Solution manual advanced accounting 4e jeter ch08

The date of acquisition of subsidiary stock is important under the purchase method because subsidiary retained earnings accumulated prior to the date of acquisition constitute a portion

CHAPTER 8

ANSWERS TO QUESTIONS

1 The three types of transactions that result in a change in a parent company’s ownership interest are:

a The parent company may buy additional shares of subsidiary stock or sell a portion of its holdings;

b The subsidiary may issue additional shares of stock to outsiders;

c The subsidiary may acquire or reissue treasury shares from or to the noncontrolling shareholders or the parent company

2 The date of acquisition of subsidiary stock is important under the purchase method because subsidiary retained earnings accumulated prior to the date of acquisition constitute a portion of the equity acquired by the parent company, whereas the parent’s share of subsidiary retained earnings accumulated after acquisition is a part of consolidated retained earnings

3 On the date that control is achieved, all previous purchases are revalued to reflect the market value

on the ―acquisition date,‖ which is the date that control is achieved Thus, they all have the same basis

4 The correct accounting depends on whether the parent retains control, or maintains some ownership but surrenders control If the parent retains control, no gain or loss is reflected in the Income Statement Instead, an adjustment is made to contributed capital If the parent surrenders control, the entire interest is adjusted to fair value, and a gain or loss reflected in the Income Statement on all shares owned prior to the sale

5 A loss would be reported because the total of the $5 per share gain related to (1) the undistributed profits of EZ Company from the date of acquisition to the beginning of the year of sale and (2) the undistributed profit of EZ Company from the beginning of the year of sale to the date of sale exceeds the $5 per share overall gain Thus, the total assigned to the first two components of gain exceed the total gain The other market factors effect (the third component) produced a loss

6 If a parent company owns less than 100% of a subsidiary and purchases an entire new issue of common stock directly from the subsidiary, either (1) the preemptive right has been waived previously, or (2) the noncontrolling stockholders elected not to exercise their rights

7 Regardless of whether the issuance results in an increase or a decrease in the book value of the parent’s share of the subsidiary’s equity, the correct accounting is to adjust the contributed capital

of the controlling interest

8

Noncontrolling Interest Situation Total Book Value Percent of Ownership

BUSINESS ETHICS

1 This is an awkward situation One strategy would be to wait a reasonable period of time, and check

to see if anything has changed (have the entries been documented, adjusted, reversed, etc.?) If nothing has been done, mention it to the supervisor again If he (she) is unresponsive this time, tactfully bring

up your concern with a higher-level supervisor

To adjust the first purchase to fair value

*[$262,350/9,900 – (($46,000+$6,500)/1,800)] x 1,800 = - $4,800

where $6,500 = ($85,000 - $20,000)×0.10, (1,800/18,000=10%)

To adjust the second purchase to fair value

*[($262,350/9,900) – (($95,000+$28,750)/4,500)] x 4,500 = -$4,659

where $28,750 = ($85,000 + $30,000)×0.25, (4,500/18,000=25%)

Dividend Income ($50,000 (1,800 + 4,500 + 9,900)/(18,000)) 45,000

To establish reciprocity/convert to equity

[(.10 $ $20,000)+ (.25 $ $30,000)) ]

Exercise 8-1 (continued)

Computation and Allocation of Difference between Implied and Book Value Acquired

Parent Non- Entire Share Controlling Value

Share Purchase price and implied value* $429,300 47,700 477,000

Less: Book value of equity acquired: 400,500 44,500 445,000

Difference between implied and book value 28,800 3,200 32,000

Balance - 0 - - 0 - - 0 -

16,200 shares × $262,350/9,900 = $429,300 or

$46,000+$95,000 + $262,350 + $35,250 - $4,800 - $4,500 = $429,300

Investment in Serbin Company ((21,600/72,000) $490,000) 147,000

To establish reciprocity to 1/1/2011 (.6 7 ($201,000 - $175,000)

Plus: Undistributed Income:

