AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS
Answers to Questions
1 A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a controlling financial interest (generally over 50 percent) of its outstanding voting stock.
2 Amounts assigned to identifiable assets and liabilities in excess of recorded amounts on the books of the subsidiary are not recorded separately by the parent. Instead, the parent records the fair value/purchase price of the interest acquired in an investment account. The assignment to identifiable asset and liability accounts is made through working paper entries when the parent and subsidiary financial statements are consolidated.
3 The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the purchase price of the subsidiary is greater than the book value of the subsidiarys net assets. If the parent had acquired an 80 percent interest and the implied fair value of the subsidiary was greater than the book value of the subsidiarys net assets, the land would still appear in the consolidated balance sheet at $100,000. Under GAAP, the noncontrolling interest is also reported based on fair values at the acquisition date.
4 Parent companya corporation that owns a controlling interest in the outstanding voting stock of another corporation (its subsidiary). Subsidiary companya corporation that is controlled by a parent that owns a controlling interest in its outstanding voting stock, either directly or indirectly. Affiliatescompanies that are controlled by a single management team through parent-subsidiary relationships. (Although the term affiliate is a synonym for subsidiary, the parent is included in the total affiliation structure.) In many annual reports, the term includes all investments accounted for by the equity method. Associatescompanies that are controlled through parent-subsidiary relationships or whose operations can be significantly influenced through equity investments of 20 percent to 50 percent.
5 A noncontrolling interest is the equity interest in a subsidiary that is owned by stockholders outside of the affiliation structure. In other words, it is the equity interest in a subsidiary (recorded at fair value) that is not held by the parent or subsidiaries of the parent.
6 Under GAAP, a subsidiary will not be consolidated if control does not rest with the majority owner, such as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under severe foreign exchange restrictions or other governmentally imposed uncertainties.
7 Consolidated financial statements are intended primarily for the stockholders and creditors of the parent, according to GAAP.
8 The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of the outstanding capital stock of the parent.
9 Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or consolidation accounted for as an acquisition. But goodwill from consolidation would not appear in the general ledger of a parent or its subsidiary. Goodwill is entered in consolidation working papers when the reciprocal investment and equity amounts are eliminated. Working paper entries affect consolidated financial statements, but they are not entered in any general ledger.
3-2 An Introduction to Consolidated Financial Statements
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l 10 The parents investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is consolidated. It would appear in the parents separate balance sheet under the heading investments or other assets. Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as investments or other assets. They are accounted for under the equity method if the parent can exercise significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost method.
11 Parents books: Reciprocal accounts on subsidiarys books: Investment in subsidiary Capital stock and retained earnings Sales Purchases Accounts receivable Accounts payable Interest income Interest expense Dividends receivable Dividends payable Advance to subsidiary Advance from parent
12 Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order to show the financial position and results of operations of the total economic entity that is under the control of a single management team. Sales by a parent to a subsidiary are internal transactions from the viewpoint of the economic entity and the same is true of interest income and interest expense and rent income and rent expense arising from intercompany transactions. Similarly, receivables from and payables to affiliates do not represent assets and liabilities of the economic entity for which consolidated financial statements are prepared.
13 The stockholders equity of a parent under the equity method is the same as the consolidated stockholders equity of a parent and its subsidiaries provided that the noncontrolling interest, if any, is reported outside of the consolidated stockholders equity. If noncontrolling interest is included in consolidated stockholders equity, it represents the sole difference between the parents stockholders equity under the equity method and consolidated stockholders equity.
14 No. The amounts that appear in the parents statement of retained earnings under the equity method and the amounts that appear in the consolidated statement of retained earnings are identical, assuming that the noncontrolling interest is included as a separate component of stockholders equity.
15 Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total income to the consolidated entity between controlling and noncontrolling stockholders. From the viewpoint of the controlling interest (the stockholders of the parent), income attributable to noncontrolling interest has the same effect on consolidated net income as an expense. This is because consolidated net income is income to all stockholders. Alternatively, you can view total consolidated net income as being allocated to the controlling and noncontrolling interests.
16 The computation of noncontrolling interest is comparable to the computation of retained earnings. It is computed:
Noncontrolling interest beginning of the period XX Add: Income attributable to noncontrolling interest XX Deduct: Noncontrolling interest dividends XX Deduct: Noncontrolling interest of amortization of excess of fair value over book value Add: Noncontrolling interest of amortization of excess of book value over fair value Noncontrolling interest end of the period
17 It is acceptable to consolidate the annual financial statements of a parent and a subsidiary with different fiscal periods, provided that the dates of closing are not more than three months apart. Any significant developments that occur in the intervening three-month period should be disclosed in notes to the financial Chapter 3 3-3
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l statements. In the situation described, it is acceptable to consolidate the financial statements of the subsidiary with an October 31 closing date with the financial statements of the parent with a December 31 closing date.
