Solution manual advanced accounting 10e by beams ch11

Chapter 11
CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND
CORPORATE JOINT VENTURES
Answers to Questions
1

Parent company theory views consolidated financial statements from the viewpoint of the parent
company and entity theory views consolidated financial statements from the viewpoint of the business
entity under which all resources are controlled by a single management team. By contrast, traditional
theory sometimes reflects the parent company viewpoint and at other times it reflects the viewpoint of
the business entity. A detailed comparison of these theories is presented in Exhibit 11–1 of the text.

2

Only contemporary theory is changed by current pronouncements of the Financial Accounting Standards
Board. While such pronouncements can and do change the current accounting and reporting practices,
they do not change the logic or the consistency of either parent company or entity theory. For example,
SFAS Nos. 141R and 160, replaced traditional theory with an almost pure entity approach to preparation
of consolidated financial statements.

3

The valuation of subsidiary assets on the basis of the price paid for the controlling interest seems
justified conceptually when substantially all of the subsidiary stock is acquired by the parent. But the
conceptual support for this approach is less when only a slim majority of subsidiary stock is acquired. In
addition, the valuation of the noncontrolling interest based on the price paid by the parent company has
practical limitations because noncontrolling interest does not represent equity ownership in the usual
sense. The ability of noncontrolling stockholders to participate in management is limited and
noncontrolling shares do not possess the usual marketability of equity securities.

4

Consolidated assets are equal to their fair values under entity theory only when the book values of
parent company assets are equal to their fair values. Otherwise, consolidated assets are not equal to their
fair values under either parent company or entity theories.

5

The valuation of the noncontrolling interest at book value might overstate the equity of noncontrolling
shareholders because of the limited marketability of shares held by noncontrolling stockholders and
because of the limited ability of noncontrolling stockholders to share in management through their
voting rights. Valuation of the noncontrolling interest at book value also overstates or understates the
noncontrolling interest unless the subsidiary assets are recorded at their fair values.

6

Consolidated net income under parent company theory and income to the controlling stockholders under
entity theory should be the same. This is illustrated in Exhibit 11–5, which shows different income
statement amounts for cost of sales, operating expenses, and income allocated to noncontrolling
stockholders, but the same income to controlling stockholders. Note that consolidated net income under
parent company and traditional theories reflects income to controlling stockholders.

7

Income to the parent company stockholders under the equity method of accounting is the same as
income to the controlling stockholders under entity theory. But income to controlling stockholders is not
identified as consolidated net income as it would be under parent company or traditional theories.

8

Consolidated income statement amounts under entity theory are the same as under contemporary theory

when subsidiary investments are made at book value because contemporary theory follows entity theory
in eliminating the effects of intercompany transactions from consolidated financial statements.

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11-1


11-2

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

9

Traditional theory corresponds to entity theory in matters relating to unrealized and constructive gains
and losses from intercompany transactions. In other words, unrealized and constructive gains and losses
are allocated between controlling and noncontrolling interests in the same manner under these two
theories.

10

Push-down accounting simplifies the consolidation process. The push-down adjustments are recorded in
the subsidiary’s separate books at the time of the business combination; thus, it is not necessary to
allocate the unamortized fair value-book value differentials in the consolidation working papers.

11

A joint venture is an entity that is owned, operated, and jointly controlled by a small group of investorventurers to operate a business for the mutual benefit of the venturers. Some joint ventures are
organized as corporations, while others are organized as partnerships or undivided interests. Each
venturer typically participates in important decisions of a joint venture irrespective of ownership
percentage.

12

Investors in corporate joint ventures use the equity method of accounting and reporting for their
investment earnings and investment balances as required by APB Opinion No. 18. The cost method
would be used only if the investor could not exercise significant influence over the corporate joint
venture.
Alternatively, investors in unincorporated joint ventures use the equity method of accounting
and reporting as explained in Interpretation No. 2 of APB Opinion No. 18 or proportional consolidation
for undivided interests specified as a special industry practice.

SOLUTIONS TO EXERCISES
Solution E11-1
1
2
3
4

A
A
C
A

5
6
7

B
C
D

4
5

D
C

Solution E11-2
1
2
3

B
B
D

Solution E11-3
1

c
Total value of Smith implied by purchase price
($720,000/.8)
Noncontrolling interest percentage
Noncontrolling interest

$900,000
20%
$180,000

2

a
Only the parent’s percentage of unrealized profits from upstream sales
is eliminated under parent company theory.

