CHAPTER 3 AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Answers to Questions 1 2 A corporation becomes a subsidiary w en anot er corporation eit er direct!y or indirect!y ac"uires a contro!!in# $inancia! interest %#enera!!y o&er '( percent) o$ its outstandin# &otin# stoc*+ Amounts a!!ocated to identi$iab!e assets and !iabi!ities in e,cess o$ recorded amounts on t e boo*s o$ t e subsidiary are not recorded separate!y by t e parent+ Instead- t e parent records t e $air &a!ue.purc ase price o$ t e interest ac"uired in an in&estment account+ T e a!!ocation to identi$iab!e asset and !iabi!ity accounts is made t rou# wor*in# paper entries w en t e parent and subsidiary $inancia! statements are conso!idated+ T e !and wou!d be s own in t e conso!idated ba!ance s eet at /0((-(((- its $air &a!ue- assumin# t at t e purc ase price is e"ua! to or #reater t an t e tota! $air &a!ue o$ t e subsidiary+ I$ t e parent ad ac"uired an 1( percent interest and t e purc ase price was e"ua! to or #reater t an t e $air &a!ue o$ t e interest ac"uired- t e !and wou!d sti!! appear in t e conso!idated ba!ance s eet at /0((-(((+ Under SFAS No+ 020R- t e noncontro!!in# interest is a!so reported based on $air &a!ues at t e ac"uisition date+ Parent company 3a corporation t at owns a contro!!in# interest in t e outstandin# &otin# stoc* o$ anot er corporation %its subsidiary)+ Subsidiary company3a corporation t at is contro!!ed by a parent company t at owns a contro!!in# interest in its outstandin# &otin# stoc*- eit er direct!y or indirect!y+ Affiliated companies 3companies t at are contro!!ed by a sin#!e mana#ement team t rou# parent4subsidiary re!ations ips+ %A!t ou# t e term a$$i!iate is a synonym $or subsidiary- t e parent company is inc!uded in t e tota! a$$i!iation structure+) Associated companies 3companies t at are contro!!ed t rou# parent4subsidiary re!ations ips or w ose operations can be si#ni$icant!y in$!uenced t rou# e"uity in&estments o$ 5( percent to '( percent+ A noncontro!!in# interest is t e e"uity interest in a subsidiary company t at is owned by stoc* o!ders outside o$ t e a$$i!iation structure+ In ot er words- it is t e e"uity interest in a subsidiary %recorded at $air &a!ue) t at is not e!d by t e parent company or subsidiaries o$ t e parent company+ Under t e pro&isions o$ FASB Statement No. !" 6Conso!idation o$ A!! Ma7ority4owned Subsidiaries-8 a subsidiary wi!! not be conso!idated i$ contro! is temporary or i$ contro! does not rest wit t e ma7ority owner- suc as in t e case o$ a subsidiary in reor#ani9ation or ban*ruptcy- or w en t e subsidiary operates under se&ere $orei#n e,c an#e restrictions or ot er #o&ernmenta!!y imposed restrictions+ Conso!idated $inancia! statements are intended primari!y $or t e stoc* o!ders and creditors o$ t e parent company- accordin# to SFAS No. #$% &and ARB No. '#(+ T e amount o$ capita! stoc* t at appears in a conso!idated ba!ance s eet is t e tota! par or stated &a!ue o$ t e outstandin# capita! stoc* o$ t e parent company+ :oodwi!! $rom conso!idation may appear in t e #enera! !ed#er o$ t e sur&i&in# entity in a mer#er or conso!idation accounted $or as an ac"uisition+ ;ut #oodwi!! $rom conso!idation wou!d not appear in t e #enera! !ed#er o$ a parent company or its subsidiary+ :oodwi!! is entered in conso!idation wor*in# papers w en t e reciproca! in&estment and e"uity amounts are e!iminated+ <or*in# paper entries a$$ect conso!idated $inancia! statements- but t ey are not entered in any #enera! !ed#er+

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An )ntroduction to Consolidat e d Financial Stat e m e n t s

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T e parent companyBs in&estment in subsidiary does not appear in a conso!idated ba!ance s eet i$ t e subsidiary is conso!idated+ It wou!d appear in t e parent companyBs separate ba!ance s eet under t e eadin# 6in&estments8 or 6ot er assets+8 In&estments in unconso!idated subsidiaries are s own in conso!idated ba!ance s eets as in&estments or ot er assets+ T ey are accounted $or under t e e"uity met od i$ t e parent can e,ercise si#ni$icant in$!uence o&er t e subsidiaryC ot erwise- t ey are accounted $or by t e $air &a!ue . cost met od+ Parent*s boo+s, In&estment in subsidiary Sa!es Accounts recei&ab!e Interest income Di&idends recei&ab!e Ad&ance to subsidiary Reciprocal accounts on subsidiary*s boo+s, Capita! stoc* and retained earnin#s ?urc ases Accounts payab!e Interest e,pense Di&idends payab!e Ad&ance $rom parent

