Solution manual advanced accounting 2nd by hamlen CH04

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CHAPTER 4
SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS

MULTIPLE CHOICE QUESTIONS
1.

b
Goodwill at the date of acquisition is $10,000,000 ( = $16,000,000 – 4,000,000 +
8,000,000 – 10,000,000). Goodwill at 1/1/14 is $10,000,000 – 2,000,000 = $8,000,000.
Land, buildings and equipment revaluation at 1/1/14 is a credit of $8,000,000 – [3 x
(8,000,000/20)] = $(6,800,000).
Intangibles revaluation at 1/1/14 = $10,000,000 – [3 x ($10,000,000/5)] = $4,000,000.
Eliminating entry R is as follows:
Goodwill
Identifiable intangibles

8,000,000
4,000,000
Land, buildings and
equipment
Investment in Salem

2.

b
Eliminating entry O is as follows:
Operating expenses
Land, buildings and equipment

2,100,000
400,000
Goodwill
Identifiable intangibles

3.

6,800,000
5,200,000

500,000
2,000,000

a
Calculation of Equity in Net Income:
Salem’s reported net income
Revaluation writeoffs:
Land, buildings and equipment depreciation
Identifiable intangibles amortization
Goodwill impairment loss
Equity in income of Salem

Solutions Manual, Chapter 4

$ 2,500,000
400,000
(2,000,000)
(500,000)
$ 400,000

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4.

c
Original cost
Change in Salem’s retained earnings to 1/1/14
3 years land, buildings and equipment depreciation
3 years identifiable intangibles amortization
Goodwill impairment loss to 1/1/14
Investment balance, 1/1/14
Equity in net income, 2014
Investment balance, 12/31/14

5.

c

Book value > undiscounted cash flows?
Fair value
Book value
Impairment loss
6.

Customer lists
No

--

Brand names
Yes
$3,400,000
5,200,000
$1,800,000

d

Step one: Division book value > fair value?
Step two:
Fair value of goodwill
Book value of goodwill
Impairment loss

7.

$ 16,000,000
14,000,000
1,200,000
(6,000,000)
(2,000,000)
23,200,000
400,000
$23,600,000

Division 1
Yes

Division 2
Yes

$1,000,000
1,600,000
$ 600,000

$8,000,000
6,400,000
-0-

Division 1
$14,000,000
16,000,000
2,000,000
$ 1,600,000

Division 2
$20,000,000
24,000,000
4,000,000
$ 4,000,000

c

Fair value of division
Book value of division
Potential goodwill impairment
Actual impairment loss

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8.

d

Fair value
Book value
Impairment loss
9.

a

10.

a

Customer lists
$1,200,000
1,500,000
$ 300,000

Brand names

$3,400,000
5,200,000
$1,800,000

$500,000 – 100,000 = $400,000.

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EXERCISES
E4.1

Equity Method Accounting

Calculation of Equity in Net Income:
Johnson’s reported net income
Revaluation writeoffs:
Plant assets $50,000,000/25
Goodwill impairment loss
Equity in net income of Johnson
Entries made by George during 2013:
Investment in Johnson
Capital stock
Investment in Johnson

$ 85,000,000
(2,000,000)
(20,000,000)
$ 63,000,000

500,000,000
500,000,000
63,000,000

Equity in net income of
Johnson
Cash

63,000,000
30,000,000

Investment in Johnson

E4.2

30,000,000

Equity Method Income and Working Paper Eliminations

(all amounts in millions)
a.

Investment balance, 1/1/14
Investment balance, 1/1/13 = $2,000 + $200
Change

2013 dividends
2013 equity income accrual
Writeoff of plant asset revaluation = ($160/10)
Saber’s 2013 net income

$2,286
2,200
86
60
146
16
$ 162

b.

Saber’s stockholders’ equity, 1/1/13
2013 net income
2013 dividends
Saber’s stockholders’ equity, 1/1/14

$2,000
162
(60)
$2,102

c.

Saber’s 2014 net income
Extra depreciation on revalued plant assets
Equity income accrual

$ 130
(16)
$ 114

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d.

(C)
Equity income accrual

114

Dividends – Saber
Investment in Saber

(E)
Stockholders’ Equity –
Saber

40
74

2,102
Investment in Saber

2,102

(R)
Plant assets, net
Goodwill

144
40
Investment in Saber

184

(O)
Depreciation expense

16
Plant assets, net

e.

