Solution manual advanced accounting 11th edition joe ben hoyle chap003

Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

CHAPTER 3
CONSOLIDATIONS - SUBSEQUENT TO
THE DATE OF ACQUISITION
I.

Several factors serve to complicate the consolidation process when it occurs
subsequent to the date of acquisition. In all combinations within its own internal records
the acquiring company will utilize a specific method to account for the investment in the
acquired company.
1. Three alternatives are available
a. Initial value method (sometimes referred to as the cost method)
b. Equity method
c. Partial equity method
2. Depending upon the method applied, the acquiring company will record earnings
from its ownership of the acquired company. This total must be eliminated on the
consolidation worksheet and be replaced by the subsidiary’s revenues and
expenses.
3. Under each of these three methods, the balance in the Investment account will
also vary. It too must be removed in producing consolidated statements and be
replaced by the subsidiary’s assets and liabilities.

II.

For combinations subsequent to the acquisition date, certain procedures are required. If
the parent applies the equity method, the following process is appropriate.
A. Assuming that the acquisition was made during the current fiscal period
1. The parent adjusts its own Investment account to reflect the subsidiary’s income
and dividend payments as well as any amortization expense relating to excess
acquisition-date fair value over book value allocations and goodwill.

2. Worksheet entries are then used to establish consolidated figures for reporting
purposes.
a. Entry S offsets the subsidiary’s stockholders’ equity accounts against the
book value component of the Investment account (as of the acquisition date).
b. Entry A recognizes the excess fair value over book value allocations made to
specific subsidiary accounts and/or to goodwill.
c. Entry I eliminates the investment income balance accrued by the parent.
d. Entry D removes intra-entity dividend payments
e. Entry E enters the current excess amortization expenses on the excess fair
over book value allocations.
f. Entry P eliminates any intra-entity payable/receivable balances.
B. Assuming that the acquisition was made during a previous fiscal period
1. Most of the consolidation entries described above remain applicable regardless
of the time that has elapsed since the combination was formed.
2. The amount of the subsidiary’s stockholders’ equity to be removed in Entry S will
differ each period to reflect the balance as of the beginning of the current year

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Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

3. The allocations established by entry A will also change in each subsequent
consolidation. Only the unamortized balances remaining as of the beginning of
the current period are recognized in this entry.
III.

For a combination where the parent has applied an accounting method other than the
equity method, the consolidation procedures described above must be modified.
A. If the initial value method is applied by the parent company, the intra-entity dividends

eliminated in Entry I will only consist of the dividends transferred from the subsidiary.
No separate Entry D is needed.
B. If the partial equity method is in use, the subsidiary income to be removed in Entry I
is the equity accrual only; no amortization expense is included. Intercompany
dividends are eliminated through Entry D.
C. In any time period after the year of acquisition.
1. The initial value method recognizes neither income in excess of dividend
payments nor excess amortization expense. Thus, for all years prior to the
current period, both of these figures must be entered directly into the
consolidation. Entry*C is used for this purpose; it converts all prior amounts to
equity method balances.
2. The partial equity method does not recognize excess amortization expenses.
Therefore, Entry*C converts the appropriate account balances to the equity
method by recognizing the expense that relates to all of the past years.

IV.

Bargain purchases
A. As discussed in Chapter Two, bargain purchases occur when the parent company
transfers consideration less than net fair values of the subsidiary’s assets acquired
and liabilities assumed.
B. The parent recognizes an excess of net asset fair value over the consideration
transferred as a “gain on bargain purchase.”

V.

Goodwill Impairment
A. When is goodwill impaired?
1. Goodwill is considered impaired when the fair value of its related reporting unit
falls below its carrying value. Goodwill should not be amortized, but should be

tested for impairment at the reporting unit level (operating segment or lower
identifiable level).
2. Goodwill should be at least qualitatively assessed for impairment annually. If
there are indicators of goodwill impairment, then without undergoing a qualitative
assessment, goodwill should be tested for impairment at least annually.
3. Interim impairment testing is necessary in the presence of negative indicators
such as an adverse change in the business climate or market, legal factors,
regulatory action, an introduction of competition, or a loss of key personnel.
B. How is goodwill tested for impairment?

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Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

VI.

1. All acquired goodwill should be assigned to reporting units. It would not be
unusual for the total amount of acquired goodwill to be divided among a number
of reporting units. Goodwill should be assigned to reporting units of the acquiring
entity that are expected to benefit from the synergies of the combination even
though other assets or liabilities of the acquired entity may not be assigned to
that reporting unit.
2. FASB permits an option to perform a qualitative analysis to assess whether
further testing procedures are appropriate. The analysis includes determining
whether it is more likely than not (a probability of more than 50 percent) that
goodwill is impaired. If this likelihood is not judged to be attained, then no further
testing is required.
3. If circumstances, or the qualitative analysis, indicate a possible decline in the fair
value of a reporting unit below its carrying value, then goodwill is tested for

impairment using a two-step approach.
a. The first step compares the fair value of a reporting unit to its carrying
amount. If the fair value of the reporting unit exceeds its carrying amount,
goodwill is not considered impaired and no further analysis is necessary.
b. The second step is a comparison of goodwill to its carrying amount. If the
implied value of a reporting unit’s goodwill is less than its carrying value,
goodwill is considered impaired and a loss is recognized. The loss is equal
to the amount by which goodwill exceeds its implied value.
4. The implied value of goodwill should be calculated in the same manner that
goodwill is calculated in a business combination. That is, an entity should
allocate the fair value of the reporting unit to all of the assets and liabilities of
that unit (including any unrecognized intangible assets) as if the reporting unit
had been acquired in a business combination and the fair value of the reporting
unit was the value assigned at a subsidiary’s acquisition date. The excess
“acquisition-date” fair value over the amounts assigned to assets and liabilities is
the implied value of goodwill. This allocation is performed only for purposes of
testing goodwill for impairment and does not require entities to record the “stepup” in net assets or any unrecognized intangible assets.
C. How is the impairment recognized in financial statements?
1. The aggregate amount of goodwill impairment losses should be presented as
a separate line item in the operating section of the income statement
unless a goodwill impairment loss is associated with a discontinued
operation.
2. A goodwill impairment loss associated with a discontinued operation should
be included (on a net-of-tax basis) within the results of discontinued
operations.
Contingent consideration
A. The fair value of any contingent consideration is included as part of the
consideration transferred.
B. If the contingency results in a liability (typically a cash payment), changes in the fair
value of the contingency are recognized in income as they occur.

