Solution manual advanced financial accounting, 8th edition by baker chap005

Chapter 05 - Consolidation of Less-Than-Wholly Owned SubsidiariesCHAPTER 5 CONSOLIDATION OF LESS-THAN-WHOLLY OWNED SUBSIDIARIES ANSWERS TO QUESTIONS Q5-1 The noncontrolling interest is r

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Chapter 05 - Consolidation of Less-Than-Wholly Owned Subsidiaries

CHAPTER 5 CONSOLIDATION OF LESS-THAN-WHOLLY OWNED SUBSIDIARIES

ANSWERS TO QUESTIONS

Q5-1 The noncontrolling interest is reported as a separate item in the stockholders’ equity

section of the balance sheet Past practice often presented the noncontrolling interestbetween long-term liabilities and stockholders’ equity

Q5-2 The consolidated balance sheet always includes 100 percent of the subsidiary’s

assets and liabilities When the parent holds less than 100 percent ownership of thesubsidiary, the noncontrolling interest’s claim on those net assets must be reported

Q5-3 The income statement portion of the consolidation workpaper is expanded to include a

line for income assigned to the noncontrolling interest This amount is deducted fromconsolidated net income in computing income to the controlling interest The balance sheetportion of the workpaper also is expanded to include the claim of the noncontrollingshareholders on the net assets of the subsidiary

Q5-4 The balance assigned to the noncontrolling interest is based on the fair value of the

noncontrolling interest at the date of acquisition

Q5-5 Consolidated retained earnings includes only amounts attributable to the shareholders

of the parent company Thus, none of the retained earnings is assigned to the noncontrollinginterest

Q5-6 One hundred percent of the fair value of the subsidiary’s assets is included.

Q5-7 The amount of goodwill at the date of acquisition is determined by deducting the fair

value of the net assets of the acquired company from the sum of the fair value of theconsideration given by the acquiring company and the fair value of the noncontrollinginterest The resulting goodwill must be apportioned between the controlling andnoncontrolling interest Under normal circumstances, goodwill apportioned to thenoncontrolling interest will equal the excess of the fair value of the noncontrolling interestover its proportionate share of the fair value of the net assets of the acquired company

Q5-8 Income assigned to the noncontrolling interest normally is a proportionate share of the

net income of the subsidiary

Q5-9 Income assigned to noncontrolling shareholders is reported as a deduction from

consolidated net income in arriving at income assigned to the parent company shareholders

Q5-10 Dividends paid to noncontrolling shareholders are eliminated in preparing the

consolidated statement of retained earnings Only dividends paid to the parent companyshareholders are reported as dividends distributed to shareholders

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Q5-11 When the parent owns all the shares of a subsidiary (and the subsidiary has no other

publicly traded securities outstanding), it is free to decide whether it wishes to publishseparate statements for the subsidiary In some cases creditors, regulatory boards, or otherinterested parties may insist that such statements be produced If the parent does not ownall the shares of the subsidiary, the subsidiary normally would be expected to publishseparate financial statements for distribution to the noncontrolling shareholders In general,the consolidated statements are published for use by parent company shareholders and arelikely to be of little use to shareholders of the subsidiary

Q5-12 Other comprehensive income elements reported by the subsidiary must be included

in other comprehensive income in the consolidated financial statement If the subsidiary isnot wholly owned, income assigned to the noncontrolling interest will include a proportionateshare of the subsidiary’s other comprehensive income

Q5-13 The parent’s portion of the subsidiary’s other comprehensive income is included in

comprehensive income attributable to the controlling interest

Q5-14 Prior to FASB 141R, the differential was computed as the difference between the fair

value of the consideration given in acquiring ownership of the subsidiary and the parent’sportion of the book value of the subsidiary’s net assets

Q5-15 Prior to FASB 141R, goodwill was reported as the difference between the fair value

of the consideration given in acquiring ownership of the subsidiary and the parent’s portion ofthe fair value of the subsidiary’s net assets

Q5-16 Prior to FASB 141R, consolidated net income was computed by deducting income to

noncontrolling interest from consolidated revenues less expenses

Q5-17* The only effect of a negative balance in retained earnings is the need for a credit to

subsidiary retained earnings, rather than a debit to retained earnings, when the stockholders’equity accounts of the subsidiary and the investment account of the parent are eliminated

Q5-18* In the period in which the land is sold, the gain or loss recorded by the subsidiary

must be adjusted by the amount of the differential assigned to the land When the differential

is assigned in the workpaper eliminating entries at the end of the period, a debit will be made

to the gain or loss on sale of land that came to the workpaper from the subsidiary’s books