16

At the beginning of 2025, the plant assets are fully depreciated and the remaining balance
for goodwill is $40 - $30 = $10.
(R)
Goodwill

10
Investment in S

10

Entry (O) is not needed since no revaluations are written off in 2025.

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E4.3

Consolidation at End of First Year

a.

The acquisition entry is as follows:
Investment in Saddlestone
Merger expenses
Capital stock
Contingent consideration
liability
Cash

10,300,000

250,000
10,000,000
300,000
250,000

Calculation of 2013 equity in net income:
Saddlestone’s reported net income
Revaluation writeoff:
Identifiable intangibles $2,000,000/5
Equity in net income of Saddlestone
Peak’s equity method entries for 2013:
Investment in Saddlestone
Equity in net income of
Saddlestone
Cash

$ 3,000,000
(400,000)
$ 2,600,000

2,600,000
2,600,000
1,000,000

Investment in Saddlestone

b.

Calculation of goodwill is as follows:
Acquisition cost

Book value of Saddlestone
Excess of acquisition cost over book value
Identifiable intangibles
Goodwill
Consolidation working paper eliminating entries for 2013:
(C)
Equity in net income of
Saddlestone
Dividends – Saddlestone
Investment in Saddlestone
(E)
Stockholders’ equity—
Saddlestone, 1/1

$ 10,300,000
(7,200,000)
3,100,000
(2,000,000)
$ 1,100,000

2,600,000
1,000,000
1,600,000

7,200,000
Investment in Saddlestone

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1,000,000

7,200,000

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E4.3

continued
(R)
Identifiable intangibles
Goodwill

2,000,000
1,100,000
Investment in Saddlestone

3,100,000

(O)
Amortization expense

400,000
Identifiable intangibles

E4.4

Eliminating Entries after First and Second Years

a.

Calculation of equity in net income for 2014:

400,000

Safeco’s reported net income
Revaluation writeoffs:
Equipment $500,000/5
Inventory
Goodwill impairment loss
Equity in net income of Safeco

$ 1,600,000
(100,000)
(200,000)
(50,000)
$ 1,250,000

Peerless’s entries for 2014:
Investment in Safeco

8,000,000
Cash

8,000,000

Investment in Safeco

1,250,000
Equity in net income of
Safeco

1,250,000

Cash

600,000
Investment in Safeco

600,000

Calculation of goodwill is as follows:
Acquisition cost
Book value of Safeco
Excess of acquisition cost over book value
Fair value less book value:
Equipment
Inventory
Goodwill

Solutions Manual, Chapter 4

$

$

500,000

200,000
$

8,000,000
(7,000,000)
1,000,000

(700,000)
300,000

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E4.4

continued
Consolidation working paper eliminating entries for 2014:
(C)
Equity in net income of
Safeco

1,250,000
Dividends – Safeco
Investment in Safeco

600,000
650,000

(E)
Stockholders’ equity—Safeco,
1/1

7,000,000
Investment in Safeco

7,000,000

(R)
Equipment, net
Inventory
Goodwill

500,000
200,000
300,000
Investment in Safeco

1,000,000

(O)
Depreciation expense
Cost of goods sold
Goodwill impairment loss

100,000
200,000
50,000

Equipment, net
Inventory
Goodwill

b.

100,000
200,000
50,000

Calculation of equity in net income for 2015:
Safeco’s reported net income
Revaluation writeoff:
Equipment $500,000/5
Equity in net income of Safeco

$ 2,000,000
(100,000)
$ 1,900,000

Peerless’s equity method entries for 2015:
Investment in Safeco

1,900,000
Equity in net income of Safeco

Cash

800,000
Investment in Safeco

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1,900,000

800,000

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E4.4

continued
The Investment in Safeco balance at December 31, 2015 is $8,000,000 + 1,250,000 –
600,000 + 1,900,000 – 800,000 = $9,750,000.
Consolidation working paper eliminating entries for 2015:
(C)
Equity in net income of Safeco

1,900,000
Dividends – Safeco
Investment in Safeco

(E)
Stockholders’ equity—Safeco,
1/1

800,000
1,100,000

8,000,000

Investment in Safeco
8,000,000
Stockholders’ equity—Safeco at 1/1/2015 = $7,000,000 + 1,600,000 – 600,000 =
$8,000,000
(R)
Equipment, net
Goodwill

400,000
250,000
Investment in Safeco

(O)
Depreciation expense

100,000
Equipment, net

Solutions Manual, Chapter 4

650,000

100,000

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E4.5

Equity Method, Eliminating Entries, Several Years after Acquisition

a.