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Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

C. If the contingency calls for an additional equity issue at a later date, the acquisitiondate fair value of the contingency is not adjusted over time. Any subsequent shares
issued as a consequence of the contingency are recorded at the original acquisitiondate fair value. This treatment is similar to other equity issues (e.g., common stock,
preferred stock, etc.) in the parent’s owners’ equity section.
VII.

Push-down accounting
A. A subsidiary may record any acquisition-date fair value allocations directly in its own
financial records rather than through the use of a worksheet. Subsequent
amortization expense of these allocations could also be recorded by the subsidiary.
B. Push-down accounting reports the assets and liabilities of the subsidiary at the
amount the new owner paid. It also assists the new owner in evaluating the
profitability that the subsidiary is adding to the business combination.
C. Push-down accounting can also make the consolidation process easier since
allocations and amortization need not be included as worksheet entries.

Answers to Discussion Questions
How Does a Company Really Decide which Investment Method to Apply?
Students can come up with dozens of factors that Pilgrim should consider in choosing its
internal method of accounting for its subsidiary, Crestwood Corporation. The following is only a
partial list of possible points to consider.


Use of the information. If Pilgrim does not monitor its subsidiary’s income levels closely,
applying the equity method may be not be fruitful. A company must plan to use the data

before the task of accumulation becomes worthwhile. For example, Crestwood may use the
information for evaluating the performance of the subsidiary’s managers.



Size of the subsidiary. If the subsidiary is large in comparison to Pilgrim, the effort required
of the equity method may be important. Income levels would probably be significant.
However, if the subsidiary is actually quite small in relation to the parent, the impact might
not be material enough to warrant the extra effort.



Size of dividend payments. If Crestwood distributes most of its income as dividends, that
figure will approximate equity income. Little additional information would be accrued by
applying the equity method. In contrast, if dividends are small or not paid on a regular basis,
a Dividend Income balance might vastly understate the profits to be recognized by the
business combination.



Amount of excess amortizations. If Pilgrim has paid a significant amount in excess of book
value, its annual amortization charges are high, and use of the equity method might be
preferred to show the amortization effect each reporting period. In this case, waiting until
year end and recording all of the expense at one time through a worksheet entry might not
be the best way to reflect the impact of the expense.

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Chapter 03 - Consolidations - Subsequent to the Date of Acquisition



Amount of intra-entity transactions. As with amortization, the volume of transfers can be an
important element in deciding which accounting method to use. If few intra-entity sales are
made, monitoring the subsidiary through the application of the equity method is less
essential. Conversely, if the amount of these transactions IS significant, the added data can
be helpful to company administrators evaluating operations.



Sophistication of accounting systems. If Pilgrim and Crestwood both have advanced
accounting systems, application of the equity method may be relatively easy. Unfortunately,
if these systems are primitive, the cost and effort necessary to apply the equity method may
outweigh any potential benefits.



The timeliness and accuracy of income figures generated by Crestwood. If the subsidiary
reports operating results on a regular basis (such as weekly or monthly) and these figures
prove to be reliable, equity totals recorded by Pilgrim may serve as valuable information to
the parent. However, if Crestwood's reports are slow and often require later adjustment,
Pilgrim's use of the equity method will provide only questionable results.

Answers to Questions
1.

a. CCES Corp., for its own recordkeeping, may apply the equity method to its
Investment in Schmaling. Under this approach, the parent's records parallel the
activities of the subsidiary. The parent accrues income as it is earned by the

subsidiary. Dividends paid by Schmaling reduce its book value; therefore, CCES
reduces the investment account. In addition, any excess amortization expense
associated CCES's acquisition-date fair value allocations is recognized through a
periodic adjustment. By applying the equity method, both the parent’s income and
investment balances accurately reflect consolidated totals. The equity method is
especially helpful in monitoring the income of the business combination. This method
can be, however, rather difficult to apply and a time consuming process.
b. The initial value method. The initial value method can also be utilized by CCES
Corporation. Any dividends received are recognized as income but no other
investment entries are made. Thus, the initial value method is easy to apply.
However, the resulting account balances of the parent may not provide a reasonable
representation of the totals that result from consolidating the two companies.
c. The partial equity method combines the advantages of the previous two techniques.
Income is accrued as earned by the subsidiary as under the equity method.
Similarly, dividends reduce the investment account. However, no other entries are
recorded; more specifically, amortization is not recognized by the parent. The
method is, therefore, easier to apply than the equity method but the subsidiary's
individual totals will still frequently approximate consolidated balances.

2.

a. The consolidated total for equipment is made up of the sum of Maguire’s book value,
Williams’ book value, and any unamortized excess acquisition-date fair value over
book value attributable to Williams’ equipment.
b. Although an Investment in Williams account is appropriately maintained by the
parent, from a consolidation perspective the balance is intra-entity in nature. Thus,
the entire amount is eliminated in arriving at consolidated financial statements.

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Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

c. Only dividends paid to outside parties are included in consolidated statements.
Because Maguire owns 100 percent of Williams, all of the subsidiary's dividends are
intra-entity. Consequently, only the dividends paid by the parent company will be
reported in the financial statements for this business combination.
d. Any acquisition-date goodwill must still be reported for consolidation purposes.
Reductions to goodwill are made if goodwill is determined to be impaired.
e. Unless intra-entity revenues have been recorded, consolidation is achieved in
subsequent periods by adding the two book values together.
f.