3

b
Subsidiary’s income of $200,000 ´ 10% noncontrolling
interest
Less: Patent amortization ($70,000/10 years ´ 10%)

$ 20,000

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(700)


Chapter 11

11-3

Noncontrolling interest share

$ 19,300

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11-4

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-3 (continued)
4

5

a
Implied fair value — $840,000 = patents at acquisition
Book value of 100% of identifiable net assets
Add: Patents at acquisition ($54,000/90%)
Total implied value
Percent acquired
Purchase price under entity theory

$840,000
60,000
900,000
80%
$720,000

b
Purchase price — ($840,000 ´ 80%) = patents at acquisition
Book value $840,000 ´ 80% = underlying equity
Add: Patents at acquisition ($54,000/90%)
Purchase price (traditional theory)

$672,000

60,000
$732,000

Solution E11-4
1

2

3

Goodwill
Parent company theory
Cost of investment in Staff
Fair value acquired ($400,000 ´ 80%)
Goodwill
Entity theory
Implied value based on purchase price ($500,000/.8)
Fair value of Staff’s net assets
Goodwill
Noncontrolling interest
Parent company theory
Book value of Staff’s net assets
Noncontrolling interest percentage
Noncontrolling interest
Entity theory
Total valuation of Staff
Noncontrolling interest percentage
Noncontrolling interest
Total assets
Parent company theory

Pond
Current assets
$ 20,000
Plant assets — net 480,000
Goodwill
$500,000
Entity theory
Current assets
$ 20,000
Plant assets — net 480,000
Goodwill
$500,000

Staff
$ 50,000
250,000

$300,000

$
$
$

$
$
$
$

Adjustment
$ 40,000 ´ 80%

110,000 ´ 80%

$300,000
$ 50,000
250,000

$

$ 40,000 ´ 100%
110,000 ´ 100%

500,000
320,000
180,000
625,000
400,000
225,000

260,000
20%
52,000
625,000
20%
125,000

Total
102,000
818,000
180,000
$1,100,000

$

$

110,000
840,000
225,000
$1,175,000

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Chapter 11

11-5

Solution E11-5
Preliminary computations
Parent company theory
Cost of 80% interest
Fair value acquired ($350,000 ´ 80%)
Goodwill

$300,000
280,000
$ 20,000

Entity theory
Implied total value ($300,000 cost ÷ 80%)
Fair value of Shelly’s net identifiable assets

Goodwill

$375,000
350,000
$ 25,000

1

2

Consolidated net income and noncontrolling interest share for 2009:
Parent
Entity
Company Theory
Theory
Combined separate incomes
Depreciation on excess allocated to
equipment:
$75,000 excess ´ 80% acquired ÷ 5 years
$75,000 excess ÷ 5 years
Total consolidated income
Less: Noncontrolling interest share
$50,000 ´ 20%
($50,000 -15,000) ´ 20%
Controlling interest share of NI

$550,000

$550,000

$528,000

(7,000)
$528,000

Goodwill at December 31, 2009:

$ 20,000

$ 25,000

(12,000)
538,000

(15,000)
535,000

(10,000)

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11-6

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-6
Preliminary computation
Interest acquired in Stahl: 72,000 shares ¸ 80,000 shares = 90%
1

Stahl’s net assets under entity theory
Implied value from purchase price: $1,800,000/90% interest

2

Goodwill
a

3

Entity theory
Implied value
Less: Fair value and book value of net assets
Goodwill

$2,000,000
1,710,000
$ 290,000

b

Parent company theory
Cost of 90% interest
$1,800,000
Fair values of net assets acquired ($1,710,000 ´ 90%) 1,539,000
Goodwill
$ 261,000

c

Contemporary theory (same as entity theory)

$

290,000

$

36,000

Investment income from Stahl
Income from Stahl ($80,000 ´ 1/2 year ´ 90% interest)

4

$2,000,000

Noncontrolling interest under entity theory
Imputed value of Stahl at July 1, 2009
Add: Income for 1/2 year
Noncontrolling percentage
Noncontrolling interest

$2,000,000
40,000
2,040,000
10%
$ 204,000

Alternatively, $200,000 noncontrolling interest at July 1, plus $4,000
share of reported income = $204,000

