Solution manual advanced accounting 11th edition joe ben hoyle chap004

Measurement of subsidiary accounts is based on the acquisition-date fair value of the company frequently determined by the consideration transferred and the fair value of the noncontrol

CHAPTER 4 CONSOLIDATED FINANCIAL STATEMENTS

AND OUTSIDE OWNERSHIPChapter Outline

I Outside ownership may be present within any business combination

A Complete ownership of a subsidiary is not a prerequisite for consolidation—only enough voting shares need be owned so that the acquiring company has the ability

to control the decision-making process of the acquired company

B Any ownership retained in a subsidiary corporation by a party unrelated to the acquiring company is termed a noncontrolling interest

II Measurement of subsidiary assets and liabilities requires analysis when a noncontrolling

interest is present under the acquisition method

1 The accounting emphasis is placed on the entire entity that results from the business combination as measured by the sum of the acquisition-date fair values

of the controlling and noncontrolling interests.

2 Measurement of subsidiary accounts is based on the acquisition-date fair value

of the company (frequently determined by the consideration transferred and the fair value of the noncontrolling interest); specific subsidiary assets and liabilities are consolidated at their fair values.

3 The noncontrolling interest balance is reported as a component of stockholders' equity in the consolidated balance sheet.

III Consolidations involving a noncontrolling interest—subsequent to the date of acquisition

A According to the parent company concept, all noncontrolling interest amounts are calculated in reference to the book value of the subsidiary company

B Four noncontrolling interest figures are determined for reporting purposes

1 Beginning of year balance

2 Noncontrolling interest in subsidiary’s current income

3 Dividends attributable to the noncontrolling interest during the period

4 End of year balance

C Noncontrolling interest balances are accumulated in a separate column in the consolidation worksheet

1 The beginning of year figure is recorded on the worksheet as a component of Entries S and A

2 The noncontrolling interest's share of the subsidiary's income is established by a columnar entry that simultaneously reports the balance in both the consolidated income statement and the noncontrolling interest column

3 Dividends paid to these outside owners are reflected by extending the

subsidiary's Dividends Paid balance (after eliminating intra-entity transfers) into the noncontrolling interest column as a reduction

4 The end of year noncontrolling interest total is the summation of the three items above and is reported in stockholders' equity.

IV Step acquisitions

A An acquiring company may make several different purchases of a subsidiary's stock

in order to gain control

B Upon attaining control, all of the parent’s previous investments in the subsidiary are adjusted to fair value and a gain or loss recognized as appropriate

C Upon attaining control, the valuation basis for the subsidiary is established at its total fair value (the sum of the fair values of the controlling and noncontrolling interests)

V Sales of subsidiary stock

A The proper book value must be established within the parent's Investment account

so that the sales transaction can be correctly recorded

B The investment balance is adjusted as if the equity method had been applied during the entire period of ownership

C If only a portion of the shares are being sold, the book value of the investment account is reduced using either a FIFO or a weighted-average cost flow assumption

D If the parent maintains control, any difference between the proceeds of the sale and the equity-adjusted book value of the share sold is recognized as an adjustment to additional paid-in capital.

E If the parent loses control with the sale of the subsidiary shares, the difference between the proceeds of the sale and the equity-adjusted book value of the share sold is recognized as a gain or loss.

F Any interest retained by the parent company should be accounted for by either consolidation, the equity method, or the fair value method depending on the

influence remaining after the sale.

Answers to Questions

1 "Noncontrolling interest" refers to an equity interest that is held in a member of a

business combination by an unrelated (outside) party.

2 $220,000 (fair value) Under the acquisition method, all assets acquired and liabilities

assumed in a business combination are recorded at their acquisition-date fair values

3 A control premium is the portion of an acquisition price (above currently traded market

values) paid by a parent company to induce shareholders to sell a sufficient number of shares to obtain control The extra payment typically becomes part of the goodwill acquired in the acquisition attributable to the parent company.

