Solution manual advanced accounting 9e by hoyle ch03

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CHAPTER 3
CONSOLIDATIONS—SUBSEQUENT TO
THE DATE OF ACQUISITION
I.

Several factors serve to complicate the consolidation process when it occurs
subsequent to the date of acquisition. In all combinations within its own internal records
the acquiring company will utilize a specific method to account for the investment in the
acquired company.
1. Three alternatives are available
a. Initial value method (formerly called the cost method prior to SFAS 141R)
b. Equity method
c. Partial equity method
2. Depending upon the method applied, the acquiring company will record earnings
from its ownership of the acquired company. This total must be eliminated on the
consolidation worksheet and be replaced by the subsidiary’s revenues and
expenses.
3. Under each of these three methods, the balance in the Investment account will
also vary. It too must be removed in producing consolidated statements and be
replaced by the subsidiary’s assets and liabilities.

II.

For combinations being consolidated after the acquisition date, certain procedures are
required. If the acquiring company has applied the equity method, the following process
is appropriate.
A. Assuming that the acquisition was made during the current fiscal period
1. The parent adjusts its own Investment account to reflect the subsidiary’s income
and dividend payments as well as any amortization expense relating to excess

acquisition-date fair value over book value allocations and goodwill.
2. Worksheet entries are then used to establish consolidated figures for reporting
purposes.
a. Entry S offsets the subsidiary’s stockholders’ equity accounts against the
book value component of the Investment account (as of the acquisition date).
b. Entry A recognizes the excess fair over book value allocations made to
specific subsidiary accounts and/or to goodwill.
c. Entry I eliminates the investment income balance accrued by the parent.
d. Entry D removes intercompany dividend payments
e. Entry E records the current excess amortization expenses on the excess fair
over book value allocations.
f. Entry P eliminates any intercompany payable/receivable balances.
B. Assuming that the acquisition was made during a previous fiscal period
1. Most of the consolidation entries described above remain applicable regardless
of the time that has elapsed since the combination was formed.

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2. The amount of the subsidiary’s stockholders’ equity to be removed in Entry S will
differ each period to reflect the balance as of the beginning of the current year
3. The allocations established by entry A will also change in each subsequent
consolidation. Only the unamortized balances remaining as of the beginning of
the current period are recognized in this entry.

III.

For a combination where the parent has applied an accounting method other than the
equity method, the consolidation procedures described above must be modified.
A. If the initial value method is applied by the parent company, the intercompany
dividends eliminated in Entry I will only consist of the dividends transferred from the
subsidiary. No separate Entry D is needed.
B. If the partial equity method is in use, the intercompany income to be removed in
Entry I is the equity accrual only; no amortization expense is included. Intercompany
dividends are eliminated through Entry D.
C. In any time period after the year of acquisition.
1. The initial value method recognizes neither income in excess of dividend
payments nor amortization expense. Thus, for all years prior to the current
period, both of these figures must be entered directly into the consolidation.
Entry*C is used for this purpose; it converts all prior amounts to equity method
balances.
2. The partial equity method does not recognize excess amortization expenses.
Therefore, Entry*C converts the appropriate account balances to the equity
method by recognizing the expense that relates to all of the past years.

IV.

Bargain purchases
A. As discussed in Chapter Two, bargain purchases occur when the parent company
transfers consideration less than net fair values of the subsidiary’s assets acquired
and liabilities assumed.
B. According to SFAS 141R, the parent recognizes an excess of net asset fair value
over the consideration transferred as a ―gain on bargain purchase.‖

V.

Goodwill Impairment – SFAS No. 142
A. When is goodwill impaired?
1. Goodwill is considered impaired when the fair value of its related reporting unit
falls below its carrying value. Goodwill should not be amortized, but should be
tested for impairment at the reporting unit level (operating segment or lower
identifiable level).
2. Goodwill should be tested for impairment at least annually.
3. Interim impairment testing may be necessary in the presence of negative
indicators such as an adverse change in the business climate or market, legal
factors, regulatory action, an introduction of competition, or a loss of key
personnel.
B. How is goodwill tested for impairment?
1. All acquired goodwill should be assigned to reporting units. It would not be
unusual for the total amount of acquired goodwill to be divided among a number

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of reporting units. Goodwill may be assigned to reporting units of the acquiring
entity that are expected to benefit from the synergies of the combination even
though other assets or liabilities of the acquired entity may not be assigned to
that reporting unit.
2. Goodwill is tested for impairment using a two-step approach.

a. The first step simply compares the fair value of a reporting unit to its carrying
amount. If the fair value of the reporting unit exceeds its carrying amount,
goodwill is not considered impaired and no further analysis is necessary.
b. The second step is a comparison of goodwill to its carrying amount. If the
implied value of a reporting unit’s goodwill is less than its carrying value,
goodwill is considered impaired and a loss is recognized. The loss is equal
to the amount by which goodwill exceeds its implied value.
3. The implied value of goodwill should be calculated in the same manner that
goodwill is calculated in a business combination. That is, an entity should
allocate the fair value of the reporting unit to all of the assets and liabilities of that
unit (including any unrecognized intangible assets) as if the reporting unit had
been acquired in a business combination and the fair value of the reporting unit
was the value assigned at a subsidiary’s acquisition date. The excess
―acquisition-date‖ fair value over the amounts assigned to assets and liabilities is
the implied value of goodwill. This allocation is performed only for purposes of
testing goodwill for impairment and does not require entities to record the ―stepup‖ in net assets or any unrecognized intangible assets.
C. How is the impairment recognized in financial statements?
A.
The aggregate amount of goodwill impairment losses should be presented as
a separate line item in the operating section of the income statement
unless a goodwill impairment loss is associated with a discontinued
operation.
B.
A goodwill impairment loss associated with a discontinued operation should
be included (on a net-of-tax basis) within the results of discontinued
operations.
VI.