18 The acquisition of shares from noncontrolling stockholders is not a business combination. It must be accounted for as a treasury stock transaction if the acquirer is the controlling interest. It is not possible, by definition, to acquire a controlling interest from noncontrolling stockholders.
SOLUTIONS TO EXERCISES
Solution E3-1 Solution E3-2
1 b 1 d 2 c 2 b 3 d 3 d 4 d 4 d 5 a 5 a 6 b 7 c
Solution E3-3 [ AI CPA adapt ed]
1 c Advance t o Hi l l $75, 000 + r ecei vabl e f r omWar d $200, 000 = $275, 000
2 a Zer o, goodwi l l has an i ndet er mi nat e l i f e and i s not amor t i zed.
3 a Pow account s f or Sap usi ng t he equi t y met hod, t her ef or e, consol i dat ed r et ai ned ear ni ngs i s equal t o Pow s r et ai ned ear ni ngs, or $2, 480, 000.
4 d Zer o, al l i nt er company r ecei vabl es and payabl es ar e el i mi nat ed.
Solution E3-4 (in thousands)
1 I mpl i ed f ai r val ue of San ( $1, 800 / 90%) $2, 000 Less: Book val ue of San ( 1, 800) Excess f ai r val ue over book val ue $ 200 Equi pment under val ued 60 Goodwi l l at J anuar y 1, 2011 $ 140 Goodwi l l at December 31, 2011 = Goodwi l l f r omconsol i dat i on $ 140 Si nce goodwi l l i s not amor t i zed
2 Consolidated net income
Pi n s r epor t ed net i ncome $980 Less: Cor r ect i on t o i ncome f r omSan f or depr eci at i on on excess al l ocat ed
t o equi pment [ ( $60, 000/ 3 year s) x 90%] ( 18) Cont r ol l i ng shar e of consol i dat ed net i ncome $962
Noncont r ol l i ng shar e of consol i dat ed net i ncome [ $200, 000 - $20, 000 depr eci at i on] x 10% $ 18 Cont r ol l i ng shar e of consol i dat ed net i ncome 962 Consol i dat ed net i ncome $980 3-4 An Introduction to Consolidated Financial Statements
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Chapter 3 3-5
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution E3-5 (in thousands)
1 $1, 200, t he di vi dends of Pan
2 $660, equal t o $600 di vi dends payabl e of Pan pl us $60 ( 30%of $200) di vi dends payabl e t o noncont r ol l i ng i nt er est s of Sad.
Solution E3-6 (in thousands)
Preliminary computation Cost of Sl i st ock ( Fai r val ue) $2, 500 Fai r val ue of Sl i s i dent i f i abl e net asset s 2, 000 Goodwi l l $ 500
1 Journal entry to record push down values
I nvent or i es 40 Land 100
Bui l di ngs net 300
Equi pment net 160 Goodwi l l 500 Ret ai ned ear ni ngs 420 Not e payabl e 20 Push- down capi t al 1, 500
2 Sli Corporation Bal ance Sheet J anuar y 1, 2011 ( i n t housands) Assets Cash $ 140 Account s r ecei vabl e 160 I nvent or i es 200 Land 400
Bui l di ngs net 1, 000
Equi pment net 600 Goodwi l l 500 Tot al asset s $3, 000
Liabilities Account s payabl e $ 200 Not e payabl e 300 Tot al l i abi l i t i es 500
Stockholders equity Capi t al st ock $1, 000 Push- down capi t al 1, 500 Tot al st ockhol der s equi t y 2, 500 Tot al l i abi l i t i es and st ockhol der s equi t y $3, 000
3-6 An Introduction to Consolidated Financial Statements
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution E3-7
1 Pas Corporation and Subsidiary Consol i dat ed I ncome St at ement f or t he year 2012 ( i n t housands) Sal es ( $2, 000 + $800) $2, 800 Less: Cost of sal es ( $1, 200 + $400) ( 1, 600)
Gr oss pr of i t 1, 200 Less: Depr eci at i on expense ( $100 + $80) ( 180) Ot her expenses ( $398 + $180) ( 578)
Consol i dat ed net i ncome 442
Less: Noncont r ol l i ng i nt er est shar e ( $140 30%) ( 42) Cont r ol l i ng i nt er est shar e of cnsol i dat ed net i ncome $ 400
2 Pas Corporation and Subsidiary Consol i dat ed I ncome St at ement f or t he year 2012 ( i n t housands) Sal es ( $2, 000 + $800) $2, 800 Less: Cost of sal es ( $1, 200 + $400) ( 1, 600)
Gr oss pr of i t 1, 200 Less: Depr eci at i on expense ( $100 + $80 - $12) ( 168) Ot her expenses ( $398 + $180) ( 578)
Consol i dat ed net i ncome 454 Less: Noncont r ol l i ng i nt er est shar e [ ( $140 30%) + ( $12 depr eci at i on x 30%) ]
( 45. 6) Cont r ol l i ng i nt er est shar e of consol i dat ed net i ncome $ 408. 4
Supporting computations
Depr eci at i on of excess al l ocat ed t o overvalued equi pment : $60/ 5 year s = $12
Chapter 3 3-7
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution E3-8 (in thousands)
1 Capital stock
The capi t al st ock appear i ng i n t he consol i dat ed bal ance sheet at December 31, 2011 i s $3, 600, t he capi t al st ock of Pob, t he par ent company.