(A) Change in Retained Earnings from the date of

acquisition (1/1/10) to the beginning of the year

(1/1/11)

(B) Earnings from beginning of current year to the

To adjust additional contributed capital for the portion for earnings accruing to the shares sold included in consolidated income in prior years (($201,000 - $175,000) 18)

Exercise 8-3 (continued)

To eliminate intercompany dividends on the remaining shares owned

(80,400/120,000 $25,000) = (.67 $25,000) = 16,750

To eliminate investment account and create noncontrolling interest account

Computation and Allocation of Difference between Implied and Book Value Acquired

Parent Non- Entire Share Controlling Value

Share Purchase price and implied value $490,000 326,667 816,667

Less: Book value of equity acquired:

Less interest acquired:

(.10 of $50,000 decrease in Sanno Company retained earnings during 2009)

2011

To adjust the first purchase to fair value

*[$262,350/9,900 – (($46,000+$6,500)/1,800) ] x 1,800 = - $4,800

where $6,500 = ($85,000 - $20,000)×0.10, (1,800/18,000=10%)

To adjust the second purchase to fair value

*[($262,350/9,900) – (($95,000+$28,750)/4,500) ] x 4,500 = -$4,659

where $28,750 = ($85,000 + $30,000)×0.25, (4,500/18,000=25%)

Investment in Sanno Company (.90 $50,000 subsidiary dividend) 45,000

* $403,350- $5,000 + $40,250 - $45,000 + $121,500 - $76,500 - $4,800 - $4,500

Investment in Serbin Company (.60 $20,000 subsidiary dividend) 12,000

Equity in Subsidiary Income (.60 $46,000 subsidiary income) 27,600

2011

a

Less interest acquired:

Common Stock (25% x 600,000) 150,000 Retained Earnings (25% x $201,000) 50,250

Adjustment to Additional Contributed Capital – Papke 9,333

* or 25% of the total carrying value of Serbin Company, or ($490,000/.60) plus the change in retained earnings for 2008 of $26,000), or (25%)($842,667) = $210,667

Equity in Subsidiary Income (.85 $15,000 income for 1st three months) 12,750

Equity in Subsidiary Income [.67 ($60,000 - $15,000)] 30,150

Exercise 8-5 (continued)

Computation and Allocation of Difference between Implied and Book Value Acquired

Parent Non- Entire Share Controlling Value

Share Purchase price and implied value $490,000 326,667 816,667

Less: Book value of equity acquired:

Less interest acquired:

Common Stock (25% × 600,000) 150,000 Retained Earnings (25% × $201,000) 50,250

New percentage of ownership is 712,500/750,000 = 95%

To establish reciprocity (.925 ($150,000 - $60,000))

Exercise 8-6 (continued)

Other Contributed Capital – Sime $40,000 + 0.50 $250,000) 165,000

Difference between Implied and Book Value ($578,125/.925 –$600,000) 25,000

**Pace Company’s share of Sime Company’s equity:

To establish reciprocity (.925 $150,000 - $60,000)

Other Contributed Capital – Sime $40,000 + 0.30 $250,000)) 115,000

Difference between Implied and Book Value ($578,125/.925 –$600,000) 25,000

Exercise 8-7 (continued)

** Pace Company’s share of Sime Company’s equity:

After new purchase (.95 ($690,000 + $325,000)) 964,250

Exercise 8-8

Part A

Cost, Partial Equity, and Complete Equity Methods

* Padilla Company’s share of Skon Company’s equity:

Before sale to noncontrolling shareholders (.8 $170,500) $136,400 After sale to noncontrolling shareholders (.64** $170,500 + $45,000) 137,920

Exercise 8-8 (continued)

Part B

Cost Method

To establish reciprocity/convert to equity 8 ($50,500 - $30,000)

