Solution manual advanced accounting 4e jeter ch08

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER ANSWERS TO QUESTIONS The three types of transactions that result in a change in a parent company’s ownership interest are: a The parent company may buy additional shares of subsidiary stock or sell a portion of its holdings; b The subsidiary may issue additional shares of stock to outsiders; c The subsidiary may acquire or reissue treasury shares from or to the noncontrolling shareholders or the parent company The date of acquisition of subsidiary stock is important under the purchase method because subsidiary retained earnings accumulated prior to the date of acquisition constitute a portion of the equity acquired by the parent company, whereas the parent’s share of subsidiary retained earnings accumulated after acquisition is a part of consolidated retained earnings On the date that control is achieved, all previous purchases are revalued to reflect the market value on the ―acquisition date,‖ which is the date that control is achieved Thus, they all have the same basis The correct accounting depends on whether the parent retains control, or maintains some ownership but surrenders control If the parent retains control, no gain or loss is reflected in the Income Statement Instead, an adjustment is made to contributed capital If the parent surrenders control, the entire interest is adjusted to fair value, and a gain or loss reflected in the Income Statement on all shares owned prior to the sale A loss would be reported because the total of the $5 per share gain related to (1) the undistributed profits of EZ Company from the date of acquisition to the beginning of the year of sale and (2) the undistributed profit of EZ Company from the beginning of the year of sale to the date of sale exceeds the $5 per share overall gain Thus, the total assigned to the first two components of gain exceed the total gain The other market factors effect (the third component) produced a loss If a parent company owns less than 100% of a subsidiary and purchases an entire new issue of common stock directly from the subsidiary, either (1) the preemptive right has been waived previously, or (2) the noncontrolling stockholders elected not to exercise their rights Regardless of whether the issuance results in an increase or a decrease in the book value of the parent’s share of the subsidiary’s equity, the correct accounting is to adjust the contributed capital of the controlling interest Noncontrolling Interest Situation Total Book Value Percent of Ownership (a) No Change Decrease (b) Decrease Decrease (c) Increase Decrease (d) Increase Increase 8-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com BUSINESS ETHICS This is an awkward situation One strategy would be to wait a reasonable period of time, and check to see if anything has changed (have the entries been documented, adjusted, reversed, etc.?) If nothing has been done, mention it to the supervisor again If he (she) is unresponsive this time, tactfully bring up your concern with a higher-level supervisor ANSWERS TO EXERCISES Exercise 8-1 Part A Investment in Sanno Company Cash Loss on Revaluation* Investment in Sanno Company To adjust the first purchase to fair value *[$262,350/9,900 – (($46,000+$6,500)/1,800)] x 1,800 = - $4,800 where $6,500 = ($85,000 - $20,000)×0.10, (1,800/18,000=10%) Loss on Revaluation* Investment in Sanno Company To adjust the second purchase to fair value *[($262,350/9,900) – (($95,000+$28,750)/4,500)] x 4,500 = -$4,659 where $28,750 = ($85,000 + $30,000)×0.25, (4,500/18,000=25%) Cash 262,350 262,350 4,800 4,800 4,500 4,500 45,000 Dividend Income ($50,000 (1,800 + 4,500 + 9,900)/(18,000)) Part B Dividend Income Dividends Declared - Sanno 45,000 45,000 45,000 Investment in Sanno Company Retained Earnings - Peck To establish reciprocity/convert to equity [(.10 $ $20,000)+ (.25 $ 35,250 35,250 $30,000)) ] Common Stock - Sanno Company(18,000 $ 360,000 Retained Earnings - Sanno Company (1/1) 85,000 Difference between Implied and Book Value 32,000 Investment in Sanno Company* Noncontrolling interest To eliminate investment account and create noncontrolling interest account * $429,000 = 46,000+95,000+262,350-4,800-4,500 + 35,250 Goodwill Difference between Implied and Book Value 8-2 429,300 47,700 32,000 32,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-1 (continued) Computation and Allocation of Difference between Implied and Book Value Acquired Parent Share Purchase price and implied value* Less: Book value of equity acquired: $429,300 400,500 Difference between implied and book value Goodwill Balance 16,200 shares × $262,350/9,900 = $429,300 or 28,800 (28,800) -0- NonControlling Share 47,700 44,500 3,200 (3,200) -0- $46,000+$95,000 + $262,350 + $35,250 - $4,800 - $4,500 = $429,300 8-3 Entire Value 477,000 445,000 32,000 (32,000) -0- To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-2 January 1, 2011 Investment in Serbin Company Cash Note: The $9,333 transfer to paid in capital is handled in consolidation 220,000 220,000 April 1, 2011 Cash Investment in Serbin Company ((21,600/72,000) Additional Contributed Capital 260,000 147,000 113,000 $490,000) September 30, 2011 Cash 16,750 16,750 Dividend Income (.67* $25,000) * 67 = (72,000 + 30,000 -21,600) 120,000 Exercise 8-3 Part A Investment in Serbin Company Retained Earnings 1/1 - Papke Company To establish reciprocity to 1/1/2011 (.6 ($201,000 - $175,000) Cost of Shares (21,600/72,000 × $490,000) Plus: Undistributed Income: (A) Change in Retained Earnings from the date of acquisition (1/1/10) to the beginning of the year (1/1/11) ($201,000 - $175,000) Ownership percentage sold (B) Earnings from beginning of current year to the the date of sale (1/1/11 to 7/1/11) Ownership percentage sold Adjusted cost of shares sold 10,920 10,920 $147,000 $26,000 18% 15,000 18% Selling price of shares Adjusted cost of shares sold Additional paid in capital – Papke Company Paid in capital already recorded on Papke Company books Decrease needed to Paid in Capital – Papke Company 4,680 2,700 $154,380 $260,000 154,380 $105,620 113,000 7,380 Additional Contributed Capital 4,680 Retained Earnings 1/1 - Papke Company 4,680 To adjust additional contributed capital for the portion for earnings accruing to the shares sold included in consolidated income in prior years (($201,000 - $175,000) 18) Additional Contributed Capital ($15,000 Subsidiary Income Sold To adjust for current Year’s income sold 18) 2,700 2,700 to the noncontrolling stockholders ($15,000 18) 8-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-3 (continued) Dividend Income Dividends Declared - Serbin Company To eliminate intercompany dividends on the remaining shares owned (80,400/120,000 $25,000) = (.67 $25,000) = 16,750 16,750 16,750 Common Stock - Serbin Company Retained Earnings - Serbin Difference between Implied and Book Value Additional Contributed Capital- Papkea Investment in Serbin Company Noncontrolling interestb To eliminate investment account and create noncontrolling interest account Goodwill Difference between Implied and Book Value 41,667 41,667 Computation and Allocation of Difference between Implied and Book Value Acquired Parent Share Purchase price and implied value Less: Book value of equity acquired: Common Stock Retained Earnings $490,000 NonControlling Share 326,667 816,667 (360,000) (105,000) (240,000) (70,000) (600,000) (175,000) 25,000 (25,000) -0- 16,667 (16,667) -0- 41,667 (41,667) -0- Difference between implied and book value Goodwill Balance a Price paid for 25% interest Less interest acquired: Common Stock (25% x 600,000) Retained Earnings (25% x $201,000) Goodwill (25% x $41,667) Adjustment to Additional Contributed Capital – Papke b Entire Value 220,000 150,000 50,250 10,417 (210,667) 9,333 33% x 816,667 + 33% x ($201,000-$175,00) = $278,080 or $326,667 – $210,667 + 40% x ($201,000-$175,000) + $154,380 - $2,700 = $278,080 Part B $278,080 + 33% x ($60,000 - $25,000) = $289,630 8-5 600,000 201,000 41,667 9,333 573,920 278,080 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-4 Part A 2010 Investment in Sanno Company Cash 95,000 95,000 Retained Earnings Investment in Sanno Company (.10 of $50,000 decrease in Sanno Company retained earnings during 2009) Investment in Sanno Company Equity in Investee Income (.35 5,000 5,000 40,250 40,250 $115,000) 2011 Investment