Solution manual advanced accounting 10e by fischer taylor CH03

15,000 4 Pepper Company and Subsidiary Sultan Company Consolidated Statement of Retained Earnings For the Year Ended December 31, 20X1 Retained earnings, January 1, 20X1 ..... 3 Neiman C

CHAPTER 3

UNDERSTANDING THE ISSUES

1 (a) Subsidiary Income = $30,000

2 Date alignment means adjusting the in-

vestment 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

subsidi-ary’s equity accounts reflect

beginning-of-year balances, yet the investment

account reflects an end-of-year

bal-ance During the consolidation process,

the subsidiary income and the parent’s

share of the subsidiary’s declared

divi-dends are closed to the investment

ac-count to return it to its

beginning-of-year balance

(b) Sophisticated equity method—The

subsidiary’s equity accounts reflect

be-ginning-of-year balances, yet the

in-vestment account reflects an

end-of-year balance During the consolidation

process, the subsidiary income and the

parent’s share of the subsidiary’s

de-clared dividends are closed to the

in-vestment account to return it to its

be-ginning-of-year balance

(c) Cost method—The subsidiary’s equity

accounts reflect beginning-of-year

bal-ances, yet the investment account

re-flects the balance on the date of

acqui-sition Therefore, the investment

ac-count is converted to its simple equity

balance at the beginning of the period

to create date alignment

3 The noncontrolling share of consolidated

net income is the outside ownership share

of the subsidiary’s internally generated

in-come as adjusted for amortizations created

by fair value adjustments on the acquisition date The NCI share of consolidated net in-come has, in the past, been shown as an expense That is no longer allowed It is to

be shown as a distribution of consolidated net income

4 The $80,000 excess attributed to the

con-trolling interest means that the patent is justed by $100,000 ($80,000/80%)

(a) Parent net income for 20X1 $140,000 Subsidiary net income in

20X1 ($60,000 × ½ year) 30,000 Amortization of excess for

20X1 ($100,000 ÷ 10 × ½ year) (5,000) Consolidated net income $165,000 (b) NCI share of net income = 1/2 ×

($60,000 – $10,000) × 20% = $5,000

5 In 20X1, consolidated net income would be

reduced by $20,000 as a result of the ventory and equipment The inventory would increase cost of goods sold by

in-$10,000 ($60,000 – $50,000) The ment would increase depreciation expense

equip-by $10,000 [($150,000 – $100,000) ÷ 5 years] In 20X2, consolidated net income would be reduced by $10,000 as a result of the equipment The equipment would in-crease depreciation expense by $10,000 [($150,000 – $100,000) ÷ 5 years]

6 The total noncontrolling interest will consist

of 20% of the subsidiary’s common stock, paid-in capital in excess of par, retained earnings, dividends declared, and internally generated income The NCI is shown, in to-tal, as a subdivision of equity on the consol-idated balance sheet

7 Consolidated net income could exceed the

sum of the separately calculated net comes of the parent and subsidiary This would occur if the fair value of the subsidi-ary’s net assets were less than their book value, resulting in a markdown of assets The amortization of this markdown would decrease expense; therefore, consolidated net income is increased

in-EXERCISES

EXERCISE 3-1 Determination and Distribution of Excess Schedule

Fair value of subsidiary $450,000* $360,000 $90,000

Less book value of interest acquired:

Common stock ($5 par) $ 50,000

Paid-in capital in excess of par 100,000

Subsidiary income of Investment in Hill Company 48,000

$60,000 reported to parent Subsidiary Income 48,000

Dividends of $10,000 paid Cash 8,000

Subsidiary income of Investment in Hill Company 32,000

$40,000 reported to parent Subsidiary Income 32,000

Dividends of $10,000 paid Cash 8,000

reported to parent

Dividends of $10,000 paid Cash 8,000

Subsidiary income of Investment in Hill Company 28,000

($40,000 – $5,000 Subsidiary Income 28,000 amortization) × 80%

reported to parent

Dividends of $10,000 paid Cash 8,000

Dividends of $10,000 paid Cash 8,000

Subsidiary income of No entry

$40,000 reported to parent

Dividends of $10,000 paid Cash 8,000

EXERCISE 3-2 Determination and Distribution of Excess Schedule

Fair value of subsidiary $616,667* $462,500 $154,167

Less book value of interest acquired:

Common stock ($5 par) $ 50,000

Paid-in capital in excess of par 150,000

book value) $ 10,000 debit D1

Buildings and equipment

(a) Simple equity $462,500

+ (75% × Increase in Retained Earnings of $78,000*) 58,500**

*Shaw’s ending retained earnings, December 31, 20X5 $278,000

– Shaw’s beginning retained earnings, January 1, 20X4 200,000

Increase in retained earnings $ 78,000

**Or 75% × ($70,000 – $20,000 + $48,000 – $20,000)

Ch 3—Exercises

EXERCISE 3-3

(1) Determination and Distribution of Excess Schedule

Fair value of subsidiary $312,500* $250,000 $ 62,500

Less book value of interest acquired:

Common stock ($10 par) $100,000

Fixed assets $62,500 debit D 10 $6,250

Total $62,500

*$250,000/80% = $312,500

(2) (CY1) Subsidiary Income 20,000

Investment in Sultan Company 20,000

To eliminate parent’s share of subsidiary earnings for the current year

(CY2) Investment in Sultan Company ($5,000 × 80%) 4,000

Investment in Sultan Company 200,000

To eliminate pro rata share of the beginning-of- year Sultan equity balances

(D) Depreciable Fixed Assets 62,500

Investment in Sultan Company 50,000 Retained Earnings—Sultan (NCI adjustment) 12,500

To distribute excess per determination and distribution of excess schedule

(A) Depreciation Expense 6,250

Accumulated Depreciation 6,250

To amortize excess for the current year

Exercise 3–3, Continued

Consolidated Income Statement For Year Ended December 31, 20X1 Sales $250,000

Less expenses (add $6,250 adjustment) 191,250

Consolidated net income $ 58,750

Distributed to noncontrolling interest 3,750

Distributed to controlling interest $ 55,000

Subsidiary Sultan Company Income Distribution Depreciation adjustment $6,250 Internally generated net

income $25,000

Parent Pepper Company Income Distribution

Internally generated net

80% × Sultan adjusted income of $18,750 15,000

(4) Pepper Company and Subsidiary Sultan Company

Consolidated Statement of Retained Earnings For the Year Ended December 31, 20X1

Retained earnings, January 1, 20X1 $30,000 $200,000

Consolidated net income 3,750 55,000

Dividends declared (1,000)

Retained earnings, December 31, 20X1 $32,750 $255,000

Ch 3—Exercises

Exercise 3–3, Concluded (5) Pepper Company and Subsidiary Sultan Company

Consolidated Balance Sheet December 31, 20X1 Assets Current assets $190,000 Depreciable fixed assets $662,500a

Less accumulated depreciation 132,250b 530,250 Total assets $720,250

Liabilities and Stockholders’ Equity Current liabilities $100,000 Stockholders’ equity:

Noncontrolling interest 65,250c Controlling interest:

Common stock ($10 par) $300,000

Retained earnings 255,000 555,000 Total liabilities and stockholders’ equity $720,250

a$400,000 + $200,000 + $62,500 = $662,500

b$106,000 + $20,000 + 6,250 = $132,250

c($100,000 x 20%) + $32,750 retained earnings + $12,500 NCI adjustment = $65,250

EXERCISE 3-4

(1) (CY1) Subsidiary Income 12,000

Investment in Sultan Company 12,000

To eliminate parent’s share of subsidiary earnings for the current year

(CY2) Investment in Sultan Company 8,000

Investment in Sultan Company 216,000

To eliminate pro rata share of the beginning-of- year Sultan equity balances

(D) Depreciable Fixed Assets 62,500

Investment in Sultan Company 50,000 Retained Earnings—Sultan (NCI adjustment) 12,500

