Solution manual advanced accounting 4e jeter ch05

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER ANSWERS TO QUESTIONS a The ―difference between implied and book value‖ is the total difference between the value of the subsidiary in total, as implied by the acquisition cost of an investment in that subsidiary, and the book value of the subsidiary’s equity on the date of the acquisition (note that equity is the same as net assets) b The excess of implied value over fair value, or ―Goodwill,‖ is the excess of the value of the subsidiary, as implied by the amount paid by the parent, over the fair value of the identifiable net assets of that subsidiary on the date of acquisition c The ―excess of fair value over implied value‖ is the excess of the fair value of the identifiable net assets of a subsidiary (all assets other than goodwill minus liabilities) on the acquisition date over the value of the subsidiary as implied by the amount paid by the parent This may be referred to as a bargain acquisition d An excess of book value over fair value describes a situation where some (or all) of the subsidiary’s assets need to be written down rather than up (or liabilities need to be increased, or both) It does not, however, tell us whether the acquisition results in the recording of goodwill or an ordinary gain (in a bargain acquisition) That determination depends on the comparison of fair value of identifiable net assets and the implied value (purchase price divided by percentage acquired), referred to in parts (b) and (c) above The ―difference between implied and book value‖ and the ―Goodwill‖ are a part of the cost of an investment and are included in the amount recorded in the investment account Although not recorded separately in the records of the parent company, these amounts must be known in order to prepare the consolidated financial statements In allocating the difference between implied and book value to specific assets of a less than wholly owned subsidiary, the difference between the fair value and book value of each asset on the date of acquisition is reflected by adjusting each asset upward or downward to fair value (marked to market) in its entirety, regardless of the percentage acquired by the parent company If the parent’s share of the fair value exceeds the cost, then the entire fair value similarly exceeds the implied value of the subsidiary This constitutes a bargain acquisition, and under proposed GAAP (ED No 1204-001), the excess is recorded as an ordinary gain in the period of the acquisition Past GAAP (APB Opinion No 16) differed in that it provided that the excess of fair value over cost should be allocated to reduce proportionally the values assigned to noncurrent assets with certain exceptions If such noncurrent assets were reduced to zero (or to the noncontrolling percentage, if there was one) by this allocation, any remaining excess was recorded as an extraordinary gain The recording of an ordinary (or extraordinary gain) on an acquisition flies in the face of the rules of revenue recognition because no earnings process has been completed On the other hand, a decision to record certain assets below their fair values is arbitrary, and also rather confusing (how far should they be reduced?) The reason that bargain acquisitions are unlikely to occur very often is because they suggest that the usual assumptions of an arm’s length transaction have been 5–1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com violated In most accounting scenarios, we assume that both parties are negotiating for a reasonable exchange price and that price, once established, represents fair value both for the item given up and the item received In the case of a business combination, there is not a single item being exchanged but rather a number of assets and liabilities Nonetheless, the assumption is still that both parties are negotiating for a fair valuation If one party is able to obtain a bargain, it most likely indicates that the other party was being influenced by non-quantitative considerations, such as a wish to retire quickly, health concerns, etc If P Company acquires a 100 percent interest in S Company the land will be included in the consolidated financial statements at its fair