Solution manual advanced accounting 10e by fischer taylor CH03

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CHAPTER 3
UNDERSTANDING THE ISSUES
1. (a) Subsidiary Income = $30,000
Investment in Subsidiary ($400,000 +
$30,000 – $5,000) = $425,000.
(b) Subsidiary Income ($30,000 – $5,000)
= $25,000.
Investment in Subsidiary ($400,000 +
$25,000 – $5,000) = $420,000.
(c) Subsidiary Income = $0.
Dividend Income = $5,000.
Investment in Subsidiary = $400,000.

by fair value adjustments on the acquisition
date. The NCI share of consolidated net income has, in the past, been shown as an
expense. That is no longer allowed. It is to
be shown as a distribution of consolidated
net income.
4. The $80,000 excess attributed to the controlling interest means that the patent is adjusted by $100,000 ($80,000/80%).
(a) Parent net income for 20X1 ...
$140,000
Subsidiary net income in
20X1 ($60,000 × ½ year) .....
30,000
Amortization of excess for
20X1 ($100,000 ÷ 10 ×
½ year) .................................
(5,000)
Consolidated net income ........

$165,000
(b) NCI share of net income = 1/2 ×
($60,000 – $10,000) × 20% = $5,000.

2. Date alignment means adjusting the investment account to reflect the same date
as the subsidiary equity accounts so that
their balances reflect the same point in
time.
(a) Simple equity method—The subsidiary’s equity accounts reflect beginningof-year balances, yet the investment
account reflects an end-of-year balance. During the consolidation process,
the subsidiary income and the parent’s
share of the subsidiary’s declared dividends are closed to the investment account to return it to its beginning-ofyear balance.
(b) Sophisticated equity method—The
subsidiary’s equity accounts reflect beginning-of-year balances, yet the investment account reflects an end-ofyear balance. During the consolidation
process, the subsidiary income and the
parent’s share of the subsidiary’s declared dividends are closed to the investment account to return it to its beginning-of-year balance.
(c) Cost method—The subsidiary’s equity
accounts reflect beginning-of-year balances, yet the investment account reflects the balance on the date of acquisition. Therefore, the investment account is converted to its simple equity
balance at the beginning of the period
to create date alignment.

5. In 20X1, consolidated net income would be
reduced by $20,000 as a result of the inventory and equipment. The inventory
would increase cost of goods sold by
$10,000 ($60,000 – $50,000). The equipment would increase depreciation expense
by $10,000 [($150,000 – $100,000) ÷ 5
years]. In 20X2, consolidated net income
would be reduced by $10,000 as a result of
the equipment. The equipment would increase depreciation expense by $10,000
[($150,000 – $100,000) ÷ 5 years].

6. The total noncontrolling interest will consist
of 20% of the subsidiary’s common stock,
paid-in capital in excess of par, retained
earnings, dividends declared, and internally
generated income. The NCI is shown, in total, as a subdivision of equity on the consolidated balance sheet.
7. Consolidated net income could exceed the
sum of the separately calculated net incomes of the parent and subsidiary. This
would occur if the fair value of the subsidiary’s net assets were less than their book
value, resulting in a markdown of assets.
The amortization of this markdown would
decrease expense; therefore, consolidated
net income is increased.

3. The noncontrolling share of consolidated
net income is the outside ownership share
of the subsidiary’s internally generated income as adjusted for amortizations created

79


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Ch. 3—Exercises

EXERCISES
EXERCISE 3-1
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value

Fair value of subsidiary .....................
Less book value of interest acquired:
Common stock ($5 par)...............
Paid-in capital in excess of par ...
Retained earnings .......................
Total equity ............................
Interest acquired .........................
Book value ........................................
Excess of fair value over book
value............................................

Parent
Price
(80%)

$450,000* $360,000
$ 50,000
100,000
150,000
$300,000

NCI
Value
(20%)
$90,000

$300,000
80%
$240,000

$300,000
20%
$ 60,000

$150,000

$120,000

$ 30,000

Adjustment

Worksheet
Key

Adjustment of identifiable accounts:

Equipment .........................................
Goodwill ............................................
Total ............................................

$

Life

25,000 debit D1
125,000 debit D2
$150,000

Amortization

per Year

5

$5,000

*$360,000/80% = $450,000

(a)

Event
20X1
Subsidiary income of
$60,000 reported to parent

Investment in Hill Company ..............
Subsidiary Income .......................

48,000

Dividends of $10,000 paid
by Hill

Cash ..................................................
Investment in Hill Company.........

8,000

20X2
Subsidiary income of

$40,000 reported to parent

Investment in Hill Company ..............
Subsidiary Income .......................

32,000

Dividends of $10,000 paid
by Hill

Cash ..................................................
Investment in Hill Company.........

8,000

Simple Equity Method

80

48,000
8,000

32,000
8,000


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Ch. 3—Exercises

Exercise 3-1, Concluded
(b)

Event
20X1
Subsidiary income of
($60,000 – $5,000
amortization) × 80%
reported to parent

Investment in Hill Company ..............
Subsidiary Income .......................

44,000

Dividends of $10,000 paid
by Hill

Cash ..................................................
Investment in Hill Company.........

8,000

Investment in Hill Company ..............
Subsidiary Income .......................

28,000

Cash ..................................................
Investment in Hill Company.........