Push-down accounting
A. A subsidiary may record any acquisition-date fair value allocations directly onto its

own financial records rather than through the use of a worksheet. Subsequent
amortization expense on these allocations could also be recorded by the subsidiary.
B. Push-down accounting reports the assets and liabilities of the subsidiary at the
amount the new owner paid. It also assists the new owner in evaluating the
profitability that the subsidiary is adding to the business combination.
C. Push-down accounting can also make the consolidation process easier since
allocations and amortization need not be included as worksheet entries.

VII.

Contingent consideration
A. Under SFAS 141R, the fair value of any contingent consideration is included as part
of the consideration transferred.
B. If the contingency is based on earnings or other financial performance measures,
changes in the fair value of the contingency are recognized in income as they occur.

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C. If the contingency requires additional stock to be issued at a later date (or any other
equity issues), the acquisition-date fair value of the contingency is not adjusted over
time. Any subsequent shares issued as a consequence of the contingency are
simply recorded at the original acquisition-date fair value.

Learning Objectives
Having completed Chapter Three, ―Consolidations—Subsequent to the Date of Acquisition,‖
students should be able to fulfill each of the following learning objectives:
1.

Identify and describe the three basic methods that an acquiring company can use in
accounting for its investment in an acquired company.

2.

Discuss the advantages and disadvantages of each of the three accounting methods
that an acquiring company can use in recording its investment.

3.

Determine consolidated balances at the end of the year in which a business combination
occurs if the parent uses either the initial value method, the equity method, or the partial
equity method.

4.

Determine consolidated balances for any period subsequent to the year in which a
purchase combination is formed if the parent uses either the initial value method, the
equity method, or the partial equity method.

5.

Understand the necessity for consolidation purposes of converting parent company
figures to the equity method when another method has been used during previous
years.

6.

Understand the process of goodwill impairment and the techniques needed to calculate
a goodwill impairment for a reporting unit of a business combination.

7.

Account for additional amounts paid by a parent company or additional shares of stock
issued subsequent to the creation of a business combination.

8.

Explain the process of push-down accounting, identify its reporting advantages, and
indicate when this method is appropriate for external reporting.

Answers to Discussion Questions
How Does a Company Really Decide which Investment Method to Apply?
Students can come up with literally dozens of factors that should be considered by Pilgrim in
making the decision as to the method of accounting for its subsidiary, Crestwood Corporation.
The following is simply a partial list of possible points to consider.


Use of the information. If Pilgrim does not monitor its own income levels closely, applying the
equity method would seem to be a waste of time and energy. A company must plan to use
the additional data before the task of accumulation becomes worthwhile.



Size of the subsidiary. If the subsidiary is large in comparison to Pilgrim, the effort required

of the equity method may be important. Income levels would probably be significant.

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However, if the subsidiary is actually quite small in relation to the parent, the impact might
not be material enough to warrant the extra effort.


Size of dividend payments. If Crestwood pays out most of its earnings each period as
dividends, that figure will approximate equity income. Little additional information would be
accrued by applying the equity method. In contrast, if dividends are small or not paid on a
regular basis, a Dividend Income balance might vastly understate the profits to be
recognized by the business combination.



Amount of excess amortizations. If Pilgrim has paid a significant amount in excess of book
value so that annual amortization charges are quite high, use of the equity method might be
preferred to show the effect of this expense each month (or whenever internal reporting is
made). In this case, waiting until the end of the year and recording all of the expense at one
time through a worksheet entry might not be the best way to reflect the impact of the
expense.



Amount of intercompany transactions. As with amortization, the volume of transfers can be
an important element in deciding which accounting method to use. If few intercompany
sales are made, monitoring the subsidiary through the application of the equity method is
less essential. Conversely, if the amount of these transactions IS significant, the added data
can be helpful to company administrators evaluating operations.



Sophistication of accounting systems. If Pilgrim and Crestwood both have advanced
accounting systems, application of the equity method may be relatively simple.
Unfortunately, if these systems are primitive, the cost and effort necessary to apply the
equity method may outweigh any potential benefits.



The timeliness and accuracy of income figures generated by Crestwood. If the subsidiary
reports operating results on a regular basis (such as weekly or monthly) and these figures
prove to be reliable, equity totals recorded by Pilgrim may serve as valuable information to
the parent. However, if Crestwood's reports are slow and often require later adjustment,
Pilgrim's use of the equity method will provide only questionable results.

