Chapter 11 CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND CORPORATE JOINT VENTURES Answers to Questions Parent company theory views consolidated financial statements from the viewpoint of the parent company and entity theory views consolidated financial statements from the viewpoint of the business entity under which all resources are controlled by a single management team By contrast, traditional theory sometimes reflects the parent company viewpoint and at other times it reflects the viewpoint of the business entity A detailed comparison of these theories is presented in Exhibit 11–1 of the text Only contemporary theory is changed by current pronouncements of the Financial Accounting Standards Board While such pronouncements can and change the current accounting and reporting practices, they not change the logic or the consistency of either parent company or entity theory For example, SFAS Nos 141R and 160, replaced traditional theory with an almost pure entity approach to preparation of consolidated financial statements The valuation of subsidiary assets on the basis of the price paid for the controlling interest seems justified conceptually when substantially all of the subsidiary stock is acquired by the parent But the conceptual support for this approach is less when only a slim majority of subsidiary stock is acquired In addition, the valuation of the noncontrolling interest based on the price paid by the parent company has practical limitations because noncontrolling interest does not represent equity ownership in the usual sense The ability of noncontrolling stockholders to participate in management is limited and noncontrolling shares not possess the usual marketability of equity securities Consolidated assets are equal to their fair values under entity theory only when the book values of parent company assets are equal to their fair values Otherwise, consolidated assets are not equal to their fair values under either parent company or entity theories The valuation of the noncontrolling interest at book value might overstate the equity of noncontrolling shareholders because of the limited marketability of shares held by noncontrolling stockholders and because of the limited ability of noncontrolling stockholders to share in management through their voting rights Valuation of the noncontrolling interest at book value also overstates or understates the noncontrolling interest unless the subsidiary assets are recorded at their fair values Consolidated net income under parent company theory and income to the controlling stockholders under entity theory should be the same This is illustrated in Exhibit 11–5, which shows different income statement amounts for cost of sales, operating expenses, and income allocated to noncontrolling stockholders, but the same income to controlling stockholders Note that consolidated net income under parent company and traditional theories reflects income to controlling stockholders Income to the parent company stockholders under the equity method of accounting is the same as income to the controlling stockholders under entity theory But income to controlling stockholders is not identified as consolidated net income as it would be under parent company or traditional theories Consolidated income statement amounts under entity theory are the same as under contemporary theory when subsidiary investments are made at book value because contemporary theory follows entity theory in eliminating the effects of intercompany transactions from consolidated financial statements © 2009 Pearson Education, Inc publishing as Prentice Hall 11-1 11-2 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Traditional theory corresponds to entity theory in matters relating to unrealized and constructive gains and losses from intercompany transactions In other words, unrealized and constructive gains and losses are allocated between controlling and noncontrolling interests in the same manner under these two theories 10 Push-down accounting simplifies the consolidation process The push-down adjustments are recorded in the subsidiary’s separate books at the time of the business combination; thus, it is not necessary to allocate the