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Chapter 11

11-7

Solution E11-7
1

Parent company theory
Combined separate incomes of Palumbo and Seal
Less: Palumbo’s share of unrealized profits from upstream
inventory sales ($30,000 ´ 80%)
Less: Noncontrolling interest share ($300,000 ´ 20%)
Consolidated net income

2

$800,000
(24,000)
(60,000)
$716,000

Entity theory
Combined separate incomes
Less: Unrealized profits from upstream sales

Total consolidated income

$800,000
(30,000)
$770,000

Income allocated to controlling stockholders ($500,000 +
[$270,000 ´ 80%])

$716,000

Income allocated to noncontrolling stockholders
($300,000 - $30,000) ´ 20%

$ 54,000

Solution E11-8

Combined separate incomes
Less: Unrealized inventory profits
from downstream sales
($60,000 - $30,000) ´ 50%
Less: Unrealized profit on upstream
sale of land
($96,000 - $70,000) ´ 100%
($96,000 - $70,000) ´ 80%
Less: Noncontrolling interest share
($60,000 - $26,000) ´ 20%
$60,000 ´ 20%
Controlling share of net income

Traditional
Theory
$180,000

Total consolidated income
Allocated to controlling stockholders
Allocated to noncontrolling
Stockholders
($60,000 - $26,000) ´ 20%

(15,000)

Parent
Company
Theory
$180,000
(15,000)

(26,000)

Entity
Theory
$180,000
(15,000)
(26,000)

(20,800)
(6,800)
$132,200

(12,000)
$132,200
$139,000
$132,200
$

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6,800


11-8

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-9

[Push-down accounting]

1

Push down under parent company theory
Retained earnings
800,000
Inventories
90,000
Land
450,000
270,000

Buildings — net
Goodwill
360,000
Equipment
180,000
Other liabilities
90,000
Push down equity
1,700,000
To record revaluation of 90% of the net assets and elimination of
retained earnings as a result of a business combination with
Pioneer Corporation. Push down equity = ($600,000 fair value —
book value differential ´ 90%) + $360,000 goodwill + $800,000
retained earnings.

2

Push down under entity theory
Retained earnings
800,000
Inventories
100,000
Land
500,000
300,000
Buildings — net
Goodwill
400,000
200,000
Equipment — net

Other liabilities
100,000
Push down equity
1,800,000
To record revaluation of 100% of the net assets and elimination of
retained earnings as a result of a business combination with
Pioneer. Push down equity = $600,000 fair value — book value
differential + $400,000 goodwill + $800,000 retained earnings.

Solution E11-10
Each of the investments should be accounted for by the equity method as a oneline consolidation because the joint venture agreement requires consent of
each venturer for important decisions. Thus, each venturer is able to exercise
significant influence over its joint venture investment irrespective of
ownership interest.
The 40 percent venturer:
Income from Sun-Belt ($500,000 ´ 40%)
Investment in Sun-Belt ($8,500,000 ´ 40%)

$ 200,000
$3,400,000

The 15 percent venturer
Income from Sun-Belt ($500,000 ´ 15%)
Investment in Sun-Belt ($8,500,000 ´ 15%)

$
75,000
$1,275,000

Solution E11-11

In general, VIE accounting follows normal consolidation principles.
Under that approach, the noncontrolling interest share would be 90% of VIE
earnings, or $450,000. However, the intercompany fees must be allocated to the
primary beneficiary, not to noncontrolling interests. Therefore, in this case,
noncontrolling interest share would be 90% of $460,000, or $414,000.
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Chapter 11

11-9

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11-10

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-12
As primary beneficiary, Paxel must include Polo in its consolidated
financial staements. Additionally, Paxel must make the following disclosures:
(a) the nature, purpose, size, and activities of the variable interest entity,
(b) the carrying amount and classification of consolidated assets that are
collateral for the variable interest entity’s obligations, and (c) lack of
recourse if creditors (or beneficial interest holders) of a consolidated
variable interest entity have no recourse to the general credit of the primary
beneficiary.
Darden will not consolidate Polo, since they are not the primary beneficiary.
As in traditional consolidations, only one firm consolidates a subsidiary.