Consolidated expenses are determined by combining the parent's and subsidiary
amounts and then including any amortization expense associated with the
acquisition-date fair value allocations. As will be discussed in detail in Chapter Five,
intra-entity expenses can also be present which require elimination in arriving at
consolidated figures.

g. Only the parent’s common stock outstanding is included in consolidated totals.
h. The net income for a business combination is calculated as the difference between
consolidated revenues and consolidated expenses.
3.

Under the equity method, the parent accrues subsidiary earnings and amortization
expense (from allocation of acquisition-date fair values) in the same manner as in the
consolidation process. The equity method parallels consolidation. Thus, the parent’s net
income and retained earnings each year will equal the consolidated totals.

4.

In the consolidation process, excess amortizations must be recorded annually for any
portion of the purchase price that is allocated to specific accounts (other than land or to
goodwill opr other indefinite-lived assets). Although this expense can be simulated in
total on the parent's books by an equity method entry, the actual amortization of each
allocated fair value adjustment is appropriate for consolidation. Hence, the effect of the
parent's equity method amortization entry is removed as part of Entry I so that the
amortization of specific accounts (e.g., depreciation) can be recorded (in consolidation
Entry E).

5.

When a parent applies the initial value method, no accrual is recorded to reflect the
subsidiary's change in book value subsequent to acquisition. Recognition of excess
amortizations relating to the acquisition is also omitted by the parent. The partial equity
method, in contrast, records the subsidiary’s book value increases and decreases but
not amortizations. Consequently, for both of these methods, a technique must be
employed in the consolidation process to record the omitted figures. Entry *C simply
brings the parent's records (more specifically, the beginning retained earnings balance
and the investment account) up-to-date as of the first day of the current year. If the
acquirer applies the initial value method, changes in the subsidiary's book value in
previous years are recognized on the worksheet along with the appropriate amount of
amortization expense. For the partial equity method, only the amortization relating to
these prior years needs to be recognized.

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Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

No similar entry to *C is needed when the parent applies the equity method. The parent
will record changes in the subsidiary's book value as well as excess amortization each
year. Thus, under the equity method, the parent's investment and beginning retained
earnings balances are both correctly established and need no further adjustment.
6.

Lambert's loan payable and the receivable held by Jenkins are intra-entity accounts.
The consolidation process offsets these reciprocal balances. The $100,000 is neither a
debt to nor a receivable from an unrelated (or outside) party and is, therefore, not
reported in consolidated financial statements. Any interest income/expense recognized
on this loan is also intra-entity in nature and must likewise be eliminated.

7.

Because Benns applies the equity method, the $920,000 is composed of four balances:
a.
b.
c.
d.

The original consideration transferred by the parent;
The annual accruals made by Benns to recognize subsidiary income as it is earned
The reductions that are created by the subsidiary's payment of dividends
The periodic amortization recognized by Benns in connection with the identified
acquisition-date fair value allocations.

8.

The $100,000 attributed to goodwill is reported at its original amount unless a portion of
goodwill is impaired or a unit of the business where goodwill resides is sold.

9.

A parent should consider recognizing an impairment loss for goodwill associated with a
subsidiary when, at the reporting unit level, the fair value is less than its carrying
amount. A firm has the option to perform a qualitative assessment of whether a
reporting unit’s fair value is more likely than not to be less than its carrying value before
proceeding to the quantitative 2-step goodwill impairment testing procedure. Goodwill is
reduced when its carrying value is less than its implied fair value. To compute an implied
fair value for goodwill, the fair values of the reporting unit’s identifiable net assets are
subtracted from its total fair value. The impairment is recognized as a loss from
continuing operations.
The acquisition-date fair value of the contingent payment is part of the consideration
transferred by Reimers to acquire Rollins and thus is part of the overall fair value
assigned to the acquisition. If the contingency is a liability (to be settled in cash or other
assets) then the liability is adjusted to fair value through time. If the contingency is a
component of equity (e.g., to be settled by the parent issuing equity shares), then the
equity instrument is not adjusted to fair value over time.

10.

11.

At present, the Securities and Exchange Commission requires the use of push-down
accounting for the separate financial statements of a subsidiary where no substantial
outside ownership exists. Thus, if Company A owns all of Company B, the push-down
method of accounting is appropriate for the separately issued statements of Company
B. The SEC normally requires push-down accounting where 95 percent of a subsidiary
is acquired and the company has no outstanding public debt or preferred stock.

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Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

Push-down accounting may be required if 80-95 percent of the outstanding voting stock
is acquired. Push-down accounting uses the consideration transferred as the valuation
basis for the subsidiary in consolidated reports. For example, if a piece of land costs
Company B $10,000 but Company A allocates a $13,000 fair value to the land in
acquiring Company B, the land has a basis to the current owners of B of $13,000. If B's
financial records had been united with A at the time of the acquisition, the land would
have been reported at $13,000. Thus, keeping the $10,000 figure simply because
separate incorporation is maintained is viewed, by proponents of push-down accounting,
as unjustified.
12.

When push-down accounting is applied, the subsidiary adjusts the book value of its
assets and liabilities based on the acquisition-date fair value allocations. The subsidiary
then recognizes periodic amortization expense on those allocations with definite lives.
Therefore, the subsidiary’s recorded income equals its impact on consolidated earnings.
The parent uses no special procedures when push-down accounting is being applied.
However, if the equity method is in use, amortization need not be recognized by the
parent since that expense is included in the figure reported by the subsidiary.

Answers to Problems
1. A
2. B
3. A
4. D Willkom’s equipment book value—12/31/13.......................
Szabo’s equipment book value—12/31/13..........................