Q5-19A When the cost method is used, income reported by the parent and the resulting balance in the investment account do not reflect undistributed earnings of the subsidiary

following the date of acquisition Because these account balances are different under thecost and equity methods, a different set of eliminating entries must be used The majorchange in eliminating entries when the cost method is adopted is that a portion of thesubsidiary retained earnings is carried forward to the consolidated total The carryforward isneeded because the parent’s retained earnings does not include its portion of undistributedsubsidiary earnings following the acquisition, and therefore is less than consolidated retainedearnings

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SOLUTIONS TO CASES

C5-1 Consolidation Workpaper Preparation

a If the parent company is using the equity method, the elimination of the incomerecognized by the parent from the subsidiary generally should not be equal to a proportionateshare of the subsidiary’s dividends If the parent has recognized only dividend income fromthe subsidiary, it is using the cost method

b It should be possible to tell if the preparer has included the parent's share of thesubsidiary's reported income in computing consolidated net income It is not possible to tellfrom looking at the workpaper alone whether or not all the adjustments that should havebeen made for amortization of the differential or to eliminate unrealized profits have beenproperly treated in computing the consolidated net income

c If the parent paid more than its proportionate share of the fair value of the subsidiary’s netassets, the eliminating entries relating to that subsidiary should show amounts assigned toindividual asset accounts for fair value adjustments and to goodwill when the investmentaccount balance is eliminated and any noncontrolling interest is established in theworkpaper It should be relatively easy to determine if this has occurred by examining theconsolidation workpaper

d If the preparer has made a separate entry in the workpaper to eliminate the change in theparent’s investment account during the period, the easiest way to ascertain the parent’ssubsidiary ownership percentage is to determine the percentage share of the subsidiary’sdividends eliminated in that entry Another approach might be to divide the total amount ofthe parent’s subsidiary investment account eliminated in the workpaper by the sum of thetotal parent’s investment account eliminated and the total amount of the noncontrollinginterest established in the workpaper through eliminating entries However, this approachassumes that the fair value of the consideration given by the parent when acquiring itssubsidiary interest and the fair value of the noncontrolling interest on that date wereproportional, which is usually, by not always, the case

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C5-2 Consolidated Income Presentation

MEMO

Standard Company

FROM: , Accounting Staff

RE: Allocation of Consolidated Income to Parent and Noncontrolling

Shareholders

FASB 160 specifies that consolidated net income reflects the income of the entire

consolidated entity and that consolidated net income must be allocated between thecontrolling and noncontrolling interests Earnings per share reported in the consolidatedincome statement is based on the income allocated to the controlling interest only

Consolidated net income increased by $34,000 from 20X4 to 20X5, an increase of 52percent However, consolidated net income allocated to the controlling interest increased by

$24,100 from 20X4 to 20X5, an increase of only 38 percent The increase in the controllinginterest’s share of consolidated net income did not keep pace with the increase in salesbecause nearly all of the sales increase was experienced by Jewel, which has a very lowprofit margin In addition the parent receives only 55 percent of the increased profits of thesubsidiary Consolidated net income for the two years is computed and allocated as follows:

20X4 20X5

Income to noncontrolling shareholders (2,700)(e) (12,600) (f)Income to controlling shareholders $ 63,300 $ 87,400

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C5-3 Pro Rata Consolidation

MEMO

To: Financial Vice-President

Rose Corporation

From: , Senior Accountant

Re: Pro Rata Consolidation of Joint Venture

This memo is in response to your request for additional information on the desirability ofusing pro rata consolidation rather than equity method reporting for Rose Corporation’sinvestment in its joint venture with Krome Company The equity method is used by most

companies in reporting their investments in corporate joint ventures [APB Opinion, Par 16] While APB 18 provides guidance for joint ventures that have issued common stock, it does not provide guidance for ownership of noncorporate entities Interpretation No 2 to APB 18

suggests that the equity method would be appropriate for unincorporated entities as well

[APB 18, Int #2]

Assuming the joint venture with Krome Company is unincorporated, Rose owns an undividedinterest in each asset held by the joint venture and is liable for its share of each of itsliabilities and, under certain circumstances, the entire amount In this case, it can be arguedpro rata consolidation provides a more accurate picture of Rose’s assets and liabilities,although not all agree with this assertion Pro rata consolidation is generally considered notacceptable in this country, although it is a widely used industry practice in a few industriessuch as oil and gas exploration and production If the joint venture is incorporated, Rosedoes not have a direct claim on the assets of the joint venture and Rose’s liability is sheltered

by the joint venture’s corporate structure In this case, continued use of the equity methodappears to be appropriate

Primary citations:

APB 18

APB 18, INT #2

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C5-4 Elimination Procedures

a The eliminating entries are recorded only in the consolidation workpaper and therefore donot change the balances recorded on the company's books Each time consolidatedstatements are prepared the balances reported on the company's books serve as the startingpoint Thus, all the necessary eliminating entries must be entered in the consolidationworkpaper each time consolidated statements are prepared

b For acquisitions prior to the application of FASB 141R, the balance assigned to the

noncontrolling shareholders at the beginning of the period is based on the book value of thenet assets of the subsidiary at that date and is recorded in the workpaper in the entry toeliminate the beginning stockholders' equity balances of the subsidiary and the beginning

investment account balance of the parent For acquisitions after the effective date of FASB 141R, the noncontrolling interest at a point in time is equal to its fair value on the date of

combination, adjusted to date for a proportionate share of the undistributed earnings of thesubsidiary and the noncontrolling interest’s share of any write-off of differential Anotherapproach to determining the noncontrolling interest at a point in time is to add the remainingdifferential at that time to the subsidiary’s common stockholders’ equity and multiply the result

by the noncontrolling interest’s proportionate ownership interest in the subsidiary

c In the consolidation workpaper the ending balance assigned to noncontrolling interest isderived by crediting noncontrolling interest for the starting balance, as indicated in thepreceding question, and then adding income assigned to the noncontrolling interest in theconsolidated income statement and deducting a pro rata portion of subsidiary dividendsdeclared during the period

d All the stockholders' equity account balances of the subsidiary must be eliminated eachtime consolidated financial statements are prepared Intercompany receivables andpayables, if any, must also be eliminated

e The "investment in subsidiary" and "income from subsidiary" accounts must be eliminatedeach time consolidated financial statements are prepared Intercompany receivables andpayables, if any, must also be eliminated

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C5-5 Changing Accounting Standards: Monsanto Company

a Monsanto reported the income to noncontrolling (minority) shareholders of consolidated subsidiaries as an expense in the continuing operations portion of its 2007 income

statement

b Monsanto reported the noncontrolling interest in consolidated subsidiaries in other

liabilities in its consolidated balance sheet

c In 2007, Monsanto’s treatment of its noncontrolling interest in its consolidated financial statements, although theoretically objectionable, was considered acceptable The

noncontrolling (minority) interest did not fit the definition of a liability, and its share of income did not fit the definition of an expense Nevertheless, prior to 2008 no authoritative

pronouncement prohibited the treatment exhibited by Monsanto With the issuance of FASB

160, however, Monsanto’s 2007 treatment became unacceptable The noncontrolling

interest is now required to be treated as an equity item, with the income attributed to the noncontrolling interest treated as an allocation of consolidated net income

d Monsanto provided customer financing through a lender that was a special purpose entity.Monsanto had no ownership interest in the special purpose entity but did consolidate it because Monsanto effectively originated, guaranteed, and serviced the loans Monsanto had

a 9-percent ownership interest in one variable interest entity and a 49-percent ownership interest in another Neither entity was consolidated because Monsanto was not the primary beneficiary of either entity

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E5-3 Eliminating Entries with Differential

Fair value of the consideration given by Game Corp $49,200

Book value of Amber’s net assets ($85,000 - $28,000) (57,000)

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E5-4 Computation of Consolidated Balances

Fair value increment for:

Buildings and equipment (net) 70,000

e Investment in Slim Corporation: None would be reported;

the balance in the investment account is eliminated

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E5-5 Balance Sheet Workpaper

Power Company and Pleasantdale DairyConsolidated Balance Sheet Workpaper

January 1, 20X7Pleas- Adjustments andPower antdale Eliminations Consol- Item Company Dairy Debit Credit idated Cash and Receivables 130,000 70,000 (a) 900 (3) 8,900 192,000

Accrue interest earned by Power Company

Eliminate intercompany receivable/payable

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Solutions Manual – Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

5 - 12

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E5-6 Majority-Owned Subsidiary Acquired at Greater than Book Value

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E5-6 (continued)

Consolidated Balance Sheet Workpaper

December 31, 20X4

Item Corp Corp Debit Credit idated

Consolidated Balance Sheet December 31, 20X4

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E5-7 Consolidation with Minority Interest

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Consolidated Balance Sheet Workpaper

January 1, 20X5Glitter

Item prises Builders Debit Credit idated

Consolidated Balance Sheet January 1, 20X5

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E5-9 Multiple-Choice Questions on Balance Sheet Consolidation

1 d $215,000 = $130,000 + $70,000 + ($85,000 - $70,000)

2 c $40,000 = ($150,500 + $64,500) - ($405,000 - $28,000 - $37,000

- $200,000) - $15,000 - $20,000

Less: Investment in Silk Corp (150,500)

$ 641,000 Book value of assets of Silk Corp 405,000 Book value reported by Power and

Increase in inventory ($85,000 - $70,000) 15,000 Increase in land ($45,000 - $25,000) 20,000

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E5-10 Basic Consolidation Entries for Majority-Owned Subsidiary

a Journal entries recorded by Horrigan Corporation:

Record purchase of Farmstead Company Stock

Record dividends from Farmstead Company

Record equity-method income

b Eliminating entries:

Eliminate income from subsidiary

Assign income to noncontrolling interest

Eliminate investment balance

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E5-11 Majority-Owned Subsidiary with Differential

a Journal entries recorded by West Corporation:

(1) Investment in Canton Corporation Stock 133,500

Record investment

Record dividends from Canton Corporation:

$9,000 = $12,000 x 75

Record equity-method income:

$22,500 = $30,000 x 75

Amortize differential assigned to equipment:

$3,000 = ($28,000 / 7 years) x 75

b Eliminating entries December 31, 20X3:

Assign beginning differential

Amortize differential related to equipment:

$4,000 = $28,000 / 7 years

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E5-12 Differential Assigned to Amortizable Asset

Lancaster Company’s retained earnings, January 1, 20X1 380,000

Book value of Lancaster's shares purchased

Excess of acquisition price over book value 36,000

Dividends paid by Lancaster ($20,000 x 90) (18,000)

b Eliminating entries, December 31, 20X1:

Eliminate income from subsidiary:

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E5-13 Consolidation after One Year of Ownership

a Eliminating entries, January 1, 20X2:

Fair value of consideration given by Pioneer $190,000

Fair value of noncontrolling interest 47,500

Computation of income from subsidiary

Amortization of differential assigned to

Income after amortization of differential $36,000

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Amortize differential

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E5-14 Consolidation Following Three Years of Ownership

a Computation of increase in value of patents:

Increase in value of equipment ($360,000 - $320,000) (40,000)

c Computation of investment account balance at January 1, 20X9:

Undistributed income since acquisition

Amortization of differential assigned to:

Patents ($15,000 / 10) x 60 x 2 years (1,800)

d Entries recorded by Knox during 20X9:

Record dividends from subsidiary

Amortize differential:

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$3,900 = [($40,000 / 8 years) x 60] + [($15,000 / 10 years) x 60]

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e Eliminating entries:

Eliminate income from subsidiary:

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E5-15 Consolidation Workpaper for Majority-Owned Subsidiary

a Eliminating entries:

Eliminate beginning investment balance

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Consolidation Workpaper December 31, 20X3 Proud Stergis Eliminations Consol- Item Corp Co Debit Credit idated

Income, from above 94,000 30,000 30,000 94,000

(2) 2,000 (40,000)Ret Earnings, Dec 31,

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Consolidated Balance Sheet December 31, 20X3

Proud Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X3

Proud Corporation and SubsidiaryConsolidated Retained Earnings StatementYear Ended December 31, 20X3

$324,000

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E5-16 Consolidation Workpaper for Majority-Owned Subsidiary for Second Year

a Eliminating entries:

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Consolidation Workpaper December 31, 20X4

Item Corp Co Debit Credit idated

Income, from above 83,000 35,000 35,000 83,000

(2) 3,000 (50,000)Ret Earnings, Dec 31,

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E5-17 Preparation of Stockholders' Equity Section with Other Comprehensive

Income

a Consolidated net income:

20X8 20X9

Amortization of differential ($580,000 - $500,000) / 10

Comprehensive gain reported by Stem 10,000 5,000

b Comprehensive income attributable to controlling

interest:

20X8 20X9

Comprehensive income attributable to

Noncontrolling interest

($65,000 - $8,000) x 25 (14,250) Comprehensive income attributable to

c Consolidated stockholders' equity:

20X8 20X9 Controlling Interest:

Accumulated Other Comprehensive Income 7,500 11,250

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E5-18 Eliminating Entries for Subsidiary with Other Comprehensive Income

a Journal entries recorded by Palmer Corp in 20X8:

Record acquisition of Krown Corp stock

Record dividends from subsidiary

Other Comprehensive Income from

Record Palmer's proportionate share of

other comprehensive income of subsidiary

b Eliminating entries:

E(3) Other Comprehensive Income from

Eliminate other comprehensive income from

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E5-19 Majority-Owned Subsidiary with Differential – Prior Procedures

a Journal entries recorded by West Corporation:

(1) Investment in Canton Corporation Stock 133,500

Record investment

Record dividends from Canton Corporation:

$9,000 = $12,000 x 75

Record equity-method income:

$22,500 = $30,000 x 75

Amortize differential assigned to equipment:

$3,000 = [$133,500 - ($150,000 x 75)] / 7 years

b Eliminating entries December 31, 20X3:

Amortize differential related to equipment:

$3,000 = $21,000 / 7 years

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E5-20 Consolidation after One Year of Ownership– Prior Procedures

a Eliminating entries, January 1, 20X2:

Underlying book value ($200,000 x 80) (160,000)

Computation of income from subsidiary

Proportion of stock acquired x .80

Amortization of differential assigned to

buildings and equipment ($25,600 / 8) (3,200)

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Amortize differential

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