Solution manual advanced accounting 10e by beams ch03

CHAPTER 3
AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS
Answers to Questions
1

A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a
controlling financial interest (generally over 50 percent) of its outstanding voting stock.

2

Amounts allocated to identifiable assets and liabilities in excess of recorded amounts on the books of the
subsidiary are not recorded separately by the parent. Instead, the parent records the fair value/purchase
price of the interest acquired in an investment account. The allocation to identifiable asset and liability
accounts is made through working paper entries when the parent and subsidiary financial statements are
consolidated.

3

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

4

Parent company—a corporation that owns a controlling interest in the outstanding voting stock of
another corporation (its subsidiary).
Subsidiary company—a corporation that is controlled by a parent company that owns a
controlling interest in its outstanding voting stock, either directly or indirectly.
Affiliated companies—companies that are controlled by a single management team through

parent-subsidiary relationships. (Although the term affiliate is a synonym for subsidiary, the parent
company is included in the total affiliation structure.)
Associated companies—companies that are controlled through parent-subsidiary relationships
or whose operations can be significantly influenced through equity investments of 20 percent to 50
percent.

5

A noncontrolling interest is the equity interest in a subsidiary company that is owned by stockholders
outside of the affiliation structure. In other words, it is the equity interest in a subsidiary (recorded at
fair value) that is not held by the parent company or subsidiaries of the parent company.

6

Under the provisions of FASB Statement No. 94, “Consolidation of All Majority-owned Subsidiaries,” a
subsidiary will not be consolidated if control is temporary or if control does not rest with the majority
owner, such as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary
operates under severe foreign exchange restrictions or other governmentally imposed restrictions.

7

Consolidated financial statements are intended primarily for the stockholders and creditors of the parent
company, according to SFAS No. 160 (and ARB No. 51).

8

The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of
the outstanding capital stock of the parent company.

9

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

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3-1


3-2

An Introduction to Consolidated Financial Statements

10

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

11

Parent’s books:
Investment in subsidiary
Sales
Accounts receivable

Interest income
Dividends receivable
Advance to subsidiary

12

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

13

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

14

No. The amounts that appear in the parent company’s statement of retained earnings under the equity
method and the amounts that appear in the consolidated statement of retained earnings are identical,
assuming that the noncontrolling interest is included as a separate component of stockholders’ equity.

15

Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total
income to the consolidated entity between controlling and noncontrolling stockholders. From the
viewpoint of the controlling interest (the stockholders of the parent company), income attributable to
noncontrolling interest has the same effect on consolidated net income as an expense. This is because
consolidated net income is income to the parent company stockholders. Alternatively, you can view total
consolidated net income as being allocated to the controlling and noncontrolling interests.

16

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

Reciprocal accounts on subsidiary’s books:
Capital stock and retained earnings
Purchases
Accounts payable
Interest expense
Dividends payable
Advance from parent

Noncontrolling interest beginning of the period
Add: Income attributable to noncontrolling
interest
Deduct: Noncontrolling interest dividends
Noncontrolling interest end of the period
17

XX
XX
–XX

XX

It is acceptable to consolidate the annual financial statements of a parent company and a subsidiary with
different fiscal periods, provided that the dates of closing are not more than three months apart. Any
significant developments that occur in the intervening three-month period should be disclosed in notes
to the financial statements. In the situation described, it is acceptable to consolidate the financial
statements of the subsidiary with an October 31 closing date with the financial statements of the parent
with a December 31 closing date.

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Chapter 3

18

3-3

The acquisition of shares held by noncontrolling stockholders does not constitute a business
combination. Rather, it must be accounted for as a treasury stock transaction. It is not possible, by
definition, to acquire a controlling interest from noncontrolling stockholders.

SOLUTIONS TO EXERCISES
Solution E3-1

Solution E3-2

1
2
3

4
5
6

1
2
3
4
5
6
7

b
c
d
d
b
a

d
b
d
d
a
d
c

Solution E3-3 [AICPA adapted]
1

c

Advance to Hill $75,000 + receivable from Ward $200,000 = $275,000

2

a

Goodwill has an indeterminate life and is not amortized.