8,000

20X2
Subsidiary income of
($40,000 – $5,000
amortization) × 80%
reported to parent
Dividends of $10,000 paid
by Hill

Sophisticated Equity Method

44,000

8,000

28,000

8,000

(c)
Event
20X1
Subsidiary income of
$60,000 reported to parent

Cost Method
No entry

Dividends of $10,000 paid
by Hill

Cash ..................................................
Dividend Income .........................

20X2
Subsidiary income of
$40,000 reported to parent

No entry

Dividends of $10,000 paid
by Hill

Cash ..................................................
Dividend Income .........................

81

8,000
8,000

8,000
8,000


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Ch. 3—Exercises

EXERCISE 3-2
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary .....................
Less book value of interest acquired:
Common stock ($5 par)...............
Paid-in capital in excess of par ...
Retained earnings .......................
Total equity ............................
Interest acquired .........................
Book value ........................................
Excess of fair value over book
value............................................

Parent
Price
(75%)

$616,667* $462,500
$ 50,000
150,000
200,000
$400,000

NCI
Value
(25%)

$154,167

$400,000
75%
$300,000

$400,000
25%
$100,000

$216,667

$162,500

$ 54,167

Adjustment

Worksheet
Key

Adjustment of identifiable accounts:

Inventory ($50,000 fair – $40,000
book value)..................................
Buildings and equipment
($300,000 fair – $200,000
book value)..................................
Patent ($50,000 fair –
$30,000 fair value) ......................

Goodwill ............................................
Total ............................................

$

Life

Amortization
per Year

10,000 debit D1

100,000 debit D2

20

$5,000

20,000 debit D3
86,667 debit D4
$216,667

10

2,000

*$463,500/75% = $616,667
(a) Simple equity ........................................................................................
+ (75% × Increase in Retained Earnings of $78,000*) .........................
Balance .................................................................................................

$462,500
58,500**
$521,000

(b) Sophisticated equity..............................................................................
+ (75% × Increase in Retained Earnings of $78,000*) .........................
– 20X4 Amortization of Excess
75% × ($10,000 Inventory + $5,000 Buildings and Equipment +
$2,000 Patent) ................................................................................
– 20X5 Amortization of Excess
75% × ($5,000 Buildings and Equipment + $2,000 Patent) ............
Balance .................................................................................................

$462,500
58,500**

(c) Cost ......................................................................................................
*Shaw’s ending retained earnings, December 31, 20X5 .....................
– Shaw’s beginning retained earnings, January 1, 20X4 .................
Increase in retained earnings ............................................................
**Or 75% × ($70,000 – $20,000 + $48,000 – $20,000)

$462,500
$278,000
200,000
$
78,000

82

(12,750)
(5,250)
$503,000


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Ch. 3—Exercises

EXERCISE 3-3
(1) Determination and Distribution of Excess Schedule
Company
Parent
Implied
Price
Fair Value
(80%)
Fair value of subsidiary ..............
Less book value of interest acquired:
Common stock ($10 par) ........
Retained earnings ..................
Total equity .........................
Interest acquired.....................
Book value .................................
Excess of fair value over book
value .......................................

$312,500* $250,000
$100,000

150,000
$250,000

$ 62,500

NCI
Value
(20%)
$ 62,500

$250,000
80%
$200,000

$250,000
20%
$ 50,000

$ 50,000

$ 12,500

Adjustment of identifiable accounts:
Adjustment
Fixed assets...............................
Total ......................................

Worksheet
Key

$62,500
$62,500

Life

debit D

Amortization
per Year

10

$6,250

*$250,000/80% = $312,500
(2) (CY1)

(CY2)

(EL)

(D)

(A)

Subsidiary Income ...................................................................
Investment in Sultan Company..........................................
To eliminate parent’s share of subsidiary earnings
for the current year.

20,000

Investment in Sultan Company ($5,000 × 80%) ......................
Dividends Declared ...........................................................
To eliminate parent’s share of dividends for the
current year.

4,000

Common Stock—Sultan ($100,000 × 80%) ............................
Retained Earnings—Sultan ($150,000 × 80%) .......................
Investment in Sultan Company..........................................
To eliminate pro rata share of the beginning-ofyear Sultan equity balances.

80,000
120,000

Depreciable Fixed Assets ........................................................
Investment in Sultan Company..........................................
Retained Earnings—Sultan (NCI adjustment) ...................
To distribute excess per determination and
distribution of excess schedule.

62,500

Depreciation Expense .............................................................
Accumulated Depreciation.................................................
To amortize excess for the current year.

6,250

83

20,000

4,000

200,000

50,000
12,500

6,250


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Ch. 3—Exercises

Exercise 3–3, Continued
(3)

Pepper Company and Sultan Company
Consolidated Income Statement
For Year Ended December 31, 20X1
Sales ................................................................................................................
Less expenses (add $6,250 adjustment) .........................................................
Consolidated net income .................................................................................

$

$250,000
191,250
58,750

Distributed to noncontrolling interest ...............................................................
Distributed to controlling interest .....................................................................

$

3,750
55,000

Subsidiary Sultan Company Income Distribution
Depreciation adjustment .......

$6,250

Internally generated net
income .................................

$25,000

Adjusted income ........................
NCI share ...................................
NCI .............................................

$18,750
× 20%
$ 3,750

Parent Pepper Company Income Distribution
Internally generated net
income .................................
80% × Sultan adjusted
income of $18,750 ...............
Controlling interest .....................