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Reciproca! accounts are e!iminated in t e process o$ preparin# conso!idated $inancia! statements in order to s ow t e $inancia! position and resu!ts o$ operations o$ t e tota! economic entity t at is under t e contro! o$ a sin#!e mana#ement team+ Sa!es by a parent to a subsidiary are interna! transactions $rom t e &iewpoint o$ t e economic entity and t e same is true o$ interest income and interest e,pense and rent income and rent e,pense arisin# $rom intercompany transactions+ Simi!ar!y- recei&ab!es $rom and payab!es to a$$i!iated companies do not represent assets and !iabi!ities o$ t e economic entity $or w ic conso!idated $inancia! statements are prepared+ T e stoc* o!dersB e"uity o$ a parent company under t e e"uity met od is t e same as t e conso!idated stoc* o!dersB e"uity o$ a parent company and its subsidiaries pro&ided t at t e noncontro!!in# interest- i$ any- is reported outside o$ t e conso!idated stoc* o!dersB e"uity+ I$ noncontro!!in# interest is inc!uded in conso!idated stoc* o!dersB e"uity- it represents t e so!e di$$erence between t e parent companyBs stoc* o!dersB e"uity under t e e"uity met od and conso!idated stoc* o!dersB e"uity+ No+ T e amounts t at appear in t e parent companyBs statement o$ retained earnin#s under t e e"uity met od and t e amounts t at appear in t e conso!idated statement o$ retained earnin#s are identica!assumin# t at t e noncontro!!in# interest is inc!uded as a separate component o$ stoc* o!dersB e"uity+ Income attributab!e to noncontro!!in# interest is not an e,pense- but rat er it is an a!!ocation o$ t e tota! income to t e conso!idated entity between contro!!in# and noncontro!!in# stoc* o!ders+ From t e &iewpoint o$ t e contro!!in# interest %t e stoc* o!ders o$ t e parent company)- income attributab!e to noncontro!!in# interest as t e same e$$ect on conso!idated net income as an e,pense+ T is is because conso!idated net income is income to t e parent company stoc* o!ders+ A!ternati&e!y- you can &iew tota! conso!idated net income as bein# a!!ocated to t e contro!!in# and noncontro!!in# interests+ T e computation o$ noncontro!!in# interest is comparab!e to t e computation o$ retained earnin#s+ It is computedD Noncontro!!in# interest be#innin# o$ t e period AddD Income attributab!e to noncontro!!in# interest DeductD Noncontro!!in# interest di&idends Noncontro!!in# interest end o$ t e period EE EE FEE EE

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It is acceptab!e to conso!idate t e annua! $inancia! statements o$ a parent company and a subsidiary wit di$$erent $isca! periods- pro&ided t at t e dates o$ c!osin# are not more t an t ree mont s apart+ Any si#ni$icant de&e!opments t at occur in t e inter&enin# t ree4mont period s ou!d be disc!osed in notes to t e $inancia! statements+ In t e situation described- it is acceptab!e to conso!idate t e $inancia! statements o$ t e subsidiary wit an October A0 c!osin# date wit t e $inancia! statements o$ t e parent wit a December A0 c!osin# date+

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T e ac"uisition o$ s ares e!d by noncontro!!in# stoc* o!ders does not constitute a business combination+ Rat er- it must be accounted $or as a treasury stoc* transaction+ It is not possib!e- by de$inition- to ac"uire a contro!!in# interest $rom noncontro!!in# stoc* o!ders+

SOLUTIONS TO EXERCISES Solution E3-1 1 2 3 4 5 6 b c d d b a Solution E3-2 1 2 3 4 5 6 7 d b d d a d c

Solution E3-3 [AICPA adapted] 1 2 3 c a Ad ance to Hill !"#,000 $ recei able %ro& 'ard !200,000 ( !2"#,000 )ood*ill has an indeter&inate li%e and is not a&orti+ed.

a ,*en accounts %or -harp using the e.uit/ &ethod, there%ore, consolidated retained earnings is e.ual to ,*en0s retained earnings, or !1,220,000. d All interco&pan/ recei ables and pa/ables are eli&inated.

Solution E3-4 1 I&plied %air alue o% -anta 3aria 4!900,000 5 9067 8ess9 :oo; alue o% -anta 3aria E<cess %air alue o er boo; alue E.uip&ent under alued )ood*ill at >anuar/ 1, 2009 )ood*ill at ?ece&ber =1, 2009 ( )ood*ill %ro& consolidation -ince good*ill is not a&orti+ed Consolidated net income Pinto0s reported net inco&e 8ess9 Correction %or depreciation on e<cess allocated to e.uip&ent 4!=0,0005= /ears7 Consolidated net inco&e Solution E3-5 1 2 !A00,000, the di idends o% Pander&an !==0,000, e.ual to !=00,000 di idends pa/able o% Pander&an plus !=0,000 4=06 o% !100,0007 di idends pa/able to noncontrolling interests o% -adis&an. 2009 Pearson Education, Inc. publishing as Prentice Hall !290,000 410,0007 !2@0,000 !1,000,000 4900,0007 ! 100,000 =0,000 ! "0,000 ! "0,000

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An )ntroduction to Consolidat e d Financial Stat e m e n t s

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Solution E3-6 Preliminary computation Cost o% -lider stoc; 4Bair :oo; alue o% -lider )ood*ill 1 alue7 !1,2#0,000 1,000,000 ! 2#0,000

Journal entry to record push down values In entories 8and :uildings 3 net E.uip&ent 3 net )ood*ill Cetained earnings Dote pa/able PushEdo*n capital 20,000 #0,000 1#0,000 @0,000 2#0,000 210,000 10,000 "#0,000 Slider Corporation :alance -heet >anuar/ 1, 2010 4in thousands7 Assets Cash Accounts recei able In entories 8and :uildings 3 net E.uip&ent 3 net )ood*ill Fotal assets Liabilities Accounts pa/able Dote pa/able Fotal liabilities Stockholders equity Capital stoc; PushEdo*n capital Fotal stoc;holders0 e.uit/ Fotal liabilities and stoc;holders0 e.uit/ ! "0 @0 100 200 #00 =00 2#0 !1,#00 ! 100 1#0 2#0