Calculation of total goodwill is as follows:
Acquisition cost
Book value of Oslo
Excess of acquisition cost over book value
Fair value less book value:
Land
Buildings
Identifiable intangibles
Long-term debt
Goodwill

b.

$

450,000
(400,000)
1,000,000
250,000

6,000,000
(2,500,000)
3,500,000

(1,300,000)
$ 2,200,000

Calculation of Equity in net income for 2014:
Oslo’s reported net income
Revaluation writeoffs:
Buildings $(400,000)/20
Long-term debt $250,000/10
Goodwill impairment loss
Equity in net income of Oslo

c.

$

$ 450,000
20,000
(25,000)
(60,000)
$ 385,000

Calculation of Investment in Oslo, 12/31/14
Investment in Oslo, 1/1/06
Oslo’s reported income, 2006-2013
Oslo’s reported dividends, 2006-2013

Revaluation writeoffs, 2006-2013:
Buildings $[(400,000)/20] x 8
Identifiable intangibles (full balance)
Long-term debt $[250,000/10] x 8
Goodwill impairment loss
Investment in Oslo, 1/1/14
Equity in net income, 2014
Oslo’s dividends, 2014
Investment in Oslo, 12/31/14

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$ 6,000,000
4,000,000
(1,200,000)
160,000
(1,000,000)
(200,000)
(300,000)
7,460,000
385,000
(100,000)
$ 7,745,000

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E4.5

continued

d.

Consolidation working paper eliminating entries for 2014:
(C)
Equity in net income of Oslo

385,000
Dividends – Oslo
Investment in Oslo

(E)
Stockholders’ equity—Oslo, 1/1

100,000
285,000

5,300,000

Investment in Oslo
5,300,000
Stockholders’ equity, January 1, 2014 = $2,500,000 + 4,000,000 – 1,200,000 = $5,300,000.
(R)
Land
Long-term debt
Goodwill

450,000
50,000
1,900,000

Investment in Oslo
2,160,000
Buildings, net
240,000
Revaluations at January 1, 2014 = original revaluations less writeoffs for 2006-2013.
(O)
Interest expense
Buildings, net
Goodwill impairment loss

25,000
20,000
60,000
Long-term debt
Depreciation expense
Goodwill

Solutions Manual, Chapter 4

25,000
20,000
60,000

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E4.6

Consolidation after Several Years

Calculation of total goodwill is as follows:
Acquisition cost
Book value of Baker
Excess of acquisition cost over book value
Fair value less book value:
Buildings
Goodwill

$

7,500,000
(5,000,000)
2,500,000

(1,000,000)
$ 1,500,000

Calculation of equity in net income for 2013:
Baker’s reported net income
Revaluation writeoffs:
Buildings $1,000,000/25
Goodwill impairment loss
Equity in net income of Baker

$

300,000

$

(40,000)
(100,000)
160,000

Calculation of investment balance at December 31, 2013:
Investment in Baker, 12/31/06
Baker reported income, 2007-2012
Baker reported dividends, 2007-2012
Revaluation writeoffs, 2007-2012:
Buildings ($1,000,000/25) x 6
Investment in Baker, 1/1/13
Equity in net income, 2013
Dividends, 2013
Investment in Baker, 12/31/13

$ 7,500,000
1,300,000
(400,000)
(240,000)
8,160,000
160,000
(100,000)
$ 8,220,000

Consolidation working paper eliminating entries for 2013:
(C)
Equity in net income of Baker

160,000
Dividends – Baker
Investment in Baker

(E)
Stockholders’ equity—Baker, 1/1

100,000
60,000

5,900,000

Investment in Baker
5,900,000
Stockholders’ equity, January 1, 2013 = $5,000,000 + 1,300,000 – 400,000 = $5,900,000.

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E4.6

continued

(R)
Buildings, net
Goodwill

760,000
1,500,000

Investment in Baker
2,260,000
Revaluations at January 1, 2013 = original revaluations less writeoffs for 2007-2012.
(O)
Depreciation expense
Goodwill impairment loss

40,000
100,000
Buildings, net
Goodwill

40,000
100,000

E4.7

Goodwill Impairment Losses

a.

