Find more slides, ebooks, solution manual and testbank on www.downloadslide.com CHAPTER CONSOLIDATED FINANCIAL STATEMENTS AND OUTSIDE OWNERSHIP Chapter 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 Valuation of subsidiary assets and liabilities poses a problem when a noncontrolling interest is present follows the acquisition method (Economic Unit Concept) SFAS 141R and SFAS 160 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 Valuation 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 The noncontrolling interest balance is reported as a component of stockholders' equity 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 Only four noncontrolling interest figures are determined for reporting purposes Beginning of year balance Interest in subsidiary’s current income Dividends paid during the period End of year balance C Noncontrolling interest balances are accumulated in a separate column in the consolidation worksheet The beginning of year figure is recorded on the worksheet as a component of Entries S and A 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 Dividends paid to these outside owners are reflected by extending the subsidiary's Dividends Paid balance (after eliminating intercompany transfers) into the noncontrolling interest column as a reduction McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 4-1 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com The end of year noncontrolling interest total is the summation of the three items above and is reported (in this book) between consolidated liabilities and 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) Vl 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 must be reduced based on 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 Learning Objectives Upon completion of Chapter Four, "Consolidated Financial Statements and Outside Ownership," students should be able to fulfill each of the following learning objectives: Realize that complete ownership is not a prerequisite for the formation of a business combination Understand the meaning of the term "noncontrolling interest.” Explain the rationale underlying the acquisition method for accounting for the noncontrolling interest Identify appropriate balance sheet placements for the components of the noncontrolling interest in consolidated financial statements Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and be able to enter each balance on a consolidation worksheet McGraw-Hill/Irwin 4-2 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Carry out a consolidation when a step acquisition has taken place Record the sale of a subsidiary (or a portion of its shares) when the parent has been applying either the Initial value method, the equity method, or the partial equity method Select an appropriate method by which to account for any shares remaining after the sale of a portion of an investment in a subsidiary company Answers to Questions "Noncontrolling interest" refers to an equity interest that is held in a member of a business combination by an unrelated (outside) party a Acquisition method = $220,000 (fair value) b Purchase method = $208,000 (all of the book value plus 80 percent of the $60,000 difference between fair value and book value) 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 In practice, noncontrolling interest figures will appear in various locations within consolidated financial statements The end of year balance can be found in the liability section, in the stockholders' equity section, or between these two The noncontrolling interest's share of net income can be shown as a reduction on either the income statement or the statement of retained earnings Based on current practice, this textbook reports the ending balance between consolidated liabilities and stockholders' equity with the income allocation shown as a reduction on the income statement The ending noncontrolling interest can be determined on a consolidation worksheet by adding the components found in the noncontrolling interest column: the beginning balance plus allocation of current year net income less dividends paid to these outside owners The ending balance can also be determined (at this point in the exploration of consolidated financial statements) by multiplying the outside ownership percentage by the subsidiary's ending book value In subsequent chapters, this calculation must be altered because of various adjustments made within the consolidation process Allsports should remove the pre-acquisition revenues and expenses from the consolidated totals These amounts have been earned (incurred) prior to ownership by Allsports and therefore should not be reported as earnings for the current parent company owners In previous years, Tree