#00 "#0 1,2#0 !1,#00

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An )ntroduction to Consolidat e d Financial Stat e m e n t s

Solution E3-7 1 a!ture Corporation and Su"!idiar# Consolidated Inco&e -tate&ent %or the /ear 2010 4in thousands7 -ales 4!1,000 $ !2007 8ess9 Cost o% sales 4!A00 $ !2007 )ross pro%it 8ess9 ?epreciation e<pense 4!#0 $ !207 ,ther e<penses 4!199 $ !907 Fotal consolidated inco&e 8ess9 Doncontrolling interest share 4!"0 =067 Controlling interest share o% cnsolidated net inco&e 2 a!ture Corporation and Su"!idiar# Consolidated Inco&e -tate&ent %or the /ear 2010 4in thousands7 -ales 4!1,000 $ !2007 8ess9 Cost o% sales 4!A00 $ !2007 )ross pro%it 8ess9 ?epreciation e<pense 4!#0,000 $ !20,000 E !A,0007 ,ther e<penses 4!199,000 $ !90,0007 Fotal consolidated inco&e 8ess9 Doncontrolling interest share [4!"0 =067$ 4!A depreciation < =067] Controlling interest share o% cnsolidated net inco&e Supporting computations ?epreciation o% e<cess allocated to overvalued e.uip&ent9 !=05# /ears ( !A

!1,200 4@007 A00 4907 42@97 221 4217 200

!1,200 4@007 A00 4@27 42@97 22" ! 422.@7 202.2

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Solution E3-$ 1 Capital stock Fhe capital stoc; appearing in the consolidated balance sheet at ?ece&ber =1, 2009 is !1,@00,000, the capital stoc; o% Poball, the parent co&pan/. 2 Goodwill at ecember !"# $%%& !"00,000 !@"#,000 4A00,0007 !2"#,000

In est&ent cost at >anuar/ 2, 2009 4@06 interest7 I&plied total %air alue o% -o%tcan 4!"00,000 5 @067 :oo; alue o% -o%tcan410067 E<cess is considered good*ill since no other %air alue in%or&ation is gi en. 3 Consolidated retained earnings at ecember !"# $%%&

Poball0s retained earnings >anuar/ 2 4e.ual to beginning consolidated retained earnings Add9 Det inco&e o% Poball 4e.ual to controlling share o% consolidated net inco&e7 8ess9 ?i idends declared b/ Poball Consolidated retained earnings ?ece&ber =1 4 'oncontrolling interest at ecember !"# $%%&

!@00,000 =00,000 41@0,0007 !920,000

Capital stoc; and retained earnings o% -o%tcan on >anuar/ 2 Add9 -o%tcan0s net inco&e 8ess9 ?i idends declared b/ -o%tcan -o%tcan0s stoc;holders0 e.uit/ ?ece&ber =1 Doncontrolling interest percentage Doncontrolling interest ?ece&ber =1 5 ividends payable at ecember !"# $%%&

!A00,000 90,000 4#0,0007 A20,000 206 !12@,000

?i idends pa/able to stoc;holders o% Poball ! 90,000 ?i idends pa/able to noncontrolling stoc;holders 4!2#,000 #,000 2067 ?i idends pa/able to stoc;holders outside the Consolidated entit/ ! 9#,000

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An )ntroduction to Consolidat e d Financial Stat e m e n t s

Solution E3-% a!&e# Corporation and Su"!idiar# Partial :alance -heet at ?ece&ber =1, 2010 Stockholders equity( Capital stoc;, !10 par Additional paidEin capital Cetained earnings E.uit/ o% controlling stoc;holders Doncontrolling interest Fotal stoc;holders0 e.uit/ Supporting computations Co&putation o% consolidated retained earnings9 Pas;e/0s ?ece&ber =1, 2009 retained earnings Add9 Pas;e/0s reported inco&e %or 2010 8ess9 Pas;e/0s di idends Consolidated retained earnings ?ece&ber =1, 2010 Computation o) noncontrolling interest at ecember !"# $%"% -ala&0s ?ece&ber =1, 2009 stoc;holders0 e.uit/ Inco&e less di idends %or 2010 4!20,000 E !1#,0007 -ala&0s ?ece&ber =1, 2010 stoc;holders0 e.uit/ Doncontrolling interest percentage Doncontrolling interest ?ece&ber =1, 2010 !=00,000 #0,000 A#,000 21#,000 21,000 !2#A,000

! =#,000 ##,000 42#,0007 ! A#,000 !200,000 #,000 20#,000 206 ! 21,000

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Solution E3-1' ee&o! Corporation and Su"!idiar# Consolidated Inco&e -tate&ent %or the /ear ended ?ece&ber =1, 2011 4in thousands7 -ales Cost o% goods sold )ross pro%it ?educt9 ,perating e<penses Fotal consolidated inco&e ?educt9 Doncontrolling interest share Controlling interest share o% consolidated net inco&e Supporting computations In est&ent cost >anuar/ 2, 2009 4906 interest7 I&plied total %air alue o% -logger 4!@10,000 5 9067 -logger0s :oo; alue ac.uired 410067 E<cess o% %air alue o er boo; alue *+cess allocated to( In entories 4sold in 20097 E.uip&ent 42 /ears re&aining use li%e7 )ood*ill E<cess o% %air alue o er boo; alue ,perating e+penses( Co&bined operating e<penses o% Pee;os and -logger Add9 ?epreciation on e<cess allocated to e.uip&ent 4!20,00052 /ears7 Consolidated operating e<penses ! ! @10 900 4"007 ! 200 ! ! =0 20 1=0 200 !2,100 1,100 1,000 #A0 220 12 ! 22A

! !