However, since Darden has a significant interest in Polo, they must disclose:
(a) the nature of its involvement with the variable interest entity and when
that involvement began, (b) the nature, purpose, size, and activities of the
variable interest entity, and (c) the enterprise’s maximum exposure to loss as
a result of its involvement with the variable interest entity.
Solution E11-13
According to FIN 46(R), if an enterprise absorbs a majority of a
variable interest entity’s expected losses and another receives a majority of
expected residual returns, the enterprise absorbing the losses is the primary
beneficiary and must consolidate the variable interest entity. The contractual
arrangement makes Laura the primary beneficiary.

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Chapter 11

11-11

SOLUTION TO PROBLEMS
Solution P11-1
Picody Corporation and Subsidiary
Comparative Consolidated Balance Sheets
at December 31, 2010
Parent
Company Theory
Assets
Cash
Receivables — net
Inventories

Plant assets — neta
Patentsb
Total assets
Liabilities
Accounts payable
Other liabilities
Noncontrolling interestc
Total liabilities
Capital stock
Retained earnings
Noncontrolling interestd
Total stockholders’ equity
Total liabilities and
stockholders’ equity
a

b
c
d

Entity Theory

$

52,000
300,000
450,000
1,998,000
64,000
$2,864,000

52,000
300,000
450,000
2,010,000
80,000
$2,892,000

$

$

304,000
500,000
160,000
964,000
1,000,000
900,000
0
1,900,000

$2,864,000

$

304,000
500,000
804,000
1,000,000
900,000

188,000
2,088,000

$2,892,000

Parent company theory: Combined plant assets of $1,950,000 + ($80,000 ´ 3/5
undepreciated excess)
Entity theory: Combined plant assets of $1,950,000 + ($100,000 ´ 3/5
undepreciated excess)
Parent company theory: $80,000 patents - $16,000 amortization
Entity theory: $100,000 patents - $20,000 amortization
Parent company theory: Noncontrolling interest equals Scone’s equity of $800,000
´ 20%
Entity theory: [Scone’s equity of $800,000 + ($60,000 undepreciated plant assets
+ $80,000 unamortized patents)] ´ 20%

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11-12

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-2
Preliminary computation
Implied value of Pisces based on purchase price ($160,000/.8)
Book value
Excess to undervalued equipment
1

$200,000
170,000
$ 30,000

Pisces Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2009
Sales
Less: Cost of sales
Gross profit
Other expenses
Depreciationa

$600,000
380,000
220,000
$ 80,000
79,500

Total consolidated net income
Allocation of income to:
Noncontrolling interestb
Controlling interest
a
b

159,500
$ 60,500
$

4,100

$ 56,400

$75,000 depreciation - $500 piecemeal recognition of gain on equipment
through depreciation + ($30,000 excess ¸ 6 years) excess depreciation
($30,000 reported income - $5,000 unrealized gain on equipment + $500
piecemeal recognition of gain on equipment - $5,000 excess depreciation) ´
20% interest

2

Pisces Corporation and Subsidiary
Consolidated Balance Sheet
at December 31, 2009
Assets
Current assets
Plant and equipment — net
($595,000 - $199,500 + 25,000)
Total assets
Liabilities and equity
Liabilities
Capital stock
Retained earningsa
Noncontrolling interestb
Total liabilities and stockholders’ equity
a
b

$241,600

420,500
$662,100
$150,000
300,000
170,000
42,100
$662,100

Pisces beginning retained earnings $163,600 + Pisces net income $56,400 Pisces dividends of $50,000
($190,000 stockholders’ equity + $25,000 excess - $4,500 unrealized gain on
equipment) ´ 20%

Check: $40,000 beginning noncontrolling interest + $4,100 noncontrolling
interest share - $2,000 noncontrolling interest dividends = $42,100

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Chapter 11

11-13

Solution P11-3
Parent company theory
1a
Income from Sign for 2009 ($90,000 ´ 70%)

$ 63,000

1b

Goodwill at December 31, 2009
($595,000 cost - $525,000 fair value)

$ 70,000

1c

Consolidated net income for 2009
Palace’s separate income
Add: Income from Sign

1d

$300,000
63,000

Noncontrolling interest share for 2009
Net income of Sign of $90,000 ´ 30%

1e

$363,000

$ 27,000

Noncontrolling interest December 31, 2009
Sign’s stockholders’ equity $790,000 ´ 30%

$237,000

Entity theory
2a

Income from Sign for 2009 ($90,000 ´ 70%)