(4)

$40,000
15,000
$55,000

Pepper Company and Subsidiary Sultan Company
Consolidated Statement of Retained Earnings
For the Year Ended December 31, 20X1

Retained earnings, January 1, 20X1 ................
Consolidated net income ..................................
Dividends declared ...........................................
Retained earnings, December 31, 20X1...........

84

Noncontrolling
Interest
$30,000
3,750
(1,000)

$32,750

Controlling
Retained Earnings
$200,000
55,000
$255,000


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Ch. 3—Exercises

Exercise 3–3, Concluded
(5)

Pepper Company and Subsidiary Sultan Company
Consolidated Balance Sheet
December 31, 20X1
Assets
Current assets ..........................................................................
Depreciable fixed assets...........................................................
Less accumulated depreciation ................................................
Total assets ..............................................................................
Liabilities and Stockholders’ Equity
Current liabilities .......................................................................
Stockholders’ equity:
Noncontrolling interest ........................................................
Controlling interest:
Common stock ($10 par) ................................................

Retained earnings ..........................................................
Total liabilities and stockholders’ equity....................................

$190,000
a

$662,500
132,250b

530,250
$720,250
$100,000
65,250c

$300,000
255,000

555,000
$720,250

a

$400,000 + $200,000 + $62,500 = $662,500
$106,000 + $20,000 + 6,250 = $132,250
c
($100,000 x 20%) + $32,750 retained earnings + $12,500 NCI adjustment = $65,250
b

EXERCISE 3-4
(1) (CY1)

(CY2)

(EL)

(D)

(A)

Subsidiary Income ...................................................................
Investment in Sultan Company..........................................
To eliminate parent’s share of subsidiary earnings
for the current year.

12,000

Investment in Sultan Company ...............................................
Dividends Declared ...........................................................
To eliminate parent’s share of dividends for the
current year.

8,000

Common Stock—Sultan ..........................................................
Retained Earnings—Sultan ($170,000 × 80%) .......................
Investment in Sultan Company..........................................
To eliminate pro rata share of the beginning-ofyear Sultan equity balances.

80,000
136,000

Depreciable Fixed Assets ........................................................
Investment in Sultan Company..........................................
Retained Earnings—Sultan (NCI adjustment) ...................
To distribute excess per determination and
distribution of excess schedule.

62,500

Depreciation Expense .............................................................
Retained Earnings—Pepper (80% × $6,250) ..........................
Retained Earnings—Sultan (20% × $6,250) ...........................
Accumulated Depreciation (2 years × $6,250) ..................
To amortize excess for the prior and current years.

6,250
5,000
1,250

85

12,000

8,000

216,000

50,000
12,500

12,500


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Ch. 3—Exercises

Exercise 3–4, Concluded
(2)

Pepper Company and Sultan Company
Consolidated Income Statement
For Year Ended December 31, 20X2
Sales ................................................................................................................
Less expenses (add $6,250 adjustment) .........................................................
Consolidated net income .................................................................................

$

$300,000
251,250
48,750

Distributed to noncontrolling interest ...............................................................
Distributed to controlling interest .....................................................................

$

1,750
47,000

Subsidiary Sultan Company Income Distribution
Depreciation adjustment ...... (A)

6,250

Internally generated net
income .....................................

$15,000

Adjusted income ............................
NCI share ......................................
NCI ................................................

$ 8,750
× 20%
$ 1,750

Parent Pepper Company Income Distribution
Internally generated net
income .....................................
80% × Sultan adjusted
income of $8,750 .....................
Controlling interest ........................

86

$40,000
7,000

$47,000


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Ch. 3—Exercises

EXERCISE 3-5
(1) Same as Exercise 3, part (1).
(2) (CY1)
(CY2)
(EL)

(D)

(A)

Subsidiary Income ...................................................................
Investment in Sultan Company..........................................

15,000

Investment in Sultan Company ...............................................
Dividends Declared ...........................................................

4,000

Common Stock—Sultan ..........................................................
Retained Earnings—Sultan .....................................................
Investment in Sultan Company..........................................

80,000
120,000

Depreciable Fixed Assets ........................................................
Investment in Sultan Company..........................................
Retained Earnings—Sultan (NCI adjustment) ...................
To distribute excess per determination and
distribution of excess schedule.

62,500

Depreciation Expense .............................................................
Accumulated Depreciation.................................................
To amortize excess for the current year.

6,250

15,000
4,000

200,000
50,000
12,500

6,250

(3) Same as Exercise 3, part (3).
(4) Same as Exercise 3, part (4).
(5) Same as Exercise 3, part (5).

EXERCISE 3-6
(1) (CY1)
(CY2)
(EL)

(D)

(A)

Subsidiary Income ...................................................................
Investment in Sultan Company..........................................

7,000

Investment in Sultan Company ...............................................
Dividends Declared ...........................................................

8,000

Common Stock—Sultan ..........................................................
Retained Earnings—Sultan .....................................................
Investment in Sultan Company..........................................

80,000
136,000

Depreciable Fixed Assets ........................................................
Investment in Sultan Company..........................................
Retained Earnings—Sultan (NCI adjustment) ...................

To distribute excess per determination and
distribution of excess schedule. Amounts are
9/10 of original amounts since 1 year has been
amortized.

56,250

Depreciation Expense .............................................................
Accumulated Depreciation.................................................
To amortize excess for the current year.

6,250

(2) Same as Exercise 4, part (2).