has appropriately utilized the market-value method in accounting for its investment in Limb Now, following a second acquisition, consolidation has become applicable These two methods are not considered to be comparable Therefore, at the point in time that Tree begins to produce consolidated statements, all previous financial reports must be restated as if the equity method had been applied since the date of the first acquisition This handling presents the reader of the financial statements with figures that are more comparable from year to year McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 4-3 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com When a company sells a portion of an investment, a gain or loss is recognized based on the difference between the proceeds received and the book value of the investment (on the portion sold) The correct book value is determined based upon the consistent 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 Unless control is surrendered, the acquisition method views the sale of subsidiary's stock as a treasury stock transaction Thus, no gain or loss can be recognized 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 market-value method then is appropriate McGraw-Hill/Irwin 4-4 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Answers to Problems D The acquisition method consolidates assets at fair value at acquisition date regardless of the parent’s percentage ownership D In consolidating the subsidiary's figures, all intercompany 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 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, 2009 Amortization for years (10 year life) Patent reported amount December 31, 2010 A Plaster building Turner building acquisition-date fair value $300,000 Amortization for years (10-year life) (90,000) Consolidated buildings $45,000 (9,000) $36,000 $510,000 210,000 $720,000 -ORPlaster building $510,000 Turner building 12/31/11 $182,000 Excess acquisition-date fair value allocation 40,000 Excess amortization for years (10-year life) (12,000) 210,000 Consolidated buildings $720,000 C Hygille expense $621,000 Nuyt expenses 714,000 Excess fair value amortization (70,000 ÷ 10 yrs) 7,000 Consolidated expenses $1,342,000 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 C B McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 4-5 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com McGraw-Hill/Irwin 4-6 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com A Amie, Inc Fair value at January 1, 2007: 30% previously owned fair value (30,000 shares × $5) 60% new shares acquired (60,000 shares × $6) 10% NCI fair value (10,000 shares × $5) Acquisition-date fair value Net assets' fair value Goodwill $150,000 360,000 50,000 $560,000 500,000 $60,000 11 A Fair value of noncontrolling interest on April 30% of net income for months (ắ year ì $240,000 ì 30%) Noncontrolling interest December 31 $165,000 54,000 $219,000 10 C 12 B Combined revenues $1,300,000 Combined expenses (800,000) Trademark amortization (6,000) Patented technology amortization (8,000) Consolidated net income $486,000 13 C Subsidiary income ($100,000 – $14,000 excess amortizations) Noncontrolling interest percentage Noncontrolling interest in subsidiary income $86,000 40% $34,400 Fair value of noncontrolling interest at acquisition date 40% change in Scott book value since acquisition Excess fair value amortization ($14,000 × 40%) 40% current year income Noncontrolling interest at end of year $180,000 52,000 (5,600) 34,400 $260,800 14 A Michael trademark balance Scott trademark balance Excess fair value Two years amortization (10-year life) Consolidated trademarks $260,000 200,000 60,000 (12,000) $508,000 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 4-7 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 15 A Acquisition-date fair value ($60,000 ÷ 80%) Strand's book value Fair value in excess of book value $75,000 (50,000) $25,000 Excess assigned to inventory (60%) $15,000 Excess assigned to goodwill (40%) $10,000 Park current assets Strand current assets Excess inventory fair value Consolidated current assets $70,000 20,000 15,000 $105,000 16 D Park noncurrent assets Strand noncurrent assets Excess fair value to goodwill Consolidated noncurrent assets $90,000 40,000 10,000 $140,000 17 B Add the two book values and include 10% (the $6,000 current portion) of the loan taken out by Park to acquire Strand 18 B Add the two book values and include 90% (the $54,000 noncurrent portion) of the loan taken out by Polk to acquire Strand 19 C Park stockholders' equity Noncontrolling interest at fair value (20% × $75,000) Total stockholders' equity 20 $80,000 15,000 $95,000 (15 minutes) (Compute consolidated