##0 10 #A0

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An )ntroduction to Consolidat e d Financial Stat e m e n t s

SOLUTIONS TO Solution 1 3-1

RO(LE)S

enn#*ale Corporation and Su"!idiar# Consolidated :alance -heet at ?ece&ber =1, 2009 Assets Cash 4!=2,000 $ !1@,0007 Accounts recei able 4!2#,000 $ !=2,000 E !#,0007 In entories 4!12=,000 $ !#A,0007 E.uip&ent 3 net 4!=@0,000 $ !1"#,0007 Fotal assets Liabilities and Stockholders *quity Liabilities( Accounts pa/able 4!20,000 $ !==,000 E !#,0007 Stockholders equity( Co&&on stoc;, !10 par Cetained earnings Doncontrolling interest 4!1#0,000 $ !100,0007 206 Fotal liabilities and stoc;holders0 e.uit/ ! #0,000 "2,000 199,000 ###,000 !@"@,000

! A@,000 2A0,000 =00,000 #0,000 !@"@,000

Consolidated net income )or $%"% Penn/ ale0s separate inco&e Add9 Inco&e %ro& -utherland -ales 4!90,000 @067 Consolidated net inco&e Doncontrolling interest share 4206 < !90,0007 Controlling interest share 4@067 !1"0,000 90,000 !2A0,000 ! 1@,000 !222,000

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Solution 1

3-2

Schedule to allocate )air value-book value di))erential Cost o% in est&ent in -etting I&plied %air alue o% -etting 4!1"#,000 5 "067 :oo; alue o% -etting E<cess %air alue o er boo; alue E<cess allocated9 Bair Galue :oo; Galue In entories 4!#0,000 E !=0,0007 8and 4!A0,000 E !#0,0007 4!90,000 E !"0,0007 :uildings 3 net 4!=0,000 E !20,0007 E.uip&ent 3 net ,ther liabilities 4!20,000 E !#0,0007 Allocated to identi%iable net assets )ood*ill %or the re&ainder E<cess %air alue o er boo; alue !1"#,000 !2#0,000 4110,0007 !120,000 Allocation ! 20,000 10,000 20,000 410,0007 10,000 #0,000 90,000 !120,000

arlor Corporation and Su"!idiar# Consolidated :alance -heet at >anuar/ 1, 2009 Assets Current assets( Cash 4!=#,000 $ !20,0007 Cecei ables 3 net 4!@0,000 $ !=0,0007 In entories 4!"0,000 $ !=0,000 $ !20,0007 Property# plant and equipment( 8and 4!100,000 $ !#0,000 $ !10,0007 :uildings 3 net 4!110,000 $ !"0,000 $ !20,0007 E.uip&ent 3 net 4!@0,000 $ !20,000 E !10,0007 Goodwill .)rom consolidation/ Fotal assets

! ##,000 110,000 120,000 !1A0,000 200,000 110,000

!2@#,000

2"0,000 90,000 !@2#,000

Liabilities and Stockholders *quity Liabilities( Accounts pa/able 4!90,000 $ !@0,0007 !1"0,000 ,ther liabilities 4!10,000 $ !#0,000 E !10,0007 #0,000 Stockholders equity( Capital stoc; Cetained earnings E.uit/ o% controlling stoc;holders Doncontrolling interest H Fotal liabilities and stoc;holders0 e.uit/ H "06 o% i&plied %air alue o% !2#0,000 ( !"#,000. !#00,000 #0,000 ##0,000 "#,000

!220,000

A2#,000 !@2#,000

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An )ntroduction to Consolidat e d Financial Stat e m e n t s

Solution

3-3 !2,"00,000 !=,="#,000 2,#00,000 ! @"#,000

Cost o% in est&ent in -o%tbac; :oo;s >anuar/ 1, 2009 I&plied %air alue o% -o%tbac; 4!2,"00,000 5 @067 :oo; alue o% -o%tbac; E<cess o% %air alue o er boo; alue Schedule to Allocate 0air 1alue . 2ook 1alue Bair Galue E :oo; Galue ! #00,000 1,000,000 i))erential

Current assets E.uip&ent ,ther plant assets :argain purchase H E<cess %air alue o er boo;

Allocation ! #00,000 1,000,000 alue 4A2#,0007 !@"#,000

H A%ter recogni+ing ac.uired assets and liabilities at their %air alues, *e are le%t *ith a negati e e<cess o% !A2#,000. Inder -BA- Do. 121C, this di%%erence is recorded as a gain in the consolidated inco&e state&ent in the /ear o% ac.uisition. Fhe gain is attributable entirel/ to the controlling interest, and is recorded on the parent0s boo;s b/ a debit to the In est&ent account and a credit to a )ain %ro& bargain Purchase account. An alternati e calculation o% this a&ount ta;es the di%%erence bet*een the %air alues o% the net assets 4!2,000,0007 and their %air alue i&plied b/ the ac.uisition price 4!=,="#,0007, *hich e.uals !A2#,000. Solution 3-4