87

7,000
8,000

216,000
45,000
11,250

6,250


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Ch. 3—Exercises

EXERCISE 3-7
(1) Same as Exercise 3, part (1).
(2) (CY2)

(EL)

(D)

(A)

Dividend Income ......................................................................
Dividends Declared ...........................................................
To eliminate parent’s share of subsidiary dividends
for the current year.

4,000

Common Stock—Sultan ..........................................................
Retained Earnings—Sultan .....................................................
Investment in Sultan Company..........................................
To eliminate pro rata share of the beginning-ofyear Sultan equity balances.

80,000
120,000

Depreciable Fixed Assets ........................................................
Investment in Sultan Company..........................................
Retained Earnings—Sultan (NCI adjustment) ...................
To distribute excess per determination and

distribution of excess schedule.

62,500

Depreciation Expense .............................................................
Accumulated Depreciation.................................................
To amortize excess for the current year.

6,250

(3) Same as Exercise 3, part (3).
(4) Same as Exercise 3, part (4).
(5) Same as Exercise 3, part (5).

88

4,000

200,000

50,000
12,500

6,250


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Ch. 3—Exercises

EXERCISE 3-8
(1) (CV)

(CY2)

(EL)

(D)

(A)

Investment in Sultan Company ...............................................
Retained Earnings—Pepper ..............................................
Convert from cost to equity method by adding to
investment account parent’s share of subsidiary
equity increase. [80% × ($170,000 – $150,000)]

16,000

Dividend Income ......................................................................
Dividends Declared ...........................................................
To eliminate parent’s share of subsidiary dividends
for the current year.

8,000

Common Stock—Sultan ..........................................................
Retained Earnings—Sultan .....................................................
Investment in Sultan Company..........................................
To eliminate pro rata share of the beginning-ofyear Sultan equity balances.

80,000
136,000

Depreciable Fixed Assets ........................................................
Investment in Sultan Company..........................................
Retained Earnings—Sultan (NCI adjustment) ...................
To distribute excess per determination and
distribution of excess schedule.

62,500

Depreciation Expense .............................................................
Retained Earnings—Pepper (80% × $6,250) ..........................
Retained Earnings—Sultan (20% × $6,250) ...........................
Accumulated Depreciation (2 years × $6,250) ..................
To amortize excess for the prior and current year.

6,250
5,000
1,250

16,000

8,000

216,000

50,000
12,500

12,500

(2) Same as Exercise 4, part (2).

EXERCISE 3-9
Amortization Schedule
Account Adjustments
Inventory ........................................
Amortization:
Investments ..............................
Buildings (net) ..........................
Equipment (net)........................
Patent .......................................
Trademark ................................
Discount on Bonds Payable .....
Total .........................................

Life
1

Annual
Amount
$

6,250

3
20
5

10
10
5

5,000
12,500
34,500
2,250
2,000
2,500

89

20X1
$

20X2

20X3

20X4

6,250

5,000 $ 5,000 $5,000
12,500
12,500
34,500
34,500
2,250

2,250
2,000
2,000
2,500
2,500 2,500
$65,000 $58,750 $58,750

$
12,500
34,500
2,250
2,000

$53,750


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Ch. 3—Exercises

EXERCISE 3-10
(1) Determination and Distribution of Excess Schedule
Company
Parent
Implied
Price
Fair Value
(80%)
Fair value of subsidiary ..............
Less book value of interest acquired:

Common stock ......................
Retained earnings .................
Total equity ......................
Interest acquired ...................
Book value .................................
Excess of fair value over book
value ......................................
$

NCI
Value
(20%)

$387,500 $310,000

$ 77,500

$100,000
300,000
$400,000 $400,000
80%
$320,000

$400,000
20%
$ 80,000

(12,500) $

(10,000) $

(2,500)

Adjustment of identifiable accounts:
Adjustment
Fixed assets ................................
Total ......................................
(2) (EL)

(D)

(A)

(3)

Worksheet
Key

Amortization
per Year

Life

$(12,500) credit D
$(12,500)

5

$(2,500)

Common Stock—Kraus ...........................................................
Retained Earnings—Kraus ......................................................
Investment in Kraus Company ..........................................
To eliminate pro rata share of the beginning-ofyear Kraus equity balances and purchased income.

80,000
240,000

Investment in Kraus Company ................................................
Retained Earnings—Kraus (NCI adjustment) ..........................
Equipment .........................................................................
To distribute excess book value to plant assets.

10,000
2,500

Accumulated Depreciation [($12,500 ÷ 5) × 1/2] .....................
General Expenses .............................................................
To reduce depreciation expense for one-half year.

1,250

320,000

12,500

1,250

Neiman Company and Subsidiary Kraus Company
Consolidated Income Statement

For Year Ended December 31, 20X2
Sales .....................................................................................................
Less cost of goods sold ........................................................................
Gross profit ...........................................................................................
Less general expenses (less $1,250 adjustment) ................................
Consolidated net income ......................................................................
Distributed to noncontrolling interest ....................................................
Distributed to controlling interest ..........................................................

90

$
$

$400,000
225,000
$175,000
83,750
91,250
6,250
85,000


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Ch. 3—Exercises

Exercise 3-10 Concluded
Subsidiary Kraus Company Income Distribution
Internally generated net

income ....................................
Adjustment of depreciation ...........

$30,000
1,250

Adjusted income ...........................
NCI share ......................................
NCI ................................................

$31,250
× 20%
$ 6,250

Parent Neiman Company Income Distribution
Internally generated net
income ....................................
80% × Kraus adjusted
income of $31,250
(past 6 months) .......................
Controlling interest ........................