2 Goodwill at December 31, 2011
I nvest ment cost at J anuar y 2, 2011 ( 80%i nt er est ) $1, 400 I mpl i ed t ot al f ai r val ue of Sof ( $1, 400 / 80%) $1, 750 Book val ue of Sof ( 100%) ( 1, 200) Excess i s consi der ed goodwi l l si nce no ot her f ai r val ue i nf or mat i on i s gi ven.
$ 550
3 Consolidated retained earnings at December 31, 2011
Pob s r et ai ned ear ni ngs J anuar y 2 ( equal t o begi nni ng consol i dat ed r et ai ned ear ni ngs $1, 600 Add: Net i ncome of Pob ( equal t o cont r ol l i ng shar e of consol i dat ed net i ncome)
600 Less: Di vi dends decl ar ed by Pob ( 360) Consol i dat ed r et ai ned ear ni ngs December 31 $1, 840
4 Noncontrolling interest at December 31, 2011
Capi t al st ock and r et ai ned ear ni ngs of Sof on J anuar y 2
$1, 200 Add: Sof s net i ncome 180 Less: Di vi dends decl ar ed by Sof ( 100) Sof s st ockhol der s equi t y December 31 1, 280 Noncont r ol l i ng i nt er est per cent age 20% Noncont r ol l i ng i nt er est at book val ue Add: 20%Goodwi l l Noncont r ol l i ng i nt er est December 31 $ 256 110 $ 366
5 Dividends payable at December 31, 2011
Di vi dends payabl e t o st ockhol der s of Pob $ 180
Di vi dends payabl e t o noncont r ol l i ng st ockhol der s ( $50 20%) 10 Di vi dends payabl e t o st ockhol der s out si de t he Consol i dat ed ent i t y $ 190
3-8 An Introduction to Consolidated Financial Statements
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution E3-9 (in thousands)
Pas Corporation and Subsidiary Par t i al Bal ance Sheet at December 31, 2011
Stockholders equity: Capi t al st ock, $10 par $600 Addi t i onal pai d- i n capi t al 100 Ret ai ned ear ni ngs 130 Equi t y of cont r ol l i ng st ockhol der s 830 Noncont r ol l i ng i nt er est 82 Tot al st ockhol der s equi t y $912
Supporting computations Comput at i on of consol i dat ed r et ai ned ear ni ngs: Pas s December 31, 2010 r et ai ned ear ni ngs $ 70 Add: Pas s r epor t ed i ncome f or 2011 110 Less: Pas s di vi dends ( 50) Consol i dat ed r et ai ned ear ni ngs December 31, 2011 $130
Computation of noncontrolling interest at December 31, 2011 Sal s December 31, 2010 st ockhol der s equi t y $400 I ncome l ess di vi dends f or 2011 ( $40 - $30) 10 Sal s December 31, 2011 st ockhol der s equi t y 410 Noncont r ol l i ng i nt er est per cent age 20% Noncont r ol l i ng i nt er est December 31, 2011 $ 82
Chapter 3 3-9
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution E3-10
Pek Corporation and Subsidiary Consol i dat ed I ncome St at ement f or t he year ended December 31, 2013 ( i n t housands) Sal es $4, 200 Cost of goods sol d 2, 200 Gr oss pr of i t 2, 000 Deduct : Oper at i ng expenses 1, 110 Consol i dat ed net i ncome 890 Deduct : Noncont r ol l i ng i nt er est shar e 29 Cont r ol l i ng i nt er est shar e $ 861
Supporting computations