value on the date of acquisition of $1,500,000 If P Company acquires an 80 percent interest in S Company, the land will still be included in the consolidated financial statements at $1,500,000, and the noncontrolling interest would be charged with its share of the fair value adjustment (d) Once the determination is made that none of the assets are over-valued (and none of the liabilities under-valued), the bargain is reflected as an ordinary gain of $10,000 in the year of acquisition (b) The ―excess of fair value over implied value‖ is reported as an ordinary gain under the FASB exposure draft on business combinations (ED 1204-001) Under the entity theory, the noncontrolling interest shares in the adjustment of consolidated net assets for the difference between implied and book value The noncontrolling interest is also affected by the amortization or depreciation in the consolidated workpapers of the difference between implied and book value Assuming that implied value exceeds book value, the effect will generally be to lower the noncontrolling interest in reported earnings because of its (the noncontrolling interest’s) share of the excess depreciation and amortization charges, additional cost of goods sold, impairment of goodwill, etc ANSWERS TO BUSINESS ETHICS CASE This case brings an interesting question to the table for discussion As the article by Mano points out, each individual must decide for himself or herself how to respond to the gray issues that are bound to arise in life Ultimately life is more about being at peace with ourselves and leaving a legacy of a life well-lived and values taught through our example to the generations that we leave behind us than it is about accumulating wealth (that we cannot take to the grave) The individual, had he acted on the advice, may have been guilty of insider trading as the information available to him was, apparently, not available publicly Although there is no clear-cut definition of what constitutes insider trading, the gray area implies uncertainty; and this uncertainty can in many cases result in decisions that have severe implications both professionally and personally 5–2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO EXERCISES Exercise 5-1 Part A Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value $540,000 Less: Book value of equity acquired: Common stock 340,000 Retained earnings 119,000 Total book value 459,000 Difference between implied and book value 81,000 Marketable Securities ($45,000 – $20,000) (21,250) Equipment ($140,000 – $120,000) (17,000) Balance 42,750 Goodwill (42,750) Balance -0- NonControlling Share 95,294 60,000 21,000 81,000 14,294 (3,750) (3,000) 7,544 (7,544) -0- Entire Value 635,294 * 400,000 140,000 540,000 95,294 (25,000) (20,000) 50,294 (50,294) -0- *$540,000/.85 Part B Marketable securities Equipment (net) Goodwill $ 45,000 140,000 50,294 Exercise 5-2 Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Equipment ($705,000 – $525,000) Balance $585,000 450,000 135,000 (135,000) -0- NonEntire Controlling Value Share 195,000 780,000 * 150,000 600,000 45,000 180,000 (45,000) (180,000) -0-0- *$585,000/.75 Part A Equipment Difference between Implied and Book Value Depreciation Expense ($180,000/10) Accumulated Depreciation 180,000 180,000 18,000 18,000 5–3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 5-2 (continued) Part B The asset has a value of $180,000 with 10 years of a 15 year life (i.e 2/3) Therefore, the implied gross value of the asset is $270,000 (or $180,000 2/3) Equipment ($180,000 2/3) Accumulated Depreciation (1/3 $270,000) Difference between Implied and Book Value 270,000 90,000 180,000 Depreciation Expense ($180,000/10) Accumulated Depreciation 18,000 18,000 Exercise 5-3 Part A Investment in Saddler Corporation Cash 525,000 525,000 Part B Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value $525,000 Less: Book value of equity acquired 480,000 Difference between implied and book value 45,000 Inventory (16,000) Marketable Securities (20,000) Plant and Equipment (24,000) Balance (excess of FV over implied value) (15,000) Gain 15,000 Increase Noncontrolling interest to fair value of assets Total allocated bargain Balance -0*$525,000/.80 5–4 NonControlling Share 131,250 120,000 