4 Current accounting standards require the noncontrolling interest to appear in various

locations within consolidated financial statements The end of year balance can be found in the stockholders' equity section of the balance sheet The noncontrolling interest's share of net income is shown as an allocated component of consolidated net income in the income statement

5 The ending noncontrolling interest can be determined on a consolidation worksheet by

adding the four components found in the noncontrolling interest column: (1) the

beginning balance of the subsidiary’s book value, (2) the noncontrolling interest share of the adusted acquisition-date excess fair over book value allocation, (3) its share of current year subsidiary income, (4) less dividends paid to these outside owners

6 Allsports should remove the pre-acquisition revenues and expenses from the

consolidated totals These amounts were earned (incurred) prior to ownership by

Allsports and therefore should are not earnings for the current parent company owners.

7 Following the second acquisition, consolidation is appropriate Once Tree gains control,

the 10% previous ownership is included at fair value as part of the total consideration transferred by Tree in the acquisition.

8 When a company sells a portion of an investment, it must remove the carrying value of

that portion from its investment account The carrying value is based upon application of the equity method Thus, if either the initial value method or the partial equity method has been used, Duke must first restate the account to the equity method before

recording the sales transaction This same method is also applied to the operations of the current period occurring prior to the time of sale

9 Unless control is surrendered, the acquisition method views the sale of subsidiary's

stock as a transaction with its owners Thus, no gain or loss is recognized The

difference between the sale proceeds and the carrying value of the shares sold (equity method) is accounted for as an adjustment to the parent’s additional paid in capital.

10 The accounting method choice for the remaining shares depends upon the current

relationship between the two firms If Duke retains control, consolidation is still required However, if the parent now can only significantly influence the decision-making process, the equity method is applied A third possibility is Duke may have lost the power to exercise even significant influence The fair value method then is appropriate.

Answers to Problems

1 C

2 D At the date control is obtained, the parent consolidates subsidiary assets

at fair value ($500,000 in this case) regardless of the parent’s percentage ownership

3 D In consolidating the subsidiary's figures, all intra-entity balances must be

eliminated in their entirety for external reporting purposes Even though the subsidiary is less than fully owned, the parent nonetheless controls it.

4 C An asset acquired in a business combination is initially valued at 100%

acquisition-date fair value and subsequently amortized its useful life.

Patent fair value at January 1, 2012 $45,000 Amortization for 2 years (10 year life) (9,000) Patent reported amount December 31, 2013 $36,000

5 C

6 B Combined revenues $1,100,000

Combined expenses (700,000) Excess acquisition-date fair value amortization (15,000) Consolidated net income $385,000 Less: noncontrolling interest ($85,000 × 40%) (34,000) Consolidated net income to controlling interest $351,000

7 C Consideration transferred by Pride $540,000

Noncontrolling interest fair value 60,000 Star acquisition-date fair value $600,000 Star book value 420,000 Excess fair over book value $180,000

Amort.

to equipment (8 year remaining life) $ 80,000 $10,000

to customer list (4 year remaining life) 100,000 25,000

$35,000

Combined revenues $783,000 Combined expenses $545,000

Excess fair value amortization 35,000 580,000 Consolidated net income $203,000

8 A Under the equity method, consolidated RE = parent’s RE.

9 B

10 A Amie, Inc fair value at July 1, 2013:

30% previously owned fair value (30,000 shares × $5) $150,000 60% new shares acquired (60,000 shares × $6) 360,000 10% NCI fair value (10,000 shares × $5) 50,000 Acquisition-date fair value $560,000 Net assets' fair value 500,000 Goodwill $ 60,000

11 C

12 B Fair value of 30% noncontrolling interest on April 1 $165,000

30% of net income for remainder of year ($240,000 × 30%) 72,000 Noncontrolling interest December 31 $237,000

13 C Proceeds of $80,000 less $64,000 (⅓ × $192,000) book value = $16,000

Control is maintained so excess proceeds go to APIC.

