securities fair value over book
value
Plus: Fair value of patent in excess of book value
Equals: Total fair value of assets
Less: Fair value of liabilities
Equals: Fair value of net assets
Percentage acquired
Equals: Fair value of net assets acquired

$
$
$

$

$
$

350,000
40,000
390,000
390,000
40,000
50,000
25,000
505,000
50,000
455,000
80%
364,000

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-20


To download more slides, ebook, solutions and test bank, visit

Required:
Goodwill under the parent company theory:
Purchase price
Less: Fair value of net assets acquired
Goodwill using the parent company theory
Goodwill under the parent company theory
Divided by: Percentage acquired
Goodwill under the entity theory

$

500,000

$

364,000
136,000

$

136,000
80%
170,000

$

Exercise 5
Requirement 1:
Parent company theory:
Cost of 80% interest on January 1, 2005
Book value acquired ($160,000 x 80%)
Excess cost over book value acquired
Excess allocation:
Plant assets ($20,000 x 80%) = $16,000
Patent
($30,000 x 80%) = 24,000
Goodwill
Entity theory:

Total value implied by purchase price ($184,000/80%)
Book value
Excess implied value over book value
Excess allocated:
Plant assets
$20,000
Patent
30,000
Goodwill
Or: ($16,000 goodwill)/80%

$

184,000
128,000
56,000

$

(
$

$

40,000 )
16,000

230,000
160,000
70,000

$

$

(

50,000 )
20,000

$

20,000

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-21


To download more slides, ebook, solutions and test bank, visit

Requirement 2:

Combined separate incomes
Less: Deprec./Amort. on excess to:
Plant assets: $16,000/5 years
$20,000/5 years
Patent:
$24,000/6 years
$30,000/6 years

Less: Minority interest income
Consolidated net income

Parent
Theory
350,000

$
(

3,200 )

(

4,000 )

(
$

$

Entity
Theory
350,000

(

4,000 )

(

5,000 )

10,000 )
332,800

Total consolidated income

$

341,000

Income allocated to majority shareholders

$

332,800

Income allocated to minority shareholders

$

8,200

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-22


To download more slides, ebook, solutions and test bank, visit

Exercise 6
Preliminary computations:
Parent company theory:
Cost of 80% interest
Fair value acquired $700,000 x 80%
Goodwill

$
$

Entity theory:
Implied value $840,000/80%
Fair value of net assets
Goodwill

Book
Value
Cash

$

30,000 $

840,000
560,000
280,000

$

1,050,000

700,000
350,000

$

Parent
Company
Theory
PushDown
Balance
Sheet

Entity
Theory
PushDown
Balance
Sheet

Fair
Value
30,000 $

30,000 $

30,000

Receivables

200,000

200,000

200,000

200,000

Inventory

300,000

360,000

360,000

348,000

50,000

90,000

90,000

82,000

250,000

300,000

300,000

290,000

350,000

280,000

Land
Plant assets-net
Goodwill
Total Assets

$

830,000 $

980,000 $

1,330,000 $

1,230,000

Current liabilities

$

180,000 $

180,000 $

180,000 $

180,000

Other liabilities

120,000

100,000

100,000

104,000

Common Stock

400,000

400,000

400,000

Retained Earnings

130,000

0

0

650,000

546,000

Push-down capital
Tot. Liab &

Equity

$

830,000

$

1,330,000 $

1,230,000

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-23


To download more slides, ebook, solutions and test bank, visit

Exercise 7
Requirement 1:
Push-down under parent company theory:
Cost of the 80% interest
Book value acquired ($10,000 x 80%)
Excess of cost over book value

$
$

Excess allocated to:
Equipment ($2,000 x 80%)
Goodwill
Excess of cost over book value

Entry:
Equipment
Goodwill
Retained earnings
Push-down capital
Requirement 2:
Push-down under entity theory:
Implied value ($20,000/80%)
Fair value
Excess of cost over book value
Excess allocated to:
Equipment
Goodwill
Excess of cost over book value

Entry:
Equipment
Goodwill
Retained earnings
Push-down capital

$
$

20,000
8,000
12,000

1,600
10,400
12,000

1,600
10,400
6,000
18,000

$
$

$
$

25,000
(10,000)
15,000

2,000
13,000
15,000

2,000
13,000
6,000

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-24

21,000


To download more slides, ebook, solutions and test bank, visit

Exercise 8
Cost of a 70% interest in Sank
Fair value acquired ($225,000 x 70%)
Goodwill

$

Cost
Book value acquired ($210,000 x 70%)
Excess of cost over book value acquired

$

Excess allocated:
Receivables: $10,000 x 70%
Inventories: $20,000 x 70%
Property, plant & equipment ($15,000) x 70%
Goodwill

Total excess cost over book value

Entry:
Receivables
Inventories
Goodwill
Retained earnings
Plant, property, and equipment
Push-down capital

225,000
157,500
67,500

$

225,000
147,000
78,000

$

$
(
$

7,000
14,000
10,500 )
67,500

78,000

7,000
14,000
67,500
90,000
10,500
168,000

Sank Corporation
Balance Sheet
1/1/03 (After Push-Down)
Assets
Cash
Receivables
Inventories
Property, plant, and equipment
Goodwill
Total assets
Liabilities & Equity
Accounts payable
Common stock
Push-down capital
Total liab. & equity

$

$

$

$

25,000
52,000
54,000
129,500
67,500
328,000

40,000
120,000
168,000
328,000

©2009 Pearson Education, Inc. publishing as Prentice Hall
11-25