I nvest ment cost J anuar y 1, 2011 ( 90%i nt er est ) $ 1, 620 I mpl i ed t ot al f ai r val ue of Sl o ( $1, 620 / 90%) $ 1, 800 Sl o s Book val ue acqui r ed ( 100%) ( 1, 400) Excess of f ai r val ue over book val ue $ 400
Excess allocated to: I nvent or i es ( sol d i n 2011) $ 60 Equi pment ( 4 year s r emai ni ng usef ul l i f e) 40 Goodwi l l 300 Excess of f ai r val ue over book val ue $ 400
Operating expenses: Combi ned oper at i ng expenses of Pek and Sl o $1, 100 Add: Depr eci at i on on excess al l ocat ed t o equi pment ( $40/ 4 year s) 10 Consol i dat ed oper at i ng expenses $1, 110
3-10 An Introduction to Consolidated Financial Statements
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l SOLUTIONS TO PROBLEMS
Solution P3-1
1 Pen Corporation and Subsidiary Consol i dat ed Bal ance Sheet at December 31, 2011 ( i n t housands)
Assets Cash ( $64 + $36) $ 100 Account s r ecei vabl e ( $90 + $68 - $10) 148 I nvent or i es ( $286 + $112) 398
Equi pment net ( $760 + $350) 1, 110 Tot al asset s $1, 756
Liabilities and Stockholders Equity Liabilities: Account s payabl e ( $80 + $66 - $10) $ 136 Stockholders equity: Common st ock, $10 par 920 Ret ai ned ear ni ngs 600
Noncont r ol l i ng i nt er est ( $300 + $200) 20% 100 Tot al l i abi l i t i es and st ockhol der s equi t y $1, 756
2 Consolidated net income for 2012
Pen s separ at e i ncome $340 Add: I ncome f r omSut 180 Consol i dat ed net i ncome $520 Noncont r ol l i ng i nt er est shar e ( 20%x $180, 000) $ 36 Cont r ol l i ng i nt er est shar e ( 80%) $484
Chapter 3 3-11
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P3-2 (in thousands)
1 Schedule to allocate fair value/book value differential
Cost of i nvest ment i n Set $350 I mpl i ed f ai r val ue of Set ( $350 / 70%) $500 Book val ue of Set ( 220) Excess f ai r val ue over book val ue $280 Excess al l ocat ed: Fai r Val ue Book Val ue Al l ocat i on I nvent or i es ( $100 - $60) $ 40 Land ( $120 - $100) 20
Bui l di ngs net ( $180 - $140) 40
Equi pment net ( $60 - $80) ( 20) Ot her l i abi l i t i es ( $80 - $100) 20 Al l ocat ed t o i dent i f i abl e net asset s 100 Goodwi l l f or t he r emai nder 180 Excess f ai r val ue over book val ue $280
2 Par Corporation and Subsidiary Consol i dat ed Bal ance Sheet at J anuar y 1, 2011
Assets Current assets: Cash ( $70 + $40) $110
Recei vabl es net ( $160 + $60) 220 I nvent or i es ( $140 + $60 + $40) 240 $ 570
Property, plant and equipment: Land ( $200 + $100 + $20) $320
Bui l di ngs net ( $220 + $140 + $40) 400
Equi pment net ( $160 + $80 - $20) 220 940 Goodwill (from consolidation) 180 Tot al asset s $1, 690
Liabilities and Stockholders Equity Liabilities: Account s payabl e ( $180 + $160) $ 340 Ot her l i abi l i t i es ( $20 + $100 - $20) 100 $ 440
Stockholders equity: Capi t al st ock $1, 000 Ret ai ned ear ni ngs 100 Equi t y of cont r ol l i ng st ockhol der s 1, 100 Noncont r ol l i ng i nt er est * 150 1, 250 Tot al l i abi l i t i es and st ockhol der s equi t y $1, 690
* 70%of i mpl i ed f ai r val ue of $500 = $150.