14 B Combined revenues $1,300,000

Combined expenses (800,000) Trademark amortization (6,000) Patented technology amortization (8,000) Consolidated net income $486,000

15 C Subsidiary income ($100,000 – $14,000 excess amortizations) $86,000

Noncontrolling interest percentage 40 % Noncontrolling interest in subsidiary income $34,400 Fair value of noncontrolling interest at acquisition date $200,000 40% change in Solar book value since acquisition 52,000 Excess fair value amortization ($14,000 × 40% × 2 years) (11,200) Noncontrolling interest at end of year $240,800

16 A West trademark balance $260,000

Solar trademark balance 200,000 Acquisition-date fair value allocation 60,000 Excess fair value amortization for two years (12,000) Consolidated trademarks $508,000

17 A Acquisition-date fair value ($60,000 ÷ 80%) $75,000

Strand's book value (50,000) Fair value in excess of book value $25,000 Excess assigned to inventory (60%) $15,000

Excess assigned to goodwill (40%) $10,000

Park current assets $70,000 Strand current assets 20,000 Excess inventory fair value 15,000 Consolidated current assets $105,000

18 D Park noncurrent assets $90,000

Strand noncurrent assets 40,000 Excess fair value to goodwill 10,000 Consolidated noncurrent assets $140,000

19 B Add the two book values and include 10% (the $6,000 current portion) of

the loan taken out by Park to acquire Strand.

20.B Add the two book values and include 90% (the $54,000 noncurrent portion)

of the loan taken out by Park to acquire Strand

21 C Park stockholders' equity $80,000

Noncontrolling interest at fair value (20% × $75,000) 15,000 Total stockholders' equity $95,000

22 (15 minutes) (Compute consolidated income and noncontrolling interests)

a Harrison income $220,000 $260,000 Starr income 70,000 90,000 Acquisition-date excess fair value amortization (8,000 ) (8,000 ) Consolidated net income $282,000 $342,000

b Starr fair value $1,200,000 Fair value of consideration transferred 1,125,000 Noncontrolling interest fair value $75,000

Noncontrolling interest fair value January 1, 2012 (above) $75,000

2012 income to NCI ([$70,000 – $8,000] × 10%) 6,200

2012 dividends to NCI (3,000) Noncontrolling interest reported value December 31, 2012 78,200

2013 income to NCI ([$90,000 – $8,000] × 10%) 8,200

2013 dividends to NCI (3,000 ) Noncontrolling interest reported value December 31, 2013 $83,400

23 (30 minutes) (Consolidated balances, allocation of consolidated net income to controlling and noncontrolling interest, calculation of noncontrolling interest).

a Harlan’s technology processes:

Acquisition-date fair value (20 year remaining life) $1,000,000

On Harlan’s books ($195,000 ÷ 10 years) $19,500

Depreciation of acquisition-date fair value allocation

c Controlling interest in combined entity net income:

Excess fair value amortization:

Building ($345,000 – $195,000) ÷ 10 years (15,000 )

Pepper’s ownership percentage 80 % 228,000 Controlling interest in combined entity net income $928,000

d Noncontrolling interest in Harlan’s net income:

Excess fair value amortization:

e Noncontrolling interest:

Acquisition-date balance 1/1/13

Noncontrolling interest acquisition-date fair value $750,000

Noncontrolling interest share of Harlan dividends (20% × $50,000) (10,000 )

24 (40 minutes) (Several valuation and income determination questions for a business combination involving a noncontrolling interest.)

a Business combinations are recorded generally at the fair value of the

consideration transferred by the acquiring firm plus the acquisition-date fair value of the noncontrolling interest.