3

a
Owen accounts for Sharp using the equity method, therefore,
consolidated retained earnings is equal to Owen’s retained earnings, or
$1,240,000.

4

d

All intercompany receivables and payables are eliminated.

Solution E3-4
1

Implied fair value of Santa Maria ($900,000 / 90%)
Less: Book value of Santa Maria
Excess fair value over book value
Equipment undervalued

Goodwill at January 1, 2009
Goodwill at December 31, 2009 = Goodwill from consolidation
Since goodwill is not amortized

2

Consolidated net income
Pinto’s reported net income
Less: Correction for depreciation on excess allocated
to equipment ($30,000/3 years)
Consolidated net income

$1,000,000
(900,000)
$ 100,000
30,000
$
70,000
$
70,000

$490,000
(10,000)
$480,000

Solution E3-5
1

$600,000, the dividends of Panderman

2

$330,000, equal to $300,000 dividends payable of Panderman plus $30,000
(30% of $100,000) dividends payable to noncontrolling interests of
Sadisman.
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3-4

An Introduction to Consolidated Financial Statements

©2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 3

3-5

Solution E3-6
Preliminary computation
Cost of Slider stock (Fair value)
Book value of Slider
Goodwill
1

$1,250,000
1,000,000
$ 250,000

Journal entry to record push down values
Inventories
Land
Buildings — net
Equipment — net
Goodwill
Retained earnings
Note payable
Push-down capital

2

20,000
50,000
150,000
80,000
250,000
210,000
10,000
750,000
Slider Corporation
Balance Sheet
January 1, 2010
(in thousands)

Assets
Cash
Accounts receivable
Inventories
Land

Buildings — net
Equipment — net
Goodwill
Total assets
Liabilities
Accounts payable
Note payable
Total liabilities
Stockholders’ equity
Capital stock
Push-down capital
Total stockholders’ equity
Total liabilities and stockholders’ equity

$

70
80
100
200
500
300
250
$1,500
$

$

100
150

250

500
750
1,250
$1,500

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3-6

An Introduction to Consolidated Financial Statements

Solution E3-7
1

Pasture Corporation and Subsidiary
Consolidated Income Statement
for the year 2010
(in thousands)
Sales ($1,000 + $400)
Less: Cost of sales ($600 + $200)

$1,400
(800)

Gross profit
Less: Depreciation expense ($50 + $40)
Other expenses ($199 + $90)

2

600
(90)
(289)

Total consolidated income
Less: Noncontrolling interest share ($70 ´ 30%)
Controlling interest share of cnsolidated net income

221
(21)
200

$

Pasture Corporation and Subsidiary
Consolidated Income Statement
for the year 2010
(in thousands)
Sales ($1,000 + $400)
Less: Cost of sales ($600 + $200)

$1,400
(800)

Gross profit
Less: Depreciation expense ($50,000 + $40,000 - $6,000)
Other expenses ($199,000 + $90,000)

600
(84)
(289)

Total consolidated income
Less: Noncontrolling interest share
[($70 ´ 30%)+ ($6 depreciation x 30%)]
Controlling interest share of cnsolidated net income

227
$

Supporting computations
Depreciation of excess allocated to overvalued equipment:
$30/5 years = $6

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(22.8)
204.2


Chapter 3

3-7

Solution E3-8
1

Capital stock
The capital stock appearing in the consolidated balance sheet at
December 31, 2009 is $1,800,000, the capital stock of Poball,
the parent company.

2

Goodwill at December 31, 2009
Investment cost at January 2, 2009 (80% interest)
Implied total fair value of Softcan ($700,000 / 80%)
Book value of Softcan(100%)
Excess is considered goodwill since no other fair value
information is given.