Answers to Questions
1.

a. CCES Corp., for its own recordkeeping, may apply the equity method to the
investment in Schmaling. Under this approach, the parent's records parallel the
activities of the subsidiary. Income will be accrued by the parent as it is earned by
the subsidiary. Dividends paid by Schmaling cause a reduction in book value;

therefore, the investment account is reduced by CCES in a corresponding manner.
In addition, any excess amortization expense associated with the allocation of
CCES's purchase price is recognized through a periodic adjustment. By applying the
equity method, both the income and investment balances maintained by the parent
accurately reflect consolidated totals. The equity method is especially helpful in
monitoring the income of the business combination. This method can be, however,
rather difficult to apply and a time-consuming process.
b. The initial value method. The initial value method can also be utilized by CCES
Corporation. Any dividends received will be accounted for as income but no other
investment entries are recorded. Thus, the initial value method is quite easy to apply.

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However, the balances found within the parent's financial records may not provide a
reasonable representation of the totals that will result from consolidating the two
companies.
c. The partial equity method combines the advantages of the previous two techniques.
Income is accrued as earned by the subsidiary in the same manner as the equity
method. Similarly, dividends are reported as a reduction in the investment account.
However, no other entries are recorded; more specifically, amortization is not
recognized by the parent. The method is, therefore, easier to apply than the equity
method but the subsidiary's individual totals will still frequently approximate
consolidated balances.

2.

a. The consolidated total for equipment is made up of the sum of Maguire’s book value,
Williams’ book value, and any unamortized excess acquisition-date fair value over
book value attributable to Williams’ equipment.
b. Although an Investment in Williams account is appropriately maintained by the
parent, from a consolidation perspective the balance is intercompany in nature.
Thus, the entire amount will be eliminated in arriving at consolidated financial
statements.
c. Only dividends paid to outside parties are included in consolidated statements.
Because Maguire owns 100 percent of Williams, all of the subsidiary's dividends are
intercompany. Consequently, only the dividends paid by the parent company will be
reported in the financial statements for this business combination.
d. Any goodwill recognized within Maguire's original acquisition price must still be
reported for consolidation purposes. Reductions to the goodwill balance are made if
goodwill is determined to be impaired.
e. Unless intercompany revenues have been recorded, consolidation is achieved in
subsequent periods by adding the two book values together.
f.

Consolidated expenses can be determined by adding the parent's book value to that
of the subsidiary and then including any amortization expense associated with the
purchase price. As will be discussed in detail in Chapter Five, intercompany
expenses can also be present which require elimination in arriving at consolidated
figures.

g. Only the common stock outstanding for the parent company is included in
consolidated totals.
h. The net income for a business combination is calculated as the difference between
consolidated revenues and consolidated expenses.

3.

When using the equity method, subsidiary earnings are accrued and amortization
expense (associated with the acquisition price in a purchase) is recognized in the same
manner as in the consolidation process. The equity method parallels consolidation.
Thus, the net income and retained earnings reported by the parent company each year
will equal the consolidated totals.

4.

In the consolidation process, excess amortizations must be recorded annually for any
portion of the purchase price that is allocated to specific accounts (other than land or to

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goodwill). Although this expense can be simulated in total on the parent's books by an
equity method entry, the actual amortization of each allocated fair value adjustment is
appropriate for consolidation. Hence, the effect of the parent's equity method
amortization entry is removed as part of Entry I so that the amortization of specific
accounts (e.g., depreciation) can be recorded (in consolidation Entry E).
5.

When the initial value method is applied by the parent company, no accrual is recorded

to reflect the subsidiary's change in book value during the years following acquisition.
Furthermore, recognition of excess amortizations relating to the acquisition price is also
omitted by the parent. The partial equity method, in contrast, records the subsidiary’s
book value increases and decreases but not amortizations. Consequently, for both of
these methods, a technique must be established within the consolidation process to
record the omitted figures. Entry *C simply brings the parent's records (more specifically,
the beginning retained earnings balance and the investment account) up-to-date as of
the first day of the current year. If the initial value method has been applied by the
acquiring company, any changes in the subsidiary's book value in previous years must
be recorded on the worksheet along with the appropriate amount of amortization
expense. For the partial equity method, only the amortization relating to these prior years
needs to be recognized.
No similar entry is needed if the equity method has been applied; changes in the
subsidiary's book value as well as excess amortization expense will be recorded each
year by the parent. Thus, under the equity method, the parent's investment and
beginning retained earnings balances are both correctly established without further
adjustment.

6.

Lambert's loan payable and the receivable held by Jenkins are intercompany accounts.
As such, the reciprocal balances should be offset in the consolidation process. The
$100,000 is not a debt to or a receivable from an unrelated (or outside) party and
should, therefore, not be reported in consolidated financial statements. Additionally any
interest income/expense recognized on this loan is also intercompany in nature and
must likewise be eliminated.

7.

Since the equity method has been applied by Benns, the $920,000 is composed of four

balances:
a. The original consideration transferred by the parent;
b. The annual accruals made by Benns to recognize income as it is earned by the
subsidiary;
c. The reductions that are created by the subsidiary's payment of dividends;
d. The periodic amortization recognized by Benns in connection with the allocations
identified with its purchase price.

8.

The $100,000 attributed to goodwill is reported at its original amount unless a portion of
goodwill is impaired or a unit of the business where goodwill resides is sold.

9.

A parent should consider recognizing an impairment loss for goodwill associated with a
purchased subsidiary when, at the reporting unit level, the fair value is less than its
carrying amount. Goodwill is reduced when its carrying value is less than its fair value.
To compute fair value for goodwill, its implied value is calculated by subtracting the fair

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10.

