Solution manual fundamentals of advanced accounting 9e by fischertaylor ch 03

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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.

amount does not reflect adjustments based on
fair values at the purchase date. In the past, it
has been displayed as an expense. However, it
should be displayed as a distribution of consolidated net income to the NCI.
4. (a) Parent net income for 20X1 .....
Parent’s share of subsidiary
net income in 20X1
($60,000 × ½ year × 80%) ....
Amortization of excess for 20X1
($100,000 ÷ 10 × ½ year) .....
NCI share of subsidiary net
income in 20X1
($60,000 × 20%) ...................
Consolidated net income..........

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 beginning of the
year balances, yet the investment account
reflects an end of the 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 of the year balance.
(b) Sophisticated equity method—The subsidiary’s equity accounts reflect beginning of
the year balances, yet the investment account reflects an end of the 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 of the year balance.
(c) Cost method—The subsidiary’s equity accounts reflect beginning of the 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.

$140,000

24,000
(5,000)

12,000
$171,000

(b) NCI share of net income = $60,000 × 20%

= $12,000.
5. In 20X1, consolidated net income would be reduced by $16,000 as a result of the inventory
and equipment. The inventory would increase
cost of goods sold by $8,000 [($60,000 –
$50,000) × 80%]. The equipment would increase depreciation expense by $8,000
[($150,000 – $100,000) × 80% ÷ 5 years]. In
20X2, consolidated net income would be reduced by $8,000 as a result of the equipment.
The equipment would increase depreciation
expense by $8,000 [($150,000 – $100,000) ×
80% ÷ 5 years]. The inventory would reduce
controlling retained earnings by $8,000 in future
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 as a subdivision of
equity as a total amount 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

3. The noncontrolling share of consolidated net
income is the outside ownership share of the
subsidiary’s internally generated income. This

79


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Ch. 3—Understanding the Issues

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.

adjustments. There is no need to make adjustments to fair value on the consolidated worksheet since fair value already exists. The
investment account is eliminated against subsidiary equity with no excess. Also, there is no
need to record any additional amortization,
since the subsidiary has already done this.

8. Push-down accounting simplifies the consolidated worksheet procedures since the subsidiary’s accounts will already reflect the fair value

80


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Ch. 3—Problems

EXERCISES
EXERCISE 3-1
Group
Total

Zone Analysis
Priority accounts ...............................
Nonpriority accounts .........................

$

0
325,000

Ownership
Portion
$

Cumulative
Total

0
260,000

$

0
260,000

Price Analysis
Price ...................................................................................
Assign to priority accounts ..................................................
Assign to nonpriority accounts ............................................
Goodwill ..............................................................................

$360,000
0 full value
260,000
full value
100,000

Determination and Distribution of Excess Schedule
Price paid for investment .............................

Less book value interest acquired:
Common stock .......................................
Paid-in capital in excess of par ...............
Retained earnings ..................................
Total equity .....................................
Interest acquired ....................................
Excess of cost over book value (debit) .........

$360,000
$ 50,000
100,000
150,000
$300,000
×
80%

Equipment ...................................................
Goodwill .......................................................
Total adjustments...................................
(a)

240,000
$120,000
$ 20,000
100,000
$120,000

5

debit

debit

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

Amortization
$4,000

Simple Equity Method

81

48,000
8,000

32,000
8,000


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Ch. 3—Problems

Exercise 3-1, Concluded
(b)

(c)

Event

Sophisticated Equity Method

20X1
Subsidiary income of
$60,000 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

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

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

28,000

Dividends of $10,000 paid

by Hill

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

8,000

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

Cost Method

44,000
8,000

28,000
8,000

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

8,000
8,000

8,000
8,000

EXERCISE 3-2
Group
Total

Zone Analysis
Priority accounts ...............................
Nonpriority accounts .........................

$

80,000
450,000

Ownership

Portion
$

60,000
337,500

Cumulative
Total
$

60,000
397,500

Price Analysis
Price ...................................................................................
Assign to priority accounts ..................................................
Assign to nonpriority accounts ............................................
Goodwill ..............................................................................
Extraordinary gain...............................................................

82

$462,500
60,000
337,500
65,000
—

full value
full value

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Ch. 3—Problems

Exercise 3-2, Concluded
Determination and Distribution of Excess Schedule
Price paid for investment .............................
Less book value interest acquired:
Common stock .......................................
Paid-in capital in excess of par ...............
Retained earnings ..................................
Total equity .....................................
Interest acquired ....................................
Excess of cost over book value (debit) .........