in Sanno Company Cash 262,350 262,350 Loss on Revaluation* Investment in Sanno Company To adjust the first purchase to fair value *[$262,350/9,900 – (($46,000+$6,500)/1,800) ] x 1,800 = - $4,800 where $6,500 = ($85,000 - $20,000)×0.10, (1,800/18,000=10%) Loss on Revaluation * Investment in Sanno Company To adjust the second purchase to fair value *[($262,350/9,900) – (($95,000+$28,750)/4,500) ] x 4,500 = -$4,659 where $28,750 = ($85,000 + $30,000)×0.25, (4,500/18,000=25%) Cash Investment in Sanno Company (.90 Investment in Sanno Company Equity in Subsidiary Income (.90 $50,000 subsidiary dividend) $135,000) Part B Equity in Subsidiary Income Dividends Declared - Sanno Investment in Sanno Company 4,800 4,800 4,500 4,500 45,000 45,000 121,500 121,500 121,500 45,000 76,500 Common Stock - Sanno 360,000 1/1 Retained Earnings - Sanno 85,000 Difference between Implied and Book Value 32,000 Investment in Sanno Company* 429,300 Noncontrolling interest 47,700 * $403,350- $5,000 + $40,250 - $45,000 + $121,500 - $76,500 - $4,800 - $4,500 Goodwill Difference between Implied and Book Value 8-6 32,000 32,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-5 Part A 2010 Investment in Serbin Company Cash 490,000 490,000 Cash Investment in Serbin Company (.60 Investment in Serbin Company Equity in Subsidiary Income (.60 12,000 12,000 $20,000 subsidiary dividend) 27,600 27,600 $46,000 subsidiary income) 2011 Investment in Serbin Company Additional Paid in Capital – Papke Company a Cash 210,667 9,333 220,000 a Price paid for 25% interest Less interest acquired: Common Stock (25% x 600,000) Retained Earnings (25% x $201,000) Goodwill (25% x $41,667) Adjustment to Additional Contributed Capital – Papke 220,000 150,000 50,250 10,417 (210,667)* 9,333 * or 25% of the total carrying value of Serbin Company, or ($490,000/.60) plus the change in retained earnings for 2008 of $26,000), or (25%)($842,667) = $210,667 Investment in Serbin Company Equity in Subsidiary Income (.85 $15,000 income for 1st three months) Cash 260,000 154,380 105,620 Investment in Serbin Company* Additional Contributed Capital Cost of first purchase (60%) 2010 subsidiary income (.60 $46,000) 2010 subsidiary dividends (.60 $20,000) 2011 subsidiary income to April (.60 $15,000) Total Portion sold (21,600/72,000) Carrying value of investment sold Cash Investment in Serbin Company (.67** $25,000 subsidiary dividend) ** 67 =(72,000 + 30,000 -21,600) 120,000 Investment in Serbin Company Equity in Subsidiary Income [.67 12,750 12,750 ($60,000 - $15,000)] Part B Equity in Subsidiary Income ($12,750 + $30,150) Subsidiary Income Sold ($15,000 60 30) Dividends Declared – Serbin ($25,000 67) Investment in Serbin Company 8-7 $490,000 27,600 (12,000) 9,000 514,600 30 $154,380 16,750 16,750 30,150 30,150 42,900 2,700 16,750 23,450 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-5 (continued) Common Stock - Serbin 1/1 Retained Earnings – Serbin Difference between Implied and Book Value Investment in Serbin Company Noncontrolling interest b 600,000 201,000 41,667 564,587 278,080 Goodwill Difference between Implied and Book Value 41,667 41,667 Computation and Allocation of Difference between Implied and Book Value Acquired Parent Share Purchase price and implied value Less: Book value of equity acquired: Common Stock Retained Earnings $490,000 NonControlling Share 326,667 816,667 (360,000) (105,000) (240,000) (70,000) (600,000) (175,000) 25,000 (25,000) -0- 16,667 (16,667) -0- 41,667 (41,667) -0- Difference between implied and book value Goodwill Balance a Price paid for 25% interest Less interest acquired: Common Stock (25% × 600,000) Retained Earnings (25% × $201,000) Goodwill (25% × $41,667) Adjustment to Additional Contributed Capital – Papke b Entire Value 220,000 150,000 50,250 10,417 (210,667) 9,333 33% × 816,667 + 33% × ($201,000-$175,00) = $278,080 or $326,667 – $210,667 + 40% × ($201,000-$175,000) + $154,380 - $2,700 = $278,080 Exercise 8-6 Part A Investment in Sime Company ($1.50×250,000 shares) Cash New percentage of ownership is 712,500/750,000 = 95% Part B Dividend Income (.95 $30,000) Dividends Declared - Sime 375,000 375,000 28,500 28,500 Investment in Sime Company Retained Earnings 