Original purchase price allocation to Szabo's equipment
($300,000 – $200,000)...........................................................
Amortization of allocation
($100,000 ÷ 10 years for 3 years)....................................
Consolidated equipment......................................................

$210,000
140,000
100,000
(30,000)
$420,000

5. A
6. B
7. D
8. B
9. B Phoenix revenues
Phoenix expenses
Net income before Sedona effect
Equity income from Sedona
Consolidated net income
-or-

$498,000
350,000
148,000
55,000
$203,000

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Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

Consolidated revenues
$783,000
Consolidated expenses (includes $35K amortization) 580,000
Consolidated net income
$203,000
10. A (same as Phoenix because of equity method use).
11. C Consideration transferred at fair value
Book value acquired
Excess fair over book value
to equipment
to customer list (4 year life)

$600,000
420,000
180,000
80,000
$100,000

Three years since acquisition, ¼ of acquisition-date value ($25,000)remains.
12. B
13. C
14. C The $60,000 excess acquisition-date fair value allocation to equipment is
"pushed-down" to the subsidiary and increases its balance to $390,000.
The consolidated balance is $810,000 ($420,000 plus $390,000).
15. (35 Minutes) (Determine consolidated retained earnings when parent uses
various accounting methods. Determine Entry *C for each of these methods)

a. CONSOLIDATED RETAINED EARNINGS--EQUITY METHOD
Herbert (parent) balance—1/1/12 ...................................
$400,000
Herbert income—2012 ...................................................
40,000
Herbert dividends—2012 (subsidiary dividends are
intercompany and, thus, eliminated) .......................
(10,000)
Rambis income—2012 (not included in parent's income)
20,000
Amortization—2012 ........................................................
(12,000)
Herbert income—2013 ....................................................
50,000
Herbert dividends—2013................................................
(10,000)
Rambis income—2013 ...................................................
30,000
Amortization—2013 .......................................................
(12,000)
Consolidated retained earnings, 12/31/13.....................
$496,000


PARTIAL EQUITY METHOD AND INITIAL VALUE METHOD
Consolidated retained earnings are the same regardless of the method
in use: the beginning balance plus the income less the dividends of the
parent plus the income of the subsidiary less amortization expense.
Thus, December 31, 2013 consolidated retained earnings are $496,000
as computed above.

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Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

b. Investment in Rambis—equity method
Rambis fair value 1/1/12............................................................ $574,000
Rambis income 2012.................................................................
20,000
Rambis dividends 2012.............................................................
(5,000)
Herbert’s 2012 excess fair over book value amortization ...... (12,000)
Investment account balance 1/1/13.......................................... $577,000
Investment in Rambis—partial equity method
Rambis fair value 1/1/12............................................................ $574,000
Rambis income 2012.................................................................
20,000
Rambis dividends 2012.............................................................
(5,000)
Investment account balance 1/1/12.......................................... $589,000
Investment in Rambis—Initial value method
Rambis fair value 1/1/12............................................................ $574,000
Investment account balance 1/1/13.......................................... $574,000
15. (continued)
c.

ENTRY *C



EQUITY METHOD
No entry is needed to convert the past figures to the equity method
since that method has already been applied.



PARTIAL EQUITY METHOD
Amortization for the prior years (only 2012 in this case) has not been
recorded and must be brought into the consolidation through
worksheet entry *C:
ENTRY *C
Retained Earnings, 1/1/13 (Parent) .....................
12,000
Investment in Rambis ....................................
12,000
(To record 2012 amortization in consolidated figures. Expense was
omitted because of application of partial equity method.)



INITIAL VALUE METHOD
Amortization for the prior years (only 2012 in this case) has not been
recorded and must be brought into the consolidation through
worksheet entry *C. In addition, only dividend income has been
recorded by the parent ($5,000 in 2012). In this prior year, Rambis
reported net income of $20,000. Thus, the parent has not recorded the
$15,000 income in excess of dividends. That amount must also be
included in the consolidation through entry *C:

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Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

ENTRY *C
Investment in Rambis ..........................................
3,000
Retained Earnings, 1/1/13 (Parent) ................
3,000
(To record 2012 unrecognized subsidiary earnings as part of the
parent’s retained earnings. $15,000 income of subsidiary was not
recorded by parent (income in excess of dividends). Amortization
expense of $12,000 was not recorded under the initial value method.
Note that *C adjustments bring the parent’s January 1, 2013 Retained
Earnings balance equal to that of the equity method.
16. (30 Minutes) (A variety of questions on equity method, initial value method,
and partial equity method.)
a. An allocation of the acquisition price (based on the fair value of the
shares Issued) must be made first.
Acquisition fair value (consideration paid by Haynes)
Book value equivalency ................................................
Excess of Turner fair value over book value ................
Excess fair value assigned to specific
accounts based on fair value
Equipment ......................... $5,000
Customer List ......................30,000

Life
5 yrs.

10 yrs.

$135,000
(100,000)
$ 35,000
Annual excess
amortizations
$1,000
3,000
$4,000

Acquisition fair value.......................................................
2012 Income accrual .......................................................
2012 Dividends paid by Turner ......................................
2012 Amortizations (above) ...........................................
2013 Income accrual ......................................................
2013 Dividends paid by Turner ......................................
2013 Amortizations ........................................................
Investment in Turner account balance .........................

$135,000
110,000
(50,000)
(4,000)
130,000
(40,000)
(4,000)
$277,000

b. Net income of Haynes ....................................................

Net Income of Turner .....................................................
Depreciation expense.....................................................
Amortization expense.....................................................
Consolidated net income 2013 ................................

$240,000
130,000
(1,000)
(3,000)
$366,000

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Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

c. Equipment balance Haynes ...........................................
Equipment balance Turner ............................................
Allocation based on fair value (above) .........................
Depreciation for 2012-2013 ............................................
Consolidated equipment—December 31, 2013.............