unamortized fair value-book value differentials in the consolidation working papers 11 A joint venture is an entity that is owned, operated, and jointly controlled by a small group of investorventurers to operate a business for the mutual benefit of the venturers Some joint ventures are organized as corporations, while others are organized as partnerships or undivided interests Each venturer typically participates in important decisions of a joint venture irrespective of ownership percentage 12 Investors in corporate joint ventures use the equity method of accounting and reporting for their investment earnings and investment balances as required by APB Opinion No 18 The cost method would be used only if the investor could not exercise significant influence over the corporate joint venture Alternatively, investors in unincorporated joint ventures use the equity method of accounting and reporting as explained in Interpretation No of APB Opinion No 18 or proportional consolidation for undivided interests specified as a special industry practice SOLUTIONS TO EXERCISES Solution E11-1 A A C A B C D D C Solution E11-2 B B D Solution E11-3 c Total value of Smith implied by purchase price ($720,000/.8) Noncontrolling interest percentage Noncontrolling interest $900,000 20% $180,000 a Only the parent’s percentage of unrealized profits from upstream sales is eliminated under parent company theory b Subsidiary’s income of $200,000 ´ 10% noncontrolling interest Less: Patent amortization ($70,000/10 years ´ 10%) $ 20,000 © 2009 Pearson Education, Inc publishing as Prentice Hall (700) Chapter 11 11-3 Noncontrolling interest share $ 19,300 © 2009 Pearson Education, Inc publishing as Prentice Hall 11-4 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution E11-3 (continued) a Implied fair value — $840,000 = patents at acquisition Book value of 100% of identifiable net assets Add: Patents at acquisition ($54,000/90%) Total implied value Percent acquired Purchase price under entity theory $840,000 60,000 900,000 80% $720,000 b Purchase price — ($840,000 ´ 80%) = patents at acquisition Book value $840,000 ´ 80% = underlying equity Add: Patents at acquisition ($54,000/90%) Purchase price (traditional theory) $672,000 60,000 $732,000 Solution E11-4 Goodwill Parent company theory Cost of investment in Staff Fair value acquired ($400,000 ´ 80%) Goodwill Entity theory Implied value based on purchase price ($500,000/.8) Fair value of Staff’s net assets Goodwill Noncontrolling interest Parent company theory Book value of Staff’s net assets Noncontrolling interest percentage Noncontrolling interest Entity theory Total valuation of Staff Noncontrolling interest percentage Noncontrolling interest Total assets Parent company theory Pond Current assets $ 20,000 Plant assets — net 480,000 Goodwill $500,000 Entity theory Current assets $ 20,000 Plant assets — net 480,000 Goodwill $500,000 Staff $ 50,000 250,000 $300,000 $ $ $ $ $ $ $ Adjustment $ 40,000 ´ 80% 110,000 ´ 80% $300,000 $ 50,000 250,000 $ $ 40,000 ´ 100% 110,000 ´ 100% 500,000 320,000 180,000 625,000 400,000 225,000 260,000 20% 52,000 625,000 20% 125,000 Total 102,000 818,000 180,000 $1,100,000 $ $ 110,000 840,000 225,000 $1,175,000 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 11 11-5 Solution E11-5 Preliminary computations Parent company theory Cost of 80% interest Fair value acquired ($350,000 ´ 80%) Goodwill $300,000 280,000 $ 20,000 Entity theory Implied total value ($300,000 cost ÷ 80%) Fair value of Shelly’s net identifiable assets Goodwill $375,000 350,000 $ 25,000 Consolidated net income and noncontrolling interest share for 2009: Parent Entity Company Theory Theory Combined separate incomes Depreciation on excess allocated to equipment: $75,000 excess ´ 80% acquired ÷ years $75,000 excess ÷ years Total consolidated income Less: Noncontrolling interest share $50,000 ´ 20% ($50,000 -15,000) ´ 20% Controlling interest share of NI $550,000 $550,000 $528,000 (7,000) $528,000 Goodwill at December 31, 2009: $ 20,000 $ 25,000 (12,000) 538,000 (15,000) 535,000 (10,000) © 2009 Pearson Education, Inc publishing as Prentice Hall 11-6 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution E11-6 Preliminary computation