2b

Goodwill at December 31, 2009
Imputed value ($595,000/70%)
Fair value of Sign’s net assets
Goodwill

2c

$ 63,000

$850,000
750,000
$100,000

Total consolidated income for 2009
Income to controlling stockholders ($300,000 + $63,000)
Add: Noncontrolling interest share ($90,000 ´ 30%)
Total consolidated income

$363,000
27,000
$390,000

2d

Noncontrolling interest share (computed in 2c above)

$ 27,000

2e

Noncontrolling interest at December 31, 2009
(Book equity $790,000 + $100,000 goodwill) ´ 30%

$267,000

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11-14

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-4
Preliminary computations
Parent company theory
Investment in Smedley
Fair value of 80% interest acquired ($240,000 ´ 80%)
Goodwill

$224,000
192,000
$ 32,000

Entity Theory
Implied value of Smedley ($224,000/.8)
Fair value of identifiable net assets
Goodwill

$280,000
240,000
$ 40,000

Pierre used an incomplete equity method in accounting for its investment in
Smedley. It ignored the intercompany upstream sales of inventory. Income from
Smedley on an equity basis would be:
Share of Smedley’s income ($50,000 ´ .8)
$ 40,000
Less: Unrealized profits in ending inventory from
upstream sale ($8,000 ´ 50% ´ 80%)
(3,200)
Income from Smedley
$ 36,800
Pierre Corporation and Subsidiary
Comparative Consolidated Income Statements
for the year ended December 31, 2010

Sales
Less: Cost of sales
Gross profit

Traditional
Theory

$1,000,000
(575,000)
425,000

Parent
Company
Theory
$1,000,000
(575,000)
425,000

Entity
Theory
$1,000,000
(575,000)
425,000

(200,000)

(200,000)

(200,000)

Expenses
Less: Unrealized profit on
upstream sale of inventory
($23,000 - $15,000) ´ 50% ´ 100%
($23,000 - $15,000) ´ 50% ´ 80%
Noncontrolling interest share
($50,000 - $4,000) ´ 20%

$50,000 ´ 20%
Consolidated net income
Total consolidated income
Allocated to controlling
Stockholders
Allocated to noncontrolling
Stockholders
($50,000 - $4,000) ´ 20%

(4,000)

(4,000)
(3,200)

(9,200)
$

211,800

$

(10,000)
211,800
$

221,000

$

211,800

$

9,200

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Chapter 11

11-15

Solution P11-4 (continued)
Pierre Corporation and Subsidiary
Comparative Statements of Retained Earnings
for the year ended December 31, 2010

Retained earnings December 31, 2009
Add: Consolidated net income
Add: Net income to controlling
stockholders
Less: Dividends to controlling
stockholders
Retained earnings December 31, 2010

Parent
Company
Theory
$360,000
211,800

Traditional
Theory
$360,000
211,800

Entity
Theory
$ 360,000
211,800

571,800
(120,000)
$

451,800

571,800
(120,000)
$

451,800

571,800
(120,000)
$

451,800

Pierre Corporation and Subsidiary

Comparative Consolidated Balance Sheets
at December 31, 2010
Parent
Company
Theory

Traditional
Theory
Assets
Cash
Accounts receivable
Inventory
Land
Buildings — net
Goodwill
Total assets
Liabilities
Accounts payable
Noncontrolling interest
Total liabilities
Stockholders’ equity
Capital stock
Retained earnings
Noncontrolling interest
Total stockholders’ equity
Total equities

$

Entity

Theory

110,800
120,000
196,000
280,000
840,000
32,000
$1,578,800

$

110,800
120,000
196,800
280,000
840,000
32,000
$1,579,600

$

$

$

275,800
52,000
327,800

$

800,000
451,800

800,000
451,800
59,200
1,311,000
$1,586,800

275,800
275,800

800,000
451,800
51,200
1,303,000
$1,578,800

1,251,800
$1,579,600

110,800
120,000
196,000
280,000
840,000
40,000
$1,586,800

275,800
275,800

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11-16

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-5
Packard Corporation and Subsidiary
Comparative Balance Sheets
at December 31, 2010
Traditional
Theory

Entity
Theory

Assets
Cash
Receivables — net
Inventories
Plant assets — net
Goodwill
Total assets