11,250 (4,000) (5,000) (6,000) (3,750) Entire Value 656,250 * 600,000 56,250 (20,000) (25,000) (30,000) (18,750) 3,750 -0- 18,750 -0- To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 5-4 Part A Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value $260,000 Less: Book value of equity acquired 270,000 Difference between implied and book value (10,000) Inventory (4,000) Current Assets (4,000) Equipment (net) (40,000) Balance (excess of FV over implied value) (58,000) Gain 58,000 Increase Noncontrolling interest to fair value of assets Total allocated bargain Balance -0- NonControlling Share 65,000 67,500 (2,500) (1,000) (1,000) (10,000) (14,500) Entire Value 325,000 * 337,500 (12,500) (5,000) (5,000) (50,000) (72,500) 14,500 -0- 72,500 -0- *$260,000/.80 Part B (1) Capital Stock- Salem Company Beginning Retained Earnings-Salem Company Difference between Implied and Book Value Investment in Salem Company Noncontrolling Interest (2) Difference between Implied and Book Value Inventory Current Assets Equipment (net) Gain on Acquisition Noncontrolling interest 207,000 130,500 12,500 260,000 65,000 12,500 5,000 5,000 50,000 58,000 14,500 Exercise 5-5 Noncontrolling Interest in Consolidated Income Amortization of the difference between implied and book value related to patent amortization ($100,000*/10) Net income reported by S $ 100,000 10,000 Adjusted net income of S Noncontrolling Ownership percentage interest Noncontrolling Interest in Consolidated Net Income * (600,000/.80) – ($300,000 + $350,000) 5–5 90,000 20% $ 18,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 5-5 (continued) Controlling Interest in Consolidated Income P Company's net income from its independent operations $ 200,000 P Company's share of the adjusted income of S Company (.8 X $90,000) 72,000 Controlling Interest in Consolidated Net Income Parent Share Purchase price and implied value $600,000 Less: Book value of equity acquired 520,000 Difference between implied and book value (patent) 80,000 Patent (80,000) Balance -0- $ 272,000 NonEntire Controlling Value Share 150,000 750,000 130,000 650,000 20,000 100,000 (20,000) (100,000) -0-0- *$600,000/.80 Exercise 5-6 1/1 Retained Earnings-Park Co.* (12,000 x 85) Noncontrolling Interest Depreciation Expense ($120,000/10) Equipment [$120,000/(10/15)] Accumulated Depreciation Difference between Implied and Book Value 2012 2013 12,000 180,000 10,200 1,800 12,000 180,000 72,000a 120,000 84,000b 120,000 * If the complete equity method is used, the debit to 1/1 Retained Earnings – Park Co would be replaced with a debit to Investment in Sunland Company a ($180,000)(6/15)= $72,000 b ($180,000)(7/15)= $84,000 Alternative entries Equipment [$120,000/(10/15)] Accumulated Depreciation ($180,000 5/15) Difference between Implied and Book Value 1/1 Retained Earnings-Park Co* Noncontrolling Interest Depreciation Expense ($120,000/10) Accumulated Depreciation 2012 180,000 2013 180,000 60,000 120,000 60,000 120,000 10,200 1,800 12,000 12,000 12,000 * If the complete equity method is used, the debit to 1/1 Retained Earnings – Park Co would be replaced with a debit to Investment in Sunland Company 5–6 24,000b To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 5-7 1/1 Retained Earnings - Packard Co.* 1/1 Noncontrolling Interest Depreciation Expense ($200,000/5) Equipment [$200,000/(5/10)] Accumulated Depreciation Difference between Implied and Book Value 2011 2012 40,000 400,000 32,000 8,000 40,000 400,000 240,000a 200,000 280,000 200,000 * If the complete equity method is used, the debit to 1/1 Retained Earnings – Packard Co would be replaced with a debit to Investment in Sage Company a $400,000 (6/10) = $240,000 $400,000 (7/10) = $280,000 b Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Equipment ($705,000 – $525,000) Balance $600,000 440,000 160,000 (160,000) -0- NonEntire Controlling Value Share 150,000 750,000 * 110,000 550,000 40,000 200,000 (40,000) (200,000) -0-0- *$600,000/.80 Alternative entries Equipment [$200,000/(5/10)] Accumulated Depreciation Difference between Implied and Book Value 1/1 Retained Earnings - Packard Co 1/1 Noncontrolling interest Depreciation Expense ($400,000/10) Accumulated Depreciation 2011 400,000 2012 400,000 200,000 200,000 200,000 200,000 32,000 