To distribute excess per determination and distribution of excess schedule

(A) Depreciation Expense 6,250

Retained Earnings—Pepper (80% × $6,250) 5,000

Retained Earnings—Sultan (20% × $6,250) 1,250

Accumulated Depreciation (2 years × $6,250) 12,500

To amortize excess for the prior and current years

Exercise 3–4, Concluded

Consolidated Income Statement For Year Ended December 31, 20X2 Sales $300,000

Less expenses (add $6,250 adjustment) 251,250

Consolidated net income $ 48,750

Distributed to noncontrolling interest 1,750

Distributed to controlling interest $ 47,000

Subsidiary Sultan Company Income Distribution Depreciation adjustment (A) 6,250 Internally generated net

Parent Pepper Company Income Distribution

Internally generated net

80% × Sultan adjusted income of $8,750 7,000

Ch 3—Exercises

EXERCISE 3-5

(1) Same as Exercise 3, part (1)

(2) (CY1) Subsidiary Income 15,000

Investment in Sultan Company 15,000 (CY2) Investment in Sultan Company 4,000

Dividends Declared 4,000 (EL) Common Stock—Sultan 80,000

To amortize excess for the current year

(3) Same as Exercise 3, part (3)

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

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

EXERCISE 3-6

(1) (CY1) Subsidiary Income 7,000

Investment in Sultan Company 7,000 (CY2) Investment in Sultan Company 8,000

Dividends Declared 8,000 (EL) Common Stock—Sultan 80,000

(A) Depreciation Expense 6,250

Accumulated Depreciation 6,250

To amortize excess for the current year

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

EXERCISE 3-7

(1) Same as Exercise 3, part (1)

(2) (CY2) Dividend Income 4,000

Investment in Sultan Company 200,000

To eliminate pro rata share of the beginning-of- year Sultan equity balances

(D) Depreciable Fixed Assets 62,500

Investment in Sultan Company 50,000 Retained Earnings—Sultan (NCI adjustment) 12,500

To distribute excess per determination and distribution of excess schedule

(A) Depreciation Expense 6,250

Accumulated Depreciation 6,250

To amortize excess for the current year

(3) Same as Exercise 3, part (3)

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

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

(CY2) Dividend Income 8,000

Investment in Sultan Company 216,000

To eliminate pro rata share of the beginning-of- year Sultan equity balances

(D) Depreciable Fixed Assets 62,500

Investment in Sultan Company 50,000 Retained Earnings—Sultan (NCI adjustment) 12,500

To distribute excess per determination and distribution of excess schedule

(A) Depreciation Expense 6,250

Retained Earnings—Pepper (80% × $6,250) 5,000

Retained Earnings—Sultan (20% × $6,250) 1,250

Accumulated Depreciation (2 years × $6,250) 12,500

To amortize excess for the prior and current year

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

EXERCISE 3-9 Amortization Schedule

Total $65,000 $58,750 $58,750 $53,750

EXERCISE 3-10

(1) Determination and Distribution of Excess Schedule

Fair value of subsidiary $387,500 $310,000 $ 77,500

Less book value of interest acquired:

Fixed assets $(12,500) credit D 5 $(2,500)

Total $(12,500)

(2) (EL) Common Stock—Kraus 80,000

Retained Earnings—Kraus 240,000

Investment in Kraus Company 320,000

To eliminate pro rata share of the beginning-of- year Kraus equity balances and purchased income

(D) Investment in Kraus Company 10,000

Retained Earnings—Kraus (NCI adjustment) 2,500

Equipment 12,500

To distribute excess book value to plant assets

(A) Accumulated Depreciation [($12,500 ÷ 5) × 1/2] 1,250

General Expenses 1,250

To reduce depreciation expense for one-half year

(3) Neiman Company and Subsidiary Kraus Company

Consolidated Income Statement For Year Ended December 31, 20X2 Sales $400,000

Less cost of goods sold 225,000

Gross profit $175,000

Less general expenses (less $1,250 adjustment) 83,750

Consolidated net income $ 91,250

Distributed to noncontrolling interest 6,250

Distributed to controlling interest $ 85,000

Ch 3—Exercises

Exercise 3-10 Concluded Subsidiary Kraus Company Income Distribution

Internally generated net

Parent Neiman Company Income Distribution

Internally generated net

80% × Kraus adjusted income of $31,250 (past 6 months) 25,000

EXERCISE 3-11

Calculation of book value of Subsidiary:

Fair value at purchase $1,062,500

Add $200,000 increase in Barker retained earnings 200,000

Deduct amortization of excess (5 years × $10,000 per year) (50,000)

Book value balance $1,212,500

Fair value of Barker Company, December 31, 20X5 (given) $1,000,000

Since the adjusted (for acquisition) book value ($1,212,500) exceeds the fair value balance

($1,000,000), goodwill is impaired

Impairment loss:

Fair value of Barker Company $1,000,000

Fair value of Barker Company identifiable assets 900,000

Estimated goodwill $ 100,000

Existing goodwill 262,500

Impairment loss $ 162,500

APPENDIX EXERCISES

EXERCISE 3B-1

(1) Investment in Largo Company 500,000

Common Stock 100,000

Paid-In Capital in Excess of Par 400,000

Value Analysis Schedule Fair Value (100%) (0%)

Company fair value $500,000 $500,000 N/A

Fair value of net assets excluding goodwill 386,000 386,000*

Goodwill $114,000 $114,000

*$330,000 equity + $80,000 asset adjustment – $24,000 (30% tax × $80,000) DTL

Based on the above information, the following D&D schedule is prepared:

(1) Determination and Distribution of Excess Schedule

Fair value of subsidiary $500,000 $500,000 N/A

Less book value of interest acquired:

Common stock ($10 par) $100,000

$100,000 book value) $ 20,000 debit D1 1

Deferred tax liability (30% tax

rate × $20,000) (6,000)credit D1t 1

Depreciable fixed assets

($270,000 fair – $210,000

book value) 60,000 debit D2 10 $6,000

Deferred tax liability (30% tax

rate × $60,000) (18,000)credit D2t 10 (1,800)

Goodwill 114,000 debit D3

Total $170,000

Ch 3—Exercises

Exercise 3B-1 Concluded (3) Elimination Entries:

Deferred Tax Liability (on inventory and equipment) 24,000

Investment in Largo Company 170,000

EXERCISE 3B-2

Value Analysis Schedule Fair Value (90%) (10%)

Company fair value $520,000 $468,000 $52,000

Fair value of net assets excluding goodwill 329,000* 296,100 32,900

Goodwill $191,000 $171,900 $19,100

*$280,000 equity + $70,000 asset adjustment – $21,000 (30% tax × $70,000) DTL

Based on the above information, the following D&D schedule is prepared:

(1) Determination and Distribution of Excess Schedule

Fair value of subsidiary $520,000 $468,000 $ 52,000

Less book value of interest acquired:

Common stock ($5 par) $100,000

Paid-in capital in excess of par 130,000

Depreciable fixed assets 50,000 debit D2 10 $5,000

Deferred tax liability (30% tax

rate × $50,000) (15,000)credit D2t 10 (1,500)

Goodwill 191,000 debit D3

Total $240,000

(2) Lucy Company and Subsidiary Diamond Company

Consolidated Income Statement For Year Ended December 31, 20X1 Sales $550,000

Less cost of goods sold (add $20,000 adjustment) 310,000

Gross profit $240,000

Less expenses:

General expenses $75,000

Depreciation expense (add $5,000 adjustment) 80,000 155,000

Consolidated income before tax $ 85,000

Provision for tax (30%) 25,500

Consolidated net income $ 59,500

Distributed to NCI (350)

Distributed to controlling interest $ 59,850

Ch 3—Exercises

Exercise 3B-2 Concluded Subsidiary Diamond Company Income Distribution Inventory consumption $20,000 Internally generated

Building depreciation 5,000 income before tax $20,0

Adjusted income before tax $ (5,0Provision for tax, 30% 1,5Adjusted net income $ (3,5

EXERCISE 3B-3

Value Analysis Schedule Fair Value (100%) (0%)

Company fair value $700,000 $700,000 N/A

Fair value of net assets excluding goodwill 445,000* 455,000

Goodwill $255,000 $255,000

*$350,000 equity + $50,000 asset adjustment – $15,000 (30% tax × $50,000) DTL + $60,000

deferred tax expense ($200,000 × 30%)