$ 70,000
110,000

120,000
300,000
40,000
$640,000

$ 70,000
110,000
120,000
300,000
50,000
$650,000

Liabilities
Accounts payable
Other liabilities
Total liabilities

$ 95,000
25,000
120,000

$ 95,000
25,000
120,000

300,000
194,000

300,000
194,000

Stockholders’ equity
Capital stock
Retained earnings
Noncontrolling interest
($150,000 - $20,000) ´ 20%
($150,000 + $50,000 - $20,000) ´ 20%
Total stockholders’ equity
Total equities
Supporting computations
Cost or imputed value
Book value of 80%
Book value of 100%
Goodwill
Investment cost
Add: 80% of retained earnings increase
($50,000 - $10,000) ´ 80%
Less: 80% of $20,000 unrealized profits
Investment balance

26,000
520,000
$640,000
Traditional
Theory
$128,000
88,000
$ 40,000

36,000

530,000
$650,000
Entity
Theory
$160,000
110,000
$ 50,000

$128,000
32,000
(16,000)
$144,000

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Chapter 11

11-17

Solution P11-6 [AICPA adapted]
1

X carries its investment in Y on a cost basis. This is evidenced by the
appearance of dividend revenue in X Company’s income statement and by
the absence of income from subsidiary.

2

X holds 1,400 shares of Y. X Company’s percentage ownership is 70%, as

determined by the relationship of X Company’s dividend revenues and Y
Company’s dividends paid ($11,200/$16,000). Y has 2,000 outstanding
shares ($200,000/$100) and X holds 70% of these, or 1,400 shares.

3

Y Company’s retained earnings at acquisition were $100,000.
Imputed value of Y ($245,000 cost/70%)
Less: Patents (applicable to 100%)
Book value and fair value of Y’s identifiable net assets
Less: Capital stock
Retained earnings

4

$

350,000
(50,000)
300,000
(200,000)
$ 100,000

The nonrecurring loss is a constructive loss on the purchase of X bonds
by Y Company.
Working paper entry:
Mortgage bonds payable (5%)
100,000
Loss on retirement of X bonds
3,000

X bonds owned
103,000
To eliminate intercompany bond investment and bonds payable and to
recognize a loss on the constructive retirement of X bonds.

5

Intercompany sales X to Y are $240,000 computed as follows:
Combined sales ($600,000 + $400,000)
Less: Consolidated sales
Intercompany sales

6

$1,000,000
760,000
$ 240,000

Yes, there are other intercompany debts:
Cash and receivables
Current payables
Dividends payable

Combined
$143,000
93,000
18,000

Consolidated
$97,400

53,000
12,400

Intercompany
Balances
$
45,600
40,000
5,600

Y Company owes X Company $40,000 on intercompany purchases and X Company
owes Y Company $5,600 dividends.

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11-18

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-6 (continued)
7

Adjustment to determine consolidated cost of goods sold:
Consolidated Cost of Goods Sold
Combined cost of goods $640,000
$240,000
Intercompany purchases
sold
Unrealized profit in

Unrealized profit in
ending inventory
8,000
5,000
beginning inventory
403,000ü
To balance
$648,000
$648,000
Consolidated cost of
goods sold
$403,000
Unrealized profit in ending inventory is equal to the combined less
consolidated inventories ($130,000 - $122,000).
Unrealized profit in beginning inventory is plugged as follows:
($640,000 + $8,000) - ($240,000 + $403,000) = $5,000

8

Noncontrolling interest share of $8,700 is computed as follows:
Net income of Y
Less: Patent amortization ($50,000/10 years)
Adjusted income of Y
Noncontrolling interest percentage
Noncontrolling interest share

$ 34,000
5,000
29,000
30%

$ 8,700

9
Noncontrolling interest of $117,000 at the balance sheet date is
computed:
Stockholders’ equity of Y Company
Add: Unamortized patents
Equity of Y plus unamortized patents
Noncontrolling interest percentage
Noncontrolling interest on balance sheet date
10

$360,000
30,000
390,000
30%
$117,000

Consolidated retained earnings
Retained earnings of X end of year
Add: X’s share of increase in Y’s retained earnings since
acquisition ($160,000 - $100,000) ´ 70%
Less: Unrealized profit in Y’s ending inventory
Less: X’s patent amortization since acquisition
$20,000 ´ 70%
Less: Loss on constructive retirement of X’s bonds
Consolidated retained earnings — end of year