8,000 40,000 40,000 40,000 80,000 * If the complete equity method is used, the debit to 1/1 Retained Earnings – Packard Co would be replaced with a debit to Investment in Sage Company 5–7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 5-8 Part A Land ($31,000/0.8) Difference between Implied and Book Value 38,750 38,750 Part B Gain on subsidiary books Reduction for consolidated adjustment to fair market value Consolidated gain $50,000 (38,750) $11,250 Part C 1/1 Retained Earnings - Padilla Co Difference between Implied and Book Value 38,750 38,750 Exercise 5-9 Part A Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Land ($100,000 – $ 80,000) Premium on Bonds Payablea Balance Goodwill Balance $2,000,000 1,760,000 240,000 (16,000) 31,941 255,941 (255,941) -0- NonEntire Controlling Value Share 500,000 2,500,000 * 440,000 2,200,000 60,000 300,000 (4,000) (20,000) 7,985 39,926 63,985 319,926 (63,985) (319,926) -0-0- *$2,000,000/.80 a Present Value on 1/1/2010 of 10% Bonds Payable Discounted at 8% over periods Principal ($500,000 0.68058) Interest ($50,000 3.99271) Fair value of bond Face value of bond Bond premium 5–8 $340,290 199,636 $539,926 500,000 39,926 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 5-9 (continued) Part B Land Goodwill Interest Expense ($50,000 – ($539,926 0.08)) Unamortized Premium on Bonds Payable ($39,926 – $6,806) Difference between Implied and Book Value 20,000 319,926 6,806 33,120 300,000 Alternative entries Land Goodwill Unamortized Premium on Bonds Payable Difference between Implied and Book Value Unamortized Premium on Bonds Payable Interest Expense ($50,000 – ($539,926 20,000 319,926 39,926 300,000 6,806 6,806 0.08)) Exercise 5-10 Part A Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Land ($200,000 - $ 120,000) Premium on Bonds Payablea Balance Goodwill Balance $3,500,000 3,150,000 350,000 (72,000) 56,867 334,867 (334,867) -0- NonEntire Controlling Value Share 388,889 3,888,889 * 350,000 3,500,000 38,889 388,889 (8,000) (80,000) 6,319 63,186 37,208 372,075 (37,208) (372,075) -0-0- *$3,500,000/.90 a Present Value on 1/2/2010 of 9% Bonds Payable Discounted at 6% for periods Principal ($500,000 0.74726) Interest ($45,000 4.21236) Fair value of bond Face value of bond Premium on bond payable 5–9 $373,630 189,556 $563,186 500,000 63,186 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 5-10 (continued) Part B Land Goodwill Interest Expense Unamortized Premium on Bonds Payable ($63,186 – $11,209) Difference between Implied and Book Value a 80,000 372,075 11,209a 51,977 388,889 Year 2010 $(33,791) 45,000 11,209 Effective Interest (0.06 $563,186) Nominal Interest (0.09 $500,000) Difference Alternative entries Land Goodwill Unamortized Premium on Bonds Payable Difference between Implied and Book Value 80,000 372,075 63,186 388,889 Unamortized Premium on Bonds Payable Interest Expense 11,209 11,209a Exercise 5-11 Part – Cost Method Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Inventory Equipment Balance Goodwill Balance $2,276,000 2,000,000 276,000 (36,000) (40,000) 200,000 (200,000) -0- NonEntire Controlling Value Share 569,000 2,845,000 * 500,000 2,500,000 69,000 345,000 (9,000) (45,000) (10,000) (50,000) 50,000 250,000 (50,000) (250,000) -0-0- *$2,276,000/.80 2010 (1) Dividend Income Dividends Declared (0.80 $20,000) To eliminate intercompany dividends 16,000 16,000 – 10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-15 (continued) Balance Sheet Cash Accounts Receivable Inventory Investment in Salem Comp Porter Salem Company Company $70,000 $65,000 260,000 190,000 240,000 175,000 925,600 (3) (4) Difference between Implied and Book Value Land 320,000 Plant and Equipment 360,000 280,000 Goodwill Total Assets $1,855,600 $1,030,000 Accounts Payable Notes Payable Common stock: Porter Company Salem Company Retained earnings from above 1/1 Noncontrolling Interest in Net Assets 12/31 Noncontrolling Interest in Net Assets Total Liabilities and Equity $132,000 90,000 (2) (3) (3) (3) Eliminations Debit Credit 32,000 (1) 41,600 (2) 29,200 970,000 432,500 (3) 65,000 130,000 (4) 197,500 (5) 432,500 Noncontrolling Consolidated Interest Balances $135,000 450,000 415,000 385,000 692,000 150,000 $2,227,000 78,000 47,500 $110,000 30,000 $242,000 120,000 