$500,000
300,000
5,000
(2,000)
$803,000

Parent's choice of an investment method has no impact on consolidated
totals.

16. (continued)
d. If the initial value method was applied during 2012, the parent would
have recorded dividend income of $50,000 rather than $110,000 (as
equity income). Net income is, therefore, understated by $60,000. In
addition, amortization expense of $4,000 was not recorded. Thus, the
January 1, 2013, retained earnings is understated by $56,000 ($60,000 –
$4,000). An Entry *C is necessary on the worksheet to correct this equity
figure:
Investment in Turner ............................................
Retained Earnings, 1/1/13 (Haynes) ..............

56,000
56,000

If the partial equity method was applied during 2012, the parent would
have failed to record amortization expense of $4,000. Retained earnings
are overstated by $4,000 and are corrected through Entry *C:
Retained Earnings, 1/1/13 (Haynes) .....................
Investment in Turner ......................................

4,000
4,000

If the equity method was applied during 2012, the parent's retained
earnings are the same as the consolidated figure so that no adjustment
is necessary.
17. (20 minutes) (Record a merger combination with subsequent testing for
goodwill impairment).
a. In accounting for the combination, the total fair value of Beltran (consideration
transferred) is allocated to each identifiable asset acquired and liability

assumed with any remaining excess as goodwill.
Cash paid
Fair value of shares issued
Fair value consideration transferred

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$450,000
1,248,000
$1,698,000


Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

Consideration transferred (above)
Fair value of net assets acquired and
liabilities assumed
Goodwill recognized in the combination

$1,698,000
1,298,000
$ 400,000

Entry by Francisco to record assets acquired and liabilities assumed in the
combination with Beltran:
Cash
75,000
Receivables
193,000
Inventory

281,000
Patents
525,000
Customer relationships
500,000
Equipment
295,000
Goodwill
400,000
Accounts payable
Long-term liabilities
Cash
Common stock (Francisco Co., par value)
Additional paid-in capital
b. Step one in quantitative goodwill impairment test:
Fair value of reporting unit as a whole
Book value of reporting unit's net assets

121,000
450,000
450,000
104,000
1,144,000
1,425,000
1,585,000

Because the total fair value of the reporting unit is less than its carrying value,
a potential goodwill impairment loss exists, step two is performed:
Fair value of reporting unit as a whole
$1,425,000

Fair values of reporting unit's net assets (excluding goodwill) 1,325,000
Implied fair value of goodwill
100,000
Book value of goodwill
400,000
Goodwill impairment loss
$ 300,000
18. (20 minutes) (Goodwill impairment testing.)
a. Goodwill Impairment
Step 1
Fair value of reporting unit =
Carrying value of reporting unit =

$650
780

Because fair value < carrying value, there is a potential goodwill impairment
loss.

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Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

Step 2
Fair value of reporting unit
$650
Fair value of net assets excluding goodwill
Tangible assets
$110

Recognized intangibles
230
Unrecognized intangibles
200 540
Implied value of goodwill
110
Carrying value of goodwill
500
Goodwill impairment loss
$390
b.
Tangible assets, net
Goodwill
Customer list
Patent

$80
110
-0-0-

19. (30 minutes) (Goodwill impairment and intangible assets.)
Part a: Goodwill Impairment Test—Step 1

Sand Dollar
Salty Dog
Baytowne

Total fair
value
$510,000

580,000
560,000

<
<
>

Carrying Potential goodwill
value
impairment?
$530,000
yes
610,000
yes
280,000
no

Part b: Goodwill Impairment Test—Step 2 (Sand Dollar and Salty Dog only)
Sand Dollar—total fair value
Fair values of identifiable net assets
Tangible assets
Trademark
Customer list
Liabilities
Implied value of goodwill
Carrying value of goodwill
Impairment loss

$510,000
$190,000

150,000
100,000
(30,000)

Salty Dog—total fair value
Fair values of identifiable net assets
Tangible assets
$200,000
Unpatented technology
125,000
Licenses
100,000
Implied value of goodwill

3-14

410,000
100,000
120,000
$20,000
$580,000

425,000
155,000


Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

Carrying value of goodwill
No impairment—implied value > carry value

150,000
-0-

Part c:
No changes in tangible assets or identifiable intangibles are reported based
on goodwill impairment testing. The sole purpose of the valuation exercise
is to estimate an implied value for goodwill. Destin will report a goodwill
impairment loss of $20,000, which will reduce the amount of goodwill
allocated to Sand Dollar.
However, because the fair value of Sand Dollar’s trademarks is less than its
carrying amount, the account should be subjected to a separate impairment
testing procedure to see if the carrying value is “recoverable” in future
estimated cash flows.
20.

(30 Minutes) (Consolidation entries for two years. Parent uses equity
method.)
Fair Value Allocation and Annual Amortization:
Acquisition fair value (consideration transferred) .
$490,000
Book value (assets minus
liabilities or total stockholders'
equity) ..................................................................
(400,000)
Excess fair value over book value ...........................
$ 90,000
Excess fair value assigned to specific
accounts based on individual fair values
Annual excess

Life
amortizations
Land ..................................... $10,000
--Buildings ...........................
40,000
4 yrs.
$10,000
Equipment ...........................
(20,000)
5 yrs.
(4,000)
Total assigned to specific
accounts ......................
Goodwill ..............................
Total ......................................