$200,000
42,000

(8,000)
(14,000)
(3,000)
$217,000

© 2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 11

11-19

Solution P11-7
1

Entry on Splash’s books at acquisition
Inventories
Land
Buildings — net
Other liabilities
Goodwill
Retained earnings
Equipment — net
Push-down capital

20,000
25,000
50,000
10,000
20,000

90,000
15,000
200,000

To push down fair value — book value differentials.
2

Splash Corporation
Balance Sheet
at January 1, 2010
Assets
Cash
Accounts receivable — net
Inventories
Total current assets
Land
Buildings — net
Equipment — net
Total plant assets
Goodwill
Total assets
Liabilities And Stockholders’ Equity
Accounts payable
Other liabilities
Total liabilities
Capital stock
Push-down capital
Total stockholders’ equity
Total liabilities and stockholders’
Equity

3

$ 30,000
70,000
80,000
$180,000
$ 75,000
150,000
75,000
300,000
20,000
$500,000
$ 40,000
60,000
$100,000
$200,000
200,000
400,000
$500,000

If Splash reports net income of $90,000 under the new push-down system
for the calendar year 2010, Played’s income from Splash will also be
$90,000 under a one-line consolidation.

© 2009 Pearson Education, Inc. publishing as Prentice Hall


11-20

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-8
1

Parent company theory
Preliminary computation:
Cost of 80% interest in Sanue
Book value acquired ($2,000,000 ´ 80%)
Excess cost over book value acquired
Excess allocated to:
Inventories $1,600,000 ´ 80%
Equipment — net $(500,000) ´ 80%
Goodwill for the remainder
Excess fair value over book value acquired

$3,000,000
1,600,000
$1,400,000
$1,280,000
(400,000)
520,000
$1,400,000

Entry on Sanue’s books to reflect 80% push down:
Inventories
1,280,000
Goodwill
520,000
Retained earnings

1,200,000
Equipment — net
Push-down capital
2

Entity theory
Preliminary computation:
Implied value of net assets ($3,000,000/.8)
Book value of net assets
Total excess
Excess allocated to:
Inventories
Equipment — net
Goodwill for remainder
Total excess

400,000
2,600,000

$3,750,000
2,000,000
$1,750,000
$1,600,000
(500,000)
650,000
$1,750,000

Entry on Sanue’s books to reflect 100% push down:
Inventories
1,600,000

Goodwill
650,000
Retained earnings
1,200,000
Equipment
Push-down capital
3

Noncontrolling interest (Parent company theory)
Sanue’s stockholders’ equity $2,000,000 ´ 20%

4

500,000
2,950,000

$

400,000

Noncontrolling interest (Entity theory)
Capital stock
Push-down capital
Stockholders’ equity
Noncontrolling interest percentage
Noncontrolling interest

$

800,000

2,950,000
3,750,000
20%
$ 750,000

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Chapter 11

11-21

Solution P11-9
1

Push down under parent company theory
18,000
Buildings — net
27,000
Equipment — net
Goodwill
36,000
Retained earnings
20,000
Inventories
9,000
Push-down capital
92,000
To record revaluation of 90% of net assets and elimination of
retained earnings as a result of a business combination with Power

Corporation.

2

Push down under entity theory
Buildings — net
Equipment — net
Goodwill
Retained earnings
Inventories
Push-down capital
To record revaluation of net assets imputed
90% interest acquired by Power Corporation.

3

20,000
30,000
40,000
20,000
10,000
100,000
from purchase price of

Swing Corporation
Comparative Balance Sheets
at January 1, 2010
Parent Company Theory

Entity Theory

Assets
Cash
Accounts receivable — net
Inventories
Land
Buildings — net
Equipment — net
Goodwill
Total assets

$ 20,000
50,000
31,000
15,000
48,000
97,000
36,000
$297,000

$ 20,000
50,000
30,000
15,000
50,000
100,000
40,000
$305,000

Liabilities and stockholders’ equity

Accounts payable
Other liabilities
Capital stock
Push-down capital
Retained earnings
Total equities

$ 45,000
60,000
100,000
92,000
0
$297,000

$ 45,000
60,000
100,000
100,000
0
$305,000

© 2009 Pearson Education, Inc. publishing as Prentice Hall


11-22

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-10
a

Power Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2010
Push down 90% — parent company theory
90%
Swing