3

$800,000
300,000
(180,000)
$920,000

Noncontrolling interest at December 31, 2009
Capital stock and retained earnings of Softcan on
January 2
Add: Softcan’s net income
Less: Dividends declared by Softcan
Softcan’s stockholders’ equity December 31
Noncontrolling interest percentage
Noncontrolling interest December 31

5

$275,000

Consolidated retained earnings at December 31, 2009
Poball’s retained earnings January 2 (equal to
beginning consolidated retained earnings
Add: Net income of Poball (equal to controlling share of
consolidated net income)
Less: Dividends declared by Poball
Consolidated retained earnings December 31

4

$700,000
$875,000
(600,000)

$600,000
90,000
(50,000)
640,000
20%
$128,000

Dividends payable at December 31, 2009
Dividends payable to stockholders of Poball
$ 90,000
Dividends payable to noncontrolling stockholders ($25,000 ´
20%)

5,000
Dividends payable to stockholders outside the
Consolidated entity
$ 95,000

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3-8

An Introduction to Consolidated Financial Statements

Solution E3-9
Paskey Corporation and Subsidiary
Partial Balance Sheet
at December 31, 2010
Stockholders’ equity:
Capital stock, $10 par
Additional paid-in capital
Retained earnings
Equity of controlling stockholders
Noncontrolling interest
Total stockholders’ equity

$300,000
50,000
65,000
415,000
41,000
$456,000

Supporting computations
Computation of consolidated retained earnings:
Paskey’s December 31, 2009 retained earnings
Add: Paskey’s reported income for 2010
Less: Paskey’s dividends
Consolidated retained earnings December 31, 2010

$ 35,000
55,000
(25,000)
$ 65,000

Computation of noncontrolling interest at December 31, 2010
Salam’s December 31, 2009 stockholders’ equity
Income less dividends for 2010 ($20,000 - $15,000)
Salam’s December 31, 2010 stockholders’ equity
Noncontrolling interest percentage
Noncontrolling interest December 31, 2010

$200,000
5,000
205,000
20%
$ 41,000

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Chapter 3

3-9

Solution E3-10
Peekos Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2011
(in thousands)
Sales
Cost of goods sold
Gross profit
Deduct: Operating expenses
Total consolidated income
Deduct: Noncontrolling interest share
Controlling interest share of consolidated net income

$2,100
1,100
1,000
560
440
14
$ 426

Supporting computations
Investment cost January 2, 2009 (90% interest)
Implied total fair value of Slogger ($810,000 / 90%)
Slogger’s Book value acquired (100%)
Excess of fair value over book value
Excess allocated to:

Inventories (sold in 2009)
Equipment (4 years remaining use life)
Goodwill
Excess of fair value over book value
Operating expenses:
Combined operating expenses of Peekos and Slogger
Add: Depreciation on excess allocated to equipment
($40,000/4 years)
Consolidated operating expenses

$
$

810
900
(700)
$ 200
$
$

30
40
130
200

$

550

$

10
560

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3-10

An Introduction to Consolidated Financial Statements

SOLUTIONS TO PROBLEMS
Solution P3-1
1

Pennyvale Corporation and Subsidiary
Consolidated Balance Sheet
at December 31, 2009
Assets
Cash ($32,000 + $18,000)
Accounts receivable ($45,000 + $34,000 - $5,000)
Inventories ($143,000 + $56,000)
Equipment — net ($380,000 + $175,000)
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable ($40,000 + $33,000 - $5,000)
Stockholders’ equity:
Common stock, $10 par
Retained earnings

Noncontrolling interest ($150,000 + $100,000) ´ 20%
Total liabilities and stockholders’ equity

2

$ 50,000
74,000
199,000
555,000
$878,000

$ 68,000
460,000
300,000
50,000
$878,000

Consolidated net income for 2010
Pennyvale’s separate income
Add: Income from Sutherland Sales ($90,000 ´ 80%)
Consolidated net income
Noncontrolling interest share (20% x $90,000)
Controlling interest share (80%)