Investment in Skon Company ($132,000 - $880 + $16,400) 147,520

** ($132,000/.8 - $132,000) + ($50,500 – $30,000) x 2 + $45,000 + $880

Partial Equity and Complete Equity Methods

ANSWERS TO PROBLEMS

Problem 8-1

Part A

Computation and Allocation of Difference between Implied and Book Value Acquired

Fair value price = $1,890,000/135,000 shares = $14/share

Fair value of 1/1/10 shares (30,000 shares at $14/share) $420,000

Cost of 30,000 shares (10% ownership) 365,000

Change in retained earnings (630,000-260,000)(10%) 37,000

Fair value of 1/1/11 shares (75,000 shares at $14/share) $1,050,000

Cost of 75,000 shares (25% ownership) 960,000

Change in retained earnings (630,000-540,000)(25%) 22,500

Parent Non- Entire Share Controlling Value

Share Fair value of 1/1/10 purchase ($14/share) 420,000

Fair value of 1/1/11 purchase ($14/share) 1,050,000

Purchase price 1/1/12 purchase ($14/share) 1,890,000

Purchase price and implied value* $3,360,000 840,000 4,200,000

Less: Book value of equity acquired:

Problem 8-1 (continued)

To establish reciprocity/convert to equity

0.10 ($630,000 - $260,000) + 25 ($630,000 - $540,000)

To eliminate investment account and create noncontrolling interest account

To allocate the difference between implied and book value to goodwill

Problem 8-2

Pyle Company’s Books

Implied value by the purchase is ($510,000/.85) = $600,000, with NCI = $90,000

The carrying value of Stern Company, on January 1, 2011, is computed as follows:

Carrying value of Stern Company

Carrying value of Stern Company (on 1/1/2011)

Pyle Company’s carrying value of Company Stern

Noncontrolling carrying value in Company Stern

Problem 8-2 (continued)

To retroactively record Pyles’s share of Stern Company earnings in the investment account

The gain or loss in net income attributable to Pyle Company is computed as follows:

Gain or loss is the difference in:

2) Sum of:

Fair value of consideration received (40,000 shares) $480,000

The loss will be split between the 40,000 shares that are sold and the 11,000 shares that are still held as

an investment To record the sale of the shares, Pyle Company makes the following entry in its books

To reduce the remaining shares to market value

After the last entry, the balance in the investment account is equal to the fair value of the remaining interest ($132,000 or 11,000 shares at $12/share)

Problem 8-3 PYLE COMPANY AND SUBSIDIARY

Consolidated Statements Workpaper For the Year Ended December 31, 2011

Net Income to Retained Earnings $220,000 $186,000 48,000 2,325 37,200 $323,125

12/31 Retained Earnings to Balance Sheet $1,340,000 $418,000 $340,000 $196,525 $25,200 $1,589,325

$172,000

Problem 8-3 (continued) Pyle Stern Eliminations Noncontrolling Consolidated

(1) To eliminate intercompany dividends (80% of $60,000)

(2) To adjust additional contributed capital for portion included in income in prior years 3/51 [.85 ($772,000 - $600,000)]

(3) To adjust additional contributed capital for current year's income sold to noncontrolling stockholders 3/51 (3/12 $186,000 85) (4) To establish reciprocity/convert to equity on shares retained (.8 ($292,000 - $120,000))

(5) To eliminate investment account and create noncontrolling interest account $510,000/.85 x.2 + ($292,000 - $120,000) x 2

Verification of Controlling interest in Consolidated Net Income:

Allocated to noncontrolling interest:

34,875

Controlling interest in Consolidated Net Income $323,125

Plus: Undistributed Income:

(A) Change in Retained Earnings from the date of

acquisition (1/2/09) to the beginning of the year

(1/1/11)

(B) Earnings from beginning of current year to the

the date of sale (1/1/11 to 4/1/11)

(Consolidated Retained Earnings)

To establish reciprocity on shares still owned at year-end

Investment in S Company (72%)