Power

Adjustments and
Eliminations

Income Statement
Sales
$ 310,800 $ 110,000
Income from Swing
37,800
b
Cost of sales
140,000 *
33,000 *
Depreciation expense
29,000 *
24,200 *
Other operating
expenses
45,000 *
11,000 *
Consolidated NI

Noncontrolling share
e
Controlling share of NI $ 134,600 $ 41,800
Retained Earnings
Retained earnings —
Power

$
134,600ü
60,000 *

$

31,800

Balance Sheet
Cash

$

$

27,000
40,000

Buildings — net
Equipment — net
Investment in Swing

9,000

20,000
40,000
140,000

35,000
15,000
43,200

165,000

77,600

$ 736,600
$ 125,000
15,000
75,000
300,000
221,600ü

$

56,000 *
138,000
4,000 *
134,600

$

147,000

$
4,000

134,600
b
e

a

9,000
1,000

8,000

208,800

Goodwill

Accounts payable
Dividends payable
Other liabilities
Capital stock
Push-down capital
Retained earnings

173,000 *
53,200 *

41,800ü
10,000 *

$ 221,600

63,800
90,000

420,800

0

Retained earnings
December 31

Accounts receivable —
net
Dividends receivable
Inventories
Land

$
37,800

$ 147,000

Retained earnings —
Swing
Controlling share of NI
Dividends

Consolidated

Statements

a

8,000

d

9,000

60,000 *
$

221,600

$

98,800
122,000

55,000
55,000
183,200
242,600
b 28,800
c 180,000

36,000
$ 273,800

$

$

$

20,000
10,000 d
9,000
20,000
100,000 c 100,000
92,000 c 92,000
31,800ü

© 2009 Pearson Education, Inc. publishing as Prentice Hall

36,000
792,600
145,000
16,000
95,000
300,000
221,600


Chapter 11

11-23
$ 736,600

$ 273,800

Noncontrolling interest January 1
Noncontrolling interest December 31

c
e

12,000
3,000
$

*

Deduct

© 2009 Pearson Education, Inc. publishing as Prentice Hall

15,000
792,600


11-24

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-10 (continued)
b
Power Corporation and Subsidiary
Consolidation Working Papers

for the year ended December 31, 2010
Push down 100% — entity theory
90%
Swing

Power

Adjustments and
Eliminations

Income Statement
Sales
$ 310,800 $ 110,000
Income from Swing
37,800
b
Cost of sales
140,000 *
32,000 *
Depreciation expense
29,000 *
25,000 *
Other operating
expenses
45,000 *
11,000 *
Consolidated NI
Noncontrolling share
e
Controlling share of NI $ 134,600 $ 42,000

Retained Earnings
Retained earnings —
Power

$
134,600ü
60,000 *

$

32,000

Balance Sheet
Cash

$

$

27,000
40,000

Buildings — net
Equipment — net
Investment in Swing

9,000
20,000
40,000
140,000

35,000
15,000
45,000

165,000

80,000

$ 736,600
$ 125,000
15,000
75,000
300,000

$

56,000 *
138,800
4,200 *
134,600

$

147,000

$
4,200

134,600

b
e

a

9,000
1,000

8,000

208,800

Goodwill

Accounts payable
Dividends payable
Other liabilities
Capital stock
Push-down capital
Retained earnings

172,000 *
54,000 *

42,000ü
10,000 *

$ 221,600

63,800

90,000

420,800

0

Retained earnings
December 31

Accounts receivable —
net
Dividends receivable
Inventories
Land

$
37,800

$ 147,000

Retained earnings —
Swing
Controlling share of NI
Dividends

Consolidated
Statements

a

8,000

d

9,000

60,000 *
$

221,600

$

98,800
122,000

55,000
55,000
185,000
245,000
b 28,800
c 180,000

40,000
$ 282,000

$

$

$

20,000
10,000 d
9,000
20,000
100,000 c 100,000
100,000 c 100,000
221,600ü
32,000ü
$ 736,600 $ 282,000

© 2009 Pearson Education, Inc. publishing as Prentice Hall

40,000
800,800
145,000
16,000
95,000
300,000
221,600


Chapter 11

11-25

Noncontrolling interest January 1
Noncontrolling interest December 31

c
e

20,000
3,200
$

*

Deduct

© 2009 Pearson Education, Inc. publishing as Prentice Hall

23,200
800,800