$60,000

25,000
$85,000

EXERCISE 3-11
Calculation of book value of Subsidiary:
Fair value at purchase .......................................................................................

Add $200,000 increase in Barker retained earnings .........................................
Deduct amortization of excess (5 years × $10,000 per year) ............................
Book value balance............................................................................................

$1,062,500
200,000
(50,000)
$1,212,500

Fair value of Barker Company, December 31, 20X5 (given) .............................

$1,000,000

Since the adjusted (for acquisition) book value ($1,212,500) exceeds the fair value balance
($1,000,000), goodwill is impaired.
Impairment loss:
Fair value of Barker Company ...........................................................................
Fair value of Barker Company identifiable assets ..............................................
Estimated goodwill .............................................................................................
Existing goodwill ................................................................................................
Impairment loss..................................................................................................

91

$1,000,000
900,000
$
100,000
262,500
$

162,500


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Ch. 3—Exercises

APPENDIX EXERCISES
EXERCISE 3B-1
(1) Investment in Largo Company ........................................................
Common Stock ...........................................................................
Paid-In Capital in Excess of Par .................................................
(2)

Company
Implied
Fair Value

Value Analysis Schedule
Company fair value ...........................................
Fair value of net assets excluding goodwill ......
Goodwill ............................................................

$500,000
386,000
$114,000

500,000
100,000
400,000

Parent
Price
(100%)

NCI
Value
(0%)

$500,000
386,000*
$114,000

N/A

*$330,000 equity + $80,000 asset adjustment – $24,000 (30% tax × $80,000) DTL
Based on the above information, the following D&D schedule is prepared:
(1) Determination and Distribution of Excess Schedule
Company
Parent
Implied
Price
Fair Value
(100%)
Fair value of subsidiary ..............
Less book value of interest acquired:
Common stock ($10 par) ........
Retained earnings ..................
Total equity .........................
Interest acquired.....................
Book value .................................

Excess of fair value over book
value .......................................

$500,000
$100,000
230,000
$330,000

$170,000

$500,000

NCI
Value
(0%)
N/A

$330,000
100%
$330,000
$170,000

Adjustment of identifiable accounts:
Worksheet
Key

Life

20,000 debit D1

1

(6,000)credit D1t

1

60,000 debit D2

10

$6,000

(18,000)credit D2t
114,000 debit D3
$170,000

10

(1,800)

Adjustment
Inventory ($120,000 fair –
$100,000 book value) ............
Deferred tax liability (30% tax
rate × $20,000) ......................
Depreciable fixed assets
($270,000 fair – $210,000
book value) ............................
Deferred tax liability (30% tax
rate × $60,000) ......................

Goodwill .....................................
Total ................................

$

92

Amortization
per Year


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Ch. 3—Exercises

Exercise 3B-1 Concluded
(3) Elimination Entries:
Common Stock ...............................................................................
Retained Earnings ..........................................................................
Investment in Largo Company ...................................................

100,000
230,000

Inventory .........................................................................................
Equipment.......................................................................................
Goodwill ..........................................................................................
Deferred Tax Liability (on inventory and equipment) .................
Investment in Largo Company ...................................................

20,000
60,000
114,000

330,000

24,000
170,000

EXERCISE 3B-2
(1)

Company
Implied
Fair Value

Value Analysis Schedule
Company fair value ...........................................
Fair value of net assets excluding goodwill ......
Goodwill ............................................................

$520,000
329,000*
$191,000

Parent
Price
(90%)
$468,000
296,100

$171,900

*$280,000 equity + $70,000 asset adjustment – $21,000 (30% tax × $70,000) DTL
Based on the above information, the following D&D schedule is prepared:
(1) Determination and Distribution of Excess Schedule
Company
Parent
Implied
Price
Fair Value
(90%)
Fair value of subsidiary ..............
$520,000
Less book value of interest acquired:
Common stock ($5 par) ..........
$100,000
Paid-in capital in excess of par
130,000
Retained earnings ..................
50,000
Total equity .........................
$280,000
Interest acquired.....................
Book value .................................
Excess of fair value over book
value .......................................
$240,000

93

NCI
Value
(10%)

$468,000

$ 52,000

$280,000
90%
$252,000

$280,000
10%
$ 28,000

$216,000

$ 24,000

NCI
Value
(10%)
$52,000
32,900
$19,100


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Ch. 3—Exercises

Exercise 3B-2 Continued
Adjustment of identifiable accounts:
Worksheet
Key

Life

20,000 debit D1

1

(6,000)credit D1t
50,000 debit D2

1
10

$5,000

(15,000)credit D2t
191,000 debit D3
$240,000

10

(1,500)

Adjustment

Inventory ....................................
Deferred tax liability (30% tax
rate × $20,000) ......................
Depreciable fixed assets............
Deferred tax liability (30% tax
rate × $50,000) ......................
Goodwill .....................................
Total ................................

(2)

$

Amortization
per Year

Lucy Company and Subsidiary Diamond Company
Consolidated Income Statement
For Year Ended December 31, 20X1
Sales .........................................................................................
Less cost of goods sold (add $20,000 adjustment) ..................
Gross profit ...............................................................................
Less expenses:
General expenses...............................................................
Depreciation expense (add $5,000 adjustment) .................
Consolidated income before tax .........................................
Provision for tax (30%) .............................................................
Consolidated net income ..........................................................
Distributed to NCI .....................................................................
Distributed to controlling interest ..............................................