1,000,000 633,600 1,000,000 550,000 (2) 340,000 (3) (4) $1,855,600 $1,030,000 550,000 380,700 8,000 (2) 10,400 $1,847,700 48,000 242,500 ** $1,847,700 * Noncontrolling Interest in Income =.2 $170,000 – (.2 x $26,000) – (.2 x $47,500) = $19,300 ** $212,500 + ($230,000 – $80,000) x 20 = $242,500 Explanations of workpaper entries are on the following page - 86 7,300 224,100 633,600 $231,400 231,400 $2,227,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-15 (continued) Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Equipment Land Inventory Balance Goodwill Balance $850,000 504,000 346,000 (104,000) (52,000) (32,000) 158,000 (158,000) -0- NonControlling Share 212,500 126,000 86,500 (26,000) (13,000) (8,000) 39,500 (39,500) -0- Entire Value 1,062,500 * 630,000 432,500 (130,000) (65,000) (40,000) 197,500 (197,500) -0- *$850,000/.80 Explanations of workpaper entries: (1) Equity in Subsidiary Income Dividends Declared ($60,000 8) Investment in Salem Company To reverse the effect of parent company entries during the year for subsidiary dividends and income 77,200 48,000 29,200 (2) Beginning Retained Earnings - Salem Co Common Stock – Salem Difference between Implied and Book Value Investment in Salem Company Noncontrolling Interest To eliminate investment account and create noncontrolling interest account 230,000 550,000 432,500 970,000 242,500 (3) Investment in Salem Company Noncontrolling Interest Land Plant and Equipment Goodwill Difference between Implied and Book Value To allocate the difference between implied and book value 32,000 8,000 65,000 130,000 197,500 432,500 (4) Investment in Salem Company (2)($20,800) Noncontrolling Interest (2)($5,200) Depreciation Expense ($130,000/5) Plant and Equipment, net 41,600 10,400 26,000 78,000 (5) Impairment Loss ($197,500 - $150,000) Goodwill To record goodwill impairment 47,500 47,500 - 87 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-15 - Part E PORTER COMPANY AND SUBSIDIARY Consolidated Financial Statements For the Year Ended December 31, 2012 Consolidated Income Statement Sales Cost of Goods Sold Gross Profit Expenses: Depreciation Expense Impairment Loss Other Expenses Consolidated Income Noncontrolling Interest in Consolidated Income Net Income $1,550,000 1,100,000 450,000 $96,000 47,500 110,000 Consolidated Statement of Retained Earnings Retained Earnings - Beginning of Year Add: Net Income 253,500 196,500 19,300 $177,200 $546,400 177,200 723,600 90,000 $633,600 Less Dividends Retained Earnings - End of Year PORTER COMPANY AND SUBSIDIARY Consolidated Statement of Financial Position December 31, 2012 Assets Current Assets: Cash Accounts Receivable Inventory $1,000,000 Noncurrent Assets: Plant and Equipment (net) Land Goodwill 1,227,000 Total Assets $135,000 450,000 415,000 692,000 385,000 150,000 $2,227,000 Liabilities And Stockholders' Equity Liabilities: Accounts Payable Notes Payable Total Liabilities Stockholders' Equity Noncontrolling Interest in Net Assets Capital Stock Retained Earnings 1,865,000 - 88 $242,000 120,000 362,000 231,400 1,000,000 633,600 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Total Liabilities and Stockholders' Equity - 89 $2,227,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-15 (continued) Part F If the subsidiary uses the LIFO assumption in pricing its inventory, a workpaper entry would be made each year debiting Inventory and crediting the Difference between Implied and Book Value, so long as there was no reduction in inventory quantities The effect on the consolidated balances would be an additional $40,000 in inventory, with a corresponding additional $32,000 and $8,000 in the investment account and noncontrolling interest The increase in inventory results from the additional amount assigned to the inventory account at acquisition, and will remain there because of the LIFO assumption The investment account and noncontrolling interest account are increased because under the LIFO assumption the $40,000 additional inventory has not passed through cost of goods sold Part G Porter Company's retained earnings on 12/31/2012 Less Cumulative Effect to December 31, 2012 of the Assignment and Depreciation of the Difference between Implied and Book Value Assigned to: 2010 2011 2012 Inventory $32,000 $0 $0 Equipment 20,800 20,800 20,800 $52,800 $20,800 $20,800 Goodwill Impairment (2012) Controlling Retained Earnings on 12/31/2012 Problem 5-16 Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value $1,000,000 Less: Book value of equity acquired 621,000 Difference between implied and book value 379,000 Equipment ($390,000 – $300,000) (81,000) Less:Accumulated Depreciation ($130,000 – $100,000) 27,000 Inventory ($210,000 – $160,000) (45,000) Land ($290,000 – $190,000) (90,000) Bond Discount ($205,556 – $150,000) (50,000) Balance 140,000 Goodwill (140,000) Balance -0- NonControlling Share 111,111 69,000 42,111 (9,000) 3,000 (5,000) (10,000) (5,556) 15,555 (15,555) -0- Entire Value 1,111,111 * 690,000 421,111 (90,000) 30,000 (50,000) (100,000) (55,556) 155,555 (155,555) -0- 600 5,000 5,556 11,156 6,000 50,000 55,556 111,556 *$1,000,000/.90 2011 Amortization Schedule Equipment (10 year life) Inventory (sold in 2011) Bond Discount Total 5,400 45,000 50,000 100,400 - 90 $766,000 (94,400) (38,000) $633,600 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-16 (continued) 2012 Amortization Schedule Equipment (10 year life) Inventory (sold in 2011) Bond Discount Total 5,400 0 5,400 600 0 600 6,000 0 6,000 *The Goodwill may also be calculated analytically as follows: Cost of Investment ($1,000,000/0.9) Fair value acquired Goodwill $1,111,111 (955,556) $155,555 Part A 2011 Cost of Goods Sold Gain on Early Extinguishment of Debt Land Equipment Goodwill Accumulated Depreciation Difference between Implied and Book Value Depreciation Expense ($60,000/10) Accumulated Depreciation To allocate and depreciate the difference between implied and book value 50,000 55,556 100,000 90,000 155,555 30,000 421,111 6,000 6,000 Treatment of the Amount of the Difference Assigned to Bond Discount Date of Acquisition Discount on Bonds Payable Difference between Implied and Book Value 55,556 55,556 2011 Book entry to record retirement in 2011 on Stevens books Bonds Payable Cash Gain on Retirement of Debt 205,556 150,000 55,556 But from consolidated point of view the gain should be $0: Bonds Payable Discount on Bonds Payable Cash 205,556 55,556 150,000 - 91 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-16 (continued) So entry in Consolidated Statements Workpaper for year ended December 31, 2011 is: Gain on Retirement of Debt 55,556 Difference between Implied and Book Value 55,556 Workpaper entries in years after 2011: Beginning Retained Earnings-Palmer Noncontrolling Interest Difference between Implied and Book Value - 92 50,000 5,556 55,556 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-16 (continued) Part B PALMER COMPANY AND SUBSIDIARY Consolidated Statement Workpaper For the Year Ended December 31, 2013 Palmer Company Income Statement Sales Cost of Good Sold Gross Margin Depreciation Expense $620,000 430,000 190,000 30,000 $340,000 240,000 100,000 20,000 60,000 100,000 35,100 135,100 35,000 45,000 Other Expenses Income from Operations Equity in Subsidiary Income Net/Consolidated Income Noncontrolling Interest in Income Net Income to Retained Earnings $135,100 Statement of Retained Earnings 1/1Retained Earnings Palmer Company $209,800 Stevens Company Net Income from above Dividends Declared Palmer Company Stevens Company 12/31Retained Earnings to Balance Sheet Stevens Company 135,100 Eliminations Dr Cr (3b) Noncontrolling Interest $960,000 670,000 290,000 56,000 6,000 95,000 139,000 (1) 35,100 45,000 $45,000 3,900 3,900 41,100 139,000 (3,900)* $135,100 $209,800 $210,000 45,000 (2) 210,000 41,100 3,900 (120,000) $224,900 Consolidated Balance 135,100 (120,000) (35,000) $220,000 - 93 251,100 (1) 31,500 31,500 (3,500) $400 $224,900 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-16 (continued) Palmer Company Stevens Company Balance Sheet Cash Accounts Receivable Inventory Investment in Stevens Company $201,200 $151,000 221,000 173,000 100,400 81,000 915,800 Difference between Implied & Book Value Equipment Accumulated Depreciation 450,000 300,000 (300,000) (140,000) Eliminations Dr Cr Noncontrolling Interest Consolidated Balance $352,200 394,000 181,400 (3a) 95,000 (3b) 10,800 (2) 421,111 (3a) 90,000 (1) 3,600 (2) 1,018,000 (3a) 421,111 840,000 (488,000) (3a) 30,000 (3b) 18,000 Land Goodwill Total Assets 