3-12 An Introduction to Consolidated Financial Statements
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P3-3 (in thousands)
Cost of i nvest ment i n Sof J anuar y 1, 2011 $5, 400 I mpl i ed f ai r val ue of Sof ( $5, 400 / 80%) $6, 750 Book val ue of Sof 5, 000 Excess of f ai r val ue over book val ue $1, 750
Schedule to Allocate Fair Value Book Value Differential
Fai r Val ue - Book Val ue
Al l ocat i on Cur r ent asset s $1, 000 $1, 000 Equi pment 2, 000 2, 000
Bar gai n pur chase * ( 1, 250) Excess f ai r val ue over book val ue $1, 750
* Af t er r ecogni zi ng acqui r ed asset s and l i abi l i t i es at f ai r val ues, we ar e l ef t wi t h a negat i ve excess of $1, 250. Under GAAP, t hi s di f f er ence i s r ecor ded as a gai n i n t he consol i dat ed i ncome st at ement i n t he year of acqui si t i on. The gai n i s at t r i but abl e ent i r el y t o t he cont r ol l i ng i nt er est , and i s r ecor ded on t he par ent s books by a debi t t o t he I nvest ment account and a cr edi t t o a Gai n f r ombar gai n Pur chase account . An al t er nat i ve cal cul at i on of t hi s amount t akes t he di f f er ence bet ween t he f ai r val ues of t he net asset s ( $8, 000) and t hei r f ai r val ue i mpl i ed by t he acqui si t i on pr i ce ( $6, 750) , whi ch equal s $1, 250.
Solution P3-4 (in thousands)
Noncont r ol l i ng i nt er est of $130 ( f ai r val ue) pl us $520 ( f ai r val ue of Pam s i nvest ment ) equal s t ot al f ai r val ue of $650. Ther ef or e, Pam s i nt er est i s 80% ( $520 / $650) , and noncont r ol l i ng i nt er est i s 20%( $130 / $650) .
Tot al f ai r val ue $ 650 Book val ue of Sap ( 520) Excess f ai r val ue over book val ue $ 130
Excess allocated to
Fai r Val ue - Book Val ue Pl ant asset s net $420 - $400 $ 20 Goodwi l l 110 Tot al $ 130
Chapter 3 3-13
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P3-5
Pal Corporation and Subsidiary Consol i dat ed Bal ance Sheet at December 31, 2011 (in thousands) Assets Cur r ent asset s $ 680 Pl ant asset s 1, 660 Goodwi l l 400 $2, 740 Equities Li abi l i t i es $1, 320 Capi t al st ock 600 Ret ai ned ear ni ngs 820 $2, 740
Supporting computations Sor s net i ncome ( $800 - $600 - $100) $ 100 Less: Excess al l ocat ed t o i nvent or i es t hat wer e sol d i n 2011 ( 40) Less: Depr eci at i on on excess al l ocat ed t o pl ant asset s ( $80 / 4 year s) ( 20) I ncome f r omSor $ 40
Pl ant asset s ( $1, 000 + $600 + $80 - $20) $1, 660
Pal s r et ai ned ear ni ngs: Begi nni ng r et ai ned ear ni ngs $ 680 Add: Oper at i ng i ncome 200 Add: I ncome f r omSor 40 Deduct : Di vi dends ( 100) Ret ai ned ear ni ngs December 31, 2011 $ 820
3-14 An Introduction to Consolidated Financial Statements
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P3-6
Per Corporation and Subsidiary Consol i dat ed Bal ance Sheet Wor ki ng Paper s at December 31, 2011 ( i n t housands) Per per books Si m per books Adj ust ment s and El i mi nat i ons Consol i dat ed Bal ance Sheet Cash $ 84 $ 40 $ 124 Recei vabl es net 100 260 b 18 342 I nvent or i es 700 100 800 Land 300 400 700 Equi pment net 1, 200 200 1, 400 I nvest ment i n Si m 918 a 918 Goodwi l l a 200 200 Tot al asset s $3, 302 $1, 000 $3, 566 Account s payabl e $ 820 $ 160 $ 980 Di vi dends payabl e 120 20 b 18 122 Capi t al st ock 2, 000 600 a 600 2, 000 Ret ai ned ear ni ngs 362 220 a 220 362 Noncont r ol l i ng i nt er est a 102 102 Tot al equi t i es $3, 302 $1, 000 $3, 566
a To el i mi nat e r eci pr ocal i nvest ment and equi t y account s, r ecor d goodwi l l ( $200) , and ent er noncont r ol l i ng i nt er est [ ( $820 equi t y + $200 goodwi l l ) 10%) ] . b To el i mi nat e r eci pr ocal di vi dends r ecei vabl e ( i ncl uded i n r ecei vabl es net ) and di vi dends payabl e amount s ( $20 di vi dends 90%) .