Doncontrolling interest o% !A#,000 4it0s %air alue7 plus !2A0,000 4%air alue o% Phar&0s in est&ent7 e.uals total %air alue o% !=2#,000. Fhere%ore, Phar&0s interest is @06 4!2A0,000 5 !=2#,0007, and noncontrolling interest is 206 4!A#,000 5 !=2#,0007. Fotal %air alue :oo; alue o% -pecht E<cess %air alue o er boo; *+cess allocated to Plant assets 3 net )ood*ill Fotal Bair Galue !210,000 E E :oo; Galue !200,000 ! ! 10,000 ##,000 A#,000 ! alue =2#,000 42A0,0007 ! A#,000

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Solution

3-5 al+er Corporation and Su"!idiar# Consolidated :alance -heet at ?ece&ber =1, 2009 .in thousands/

Assets Current assets Plant assets )ood*ill *quities 8iabilities Capital stoc; Cetained earnings Supporting computations -orrel0s net inco&e 4!200 E !=00 E !#07 8ess9 E<cess allocated to in entories that *ere sold in 2009 8ess9 ?epreciation on e<cess allocated to plant assets 4!20 52 /ears7 Inco&e %ro& -orrel Plant assets 4!#00 $ !=00 $ !20 E !107 Pal&er0s retained earnings9 :eginning retained earnings Add9 ,perating inco&e Add9 Inco&e %ro& -orrel ?educt9 ?i idends Cetained earnings ?ece&ber =1, 2009

=20 @=0 200 !1,="0 ! AA0 =00 210 !1,="0 ! #0 4207 4107 20 @=0 =20 100 20 4#07 210

! ! !

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An )ntroduction to Consolidat e d Financial Stat e m e n t s

Solution

3-6 err# Corporation and Su"!idiar# Consolidated :alance -heet 'or;ing Papers at ?ece&ber =1, 2009 4in thousands7

Cash Cecei ables 3 net In entories 8and E.uip&ent 3 net In est&ent in -i& )ood*ill Fotal assets Accounts pa/able ?i idends pa/able Capital stoc; Cetained earnings Doncontrolling interest Fotal e.uities a b

Perr/ per boo;s ! 22 #0 =#0 1#0 A00 2#9

-i& per boo;s ! 20 1=0 #0 200 100

AdJust&ents and Eli&inations b 9

Consolidated :alance -heet ! A2 1"1 200 =#0 "00

a 2#9 a 100 ! ! #00 @0 10 =00 110 #00 b 9 a =00 a 110 a #1 100 !1,"@= ! 290 A1 1,000 1@1 #1 !1,"@=

!1,A#1 ! 210 A0 1,000 1@1

!1,A#1

Fo eli&inate reciprocal in est&ent and e.uit/ accounts, record good*ill 4!1007, and enter noncontrolling interest [4!210 e.uit/ $ !100 good*ill7 1067]. Fo eli&inate reciprocal di idends recei able 4included in recei ables 3 net7 and di idends pa/able a&ounts 4!10 di idends 9067.

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Solution

3-7 !2@0,000 !=#0,000 42#0,0007 !100,000 ! 10,000 !2"9,000 4@,0007 !2"1,000

Preliminary computations Cost o% @06 in est&ent >anuar/ =, 2009 I&plied total %air alue o% -lender 4!2@0,000 5 @067 :oo; alue o% -lender E<cess %air alue o er boo; alue on >anuar/ = ( )ood*ill 1 2 'oncontrolling interest share o) income( -lender0s net inco&e !#0,000 206 noncontrolling interest Current assets( Co&bined current assets 4!202,000 $ !"#,0007 8ess9 ?i idends recei able 4!10,000 @067 Current assets Inco&e %ro& -lender9 Done In est&ent inco&e is eli&inated in consolidation.

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Capital stoc;9 !#00,000 Capital stoc; o% the parent, Portl/ Corporation. In est&ent in -lender9 Done Fhe in est&ent account is eli&inated. E<cess o% %air alue o er boo; alue !100,000

Controlling share o% consolidated net inco&e9 E.uals Portl/0s net inco&e, or9 Consolidated sales 8ess9 Consolidated cost o% goods sold 8ess9 Consolidated e<penses Consolidated net inco&e 8ess9 Doncontrolling interest share Controlling share o% consolidated net inco&e

!A00,000 4="0,0007 4@0,0007 !1#0,000 410,0007 !120,000

$ %

Consolidated retained earnings ?ece&ber =1, 20099 !200,000 E.uals Portl/0s beginning retained earnings. Consolidated retained earnings ecember !"# $%"% E.ual to Portl/0s ending retained earnings9 :eginning retained earnings Add9 Controlling share o% consolidated net inco&e 8ess9 Portl/0s di idends %or 2010 Ending retained earnings 'oncontrolling interest ecember !"# $%"% -lender0s capital stoc; and retained earnings Add9 Det inco&e 8ess9 ?i idends -lender0s e.uit/ ?ece&ber =1, 2010 at %air alue Doncontrolling interest percentage Doncontrolling interest ?ece&ber =1, 2010 using boo; alue Add9 Doncontrolling interest share o% )ood*ill Doncontrolling interest ?ece&ber =1, 2010 at %air alue

!200,000 120,000 4A0,0007 !2@0,000 !=00,000 #0,000 42#,0007 =2#,000 206 ! A#,000 20,000 ! @#,000

1'

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An )ntroduction to Consolidat e d Financial Stat e m e n t s