$462,500
$ 50,000
150,000
200,000
$400,000
×
75%

Inventory ......................................................
Buildings and equipment (net) .....................
Patent ..........................................................
Goodwill .......................................................
Extraordinary gain........................................
Total adjustments...................................

300,000
$162,500
$

7,500
75,000
15,000
65,000
—
$162,500

1 debit
20 debit
10 debit
debit

Amortization
—
$3,750
1,500

(a) Simple equity ...................................................................................................
+ (75% Cost × Increase in Retained Earnings of $78,000*) ..............................
Balance ............................................................................................................

$462,500
58,500
$521,000

(b) Sophisticated equity .........................................................................................
+ (75% Cost × Increase in Retained Earnings of $78,000*) ..............................
– 20X4 Amortization of Excess
($7,500 Inventory + $3,750 Building + $1,500 Patent) ...............................
– 20X5 Amortization of Excess
($3,750 Building + $1,500 Patent) .............................................................
Balance ............................................................................................................
*Or 75% × ($70,000 – $20,000 + $48,000 – $20,000)

$462,500
58,500

(c)

$462,500

Cost .................................................................................................................

83

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


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Ch. 3—Problems

EXERCISE 3-3
(1)

Determination and Distribution of Excess Schedule
Price paid for investment. .................................
Less book value of interest acquired:
Common stock ($10 par) ............................ $100,000
Paid-in capital in excess of par ...................
—
Retained earnings....................................... 150,000
Total equity ........................................... $250,000
Interest acquired ......................................... ×
80%
Excess of cost over book value (debit) .............
Existing goodwill ...............................................
Excess available ...............................................
Adjustments:
Depreciable fixed assets .............................
Goodwill ......................................................
Extraordinary gain.......................................
Total adjustments..................................

$250,000

200,000
$ 50,000
—
$ 50,000
$ 50,000
—
—
$ 50,000

Amortization

10 debit

(2) CY1 Subsidiary Income ..............................................................
Investment in Salt Company .........................................
To eliminate parent’s share of subsidiary earnings
for the current year.

20,000

CY2 Investment in Salt Company ...............................................
Dividends Declared.......................................................
To eliminate parent’s share of dividends for the
current year.

4,000

EL

D

$5,000

20,000

4,000

Common Stock—Salt .........................................................
Retained Earnings—Salt ....................................................

Investment in Salt Company .........................................
To eliminate pro rata share of the beginning-of-theyear Salt equity balances.

80,000
120,000

Depreciable Fixed Assets*..................................................
Investment in Salt Company .........................................
To distribute excess per determination and
distribution of excess schedule.

50,000

200,000

50,000

*Assuming no accumulated depreciation existed
on the date of acquisition.
A

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

84

5,000
5,000

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Ch. 3—Problems

Exercise 3-3, Continued
(3)

Pepper Company and Salt Company
Consolidated Income Statement
For Year Ended December 31, 20X1
Revenue ...........................................................................................................
Less expenses (add $5,000 adjustment) ..........................................................
Consolidated net income ..................................................................................
Distributed to noncontrolling interest .................................................................
Distributed to controlling interest.......................................................................

$250,000
190,000
$ 60,000
5,000
$ 55,000

Subsidiary Salt Company Income Distribution
Internally generated net
income..................................

$25,000

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

NCI .............................................

$25,000
× 20%
$ 5,000

Parent Pepper Company Income Distribution
Depreciable fixed assets .............

$5,000

Internally generated net
income..................................
80% × Salt adjusted
income of $25,000 ................
Controlling interest .....................

85

$40,000
20,000
$55,000


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Ch. 3—Problems

Exercise 3-3, Concluded
(4)

Pepper Company and Salt Company
Consolidated Balance Sheet
December 31, 20X1
Assets
Current assets .......................................................................
Depreciable fixed assets........................................................
Less accumulated depreciation .............................................
Total assets ...........................................................................

$190,000
$650,000
131,000

519,000
$709,000

Liabilities and Stockholders’ Equity
Current liabilities ....................................................................
Stockholders’ equity:
Noncontolling interest .....................................................
Controlling interest:
Common stock..........................................................
Retained earnings ....................................................
Total liabilities and stockholders’ equity .................................