1/1 - Pace To establish reciprocity (.925 ($150,000 - $60,000)) 8-8 83,250 83,250 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-6 (continued) Common Stock - Sime Other Contributed Capital – Sime $40,000 + 0.50 $250,000) Retained Earnings 1/1 - Sime Difference between Implied and Book Value ($578,125/.925 –$600,000) Additional Contributed Capital - Pace Investment in Sime Noncontrolling Interest [$46,875*+ ($150,000- $60,000) × 075 +$875] 750,000 165,000 150,000 25,000 875 1,036,375 54,500 Land 25,000 25,000 Difference between Implied and Book Value *$578,125/.925 –$578,125 = $46,875 **Pace Company’s share of Sime Company’s equity: Before new purchase (.925 $690,000) After new purchase (.95 ($690,000 + $375,000)) Stockholders equity purchased Plus: Goodwill purchased ($25,000× 2.5%) Total carrying value acquired Cost Change in paid in capital (decrease to Pace) $ 638,250 1,011,750 373,500 625 374,125 375,000 $ 875 Exercise 8-7 Part A Investment in Sime Company Cash ($1.30 250,000) 325,000 325,000 Part B Dividend Income (.95 $30,000) Dividends Declared - Sime 28,500 28,500 Investment in Sime Company Retained Earnings 1/1 - Pace To establish reciprocity (.925 $150,000 - $60,000) Common Stock - Sime Other Contributed Capital – Sime $40,000 + 0.30 $250,000)) Retained Earnings 1/1 - Sime Difference between Implied and Book Value ($578,125/.925 –$600,000) Investment in Sime Noncontrolling Interest [$46,875 + ($150,000- $60,000) × 075 - $1,625] Additional Contributed Capital - Pace Land Difference between Implied and Book Value *$578,125/.925 –$578,125 = $46,875 8-9 83,250 83,250 750,000 115,000 150,000 25,000 986,375 52,000 1,625 25,000 25,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-7 (continued) ** Pace Company’s share of Sime Company’s equity: Before new purchase (.925 $690,000) After new purchase (.95 ($690,000 + $325,000)) Stockholders equity purchased Plus: Goodwill purchased ($25,000 × 2.5%) Carrying value acquired Cost Change in paid in capital (increase to Pace) $638,250 964,250 326,000 625 326,625 325,000 ($1,625) Exercise 8-8 Part A Cost, Partial Equity, and Complete Equity Methods Additional Contributed Capital* Investment in Skon Company 880 880 * Padilla Company’s share of Skon Company’s equity: Before sale to noncontrolling shareholders (.8 $170,500) After sale to noncontrolling shareholders (.64** $170,500 + $45,000) Increase in Padilla Company’s share Less goodwill sold ** (.80 $136,400 137,920 $1,520 (2,400) (880) 60,000)/(60,000 + 15,000) = 64 Alternative solution Implied value 1/1/09 Book value – Skon Excess To Land Padilla 132,000 120,000 12,000 -12,000 NCI 33,000 30,000 3,000 -3,000 Total 165,000 150,000 15,000 -15,000 Beginning carrying value Change in RE in 2009 Carrying value 1/1/10 132,000 16,400 148,400 33,000 4,100 37,100 165,000 20,500 185,500 New issue by Skon Carry value before adjustment 148,400 45,000 82,100 45,000 230,500 No participation by Padilla Carry value based on % owned 147,520 Adjustment to paid in capital -880 82,980 +880 230,500 (64% to Padilla, 36% NCI) - 10 Notes: (132,000/.80) (common stock and RE) ($50,500 - $30,000) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-11 Pyle Company’s Books Investment in Stern Cash 600,000 600,000 Implied value by the purchase is ($510,000/.85) = $600,000, with NCI = $90,000 The carrying value of Stern Company, on January 1, 2010, is computed as follows: Carrying value of Stern Company Carrying value of Stern Company Pyle Company’s carrying value of Company Stern Initial cost (51,000 shares) (on 1/1/2009) $510,000 Increase in retained earnings ($292,000-120,000 x 0.85) 146,200 Carrying value of Investment in Stern Company 1/1/2011 656,200 Noncontrolling carrying value in Company Stern Initial value (9,000 shares) Increase in retained earnings ($292,000-120,000 x 0.15) Carrying value of Investment in S Company 1/1/2011 Total carrying value of Stern Company (1/1/2011) $90,000 25,800 115,800 772,000 The gain or loss in net income attributable to Pyle Company is computed as follows: Gain or loss is the difference in: 1) Total carrying value of Stern Company 2) Sum of: Fair value of consideration received (40,000 shares) $480,000 Fair value