360,000 290,000 1,948,400 855,000 750,000 155,555 2,185,155 Accounts Payable Bonds Payable $323,500 $135,000 400,000 $458,500 400,000 Capital Stock: Palmer Company 1,000,000 Stevens Company 500,000 Retained Earnings from above 224,900 220,000 1/1 Nonconntrolling Interest in Net Assets 12/31 Noncontrolling Interest In Net Assets Total Liabilities and Equity $1,948,400 $855,000 (3a)100,000 (3a)155,555 1,000,000 (2) 500,000 251,100 (3a) 10,556 (3b) 1,200 $1,635,322 *Noncontrolling Interest in Consolidated Income = 0.10 $45,000 - $600 = $3,900 Explanations of workpaper entries are on separate page - 94 31,500 (2) 113,111 $1,635,322 400 101,355 224,900 $101,755 $101,755 $2,185,155 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-16 (continued) Explanations of workpaper entries: (1) Equity in Subsidiary Income Investment in Stevens Company Dividends Declared ($35,000 90) To reverse effect of parent company entries during the year for subsidiary dividends and income (2) Beginning Retained Earnings-Stevens Company Common Stock-Stevens Company Difference between Implied and Book Value Investment in Stevens Company * Noncontrolling Interest ($111,111 + ($210,000 – $190,000) x 10) To eliminate investment account and create noncontrolling interest account * $1,000,000 + [$210,000 - $190,000) 90)] (3) Investment in Stevens Company [$45,000 + $50,000 + (2 $5,400)] Noncontrolling Interest [$5,000 + $5,556 + (2 x $600)] Depreciation Expense ($60,000/10) Plant and Equipment Land Goodwill Accumulated Depreciation [$30,000 + (3 $6,000)] Difference between Implied and Book Value To allocate and depreciate the difference between implied and book value Alternative to entry (3) (3a) Investment in Stevens Company [$45,000 + $50,000] Noncontrolling Interest [$5,000 + $5,556] Equipment Land Goodwill Accumulated Depreciation Difference between Implied and Book Value (3b) Investment in Stevens Company Noncontrolling Interest ($600 x 2) Depreciation Expense ($60,000/10) Accumulated Depreciation [(3 *$45,000 – ($60,000/10) = $39,000 - 95 210,000 500,000 421,111 1,018,000 113,111 105,800 11,756 6,000 90,000 100,000 155,555 48,000 421,111 95,000 10,556 90,000 100,000 155,555 30,000 421,111 10,800 1,200 6,000 18,000 $6,000)] Part C Palmer Company's net income from its own operations Palmer Company's share of Stevens Company’s income (0.90 Controlling interest in consolidated Net Income 35,100 3,600 31,500 $39,000) $100,000 35,100 $135,100 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-17 Part A Yearly Amortization (1) Price with a P/E ratio of 10: (10)($15,000) $150,000 Book Value of Equity Acquired ($100,000 – $17,000 – $18,000) 65,000 Excess of cost over book value 85,000 Allocated to: In-process R&D $30,000 Assets to fair value ($105,000 – $65,000) 40,000 70,000 Goodwill $15,000 Yearly amortization Decrease in income In-process R&D Depreciation expense Amortization expense Total decrease Year $30,000 4,000 $34,000 $4,000 $4,000 Year 2-10 Year 11-20 $4,000 $4,000 0 Yearly Amortization (2) Price with a P/E ratio of 12: (12)($15,000) $180,000 Book value of equity acquired ($100,000 - $17,000 - $18,000) 65,000 Excess of cost over book value 115,000 Allocated to: In-process R&D $30,000 Assets to fair value ($105,000 – $65,000) 40,000 70,000 Goodwill $45,000 Yearly amortization Decrease in income In-process R&D Depreciation expense Amortization expense Total decrease Year $30,000 4,000 $34,000 - 96 $ 4,000 $4,000 Years 2-10 Years 11-20 4,000 $4,000 0 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-17 (continued) Part B (1) Decrease in income In-process R&D ($30,000/20) Depreciation expense Amortization expense Total decrease Years 1-10 $1,500 4,000 $5,500 Years 11-20 $1,500 Decrease in income In-process R&D Depreciation expense Amortization expense Total decrease Years 1-10 $1,500 4,000 $5,500 Years 11-20 $1,500 $1,500 (2) _ $1,500 Under all scenarios, the future profitability of the acquisition is decreased If the in-process R&D is amortized over 20 years, the future profits are decreased even more Many managers hope that one-time charges to income are ignored by the market In general, a profitable acquisition is one that generates a return greater than the cost of capital - 97 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-18 