94

$550,000
310,000
$240,000
$75,000
80,000
$
$
$

155,000
85,000
25,500
59,500
(350)
59,850


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Ch. 3—Exercises

Exercise 3B-2 Concluded
Subsidiary Diamond Company Income Distribution
Inventory consumption.............
Building depreciation ...............

$20,000

5,000

Internally generated
income before tax ...............
Adjusted income before tax ......
Provision for tax, 30% ...............
Adjusted net income .................
NCI share ..................................
NCI ............................................

$20,0
$

(5,0
1,5
$
(3,5
× 10%
$ (350)

Parent Lucy Company Income Distribution
Internally generated
income before tax ....................
Adjusted income ............................
Tax, 30% .......................................
Adjusted net income ......................
90% × Diamond adjusted
net income of ($3,500) ............
Controlling interest ........................

95

$ 90,000
$ 90,000
(27,0
$ 63,000
(3,
$ 59,850


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Ch. 3—Exercises

EXERCISE 3B-3
Company
Implied
Fair Value

Value Analysis Schedule
Company fair value ..................................................
Fair value of net assets excluding goodwill ..............
Goodwill ...................................................................

$700,000
445,000*
$255,000

Parent
Price

(100%)

NCI
Value
(0%)

$700,000
455,000
$255,000

N/A

*$350,000 equity + $50,000 asset adjustment – $15,000 (30% tax × $50,000) DTL + $60,000
deferred tax expense ($200,000 × 30%)
Based on the above information, the following D&D schedule is prepared:
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary .....................
Less book value of interest acquired:
Common stock, $5 par ................
Retained earnings .......................
Total equity ............................
Interest acquired .........................
Book value ........................................
Excess of fair value over book
value............................................

$700,000

$250,000
100,000
$350,000

Parent
Price
(100%)
$700,000

NCI
Value
(0%)
N/A

$350,000
100%
$350,000

$350,000

$350,000

Adjustment

Worksheet
Key

Life

50,000 debit D1

10

$5,000

(15,000)credit D1t

10

(1,500)

Adjustment of identifiable accounts:

Buildings and equipment ...................
Deferred tax liability (30% tax
rate × $50,000)............................
Current deferred tax expense
($40,000 × 30%) .........................
Noncurrent deferred tax expense
($160,000 × 30%) .......................
Goodwill ............................................
Total ......................................

$

12,000 debit D2
48,000 debit D3
255,000 debit D4
$350,000

96

Amortization
per Year


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Ch. 3—Problems

PROBLEMS
PROBLEM 3-1
(1)

Company
Implied
Fair Value

Value Analysis Schedule
Company fair value ...........................................
Fair value of net assets excluding goodwill ......
Goodwill ............................................................

$900,000
720,000*
$180,000

Parent
Price
(80%)

NCI
Value
(20%)

$720,000
576,000
$144,000 $

$180,000
144,000
36,000

*$550,000 equity + $170,000 asset adjustments
Based on the above information, the following D&D schedule is prepared:
Determination and Distribution of Excess Schedule
Company
Parent
Implied
Price
Fair Value
(80%)
Fair value of subsidiary ..............
Less book value of interest acquired:
Common stock ($10 par) ........
Paid-in capital in excess of par
Retained earnings ..................
Total equity .........................
Interest acquired ........................
Book value .................................

Excess of fair value over book
value .......................................

$900,000
$100,000
200,000
250,000
$550,000

$350,000

NCI
Value
(20%)

$720,000

$180,000

$550,000
80%
$440,000

$550,000
20%
$110,000

$280,000

$ 70,000

Adjustment of identifiable accounts:
Adjustment
Land ($190,000 book –
$120,000 fair value) ..............
Building ($450,000 book –
$350,000 fair value) ..............
Goodwill .....................................
Total ................................

$

Worksheet
Key

Life

Amortization
per Year

70,000 debit D1
100,000 debit D2
180,000 debit D3
$350,000

97

20

$5,000

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Ch. 3—Problems

Problem 3-1 Continued
(2) Investment Entries:
Simple Equity Method
Investment Entries
20X1
Subsidiary reports
Investment in
income of $60,000. Sardine Company ...... 48,000
Subsidiary Income
(80% × reported) ....
48,000

Subsidiary pays
$10,000 dividend.

20X2
Subsidiary reports
income of $45,000.

Subsidiary pays
$10,000 dividend.

Cash ..........................
Investment in

Sardine Company
(80% × declared) ....

8,000

8,000

Sophisticated Equity Method

Investment in
Sardine Company ......... 44,000
Subsidiary Income
[80% × (reported –
$5,000 depreciation)]
44,000

No entry

Cash ..............................
Investment in
Sardine Company
(80% × declared) .......

Cash ..............................
Dividend (or
Investment)
income .......................

8,000

8,000

Investment in
Sardine Company ...... 36,000
Subsidiary Income
(80% × reported) ....
36,000

Investment in
Sardine Company ......... 32,000
Subsidiary Income
[80% × (reported –
$5,000 depreciation)]
32,000

Cash ..........................
Investment in
Sardine Company
(80% × declared) ....

Cash ..............................
Investment in
Sardine Company
(80% × declared) .......

8,000

8,000

Cost Method

98

8,000

8,000

8,000

8,000

No entry

Cash ..............................
Dividend (or
Investment)
income .......................