of retained NCI (11,000 x $12) 132,000 Carrying value of the NCI (9,000 shares) 115,800 Total Loss attributable to Pyle Company 772,000 727,800 $ 44,200 The loss will be split between the 40,000 shares that are sold and the 11,000 shares that are still held as an investment To record the sale of the shares, Pyle Company makes the following entry in its books on January 1, 2011 Pyle Company’s Books (1) Cash (40,000 x $12/share) 480,000 Realized loss on sale (on 40,000 shares sold) 34,667 Investment in Stern Company (40/51 × $656,200) 514,667 (2) Unrealized loss (on 11,000 shares retained) 9,533 Investment in Stern Company (remaining 11,000 shares) To reduce the remaining shares to market value - 37 9,533 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-12 Worksheet, multiple purchases, cost method Required: Control achieved on 1/1/2010, with the purchase of 12,500 shares (total shares owned equals 21,500 (53.75%) which include 9,000 shares acquired on 1/1/2009 and the 12,500 shares acquired on 1/1/2010) Computation and Allocation of Difference between Implied and Book Value Acquired Fair value price = $210,000/12,500 shares = $16.8/share Fair value of 1/1/09 shares (9,000 shares at $16.8/share) Cost of 9,000 shares (22.5% ownership) 110,500 Change in retained earnings (165,000-46,000)(22.5%) 26,775 Adjusted carrying value of shares Increase to fair value Parent Share Fair value of 1/1/09 purchase ($16.8/share) Fair value of 1/1/10 purchase ($16.8/share) Purchase price and implied value* Less: Book value of equity acquired: Capital Stock Retained Earnings Difference between implied and book value Land (other assets) Balance * $210,000/31.25% = 672,000 where 31.25% = 12,500/40,000 $151,200 137,275 $13,925 NonControlling Share Entire Value 151,200 210,000 $361,200 310,800 672,000 (215,000) (88,688) (185,000) (76,312) (400,000) (165,000) 57,512 (57,512) -0- 49,488 (49,488) -0- 107,000 (107,000) -0- - 38 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-12 (continued) Worksheet journal entries (1) Dividend Income (.5375 × $70,000) Dividends declared – Sato Company To eliminate dividends 37,625 37,625 (2) Investment in Sato Company ($37,000 + $22,500) Retained Earnings 1/1 - Phan Company To establish reciprocity/convert to equity (165,000-46,000)(22.5%) = 26,775 26,775 26,775 (3) Capital Stock - Sato Company Retained Earnings 1/1 – Sato Company Difference between Implied and Book Value Investment in Sato Company Noncontrolling interest To eliminate investment account and create noncontrolling interest account 400,000 165,000 107,000 361,200 310,800 (4) Other assets (Land) Difference between Implied and Book Value To allocate the difference between implied and book value to goodwill 107,000 107,000 - 39 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-12 (continued) Phan Company and Subsidiary Consolidated Statements Workpaper For the Year Ended December 31, 2007 Phan Company Income Statement Sales Gain on revaluation Dividend Income Total Revenue Cost of Goods Sold Other Expense Total Cost and Expense Net/Consolidated Income Noncontrolling Interest in Income Net Income to Retained Earnings Retained Earnings Statement 1/1 Retained Earnings: Phan Company Sato Company Net Income from Above Dividends Declared: Phan Company Sato Company 12/31 Retained Earnings to Balance Sheet Sato Company 1,800,000 13,925 37,625 1,851,550 1,100,000 350,000 1,450,000 401,550 605,000 401,550 155,000 Eliminations Dr Noncontrolling Interest (1) 37,625 605,000 320,000 130,000 450,000 155,000 71,688 71,688 37,625 (2) 165,000 155,000 (3) 26,775 165,000 37,625 2,418,925 1,420,000 480,000 1,900,000 518,925 (71,688) 447,237 353,100 71,688 (150,000) 447,237 (150,000) (70,000) 577,875 Consolidated Balances 2,405,000 13,925 326,325 401,550 Cr (1) 250,000 202,625 - 40 37,625 (32,375) 64,400 39,313 650,337 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-12 (continued) Phan Company Balance Sheet Current Assets 165,500 Investment in Sato Company 334,425 Difference b/w implied and book value Other Assets Total Assets Liabilities Paid in Capital - Phan Company Capital Stock: Phan Company Sato Company Retained Earnings from Above 1/1 Noncontrolling Interest 