$170,000
90,000
$260,000
$ 18,000
$242,000

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Chapter 3

3-11

Solution P3-2
1

Schedule to allocate fair value/book value differential
Cost of investment in Setting
Implied fair value of Setting ($175,000 / 70%)
Book value of Setting
Excess fair value over book value
Excess allocated:
Fair Value
Book Value
Inventories
($50,000 $30,000)
Land
($60,000 $50,000)
($90,000 $70,000)
Buildings — net
($30,000 $40,000)
Equipment — net
Other liabilities ($40,000 $50,000)
Allocated to identifiable net assets
Goodwill for the remainder
Excess fair value over book value

2

$175,000
$250,000
(110,000)
$140,000
Allocation
$ 20,000
10,000
20,000
(10,000)
10,000
50,000
90,000
$140,000

Parlor Corporation and Subsidiary
Consolidated Balance Sheet
at January 1, 2009
Assets
Current assets:
Cash ($35,000 + $20,000)
Receivables — net ($80,000 + $30,000)
Inventories ($70,000 + $30,000 + $20,000)
Property, plant and equipment:
Land ($100,000 + $50,000 + $10,000)
Buildings — net ($110,000 + $70,000 + $20,000)
Equipment — net ($80,000 + $40,000 - $10,000)
Goodwill (from consolidation)

Total assets

$ 55,000
110,000
120,000
$160,000
200,000
110,000

$285,000

470,000
90,000
$845,000

Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable ($90,000 + $80,000)
$170,000
Other liabilities ($10,000 + $50,000 - $10,000)
50,000

$220,000

Stockholders’ equity:
Capital stock
Retained earnings
Equity of controlling stockholders
Noncontrolling interest *
Total liabilities and stockholders’ equity

625,000
$845,000

$500,000
50,000
550,000
75,000

* 70% of implied fair value of $250,000 = $75,000.

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3-12

An Introduction to Consolidated Financial Statements

Solution P3-3
Cost of investment in Softback Books January 1, 2009
Implied fair value of Softback ($2,700,000 / 80%)
Book value of Softback
Excess of fair value over book value

$2,700,000
$3,375,000
2,500,000
$ 875,000

Schedule to Allocate Fair Value — Book Value Differential

Fair Value
- Book Value
$ 500,000
1,000,000

Current assets
Equipment
Other plant assets
Bargain purchase *
Excess fair value over book value

Allocation
$ 500,000
1,000,000
(625,000)
$875,000

* After recognizing acquired assets and liabilities at their fair values, we
are left with a negative excess of $625,000. Under SFAS No. 141R, this
difference is recorded as a gain in the consolidated income statement in the
year of acquisition. The gain is attributable entirely to the controlling
interest, and is recorded on the parent’s books by a debit to the Investment
account and a credit to a Gain from bargain Purchase account. An alternative
calculation of this amount takes the difference between the fair values of the
net assets ($4,000,000) and their fair value implied by the acquisition price
($3,375,000), which equals $625,000.
Solution P3-4
Noncontrolling interest of $65,000 (it’s fair value) plus $260,000 (fair value
of Pharm’s investment) equals total fair value of $325,000. Therefore, Pharm’s
interest is 80% ($260,000 / $325,000), and noncontrolling interest is 20%

($65,000 / $325,000).
Total fair value
Book value of Specht
Excess fair value over book value

$

325,000
(260,000)
$
65,000

Excess allocated to
Plant assets — net
Goodwill
Total

Fair Value
$210,000

-

Book Value
$200,000 $
$

10,000
55,000
65,000

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Chapter 3

3-13

Solution P3-5
Palmer Corporation and Subsidiary
Consolidated Balance Sheet
at December 31, 2009
(in thousands)
Assets
Current assets
Plant assets
Goodwill
Equities
Liabilities
Capital stock
Retained earnings
Supporting computations
Sorrel’s net income ($400 - $300 - $50)
Less: Excess allocated to inventories that were sold in 2009
Less: Depreciation on excess allocated to plant
assets ($40 /4 years)
Income from Sorrel
Plant assets ($500 + $300 + $40 - $10)
Palmer’s retained earnings:
Beginning retained earnings
Add: Operating income

