Solution manual advanced accounting 9e by hoyle ch04

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 noncontrollin

CHAPTER 4 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

1 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

2 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

3 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

1 Beginning of year balance

2 Interest in subsidiary’s current income

3 Dividends paid during the period

4 End of year balance

C Noncontrolling interest balances are accumulated in a separate column in the

3 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

4 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

2 Understand the meaning of the term "noncontrolling interest.”

3 Explain the rationale underlying the acquisition method for accounting for the

6 Carry out a consolidation when a step acquisition has taken place

7 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

8 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

1 "Noncontrolling interest" refers to an equity interest that is held in a member of a

business combination by an unrelated (outside) party

2 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)

3 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

4 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

5 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

6 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

7 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

8 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

9 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

Answers to Problems

1 D The acquisition method consolidates assets at fair value at acquisition date

regardless of the parent’s percentage ownership

2 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

3 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 $45,000 Amortization for 2 years (10 year life) (9,000) Patent reported amount December 31, 2010 $36,000

4 A Plaster building $510,000

Turner building acquisition-date fair value $300,000

Amortization for 3 years (10-year life) (90,000) 210,000 Consolidated buildings $720,000

-OR-

Plaster building $510,000

Excess acquisition-date fair value allocation 40,000

Excess amortization for 3 years (10-year life) (12,000) 210,000 Consolidated buildings $720,000

5 C Hygille expense $621,000

Nuyt expenses 714,000 Excess fair value amortization (70,000 ÷ 10 yrs) 7,000 Consolidated expenses $1,342,000

6 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

7 C

8 B

9 A Amie, Inc Fair value at January 1, 2007:

30% previously owned fair value (30,000 shares × $5) $150,000 60% new shares acquired (60,000 shares × $6) 360,000 10% NCI fair value (10,000 shares × $5) 50,000 Acquisition-date fair value $560,000 Net assets' fair value 500,000 Goodwill $60,000

10 C

11 A Fair value of noncontrolling interest on April 1 $165,000

30% of net income for 9 months (¾ year × $240,000 × 30%) 54,000 Noncontrolling interest December 31 $219,000

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) $86,000

Noncontrolling interest percentage 40% Noncontrolling interest in subsidiary income $34,400 Fair value of noncontrolling interest at acquisition date $180,000 40% change in Scott book value since acquisition 52,000 Excess fair value amortization ($14,000 × 40%) (5,600) 40% current year income 34,400 Noncontrolling interest at end of year $260,800

14 A Michael trademark balance $260,000

Scott trademark balance 200,000 Excess fair value 60,000 Two years amortization (10-year life) (12,000) Consolidated trademarks $508,000

15 A Acquisition-date fair value ($60,000 ÷ 80%) $75,000

Strand's book value (50,000) Fair value in excess of book value $25,000 Excess assigned to inventory (60%) .$15,000

Excess assigned to goodwill (40%) .$10,000

Park current assets $70,000 Strand current assets 20,000 Excess inventory fair value 15,000 Consolidated current assets $105,000

16 D Park noncurrent assets $90,000

Strand noncurrent assets 40,000 Excess fair value to goodwill 10,000 Consolidated noncurrent assets $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 $80,000

Noncontrolling interest at fair value (20% × $75,000) 15,000 Total stockholders' equity $95,000

20 (15 minutes) (Compute consolidated income and noncontrolling interests)

2009 2010 Harrison income $220,000 $260,000 Starr income 70,000 90,000 Excess fair value amortization (8,000) (8,000) Consolidated net income $282,000 $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) $75,000

2009 income to NCI ([$70,000 – $8,000] × 10%) 6,200

2009 dividends to NCI (3,000) Noncontrolling interest reported value December 31, 2009 78,200

2010 income to NCI ([$90,000 – $8,000] × 10%) 8,200

2010 dividends to NCI (3,000) Noncontrolling interest reported value December 31, 2010 $83,400

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

To controlling interest:

Consolidated net income $1,615,000 Noncontrolling interest share of consolidated net income (73,000) Controlling interest share of consolidated net income $1,542,000

-OR-

Patterson’s revenues $3,000,000 Patterson’s expenses 1,750,000 Patterson’s separate net income $1,250,000 Patterson’s share of Soriano’s adjusted net income

(80% × $365,000) 292,000 Controlling interest share of consolidated net income $1,542,000

f Fair value of noncontrolling interest January 1, 2009 $600,000

2009 income 73,000 Dividends (20% × $30,000) (6,000) Noncontrolling interest December 31, 2009 $ 667,000

g If Soriano’s acquisition-date total fair value was $2,250,000, then a bargain purchase has occurred

Soriano’s total fair value 1/1/09 $2,250,000 Collective fair values of Soriano’s net assets $2,300,000 Bargain purchase $50,000