Interest acquired in Stahl: 72,000 shares ¸ 80,000 shares = 90% Stahl’s net assets under entity theory Implied value from purchase price: $1,800,000/90% interest Goodwill a Entity theory Implied value Less: Fair value and book value of net assets Goodwill $2,000,000 1,710,000 $ 290,000 b Parent company theory Cost of 90% interest $1,800,000 Fair values of net assets acquired ($1,710,000 ´ 90%) 1,539,000 Goodwill $ 261,000 c Contemporary theory (same as entity theory) $ 290,000 $ 36,000 Investment income from Stahl Income from Stahl ($80,000 ´ 1/2 year ´ 90% interest) $2,000,000 Noncontrolling interest under entity theory Imputed value of Stahl at July 1, 2009 Add: Income for 1/2 year Noncontrolling percentage Noncontrolling interest $2,000,000 40,000 2,040,000 10% $ 204,000 Alternatively, $200,000 noncontrolling interest at July 1, plus $4,000 share of reported income = $204,000 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 11 11-7 Solution E11-7 Parent company theory Combined separate incomes of Palumbo and Seal Less: Palumbo’s share of unrealized profits from upstream inventory sales ($30,000 ´ 80%) Less: Noncontrolling interest share ($300,000 ´ 20%) Consolidated net income $800,000 (24,000) (60,000) $716,000 Entity theory Combined separate incomes Less: Unrealized profits from upstream sales Total consolidated income $800,000 (30,000) $770,000 Income allocated to controlling stockholders ($500,000 + [$270,000 ´ 80%]) $716,000 Income allocated to noncontrolling stockholders ($300,000 - $30,000) ´ 20% $ 54,000 Solution E11-8 Combined separate incomes Less: Unrealized inventory profits from downstream sales ($60,000 - $30,000) ´ 50% Less: Unrealized profit on upstream sale of land ($96,000 - $70,000) ´ 100% ($96,000 - $70,000) ´ 80% Less: Noncontrolling interest share ($60,000 - $26,000) ´ 20% $60,000 ´ 20% Controlling share of net income Traditional Theory $180,000 Total consolidated income Allocated to controlling stockholders Allocated to noncontrolling Stockholders ($60,000 - $26,000) ´ 20% (15,000) Parent Company Theory $180,000 (15,000) (26,000) Entity Theory $180,000 (15,000) (26,000) (20,800) (6,800) $132,200 (12,000) $132,200 $139,000 $132,200 $ © 2009 Pearson Education, Inc publishing as Prentice Hall 6,800 11-8 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution E11-9 [Push-down accounting] Push down under parent company theory Retained earnings 800,000 Inventories 90,000 Land 450,000 270,000 Buildings — net Goodwill 360,000 Equipment 180,000 Other liabilities 90,000 Push down equity 1,700,000 To record revaluation of 90% of the net assets and elimination of retained earnings as a result of a business combination with Pioneer Corporation Push down equity = ($600,000 fair value — book value differential ´ 90%) + $360,000 goodwill + $800,000 retained earnings Push down under entity theory Retained earnings 800,000 Inventories 100,000 Land 500,000 300,000 Buildings — net Goodwill 400,000 200,000 Equipment — net Other liabilities 100,000 Push down equity 1,800,000 To record revaluation of 100% of the net assets and elimination of retained earnings as a result of a business combination with Pioneer Push down equity = $600,000 fair value — book value differential + $400,000 goodwill + $800,000 retained earnings Solution E11-10 Each of the investments should be accounted for by the equity method as a oneline consolidation because the joint venture agreement requires consent of each venturer for important decisions Thus, each venturer is able to exercise significant influence over its joint venture investment irrespective of ownership interest The 40 percent venturer: Income from Sun-Belt ($500,000 ´ 40%) Investment in Sun-Belt ($8,500,000 ´ 40%) $ 200,000 $3,400,000 The 15 percent venturer Income from Sun-Belt ($500,000 ´ 15%) Investment in Sun-Belt ($8,500,000 ´ 15%) $ 75,000 $1,275,000 Solution E11-11 In general, VIE accounting follows normal consolidation principles Under that approach, the noncontrolling interest share would be 90% of VIE earnings, or $450,000 However, the intercompany fees must be allocated to the primary beneficiary, not to noncontrolling interests Therefore, in this case, noncontrolling interest share would