30,000
60,000
$90,000

Indefinite

-0$6,000

Consolidation Entries as of December 31, 2012
Entry S
Common Stock—Abernethy.................................
250,000
Additional Paid-in Capital—Abernethy..............
50,000

Retained Earnings—1/1/12 ..................................
100,000
Investment in Abernethy ................................
(To eliminate stockholders' equity accounts of subsidiary)

3-15

400,000


Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

Entry A
Land ......................................................................
10,000
Buildings ...............................................................
40,000
Goodwill ...............................................................
60,000
Equipment ......................................................
20,000
Investment in Abernethy ................................
90,000
(To recognize allocations attributed to fair value of specific accounts at
acquisition date with residual fair value recognized as goodwill).
Entry I
Equity in Earnings of Subsidiary.........................
74,000
Investment in Abernethy ................................
74,000

(To eliminate $80,000 income accrual for 2012 less $6,000 amortization
recorded by parent using equity method)
20. (continued)
Entry D
Investment in Abernethy .....................................
Dividend Paid .................................................
(To eliminate intercompany dividend transfers)
Entry E
Depreciation Expense..........................................
Equipment.............................................................
Buildings..........................................................
(To record current year amortization expense)

10,000
10,000

6,000
4,000
10,000

Consolidation Entries as of December 31, 2013
Entry S
Common Stock—Abernethy ...............................
250,000
Additional Paid-in Capital—Abernethy ..............
50,000
Retained Earnings—1/1/13...................................
170,000
Investment in Abernethy ................................
470,000

(To eliminate beginning stockholders' equity of subsidiary—the
Retained Earnings account has been adjusted for 2012 income and
dividends. Entry *C is not needed because equity method was applied.)
Entry A
Land ......................................................................
Buildings ..............................................................
Goodwill ...............................................................
Equipment ......................................................
Investment in Abernethy ................................

3-16

10,000
30,000
60,000
16,000
84,000


Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

(To recognize allocations relating to investment—balances shown here
are as of beginning of current year [original allocation less excess
amortizations for the prior period])
Entry I
Equity in Earnings of Subsidiary.........................
104,000
Investment in Abernethy ................................
104,000
(To eliminate $110,000 income accrual less $6,000 amortization recorded

by parent during 2013 using equity method)
Entry D
Investment in Abernethy .....................................
Dividend Paid .................................................
(To eliminate intercompany dividend transfers)

30,000
30,000

Entry E
Same as Entry E for 2012
21.

(35 Minutes) (Consolidation entries for two years. Parent uses initial value
method.)
Purchase price allocation and annual excess fair value amortizations:
Acquisition date value (consideration paid) ...... $500,000
Book value ........................................................... (400,000)
Excess price paid over book value .................... $100,000
Excess price paid assigned to specific
accounts based on fair values
Equipment
Long-term liabilities
Goodwill
Total

$ 20,000
30,000
50,000
$100,000

Life

Annual excess
amortizations

5 yrs.
4 yrs.
Indefinite

$4,000
7,500
-0$11,500

Consolidation entries as of December 31, 2012
Entry S
Common Stock—Abernethy ..............................
250,000
Additional Paid-in Capital—Abernethy..............
50,000
Retained Earnings—1/1/12 ..................................
100,000
Investment in Abernethy...............................
(To eliminate stockholders' equity accounts of subsidiary)
Entry A
Equipment ..........................................................
Long-term Liabilities ..........................................
Goodwill ..............................................................
Investment in Abernethy ..............................

3-17

400,000

20,000
30,000
50,000
100,000


Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

(To recognize allocations determined above in connection with
acquisition-date fair values)
Entry I
Dividend Income .................................................
10,000
Dividends Paid ..............................................
10,000
(To eliminate intercompany dividend payments recorded by parent as
income)
Entry E
Depreciation Expense ........................................
Interest Expense.................................................
Equipment......................................................
Long-term Liabilities......................................
(To record 2012 amortization expense)

4,000
7,500

4,000
7,500

21. (continued)
Consolidation Entries as of December 31, 2013
Entry *C
Investment in Abernethy ....................................
58,500
Retained Earnings—1/1/13 (Chapman) ........
58,500
(To convert parent company figures to equity method by recognizing
subsidiary's increase in book value for prior year [$80,000 net income
less $10,000 dividend payment] and excess amortizations for that period
[$11,500])
Entry S
Common Stock—Abernethy ..............................
250,000
Additional Paid-in Capital—Abernethy..............
50,000
Retained Earnings—1/1/13 .................................
170,000
Investment in Abernethy ....................................
470,000
(To eliminate beginning of year stockholders' equity accounts of
subsidiary. The retained earnings balance has been adjusted for 2012
income and dividends)
Entry A
Equipment ..........................................................
16,000

Long-term Liabilities ..........................................
22,500
Goodwill ..............................................................
50,000
Investment in Abernethy ..............................
88,500
(To recognize allocations relating to investment—balances shown here
are as of the beginning of the current year [original allocation less
excess amortizations for the prior period])
Entry I
Dividend income ................................................
30,000
Dividends Paid .........................................
30,000
(To eliminate intercompany dividend payments recorded by parent as
income)

3-18


Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

Entry E
Same as Entry E for 2012
22.

(20 Minutes) (Consolidation entries for two years. Parent uses partial equity
method.)
Fair value allocation and annual excess amortizations:
Abernethy fair value (consideration paid) ...............

Book value ................................................................
Excess fair value over book value (all goodwill) ....

$520,000
(400,000)
$120,000

Life assigned to goodwill ......................................... Indefinite
Annual excess amortizations ...................................

-0-

Consolidation Entries as of December 31, 2012
Entry S
Common Stock—Abernethy ...............................
250,000
Additional Paid-in Capital—Abernethy ..............
50,000
Retained Earnings—Abernethy—1/1/12 ..............
100,000
Investment in Abernethy ................................
(To eliminate stockholders' equity accounts of subsidiary)

400,000

Entry A
Goodwill ...............................................................
120,000
Investment in Abernethy ................................
120,000

(To recognize goodwill portion of the original acquisition fair value)
Entry I
Equity in Earnings of Subsidiary.........................
80,000
Investment in Abernethy ................................
80,000
(To eliminate intercompany income accrual for the current year based
on the parent's usage of the partial equity method)
Entry D
Investment in Abernethy .....................................
Dividend Paid .................................................
(To eliminate intercompany dividend transfers)

10,000
10,000

Entry E—Not needed. Goodwill is not amortized.
Consolidation Entries as of December 31, 2013
Entry *C—Not needed. Goodwill is not amortized.
Entry S
Common Stock—Abernethy.................................
Additional Paid-in Capital—Abernethy...............
Retained Earnings —Abernethy—1/1/13 ............
Investment in Abernethy ................................