The acquisition method requires that the subsidiary assets acquired and

liabilities assumed be recognized at their acquisition date fair values

regardless of the assessed fair value Therefore, none of Soriano’s identifiable assets and liabilities would change as a result of the assessed fair value

When a bargain purchase occurs, however, no goodwill is recognized

22 (20 Minutes) (Determine consolidated income balances, includes a mid-year acquisition)

a Acquisition-date total fair value $594,000

Book value of net assets (400,000)

Fair value in excess of book value $194,000 Annual Excess

Patent 140,000 5 years $28,000 Land 10,000

Buildings 30,000 10 years 3,000 Goodwill 14,000

Total -0- $31,000

Consolidated figures following January 1 acquisition date:

Combined revenues $1,500,000 Combined expenses (1,031,000) Consolidated net income 469,000 NCI in Sawyer’s income ([200,000 – 31,000] × 30%) (50,700) Controlling interest in consolidated net income $418,300

b Consolidated figures following April 1 acquisition date:

Combined revenues (1) $1,350,000 Combined expenses (2) (923,250) Consolidated net income $426,750 Noncontrolling interest in subsidiary income (3) (38,025) Controlling interest in consolidated net income $388,725

(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues

(2) $600,000 Parker expenses plus $300,000 of post-acquisition Sawyer expenses

plus $23,250 amortization expenses for 9 months

(3) ($200,000 – 31,000) adjusted subsidiary income × 30% × ¾ year

23 (15 minutes) Consolidated figures with noncontrolling interest

Fair value of company (given) $60,000

Fair value in excess of book value 50,000

to machine ($50,000 – $10,000) 40,000 ÷ 10 = $4,000 per year

to process trade secret $10,000 ÷ 4 = 2,500 per year

Consolidated figures:

 Noncontrolling interest in subsidiary income

= 40%  ($50,000 revenues less $26,500 expenses) = $9,400

 End-of-year noncontrolling interest:

Beginning balance (40%  $60,000) $24,000

Dividend reduction (40%  $5,000) (2,000) End-of-year noncontrolling interest $31,400

 Machine (net) = $45,000 ($9,000 book value plus $40,000 excess

allocation less $4,000 excess depreciation for one year)

 Process trade secret (net) = $10,000 – $2,500 = $7,500

24 (20 Minutes) (Determine consolidated balances for a step acquisition)

a Amsterdam fair value implied by price paid by Morey

b Revaluation gain

1/1 equity investment in Amsterdam (book value) $178,000

c Goodwill at 12/31

Book value at 6/30 (700,000 + [70,000 ÷ 2]) 735,000

Allocation to goodwill (no impairment) $65,000

25 (30 Minutes) (Reporting the sale of a portion of an investment in a subsidiary.)

a The 1,000 shares sold are reported using the equity method for the January 1, 2011 until October 1, 2011 period This stock represents 10 percent of the outstanding shares of Santana An accrual of $9,000 is recorded by Girardi (10% × $120,000 × ¾ year) reduced by $1,500 in amortization expense as computed below Therefore, an "Equity Income from Sold Shares of Santana" in the amount of $7,500 will appear in the

2011 consolidated income statement The consolidation will now

include all of Santana's accounts with the 40% noncontrolling interest recognized

Santana fair value 1/1/09 $1,100,000

Santana book value (1,030,000)

Shares sold—1,000 out of 7,000 1/7

Amortization relating to sold shares $1,500

b As long as control is maintained, the acquisition method considers transactions in the stock of a subsidiary, whether purchases or sales,

as transactions in the equity of the consolidated entity

Investment Book Value 10/1/11

1/1/11 balance (given—equity method) $1,085,000

Recognition of 1/1/11–10/1/11 period:

Income accrual ($120,000 × 70% × ¾) 63,000 Dividends ($40,000 × 70% × ¾) (21,000) Amortization ($14,000 × ¾) (10,500) Correct investment book value—10/1/11 $1,116,500

Computation of Income Effect—Sales Transaction

10/1/11 book value (above) $1,116,500

Portion of investment sold (1,000/7,000 shares) 1/7

Book value of investment sold $159,500

Proceeds 191,000

Credit to Girardi’s additional paid-in capital $ 31,500

c Because Girardi continues to hold 6,000 shares of Santana, control is still maintained and consolidated financial statements would be

appropriate with a noncontrolling interest of 40 percent

26 (35 Minutes) (Consolidation entries and the effect of different investment

Entry A

Patent 18,000 Goodwill 190,000 Investment in Bandmor 145,600 Noncontrolling Interest in Bandmor (30%) 62,400 (To recognize unamortized portions of acquisition-date fair value allocations Patent has undergone two years amortization)

Entry I

Equity in Subsidiary Earnings 72,800 Investment in Bandmor 72,800 (To eliminate intercompany income balance Equity accrual of