Add: Income from Sorrel
Deduct: Dividends
Retained earnings December 31, 2009

$

340
830
200
$1,370
$

660
300
410
$1,370
$

50
(20)

$

(10)
20

$

830

$

340
100
20
(50)
410

$

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3-14

An Introduction to Consolidated Financial Statements

Solution P3-6
Perry Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2009
(in thousands)
Cash
Receivables — net
Inventories
Land
Equipment — net
Investment in Sim
Goodwill
Total assets

Accounts payable
Dividends payable
Capital stock
Retained earnings
Noncontrolling interest
Total equities
a
b

Perry
per books
$
42
50

Sim
per books
$
20
130

350
150
600

Adjustments and
Eliminations
b

9

Consolidated
Balance Sheet
$
62
171

50
200
100

400
350
700

459

a 459
a

$1,651

$

500

$

410
60

1,000
181

$

80
10
300
110

$1,651

$

100

100
$1,783
$

b
9
a 300
a 110
a

500

51

490
61
1,000
181
51
$1,783

To eliminate reciprocal investment and equity accounts, record goodwill ($100),
and enter noncontrolling interest [($410 equity + $100 goodwill) ´ 10%)].
To eliminate reciprocal dividends receivable (included in receivables — net) and
dividends payable amounts ($10 dividends ´ 90%).

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Chapter 3

3-15

Solution P3-7
Preliminary computations
Cost of 80% investment January 3, 2009
Implied total fair value of Slender ($280,000 / 80%)
Book value of Slender
Excess fair value over book value on January 3 = Goodwill
1
2

$280,000
$350,000

(250,000)
$100,000

Noncontrolling interest share of income:
Slender’s net income $50,000 ´ 20% noncontrolling interest

$ 10,000

Current assets:
Combined current assets ($204,000 + $75,000)
Less: Dividends receivable ($10,000 ´ 80%)
Current assets

$279,000
(8,000)
$271,000

3

Income from Slender: None Investment income is eliminated in
consolidation.

4

Capital stock: $500,000 Capital stock of the parent, Portly Corporation.

5

Investment in Slender: None The investment account is eliminated.

6

Excess of fair value over book value

$100,000

7

Controlling share of consolidated net income: Equals
Portly’s net income, or:
Consolidated sales
Less: Consolidated cost of goods sold
Less: Consolidated expenses
Consolidated net income
Less: Noncontrolling interest share
Controlling share of consolidated net income

$600,000
(370,000)
(80,000)
$150,000
(10,000)
$140,000

8

Consolidated retained earnings December 31, 2009: $200,000 Equals
Portly’s beginning retained earnings.

9

Consolidated retained earnings December 31, 2010
Equal to Portly’s ending retained earnings:
Beginning retained earnings
Add: Controlling share of consolidated net income
Less: Portly’s dividends for 2010
Ending retained earnings

$200,000
140,000
(60,000)
$280,000

Noncontrolling interest December 31, 2010
Slender’s capital stock and retained earnings
Add: Net income
Less: Dividends
Slender’s equity December 31, 2010 at fair value
Noncontrolling interest percentage
Noncontrolling interest December 31, 2010 using book value
Add: Noncontrolling interest share of Goodwill
Noncontrolling interest December 31, 2010 at fair value

$300,000
50,000
(25,000)
325,000
20%
$ 65,000
20,000

$ 85,000

10

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3-16

An Introduction to Consolidated Financial Statements

Solution P3-8 [AICPA adapted]
Preliminary computations
Investment cost:
Meadow (1,000 shares ´ 80%) ´ $70
Van (3,000 shares ´ 70%) ´ $40
Implied total fair values:
Meadow ($56,000 / 80%)
Van ($84,000 / 70%)
Book value
Meadow ($70,000 ´ 80%)
Van ($120,000 ´ 70%)
Excess fair value over book value at acquisition
1