Based on the above information, the following D&D schedule is prepared:

Determination and Distribution of Excess Schedule

Fair value of subsidiary $700,000 $700,000 N/A

Less book value of interest acquired:

Common stock, $5 par $250,000

Buildings and equipment $ 50,000 debit D1 10 $5,000

Deferred tax liability (30% tax

Ch 3—Problems

PROBLEMS

PROBLEM 3-1

Value Analysis Schedule Fair Value (80%) (20%)

Company fair value $900,000 $720,000 $180,000

Fair value of net assets excluding goodwill 720,000* 576,000 144,000

Goodwill $180,000 $144,000 $ 36,000

*$550,000 equity + $170,000 asset adjustments

Based on the above information, the following D&D schedule is prepared:

Determination and Distribution of Excess Schedule

Fair value of subsidiary $900,000 $720,000 $180,000

Less book value of interest acquired:

Common stock ($10 par) $100,000

Paid-in capital in excess of par 200,000

Problem 3-1 Continued (2) Investment Entries:

Investment Entries

20X1

income of $60,000 Sardine Company 48,000 Sardine Company 44,000

Subsidiary Income Subsidiary Income (80% × reported) 48,000 [80% × (reported –

Subsidiary pays Cash 8,000 Cash 8,000 Cash 8,000

(80% × declared) 8,000 (80% × declared) 8,000 income 8,000

20X2

Subsidiary reports Investment in Investment in

income of $45,000 Sardine Company 36,000 Sardine Company 32,000 No entry

Subsidiary Income Subsidiary Income (80% × reported) 36,000 [80% × (reported –

Subsidiary pays Cash 8,000 Cash 8,000 Cash 8,000

(80% × declared) 8,000 (80% × declared) 8,000 income 8,000

(CY1) Subsidiary Income 48,000 Subsidiary Income 44,000 No conversion

year entries Sardine Company 48,000 Sardine Company 44,000

Sardine Company 8,000 Sardine Company…… 8,000 Dividends Declared 8,000 Dividends Declared 8,000 Dividends Declared 8,000

(EL) Common Stock 80,000 Common Stock 80,000 Common Stock 80,000

investment as Excess of Par 160,000 Excess of Par 160,000 Excess of Par 160,000

of January 1 Retained Earnings 200,000 Retained Earnings 200,000 Retained Earnings 200,000

Sardine Company 440,000 Sardine Company 440,000 Sardine Company 440,000 (D) Land 70,000 Land 70,000 Land 70,000

Distribute excess Building 100,000 Building 100,000 Building 100,000

Goodwill 180,000 Goodwill 180,000 Goodwill 180,000

Sardine Company 280,000 Sardine Company 280,000 Sardine Company 280,000 RE—Sardine (NCI) 70,000 RE—Sardine (NCI) 70,000 RE—Sardine (NCI) 70,000 (A) Depr Expense 5,000 Depr Expense 5,000 Depr Expense 5,000

Amortize excess Acc Depreciation 5,000 Acc Depreciation 5,000 Acc Depreciation 5,000 for current year

(CY1) Subsidiary Income 36,000 Subsidiary Income 32,000 Investment in

Eliminated current- Investment in Investment in Dividend Inc 8,000

year entries Sardine Company 36,000 Sardine Company 32,000 Dividends Declared 8,000

Sardine Company 8,000 Sardine Company 8,000

Dividends Declared 8,000 Dividends Declared 8,000

(EL) Common Stock 80,000 Common Stock 80,000 Common Stock 80,000

investment as Excess of Par 160,000 Excess of Par 160,000 Excess of Par 160,000

of January 1 Retained Earnings 240,000 Retained Earnings 240,000 Retained Earnings 240,000

Sardine Company 480,000 Sardine Company 480,000 Sardine Company 480,000 (D) Land 70,000 Land 70,000 Land 70,000