be 90% of $460,000, or $414,000 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 11 11-9 © 2009 Pearson Education, Inc publishing as Prentice Hall 11-10 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution E11-12 As primary beneficiary, Paxel must include Polo in its consolidated financial staements Additionally, Paxel must make the following disclosures: (a) the nature, purpose, size, and activities of the variable interest entity, (b) the carrying amount and classification of consolidated assets that are collateral for the variable interest entity’s obligations, and (c) lack of recourse if creditors (or beneficial interest holders) of a consolidated variable interest entity have no recourse to the general credit of the primary beneficiary Darden will not consolidate Polo, since they are not the primary beneficiary As in traditional consolidations, only one firm consolidates a subsidiary However, since Darden has a significant interest in Polo, they must disclose: (a) the nature of its involvement with the variable interest entity and when that involvement began, (b) the nature, purpose, size, and activities of the variable interest entity, and (c) the enterprise’s maximum exposure to loss as a result of its involvement with the variable interest entity Solution E11-13 According to FIN 46(R), if an enterprise absorbs a majority of a variable interest entity’s expected losses and another receives a majority of expected residual returns, the enterprise absorbing the losses is the primary beneficiary and must consolidate the variable interest entity The contractual arrangement makes Laura the primary beneficiary © 2009 Pearson Education, Inc publishing as Prentice Hall 11-12 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-2 Preliminary computation Implied value of Pisces based on purchase price ($160,000/.8) Book value Excess to undervalued equipment $200,000 170,000 $ 30,000 Pisces Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2009 Sales Less: Cost of sales Gross profit Other expenses Depreciationa $600,000 380,000 220,000 $ 80,000 79,500 Total consolidated net income Allocation of income to: Noncontrolling interestb Controlling interest a b 159,500 $ 60,500 $ 4,100 $ 56,400 $75,000 depreciation - $500 piecemeal recognition of gain on equipment through depreciation + ($30,000 excess ¸ years) excess depreciation ($30,000 reported income - $5,000 unrealized gain on equipment + $500 piecemeal recognition of gain on equipment - $5,000 excess depreciation) ´ 20% interest Pisces Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2009 Assets Current assets Plant and equipment — net ($595,000 - $199,500 + 25,000) Total assets Liabilities and equity Liabilities Capital stock Retained earningsa Noncontrolling interestb Total liabilities and stockholders’ equity a b $241,600 420,500 $662,100 $150,000 300,000 170,000 42,100 $662,100 Pisces beginning retained earnings $163,600 + Pisces net income $56,400 Pisces dividends of $50,000 ($190,000 stockholders’ equity + $25,000 excess - $4,500 unrealized gain on equipment) ´ 20% Check: $40,000 beginning noncontrolling interest + $4,100 noncontrolling interest share - $2,000 noncontrolling interest dividends = $42,100 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 11 11-13 Solution P11-3 Parent company theory 1a Income from Sign for 2009 ($90,000 ´ 70%) $ 63,000 1b Goodwill at December 31, 2009 ($595,000 cost - $525,000 fair value) $ 70,000 1c Consolidated net income for 2009 Palace’s separate income Add: Income from Sign 1d $300,000 63,000 Noncontrolling interest share for 2009 Net income of Sign of $90,000 ´ 30% 1e $363,000 $ 27,000 Noncontrolling interest December 31, 2009 Sign’s stockholders’ equity $790,000 ´ 30% $237,000 Entity theory 2a Income from Sign for 2009 ($90,000 ´ 70%) 2b Goodwill at December 31, 2009 Imputed value ($595,000/70%) Fair value of Sign’s net assets Goodwill 2c $ 63,000 $850,000 750,000 $100,000 Total consolidated income for 2009 Income to controlling stockholders ($300,000 + $63,000) Add: Noncontrolling interest share ($90,000 ´ 30%) Total consolidated income $363,000 27,000 $390,000 2d Noncontrolling interest share (computed in 2c above) $ 27,000 2e Noncontrolling