Chapter 3 3-15
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P3-7 (in thousands)
Preliminary computations Cost of 80%i nvest ment J anuar y 3, 2011 $560 I mpl i ed t ot al f ai r val ue of Sl e ( $560 / 80%) $700 Book val ue of Sl e ( 500) Excess f ai r val ue over book val ue on J anuar y 3 = Goodwi l l $200
1 Noncontrolling interest share of income:
Sl e s net i ncome $100 20%noncont r ol l i ng i nt er est $ 20
2 Current assets: Combi ned cur r ent asset s ( $408 + $150) $558
Less: Di vi dends r ecei vabl e ( $20 80%) ( 16) Cur r ent asset s $542
3 I ncome f r omSl e: None I nvest ment i ncome i s el i mi nat ed i n consol i dat i on.
4 Capi t al st ock: $1, 000 Capi t al st ock of t he par ent , Por Cor por at i on.
5 I nvest ment i n Sl e: None The i nvest ment account i s el i mi nat ed.
6 Excess of f ai r val ue over book val ue $200
7 Cont r ol l i ng shar e of consol i dat ed net i ncome: Equal s Por s net i ncome, or :
Consol i dat ed sal es $1, 200 Less: Consol i dat ed cost of goods sol d ( 740) Less: Consol i dat ed expenses ( 160) Consol i dat ed net i ncome $ 300 Less: Noncont r ol l i ng i nt er est shar e ( 20) Cont r ol l i ng shar e $ 280
8 Consol i dat ed r et ai ned ear ni ngs December 31, 2011: $404 Equal s Por s begi nni ng r et ai ned ear ni ngs.
9 Consolidated retained earnings December 31, 2012 Equal t o Por s endi ng r et ai ned ear ni ngs: Begi nni ng r et ai ned ear ni ngs $404 Add: Cont r ol l i ng shar e of consol i dat ed net i ncome 280 Less: Por s di vi dends f or 2012 ( 120) Endi ng r et ai ned ear ni ngs $564
10 Noncontrolling interest December 31, 2012 Sl e s capi t al st ock and r et ai ned ear ni ngs $600 Add: Net i ncome 100 Less: Di vi dends ( 50) Sl e s equi t y December 31, 2012 at f ai r val ue 650 Noncont r ol l i ng i nt er est per cent age 20% Noncont r ol l i ng i nt er est December 31, 2012 usi ng book val ue $130 Add: Noncont r ol l i ng i nt er est shar e of Goodwi l l 40 Noncont r ol l i ng i nt er est December 31, 2012 at f ai r val ue $170
3-16 An Introduction to Consolidated Financial Statements
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P3-8 [ AI CPA adapt ed]
Preliminary computations Saw Sun I nvest ment cost : Saw ( 1, 000 shar es 80%) $140 112, 000 Sun ( 3, 000 shar es 70%) $80 168, 000 I mpl i ed t ot al f ai r val ues: Saw ( $112, 000 / 80%) 140, 000 Sun ( $168, 000 / 70%) 240, 000 Book val ue Saw 140, 000 Sun 240, 000 Excess f ai r val ue over book val ue at acqui si t i on 0 0
1 a. Journal entries to account for investments
January 1, 2011 Acquisition of investments
I nvest ment i n Saw ( 80%) 112, 000 Cash 112, 000 To r ecor d acqui si t i on of 800 shar es of Saw common st ock at $140 per shar e. I nvest ment i n Sun ( 70%) 168, 000 Cash 168, 000 To r ecor d acqui si t i on of 2, 100 shar es of Sun common st ock at $80 per shar e.
b. During 2011 Dividends from subsidiaries
Cash 25, 600 I nvest ment i n Saw ( 80%) 25, 600
To r ecor d di vi dends r ecei ved f r omSaw ( $32, 000 80%) . Cash 12, 600 I nvest ment i n Sun ( 70%) 12, 600
To r ecor d di vi dends r ecei ved f r omSun ( $18, 000 70%) .
c. December 31, 2011 Share of income or loss
I nvest ment i n Saw ( 80%) 57, 600 I ncome f r omSaw 57, 600
To r ecor d i nvest ment i ncome f r omSaw ( $72, 000 80%) . Loss f r omSun 16, 800 I nvest ment i n Sun ( 70%) 16, 800
To r ecor d i nvest ment l oss f r omSun ( $24, 000 70%) .
Chapter 3 3-17
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P3-8 ( cont i nued)
2 Noncontrolling interest December 31, 2011 * Saw Sun Common st ock $100, 000 $120, 000 Capi t al i n excess of par 40, 000 Ret ai ned ear ni ngs 80, 000 38, 000 Equi t y December 31 180, 000 198, 000 Noncont r ol l i ng i nt er est per cent age 20% 30% Noncont r ol l i ng i nt er est December 31 $36, 000 $59, 400
* Fai r val ue equal s book val ue.
3 Consolidated retained earnings December 31, 2011
Consol i dat ed r et ai ned ear ni ngs i s r epor t ed at $609, 200, equal t o t he r et ai ned ear ni ngs of Pod Cor por at i on, t he par ent , at December 31, 2011.