income and noncontrolling interests) Harrison income Starr income Excess fair value amortization Consolidated net income 2009 $220,000 70,000 (8,000) $282,000 2010 $260,000 90,000 (8,000) $342,000 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, 2009 (above) 2009 income to NCI ([$70,000 – $8,000] × 10%) 2009 dividends to NCI Noncontrolling interest reported value December 31, 2009 2010 income to NCI ([$90,000 – $8,000] × 10%) 2010 dividends to NCI Noncontrolling interest reported value December 31, 2010 McGraw-Hill/Irwin 4-8 $75,000 6,200 (3,000) 78,200 8,200 (3,000) $83,400 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 4-9 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 21 (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 1/1/09 $3,100,000 b Each identifiable asset acquired and liability assumed in a business combination should initially be 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 1/1/09 $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 McGraw-Hill/Irwin 4-10 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 35 (continued) d Consolidated Worksheet Truman Atlanta Revenues (670,000) (400,000) Operating Expenses Income of subsidiary Separate company net income Consolidated net income NCI in Atlanta's income Controlling interest in CNI 402,000 (35,000) (303,000) 280,000 Retained earnings, 1/1 Net income (above) Dividends paid (823,000) (303,000) 145,000 (500,000) (120,000) 80,000 Retained earnings, 12/31 (981,000) (540,000) Current assets Investment in Atlanta 481,000 727,000 390,000 Land Buildings 388,000 701,000 200,000 630,000 (S)140,000 552,000 (S) 500,000 (D) 28,000 2,297,000 1,220,000 Liabilities (816,000) (360,000) (95,000) (405,000) (981,000) (300,000) (20,000) (540,000) McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 12,000 145,000 (981,000) 871,000 (S)588,000 (I) 35,000 (A)132,00 588,000 1,331,000 (E) 10,000 90,000 70,000 2,950,000 (1,176,000) (S) 300,000 (S) 20,000 (95,000) (405,000) (981,000) (A) 38,000 (S)252,000 (1,220,000 ) (318,000) 15,000 (303,000) (823,000) (303,000) (S) 40,000 (D) 28,000 (A) 100,000 (A) 70,000 (2,297,000) Cons (870,000) (15,000) Goodwill Total assets Noncontrolling interest, 7/1 Noncontrolling interest, 12/31 Total liabilities and stockholders' equity (S)200,000 (E) 10,000 (I) 35,000 NCI (120,000) Patent Common stock Additional paid-in capital Retained earnings, 12/31 Adjustments & Eliminations 1,263,000 1,263,000 (290,000 ) 293,000 (293,000) (2,950,000) © The McGraw-Hill Companies, Inc., 2009 4-35 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 36 (60 minutes) (Consolidated statements for a step acquisition) a Fair value of Sysinger 1/1/10 (given) Book value of Sysinger 1/1/10 (CS + APIC + RE) Excess fair value over book value To customer contract (4 year life) To goodwill b Equity in earnings of Sysinger 2010 income (150,000 × 95%) Amortization (100,000 × 95%) Equity in earnings of Sysinger $142,500 (95,000) $47,500 Revaluation of 15% block to fair value Consideration transferred 2009 Income (100,000 × 15%) 2009 dividends (30,000 × 15%) Book value at 1/1/10 Fair value at 1/1/10 Gain on revaluation $184,500 15,000 (4,500) 195,000 262,500 $67,500 Investment account balance 12/31/10 Fair value at 1/1/10 (15% block) Consideration transferred 1/1/10 (80% block) Equity earnings 2010 2010 income (95% × 150,000) Customer contract amortization Dividends 2010 (40,000 × 95%) Investment in Sysinger 12/31/10 McGraw-Hill/Irwin 4-36 $1,750,000 1,300,000 450,000 400,000 $50,000 $262,500 1,400,000 142,500 (95,000) 47,500 (38,000) $1,672,000 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 36 (Continued) c Accounts Revenues Operating expenses Equity earnings of Sysinger Gain on revaluation Separate company net income Consolidated net income NCI in Sysinger’s income Allan’s share of CNI Allan and Sysinger Consolidation Worksheet For Year Ending December 31, 2010 Allan Sysinger Consolidation Entries Company Company Debit Credit (931,000) (380,000) 615,000 230,000 (E)100,000 (47,500) -0(I) 47,500 (67,500) -0(431,000) (150,000) (2,500) Retained earnings, 1/1 Net income Dividends paid Retained earnings 12/31 (965,000) (431,000) 140,000 (1,256,000) (600,000) (150,000) 40,000 (710,000) Current assets Investment in Sysinger 288,000 1,672,000 540,000 -0- 826,000 850,000 -0- 590,000 370,000 -0-01,500,000 Property, plant, and equipment Patented technology Customer contract Goodwill Total assets 3,636,000 Liabilities Common stock Additional paid-in capital Retained earnings 12/31 NCI in Sysinger, 1/1 (1,300,000) (900,000) (180,000) (1,256,000) -0- (90,000) (500,000) (200,000) (710,000) -0- NCI in Sysinger, 12/31 Total liab and stockholders' equity -0(3,636,000) -0(1,500,000) McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e