Patterson’s consideration transferred ($31.25 × 80,000 shares) $2,500,000 Noncontrolling interest fair value ($30.00 × 20,000 shares) 600,000 Soriano’s total fair value January 1 $3,100,000

b Each identifiable asset acquired and liability assumed in a business

combination is initially reported at its acquisition-date fair value

c In periods subsequent to acquisition, the subsidiary’s assets and liabilities are reported at their acquisition-date fair values adjusted for amortization and depreciation Except for certain financial items, they are not continually

adjusted for changing fair values.

d Soriano’s total fair value January 1 $3,100,000 Soriano’s net assets book value 1,290,000 Excess acquisition-date fair value over book value $1,810,000 Adjustments from book to fair values

Buildings and equipment (250,000)

Trademarks 200,000

Patented technology 1,060,000

Unpatented technology 600,000 1,610,000 Goodwill $ 200,000

e Combined revenues $4,400,000 Combined expenses (2,350,000) Building and equipment excess depreciation 50,000 Trademark excess amortization (20,000) Patented technology amortization (265,000) Unpatented technology amortization (200,000) Consolidated net income $1,615,000

To noncontrolling interest:

Soriano’s revenues $1,400,000 Soriano’s expenses (600,000) Total excess amortization expenses (above) (435,000) Soriano’s adjusted net income $ 365,000 Noncontrolling interest percentage ownership 20 % Noncontrolling interest share of consolidated net income $ 73,000

24 (continued)

To controlling interest:

Consolidated net income $1,615,000 Noncontrolling interest share of consolidated net income (73,000 ) Controlling interest share of consolidated net income $1,542,000

-OR-Patterson’s revenues $3,000,000 Patterson’s expenses 1,750,000 Patterson’s separate net income $1,250,000 Patterson’s share of Soriano’s adjusted net income

(80% × $365,000) 292,000

Controlling interest share of consolidated net income $1,542,000

f Fair value of noncontrolling interest January 1 $ 600,000 Current year income allocation 73,000 Dividends (20% × $30,000) (6,000) Noncontrolling interest December 31 $ 667,000

g If Soriano’s acquisition-date total fair value was $2,250,000, then a bargain purchase has occurred.

Collective fair values of Soriano’s net assets $2,900,000 Soriano’s total fair value January 1 $2,250,000 Bargain purchase $ 650,000

The acquisition method requires that the subsidiary assets acquired and

liabilities assumed be recognized at their acquisition date fair values

regardless of the assessed fair value Therefore, none of Soriano’s identifiable assets and liabilities would change as a result of the assessed fair value When a bargain purchase occurs, however, no goodwill is recognized.

25 (30 minutes) Step acquisition.

Acquisition-date fair value ($1,141,000 ÷ 7) $1,630,000

Acquisition-date based value of newly acquired shares $ 445,000

70% of adjusted subsidiary income 2012 ($340,000 – $40,000) 210,000

95% of adjusted subsidiary 2013 income ($440,000 – $40,000) 380,000

26 (20 Minutes) (Determine consolidated income balances, includes a mid-year acquisition)

a Acquisition-date total fair value $594,000

Book value of net assets (400,000)

Fair value in excess of book value $194,000 Annual Excess

Patent 140,000 5 years $28,000 Land 10,000

Buildings 30,000 10 years 3,000 Goodwill 14,000

Total -0- $31,000

Consolidated figures following January 1 acquisition date:

Combined revenues $1,500,000 Combined expenses (1,031,000) Consolidated net income 469,000 NCI in Sawyer’s income ([200,000 – 31,000] × 30%) (50,700) Controlling interest in consolidated net income $418,300

b Consolidated figures following April 1 acquisition date:

Combined revenues (1) $1,350,000 Combined expenses (2) (923,250) Consolidated net income $ 426,750 Noncontrolling interest in subsidiary income (3) (38,025) Controlling interest in consolidated net income $388,725

(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues (2) $600,000 Parker expenses plus $300,000 of post-acquisition Sawyer expenses plus $23,250 amortization expenses for 9 months