8,000

8,000


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Ch. 3—Problems

Problem 3-1 Continued
Simple Equity Method
Eliminations

20X1
(CY1)
Eliminated currentyear entries
(CY2)

Sophisticated Equity Method

Cost Method

Subsidiary Income ..... 48,000
Investment in
Sardine Company...
48,000

Subsidiary Income ........ 44,000
Investment in
Sardine Company ......
44,000

No conversion
needed first year

Investment in
Sardine Company...
Dividends Declared

Investment in
Sardine Company…… 8,000
Dividends Declared....

Dividend Inc. .................
Dividends Declared....

8,000
8,000

8,000
8,000

8,000

(EL)
Eliminate
investment as
of January 1.

Common Stock .......... 80,000
Paid-In Capital in
Excess of Par ............ 160,000
Retained Earnings ..... 200,000
Investment in
Sardine Company...
440,000

Common Stock.............. 80,000
Paid-In Capital in
Excess of Par ................ 160,000
Retained Earnings ........ 200,000
Investment in
Sardine Company ......

440,000

Common Stock.............. 80,000
Paid-In Capital in
Excess of Par ................ 160,000
Retained Earnings ........ 200,000
Investment in
Sardine Company ......
440,000

(D)
Distribute excess.

Land ........................... 70,000
Building ...................... 100,000
Goodwill ..................... 180,000
Investment in
Sardine Company...
280,000
RE—Sardine (NCI)
70,000

Land .............................. 70,000
Building ......................... 100,000
Goodwill ........................ 180,000
Investment in
Sardine Company ......
280,000
RE—Sardine (NCI) ....
70,000

Land .............................. 70,000
Building ......................... 100,000
Goodwill ........................ 180,000
Investment in
Sardine Company ......
280,000
RE—Sardine (NCI) ....
70,000

(A)
Amortize excess
for current year.

Depr. Expense ...........
Acc. Depreciation ...

Depr. Expense ..............
Acc. Depreciation .......

Depr. Expense ..............
Acc. Depreciation .......

5,000
5,000

99

5,000
5,000

5,000
5,000


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Ch. 3—Problems

Problem 3-1 Concluded
Simple Equity Method

Sophisticated Equity Method

Eliminations
20X2
(CV)

Cost Method

Investment in
Sardine Company
(80% × $50,000) ........... 40,000
RE—Peter ..................
40,000

Equity conversion.
(CY1)
Eliminated currentyear entries.

Subsidiary Income ..... 36,000
Investment in
Sardine Company...
36,000

Subsidiary Income ........ 32,000
Investment in
Sardine Company ......
32,000

(CY2)

Investment in
Sardine Company ......
Dividends Declared

Investment in
Sardine Company .........
Dividends Declared....

8,000
8,000

Investment in
Dividend Inc. .................
Dividends Declared....

8,000
8,000

8,000
8,000

(EL)
Eliminate
investment as
of January 1.

Common Stock .......... 80,000
Paid-In Capital in
Excess of Par ............ 160,000
Retained Earnings ..... 240,000
Investment in
Sardine Company...
480,000

Common Stock.............. 80,000
Paid-In Capital in
Excess of Par ................ 160,000
Retained Earnings ........ 240,000
Investment in
Sardine Company ......
480,000

Common Stock.............. 80,000
Paid-In Capital in
Excess of Par ................ 160,000
Retained Earnings ........ 240,000
Investment in
Sardine Company ......

480,000

(D)
Distribute excess.

Land ........................... 70,000
Building ...................... 100,000
Goodwill ..................... 180,000
Investment in
Sardine Company...
280,000
RE—Sardine (NCI)
70,000

Land .............................. 70,000
Building (19 years) ........ 95,000
Goodwill ........................ 180,000
Investment in
Sardine Company ......
276,000
RE—Sardine (NCI) ....
69,000

Land .............................. 70,000
Building ......................... 100,000
Goodwill ........................ 180,000
Investment in
Sardine Company ......
280,000
RE—Sardine (NCI) ....

70,000

(A)
Amortize excess
for current and
prior years.

RE—Sardine..............
RE—Peter .................
Depr. Expense ...........
Acc. Depreciation ...

Depr. Expense ..............
Acc. Depreciation .......

RE—Sardine .................
RE—Peter .....................
Depr. Expense ..............
Acc. Depreciation .......

4,000
1,000
5,000
10,000

100

5,000
5,000

4,000
1,000
5,000
10,000


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Ch. 3—Problems

PROBLEM 3-2
(1)

Company
Implied
Fair Value

Value Analysis Schedule
Company fair value ...........................................
Fair value of net assets excluding goodwill ......
Goodwill ............................................................

$

$385,000
335,000
50,000 $

Determination and Distribution of Excess Schedule
Company

Parent
Implied
Price
Fair Value
(80%)
Fair value of subsidiary ..............
Less book value of interest acquired:
Common stock ......................
$
Paid-in capital in excess of par
Retained earnings .................
Total equity ......................
Interest acquired ...................
Book value .................................
Excess of fair value over book
value ......................................
$

Parent
Price
(80%)

NCI
Value
(20%)

$308,000
268,000
40,000

$77,000
67,000
$10,000

NCI
Value
(20%)

$385,000 $308,000

$ 77,000

50,000
100,000
150,000
$300,000 $300,000
80%
$240,000

$300,000
20%
$ 60,000

85,000 $ 68,000

$ 17,000

Adjustment of identifiable accounts:
Adjustment
Inventory ....................................