Meadow

Van

56,000

84,000
70,000
120,000
70,000
0

120,000
0

Journal entries to account for investments
January 1, 2009 — Acquisition of investments
Investment in Meadow (80%)
56,000
Cash
56,000
To record acquisition of 800 shares of
Meadow common stock at $70 per share.
Investment in Van (70%)
84,000
Cash
84,000
To record acquisition of 2,100 shares of
Van common stock at $40 per share.
During 2006 — Dividends from subsidiaries
Cash
12,800
Investment in Meadow (80%)
12,800
To record dividends received from Meadow ($16,000 ´ 80%).
Cash

6,300
Investment in Van (70%)
6,300
To record dividends received from Van ($9,000 ´ 70%).
December 31, 2009 — Share of income or loss
Investment in Meadow (80%)
28,800
Income from Meadow
28,800
To record investment income from Meadow ($36,000 ´ 80%).
Loss from Van
8,400
Investment in Van (70%)
8,400
To record investment loss from Van ($12,000 ´ 70%).

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Chapter 3

3-17

Solution P3-8 (continued)
2

Noncontrolling interest December 31, 2009 *
Meadow
$50,000

Common stock
Capital in excess of par
Retained earnings
Equity December 31
Noncontrolling interest percentage
Noncontrolling interest December 31

40,000
90,000
20%
$18,000

Van
$60,000
20,000
19,000
99,000
30%
$29,700

* Fair value equals book value.
3

Consolidated retained earnings December 31, 2009
Consolidated retained earnings is reported at $304,600, equal to the
retained earnings of Todd Corporation, the parent, at December 31, 2009.

4

Investment balance December 31, 2009:

Investment cost January 1
Add (deduct): Income (loss)
Deduct: Dividends received
Investment balances December 31

Meadow
$56,000
28,800
(12,800)
$72,000

Van
$84,000
(8,400)
(6,300)
$69,300

Check: Investment balances should be equal to the underlying book value
Meadow $90,000 ´ 80% = $72,000
Van $99,000 ´ 70% = $69,300

©2009 Pearson Education, Inc. publishing as Prentice Hall


3-18

An Introduction to Consolidated Financial Statements

Solution P3-9
Preliminary computations (in thousands)

Cost of 90% investment January 1, 2009
Implied total fair value of Snowdrop ($3,600 / 90%)
Book value of Snowdrop
Excess fair value over book value on January 1
Allocation to equipment
Remainder is Goodwill
Additional annual depreciation on equipment ($800 / 8 years)

$3,600
$4,000
(2,700)
$1,300
$ 800
$ 500
$ 100

Pansy Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2009
(in thousands)

Cash

$

Receivables — net
Dividends receivable
Inventory
Land
Buildings — net

Equipment — net
Investment in Snowdrop
Goodwill
Total assets

Pansy
300
600
90
700
600
2,000

600
700
1,000

1,500

800

b

Adjustments and
Eliminations

B

a

90

700

3,000
a 3,780

a
$9,570

Consolidated
Balance Sheet
$
500
1,000
1,300
1,300
3,000

3,780

Accounts payable
$ 300
Dividends payable
500
Capital stock
7,000
Retained earnings
1,770
Noncontrolling interest

Total equities
$9,570
a

90%
Snowdrop
$ 200
400

$3,700

500
$10,600

$

$

600
100
2,000
1,000

500

b
90
a 2,000
a 1,000
a

$3,700

420

900
510
7,000
1,770
420
$10,600

To eliminate reciprocal investment and equity accounts, enter unamortized excess
allocated to equipment, record goodwill, and enter noncontrolling interest (at
fair value).
To eliminate reciprocal dividends receivable and dividends payable amounts.