11.

values of the reporting unit’s identifiable net assets from its total fair value. The
impairment is recognized as a loss from continuing operations.
The additional consideration is merely an extra component of the price paid by Remo to
purchase Albane. Thus, any goodwill recognized at the original date of acquisition will be
increased in 2009 by $100,000. However, if a bargain purchase occurred on January 1,
2009, this new payment reduces the allocations to noncurrent assets previously
recognized for consolidation purposes.
At present, the Securities and Exchange Commission requires the use of push-down
accounting for the separate financial statements of a subsidiary where no substantial
outside ownership exists. Thus, if Company A owns all of Company B, the push-down
method of accounting would be appropriate for the separately issued statements of
Company B. The SEC normally requires push-down accounting where 95 percent of a
subsidiary is acquired and the company has no outstanding public debt or preferred
stock.
Push-down accounting may be required if 80-95 percent of the outstanding voting stock
is purchased. Push-down accounting is justified in that the consideration transferred by
the present owners is reported. For example, if a piece of land costs Company B
$10,000 but Company A pays $13,000 for the land when acquiring Company B, the land
has a basis to the current owners of B of $13,000. If B's financial records had been
united with A at the time of the acquisition, the land would have been reported at
$13,000. Thus, leaving the $10,000 figure simply because separate incorporation is
maintained is viewed, by proponents of push-down accounting, as unjustified.

12.

When push-down accounting is applied, the subsidiary adjusts the book value of its
assets and liabilities based on the allocations made at the date of the acquisition.

Periodic amortization expense is recognized subsequently by the subsidiary on each of
these allocations (except for land). Therefore, the income recorded by the subsidiary is a
fair representation of that company's impact on consolidated earnings.
The parent uses no special procedures when push-down accounting is being applied.
However, if the equity method is in use, amortization need not be recognized by the
parent since that expense is included in the figure reported by the subsidiary.

13.

Push-down accounting has become popular for the parent's internal reporting purposes
for two reasons. First, this method simplifies the consolidation process each year. If
purchase price allocations and subsequent amortization are recorded by the subsidiary,
they do not need to be repeated each year on a consolidation worksheet. Second,
recording of amortization by the subsidiary enables that company's information to
provide a good representation of the impact that the acquisition has on the earnings of
the business combination. For example, if the subsidiary earns $100,000 each year but
annual amortization is $80,000, the acquisition is only adding $20,000 to the income of
the combination each year rather than the $100,000 that is reported by the subsidiary
unless push-down accounting is used.

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Answers to Problems

1. A
2. B
3. A
4. D Willkom equipment book value—12/31/11..........................
Szabo book value—12/31/11 ................................................
Original purchase price allocation to Szabo's equipment
($300,000 – $200,000) ...........................................................
Amortization of allocation
($100,000/10 years for 3 years) .......................................
Consolidated equipment .....................................................

$210,000
140,000
100,000
(30,000)
$420,000

5. A
6. B
7. D
8. B
9. A
10. C
11. C $60,000 allocation to equipment is "pushed-down" to subsidiary and
increases balance from $330,000 to $390,000. Consolidated balance is
$420,000 plus $390,000.

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12. (35 Minutes) (Determine consolidated retained earnings when parent uses
various accounting methods. Determine Entry *C for each of these methods)
a. CONSOLIDATED RETAINED EARNINGS
 EQUITY METHOD
Herbert (parent) balance—1/1/09 ..................................
$400,000
Herbert income—2009 ...................................................
40,000
Herbert dividends—2009 (subsidiary dividends are
intercompany and, thus, eliminated) .......................
(10,000)
Rambis income—2009 (not included in parent's income)
20,000
Amortization—2009 ........................................................
(12,000)
Herbert income—2010 ...................................................
50,000
Herbert dividends—2010 ................................................
(10,000)
Rambis income—2010 ...................................................
30,000
Amortization—2010 .......................................................
(12,000)
Consolidated Retained Earnings, 12/31/10 ...................

$496,000


PARTIAL EQUITY METHOD AND INITIAL VALUE METHOD
Consolidated retained earnings are the same regardless of the method
in use: the beginning balance plus the income of the parent less the
dividends of the parent plus the income of the subsidiary less
amortization expense. Thus, consolidated retained earnings on
December 31, 2010 are $496,000 as computed above.

b. Investment in Rambis—Equity Method
Rambis fair value 1/1/09............................................................ $574,000
Rambis income 2009.................................................................
20,000
Rambis dividends 2009 ............................................................
(5,000)
Herbert’s 2009 excess fair over book value amortization ..... (12,000)
Investment account balance 1/1/10 ......................................... $577,000
Investment in Rambis—Partial Equity Method
Rambis fair value 1/1/09............................................................ $574,000
Rambis income 2009.................................................................
20,000
Rambis dividends 2009 ............................................................
(5,000)
Investment account balance 1/1/10 ......................................... $589,000
Investment in Rambis—Initial value method
Rambis fair value 1/1/09............................................................ $574,000
Investment account balance 1/1/10 ......................................... $574,000

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12. (continued)
c.