interest at December 31, 2009 (Book equity $790,000 + $100,000 goodwill) ´ 30% $267,000 © 2009 Pearson Education, Inc publishing as Prentice Hall 11-14 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-4 Preliminary computations Parent company theory Investment in Smedley Fair value of 80% interest acquired ($240,000 ´ 80%) Goodwill $224,000 192,000 $ 32,000 Entity Theory Implied value of Smedley ($224,000/.8) Fair value of identifiable net assets Goodwill $280,000 240,000 $ 40,000 Pierre used an incomplete equity method in accounting for its investment in Smedley It ignored the intercompany upstream sales of inventory Income from Smedley on an equity basis would be: Share of Smedley’s income ($50,000 ´ 8) $ 40,000 Less: Unrealized profits in ending inventory from upstream sale ($8,000 ´ 50% ´ 80%) (3,200) Income from Smedley $ 36,800 Pierre Corporation and Subsidiary Comparative Consolidated Income Statements for the year ended December 31, 2010 Sales Less: Cost of sales Gross profit Traditional Theory $1,000,000 (575,000) 425,000 Parent Company Theory $1,000,000 (575,000) 425,000 Entity Theory $1,000,000 (575,000) 425,000 (200,000) (200,000) (200,000) Expenses Less: Unrealized profit on upstream sale of inventory ($23,000 - $15,000) ´ 50% ´ 100% ($23,000 - $15,000) ´ 50% ´ 80% Noncontrolling interest share ($50,000 - $4,000) ´ 20% $50,000 ´ 20% Consolidated net income Total consolidated income Allocated to controlling Stockholders Allocated to noncontrolling Stockholders ($50,000 - $4,000) ´ 20% (4,000) (4,000) (3,200) (9,200) $ 211,800 $ (10,000) 211,800 $ 221,000 $ 211,800 $ 9,200 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 11 11-15 Solution P11-4 (continued) Pierre Corporation and Subsidiary Comparative Statements of Retained Earnings for the year ended December 31, 2010 Retained earnings December 31, 2009 Add: Consolidated net income Add: Net income to controlling stockholders Less: Dividends to controlling stockholders Retained earnings December 31, 2010 Parent Company Theory $360,000 211,800 Traditional Theory $360,000 211,800 Entity Theory $ 360,000 211,800 571,800 (120,000) $ 451,800 571,800 (120,000) $ 451,800 571,800 (120,000) $ 451,800 Pierre Corporation and Subsidiary Comparative Consolidated Balance Sheets at December 31, 2010 Parent Company Theory Traditional Theory Assets Cash Accounts receivable Inventory Land Buildings — net Goodwill Total assets Liabilities Accounts payable Noncontrolling interest Total liabilities Stockholders’ equity Capital stock Retained earnings Noncontrolling interest Total stockholders’ equity Total equities $ Entity Theory 110,800 120,000 196,000 280,000 840,000 32,000 $1,578,800 $ 110,800 120,000 196,800 280,000 840,000 32,000 $1,579,600 $ $ $ 275,800 52,000 327,800 $ 800,000 451,800 800,000 451,800 59,200 1,311,000 $1,586,800 275,800 275,800 800,000 451,800 51,200 1,303,000 $1,578,800 1,251,800 $1,579,600 110,800 120,000 196,000 280,000 840,000 40,000 $1,586,800 275,800 275,800 © 2009 Pearson Education, Inc publishing as Prentice Hall 11-16 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-5 Packard Corporation and Subsidiary Comparative Balance Sheets at December 31, 2010 Traditional Theory Entity Theory Assets Cash Receivables — net Inventories Plant assets — net Goodwill Total assets $ 70,000 110,000 120,000 300,000 40,000 $640,000 $ 70,000 110,000 120,000 300,000 50,000 $650,000 Liabilities Accounts payable Other liabilities Total liabilities $ 95,000 25,000 120,000 $ 95,000 25,000 120,000 300,000 194,000 300,000 194,000 Stockholders’ equity Capital stock Retained earnings Noncontrolling interest ($150,000 - $20,000) ´ 20% ($150,000 + $50,000 - $20,000) ´ 20% Total stockholders’ equity Total equities Supporting computations Cost or imputed value Book value of 80% Book value of 100% Goodwill Investment cost Add: 80% of retained earnings increase ($50,000 - $10,000) ´ 80% Less: 80% of $20,000 unrealized profits Investment balance 26,000 520,000 $640,000 Traditional Theory $128,000 88,000 $ 40,000 36,000 530,000 $650,000 Entity Theory $160,000 110,000 $ 50,000 $128,000 32,000 (16,000) $144,000 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 11 11-17 Solution P11-6 [AICPA adapted] X carries