Noncontrolling Consolidated Interest Totals (1,311,000) 945,000 -0(67,500) (S) 600,000 (D) (D) 38,000 (A) 400,000 (A) 50,000 38,000 2,000 (433,500) 2,500 (431,000) (965,000) (431,000) 140,000 (1,256,000) 828,000 -0- (S)1,235,000 (I) 47,500 (A) 427,500 1,416,000 1,220,000 300,000 50,000 3,814,000 (E) 100,000 (1,390,000) (900,000) (180,000)) (1,256,000) (S) 500,000 (S) 200,000 (S) 65,000 (A) 22,500 1,935,500 © The McGraw-Hill Companies, Inc., 2009 4-37 1,935,500 (87,500) (88,000) (88,000) (3,814,000) Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 37 (60 minutes) (Step acquisition—control previously acquired.) a According to the acquisition method, the valuation basis for a subsidiary is established on the date control is obtained, in this case January 1, 2009 Subsequent acquisitions are valued consistent with this initial value after adjusting the investment for subsidiary income and other changes Because subsequent acquisitions are considered as transactions in the parent’s own equity, no gains or losses are recorded Differences in cash paid and the underlying value are recorded as adjustments to APIC Fair value of Keane Company 1/1/09 ($573,000 ÷ 60%) Keane income 2009 Excess fair value amortization for copyright Keane dividends 2009 Initial fair value adjusted to 1/1/10 Percent acquired in step acquisition Value assigned to 30% acquisition Cash paid for the 30% acquisition Credit to APIC from 30% step acquisition $955,000 150,000 (20,000)* (80,000) $1,005,000 30% 301,500 300,000 $1,500 *Fair value of Keane Company 1/1/09 ($573,000 ÷ 60%) Book value of Keane Company 1/1/09 (given) Excess fair value over book value To copyright (6 year life) To goodwill $955,000 810,000 145,000 120,000 $25,000 Entry to record 30% additional investment in Keane: 1/1/10 Investment in Keane Cash APIC from step acquisition 301,500 b Investment in Keane Company 1/1/09 2009 Equity earnings [60% × (150,000 – 20,000)] 2009 Dividends received (60% × $80,000) Additional acquisition of 30% interest 2010 Equity earnings [90% × (180,000 – 20,000)] 2010 Dividends received (90% × $60,000) Investment in Keane Company 12/31/10 McGraw-Hill/Irwin 4-38 300,000 1,500 $573,000 78,000 (48,000) 301,500 144,000 (54,000) $994,500 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 37 (continued) part c BRETZ, INC AND KEANE COMPANY Consolidation Worksheet Year Ending December 31, 2010 Accounts Revenues Operating expenses Equity in Keane’s income Separate company net income Consolidated net income NCI in Keane’s income Bretz’s share of CNI Bretz, Inc (402,000) 200,000 (144,000) (346,000) Retained earnings, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 (797,000) (346,000) 143,000 (1,000,000) Current assets Investment in Keane Company Trademarks Copyrights Equipment (net) Goodwill Total assets Liabilities Common stock Additional paid-in capital APIC-step acquisition Retained earnings,12/31 Non-controlling interest 12/31 Total liabilities and equities McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e Keane Co (300,000) 120,000 Consolidation Entries Noncontrolling Consolidated Debit Credit Interest Totals (702,000) (E) 20,000 340,000 (I) 144,000 (180,000 (16,000) 224,000 994,500 (500,000) (180,000) 60,000 (620,000) (S) 500,000 (D) 54,000 6,000 190,000 106,000 210,000 380,000 600,000 300,000 110,000 1,914,500 1,200,000 (D)54,000 (S) 792,000 (A) 112,500 (I) 144,000 (A)100,000 (E) 20,000 (1,914,500) (200,000) (300,000) (80,000) 706,000 590,000 490,000 25,000 2,225,000 (653,000) (400,000) (60,000) (1,500) (1,000,000) (S)300,000 (S) 80,000 (620,000) (1,200,000) 1,223,000 (797,000) (346,000) 143,000 (1,000,000) 414,000 (A) 25,000 (453,000) (400,000) (60,000) (1,500) (1,000,000) (362,000) 16,000 (346,000) (A) 12,500 (S) 88,000 1,223,000 © The McGraw-Hill Companies, Inc., 2009 4-39 (100,500) 110,500 (110,500) (2,225,000) Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 38 (30 Minutes) (Determine consolidated balances when parent uses equity method Includes sale of a portion of the investment) Purchase Price Allocation and Excess Amortizations Purchase price $250,000 Book value acquired ($230,000 × 70%) 161,000 Price in excess of book value $89,000 Annual Excess Allocation based on fair value Life Amortizations Land ($10,000 × 70%) $7,000 Equipment ($68,000 × 70%) 47,600 14 yrs $3,400 Liabilities ($20,000 × 70%) 14,000 10 yrs 1,400 68,600 Goodwill $20,400 indefinite -0Total $4,800 The parent uses the equity method: Investment income of $44,200 = $49,000 (70% × $70,000) less $4,800 amortization expense Revenues Operating expenses Investment income Noncontrolling int(E)erest in Creedmoor income Bon Air (694,800) 630,000 (44,200) Creedmoor (250,000) 180,000 -0- (109,000) (70,000) Retained