4 Investment balance December 31, 2011: Saw Sun I nvest ment cost J anuar y 1 $112, 000 $168, 000 Add ( deduct ) : I ncome ( l oss) 57, 600 ( 16, 800) Deduct : Di vi dends r ecei ved ( 25, 600) ( 12, 600) I nvest ment bal ances December 31 $144, 000 $138, 600
Check: I nvest ment bal ances shoul d be equal t o t he under l yi ng book val ue
Saw $180, 000 80%= $144, 000
Sun $198, 000 70%= $138, 600
Af t er consol i dat i on, t he I nvest ment bal ances ar e $0.
3-18 An Introduction to Consolidated Financial Statements
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P3-9
Preliminary computations (in thousands) Cost of 90%i nvest ment J anuar y 1, 2011 $7, 200 I mpl i ed t ot al f ai r val ue of Son ( $7, 200 / 90%) $8, 000 Book val ue of Son ( 5, 400) Excess f ai r val ue over book val ue on J anuar y 1 $2, 600 Al l ocat i on t o equi pment $1, 600 Remai nder i s Goodwi l l $1, 000 Addi t i onal annual depr eci at i on on equi pment ( $1, 600 / 8 year s) $ 200
Pan Corporation and Subsidiary Consol i dat ed Bal ance Sheet Wor ki ng Paper s at December 31, 2011 ( i n t housands)
Pan 90% Son Adj ust ment s and El i mi nat i ons Consol i dat ed Bal ance Sheet Cash $ 600 $ 400 $ 1, 000 Recei vabl es net 1, 200 800 2, 000 Di vi dends r ecei vabl e 180 b 180 I nvent or y 1, 400 1, 200 2, 600 Land 1, 200 1, 400 2, 600 Bui l di ngs net 4, 000 2, 000 6, 000 Equi pment net 3, 000 1, 600 a 1, 400 6, 000 I nvest ment i n Son 7, 560 a 7, 560 Goodwi l l a 1, 000 1, 000 Tot al asset s $19, 140 $7, 400 $21, 200 Account s payabl e $ 600 $1, 200 $ 1, 800 Di vi dends payabl e 1, 000 200 b 180 1, 020 Capi t al st ock 14, 000 4, 000 a 4, 000 14, 000 Ret ai ned ear ni ngs 3, 540 2, 000 a 2, 000 3, 540 Noncont r ol l i ng i nt er est a 840 840 Tot al equi t i es $19, 140 $7, 400 $21, 200
a To el i mi nat e r eci pr ocal i nvest ment and equi t y account s, ent er unamor t i zed excess al l ocat ed t o equi pment , r ecor d goodwi l l , and ent er noncont r ol l i ng i nt er est ( at f ai r val ue) . b To el i mi nat e r eci pr ocal di vi dends r ecei vabl e and di vi dends payabl e amount s.
Chapter 3 3-19
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P3-10
1 Purchase price of investment in Sun (in thousands)
Under l yi ng book val ue of i nvest ment i n Sun: Equi t y of Sun J anuar y 1, 2011 $440 Add: Excess i nvest ment f ai r val ue over book val ue: Goodwi l l at December 31, 2015 120 Fai r val ue of Sun J anuar y 1, 2011 $560
Pur chase pr i ce of 80%i nvest ment at f ai r val ue( $560 x 80%) $448
2 Suns stockholders equity on December 31, 2015 (in thousands)
20%noncont r ol l i ng i nt er est at f ai r val ue $124 20%goodwi l l ( 24) 20%noncont r ol l i ng i nt er est s equi t y at book val ue $100 Tot al equi t y = Noncont r ol l i ng i nt er est s equi t y $100 / 20%= $500
3 Pans investment in Sun account balance at December 31, 2015 ( i n t housands) Under l yi ng book val ue i n Sun December 31, 2015
( $500 80%) $400 Add: 80%of Goodwi l l December 31, 2015 ( 20%i s at t r i but abl e t o t he noncont r ol l i ng i nt er est )
96 I nvest ment i n Sun December 31, 2015 $496
Al t er nat i ve sol ut i on: I nvest ment cost J anuar y 1, 2011 $448 Add: 80%of Sun s i ncr ease si nce acqui si t i on
( $500 - $440) 80% 48 I nvest ment i n Sun December 31, 2015 $496
4 Pans capital stock and retained earnings December 31, 2015 ( i n t housands) Capi t al st ock $800 Ret ai ned ear ni ngs $ 60
Amount s ar e equal t o capi t al st ock and r et ai ned ear ni ngs shown i n t he consol i dat ed bal ance sheet .