3-19

250,000
50,000
170,000

470,000


Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

22. (continued)
(To eliminate beginning of year stockholders' equity accounts of
subsidiary—the retained earnings balance has been adjusted for 2012
income and dividends.)
Entry A
Goodwill ...............................................................
Investment in Abernethy .....................................
(To recognize original goodwill balance.)

120,000
120,000

Entry I
Equity in Earnings of Subsidiary.........................
110,000
Investment in Abernethy ................................
110,000
(To eliminate Intercompany Income accrual for the current year.)
Entry D
Investment in Abernethy .....................................
Dividends Paid ...............................................
(To eliminate Intercompany dividend transfers.)

30,000
30,000

Equity E—not needed
23.

(45 Minutes) (Variety of questions about the three methods of recording an
Investment in a subsidiary for internal reporting purposes.)
a. Purchase Price Allocation and Annual Amortization:
Clay’s acquisition-date fair value ............. $510,000
Book value (assets minus liabilities,
or stockholders' equity) ...................... 450,000
Fair value in excess of book value .......... 60,000
Annual
excess
Allocation to equipment based on
Life amortizations
difference between fair and book value . . 50,000 5 yrs.
$10,000
Goodwill .................................................... $10,000 indefinite
-0Total ..........................................................
$10,000
Investment in Clay—December 31, 2013:
Consideration transferred for Clay ....................................
2012:
Equity accrual (based on Clay's Income) ................
Excess amortizations (above) ..................................
Dividends received ...................................................
2013:
Equity accrual (based on Clay's Income).................
Excess amortizations ...............................................
Dividends received ...................................................

Total ................................................................................

3-20

$510,000
55,000
(10,000)
(5,000)
60,000
(10,000)
(8,000)
$592,000


Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

23. (continued)
INITIAL VALUE METHOD
Investment Income—2013:
Dividend income .................................................................

$8,000

Investment in Clay—December 31, 2013:
Consideration transferred for Clay ...............................

$510,000

b. Consolidated balances are not affected by the parent’s investment
accounting method. Thus, consolidated expenses ($480,000 or $290,000

+ $180,000 + amortizations of $10,000) are the same regardless of
whether Adams uses the equity method or the initial value method.
c. Consolidated balances are not affected by the parent’s investment
accounting method. Thus, consolidated equipment ($970,000 or
$520,000 + $420,000 + allocation of $50,000 – two years of excess
depreciation totaling $20,000) is the same regardless of whether the
equity method or the initial value method is applied by Adams.
d. Adams retained earnings—Equity method
Adams retained earnings—1/1/12........................................
Adams income 2012.............................................................
2012 equity in earnings of Clay (above).............................
Adams retained earnings—1/1/13........................................

$860,000
125,000
45,000
$1,030,000

Adams retained earnings—Initial value method
Adams retained earnings—1/1/12........................................
Adams income 2012.............................................................
2012 dividend income from Clay.........................................
Adams retained earnings—1/1/13........................................

$860,000
125,000
5,000
$990,000

e. EQUITY METHOD—Entry *C is unnecessary because the parent's

retained earnings balance is correct.
INITIAL VALUE METHOD—Entry *C recognizes the increase in
subsidiary's book value ($55,000 income less 5,000 dividends) and
amortization ($10,000) for prior year.
Investment in Clay ...............................................
Retained Earnings, 1/1/13 (parent) ................

40,000
40,000

f. Consolidated worksheet entry S for 2013:
Common Stock (Clay) ....................................
Retained Earnings, 1/1/13 (Clay)...................
Investment in Clay ....................................

3-21

150,000
350,000
500,000


Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

23. (continued)
g. Consolidated revenues (combined) ...................
Consolidated expenses (combined plus
excess amortization) ......................................
Consolidated net income ....................................
24.

$640,000
(480,000)
$160,000

(15 Minutes) (Consolidated accounts one year after acquisition)
Stanza acquisition fair value ($10,000 in
stock issue costs reduce APIC...........$680,000
Book value of subsidiary
(1/1/13 stockholders' equity balances)..... (480,000)
Fair value in excess of book value ..........$200,000

Annual
excess
Excess fair value allocated to copyrights
Life amortizations
based on fair value .............................. 120,000 6 yrs.
$20,000
Goodwill .................................................... $ 80,000 indefinite
-0Total ......................................................
$20,000

a. Consolidated copyrights
Penske (book value) ...................................... $900,000
Stanza (book value) ........................................
400,000
Allocation (above) ..........................................
120,000
Excess amortizations, 2013 ...........................
(20,000)

Total ........................................................... $1,400,000
b. Consolidated net income, 2013
Revenues (add book values) .........................
$1,100,000
Expenses:
Combined book values ............................. $700,000
Excess amortizations ...............................
20,000
720,000
Consolidated net income................................
$380,000
c. Consolidated retained earnings, 12/31/13
Retained Earnings 1/1/13 (Penske) ...............
Net income 2013 (above) ...............................
Dividend Paid 2013 (Penske) .........................
Total ...........................................................

$600,000
380,000
(80,000)
$900,000

Stanza's January 1, 2013 retained earnings balance, is not included
because they represent pre-acquisition earnings. Stanza's dividends
paid to Penske are excluded because they are intra-entity in nature.
d. Consolidated goodwill, 12/31/13
Allocation (above) ..........................................

3-22

$80,000


Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

25.