©2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 3

3-19

Solution P3-10
1

Purchase price of investment in Snaplock (in thousands)
Underlying book value of investment in Snaplock:
Equity of Snaplock January 1, 2009

Add: Excess investment fair value over book value:
Goodwill at December 31, 2013
Fair value of Snaplock January 1, 2009

$220
60
$280

Purchase price of 80% investment at fair value
2

$224

Snaplock’s stockholders’ equity on December 31, 2013 (in thousands)
20% noncontrolling interest at fair value
$ 62
20% goodwill
(12)
20% noncontrolling interest’s equity at book value
$ 50
Total equity = Noncontrolling interest’s equity $50 / 20% = $250

3

Pandora’s investment in Snaplock account balance at December 31, 2013
(in thousands)
Underlying book value in Snaplock December 31, 2013
($250 ´ 80%)
$200
Add: 80% of Goodwill December 31, 2013

(20% is attributable to the noncontrolling interest)
48
Investment in Snaplock December 31, 2013
$248
Alternative solution:
Investment cost January 1, 2009
Add: 80% of Snaplock’s increase since acquisition
($250 - $220) ´ 80%
Investment in Snaplock December 31, 2013

4

$224
24
$248

Pandora’s capital stock and retained earnings December 31, 2013
(in thousands)
Capital stock
$400
Retained earnings
$ 30
Amounts are equal to capital stock and retained earnings shown in the
consolidated balance sheet.

©2009 Pearson Education, Inc. publishing as Prentice Hall


3-20

An Introduction to Consolidated Financial Statements

Solution P3-11
Preliminary computations (in thousands)
Cost of 70% investment in Stubb
Implied fair of Stubb ($700 / 70%)
Book value of Stubb (100%)
Excess
Excess allocated:
Inventories
Plant assets
Goodwill
Excess

$ 670
$1,000
800
$ 200
$
$

20
80
100
200

Investment balance at January 1, 2009
Share of Stubb’s retained earnings increase ($60 ´ 70%)
Less: Amortization
70% of excess allocated to inventories (sold in 2009)

70% of excess allocated to plant assets ($80 /8 years)
Investment balance at December 31, 2009

$ 700
42
(14)
(7)
$ 721

Noncontrolling interest at December 31
30% of Stubb’s book value at December 31 ($860 x 30%)
30% of Goodwill
30% Unamortized excess for plant assets
30% x ($80 - $10 amortization)
Noncontrolling at December 31 (fair value)

$258
30
21
$309

Pope Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2009
(in thousands)
Cash

$

Accounts receivable — net

Accounts receivable —
Pope
Dividends receivable
Inventories
Land
Plant assets — net
Investment in Stubb
Goodwill
Assets
Accounts payable
Account payable to Stubb
Dividends payable
Long-term debt
Capital stock
Retained earnings
Noncontrolling interest
($860,000 ´ 30%)

Pope
60
440

$

70%
Stubb
20
200

Adjustments and

Eliminations

10
7
500
100
700

320
150
350

a

b

10

c

7
820
250
1,120

70

721

a 721

a 100

$2,528

$1,050

$

$

300
10
40
600
1,000
578

Consolidated
Balance Sheet
$
80
640

100
$3,010

80
10
100
500

360

$
b
c

10
7

380
43
700
1,000
578

a 500
a 360
a 309

©2009 Pearson Education, Inc. publishing as Prentice Hall

309


Chapter 3

3-21

Equities

$2,528

$1,050

$3,010

©2009 Pearson Education, Inc. publishing as Prentice Hall


3-22

An Introduction to Consolidated Financial Statements

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

2009
2010
2011

Shasti
Dividends
$ 40
50
60
$150

Shasti
Net Income
$ 80
100
120
$300

$
$
$

80% of
Net Income
$ 64
80
96
$240

1

Shasti’s dividends for 2010 ($40 / 80%)

$

50

2

Shasti’s net income for 2010 ($50 dividends ´ 2)

$

100

3

Goodwill — December 31, 2010

$

40

4

Noncontrolling interest share of income — 2011
Shasti’s income for 2011
($48 dividends received/80%) ´ 2
Noncontrolling interest percentage
Noncontrolling interest share