3-20 An Introduction to Consolidated Financial Statements
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P3-11
Preliminary computations (in thousands) Cost of 70%i nvest ment i n St u $1, 400 I mpl i ed f ai r of St u( $1, 400 / 70%) $2, 000 Book val ue of St u ( 100%) 1, 600 Excess $ 400 Excess al l ocat ed: I nvent or i es $ 40 Pl ant asset s 160 Goodwi l l 200 Excess $ 400
I nvest ment bal ance at J anuar y 1, 2011 $1, 400 Shar e of St u s r et ai ned ear ni ngs i ncr ease ( $120 70%) 84 Less: Amor t i zat i on 70%of excess al l ocat ed t o i nvent or i es ( sol d i n 2011) ( 28) 70%of excess al l ocat ed t o pl ant asset s ( $160 / 8 year s) ( 14) I nvest ment bal ance at December 31, 2011 $1, 442
Noncont r ol l i ng i nt er est at December 31 30%of St u s book val ue at December 31 ( $1, 720 x 30%) $516 30%of Goodwi l l 60 30%Unamor t i zed excess f or pl ant asset s 30%x ( $160 - $20 amor t i zat i on) 42 Noncont r ol l i ng at December 31 ( f ai r val ue) $618
Pop Corporation and Subsidiary Consol i dat ed Bal ance Sheet Wor ki ng Paper s at December 31, 2011 ( i n t housands)
Pop 70% St u Adj ust ment s and El i mi nat i ons Consol i dat ed Bal ance Sheet Cash $ 120 $ 40 $ 160 Account s r ecei vabl e net 880 400 1, 280 Account s r ecei vabl e Pop 20 b 20 Di vi dends r ecei vabl e 14 c 14 I nvent or i es 1, 000 640 1, 640 Land 200 300 500 Pl ant asset s net 1, 400 700 a 140 2, 240 I nvest ment i n St u 1, 442 a 1, 442 Goodwi l l a 200 200 Asset s $5, 056 $2, 100 $6, 020
Account s payabl e $ 600 $ 160 $ 760 Account payabl e t o St u 20 b 20 Di vi dends payabl e 80 20 c 14 86 Long- t er mdebt 1, 200 200 1, 400 Capi t al st ock 2, 000 1, 000 a 1, 000 2, 000 Ret ai ned ear ni ngs 1, 156 720 a 720 1, 156 Noncont r ol l i ng i nt er est ( $2, 060, 000 30%)
a 618
618 Equi t i es $5, 056 $2, 100 $6, 020
Chapter 3 3-21
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P3-12
Preliminary computations (in thousands) 80%I nvest ment i n Samat cost J anuar y 1, 2011 $ 1, 520 I mpl i ed t ot al f ai r val ue of Sam( $1, 520 / 80%) $ 1, 900 Sambook val ue 1, 800 Excess f ai r val ue over book val ue r ecor ded as goodwi l l $ 100
Sam Di vi dends Sam Net I ncome 80%of Net I ncome 2011 $ 80 $160 $128 2012 100 200 160 2013 120 240 192 $300 $600 $480
1 Sam s di vi dends f or 2012 ( $80 / 80%) $ 100
2 Sam s net i ncome f or 2012 ( $160 / 80%) $ 200
3 Goodwi l l December 31, 2012 $ 100
4 Noncontrolling interest share of income 2013
Sam s i ncome f or 2013 ( $96 di vi dends r ecei ved/ 80%) 2
$ 240 Noncont r ol l i ng i nt er est per cent age 20% Noncont r ol l i ng i nt er est shar e $ 48
5 Noncontrolling interest December 31, 2013 Equi t y of SamJ anuar y 1, 2011 $1, 800 Add: I ncome f or 2011, 2012 and 2013 600 Deduct : Di vi dends f or 2011, 2012 and 2013 ( 300) Equi t y book val ue of SamDecember 31, 2013 2, 100 Goodwi l l 100 Equi t y f ai r val ue of SamDecember 31, 2013 $2, 200 Noncont r ol l i ng i nt er est per cent age 20% Noncont r ol l i ng i nt er est December 31, 2013 $ 440
6 Controlling share of consolidated net income for 2013 Pen s separ at e i ncome $ 560 Add: I ncome f r omSam 192 Cont r ol l i ng shar e of consol i dat ed net i ncome $ 752
Pen s net i ncome $560 Sam s net i ncome 240 Consol i dat ed net i ncome $800 Less: Noncont r ol l i ng i nt er est shar e ( $240 x 20%) 48 Cont r ol l i ng i nt er est shar e $752