Part A Investment in Shah Company ($28 Common Stock ($2 25,500) Other Contributed Capital ($26 714,000 51,000 663,000 25,500) Part B Dividend Income (.85 $90,000) Dividends Declared – Shah Company Common Stock - S Other Contributed Capital - S 1/1 Retained Earnings - S Difference between Implied and Book Value Investment in Shah Company Noncontrolling Interest ($714,000/.85 x 15) 76,500 76,500 120,000 164,000 267,000 289,000 * 714,000 126,000 *$714,000/.85 – ($120,000 + $164,000 + $267,000) Inventory 28,000 Land 33,500 Plant Assets 100,000 Patents 105,000 Deferred Tax Asset ($60,000 x 35) 21,000 Goodwill* 154,775 * Premium on Bonds Payable 60,000 Deferred Tax Liability ($266,500 x 35) 93,275 Difference between Implied and Book Value 289,000 * $289,000 – [($28,000 + $33,500 + $100,000 + $105,000 - $60,000) ] - 98 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-18 (continued) Cost of Goods Sold Depreciation Expense ($100,000/10) Amortization Expense – Patents ($105,000/8) Premium on Bonds Payable ($60,000/10) Inventory Plant Assets Patents Interest Expense 28,000 10,000 13,125 6,000 Deferred Tax Liability* Deferred Tax Asset (35% Income Tax Expense 17,894 *(35% 28,000 10,000 13,125 6,000 $6,000) 2,100 15,794 ($28,000 + $10,000 + $13,125)) Part C Dividend Income (.85 $100,000) Dividends Declared - Shah 85,000 85,000 Investment in Shah Company 1/1 Retained Earnings - Pruitt Company (85% $393,000* – $267,000)) 107,100 107,100 * $267,000 + $216,000 - $90,000 = $393,000 Common Stock - Shah 120,000 Other Contributed Capital - Shah 164,000 / Retained Earnings – Shah ($267,000 + $216,000 - $90,000) 393,000 Difference between Implied and Book Value 289,000 Investment in Shah Company ($714,000 + $107,100) Noncontrolling Interest [$126,000 + ($216,000 – $90,000) x 15] 821,100 144,900 Note: The next two entries may be combined into one or separated into various components The two approaches presented are only two of various ways to split the effects: Alternative One: 1/1 Retained Earnings - Pruitt Company* Noncontrolling Interest** Land Depreciation Expense Plant Assets ($100,000 – ($10,000 2)) Amortization Expense - Patents Patents ($105,000 – ($13,125 2)) Goodwill* Deferred Tax Asset ($21,000 – $2,100) Interest Expense Premium on Bonds Payable ($60,000 – ($6,000 Deferred Tax Liability ($93,275 – $17,894) Difference between Implied and Book Value - 99 24,931 4,400 33,500 10,000 80,000 13,125 78,750 154,775 18,900 2)) 6,000 48,000 75,381 289,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-18 (concluded) * ($28,000 + $10,000 + $13,125 – $6,000 – $15,794) x 85 ** ($28,000 + $10,000 + $13,125 – $6,000 – $15,794) x 15 Deferred Tax Liability (35% ($10,000 + $13,125)) Deferred Tax Asset (35% $6,000) Income Tax Expense Alternative Two: 1/1 Retained Earnings - Pruitt Company* Noncontrolling Interest Land Plant Assets Patents Goodwill Deferred Tax Asset Premium on Bonds Payable Deferred Tax Liability Difference between Implied and Book Value 8,094 2,100 5,994 23,800 4,200 33,500 100,000 105,000 154,775 21,000 60,000 93,275 289,000 * Inventory sold in prior year and reflected in cost of goods sold and hence retained earnings Depreciation Expense 1/1 Retained Earnings - Pruitt Noncontrolling Interest Plant Assets (net) 10,000 8,500 1,500 Amortization Expense - Patent 1/1 Retained Earnings – Pruitt Noncontrolling Interest Patents 13,125 11,156 1,969 Premium on Bonds Payable Interest Expense 1/1 Retained Earnings - Pruitt Noncontrolling Interest 12,000 Deferred Tax Liability [35% ($10,000 + $13,125)] + $17,894 Deferred Tax Asset (35% $6,000) + $2,100 Income Tax Expense (($10,000 + $13,125 – $6,000) 1/1 Retained Earnings – Pruitt ($15,794 x 85) Noncontrolling Interest ($15,794 x 15) 25,988 20,000 26,250 6,000 5,100 900 - 100 4,200 5,994 13,425 2,369 ...To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com violated In most accounting scenarios, we assume that both parties are negotiating... have severe implications both professionally and personally 5–2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO EXERCISES Exercise 5-1... ($180,000/10) Accumulated Depreciation 180,000 180,000 18,000 18,000 5–3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 5-2 (continued) Part B