$

120
20%
24

5

6

Noncontrolling interest December 31, 2011
Equity of Shasti January 1, 2009
Add: Income for 2009, 2010 and 2011
Deduct: Dividends for 2009, 2010 and 2011
Equity book value of Shasti December 31, 2011
Goodwill
Equity fair value of Shasti December 31, 2011
Noncontrolling interest percentage
Noncontrolling interest December 31, 2011
Controlling share of consolidated net income for 2011
Pendleton’s separate income
Add: Income from Shasti
Controlling share of consolidated net income

$
$

900
300
(150)
1,050
50
$1,100
20%
$ 220
$
$

©2009 Pearson Education, Inc. publishing as Prentice Hall

280
96
376

760
950
900
50


Chapter 3

3-23

Solution P3-13
Preliminary computations
80% Investment in Sidney (cost) January 2, 2010
Implied total fair value of Sidney ($300 / 80%)
Book value of Sidney (100%)
Excess fair value over book value
Excess allocated to
Buildings (fair value $170 - book value $150)
Remainder to goodwill
Excess fair value over book value

$300
$375
(250)
$125

$ 20
105
$125

Part 1
a

b

c

d

e

Total current assets
Cash ($50 + $20)
Other current assets ($150 + $80)
Total current assets

$ 70
230
$300

Plant and equipment net of depreciation
Land ($300 + $50)
Buildings — net ($400 + $150)
Excess allocated to buildings
Plant and equipment — net

$350
550
20
$920

Common stock
Par value of Peyton’s stock December 31, 2009
Add: Par value of shares issued for Sidney
Common stock

$600
100
$700

Additional paid-in capital
Additional paid-in capital of Peyton December 31, 2009
Add: Increase from shares issued from Sidney
Additional paid-in capital

$ 60
200
$260

Retained earnings
Consolidated retained earnings = Peyton’s retained
earnings December 31, 2009

$140

©2009 Pearson Education, Inc. publishing as Prentice Hall

3-24

An Introduction to Consolidated Financial Statements

Solution P3-13 (continued)
Part 2
a

b

c

d

e

Income from Sidney — 2010
Sidney’s reported net income
Less: Depreciation on excess — buildings ($20 /5 years)
Adjusted Net Income of Sidney

$ 40
(4)
$ 36.8

80% of Sidney’s Net Income = Income from Sidney

$ 28.8

Investment in Sidney December 31, 2010
Cost January 2
Add: Income from Sidney
Less: Dividends from Sidney ($20 ´ 80%)
Investment in Sidney December 31

$300
28.8
(16)
$312.8

Controlling share of consolidated net income — 2010
Separate income of Peyton
Add: Income from Sidney
Controlling share of consolidated net income

$ 90
28.8
$118.8

Consolidated retained earnings December 31, 2010
Retained earnings of Peyton December 31, 2009
Add: Consolidated net income
Less: Peyton’s dividends
Consolidated retained earnings December 31

$140
118.8
(50)

$208.8

Noncontrolling interest December 31, 2010
Equity of Sidney December 31, 2009
Add: Net income
Less: Dividends
Equity book value of Sidney December 31
Unamortized excess for buildings
Goodwill
Equity fair value of Sidney December 31
Noncontrolling interest percentage
Noncontrolling interest fair value - December 31

$250
40
(20)
270
16
105
$391
20%
$ 78.2

©2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 3

3-25

Solution P3-14
1

Schedule to allocate the investment fair value — book value
differential: (in thousands)
80% Investment cost January 2, 2009
$2,760
Implied total fair value ($2,760 / 80%)
$3,450
Book value of interest acquired ($2,300 ´ 80%)
(2,300)
Excess fair value over book value
$1,150
Excess allocated
Fair Value - Book Value =
Inventories
$ 500
Other current assets
200
Land
600
1,800
Buildings — net
600
Equipment — net
Other liabilities
560
Remainder to goodwill
Total excess

$

400
150
500
1,000
800
610

Allocated
$

100
50
100
800
(200)
50
250
$1,150

©2009 Pearson Education, Inc. publishing as Prentice Hall