$100,000
54,000
$300,000
255,000

555,000
$709,000

EXERCISE 3-4
(1) CY1 Subsidiary Income ..............................................................
Investment in Salt Company .........................................
To eliminate parent’s share of subsidiary earnings
for the current year.

12,000

CY2 Investment in Salt Company ...............................................
Dividends Declared.......................................................
To eliminate parent’s share of dividends for the
current year.

8,000

EL

D

12,000

8,000

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

80,000
136,000

Depreciable Fixed Assets*..................................................
Investment in Salt Company .........................................
To distribute excess to plant assets.
*No accumulated depreciation existed on the date
of acquisition.

50,000

86

216,000

50,000


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Ch. 3—Problems

Exercise 3-4, Concluded
A

Depreciation Expense ...........................................................
Retained Earnings—Pepper ..................................................
Accumulated Depreciation...........................................
To amortize excess for past and current year.

(2)

5,000
5,000
10,000

Pepper Company and Salt Company
Consolidated Income Statement
For Year Ended December 31, 20X2
Revenue .........................................................................................................
Less expenses (add $5,000 adjustment) ........................................................
Consolidated net income ................................................................................

$300,000
250,000
$ 50,000

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

3,000
$ 47,000

Subsidiary Salt Company Income Distribution
Internally generated net
income..................................

$15,000

Adjusted income.........................

NCI share ...................................
NCI .............................................

$15,000
× 20%
$ 3,000

Parent Pepper Company Income Distribution
Depreciable fixed assets .............

$5,000

Internally generated net
income..................................
80% × Salt adjusted
income of $15,000 ................
Controlling interest .....................

$40,000
12,000
$47,000

EXERCISE 3-5
(1) Same as Exercise 3, Part 1.
(2) CY1 Subsidiary Income ..............................................................
Investment in Salt Company .........................................

15,000

CY2 Investment in Salt Company ...............................................

Dividends Declared.......................................................

4,000

EL

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

87

15,000
4,000
80,000
120,000
200,000


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Ch. 3—Problems

Exercise 3-5, Concluded
D

A

Depreciable Fixed Assets*..................................................
Investment in Salt Company .........................................
*No accumulated depreciation existed on the date

of acquisition.

50,000

Depreciation Expense ........................................................
Accumulated Depreciation ............................................

5,000

50,000

5,000

(3) Same as Exercise 3, Part 3.
(4) Same as Exercise 3, Part 4.

EXERCISE 3-6
(1) CY1 Subsidiary Income ..............................................................
Investment in Salt Company .........................................

7,000

CY2 Investment in Salt Company ...............................................
Dividends Declared.......................................................

8,000

EL

D

A

7,000

8,000

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

80,000
136,000

Depreciable Fixed Assets*..................................................
Investment in Salt Company .........................................
Accumulated Depreciation ............................................
*No accumulated depreciation existed on the date
of acquisition.

50,000

Depreciation Expense ........................................................
Accumulated Depreciation ............................................

5,000

216,000

45,000

5,000

5,000

(2) Same as Exercise 4, Part 2.

EXERCISE 3-7
(1) Same as Exercise 3, Part 1.
(2) CY2 Dividend Income.................................................................
Dividends Declared.......................................................
To eliminate parent’s share of subsidiary dividends
for the current year.

88

4,000
4,000


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Ch. 3—Problems

Exercise 3-7, Concluded
EL

D

A

Common Stock—Salt .........................................................

Retained Earnings—Salt ....................................................
Investment in Brewer Company ....................................
To eliminate pro rata share of the beginning-of-theyear Salt equity balances.
Depreciable Fixed Assets*..................................................
Investment in Salt Company .........................................
To distribute excess per determination and
distribution of excess schedule.
*No accumulated depreciation existed on the date of acquisition.
Depreciation Expense ........................................................
Accumulated Depreciation ............................................
To amortize excess for the current year.

80,000
120,000
200,000

50,000
50,000

5,000
5,000

(3) Same as Exercise 3, Part 3.
(4) Same as Exercise 3, Part 4.

EXERCISE 3-8
(1) CV

Investment in Salt 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

CY2 Dividend Income.................................................................
Dividends Declared.......................................................
To eliminate parent’s share of subsidiary dividends
for the current year.