earnings, 1/1/09 Net income Dividends paid (760,000) (109,000) 68,000 (260,000) (70,000) 10,000 Retained earnings, 12/31/09 (801,000) (320,000) 72,000 321,800 120,000 -0- Land Buildings (net) Equipment (net) Goodwill 241,000 289,000 165,200 -0- 50,000 200,000 40,000 -0- Total assets 1,089,000 410,000 Liabilities Common stock Additional paid-in capital Noncontrolling interest 1/1/09 Noncontrolling interest 12/31/09 (180,000) (50,000) (58,000) (50,000) (40,000) -0- Retained earnings, 12/31/09 (801,000) McGraw-Hill/Irwin 4-40 NCI 21,000 (109,000) (S)260,000 (D) 7,000 3,000 (760,000) (109,000) 68,000 (801,000) 192,000 (D) 7,000 (S)210,000 (I) 44,200 (A)74,600 -0- (A) 7,000 (A)37,400 (A)20,400 298,000 489,000 239,200 20,400 3,400 1,238,600 (A) 9,800 (S) 40,000 (E) 1,400 (S)90,000 (221,600) (50,000) (58,000) (90,000) 108,000 (320,000) Consolidated (944,800) 814,800 -0- (E) 4,800 (I) 44,200 (21,000) Net income Current assets Investment in Creedmoor Adjustments & Eliminations (108,000) (801,000) © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Total liabilities and equities (1,089,000) McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e (410,000) 430,600 430,600 (1,238,600) © The McGraw-Hill Companies, Inc., 2009 4-41 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 39 (50 Minutes) (A variety of questions and consolidated balances for combination where parent applies equity method) a Equity accrual (60% × $70,000) Excess amortizations (below) Equity income (parent uses equity method) $42,000 (5,600) $36,400 Purchase Price Allocation and Excess Amortizations Purchase price $400,000 Book value acquired (60% of $470,000 [assets minus liabilities]) 282,000 Price in excess of book value $118,000 Excess price assigned to specific Annual Excess accounts based on fair value Life Amortizations Equipment (overvalued) ([$30,000] × 60%) (18,000) 10 yrs $(1,800) Buildings ($155,000 × 60%) 93,000 15 yrs 6,200 Bonds payable ($20,000 × 60%) 12,000 10 yrs 1,200 Goodwill $31,000 indefinite -0Total $5,600 b No adjustment to the parent's retained earnings is needed because the company is applying the equity method c $5,600—see a d $28,000—40% of $70,000 reported income figure e Watson Corporation Consolidated Income Statement For the Year Ended December 31, 2009 Revenues Operating expenses Combined entity net income Noncontrolling interest in Houston income Consolidated net income $920,000 695,600 224,400 28,000 $196,400 Remaining f Allocations (see a) Equipment Buildings Bonds payable Goodwill McGraw-Hill/Irwin 4-42 (18,000) 93,000 12,000 31,000 Excess Amortizations for years (7,200) 24,800 4,800 -0- Allocations 12/31/09 (10,800) 68,200 7,200 31,000 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 39 (continued) g Noncontrolling interest, 1/1/08 (40% of book value of $630,000) $252,000 Noncontrolling interest in subsidiary's income (see e) 28,000 Noncontrolling interest in subsidiary's dividends (16,000) (40% × $40,000) Noncontrolling interest in subsidiary, 12/31/09 $264,000 h Watson Corporation Consolidated Balance Sheet December 31, 2009 Current assets Equipment (net) Buildings (net) Goodwill Total assets 40 $475,000 Current liabilities 909,200 1,001,200 31,000 $2,416,400 Bonds Payable Noncontrolling interest Common stock Retained earnings Total liabilities and equity $560,000 462,800 264,000 310,000 819,600 $2,416,400 (40 Minutes) (Determine consolidated balances, parent has applied the cost method) Acquisition price $1,400,000 Book value acquired (see Schedule 1) ($1,120,000 × 80%) 896,000 Cost in excess of book value $504,000 Excess cost allocated to buildings based on fair value ($80,000 × 80%) Unpatented technology ($550,000 × 80%) Total Annual Excess Life Amortizations 64,000 10 years $6,400 440,000 10 years 44,000 $ -0$50,400 Schedule 1—Book Value of Morning (January 1, 2006) Book value, January 1, 2009 (stockholders' equity accounts) 2008 Increase in book value 2007 Increase in book value 2006 Increase in book value Book value, January 1, 2006 $1,500,000 $200,000 100,000 80,000 380,000 $1,120,000 Revenues = $1,384,000 (add the two book values) Expenses = $550,400 (add the two book values and then include $50,400 excess amortization expenses for the year as computed above) McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 4-43 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Noncontrolling interest in subsidiary's net income = $80,000 (20% of subsidiary's reported income of $400,000) 40 (continued) Net Income = $753,600 (consolidated revenues less both consolidated expenses and the noncontrolling interest's share of net income) Retained earnings, 1/1/09 = $1,952,800 (the cost method is in use because the original purchase price is still in the Investment