ENTRY *C

 EQUITY METHOD

No entry is needed to convert the past figures to the equity method
since that method has already been applied.
 PARTIAL EQUITY METHOD

Amortization for the prior years (only 2009 in this case) has not been
recorded and must be brought into the consolidation through
worksheet entry *C:
ENTRY *C
Retained Earnings, 1/1/10 (Parent) ....................
12,000
Investment in Rambis ....................................
12,000
(To record 2009 amortization in consolidated figures. Expense was
omitted because of application of partial equity method.)
 INITIAL VALUE METHOD

Amortization for the prior years (only 2009 in this case) has not been
recorded and must be brought into the consolidation through
worksheet entry *C. In addition, only dividend income has been
recorded by the parent ($5,000 in 2009). In this prior year, Rambis
reported net income of $20,000. Thus, the parent has not recorded the
$15,000 income in excess of dividends. That amount must also be
included in the consolidation through entry *C:
ENTRY *C
Investment in Rambis .........................................
3,000
Retained Earnings, 1/1/10 (Parent) ...............
3,000
(To record 2009 unrecognized subsidiary earnings as part of the
parent’s retained earnings. $15,000 income of subsidiary was not
recorded by parent (income in excess of dividends). Amortization
expense of $12,000 was not recorded under the initial value method.
Note that *C adjustments bring the parent’s January 1, 2010 Retained
Earnings balance equal to that of the equity method.

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13. (30 Minutes) (A variety of questions on equity method, initial value method,

and partial equity method.)
a. An allocation of the acquisition price (based on the fair value of the
shares Issued) must be made first.
Acquisition fair value (consideration paid by Haynes).
Book value equivalency .................................................
Excess of Turner fair value over book value ................
Excess fair value assigned to specific
accounts based on fair value
Equipment ......................... $5,000
Customer List ..................... 30,000

Life
5 yrs.
10 yrs.

$135,000
(100,000)
$35,000
Annual Excess
Amortizations
$1,000
3,000
$4,000

Acquisition fair value ......................................................
2009 Income accrual ......................................................
2009 Dividends paid by Turner .....................................
2009 Amortizations (above) ...........................................
2010 Income accrual ......................................................
2010 Dividends paid by Turner .....................................

2010 Amortizations ........................................................
Investment in Turner account balance .........................

$135,000
110,000
(50,000)
(4,000)
130,000
(40,000)
(4,000)
$277,000

b. Net income of Haynes ....................................................
Net Income of Turner .....................................................
Depreciation expense .....................................................
Amortization expense .....................................................
Consolidated net income 2010 ................................

$240,000
130,000
(1,000)
(3,000)
$366,000

c. Equipment balance Haynes ...........................................
Equipment balance Turner ............................................
Allocation based on fair value (above) .........................
Depreciation for 2009-2010 ............................................
Consolidated equipment—December 31, 2010 .............

$500,000
300,000
5,000
(2,000)
$803,000

Parent's choice of an investment method has no impact on consolidated
totals.

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13. (continued)
d. If the initial value method was applied during 2009, the parent would
have recorded dividend income of $50,000 rather than $110,000 (as
equity income). Income is, therefore, understated by $60,000. In
addition, amortization expense of $4,000 was not recorded. Thus, the
January 1, 2010, retained earnings is understated by $56,000 ($60,000 –
$4,000). An Entry *C is necessary on the worksheet to correct this equity
figure:
Investment in Turner ...........................................
Retained Earnings, 1/1/10 (Haynes) ..............

56,000

56,000

If the partial equity method was applied during 2009, the parent would
have failed to record amortization expense of $4,000. Retained earnings
are overstated by $4,000 and are corrected through Entry *C:
Retained Earnings, 1/1/10 (Haynes) ...................
Investment in Turner .....................................

4,000
4,000

If the equity method was applied during 2009, the parent's retained
earnings are the same as the consolidated figure so that no adjustment
is necessary.

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14. (20 minutes) (Record a merger combination with subsequent testing for
goodwill impairment).
a. In accounting for the combination, the total fair value of Beltran (consideration
transferred) is allocated to each identifiable asset acquired and liability
assumed with any remaining excess as goodwill.
Cash paid

Fair value of shares issued
Fair value transferred

$450,000
1,248,000
$1,698,000

Fair value transferred (above)
Fair value of net assets acquired and
liabilities assumed
Goodwill recognized in the combination

$1,698,000
1,298,000
$400,000

Entry by Francisco to record assets acquired and liabilities assumed in the
combination with Beltran:
Cash
$ 75,000
Receivables
193,000
Inventory
281,000
Patents
525,000
Customer relationships
500,000
Equipment
295,000

Goodwill
400,000
Accounts Payable
Long-Term Liabilities
Cash
Common Stock (Francisco Co., par value)
Additional Paid-in Capital
b. Step one in goodwill impairment test:
Fair value of reporting unit as a whole
Book value of reporting unit's net assets

$ 121,000
450,000
450,000
104,000
1,144,000

1,425,000
1,585,000

Because the total fair value of the reporting unit is less than its carrying value,
a potential goodwill impairment loss exists, step two is performed:
Fair value of reporting unit as a whole
$1,425,000
Fair values of reporting unit's net assets (excluding goodwill) 1,325,000
Implied fair value of goodwill
100,000
Book value of goodwill
400,000
Goodwill impairment loss