Solution

3-$ [AICPA adapted] 3eado* #A,000 @2,000 "0,000 120,000 "0,000 0 120,000 0 Gan

Preliminary computations In est&ent cost9 3eado* 41,000 shares @067 !"0 Gan 4=,000 shares "067 !20 I&plied total %air alues9 3eado* 4!#A,000 5 @067 Gan 4!@2,000 5 "067 :oo; alue 3eado* 4!"0,000 @067 Gan 4!120,000 "067 E<cess %air alue o er boo; alue at ac.uisition 1 Journal entries to account )or investments

January "# $%%& 3 Acquisition o) investments In est&ent in 3eado* 4@067 #A,000 Cash #A,000 Fo record ac.uisition o% @00 shares o% 3eado* co&&on stoc; at !"0 per share. In est&ent in Gan 4"067 @2,000 Cash @2,000 Fo record ac.uisition o% 2,100 shares o% Gan co&&on stoc; at !20 per share. uring $%%3 3 ividends )rom subsidiaries Cash 12,@00 In est&ent in 3eado* 4@067 12,@00 Fo record di idends recei ed %ro& 3eado* 4!1A,000 @067. Cash A,=00 In est&ent in Gan 4"067 A,=00 Fo record di idends recei ed %ro& Gan 4!9,000 "067. ecember !"# $%%& 3 Share o) income or loss In est&ent in 3eado* 4@067 2@,@00 Inco&e %ro& 3eado* 2@,@00 Fo record in est&ent inco&e %ro& 3eado* 4!=A,000 @067. 8oss %ro& Gan @,200 In est&ent in Gan 4"067 @,200 Fo record in est&ent loss %ro& Gan 4!12,000 "067.

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C-apt er 3

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Solution 2

3-$ 4continued7 ecember !"# $%%& 4 3eado* !#0,000 20,000 90,000 206 !1@,000 Gan !A0,000 20,000 19,000 99,000 =06 !29,"00

'oncontrolling interest

Co&&on stoc; Capital in e<cess o% par Cetained earnings E.uit/ ?ece&ber =1 Doncontrolling interest percentage Doncontrolling interest ?ece&ber =1 H Bair 3 alue e.uals boo; alue. ecember !"# $%%&

Consolidated retained earnings

Consolidated retained earnings is reported at !=02,A00, e.ual to the retained earnings o% Fodd Corporation, the parent, at ?ece&ber =1, 2009. 4 5nvestment balance ecember !"# $%%&( 3eado* !#A,000 2@,@00 412,@007 !"2,000 Gan !@2,000 4@,2007 4A,=007 !A9,=00 alue

In est&ent cost >anuar/ 1 Add 4deduct79 Inco&e 4loss7 ?educt9 ?i idends recei ed In est&ent balances ?ece&ber =1

Chec;9 In est&ent balances should be e.ual to the underl/ing boo; 3eado* !90,000 @06 ( !"2,000 Gan !99,000 "06 ( !A9,=00

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3- 18

An )ntroduction to Consolidat e d Financial Stat e m e n t s

Solution

3-% !=,A00 !2,000 42,"007 !1,=00 ! @00 ! #00 ! 100

Preliminary computations .in thousands/ Cost o% 906 in est&ent >anuar/ 1, 2009 I&plied total %air alue o% -no*drop 4!=,A00 5 9067 :oo; alue o% -no*drop E<cess %air alue o er boo; alue on >anuar/ 1 Allocation to e.uip&ent Ce&ainder is )ood*ill Additional annual depreciation on e.uip&ent 4!@00 5 @ /ears7 an!# Corporation and Su"!idiar# Consolidated :alance -heet 'or;ing Papers at ?ece&ber =1, 2009 4in thousands7
Pans/ =00 A00 90 "00 A00 2,000 1,#00 =,"@0 a !9,#"0 !=,"00 ! A00 100 2,000 1,000 b 90 a 2,000 a 1,000 a !=,"00 220 #00 906 -no*drop ! 200 200 A00 "00 1,000 @00 a "00 a =,"@0 AdJust&ents and Eli&inations

Cash Cecei ables 3 net ?i idends recei able In entor/ 8and :uildings 3 net E.uip&ent 3 net In est&ent in -no*drop )ood*ill Fotal assets

Consolidated :alance -heet ! #00 1,000 1,=00 1,=00 =,000 =,000 #00 !10,A00 ! 900 #10 ",000 1,""0 220 !10,A00

90

Accounts pa/able ! =00 ?i idends pa/able #00 Capital stoc; ",000 Cetained earnings 1,""0 Doncontrolling interest Fotal e.uities !9,#"0 a b

Fo eli&inate reciprocal in est&ent and e.uit/ accounts, enter una&orti+ed e<cess allocated to e.uip&ent, record good*ill, and enter noncontrolling interest 4at %air alue7. Fo eli&inate reciprocal di idends recei able and di idends pa/able a&ounts.