(3) ($200,000 – 31,000) adjusted subsidiary income × 30% × ¾ year

27 (15 minutes) Consolidated figures with noncontrolling interest

Fair value of company (given) $60,000

Fair value in excess of book value 50,000

to machine ($50,000 – $10,000) 40,000 ÷ 10 = $4,000 per year

to process trade secret $10,000 ÷ 4 = 2,500 per year

$6,500 per year Consolidated figures:

 Noncontrolling interest in subsidiary income

= 40%  ($50,000 revenues less $26,500 expenses) = $9,400

 End-of-year noncontrolling interest:

Beginning balance (40%  $60,000) $24,000

Dividend reduction (40%  $5,000) (2,000) End-of-year noncontrolling interest $31,400

 Machine (net) = $45,000 ($9,000 book value plus $40,000 excess

allocation less $4,000 excess depreciation for one year).

 Process trade secret (net) = $10,000 – $2,500 = $7,500

28 (45 minutes) Noncontrolling interest in the presence of a control premium.

Share of identifiable net assets ($324,000 + $18,000) 307,800 34,200

Excess fair value amortization (two prior years) (3,600)

Equity in Eagle’s earnings:

Excess equipment amortization (2,000 )

Equity in Eagle's earnings (79,200) 0 I 79,20 0 0

29 (25 Minutes) (Determine consolidated balances for a step acquisition).

a Amsterdam fair value implied by price paid by Morey

b Revaluation gain:

1/1 equity investment in Amsterdam (book value) $178,000

Fair value of investment at 6/30 (25% × $800,000) 200,000

c Goodwill at 12/31:

Book value at 6/30 (700,000 + [70,000 ÷ 2]) 735,000

30 (30 Minutes) (Reporting the sale of a portion of an investment in a subsidiary.)

a Posada records an accrual of $7,950 (see computation below) as "Equity Income from Sold Shares of Sabathia" for the January 1, 2013 to

October 1, 2013 period which will appear in the 2013 consolidated

income statement The consolidation will continue to include all of Sabathia's accounts but now recognizing a 40% noncontrolling interest Sabathia fair value 1/1/11 $1,200,000

Sabathia book value (1,130,000 )

Patent $70,000

Life of patent 5 years Annual amortization $14,000

Posada’s share of Sabathia’s income accruing to shares sold:

Sabathia's net income $120,000

Excess patent fair value amortization (14,000 )

Sabathia's adjusted net income 106,000

Fraction of year held 9 /12

Sabathia’s adjusted income for 9 months 79,500

Percentage owned by Posada 70 %

Posada’s share of Sabathia’s 9 month income 55,650

Shares sold—1,000 out of 7,000 1/7

Posada’s income for shares sold $7,950

b As long as control is maintained, the acquisition method considers transactions in the stock of a subsidiary, whether purchases or sales, as transactions in the equity of the consolidated entity

Posada’s investment book value 10/1/13

1/1/13 balance (given—equity method) $1,085,000

Recognition of 1/1/13–10/1/13 period:

Income accrual ($120,000 × 70% × ¾) 63,000 Dividends ($40,000 × 70% × ¾) (21,000) Amortization ($14,000 × 70% × ¾) (7,350) Pre-sale investment book value—10/1/13 $1,119,650

Computation of income effect—sale transaction

10/1/13 book value (above) $1,119,650

Portion of investment sold (1,000/7,000 shares) 1 /7

Book value of investment sold $159,950

Proceeds 191,000

Credit to Posada’s additional paid-in capital $ 31,050

c Because Posada continues to hold 6,000 shares of Sabathia, control is still maintained and consolidated financial statements would be

appropriate with a noncontrolling interest of 40 percent

31 (35 Minutes) (Consolidation entries and the effect of different investment

Entry A

Patent 18,000 Goodwill 190,000 Investment in Bandmor 145,600 Noncontrolling Interest in Bandmor (30%) 62,400 (To recognize unamortized portions of acquisition-date fair value allocations No control premium, so goodwill is allocated

proportionately Patent has undergone two years amortization)