Distribute excess Building 100,000 Building (19 years) 95,000 Building 100,000

Goodwill 180,000 Goodwill 180,000 Goodwill 180,000

Sardine Company 280,000 Sardine Company 276,000 Sardine Company 280,000 RE—Sardine (NCI) 70,000 RE—Sardine (NCI) 69,000 RE—Sardine (NCI) 70,000 (A) RE—Sardine 4,000 Depr Expense 5,000 RE—Sardine 4,000

Amortize excess RE—Peter 1,000 Acc Depreciation 5,000 RE—Peter 1,000

for current and Depr Expense 5,000 Depr Expense 5,000

prior years Acc Depreciation 10,000 Acc Depreciation 10,000

Ch 3—Problems

PROBLEM 3-2

Value Analysis Schedule Fair Value (80%) (20%)

Company fair value $385,000 $308,000 $77,000

Fair value of net assets excluding goodwill 335,000 268,000 67,000

Goodwill $ 50,000 $ 40,000 $10,000

Determination and Distribution of Excess Schedule

Fair value of subsidiary $385,000 $308,000 $ 77,000

Less book value of interest acquired:

Problem 3-2, Continued

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

Inventory 100,000 50,000 150,000

Other Current Assets 148,000 180,000 328,000

Investment in Soap 388,000 (CY1) 72,000

(CY2) 24,000

(EL) 272,000

(D) 68,000

Land 50,000 50,000 100,000

Buildings and Equipment 350,000 320,000 (D2) 25,000 695,000

Accumulated Depreciation (100,000) (60,000) (A2) 5,000 (165,000)

Goodwill (D3) 50,000 50,000

Other Intangible Assets 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—Soap (50,000) (EL) 40,000 (10,000)

Other Paid-In Capital—Soap (100,000) (EL) 80,000 (20,000)

Retained Earnings—Soap (190,000) (EL) 152,000 (52,500)

Cost of Goods Sold 300,000 260,000 560,000

Operating Expenses 120,000 100,000 (A2) 2,500 222,500

Subsidiary Income (72,000) (CY1) 72,000

Dividends Declared—Soap 30,000 (CY2) 24,000 6,000

Ch 3—Problems

Problem 3-2, Concluded Eliminations and Adjustments:

(CY1) Current-year subsidiary income

(CY2) Current-year dividend

(EL) Eliminate controlling interest in Sub equity

(D)/(NCI) Distribute excess and adjust NCI

(D1) Inventory (retained earnings)

(D2) Buildings and equipment

(D3) Goodwill

(A2) Amortize excess

Income Distribution Schedules

Soap Company Amortizations $2,500 Internally generated net

(1) Use part (1), from Problem 3-2

(2) Entries under the sophisticated equity method: 20X1 20X2

Problem 3-3, Continued

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

Other Paid-In Capital in Excess of

0

Ch 3—Problems

Problem 3-3, Concluded Eliminations and Adjustments:

(CY) Eliminate the current-year entries made in the investment account and in the

subsidiary income account

(EL) Eliminate the pro rata share of Soap Company equity balances at the beginning

of the year against the investment account

(D)/(NCI) Distribute the $58,000 remaining excess of cost over book value ($68,000 less

20X1 charges of $8,000 to Cost of Goods Sold for inventory and $2,000 to ating Expenses for extra depreciation) Adjust NCI, $14,500 ($17,000 on acquisi-tion date – 20% × $12,500 amortizations for 20X1)

Oper-(D2) Buildings for $22,500 (original $25,000 – $2,500 amortization for 20X1)

(D3) Goodwill for $50,000

(A2) For 20X2 only, depreciate the write-up to Buildings and Equipment over 10

years

Charge the 20X2 Accumulated Depreciation against Operating Expenses

Use Income distribution schedules from Problem 3-2 above

PROBLEM 3-4

(1) Determination and Distribution of Excess Schedule

Fair value of subsidiary $460,000 $460,000 N/A

Less book value of interest acquired:

Common stock ($5 par) $ 50,000

Paid-in capital in excess of par 15,000

Problem 3-4, Concluded (2) Chango Company and Subsidiary Lhasa, Inc

Consolidated Income Statement For Year Ended December 31, 20X3 Revenue $670,000

Expenses 620,000

Consolidated net income $ 50,000

Chango Company and Subsidiary Lhasa, Inc

Retained Earnings Statement For Year Ended December 31, 20X3 Retained earnings, Chango Company, January 1, 20X3

($230,000 Chango + $35,000 equity conversion) $265,000

Add consolidated net income 50,000

Less dividends declared (10,000)

Balance, December 31, 20X3 $305,000

Chango Company and Subsidiary Lhasa Inc

Consolidated Balance Sheet December 31, 20X3 Assets Current assets $ 660,000

Depreciable fixed assets $2,245,000

Accumulated depreciation (475,000) 1,770,000 Goodwill 260,000

Total assets $2,690,000

Liabilities and Stockholders’ Equity Liabilities $1,125,000 Stockholders’ equity:

Common stock, $1 par $ 220,000

Paid-in capital in excess of par 1,040,000

Retained earnings 305,000 1,565,000

Total liabilities and stockholders’ equity $2,690,000

Ch 3—Problems

PROBLEM 3-5

(1) Determination and Distribution of Excess Schedule

Fair value of subsidiary $220,000 $220,000 N/A

Less book value of interest acquired:

Common stock ($10 par) $100,000

Paid-in capital in excess of par 50,000

Problem 3-5, Continued

Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X7

Paid-In Capital in Excess of Par—

Eliminations and Adjustments:

(EL) Eliminate 100% of the subsidiary’s January 20X7 equity balances against the balance of the investment account

(D) Distribute excess of Stockdon book value over cost of investment according to the determination and distribution of excess

sche-dule

(A) Reduce the building account by $3,000 as a result of the amortization resulting from the excess adjustment resulting from entry 2

Ch 3—Problems

Problem 3-5, Concluded (3) Bell Corporation and Subsidiary Stockdon Corporation

Consolidated Income Statement For Year Ended December 31, 20X7 Revenues $ 250,000

Cost of goods sold (155,000)

Gross profit $ 95,000

Other expenses (52,000)

Consolidated net income $ 43,000

Bell Corporation and Subsidiary Stockdon Corporation

Retained Earnings Statement For Year Ended December 31, 20X7 Retained earnings, January 1, 20X7 $255,000

Add consolidated net income 43,000

Less dividends declared (5,000)

Balance, December 31, 20X7 $293,000

Bell Corporation and Subsidiary Stockdon Corporation

Consolidated Balance Sheet December 31, 20X7 Assets Current assets:

Common stock, $3 par $300,000

Paid-in capital in excess of par 180,000

Retained earnings 293,000 773,000

Total liabilities and stockholders’ equity $1,388,000

PROBLEM 3-6

Value Analysis Schedule Fair Value (80%) (20%)

Company fair value $337,500* $270,000 $67,500

Fair value of net assets excluding goodwill 235,000**

188,000 47,000

Goodwill $102,500 $ 82,000 $20,500

*$270,000/80%

**$195,000 equity + $40,000 asset adjustments

Based on the above information, the following D&D schedule is prepared:

Determination and Distribution of Excess Schedule

Fair value of subsidiary $337,500 $270,000 $ 67,500

Less book value of interest acquired:

Common stock ($10 par) $100,000

Paid-in capital in excess of par 120,000

Ch 3—Problems

Problem 3-6, Continued

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

Retained Earnings, Jan 1, 20X2—

Paid-In Capital in Excess of Par—

Retained Earnings, Jan 1, 20X2—

0

Problem 3-6, Continued Eliminations and Adjustments:

(CY1) Eliminate the subsidiary income against the investment account

(CY2) Eliminate the 80% ownership portion of the subsidiary dividends, including

$15,000 negative retained earnings

(EL) Eliminate the 80% ownership portion of the subsidiary equity accounts against

the investment

(D)/(NCI) Distribute the excess cost and NCI adjustment as follows, in accordance with the

Determination and Distribution of Excess Schedule:

Parent Prescott Company Income Distribution

Internally generated net

80% × Sandin adjusted income of $21,000 16,800

(3) Prescott Company and Subsidiary Sandin Company

Consolidated Income Statement For Year Ended December 31, 20X2 Sales $480,000

Cost of goods sold 229,000

Gross profit $251,000

Expenses 169,000

Consolidated net income $ 82,000

Distributed to noncontrolling interest 4,200

Distributed to controlling interest $ 77,800

Ch 3—Problems

Problem 3-6, Concluded Prescott Company and Subsidiary Sandin Company

Retained Earnings Statement For Year Ended December 31, 20X2

Retained earnings, January 1, 20X2 $(3,000)* $499,800

Add distribution of net income 4,200 77,800

Less dividends declared (1,000) (10,000)

Balance, December 31, 20X2 $ 200 $567,600

*$15,000 debit balance × 20%

Prescott Company and Subsidiary Sandin Company

Consolidated Balance Sheet December 31, 20X2 Assets Current assets $ 295,000

Property, plant, and equipment:

PROBLEM 3-7

Value Analysis Schedule Fair Value (80%) (20%)

Company fair value $343,750* $275,000 $68,750

Fair value of net assets excluding goodwill 260,000**

208,000 52,000

Goodwill $ 83,750 $ 67,000 $16,750

*$275,000/80%

**$200,000 equity + $60,000 asset adjustments

Based on the above information, the following D&D schedule is prepared:

Determination and Distribution of Excess Schedule

Fair value of subsidiary $343,750 $275,000 $ 68,750

Less book value of interest acquired:

Common stock ($5 par) $150,000

Ch 3—Problems

Problem 3-7, Continued

Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X1

Problem 3-7, Continued Subsidiary Super Company Income Distribution Equipment depreciation (A1) $1,000 Internally generated net

Building depreciation (A2) 1,250 income $6,000

Parent Jeter Corporation Income Distribution

Internally generated net

80% × Super adjusted income

of $3,750 (last 6 months) 3,000

Eliminations and Adjustments:

(CY1) Eliminate parent’s current-year entry for subsidiary income

(EL) Eliminate the pro rata share of Super Company equity balances and purchased

income

(D)/(NCI) Distribute the excess and adjust NCI as determined by the determination and

dis-tribution of excess schedule:

(D1) Increase equipment by $10,000

(D2) Increase building by $50,000

(D3) Record goodwill of $83,750

Record amortizations resulting from the asset and liability revaluations of entry 3:

(A1) Amortize equipment for $2,000 ($10,000 ÷ 5 years) for the half year ($1,000)

(A2) Amortize building for $2,500 ($50,000 ÷ 20 years) for the half year ($1,250)

(3) Jeter Corporation and Subsidiary Super Company

Consolidated Income Statement For Year Ended December 31, 20X1 Revenues $520,000

Cost of goods sold 250,000

Ch 3—Problems

Problem 3-7, Concluded Jeter Corporation and Subsidiary Super Company Consolidated Retained Earnings Statement For Year Ended December 31, 20X1

Retained earnings, January 1, 20X1* $10,000 $251,600

Add distribution of net income 750 33,000

Less dividends declared (10,000)

Balance, December 31, 20X1 $10,750 $274,600

*July 1 balance for NCI

Jeter Corporation and Subsidiary Super Company

Consolidated Balance Sheet For Year Ended December 31, 20X1

Assets Current assets:

Common stock, $100 par $400,000

Paid-in capital in excess of par 40,000

Retained earnings 274,600 714,600

Total liabilities and stockholders’ equity $1,414,100

*Includes both building and equipment depreciation

PROBLEM 3-8

Value Analysis Schedule Fair Value (80%) (20%)

Company fair value $2,000,000* $1,600,000 $400,000

Fair value of net assets excluding goodwill 1,860,000**

1,488,000 372,000

Goodwill $ 140,000 $ 112,000$ 28,000

*$1,600,000/80%

**$1,700,000 equity + $160,000 asset adjustments

Based on the above information, the following D&D schedule is prepared:

Determination and Distribution of Excess Schedule

Fair value of subsidiary $2,000,000 $1,600,000 $ 400,000

Less book value of interest acquired:

Common stock ($10 stated