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C-apt er 3

3- 19

Solution 1

3-1'

Purchase price o) investment in Snaplock .in thousands/ Inderl/ing boo; alue o% in est&ent in -naploc;9 E.uit/ o% -naploc; >anuar/ 1, 2009 Add9 E<cess in est&ent %air alue o er boo; alue9 )ood*ill at ?ece&ber =1, 201= Bair alue o% -naploc; >anuar/ 1, 2009 Purchase price o% @06 in est&ent at %air alue !220 A0 !2@0 !222

Snaplocks stockholders equity on

ecember !"# $%"! .in thousands/

206 noncontrolling interest at %air alue ! A2 206 good*ill 4127 206 noncontrolling interest0s e.uit/ at boo; alue ! #0 Fotal e.uit/ ( Doncontrolling interest0s e.uit/ !#0 5 206 ( !2#0 3 Pandoras investment in Snaplock account balance at ecember !"# $%"! 4in thousands7 Inderl/ing boo; alue in -naploc; ?ece&ber =1, 201= !200 4!2#0 @067 Add9 @06 o% )ood*ill ?ece&ber =1, 201= 4206 is attributable to the noncontrolling interest7 2@ In est&ent in -naploc; ?ece&ber =1, 201= !22@ Alternati e solution9 In est&ent cost >anuar/ 1, 2009 Add9 @06 o% -naploc;0s increase since ac.uisition 4!2#0 E !2207 @06 In est&ent in -naploc; ?ece&ber =1, 201= 4 Pandoras capital stock and retained earnings 4in thousands7 Capital stoc; Cetained earnings !222 22 !22@

ecember !"# $%"! !200 ! =0

A&ounts are e.ual to capital stoc; and retained earnings sho*n in the consolidated balance sheet.

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3- 20

An )ntroduction to Consolidat e d Financial Stat e m e n t s

Solution

3-11 ! A"0 !1,000 @00 ! 200 ! ! 20 @0 100 200 ! "00 22 4127 4"7 ! "21 !2#@ =0 21 !=09

Preliminary computations .in thousands/ Cost o% "06 in est&ent in -tubb I&plied %air o% -tubb 4!"00 5 "067 :oo; alue o% -tubb 410067 E<cess E<cess allocated9 In entories Plant assets )ood*ill E<cess In est&ent balance at >anuar/ 1, 2009 -hare o% -tubb0s retained earnings increase 4!A0 "067 8ess9 A&orti+ation "06 o% e<cess allocated to in entories 4sold in 20097 "06 o% e<cess allocated to plant assets 4!@0 5@ /ears7 In est&ent balance at ?ece&ber =1, 2009 Doncontrolling interest at ?ece&ber =1 =06 o% -tubb0s boo; alue at ?ece&ber =1 4!@A0 < =067 =06 o% )ood*ill =06 Ina&orti+ed e<cess %or plant assets =06 < 4!@0 E !10 a&orti+ation7 Doncontrolling at ?ece&ber =1 4%air alue7 ope Corporation and Su"!idiar# Consolidated :alance -heet 'or;ing Papers at ?ece&ber =1, 2009 4in thousands7
Cash Accounts recei able 3 net Accounts recei able 3 Pope ?i idends recei able In entories 8and Plant assets 3 net In est&ent in -tubb )ood*ill Assets Accounts pa/able Account pa/able to -tubb ?i idends pa/able 8ongEter& debt Capital stoc; Cetained earnings ! Pope A0 220 ! "06 -tubb 20 200 10 " #00 100 "00 "21 a 100 !2,#2@ ! =00 10 20 A00 1,000 #"@ !1,0#0 ! @0 10 100 #00 =A0 b c 10 " AdJust&ents and Eli&inations

Consolidated :alance -heet ! @0 A20

b c

10 " @20 2#0 1,120

=20 1#0 =#0

"0 a "21

100 !=,010 ! =@0 2= "00 1,000 #"@

a #00 a =A0

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C-apt er 3 Doncontrolling interest 4!@A0,000 =067 E.uities a =09 !2,#2@ !1,0#0 =09 !=,010

3- 21

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3- 22

An )ntroduction to Consolidat e d Financial Stat e m e n t s

Solution

3-12 ! ! ! "A0 9#0 900 #0

Preliminary computations .in thousands/ @06 In est&ent in -hasti at cost >anuar/ 1, 2009 I&plied total %air alue o% -hasti 4!"A0 5 @067 -hasti boo; alue E<cess %air alue o er boo; alue recorded as good*ill -hasti ?i idends ! 20 #0 A0 !1#0 -hasti Det Inco&e ! @0 100 120 !=00 @06 o% Det Inco&e ! A2 @0 9A !220 ! ! ! #0 100 20

2009 2010 2011 1 2 3 4

-hasti0s di idends %or 2010 4!20 5 @067 -hasti0s net inco&e %or 2010 4!#0 di idends 27 )ood*ill 3 ?ece&ber =1, 2010 'oncontrolling interest share o) income . $%"" -hasti0s inco&e %or 2011 4!2@ di idends recei ed5@067 2 Doncontrolling interest percentage Doncontrolling interest share 'oncontrolling interest ecember !"# $%"" E.uit/ o% -hasti >anuar/ 1, 2009 Add9 Inco&e %or 2009, 2010 and 2011 ?educt9 ?i idends %or 2009, 2010 and 2011 E.uit/ boo; alue o% -hasti ?ece&ber =1, 2011 )ood*ill E.uit/ %air alue o% -hasti ?ece&ber =1, 2011 Doncontrolling interest percentage Doncontrolling interest ?ece&ber =1, 2011 Controlling share o) consolidated net income )or $%"" Pendleton0s separate inco&e Add9 Inco&e %ro& -hasti Controlling share o% consolidated net inco&e

! ! !