12/31 Noncontrolling Interest Total Liabilities and Equity Sato Company Eliminations Dr Cr Noncontrolling Interest 138,000 920,000 1,419,925 672,000 810,000 142,050 100,000 160,000 303,500 (2) 26,775 (3) 361,200 (3) (4) 107,000 107,000 (4) 107,000 1,699,000 2,002,500 302,050 100,000 600,000 577,875 600,000 400,000 250,000 (3) 400,000 202,625 (3) 1,419,925 Consolidated Balances 810,000 843,400 - 41 64,400 310,800 843,400 39,313 310,800 350,113 650,337 350,113 2,002,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-13 On Phan Company’s books Investment in Sato Company (36.25%) 280,000 Cash 280,000 No revaluation is required for additional shares purchased after control is already achieved The new ownership percentage is 90% or 36,000 shares divided by 40,000 shares outstanding The balance in the investment account is $614,425 ($110,500 + $210,000 + $280,000 + 13,925) P Company’s Carrying Value of the Investment in S Company Before New After New Book Value of Purchase Purchase Interest (53.75%) (90%) Acquired Common Stock (1) $215,000 (3) $360,000 $145,000 Retained Earnings (2) 134,375 (4) 225,000 90,625 Total Stockholders’ Equity $349,375 $585,000 $235,625 Land to fair value (5) 57,513 (6) 96,300 38,787 Carrying Value in S Company 406,888 681,300 $274,412 Cost of New Shares 280,000 Decrease in Paid in Capital – Phan Company $ 5,588 (1) 5375 × $400,000 (2) 5375 × $250,000 (3) 90 × $400,000 (4) 90 × $250,000 (5) 5375 × $107,000 (6) 90 × $107,000 Worksheet journal entries (1) Dividend Income (.90 × $70,000) Dividends declared – Sato Company To remove dividends 63,000 63,000 (2) Investment in Sato Company ($26,775 + $45,688) Retained Earnings 1/1 - Phan Company To establish reciprocity/convert to equity (165,000-46,000)(22.5%) = 26,775 (250,000-165,000)(53.75%) = 45,688 72,463 72,463 (3) Capital Stock - Sato Company Retained Earnings 1/1 – Sato Company Difference between Implied and Book Value Paid in capital – Phan Company Investment in Sato Company ($614,425+72,463) Noncontrolling interest To eliminate investment account and create noncontrolling interest account 400,000 250,000 107,000 5,588 686,888 75,700 (4) Other assets (Land) Difference between Implied and Book Value To allocate the difference between implied and book value to goodwill 107,000 107,000 - 42 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-13 (continued) Phan Company and Subsidiary Consolidated Statements Workpaper For the Year Ended December 31, 2008 Phan Company Income Statement Sales Dividend Income Total Revenue Cost of Goods Sold Other Expense Total Cost and Expense Net/Consolidated Income Noncontrolling Interest in Income Net Income to Retained Earnings Retained Earnings Statement 1/1 Retained Earnings: Phan Company Sato Company Net Income from Above Dividends Declared: Phan Company Sato Company 12/31 Retained Earnings to Balance Sheet 1,800,000 Sato Company Eliminations Dr Noncontrolling Interest 600,000 63,000 1,863,000 1,100,000 350,000 1,450,000 413,000 600,000 325,000 125,000 450,000 150,000 413,000 150,000 (1) 63,000 15,000 15,000 63,000 (2) 250,000 150,000 (3) 72,463 250,000 63,000 2,400,000 1,425,000 475,000 1,900,000 500,000 (15,000) 485,000 650,338 15,000 (150,000) 485,000 (150,000) (70,000) 840,875 Consolidated Balances 2,400,000 577,875 413,000 Cr (1) 330,000 313,000 - 43 63,000 (7,000) 135,463 8,000 985,338 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-13 (continued) Phan Company Sato Company Eliminations Dr Cr Noncontrolling Interest Consolidated Balances Balance Sheet Current Assets 165,500 Investment in Sato Company 614,425 Difference b/w implied and book value Other Assets Total Liabilities Paid in Capital - Phan Company Capital Stock: Phan Company Sato Company Retained Earnings from Above 1/1 Noncontrolling Interest 12/31 Noncontrolling Interest Total 218,000 383,500 (2) 920,000 1,699,925 672,000 890,000 159,050 100,000 160,000 72,463 (3) (4) 107,000 107,000 (3) 5,588 (3) 400,000 313,000 (3) 686,888 (4) 107,000 1,699,000 2,082,500 319,050 94,412 600,000 840,875 600,000 400,000 330,000 (3) 1,699,925 890,000 1,005,051 - 44 135,463 75,700 1,005,051 8,000 75,700 83,700 985,338 83,700 2,082,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-14 