8,000

EL

D

16,000

8,000

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

80,000
136,000

Depreciable Fixed Assets*..................................................

Investment in Salt Company .........................................
To distribute excess to plant assets.
*No accumulated depreciation existed on the date of
acquisition.

50,000

89

216,000

50,000


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Ch. 3—Problems

Exercise 3-8, Concluded
A

Depreciation Expense ........................................................
Retained Earnings—Pepper ...............................................
Accumulated Depreciation ............................................
To amortize excess for past and current year.

5,000
5,000
10,000

(2) Same as Exercise 4, Part 2.

EXERCISE 3-9
Amortization Schedule
Account Adjustments

Life

Inventory ...........................................
Subject to amortization:
Investments ................................
Bonds Payable ............................
Buildings (net) .............................
Equipment (net) ..........................
Patent .........................................
Trademark ..................................
1,600
Total ......................................

Annual
Amount

20X1

1

5,000

5
5
20

5
10
10

4,000
2,000
10,000
27,600
1,800
1,600

20X2

20X3

20X4

5,000
4,000
4,000
4,000 4,000
2,000
2,000
2,000 2,000
10,000
10,000
10,000 10,000
27,600
27,600
27,600 27,600

1,800
1,800
1,800 1,800
1,600
1,600
1,600
52,000

47,000

47,000 47,000

EXERCISE 3-10
(1)
Determination and Distribution of Excess Schedule
Price paid for investment ........................
Less book value interest acquired:
Common stock ................................
Retained earnings...........................
Income of Karen, Jan. 1 to July 1 ....
Total equity .................................
Interest acquired .............................
Excess of book value over cost (credit) ..
Adjustments:
Depreciable fixed assets .................
Goodwill ..........................................
Extraordinary gain...........................
Total adjustments .......................

$310,000

$100,000
300,000
30,000
$430,000
× 80%

344,000
$
(34,000)
$

(34,000) 5 credit
—
—

$

90

(34,000)

Amortization
$(6,800)


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Ch. 3—Problems

Exercise 3-10, Continued
(2) EL

D

A

(3)

Common Stock—Karen ......................................................
Retained Earnings—Karen .................................................
Purchased Income..............................................................
Investment in Karen Company ......................................
To eliminate pro rata share of the beginning-of-theyear Karen equity balances and purchased income.

80,000
240,000
24,000

Investment in Karen Company ...........................................
Equipment ....................................................................
To distribute excess book value to plant assets.

34,000

Accumulated Depreciation [($34,000 ÷ 5) × 1/2] .................
General Expenses ........................................................
To reduce depreciation expense for one-half year.

3,400

344,000

34,000

3,400

Neiman Company and Subsidiary Karen Company
Consolidated Income Statement
For Year Ended December 31, 20X2
Sales ..............................................................................................................
Less cost of goods sold ..................................................................................
Gross profit .....................................................................................................
Less general expenses (less $3,400 adjustment) ...........................................
Net income of Neiman and Karen combined...................................................
Net income earned by outside interests ..........................................................
Consolidated net income ................................................................................
Distributed to noncontrolling interest ...............................................................
Distributed to controlling interest.....................................................................

$500,000
270,000
$230,000
106,600
$123,400
24,000
$ 99,400
12,000
$ 87,400

Subsidiary Karen Company Income Distribution
Internally generated net

income..................................

$60,000

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

$60,000
× 20%
$12,000

91


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Ch. 3—Problems

Exercise 3-10, Concluded
Parent Neiman Company Income Distribution
Internally generated net
income..................................
80% × Karen adjusted
income of $30,000
(past 6 months) ....................
Equipment depreciation ..............
Controlling interest .....................

$60,000

24,000
3,400
$87,400

EXERCISE 3-11
Calculation of book value of investment:
Purchase cost ..................................................................................................
Add 80% of $200,000 increase in Baker retained earnings .............................
Deduct amortization of excess (5 years × $8,000 per year) .............................
Balance ...........................................................................................................

$850,000
160,000
(40,000)
$970,000

80% of fair value of Baker Company (80% × $1,000,000) ................................

$800,000

Since the book value exceeds the fair value of the interest, goodwill is impaired.
Impairment loss:
Fair value of Baker Company...........................................................................
Fair value of Baker Company identifiable assets..............................................
Estimated goodwill ...........................................................................................
80% applicable to parent .................................................................................
Existing goodwill ..............................................................................................
Impairment loss ...............................................................................................