Noncontrolling Interest

Problem 8-4 PORTER COMPANY AND SUBSIDIARY

Consolidated Statements Workpaper For the Year Ended December 31, 2011

Porter Spitz Eliminations Noncontrolling Consolidated

Net Income to Retained Earnings $87,500 $60,000 24,300 1,800 11,400 $113,600

12/31 Retained Earnings to Balance Sheet $244,000 $156,000 150,300 121,500 5,700 $365,500

Less: Dividend Income (45,000 – 4,500)/50,000) $30,000) (24,300)

Problem 8-4 (continued) Porter Spitz Eliminations Noncontrolling Consolidated

Difference b/w Implied and Book Value*** (5) 10,000 (6) 10,000

(1) To eliminate intercompany dividends ($30,000 (45,000 - 4,500)/50,000)

(2) To adjust additional contributed capital for portion included in income in prior years .1 [.9 ($246,000 - $140,000)]

(4) To establish reciprocity/convert to equity on shares retained .81 ($126,000 - $20,000)

(5) To eliminate investment account and create noncontrolling interest account **$135,000/.9 x 19 + ($126,000 - $20,000) x 19

(6) To allocate the difference between implied and book value *** $135,000/.9 - $140,000

Verification of Controlling interest in Consolidated Net Income:

Allocated to noncontrolling interest:

Problem 8-4 (continued)

Plus: Undistributed Income:

(A) Change in Retained Earnings from the date of

acquisition (1/1/07) to the beginning of the year

(5/1/11)

(B) Earnings from beginning of current year to the

the date of sale (1/1/11 to 5/1/11)

To establish reciprocity on shares still owned at year-end

Problem 8-5 PYLE COMPANY AND SUBSIDIARY

Consolidated Statements Workpaper For the Year Ended December 31, 2011

Pyle Stern Eliminations Noncontrolling Consolidated

Net Income to Retained Earnings $323,125 $186,000 $151,125 $2,325 $37,200 $323,125

12/31 Retained Earnings to Balance Sheet $1,589,325 $418,000 $443,125 $50,325 $25,200 $1,589,325

Less: Equity in Subsidiary Income ($46,500 85*) + ($139,500 80**) (151,125)

$172,000

* 51,000/60,000 = 85; ** (51,000 – 3,000)/60,000 = 80

Problem 8-5 (continued) Pyle Stern Eliminations Noncontrolling Consolidated

(1) To reverse the effect of parent company entries during the year for subsidiary dividends and income

(2) To eliminate investment account and create noncontrolling interest account $510,000/.85 x.2 + ($292,000 - $120,000) x 2

Verification of Consolidated Net Income:

Allocated to noncontrolling interest:

Plus: Undistributed Income:

(A) Change in Retained Earnings from the date of

acquisition (1/2/09) to the beginning of the year

(1/1/11)

(B) Earnings from beginning of current year to the

the date of sale (1/1/11 to 4/1/13)

(1) Equity Income ($46,500×.85)+($139,500×.80) 151,125

Dividends Declared – Skon Company ($60,000×.80) 48,000

($510,000-40,925 + 2,325 + $146,200)

[90,000 + 15% (292,000 - 120,000) + 40,925 - 2,325]

Plus: Undistributed Income:

(A) Change in Retained Earnings from the date of

acquisition (1/2/09) to the beginning of the year

(1/1/11)

(B) Earnings from beginning of current year to the

the date of sale (1/1/11 to 4/1/13)

Carrying value of retained ownership 654,800

Problem 8-6 PORTER COMPANY AND SUBSIDIARY

Consolidated Statements Workpaper For the Year Ended December 31, 2011

Porter Spitz Eliminations Noncontrolling Consolidated

Net Income to Retained Earnings $113,600 $60,000 50,400 1,800 11,400 $113,600

12/31 Retained Earnings to Balance Sheet $365,500 $156,000 176,400 26,100 5,700 $365,500

Less: Equity in Subsidiary Income [(.90 $20,000) + (.81 $40,000)] (50,400)

$63,200