$300,000

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15. (20 minutes) (Goodwill impairment testing.)
a. Goodwill Impairment
Step 1
Fair value of reporting unit =
Carrying value of reporting unit =

$650
780

Because fair value < carrying value, there is a potential goodwill impairment
loss.
Step 2
Fair value of reporting unit
$650
Fair value of net assets excluding goodwill
Tangible assets
$110
Recognized intangibles
230

Unrecognized intangibles
200 540
Implied value of goodwill
110
Carrying value of goodwill
500
Goodwill impairment loss
$390
b.
Tangible assets, net
Goodwill
Customer list
Patent

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

$80
110
-0-0-

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16. (30 minutes) (Goodwill impairment and intangible assets.)
Part a
Goodwill Impairment Test—Step 1

Sand Dollar
Salty Dog
Baytowne

Total fair
value
$510,000
580,000
560,000

<
<
>

Carrying Potential goodwill
value
impairment?
$530,000
yes
610,000
yes
280,000
no

Part b
Goodwill Impairment Test—Step 2 (Sand Dollar and Salty Dog only)
Sand Dollar—total fair value
Fair values of identifiable net assets
Tangible assets

Trademark
Customer list
Liabilities
Implied value of goodwill
Carrying value of goodwill
Impairment loss

$510,000
$190,000
150,000
100,000
(30,000)

Salty Dog—total fair value
Fair values of identifiable net assets
Tangible assets
$200,000
Unpatented technology
125,000
Licenses
100,000
Implied value of goodwill
Carrying value of goodwill
No impairment—implied value > carry value

410,000
100,000
120,000
$20,000
$580,000

425,000
155,000
150,000
-0-

Part c
No changes in tangible assets or identifiable intangibles are reported based
on goodwill impairment testing. The sole purpose of the valuation exercise
is to estimate an implied value for goodwill. Destin will report a goodwill
impairment loss of $20,000, which will reduce the amount of goodwill
allocated to Sand Dollar. However, because the fair value of Sand Dollar’s
trademarks is less than its carrying amount, the account should be
subjected to a separate impairment testing procedure to see if the carrying
value is ―recoverable‖ in future estimated cash flows.

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17.

(30 Minutes) (Consolidation entries for two years. Parent uses equity
method.)
Fair Value Allocation and Annual Amortization:

Acquisition fair value (consideration paid) ............
$490,000
Book value (assets minus
liabilities or total stockholders'
equity) ..................................................................
(400,000)
Excess fair value over book value ..........................
$90,000
Excess fair value assigned to specific
accounts based on individual fair values
Annual Excess
Life
Amortizations
Land .................................... $10,000
--Buildings ............................
40,000
4 yrs.
$10,000
Equipment ..........................
(20,000)
5 yrs.
(4,000)
Total assigned to specific
accounts ........................
Goodwill .............................
Total ....................................

30,000
60,000
$90,000

Indefinite

-0$6,000

Consolidation Entries as of December 31, 2009
Entry S
Common Stock—Abernethy ................................
250,000
Additional Paid-in Capital ...................................
50,000
Retained Earnings—1/1/09 .................................
100,000
Investment in Abernethy ...............................
(To eliminate stockholders' equity accounts of subsidiary)

400,000

Entry A
Land .....................................................................
10,000
Buildings .............................................................
40,000
Goodwill ..............................................................
60,000
Equipment ......................................................
20,000
Investment in Abernethy ...............................
90,000
(To recognize allocations attributed to fair value of specific accounts at

acquisition date with residual fair value recognized as goodwill).

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17. (continued)
Entry I
Equity in Subsidiary Earnings ...........................
74,000
Investment in Abernethy ...............................
74,000
(To eliminate $80,000 income accrual for 2009 less $6,000 amortization
recorded by parent using equity method)
Entry D
Investment in Abernethy ....................................
Dividends Paid ...............................................
(To eliminate intercompany dividend transfers)
Entry E
Depreciation expense ..........................................
Equipment ............................................................
Buildings .........................................................
(To record 2009 amortization expense)

10,000

10,000

6,000
4,000
10,000

Consolidation Entries as of December 31, 2010
Entry S
Common Stock—Abernethy ...............................
250,000
Additional Paid-in Capital ...................................
50,000
Retained Earnings—1/1/10 ..................................
170,000
Investment in Abernethy ...............................
470,000
(To eliminate beginning stockholders' equity of subsidiary—the
Retained Earnings account has been adjusted for 2009 income and
dividends. Entry *C is not needed because equity method was applied.)
Entry A
Land .....................................................................
10,000
Buildings .............................................................
30,000
Goodwill ..............................................................
60,000
Equipment ......................................................
16,000
Investment in Abernethy ...............................
84,000

(To recognize allocations relating to investment—balances shown here
are as of beginning of current year [original allocation less excess
amortizations for the prior period])

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17. (continued)
Entry I
Equity in Subsidiary Earnings ...........................
104,000
Investment in Abernethy ...............................
104,000
(To eliminate $110,000 income accrual less $6,000 amortization recorded
by parent during 2010 using equity method)
Entry D
Investment in Abernethy ....................................
Dividends Paid ...............................................
(To eliminate intercompany dividend transfers)

30,000
30,000

Entry E

Same as Entry E for 2009
18.