92

$
$
$

$1,000,000
900,000
100,000
80,000
210,000
130,000


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Ch. 3—Problems

EXERCISE 3A-1
(1) Investment in Lamb Company ......................................................
Common Stock ...................................................................
Paid-In Capital in Excess of Par .........................................
(2)

Group
Total

Zone Analysis
Priority accounts (net of liabilities) ..............
Nonpriority accounts ...................................

500,000

100,000
400,000

Ownership
Portion

$134,000
252,000

Cumulative
Total

$134,000
252,000

$134,000
386,000

Price Analysis
Price ............................................................................
Assign to priority accounts ...........................................
Assign to nonpriority accounts .....................................
Goodwill (net of deferred tax liability) ...........................
Extraordinary gain .......................................................

$500,000
134,000 full value
252,000 full value
114,000
—

Determination and Distribution of Excess Schedule
Price paid for investment ........................
Less book value interest acquired:
Common stock ................................
Retained earnings...........................
Total equity .................................
Interest acquired .............................
Excess of cost over book value (debit) ...
Adjustments:
Inventory .........................................
Deferred tax liability ........................
Depreciable fixed assets .................
Deferred tax liability ........................
Goodwill (net) .................................
Goodwill ($114,000 ÷ 70%) ....................
Deferred tax liability, 30% ......................
Net Goodwill ...................................

$500,000
$100,000
230,000
$330,000
× 100%

330,000
$170,000
$

20,000

(6,000)
60,000
(18,000)
$114,000

debit
credit
debit
credit

$162,857
(48,857)
$114,000

(3) Elimination Entries:
Common Stock .............................................................................
Retained Earnings ........................................................................
Investment in Lamb Company ............................................

100,000
230,000

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

20,000

60,000
162,857

93

330,000

72,857
170,000


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Ch. 3—Problems

EXERCISE 3A-2
(1)

Group
Total

Zone Analysis
Priority accounts (net of liabilities) ..............
Nonpriority accounts ...................................

$

Ownership
Portion

74,000

255,000

$

66,600
229,500

Cumulative
Total
$

66,600
296,100

Price Analysis
Price ............................................................................
Assign to priority accounts ...........................................
Assign to nonpriority accounts .....................................
Goodwill (net of deferred tax liability) ...........................

$465,000
66,600 full value
229,500 full value
168,900

Determination and Distribution of Excess Schedule
Price paid for investment ........................
Less book value interest acquired:
Common stock ................................
Paid-in capital in excess of par .......

Retained earnings...........................
Total equity .................................
Interest acquired .............................
Excess of cost over book value (debit) ...
Adjustments:
Inventory .........................................
Deferred tax liability ........................
Building ...........................................
Deferred tax liability ........................
Goodwill (net of deferred tax liability)
Total adjustments .......................

$465,000
$100,000
130,000
50,000
$280,000
×
90%

252,000
$213,000
Amortization
$ 18,000
1
(5,400)5
45,00010
(13,500)5
168,900
$213,000

Distributed to goodwill ($168,900 ÷ 70%) .....................................
Distributed to deferred tax liability (30% × $241,286) ....................
Goodwill .............................................................................

94

debit
credit
debit
credit
debit

$241,286
(72,386)
$168,900

$(1,080)
4,500
(2,700)


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Ch. 3—Problems

Exercise 3A-2, Concluded
(2)

Lucy Company and Subsidiary Desmond Company
Consolidated Income Statement

For Year Ended December 31, 20X1
Revenue ................................................................................
Less cost of goods sold (add $18,000 adjustment) ................
Gross profit ............................................................................
Less expenses:
Depreciation expense (add $4,500 adjustment) ...............
General expenses............................................................
Consolidated income before tax ............................................
Provision for tax (30%) ..........................................................
Consolidated net income .......................................................
Distributed to NCI ..................................................................
Distributed to controlling interest............................................

$550,000
308,000
$242,000
$79,500
75,000

154,500
$ 87,500
26,250
$ 61,250
1,400
$ 59,850

Subsidiary Desmond Company Income Distribution
Internally generated net
income..................................

$14,000

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

$14,000
× 10%
$ 1,400

Parent Lucy Company Income Distribution
Inventory consumption ................
Building depreciation ..................