Worksheet, multiple purchases, equity method Control achieved on 1/1/2010, with the purchase of 12,500 shares (total shares owned equals 21,500 (53.75%) which include 9,000 shares acquired on 1/1/2009 and the 12,500 shares acquired on 1/1/2010) Computation and Allocation of Difference between Implied and Book Value Acquired Fair value price = $210,000/12,500 shares = $16.8/share Fair value of 1/1/09 shares (9,000 shares at $16.8/share) Cost of 9,000 shares (22.5% ownership) 110,500 Change in retained earnings (165,000-46,000)(22.5%) 26,775 Adjusted carrying value of shares Increase to fair value Parent Share Fair value of 1/1/09 purchase ($16.8/share) Fair value of 1/1/10 purchase ($16.8/share) Purchase price and implied value* Less: Book value of equity acquired: Capital Stock Retained Earnings Difference between implied and book value Land (other assets) Balance * $210,000/31.25% = 672,000 where 31.25% = 12,500/40,000 $151,200 137,275 $13,925 NonControlling Share Entire Value 151,200 210,000 $361,200 310,800 672,000 (215,000) (88,688) (185,000) (76,312) (400,000) (165,000) 57,512 (57,512) -0- 49,488 (49,488) -0- 107,000 (107,000) -0- On Phan Company’s books (2010) Investment in S Company Cash 210,000 210,000 Investment in S Company 26,775 1/1 Retained Earnings—P Company 26,775 [.225 × ($165,000 - $46,000) or the change in retained earnings from 1/1/09 to 1/1/10] Investment in S Company $13,925 Gain on revaluation $13,925 To record the adjusted carrying value of the original purchase of $137,500 to fair value of $151,200 Investment in Sato Company Equity in Subsidiary Income [53.75% × ($605,000 - $320,000-130,000)] - 45 83,313 83,313 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-14 (continued) Worksheet journal entries (1) Equity Income (.5375 × $155,000) Dividends declared – Sato Company (.5375 × $70,000) Investment in Sato Company To remove equity income (2) Capital Stock - Sato Company Retained Earnings 1/1 – Sato Company Difference between Implied and Book Value Investment in Sato Company Noncontrolling interest To eliminate investment account and create noncontrolling interest account 400,000 165,000 107,000 361,200 310,800 (3) Other assets (Land) Difference between Implied and Book Value To allocate the difference between implied and book value to goodwill 107,000 107,000 - 46 83,313 37,625 45,688 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-14 (continued) Phan Company and Subsidiary Consolidated Statements Workpaper For the Year Ended December 31, 2007 Phan Company Sato Company Eliminations Dr Cr Noncontrolling Interest Consolidated Balances Income Statement Sales Gain on revaluation Equity Income Total Revenue Cost of Goods Sold Other Expense Total Cost and Expense Net/Consolidated Income Noncontrolling Interest in Income Net Income to Retained Earnings Retained Earnings Statement 1/1 Retained Earnings: Phan Company Sato Company Net Income from Above Dividends Declared: Phan Company Sato Company 12/31 Retained Earnings to Balance Sheet 1,800,000 13,925 83,313 1,897,238 1,100,000 350,000 1,450,000 447,238 605,000 605,000 320,000 130,000 450,000 155,000 447,238 155,000 2,405,000 13,925 (1) 83,313 71,688 71,688 83,313 353,100 447,238 353,100 165,000 155,000 (2) 165,000 83,313 71,688 (150,000) 447,237 (150,000) (70,000) 650,338 2,418,925 1,420,000 480,000 1,900,000 518,925 (71,688) 447,237 (1) 250,000 248,313 - 47 37,625 (32,375) 37,625 39,313 650,337 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-14 (continued) Phan Company Sato Company Eliminations Dr Cr Noncontrolling Interest Consolidated Balances Balance Sheet Current Assets Investment in Sato Company 165,500 406,888 138,000 Difference b/w implied and book value Other Assets 920,000 672,000 1,492,388 810,000 2,002,500 142,050 100,000 160,000 302,050 100,000 Total Liabilities Paid in Capital - Phan Company Capital Stock: Phan Company Sato Company Retained Earnings from Above 1/1 Noncontrolling Interest 12/31 Noncontrolling Interest Total 303,500 (2) (3) 107,000 107,000 (1) (2) (3) 45,688 361,200 107,000 1,699,000 600,000 650,338 600,000 400,000 250,000 (2) 400,000 248,313 (2) 1,492,388 810,000 862,313 - 48 37,625 310,800 862,313 39,313 