account Thus, the $380,000 increase in book value for the three previous years [income of $680,000 less dividends paid of $300,000] multiplied by the 80 percent ownership gives an equity accrual of $304,000 Excess amortization for these same three years totals $151,200 ($50,400× 3) Therefore, the parent's retained earnings must be increased by the net amount [$152,800 or $304,000 – $151,200]) Dividends paid = $380,000 (the parent company balance only) Retained earnings, 12/31/09 = $2,326,400 (beginning balance plus net income less dividends paid) Cash = $500,000 (add book values) Receivables = $1,000,000 (add book values after removing $100,000 intercompany balance) Inventory = $900,000 (add book values) Investment in Morning = -0- (balance is removed so that subsidiary's assets and liabilities can be included in the consolidated figures) Land = $1,300,000 (add book values) Buildings = $1,038,400 (add book values plus $64,000 allocation less four years of $6,400 annual excess amortization) Unpatented technology = $264,000 ($440,000 original allocation less four years of $44,000 annual amortization) Total assets = $5,002,400 Liabilities = $720,000 (add book values after removing $100,000 intercompany balance) Noncontrolling Interest in subsidiary, 12/31/09 = $356,000 (20% of subsidiary's beginning book value [$1,500,000] plus interest in subsidiary income [$80,000 as computed above] less 20% of subsidiary's dividends [$120,000]) Common stock = $1,000,000 (parent company balance) Additional paid-in capital = $600,000 (parent company balance) Retained earnings, 12/31/09 = $2,326,400 (computed above) McGraw-Hill/Irwin 4-44 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Total liabilities and equities = $5,002,400 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 4-45 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 40 (continued) Consolidated figures can also be determined through a worksheet as follows: Consolidation Entries Entry *C Investment in Morning Retained Earnings, 1/1/09 Good 152,800 152,800 (To recognize Good's share of Morning's increase in book value during the 2006-2008 period as well as the amortization expense for that same period Because the original $1,400,000 is still the balance in the investment in Morning account, the parent is applying the cost method Thus, 80% of Morning's $380,000 increase in book value [$304,000] must be accrued Excess amortizations of $151,200 [$50,400 per year for these three years] is also recorded leaving a net adjustment of $152,800.) Entry S Common Stock (Morning) 460,000 Additional Paid-in Capital (Morning) 40,000 Retained Earnings, 1/1/09 (Morning) 1,000,000 Investment in Morning (80%) Noncontrolling Interest in Morning (20%) 1,200,000 300,000 (To eliminate subsidiary's stockholders' equity accounts while recording the January 1, 2009 balance of the noncontrolling interest.) Entry A Buildings Unpatented technology Investment in Morning 44,800 308,000 352,800 (To recognize unamortized amounts paid in connection with acquisition of Morning Original allocations have undergone three previous years of excess amortizations.) Entry I Dividend Income Dividends Paid 96,000 96,000 (To eliminate intercompany income accounts.) Entry E Operating Expenses Buildings Unpatented technology 50,400 6,400 44,000 (To recognize amortization expenses for current year.) Entry P Liabilities Receivables 100,000 100,000 (To eliminate intercompany debt.) McGraw-Hill/Irwin 4-46 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 40 (continued) Accounts Revenues Operating Expenses Dividend Income NCI in Morning's income (20% × 400,000) Net Income Retained earnings, 1/1 Good Morning Net income (above) Dividends paid Retained earnings, 12/31 Cash Receivables Inventory Investment in Morning Land Buildings Unpatented Technology Total assets Liabilities Common stock Additional paid-in capital Retained earnings, 12/31 (above) NCI in Morning, 1/1 NCI in Morning, 12/31 Total liabilities and stockholders' equity McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e GOOD AND MORNING Consolidation Worksheet For Year Ending December 31, 2009 Good (884,000) 400,000 (96,000) -0(580,000) (1,800,000) (580,000) 380,000 (2,000,000) 300,000 700,000 400,000 1,400,000 Morning (500,000) 100,000 (E) -0- (I) -0(400,000) Consolidation Entries Debit Credit Noncontrolling Consolidated Interest Totals 50,400 96,000 (*C) 152,800 (1,000,000) (S)1,000,000 (400,000) 120,000 (I) 96,000 (1,280,000) (80,000) 24,000 (1,384,000) 550,400 -080,000 (753,600) (1,952,800) -0(753,600) 380,000 (2,326,400) 500,000 1,000,000 900,000 700,000 300,000 -03,800,000 200,000 400,000 (P) 100,000 500,000 -0- (*C) 152,800 (S)1,200,000 (A) 352,800 600,000 700,000 (A) 44,800 (E) 6,400 -0- (A) 308,000 (E) 44,000 2,400,000 (200,000) (1,000,000) (600,000) (2,000,000) -0-0(3,800,000) (620,000) (P) 100,000 (460,000) (S) 460,000 (40,000) (S) 40,000 (1,280,000) -0(S) 300,000 -0(2,400,000) (720,000) (1,000,000) (600,000) (2,326,400) © The McGraw-Hill Companies, Inc., 2009 4-47 -01,300,000 1,038,400 264,000 5,002,400 (300,000) (356,000) (356,000) (5,002,400) Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Accounting Theory Research Case: Noncontrolling Interest In deliberations prior to the issuance of SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements,” the FASB consider three alternatives for displaying the noncontrolling interest in the consolidated statement of financial position What were these three alternatives? As a liability As equity In the “mezzanine” area between liabilities and owners’ equity What criteria did the FASB use to evaluate the desirability of each alternative? The FASB evaluated whether the classifications conformed to current definitions of financial statement elements (assets, liabilities, or equity) as articulated in FASB Concept Statement No In what specific ways did FASB Concept Statement affect the FASB’s evaluation of these alternatives? From SFAS 160 paragraphs 32-34 If it required that the noncontrolling interest be reported in the mezzanine, the Board would have had to create a new element—noncontrolling interest in subsidiaries—specifically for consolidated financial statements The Board concluded that no compelling reason exists to create a new element specifically for consolidated financial statements to report the interests in a subsidiary held by owners other than the parent The Board believes that using the existing elements of financial statements along with appropriate labeling and disclosure provides financial information in the consolidated financial statements that is representationally faithful, understandable, and relevant to the entity’s owners, creditors, and other resource providers The Board concluded that a noncontrolling interest in a subsidiary does not meet the definition of a liability in the Board’s conceptual framework Paragraph 35 of Concepts Statement defines liabilities as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events” The Board concluded that a noncontrolling interest represents the residual interest in the net assets of a subsidiary within the consolidated group held by owners other than the parent The noncontrolling interest, therefore, meets the definition of equity in Concepts Statement Paragraph 49 of Concepts Statement defines equity (or net assets) as “the residual interest in the assets of an entity that remains after deducting its liabilities.” McGraw-Hill/Irwin 4-48 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Research and Communication Case Memorandum To: CFO, Allied Telecom Corporation Re: Surefire Cell Corporation Noncontrolling Interest Valuation You are correct in observing that the newly created 10 percent noncontrolling interest in your recent acquisition, Surefire Cell, must be valued for presentation in your consolidated financial statements The acquisition-date fair value is the required valuation basis for the noncontrolling interest—usually provided by market trading data However, because the 10 percent shares not appear to be actively traded, a valuation alternative will need to be selected According to SFAS 157, “Fair Value Measurements,” three main techniques are available for the noncontrolling interest valuation: the market approach, the income approach, and the cost approach The market approach involves obtaining fair values for similar assets or businesses that are comparable to Surefire Cell This valuation technique is appropriate when such comparable firms with observable market values are available The income approach values a firm by discounting the best available measures of future benefits, typically cash flows or earnings Often the income approach requires both supportable assumptions and a sufficient number of inputs to create an accurate forecasting model The cost approach looks to the replacement cost of the firm’s net assets (in current condition) to value the firm This approach requires ready market prices for the firm’s assets and does not rely on estimates of future cash flows or earnings As such it is often the least accurate valuation method McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 4-49 ... Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The... $351,000 C B McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 4-5 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com... (12,000) $508,000 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 4-7 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com