120 206 22

900 =00 41#07 1,0#0 #0 !1,100 206 ! 220 ! ! 2@0 9A ="A

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C-apt er 3

3- 23

Solution

3-13 !=00 !="# 42#07 !12# ! 20 10# !12#

Preliminary computations @06 In est&ent in -idne/ 4cost7 >anuar/ 2, 2010 I&plied total %air alue o% -idne/ 4!=00 5 @067 :oo; alue o% -idne/ 410067 E<cess %air alue o er boo; alue *+cess allocated to :uildings 4%air alue !1"0 E boo; Ce&ainder to good*ill E<cess %air alue o er boo; art 1 a 6otal current assets Cash 4!#0 $ !207 ,ther current assets 4!1#0 $ !@07 Fotal current assets Plant and equipment net o) depreciation 8and 4!=00 $ !#07 :uildings 3 net 4!200 $ !1#07 E<cess allocated to buildings Plant and e.uip&ent 3 net Common stock Par alue o% Pe/ton0s stoc; ?ece&ber =1, 2009 Add9 Par alue o% shares issued %or -idne/ Co&&on stoc; Additional paid7in capital Additional paidEin capital o% Pe/ton ?ece&ber =1, 2009 Add9 Increase %ro& shares issued %ro& -idne/ Additional paidEin capital 8etained earnings Consolidated retained earnings ( Pe/ton0s retained earnings ?ece&ber =1, 2009 alue !1#07 alue

! "0 2=0 !=00 !=#0 ##0 20 !920 !A00 100 !"00 ! A0 200 !2A0

"

!120

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3- 24

An )ntroduction to Consolidat e d Financial Stat e m e n t s

Solution art 2 a

3-13 4continued7

5ncome )rom Sidney . $%"% -idne/0s reported net inco&e 8ess9 ?epreciation on e<cess 3 buildings 4!20 5# /ears7 AdJusted Det Inco&e o% -idne/ @06 o% -idne/0s Det Inco&e ( Inco&e %ro& -idne/

! 20 427 ! =A.@ ! 2@.@ !=00 2@.@ 41A7 !=12.@ ! 90 2@.@ !11@.@ !120 11@.@ 4#07 !20@.@ !2#0 20 4207 2"0 1A 10# !=91 206 ! "@.2

"

5nvestment in Sidney ecember !"# $%"% Cost >anuar/ 2 Add9 Inco&e %ro& -idne/ 8ess9 ?i idends %ro& -idne/ 4!20 @067 In est&ent in -idne/ ?ece&ber =1 Controlling share o) consolidated net income . $%"% -eparate inco&e o% Pe/ton Add9 Inco&e %ro& -idne/ Controlling share o% consolidated net inco&e Consolidated retained earnings ecember !"# $%"% Cetained earnings o% Pe/ton ?ece&ber =1, 2009 Add9 Consolidated net inco&e 8ess9 Pe/ton0s di idends Consolidated retained earnings ?ece&ber =1 'oncontrolling interest ecember !"# $%"% E.uit/ o% -idne/ ?ece&ber =1, 2009 Add9 Det inco&e 8ess9 ?i idends E.uit/ boo; alue o% -idne/ ?ece&ber =1 Ina&orti+ed e<cess %or buildings )ood*ill E.uit/ %air alue o% -idne/ ?ece&ber =1 Doncontrolling interest percentage Doncontrolling interest %air alue E ?ece&ber =1

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C-apt er 3

3- 25

Solution 1

3-14

Schedule to allocate the investment )air value . book value di))erential( .in thousands/ @06 In est&ent cost >anuar/ 2, 2009 !2,"A0 I&plied total %air alue 4!2,"A0 5 @067 !=,2#0 42,=007 :oo; alue o% interest ac.uired 4!2,=00 @067 E<cess %air alue o er boo; alue !1,1#0 *+cess allocated Bair Galue E :oo; Galue ( In entories ! #00 ,ther current assets 200 8and A00 1,@00 :uildings 3 net A00 E.uip&ent 3 net ,ther liabilities #A0 Ce&ainder to good*ill Fotal e<cess ! 200 1#0 #00 1,000 @00 A10 ! Allocated 100 #0 100 @00 42007 #0 2#0 !1,1#0

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3- 26

An )ntroduction to Consolidat e d Financial Stat e m e n t s

Solution 2

3-14 4continued7 ortland Corporation and Su"!idiar# Consolidated :alance -heet at >anuar/ 2, 2009 4in thousands7

Assets Current Assets( Cash 4!220 $ !A07 Cecei ables 3 net 4!@00 $ !2007 In entories 4!1,100 $ !200 $ !1007 ,ther current assets 4!900 $ !1#0 $ !#07 Fotal current assets 0i+ed Assets( 8and 4!=,100 $ !#00 $ !1007 :uildings 3 net 4!A,000 $ !1,000 $ !@007 E.uip&ent 3 net 4!=,#00 $ !@00 E !2007 )ood*ill Fotal %i<ed assets Fotal assets Liabilities and Stockholders *quity Liabilities( Accounts pa/able 4!200 $ !2007 ,ther liabilities 4!1,#00 $ !A10 E !#07 Fotal liabilities Stockholders equity( Capital stoc; Cetained earnings Doncontrolling interest H Fotal stoc;holders0 e.uit/ Fotal liabilities and stoc;holders0 e.uit/ H 'oncontrolling interest -idne/0s e.uit/ at boo; alue Ina&orti+ed e<cess %air alue -idne/0s e.uit/ at %air alue 206 Doncontrolling interest !2,=00 1,1#0 !=,2#0 ! A90

=00 1,000 1,A00 1,100 2,000

! =,"00 ",@00 2,100 2#0 1#,@#0 !19,@#0

A00 2,0A0 2,AA0

!1#,000 1,#00 A90 1",190 !19,@#0

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