310,800 350,113 650,337 350,113 2,002,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-15 Worksheet, Multiple Stock Purchases, Equity Method On Phan Company’s books Investment in Sato Company (36.25%) Cash Investment in Sato Cash Equity Income 280,000 280,000 72,000 63,000 135,000 No revaluation is required for additional shares purchased after control is already achieved The new ownership percentage is 90% or 36,000 shares divided by 40,000 shares outstanding The balance in the investment account is $758,888 ($110,500 + $26,775 + $210,000 + 45,688 + $280,000 + 13,925 +72,000) P Company’s Carrying Value of the Investment in S Company Before New After New Book Value of Purchase Purchase Interest (53.75%) (90%) Acquired Common Stock (1) $215,000 (3) $360,000 $145,000 Retained Earnings (2) 134,375 (4) 225,000 90,625 Total Stockholders’ Equity $349,375 $585,000 $235,625 Land to fair value (5) 57,513 (6) 96,300 38,787 Carrying Value in S Company 406,888 681,300 $274,412 Cost of New Shares 280,000 Decrease in Paid in Capital – Phan Company $ 5,588 (1) 5375 × $400,000 (2) 5375 × $250,000 (3) 90 × $400,000 (4) 90 × $250,000 (5) 5375 × $107,000 (6) 90 × $107,000 Worksheet journal entries (1) Equity Income (.90 × $150,000) Dividends declared – Sato Company (.90 × $70,000) Investment in Sato Company To remove dividends 135,000 63,000 72,000 (2) Capital Stock - Sato Company Retained Earnings 1/1 – Sato Company Difference between Implied and Book Value Paid in capital – Phan Company Investment in Sato Company ($758,888-72,000) Noncontrolling interest To eliminate investment account and create noncontrolling interest account 400,000 250,000 107,000 5,588 686,888 75,700 (3) Other assets (Land) Difference between Implied and Book Value To allocate the difference between implied and book value to goodwill 107,000 107,000 - 49 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-15 (continued) Phan Company and Subsidiary Consolidated Statements Workpaper For the Year Ended December 31, 2008 Phan Company Income Statement Sales Sato Company 1,800,000 600,000 Equity Income Total Revenue Cost of Goods Sold Other Expense Total Cost and Expense Net/Consolidated Income Noncontrolling Interest in Income 135,000 1,935,000 1,100,000 350,000 1,450,000 485,000 600,000 325,000 125,000 450,000 150,000 Net Income to Retained Earnings 485,000 Retained Earnings Statement 1/1 Retained Earnings: Phan Company Sato Company Net Income from Above Dividends Declared: Phan Company Sato Company 12/31 Retained Earnings to Balance Sheet Eliminations Dr Cr Noncontrolling Interest 2,400,000 (1) 135,000 150,000 135,000 15,000 2,400,000 1,425,000 475,000 1,900,000 500,000 (15,000) 15,000 485,000 650,338 485,000 650,338 250,000 150,000 (2) 250,000 135,000 15,000 (150,000) 485,000 (150,000) (70,000) 985,338 Consolidated Balances (1) 330,000 385,000 - 50 63,000 63,000 (7,000) 8,000 985,338 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 8-15 (continued) Phan Company Balance Sheet Current Assets 165,500 Investment in Sato Company 758,888 Difference b/w implied and book value Other Assets Total Sato Company Dr Cr Noncontrolling Interest 218,000 920,000 1,844,388 672,000 890,000 Liabilities Paid in Capital - Phan Company Capital Stock: Phan Company Sato Company 159,050 100,000 160,000 Retained Earnings from Above 1/1 Noncontrolling Interest in Net Assets 12/31 Noncontrolling Interest in Net Assets 985,338 Total Eliminations 383,500 (2) (3) 107,000 107,000 (2) 5,588 (2) 400,000 (1) (2) 72,000 686,888 (3) 107,000 1,699,000 2,082,500 319,050 94,412 600,000 600,000 400,000 330,000 385,000 (2) 1,844,388 Consolidated Balances 890,000 1,004,588 - 51 63,000 75,700 1,004,588 8,000 75,700 985,338 83,700 83,700 2,082,500 ... more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Controlling interest in Consolidated Net Income $323,125 - 17 To download more slides, ebook, solutions and test... between Implied and Book Value 8-2 429,300 47,700 32,000 32,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-1 (continued) Computation... = $429,300 8-3 Entire Value 477,000 445,000 32,000 (32,000) -0- To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 8-2 January 1, 2011 Investment