Goodwill is not a standalone asset, but represents the value of above-average future
performance potential that cannot be assigned to identifiable assets such as property or
specific intangible assets. Because performance potential is related to business
operations, to measure impairments in its value it must be connected with a specific
business unit. In the case of Time Warner, as discussed in the text of Chapter 4, goodwill
is assigned to ―Networks‖ as a business unit. The WB Network was one part of this
business unit, but did not comprise the entire unit.

b.

First, Time Warner has the option to perform a qualitative analysis to determine if it is
more likely than not that the business unit’s book value exceeds its fair value. If so, the
fair value of the business unit is calculated and compared with its book value. If book
value exceeds fair value, we determine the amount of the impairment, if any, by
comparing the fair value of the goodwill with its book value. An impairment loss is
reported if book value exceeds fair value.
Since The WB Network was shut down, its future performance will no longer benefit
Time Warner, and the impairment charge is appropriate. Had the qualitative assessment
option been available in 2006, Time Warner would likely have bypassed this option due
to strong indicators that The WB Network’s future cash flows were significantly
impaired.

c.

Time Warner has a 50% interest in The CW, so under U.S. GAAP it does not have a
controlling interest and reports its investment using the equity method. Time Warner’s
equity in the net income of The CW is reported as part of consolidated other income. The
investment balance is reported as part of consolidated assets. The CW’s individual
assets, liabilities, revenues and expenses are not reported on the consolidated financial

statements.

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E4.8

Projecting Consolidation Entries

a.
(R)
Land
Equipment, net

80,000
18,000

Investment in Samson
98,000
Inventory has been sold, and the equipment revaluation as of the start of the third year is
$30,000 – (2 x 6,000) = $18,000.
(O)
Depreciation expense

6,000

Equipment, net

b.
(R)
Land

6,000

80,000
Investment in Samson

80,000

Inventory has been sold, and the equipment revaluation has been completely written off.
Therefore no eliminating entry (O) is appropriate.
c.

No eliminating entries are necessary to recognize or write off the revaluations, because
the assets requiring revaluation have been either sold or written off.

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E4.9

Identifiable Intangibles and Goodwill, U.S. GAAP

Amortization expense for 2014:
Customer relationships
Favorable leaseholds
Total

$4,000,000/4
$8,000,000/5

$ 1,000,000
1,600,000
$2,600,000

Impairment testing – identifiable intangibles:
Customer relationships
Book value = $4,000,000 – 2 x ($4,000,000/4) = $2,000,000
Book value > Sum of undiscounted cash flows? $2,000,000 > $1,200,000: Yes
Impairment loss = $2,000,000 - $900,000 = $1,100,000
Favorable leaseholds
Book value = $8,000,000 – 1.5 x ($8,000,000/5) = $5,600,000
Book value > Sum of undiscounted cash flows? $5,600,000 < $6,000,000: No
Brand names
Book value = $18,000,000
Book value > Sum of discounted cash flows? $18,000,000 > $7,000,000: Yes
Impairment loss = $18,000,000 - $7,000,000 = $11,000,000
Impairment testing – Goodwill:
Reporting Unit

Unit FV < BV?

Fair Value of GW

GW impairment loss

Asia

$400,000,000 > $300,000,000:
No
$350,000,000> $200,000,000:
No
$500,000,000< $600,000,000:
Yes

$500,000,000 – 385,000,000
= 115,000,000

$250,000,000 – 115,000,000 =
$135,000,000

South America
Europe

Summary:
Amortization expense – identifiable intangibles
Impairment losses – identifiable intangibles
Goodwill impairment loss
Total

Solutions Manual, Chapter 4

$

2,600,000
12,100,000
135,000,000
$149,700,000

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E4.10 Identifiable Intangibles and Goodwill, IFRS
Amortization expense for 2014:
Customer relationships
Favorable leaseholds
Total

$4,000,000/4
$8,000,000/5

$ 1,000,000
1,600,000
$2,600,000

Impairment testing – identifiable intangibles:
Customer relationships
Book value = $4,000,000 – 2 x ($4,000,000/4) = $2,000,000

Book value > Sum of discounted cash flows? $2,000,000 > $900,000: Yes
Impairment loss = $2,000,000 - $900,000 = $1,100,000
Favorable leaseholds
Book value = $8,000,000 – 1.5 x ($8,000,000/5) = $5,600,000
Book value > Sum of discounted cash flows? $5,600,000 > $4,400,000: Yes
Impairment loss = $5,600,000 – $4,400,000 = $1,200,000
Brand names
Book value = $18,000,000
Book value > Sum of discounted cash flows? $18,000,000 > $7,000,000: Yes
Impairment loss = $18,000,000 - $7,000,000 = $11,000,000
Impairment testing – Goodwill:
Reporting Unit

Unit FV < BV?