$72,800 [70% × ($110,000 – 6,000 amortization)] has been recorded) Entry D

Investment in Bandmor 42,000 Dividends Paid 42,000 (To eliminate current intercompany dividend transfers—70% of

$60,000) Entry E

Amortization Expense 6,000 Patent 6,000 (To recognize amortization for current year)

Entry P

Accounts Payable 22,000 Accounts Receivable 22,000 (To eliminate intercompany payable/receivable balance)

26 (continued)

b If the initial value method had been applied, the parent would have recorded only the dividends received as income rather than an equity accrual Therefore, Entry *C is needed to adjust the parent's beginning retained earnings for 2011 to the equity method During 2009 and 2010, the subsidiary earned a total net income of $171,000 but paid dividends

of only $83,000 The parent's share of the difference is $61,600 (70% of

$88,000 [$171,000 - $83,000]) In addition, the parent’s 70% share of excess amortization expense for two years must also be included

($8,400 = 2 years × $6,000 per year × 70%) The net amount to be

recognized is $53,200 ($61,600 - $8,400)

ENTRY *C

Investment in Bandmor 53,200 Retained Earnings, 1/1/11 53,200

c If the partial equity method had been applied, only the excess

amortization expenses for the previous two years would have been omitted from the parent's retained earnings As shown above, that

figure is $8,400 (2 years × $6,000 per year × 70%)

ENTRY *C

Retained Earnings, 1/1/11 8,400 Investment in Bandmor 8,400

d Noncontrolling interest in Bandmor's income—2011

–OR–

Worksheet adjustment S $170,400 Worksheet adjustment A $62,400

2009 income to noncontrolling interest 31,200

2009 dividends to noncontrolling interest (18,000) Noncontrolling interest in Bandmor 12/31/11 $246,000

27 (45 Minutes) (Asks about several consolidated balances and consolidation

process Includes the different accounting methods to record investment.)

a Schedule 1 —Fair Value Allocation and Excess Amortizations

Consideration transferred by Miller $664,000

Noncontrolling interest fair value 166,000

Taylor’s fair value $830,000

Taylor’s book value (600,000)

Fair value in excess of book value 230,000 Annual Excess

Life Amortizations

Excess fair value assigned to buildings 80,000

20 years $4,000

Goodwill $150,000 indefinite -0- Total $4,000

b $150,000 (see schedule 1 above)

c Entry (S)

Common Stock (Taylor) 300,000

Additional Paid-in Capital (Taylor) 90,000

Retained Earnings (Taylor) 210,000

Investment in Taylor Company (80%) 480,000 Noncontrolling interest in Taylor (20%) 120,000

(2) Partial Equity Method

27 (continued)

Partial Equity Method

Investment in Taylor—12/31/11 = $836,000 (initial value paid plus income accrual of $208,000 less dividends of $36,000 [no excess amortizations])

Initial Value Method

Investment in Taylor—12/31/11 = $664,000 (original value paid)

f Using the acquisition method, the allocation will be the total difference ($80,000) between the buildings' book value and fair value Based on a

20 year life, annual excess amortization is $4,000

Miller book value—buildings $800,000

Taylor book value—buildings 300,000

Allocation 80,000

Excess Amortizations for 2009–2010 ($4,000 × 2) (8,000)

Consolidated buildings account $1,172,000

g Acquisition-date fair value allocated to goodwill

(see schedule 1 above) $150,000

h If the parent has been applying the equity method, the stockholders' equity accounts on its books will already represent consolidated totals The common stock and additional paid-in capital figures to be reported are the parent balances only As to retained earnings, the equity method will properly record all subsidiary income and amortization so that the parent balance is also a reflection of the consolidated total

28 (20 Minutes) (A variety of consolidated balances-midyear acquisition)

Book value of Reckers, 1/1

(stockholders' equity accounts) $1,400,000 Increase in book value:

Net Income (revenues less cost of goods sold and expenses) $120,000 Dividends (20,000) Change during year $100,000

Change during first six months of year 50,000 Book value of Reckers, 7/1 (acquisition date) $1,450,000 Consideration transferred by Kaplan $1,360,000

Noncontrolling interest fair value 300,000

Reckers’ fair value (given) $1,630,000

Book value of Reckers (1,450,000)

Fair value in excess of book value $180,000 Annual Excess Excess fair value assigned Life Amortizations

Trademarks 150,000 5 years $30,000 Goodwill $60,000 indefinite -0- Total $30,000 CONSOLIDATION TOTALS:

 Noncontrolling Interest in sub Income (4) $9,000

(1) $800,000 Kaplan revenues plus $250,000 (post-acquisition subsidiary

revenue) (2) $400,000 Kaplan COGS plus $140,000 (post-acquisition subsidiary COGS) (3) $200,000 Kaplan operating expenses plus $50,000 (post-acquisition

subsidiary operating expenses) plus ½ year excess amortization of $15,000 (4) 20% of post-acquisition subsidiary income less excess fair value

amortization [20% × (120,000 – 30,000) × ½ year] = $9,000

 Retained Earnings, 1/1 = $1,400,000 (the parent’s balance because the subsidiary was acquired during the current year)

 Trademark = $935,000 (add the two book values and the excess fair

value allocation after taking one-half year excess amortization)

 Goodwill = $60,000 (the original allocation)

29 (25 Minutes) (A variety of consolidated questions and balances)

a Nascent applies the initial value method because the original price of

$414,000 is still in the Investment in Sea-Breeze account In addition, the Investment Income account is equal to 60 percent of the dividends paid

by the subsidiary during the year

b Consideration transferred in acquisition $414,000

Noncontrolling interest fair value 276,000

Sea-Breeze fair value 1/1/09 $690,000

Sea-Breeze book value 1/1/09 550,000

Excess fair value over book value $140,000

Life Amortizations

Buildings 60,000 6 years $10,000 Equipment (20,000) 4 years (5,000) Patent 100,000 10 years 10,000 Total -0- $15,000

c If the equity method had been applied, the Investment Income account would show the basic equity accrual less amortization: 60% of (the subsidiary's income of $90,000 less $15,000 excess fair value

amortization) = $45,000

d The initial value method recognizes neither the increase in the

subsidiary's book value nor the excess amortization expenses for prior years At the acquisition date, the subsidiary’s book value was $550,000

as indicated by the assets less liabilities At the beginning of the current year, the book value of the subsidiary is $780,000 as indicated by

beginning stockholders' equity balances

Increase in book value during prior years

($780,000 – $550,000) $230,000 Less excess amortization (45,000) Net increase in book value $185,000 Ownership 60% Increase required in parent's retained earnings, 1/1/12 $111,000 Parent's retained earnings, 1/1/12 as reported 700,000 Parent’s share of consolidated retained earnings, 1/1/12 $811,000

e Consolidated net income and allocation

 Expenses (add book values and excess amortization) (635,000)

 Noncontrolling interest in consolidated net income

 Controlling interest in consolidated net income $235,000

29 (continued)

f Consolidated buildings, 1/1/09 (subsidiary):

Book value $300,000 Acquisition-date fair-value allocation 60,000 Consolidation figure $360,000

g Consolidated buildings, 12/31/12:

Parent's book value $700,000 Subsidiary's book value 200,000 Original allocation 60,000 Amortization ($10,000 × 4 years) (40,000) Consolidated balance $920,000

30 Acquisition Method Consolidated Balances

Fair value of Steele Company (1,710,000 ÷ 90%) $1,900,000

to customer base 800,000

30 (Continued)

Controlling Noncontrolling Interest Interest

Relative fair values of identifiable net assets

90% and 10% of $1,525,000 (acquisition date

recorded fair value plus customer base) 1,372,500 152,500

b If the fair value of the noncontrolling interest was $152,500, both goodwill and the noncontrolling interest balance would be reduced equally by $37,500 as

follows:

Fair value of Steele Company (1,710,000 + 152,500) $1,862,500

to customer base 800,000

Noncontrolling interest balance beginning of year $(157,500)

Noncontrolling interest in consolidated net income (13,500)

Controlling Noncontrolling Interest Interest

Relative fair values of identifiable net assets

90% and 10% of $1,525,000 (acquisition date

recorded fair value plus customer base) 1,372,500 152,500

31 (60 Minutes) (Consolidation worksheet and income statement with parent

using initial value method Also consolidated balances with a control

premium paid by parent.)

a Fair Value Allocation and Amortization

Consideration transferred by Krause $504,000

Noncontrolling interest fair value 126,000

Leahy total fair value 1/1/09 $630,000

Leahy book value 1/1/09 (380,000)

Fair value in excess of book value $250,000 Annual Excess

Life Amortizations

Excess price allocated to undervalued

Building 45,000 5 years $9,000 Trademark 60,000 10 years 6,000 Goodwill $145,000 $15,000

Explanation of Consolidation Entries Found on Worksheet

Entry *C: Convert the parent’s 1/1/10 retained earnings balance from the cash basis to the accrual basis

Entry S: Eliminates stockholders' equity accounts of subsidiary while recognizing noncontrolling interest balance (20%) as of the beginning of the current year

Entry A: Recognizes acquisition-date fair value allocations less 1 year amortization for building and trademark and increases beginning

balance of the noncontrolling interest for it’s share

Entry I: Eliminates Intercompany dividend payments recorded as income

by parent

Entry E: Recognizes amortization expense for current year

Columnar Entry—Recognizes noncontrolling interest's share of

subsidiary's net income ($90,000 – 15,000) × 20%)