$18,000
4,500

Internally generated net
income before tax .................
Adjusted income.........................
Tax, 30% ....................................
Adjusted net income ...................
90% × Desmond adjusted
Net income of $14,000 .........
Controlling interest .....................

95

$ 90,000
$ 67,500

(20,250)
$ 47,250
12,600
$ 59,850


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Ch. 3—Problems

PROBLEMS
PROBLEM 3-1
(1)
Group
Total

Zone Analysis
Priority accounts .........................
Nonpriority accounts ...................

$

Ownership
Portion

(80,000)
800,000

$

(64,000)

640,000

Cumulative
Total
$

(64,000)
576,000

Price Analysis
Price .............................................................................
Assign to priority accounts ............................................
Assign to nonpriority accounts ......................................
Goodwill ........................................................................

$740,000
(64,000)
640,000
164,000

full value
full value

Determination and Distribution of Excess Schedule
Price paid for investment ........................
Less book value interest acquired:
Common stock .................................
Paid-in capital in excess of par .........
Retained earnings ............................
Total equity .................................

Interest acquired ..............................
Excess of cost over book value (debit) ...
Adjustments:
Land .................................................
Buildings ..........................................
Goodwill ...........................................
Extraordinary gain ............................
Total adjustments .......................

$740,000

×

$100,000
200,000
250,000
$550,000
80%
440,000
$300,000
Amortization
$ 56,000
80,000
164,000
—
$300,000

96

— debit D1

20 debit D2
debit D3

$4,000


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Ch. 3—Problems

Problem 3-1, Continued
(2) Investment Entries:
Event

Simple Equity Method

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

Investment in Saul Company ..............
Subsidiary Income.............................

48,000

Dividends of $10,000 paid
by Saul

Cash ....................................................
Investment in Saul Company.............

8,000

20X2
Subsidiary income of
$45,000 reported to parent

Investment in Saul Company ...............
Subsidiary Income.............................

36,000

Dividends of $10,000 paid
by Saul

Cash ....................................................
Investment in Saul Company.............

8,000

Event

Sophisticated Equity Method

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

Investment in Saul Company* ..............
Subsidiary Income.............................

44,000

Dividends of $10,000
paid by Saul

Cash ....................................................
Investment in Saul Company.............

8,000

20X2
Subsidiary income of
$45,000 reported to parent

Investment in Saul Company* ..............
Subsidiary Income.............................

32,000

Dividends of $10,000
paid by Saul

Cash ....................................................
Investment in Saul Company.............

8,000

48,000
8,000

36,000
8,000

44,000
8,000

32,000
8,000

*Amortization of building excess deducted ($4,000).
Event

Cost Method

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

No entry

Dividends of $10,000
paid by Saul

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

20X2
Subsidiary income of
$45,000 reported to parent

No entry

Dividends of $10,000
paid by Saul

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

97

8,000
8,000

8,000
8,000


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Ch. 3—Problems

Problem 3-1, Continued
(3) Elimination Entries:
Event
20X1
Eliminate current-year
entries

Simple Equity Method
CY1

Subsidiary Income ..............................
Investment in Saul ...........................

48,000

Investment in Saul ..............................
Dividends Declared..........................

8,000

Common Stock ...................................
Paid-In Capital in Excess of Par .........
Retained Earnings ..............................
Investment in Saul ...........................

80,000
160,000
200,000

D1
D2
D3
D

Land ...................................................
Building...............................................
Goodwill..............................................
Investment in Saul ...........................

56,000

80,000
164,000

A2
A2

Depreciation Expense.........................
Accumulated Depreciation ...............

4,000

CY1

Subsidiary Income ..............................
Investment in Saul ...........................

36,000

Investment in Saul ..............................
Dividends Declared..........................

8,000

Common Stock ...................................
Paid-In Capital in Excess of Par .........
Retained Earnings ..............................
Investment in Saul ...........................

80,000
160,000

240,000

Land ...................................................
Building...............................................
Goodwill..............................................
Investment in Saul ...........................

56,000
80,000
164,000

A2–A3 Retained Earnings—Peter ..................
A2
Depreciation Expense.........................
A2
Accumulated Depreciation ...............