Entry I

Equity in Subsidiary Earnings 72,800 Investment in Bandmor 72,800 (To eliminate intra-entity income balance Equity accrual of $72,800 [70% × ($110,000 – 6,000 amortization)] has been recorded)

Entry D

Investment in Bandmor 42,000 Dividends Paid 42,000 (To eliminate current intra-entity dividend transfers—70% of $60,000) Entry E

Amortization Expense 6,000 Patent 6,000 (To recognize amortization for current year)

Entry P

Accounts Payable 22,000 Accounts Receivable 22,000 (To eliminate intra-entity payable/receivable balance)

31 (continued)

b If the initial value method had been applied, the parent would have recorded only the dividends received as income rather than an equity accrual Therefore, Entry *C is needed to adjust the parent's beginning retained earnings for 2013 to the equity method During 2011 and 2012, the subsidiary earned a total net income of $171,000 but paid dividends

of only $83,000 The parent's share of the difference is $61,600 (70% of

$88,000 [$171,000 - $83,000]) In addition, the parent’s 70% share of excess amortization expense for two years must also be included

($8,400 = 2 years × $6,000 per year × 70%) The net amount to be

recognized is $53,200 ($61,600 - $8,400).

ENTRY *C

Investment in Bandmor 53,200 Retained Earnings, 1/1/13 53,200

c If the partial equity method had been applied, only the excess

amortization expenses for the previous two years would have been omitted from the parent's retained earnings As shown above, that figure

is $8,400 (2 years × $6,000 per year × 70%).

ENTRY *C

Retained Earnings, 1/1/13 8,400 Investment in Bandmor 8,400

d Noncontrolling interest in Bandmor's income—2013

[($110,000 – 6,000) × 30%] $31,200

Noncontrolling interest fair value January 1, 2011 $210,000 Adjustments to original basis:

2011 Net Income to NCI $20,700

Dividends paid (11,700) 9,000

2012 Net income to noncontrolling interest $27,000

Dividends to noncontrolling interest (13,200) 13,800

2013 Net income to noncontrolling interest $31,200

Dividends to noncontrolling interest (18,000) 13,200 Noncontrolling interest in Bandmor 12/31/13 $246,000

–OR–

Worksheet adjustment S $170,400 Worksheet adjustment A 62,400

2013 income to noncontrolling interest 31,200

2013 dividends to noncontrolling interest (18,000) Noncontrolling interest in Bandmor 12/31/13 $246,000

32 (45 Minutes) (Asks about several consolidated balances and consolidation

process Includes the different accounting methods to record investment.)

a Schedule 1—Fair Value Allocation and Excess Amortizations

Consideration transferred by Miller $664,000

Noncontrolling interest fair value 166,000

Taylor’s fair value $830,000

Taylor’s book value (600,000)

Fair value in excess of book value 230,000 Annual Excess

-0-b $150,000 (see schedule 1 above)

c Entry (S)

Common Stock (Taylor) 300,000

Additional Paid-In Capital (Taylor) 90,000

Retained Earnings (Taylor) 210,000

Investment in Taylor Company (80%) 480,000 Noncontrolling Interest in Taylor (20%) 120,000

Entry (A)—no control premium

(2) Partial equity method

(2) Partial Equity Method

Investment in Taylor—12/31/13 = $836,000 (initial value paid plus income accrual of $208,000 less dividends of $36,000 [no excess amortizations])

(3) Initial Value Method

Investment in Taylor—12/31/13 = $664,000 (original value paid)

f Using the acquisition method, the allocation will be the total difference ($80,000) between the buildings' book value and fair value Based on a

20 year life, annual excess amortization is $4,000.