(30 Minutes) (Consolidated balances three years after the date of
acquisition. Includes questions about parent's method of recording
investment for internal reporting purposes.)
a. Acquisition-Date Fair Value Allocation and Amortization:
Consideration transferred 1/1/11 ..............
Book value (given) ....................................
Fair value in excess of book value .....
Allocation to equipment based on
difference in fair value and
book value ............................................
Goodwill ....................................................
Total ......................................................

$600,000
(470,000)
130,000

Annual
excess
Life amortizations

90,000 10 yrs.
$40,000 indefinite

$9,000
-0$9,000

CONSOLIDATED BALANCES


Depreciation expense = $659,000 (book values plus $9,000 excess
depreciation)



Dividend Paid = $120,000 (parent balance only. Subsidiary's
dividends are eliminated as intra-entity transfer)



Revenues = $1,400,000 (add book values)



Equipment = $1,563,000 (add book values plus $90,000 allocation
less three years of excess depreciation [$27,000])



Buildings = $1,200,000 (add book values)



Goodwill = $40,000 (original residual allocation)



Common Stock = $900,000 (parent balance only)

b. The parent's choice of an investment method has no impact on the
consolidated totals. The choice of an investment method only affects
the internal reporting of the parent.
c. The initial value method is used. The parent's Investment in Subsidiary
account still retains the original consideration transferred of $600,000.
In addition, the Investment Income account equals the amount of
dividends paid by the subsidiary.
d. If the partial equity method had been utilized, the investment income
account would have shown an equity accrual of $100,000. If the equity
method had been applied, the Investment Income account would have
included both the equity accrual of $100,000 and excess amortizations
of $9,000 for a balance of $91,000.
e. Initial value method—Foxx’s retained earnings—1/1/13
Foxx’s 1/1/13 balance (initial value method was employed) $1,100,000

3-23


Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

Partial equity method—Foxx’s retained earnings—1/1/13
25. (continued)
Foxx’s 1/1/13 balance (initial value method)........................... $1,100,000
2011 net equity accrual for Greenburg ($90,000 – $20,000) .

70,000
2012 net equity accrual for Greenburg ($100,000 – $20,000)
80,000
Foxx’s 1/1/13 retained earnings........................................... $1,250,000
Equity method—Foxx’s retained earnings—1/1/13
Foxx’s 1/1/13 balance (initial value method)...................... $1,100,000
2011 net equity accrual for Greenburg ($90,000 – $20,000) .
70,000
2011 excess fair over book value amortization..................
(9,000)
2012 net equity accrual for Greenburg ($100,000 – $20,000)
80,000
2012 excess fair over book value amortization..................
(9,000)
Foxx’s 1/1/13 retained earnings........................................... $1,232,000
26.

(50 Minutes) (Consolidated totals for an acquisition. Worksheet is
produced as a separate requirement.)
a. O’Brien acquisition-date fair value .....................
O’Brien book value ..............................................
Fair value in excess of book value .....................
Excess assigned to specific
accounts based on fair value
Trademarks ..............................
Customer relationships...........
Equipment ................................
Goodwill ...................................
Total ..........................................

$550,000
(350,000)
$200,000

Annual
Life
excess
amortizations
$100,000 indefinite
-075,000
5 yrs. $15,000
(30,000)
10 yrs.
(3,000)
55,000 indefinite
-0$200,000
$12,000

If the partial equity method were in use, the Income of O’Brien account would
have had a balance of $222,000 (100% of O’Brien's reported income for the
period). If the initial value method were in use, the Income of O’Brien account
would have had a balance of $80,000 (100% of the dividends paid by O’Brien).
The Income of O’Brien balance is an equity accrual of $222,000 (100% of
O’Brien’s reported income) less excess amortizations of $12,000 (as computed
above). Thus, the equity method must be in use.
b. Students can develop consolidated figures conceptually, without relying on a
worksheet or consolidation entries. Thus, part b. asks students to determine
independently each balance to be reported by the business combination.
 Revenues = $1,645,000 (the accounts of both companies combined)

3-24


Chapter 03 - Consolidations - Subsequent to the Date of Acquisition



Cost of goods sold = 528,000 (the accounts of both companies combined)

Amortization expense = $40,000 (the accounts of both companies and the
acquisition-related adjustment of $15,000)
26. (continued)




Depreciation expense = $142,000 (the accounts for both companies and the
acquisition-related depreciation adjustment of $3,000)



Income of O’Brien = $0 (the balance reported by the parent is removed and
replaced with the subsidiary’s individual revenue and expense accounts)



Net Income = 935,000 (consolidated revenues less expenses)



Retained earnings, 1/1 = $700,000 (only the parent's retained earnings
figure is included)



Dividend Paid = $142,000 (the subsidiary's dividends were paid to the
parent and, thus, as an intra-entity transfer are eliminated)



Retained earnings, 12/31 = $1,493,000 (the beginning balance for the parent
plus consolidated net income less consolidated [parent] dividends)



Cash = $290,000 (the accounts of both companies are added together)



Receivables = $281,000 (the accounts of both companies are combined)



Inventory = $310,000 (the accounts of both companies are combined)



Investment in O’Brien = $0 (the parent’s balance is removed and replaced
with the subsidiary’s individual asset and liability accounts)



Trademarks = $634,000 (the accounts of both companies are added
together plus the 100,000 fair value adjustment)



Customer relationships = $60,000 (the initial $75,000 fair value adjustment
less $15,000 amortization expense)



Equipment = $1,170,000 (both company’s balances less the $30,000 fair
value adjustment net of $3,000 in depreciation expense reduction)



Goodwill = $55,000 (the original allocation)



Total assets = $2,800,000 (summation of consolidated balances)



Liabilities = $907,000 (the accounts of both companies are combined)



Common stock = $400,000 (parent balance only)



Retained earnings, 12/31 = $1,493,000 (computed above)



Total liabilities and equities = 2,800,000 (summation of consolidated
balances)

3-25