(35 Minutes) (Consolidation entries for two years. Parent uses initial value
method.)
Purchase Price Allocation and Annual Excess Amortizations:
Acquisition date value (consideration paid) ..... $500,000
Book value ........................................................... (400,000)
Excess price paid over book value .................... $100,000
Excess price paid assigned to specific
accounts based on fair values
Equipment
Long-term liabilities
Goodwill
Total

$20,000
30,000
$50,000
$100,000

Life

Annual Excess
Amortizations

5 yrs.
4 yrs.
Indefinite

$4,000
7,500
-0$11,500

Consolidation Entries as of December 31, 2009
Entry S
Common Stock—Abernethy ..............................
250,000
Additional Paid-in Capital ..................................
50,000
Retained Earnings—1/1/09 ................................
100,000
Investment in Abernethy ...............................
(To eliminate stockholders' equity accounts of subsidiary)

400,000

Entry A
Equipment ..........................................................
20,000
Long-term Liabilities ..........................................
30,000
Goodwill .............................................................
50,000
Investment in Abernethy ..............................
100,000
(To recognize allocations determined above in connection with
acquisition-date fair values)

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18. (continued)
Entry I
Dividend Income ................................................
10,000
Dividends Paid ..............................................
10,000
(To eliminate intercompany dividend payments recorded by parent as
income)
Entry E
Depreciation expense ........................................
4,000
Interest expense ..................................................
7,500
Equipment ......................................................
4,000
Long-term liabilities.......................................
7,500
(To record 2009 amortization expense)
Consolidation Entries as of December 31, 2010
Entry *C
Investment in Abernethy ...................................
58,500

Retained Earnings—1/1/10 (Chapman) .......
58,500
(To convert parent company figures to equity method by recognizing
subsidiary's increase in book value for prior year [$80,000 net income
less $10,000 dividend payment] and excess amortizations for that period
[$11,500])
Entry S
Common Stock—Abernethy ..............................
250,000
Additional Paid-in Capital ..................................
50,000
Retained Earnings—1/1/10 ................................
170,000
Investment in Abernethy ..............................
470,000
(To eliminate beginning of year stockholders' equity accounts of
subsidiary. The retained earnings balance has been adjusted for 2009
income and dividends)
Entry A
Equipment ..........................................................
16,000
Long-term Liabilities ..........................................
22,500
Goodwill .............................................................
50,000
Investment in Abernethy ..............................
88,500
(To recognize allocations relating to investment—balances shown here
are as of the beginning of the current year [original allocation less
excess amortizations for the prior period])

Entry I
Dividend Income ................................................
30,000
Dividends Paid .........................................
30,000
(To eliminate intercompany dividend payments recorded by parent as
income)
Entry E
Same as Entry E for 2009

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19.

(20 Minutes) (Consolidation entries for two years. Parent uses partial equity
method.)
Fair Value Allocation and Annual Excess Amortizations:
Abernethy fair value (consideration paid) ..............
Book value ................................................................
Excess fair value over book value (all goodwill) ...

$520,000
(400,000)

$120,000

Life assigned to goodwill ........................................ Indefinite
Annual excess amortizations ..................................

-0-

Consolidation Entries as of December 31, 2009
Entry S
Common Stock—Abernethy ...............................
250,000
Additional Paid-in Capital ...................................
50,000
Retained Earnings—Abernethy—1/1/09 ............
100,000
Investment in Abernethy ...............................
(To eliminate stockholders' equity accounts of subsidiary)

400,000

Entry A
Goodwill ..............................................................
120,000
Investment in Abernethy ...............................
120,000
(To recognize goodwill portion of the original acquisition fair value)
Entry I
Equity in Earnings of Subsidiary ........................
80,000
Investment in Abernethy ...............................

80,000
(To eliminate intercompany income accrual for the current year based
on the parent's usage of the partial equity method)
Entry D
Investment in Abernethy ....................................
Dividends Paid ...............................................
(To eliminate intercompany dividend transfers)

10,000
10,000

Entry E—Not needed. Goodwill is not amortized.
Consolidation Entries as of December 31, 2010
Entry *C—Not needed. Goodwill is not amortized.
Entry S
Common Stock—Abernethy ................................
Additional Paid-in Capital—Abernethy ..............
Retained Earnings—Abernethy—1/1/10 ............
Investment in Abernethy ...............................

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

250,000
50,000
170,000
470,000

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19. (continued)
(To eliminate beginning of year stockholders' equity accounts of
subsidiary—the retained earnings balance has been adjusted for 2009
Income and dividends.)
Entry A
Goodwill ..............................................................
Investment in Abernethy ...............................
(To recognize original goodwill balance.)

120,000
120,000

Entry I
Equity in Earnings of Subsidiary ........................
110,000
Investment in Abernethy ...............................
110,000
(To eliminate Intercompany Income accrual for the current year.)
Entry D
Investment in Abernethy ....................................
Dividends Paid ...............................................
(To eliminate Intercompany dividend transfers.)

30,000
30,000

Equity E—not needed

20.