GW impairment loss

E. Asia

$150,000,000 < $200,000,000: Yes

$200,000,000 – 150,000 =
$50,000,000; impairment limited to full
goodwill balance of $40,000,000.

Indonesia
Brazil
Mediterranean

$120,000,000 > $100,000,000: No

$140,000,000 >$130,000,000: No
$190,000,000 < $220,000,000: Yes

Scandinavia

$230,000,000 < $300,000,000: Yes

Summary:
Amortization expense – identifiable intangibles
Impairment losses – identifiable intangibles
Goodwill impairment loss
Total

©Cambridge Business Publishers, 2013
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$220,000,000 – 190,000,000 =
$30,000,000
$300,000,000 – 230,000,000 =
$70,000,000

$

2,600,000
13,300,000
140,000,000
$155,900,000

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E4.11 Consolidated Income Statement
a.
(amounts in millions)
Sales $5,000 + 2,000
Cost of goods sold $3,000 + 800 + 160
Gross margin
Depreciation expense $500 + 140 – (200/10)
Interest expense $100 + 60 + (100/5)
Other expenses $600 + 700
Total operating expenses
Net income
b.

$7,000
3,960
3,040
620
180
1,300
2,100
$ 940

Parson reports its own income of $800 million plus its equity in the income of Soaper of
$140 million. Equity in the income of Soaper is Soaper’s reported income adjusted for
write-offs of Soaper’s net asset revaluations. Consolidated income is Parson’s and
Soaper’s reported revenues and expenses, with Soaper’s expenses adjusted for the
revaluation writeoffs. Parson’s separately reported income and consolidated income

therefore report the same items, packaged differently.

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E4.12 Amortization and Impairment Testing of Identifiable Intangible Assets
a.
Technology
Arroyo
WebEx

$15,000/5 x 9/12 =
$312,000/4 x 1/12 =

Customer Relationships
Arroyo
WebEx

$14,000/7 x 9/12 =
$153,000/6 x 1/12 =

Total amortization expense

$

2,250
6,500

1,500
2,125
$ 12,375

b.

Technology
Arroyo
WebEx
Customer
Relationships
Arroyo
WebEx

7/31/07
Book value>
Book
Undiscounted
value
cash flows?
Impairment loss
$ 12,750 $12,750>$14,000? No
--305,500 $305,500>$300,000? Yes $305,500-250,000 = $ 55,500

-12,500 $12,500>$16,000? No
$150,875-100,000
=

150,875 $150,875>$140,000? Yes

Total impairment loss

-50,875
$106,375

c.

Arroyo
WebEx
7/31/07 book value

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Technology
$ 12,750
250,000
$ 262,750

Customer
Relationships
$ 12,500
100,000
$ 112,500

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E4.13 Consolidation Using Cost Method
Calculation of total goodwill is as follows:
Acquisition cost
Book value of Baker
Excess of acquisition cost over book value
Fair value less book value:
Buildings
Goodwill

$

7,500,000
(5,000,000)
2,500,000

(1,000,000)
$ 1,500,000

Calculation of adjustment to investment balance to convert it to complete equity method at
January 1, 2013:
Baker reported income, 2007-2012
Baker reported dividends, 2007-2012
Revaluation writeoffs, 2007-2012:
Buildings ($1,000,000/25) x 6
Adjustment to Investment in Baker, 1/1/13

$ 1,300,000
(400,000)

(240,000)
$ 660,000

Consolidation working paper eliminating entries for 2013:
(A)
Investment in Baker

660,000
Stockholders’ equity –Adam

(C)
Dividend income – Adam

660,000
100,000

Dividends – Baker
(E)
Stockholders’ equity—Baker, 1/1

100,000
5,900,000

Investment in Baker
5,900,000
Stockholders’ equity, January 1, 2013 = $5,000,000 + 1,300,000 – 400,000 = $5,900,000.
(R)
Buildings, net
Goodwill

760,000
1,500,000

Investment in Baker
Revaluations at January 1, 2013 = original revaluations less writeoffs for 2007-2012.
(O)
Depreciation expense
Goodwill impairment loss

40,000
100,000
Buildings, net
Goodwill

Solutions Manual, Chapter 4

2,260,000

40,000
100,000

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PROBLEMS
P4.1

Condensed Consolidated Financial Statements One Year after Acquisition

a.