4,000
4,000

CY2
Eliminate investment
as of Jan. 1

Distribute excess

Amortize excess

20X2
Eliminate current-year

entries

EL

CY2
Eliminate investment
as of Jan. 1

Distribute excess

Amortize excess

EL

D1
D2
D3
D

98

48,000
8,000

440,000

300,000
4,000

36,000

8,000

480,000

300,000

8,000


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Ch. 3—Problems

Problem 3-1, Continued
Event
20X1
Eliminate current-year
entries

Sophisticated Equity Method
CY1

Subsidiary Income ..............................
Investment in Saul ...........................

44,000

Investment in Saul ..............................
Dividends Declared..........................

8,000

Common Stock ...................................
Paid-In Capital in Excess of Par .........
Retained Earnings ..............................
Investment in Saul ...........................

80,000
160,000
200,000

D1
D2
D3
D

Land ...................................................
Building...............................................
Goodwill..............................................
Investment in Saul ...........................

56,000
80,000
164,000

A2
A2

Depreciation Expense.........................
Accumulated Depreciation ...............

4,000

CY1

Subsidiary Income ..............................
Investment in Saul ...........................

32,000

Investment in Saul ..............................
Dividends Declared..........................

8,000

Common Stock ...................................
Paid-In Capital in Excess of Par .........
Retained Earnings ..............................
Investment in Saul ...........................

80,000
160,000
240,000

D1
D2
D3
D

Land ...................................................
Building (net)* .....................................

Goodwill..............................................
Investment in Saul ...........................

56,000
76,000
164,000

A2
A2

Depreciation Expense.........................
Accumulated Depreciation ...............

4,000

CY2
Eliminate investment
as of Jan. 1

Distribute excess

Amortize excess

20X2
Eliminate current-year
entries

EL

CY2

Eliminate investment
as of Jan. 1

Distribute excess

Amortize excess

EL

*(80,000 – 4,000)

99

44,000
8,000

440,000

300,000
4,000

32,000
8,000

480,000

296,000
4,000

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Ch. 3—Problems

Problem 3-1, Concluded
Event
20X1
Eliminate current-year
entries
Eliminate investment
as of Jan. 1

Distribute excess

Amortize excess

20X2
Equity conversion

Cost Method
CY2

Dividend Income .................................
Dividends Declared..........................

8,000

Common Stock ...................................
Paid-In Capital in Excess of Par .........
Retained Earnings ..............................
Investment in Saul ...........................

80,000
160,000
200,000

D1
D2
D3
D

Land ...................................................
Building...............................................
Goodwill..............................................
Investment in Saul ...........................

56,000
80,000
164,000

A2
A2

Depreciation Expense.........................
Accumulated Depreciation ...............

4,000

CV

Investment in Saul ..............................

Retained Earnings—Peter ...............

40,000

Dividend Income .................................
Dividends Declared..........................

8,000

Common Stock ...................................
Paid-In Capital in Excess of Par .........
Retained Earnings ..............................
Investment in Saul ...........................

80,000
160,000
240,000

Land ...................................................
Building...............................................
Goodwill..............................................
Investment in Saul ...........................

56,000
80,000
164,000

A2–A3 Retained Earnings—Peter ..................
A2
Depreciation Expense.........................

A2
Accumulated Depreciation ...............

4,000
4,000

EL

Eliminate current-year
entries

CY2

Eliminate investment
as of Jan. 1

EL

Distribute excess

Amortize excess

D1
D2
D3
D

100

8,000

440,000

300,000
4,000

40,000
8,000

480,000

300,000

8,000


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Ch. 3—Problems

PROBLEM 3-2
(1)
Determination and Distribution of Excess Schedule
Price paid for investment ........................
Less book value interest acquired:
Common stock .................................
Other paid-in capital .........................
Retained earnings ............................
Total equity .................................
Interest acquired ..............................
Excess of cost over book value (debit) ...

Adjustments:
Inventory ..........................................
Buildings ..........................................
Goodwill ...........................................
Extraordinary gain ............................
Total adjustments .......................

(2)

$308,000
$

×

50,000
100,000
150,000
$300,000
80%
240,000
$ 68,000
Amortization
$

(1)
(2)
(3)
(4)

1 debit D1

10 debit D2
debit D3

$2,000

$ 68,000

Entries under the simple equity method:
Investment in Soll ................................
Soll Income ...................................
Cash ...................................................
Investment in Soll ..........................