Miller book value—buildings $800,000

Taylor book value—buildings 300,000

Allocation 80,000

Excess amortizations for 2011–2012 ($4,000 × 2) (8,000)

Consolidated buildings account $1,172,000

g Acquisition-date fair value allocated to goodwill

(see schedule 1 above) $150,000

h If the parent has been applying the equity method, the stockholders' equity accounts on its books will already represent consolidated totals The common stock and additional paid-in capital figures to be reported are the parent balances only As to retained earnings, the equity method will properly record all subsidiary income and amortization so that the parent balance is also a reflection of the consolidated total.

33 (20 Minutes) (A variety of consolidated balances-midyear acquisition)

Consideration transferred by Karson

(cash and contingent consideration) $1,360,000

Noncontrolling interest fair value 340,000

Reilly’ fair value (given) $1,700,000

Book value of Reilly (1,450,000)*

Fair value in excess of book value $250,000 Annual Excess

Trademarks 150,000 5 years $30,000 Goodwill $100,000 indefinite -0- Total $30,000

*Reilly book value, January 1

(Common stock + APIC + RE) $1,400,000

Increase in book value:

Net income (revenues less cost of goods sold and expenses) $120,000 Dividends (20,000) Change during year $100,000 Change during first 6 months of year 50,000 Reilly book value, July 1 (acquisition date) $1,450,000

CONSOLIDATION TOTALS:

 Noncontrolling Interest in sub Income (4) $9,000

(1) $800,000 Karson revenues plus $250,000 (post-acquisition subsidiary revenue)

(2) $400,000 Karson COGS plus $140,000 (post-acquisition subsidiary COGS)

(3) $200,000 Karson operating expenses plus $50,000 (post-acquisition subsidiary operating expenses) plus ½ year excess amortization of

$15,000 (4) 20% of post-acquisition subsidiary income less excess fair value amortization [20% × ½ year × (120,000 – 30,000)] = $9,000

 Retained earnings, 1/1 = $1,400,000 (the parent’s balance because the subsidiary was acquired during the current year)

 Trademarks = $935,000 (add the two book values and the excess fair value allocation after taking one-half year excess amortization)

 Goodwill = $100,000 (the original allocation)

34 (25 Minutes) (A variety of consolidated questions and balances)

a Nascent applies the initial value method because the original price of

$414,000 is still in the Investment in Sea-Breeze account In addition, the Investment Income account is equal to 60 percent of the dividends paid

by the subsidiary during the year.

b Consideration transferred in acquisition $414,000

Noncontrolling interest fair value 276,000

Sea-Breeze fair value 1/1/10 $690,000

Excess fair value over book value $140,000

Life Amortizations

Buildings 60,000 6 years $10,000 Equipment (20,000) 4 years (5,000) Patent 100,000 10 years 10,000 Total -0- $15,000

c If the equity method had been applied, the Investment Income account would show the basic equity accrual less amortization: 60% of (the subsidiary's income of $90,000 less $15,000 excess fair value

amortization) = $45,000.

d The initial value method recognizes neither the increase in the

subsidiary's book value nor the excess amortization expenses for prior years At the acquisition date, the subsidiary’s book value was $550,000

as indicated by the assets less liabilities At the beginning of the current year, the book value of the subsidiary is $780,000 as indicated by

beginning stockholders' equity balances.

Increase in book value during prior years

($780,000 – $550,000) $230,000 Less excess amortization (45,000) Net increase in book value $185,000 Ownership 60%

Increase required in parent's retained earnings, 1/1/13 $111,000 Parent's retained earnings, 1/1/13 as reported 700,000 Parent’s share of consolidated retained earnings, 1/1/13 $811,000

e Consolidated net income and allocation

 Expenses (add book values and excess amortization) (635,000)

 Noncontrolling interest in consolidated net income

g Consolidated buildings, 12/31/13:

Parent's book value $700,000 Subsidiary's book value 200,000 Original allocation 60,000 Amortization ($10,000 × 4 years) (40,000) Consolidated balance $920,000