Buildings ....................................
Goodwill .....................................
Total ......................................

Worksheet
Key

$10,000 debit D1
25,000 debit D2
50,000 debit D3
$85,000

101

Life
10

Amortization
per Year
$2,500


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Ch. 3—Problems

Problem 3-2, Continued
(2)

Peres Company and Soap Company

Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X2

Trial Balance
Peres
Soap
Inventory .........................................................
Other Current Assets ......................................
Investment in Soap .........................................

Land ................................................................
Buildings and Equipment ................................
Accumulated Depreciation ..............................
Goodwill ..........................................................
Other Intangible Assets ...................................
Current Liabilities ............................................
Bonds Payable ................................................
Other Long-Term Liabilities.............................
Common Stock—Soap ...................................
Other Paid-In Capital—Soap ..........................
Retained Earnings—Soap ..............................

Common Stock—Peres ..................................
Other Paid-In Capital in
Excess of Par—Peres .................................
Retained Earnings—Peres .............................

100,000
148,000
388,000

...........
...........
...........
50,000
350,000
(100,000)
...........
20,000
(120,000)
...........
(200,000)
...........
...........
...........
...........
...........
...........
(200,000)

Eliminations
Dr.

50,000
180,000
............
............
(CY2)
............
............
50,000

320,000 (D2)
(60,000)
............
(D3)
............
(40,000)
(100,000)
............
(50,000) (EL)
(100,000) (EL)
(190,000) (EL)
............
............
(D1)
............
(A2)

...........
...........
...........
(CY1)
24,000
...........
(EL)
...........
(D)
...........
25,000
...........
(A2)

50,000
...........
...........
...........
...........
40,000
80,000
152,000
...........
(NCI)
2,000
500

............

...........

Cr.

Consolidated
Net
Income

...........
...........
72,000
...........
272,000
68,000
...........

...........
5,000
...........
...........
...........
...........
...........
...........
...........
...............
17,000
...........
...........
...........

NCI

Controlling
Retained
Earnings

...........
...........
...........
...........
...........
...........
...........
...........
...........

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
(10,000)
(20,000)
(52,500)
...........

...........
...........

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

150,000
328,000
...........
...........
...........
...........

100,000
695,000
(165,000)
50,000
20,000
(160,000)
(100,000)
(200,000)
...........
...........
...........
...........
...........
...........

...........

...........

...........

(200,000)

(100,000) ............
...........
...........
...........
...........
...........
(214,000) ............

...........
...........
...........
...........
...........
...........
............
(D1)
8,000
...........
...........
...........
...........
...........
............
(A2)
2,000
...........
...........
...........
...........
...........
............
...........
...........
...........
...........
(204,000)
Sales ...............................................................
(520,000)

(450,000)
...........
...........
(970,000) ...........
...........
Cost of Goods Sold .........................................
300,000
260,000
...........
...........
560,000
...........
...........
Operating Expenses .......................................
120,000
100,000 (A2)
2,500
...........
222,500
...........
...........
Subsidiary Income ..........................................
(72,000) ............
(CY1)
72,000
...........
...........
...........
...........
Dividends Declared—Soap .............................

...........
30,000
...........
(CY2)
24,000
...........
6,000 ...........
...........
...........
...........
...........
50,000
Dividends Declared—Peres ............................
50,000 ............
0
458,000
458,000
...........
...........
...........
Totals ..........................................................
0
Consolidated Net Income .....................................................................................................................................................
(187,500) ...........
...........
(17,500) ...........
NCI Share ............................................................................................................................................................................
17,500
...........
(170,000)

Controlling Share .................................................................................................................................................................
170,000
NCI ................................................................................................................................................................................................................
(94,000) ...........
Controlling Retained Earnings ..............................................................................................................................................................................................
(324,000)
Totals ........................................................................................................................................................................................................................................................

102

Consolidated
Balance
Sheet

(100,000)
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
(94,000)

(324,000)
0


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Ch. 3—Problems

Problem 3-2, Concluded
Eliminations and Adjustments:
(CY1)
Current-year subsidiary income.
(CY2)
Current-year dividend.
(EL)
Eliminate controlling interest in Sub equity.
(D)/(NCI) Distribute excess and adjust NCI.
(D1)
Inventory (retained earnings).
(D2)
Buildings and equipment.
(D3)
Goodwill.
(A2)
Amortize excess.
Income Distribution Schedules
Soap Company
Amortizations ................................

$2,500

Internally generated net
income .....................................

$90,000

Adjusted income............................
NCI share ......................................
NCI ................................................

$87,500
20%
$17,500

Peres Company
Internally generated
net income ............................... $100,000
Controlling share of subsidiary ......
70,000
Controlling interest ........................ $170,000

PROBLEM 3-3
(1) Use part (1), from Problem 3-2.
(2) Entries under the sophisticated equity method:
Debit

20X1
Credit

Debit

38,000a

Investment in Soap .....................................
Subsidiary Income.................................
Cash ............................................................
Investment in Soap ...............................

20X2
Credit

70,000b
38,000

16,000
16,000c

a

80% of $60,000 net income less $12,500 ($10,000 write-off of inventory and
$2,500 extra depreciation)
b
80% of $90,000 net income less $2,500 (extra depreciation)
c
80% of $20,000 dividends
d
80% of $30,000 dividends
(3) Balance in Investment in Soap Company:
$308,000 + $38,000 – $16,000 + $70,000 – $24,000 = $376,000

103

70,000
24,000
24,000d