Calculation of equity in net income for 2014:
Santo’s reported net income
Revaluation writeoffs:
Inventory (1)
Plant assets $8,000,000/8
Patents $1,500,000/4
Long-term debt $1,000,000/10
Goodwill impairment loss
Equity in net income of Santo

$ 5,000,000
(2,000,000)
(1,000,000)
(375,000)
100,000
(400,000)
$ 1,325,000

(1) Santo’s beginning inventory on its own books is $3,000,000 (= $5,200,000 +
4,000,000 – 6,200,000). Since Santo’s cost of goods sold is $4,000,000, its
beginning inventory is completely sold in 2014, and the revaluation is written off.
b.
Consolidation Working Paper, December 31, 2014
Trial Balances Taken From
Books
Dr (Cr)

Eliminations
Consolidated

Ponon

Santo

Cash and receivables
Inventory
Plant assets, net
Investment in Santo

$ 4,500,000
5,000,000
8,000,000
26,325,000

$ 3,100,000
5,200,000
12,000,000
--

Patents
Goodwill
Current liabilities
Long-term debt
Capital stock
Retained earnings, Jan. 1
Sales

Equity in income of Santos
Cost of goods sold
Depreciation and
amortization expense
Interest and other expenses
GW impairment loss

--(5,100,000)
(20,000,000)
(8,000,000)
(4,800,000)
(30,000,000)
(1,325,000)
18,000,000
2,000,000

--(2,000,000)
(3,300,000)
(6,000,000)
(4,000,000)
(13,200,000)
-4,000,000
3,200,000

5,400,000
-$
-0-

1,000,000
-$

-0-

©Cambridge Business Publishers, 2013
20

Dr

Balances

Cr
$

(R) 2,000,000
(R) 8,000,000

(R) 1,500,000
(R) 4,500,000
(O-4) 100,000
(E) 6,000,000
(E) 4,000,000

2,000,000 (O-1)
1,000,000 (O-2)
1,325,000 (C)
10,000,000 (E)
15,000,000 (R)
375,000 (O-3)
400,000 (O-5)
1,000,000

(R)

(C) 1,325,000
(O-1) 2,000,000
(O-2) 1,000,000
(O-3) 375,000
(O-5) 400,000
$
31,200,000

100,000 (O-4)
_______
$31,200,000

7,600,000
10,200,000
27,000,000
--

1,125,000
4,100,000
(7,100,000)
(24,200,000)
(8,000,000)
(4,800,000)
(43,200,000)
-24,000,000
6,575,000
6,300,000
400,000

$
-0-

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P4.1

continued

c.
Consolidated Statement of Income and Retained Earnings For the Year 2014
Sales
$ 43,200,000
Costs of goods sold
(24,000,000)
Gross margin
19,200,000
Operating expenses:
Depreciation and amortization expense
$ 6,575,000
Interest and other expenses
6,300,000
Goodwill impairment loss
400,000
(13,275,000)
Net income
5,925,000

Retained earnings, beginning balance
4,800,000
Retained earnings, ending balance
$ 10,725,000
Consolidated Balance Sheet, December 31, 2014
Assets
Cash and receivables
Inventory
Plant assets, net
Patents
Goodwill
Total assets
Liabilities and stockholders’ equity
Current liabilities
Long-term debt
Capital stock
Retained earnings
Total liabilities and stockholders’ equity

Solutions Manual, Chapter 4

$

7,600,000
10,200,000
27,000,000
1,125,000
4,100,000
$ 50,025,000
$

7,100,000
24,200,000
8,000,000
10,725,000
$ 50,025,000

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P4.2

Equity Method and Eliminating Entries Three Years after Acquisition

a.

Calculation of equity in net income for 2014:
Sunset Coast’s reported net income for 2014
Revaluation writeoffs:
Plant assets ($1,000,000)/10
Identifiable intangibles $3,600,000/20
Equity in net income of Sunset Coast

$ 200,000
100,000
(180,000)
$ 120,000

Note: Identifiable intangibles at the date of acquisition are $2,100,000 + 500,000 +
1,000,000 = $3,600,000.
b.