(45 Minutes) (Variety of questions about the three methods of recording an
Investment in a subsidiary for internal reporting purposes.)
a. Purchase Price Allocation and Annual Amortization:
Hamilton’s acquisition-date fair value .... $510,000
Book value (assets minus liabilities
or stockholders' equity) ..................... 450,000
Fair value in excess of book value .........
60,000
Annual Excess
Allocation to equipment based on
Life Amortizations
difference between fair value and
book value ................................................
50,000 5 yrs.
$10,000
Goodwill ................................................... $10,000 indefinite
-0Total .........................................................
$10,000
EQUITY METHOD
Investment Income—2010:
Equity accrual (based on Hamilton's income)
Amortization (above) .....................................................
Total .................................................................................

McGraw-Hill/Irwin
3-22

$60,000
(10,000)
$50,000

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20. (continued)
Investment in Hamilton—December 31, 2010:
Consideration transferred for Hamilton .......................
2009:
Equity accrual (based on Hamilton's Income) ........
Excess amortizations (above) .................................
Dividends received ...................................................
2010:
Equity accrual ...........................................................
Excess amortizations ...............................................
Dividends received ...................................................
Total ................................................................................
PARTIAL EQUITY METHOD
Investment Income—2010:
Equity accrual ................................................................
Investment in Hamilton—December 31, 2010:
Consideration transferred for Hamilton .......................
2009:
Equity accrual (based on Hamilton's Income) ........

Dividends received ...................................................
2010:
Equity accrual ...........................................................
Dividends received ...................................................
Total ..........................................................................

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

$510,000
55,000
(10,000)
(5,000)
60,000
(10,000)
-0$600,000

$60,000
$510,000
55,000
(5,000)
60,000
-0$620,000

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20. (continued)
INITIAL VALUE METHOD
Investment Income—2010:
Dividend Income (none indicated) ................................

-0-

Investment in Hamilton—December 31, 2010:
Consideration transferred for Hamilton .......................

$510,000

b. The consolidated account balances are not affected by the method of
recording used by the parent. Thus, consolidated Expenses ($480,000 or
$290,000 + $180,000 + amortizations of $10,000) are the same regardless
of whether the equity method, the partial equity method, or the initial
value method is applied by Jefferson.
c. The consolidated account balances are not affected by the method of
recording used by the parent. Thus, consolidated Equipment ($970,000
or $520,000 + $420,000 + allocation of $50,000 – two years of excess
depreciation of $20,000) is the same regardless of whether the equity
method, the partial equity method, or the initial value method is applied
by Jefferson.
d. Jefferson Retained Earnings—Equity Method
Jefferson Retained Earnings—1/1/09 .................................
Jefferson income 2009 (400,000 – 290,000) ........................
2009 equity accrual for Hamilton income ...........................
2009 excess amortization ....................................................
Jefferson Retained Earnings—1/1/10 .................................

$860,000
110,000
55,000
(10,000)
$1,015,000

Jefferson Retained Earnings—Partial Equity Method
Jefferson Retained Earnings—1/1/09 .................................
Jefferson income 2009 (400,000 – 290,000) ........................
2009 equity accrual for Hamilton income ...........................
Jefferson Retained Earnings—1/1/10 .................................

$860,000
110,000
55,000
$1,025,000

Jefferson Retained Earnings—Initial value method
Jefferson Retained Earnings—1/1/09 .................................
Jefferson income 2009 (400,000 – 290,000) ........................
2009 dividend income from Hamilton .................................
Jefferson Retained Earnings—1/1/10 .................................

McGraw-Hill/Irwin
3-24

$860,000
110,000
5,000
$975,000

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20. (continued)
e. EQUITY METHOD—Entry *C is not utilized since parent's retained
earnings balance is correct.
PARTIAL EQUITY METHOD—Entry *C is needed to record amortization
for prior year.
Retained earnings, 1/1/10 (parent) .....................
Investment in Hamilton .................................

10,000
10,000

INITIAL VALUE METHOD—Entry *C is needed to record increase in
subsidiary's book value ($50,000) and amortization ($10,000) for prior
year.
Investment in Hamilton .......................................
Retained earnings, 1/1/10 (parent) ................

40,000
40,000

f. Entry S is not affected by the method used by the parent to record the
Investment in Hamilton. Under each of these three methods, the
following Entry S would be appropriate for 2010:

Common stock (Hamilton) ............................
Retained earnings, 1/1/10 (Hamilton) ............
Investment in Hamilton ............................

150,000
350,000

g. Consolidated revenues (add the two book values)
Consolidated expenses (add the two book values
and excess amortizations) ............................
Consolidated net income ...................................
21.

500,000
$640,000
(480,000)
$160,000

(15 Minutes) (Consolidated accounts one year after acquisition)
Stanza acquisition fair value ($10,000 in
stock issue costs reduce
additional paid-in capital) .................. $680,000
Book value of subsidiary
(1/1/10 stockholders' equity balances) .... (480,000)
Fair value in excess of book value ......... $200,000
Excess fair value allocated to copyrights
based on fair value .............................
Goodwill ...................................................
Total .....................................................

Annual
Excess
Life Amortizations
120,000 6 yrs.
$20,000
$80,000 indefinite
-0$20,000

a. Consolidated copyrights
Penske (book value) ...................................... $900,000
Stanza (book value) .......................................
400,000
Allocation (above) ..........................................
120,000
Excess amortizations, 2010 ..........................
(20,000)
Total .......................................................... $1,400,000

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