8,000
20,000
40,000

20X1
Debit
48,000 (1)

20X2
Credit

Debit
72,000 (2)

48,000
16,000 (3)

Credit
72,000

24,000 (4)
16,000

24,000

80% of $60,000 net income
80% of $90,000 net income
80% of $20,000 dividends
80% of $30,000 dividends

(3) Balance in Investment in Soll Company:
Cost .........................................................................................................
Equity in 20X1 income..............................................................................
Share of dividends received—20X1 .........................................................
Equity in 20X2 income..............................................................................
Share of dividends received—20X2 .........................................................
Total ..................................................................................................

101

$308,000
48,000
(16,000)
72,000
(24,000)
$388,000

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Ch. 3—Problems

Problem 3-2, Continued
(4)

Peres Company and Soll Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X2
Trial Balance
Peres
Soll

Inventory, December 31 ................................
......................................................... 150,000
Other Current Assets.....................................
......................................................... 328,000
Investment in Soll ..........................................
......................................................................

Eliminations
and Adjustments
Dr.
Cr.

Consolidated
Income
Statement

NCI

Controlling
Retained
Earnings

Consol.
Balance
Sheet

100,000

50,000 ...............

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

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

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

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

148,000

180,000 .............

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

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

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

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

............. 72,000 ...............

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

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

388,000 .............
................. .................
................. .................
50,000

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

24,000
(EL)
(D)

(CY1)

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

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

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

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

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

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

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

............... 4,000 ...............

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Land ..............................................................
......................................................... 100,000
Buildings and Equipment...............................
350,000
320,000
(D2)
20,000 ......
......................................................... 690,000
Accumulated Depreciation ............................
(100,000)
(60,000) .............
(A)
...................................................................... (164,000)
Goodwill ........................................................ ................. ................. (D3)
40,000
.................
........................................................... 40,000
Other Intangibles ...........................................

20,000 .............
.................
.................
........................................................... 20,000
Current Liabilities...........................................
(120,000)
(40,000) .............
.................
....................................................... (160,000)
Bonds Payable .............................................. .................
(100,000) .................
.................
....................................................... (100,000)
Other Long-Term Liabilities ...........................
(200,000) ............
.................
.................
....................................................... (200,000)
Common Stock—Peres .................................
(200,000) ............
.................
.................
....................................................... (200,000)
Other Paid-In Capital—Peres ........................
(100,000) ............
.................
.................
....................................................... (100,000)
Retained Earnings—Peres ............................
(214,000) ............

(D1)
8,000 .................
................. ................. (A)
2,000
.................
Common Stock—Soll .................................... .................
(50,000) (EL)
40,000 .................
......................................................................
Other Paid-In Capital—Soll ........................... .................
(100,000) (EL)
80,000 .................
......................................................................
Retained Earnings—Soll ............................... .................
(190,000) (EL)
152,000 ...............
......................................................................

102

.................
(204,000) ..
............ (10,000) ..............

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

............ (20,000) ..............

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

............ (38,000) ..............


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Ch. 3—Problems
Net Sales.......................................................
(520,000)
(450,000) ...........
.................
.......... (970,000) ...............
.................
......................................................................
Cost of Goods Sold .......................................
300,000
260,000 .............
.................
........... 560,000 ................
.................
......................................................................
Operating Expenses ......................................
120,000
100,000
(A)
2,000 ........
........... 222,000 ................
.................
......................................................................
Subsidiary Income .........................................
(72,000) ............
(CY1) 72,000

.................
.................
.................
..................
.................
Dividends Declared—Peres ..........................
50,000 .............
.................
.................
.................
.................
50,000 ......
Dividends Declared—Soll.............................. .................
30,000
.................
(CY2)
24,000 ......
6,000.........
.................
Total...........................................................
0
0
440,000
440,000 ....
.................
..................
.................
Consolidated Net Income ........................................................................................................................................
(188,000) ..............
..................

.................
To Noncontrolling Interest (see distribution schedule) .........................................................................................
18,000
(18,000) ....
.................
To Controlling Interest (see distribution schedule) ...............................................................................................
170,000 ...............
(170,000) ..
Total NCI ........................................................................................................................................................................................
(80,000) ...............
(80,000)
Retained Earnings—Controlling Interest, December 31, 20X2 .............................................................................................................................
(324,000)
(324,000)
0

103