Calculation of investment balance at December 31, 2014:
Investment in Sunset Coast, December 31, 2011
Sunset Coast’s reported income, 2012-2014
Sunset Coast’s reported dividends, 2012-2014 (50% of
reported income)
Revaluation writeoffs, 2012-2014:
Plant assets [($1,000,000)/10] x 3
Identifiable intangibles ($3,600,000/20) x 3
Investment in Sunset Coast, December 31, 2014

$ 3,500,000
850,000
(425,000)
300,000
(540,000)
$ 3,685,000

Note to instructor: Under LIFO and increasing inventory, the acquisition date
revalued inventory is assumed to still be on hand.
c.

Consolidation working paper eliminating entries for 2014:
(C)
Equity in net income of Sunset
Coast

120,000
Dividends – Sunset
Coast (.5 x $200,000)
Investment in Sunset
Coast

©Cambridge Business Publishers, 2013
22

100,000
20,000

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P4.2

continued
(E)
Stockholders’ equity—Sunset
Coast, 1/1

1,725,000

Investment in Sunset
Coast
1,725,000

Sunset Coast’s stockholders’ equity, December 31, 2011 = $1,400,000 (acquisition cost
$3,500,000 less excess over book value $2,100,000).
Sunset Coast’s stockholders’ equity, January 1, 2014 = $1,400,000 + (1 - .5)(850,000 –
200,000) = $1,725,000.
(R)
Identifiable intangibles

3,240,000

Inventory
500,000
Plant assets, net
800,000
Investment in Sunset
Coast
1,940,000
Revaluations at January 1, 2014 = original revaluations less writeoffs for 2012 and 2013.
(O)
Plant assets, net
Amortization expense

100,000
180,000
Depreciation expense
Identifiable intangibles

d.

100,000
180,000

Puffin’s income from its own operations plus equity in net income of Sunset Coast =
consolidated net income: $600,000 + $120,000 = $720,000.

Solutions Manual, Chapter 4

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P4.3

Consolidation at End of First Year, Preacquisition Contingency

a.

Calculation of equity in net income for 2013:
Sanders’ reported net income for 2013
Revaluation writeoffs:
Inventory $80,000 x 60%
Equipment $200,000/10
Equity in net income of Sanders
Perkins’entries for 2013:
Investment in Sanders
Merger expenses
Restructuring expenses

$ 500,000

(48,000)
(20,000)
$ 432,000

4,000,000
50,000
100,000
Cash

Investment in Sanders

4,150,000
432,000

Equity in net income of
Sanders
Cash

432,000
150,000

Investment in Sanders
b.

150,000

Consolidation working paper eliminating entries for 2013:
(C)
Equity in net income of
Sanders

432,000
Dividends – Sanders
Investment in Sanders

(E)
Stockholders’ equity—
Sanders, 1/1

2,200,000
Investment in Sanders

©Cambridge Business Publishers, 2013
24

150,000
282,000

2,200,000

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P4.3

Consolidation at End of First Year, Preacquisition Contingency
(R)
Inventory

Equipment, net
In-process research and
development
Goodwill

80,000
200,000
300,000
1,305,000
Lawsuit liability
Investment in Sanders

85,000
1,800,000

Note: Because the change in the lawsuit liability occurs within the measurement period,
the increased liability value increases acquisition date goodwill.
(O)
Cost of goods sold
Depreciation expense

48,000
20,000
Inventory
Equipment, net

P4.4

48,000
20,000

Consolidated Balance Sheet Working Paper, Bargain Purchase (see related P3.4)

(all amounts in millions)
a.

Calculation of equity in net income for 2013:
Saxon’s reported net income for 2013 ($10,000 + 10 – 8,000 – 40 – 25 – 1,600)
Revaluation writeoffs:
Inventory
Marketable securities
Buildings and equipment $300/20
Long-term debt $110/5
Equity in net income of Saxon

$ 345
(100)
50
(15)
(22)
$ 258

Calculation of Investment balance, December 31, 2013:
Investment balance, December 31, 2012 (1)
Equity in net income for 2013
Dividends for 2013
Investment balance, December 31, 2013
(1)

$2,000

258
(100)
$2,158

Paxon acquired Saxon for $1,800, but there is a bargain gain that increases the
investment balance by $200, as follows:

Solutions Manual, Chapter 4

©Cambridge Business Publishers, 2013
25