its investment in Y on a cost basis This is evidenced by the appearance of dividend revenue in X Company’s income statement and by the absence of income from subsidiary X holds 1,400 shares of Y X Company’s percentage ownership is 70%, as determined by the relationship of X Company’s dividend revenues and Y Company’s dividends paid ($11,200/$16,000) Y has 2,000 outstanding shares ($200,000/$100) and X holds 70% of these, or 1,400 shares Y Company’s retained earnings at acquisition were $100,000 Imputed value of Y ($245,000 cost/70%) Less: Patents (applicable to 100%) Book value and fair value of Y’s identifiable net assets Less: Capital stock Retained earnings $ 350,000 (50,000) 300,000 (200,000) $ 100,000 The nonrecurring loss is a constructive loss on the purchase of X bonds by Y Company Working paper entry: Mortgage bonds payable (5%) 100,000 Loss on retirement of X bonds 3,000 X bonds owned 103,000 To eliminate intercompany bond investment and bonds payable and to recognize a loss on the constructive retirement of X bonds Intercompany sales X to Y are $240,000 computed as follows: Combined sales ($600,000 + $400,000) Less: Consolidated sales Intercompany sales $1,000,000 760,000 $ 240,000 Yes, there are other intercompany debts: Cash and receivables Current payables Dividends payable Combined $143,000 93,000 18,000 Consolidated $97,400 53,000 12,400 Intercompany Balances $ 45,600 40,000 5,600 Y Company owes X Company $40,000 on intercompany purchases and X Company owes Y Company $5,600 dividends © 2009 Pearson Education, Inc publishing as Prentice Hall 11-18 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-6 (continued) Adjustment to determine consolidated cost of goods sold: Consolidated Cost of Goods Sold Combined cost of goods $640,000 $240,000 Intercompany purchases sold Unrealized profit in Unrealized profit in ending inventory 8,000 5,000 beginning inventory 403,000ü To balance $648,000 $648,000 Consolidated cost of goods sold $403,000 Unrealized profit in ending inventory is equal to the combined less consolidated inventories ($130,000 - $122,000) Unrealized profit in beginning inventory is plugged as follows: ($640,000 + $8,000) - ($240,000 + $403,000) = $5,000 Noncontrolling interest share of $8,700 is computed as follows: Net income of Y Less: Patent amortization ($50,000/10 years) Adjusted income of Y Noncontrolling interest percentage Noncontrolling interest share $ 34,000 5,000 29,000 30% $ 8,700 Noncontrolling interest of $117,000 at the balance sheet date is computed: Stockholders’ equity of Y Company Add: Unamortized patents Equity of Y plus unamortized patents Noncontrolling interest percentage Noncontrolling interest on balance sheet date 10 $360,000 30,000 390,000 30% $117,000 Consolidated retained earnings Retained earnings of X end of year Add: X’s share of increase in Y’s retained earnings since acquisition ($160,000 - $100,000) ´ 70% Less: Unrealized profit in Y’s ending inventory Less: X’s patent amortization since acquisition $20,000 ´ 70% Less: Loss on constructive retirement of X’s bonds Consolidated retained earnings — end of year $200,000 42,000 (8,000) (14,000) (3,000) $217,000 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 11 11-19 Solution P11-7 Entry on Splash’s books at acquisition Inventories Land Buildings — net Other liabilities Goodwill Retained earnings Equipment — net Push-down capital 20,000 25,000 50,000 10,000 20,000 90,000 15,000 200,000 To push down fair value — book value differentials Splash Corporation Balance Sheet at January 1, 2010 Assets Cash Accounts receivable — net Inventories Total current assets Land Buildings — net Equipment — net Total plant assets Goodwill Total assets Liabilities And Stockholders’ Equity Accounts payable Other liabilities Total liabilities Capital stock Push-down capital Total stockholders’ equity Total liabilities and stockholders’ Equity $ 30,000 70,000 80,000 $180,000 $ 75,000 150,000 75,000 300,000 20,000 $500,000 $ 40,000 60,000 $100,000 $200,000 200,000 400,000 $500,000 If Splash reports net income of $90,000 under the new push-down system for the calendar year 2010, Played’s income from Splash will also be $90,000 under a one-line consolidation © 2009 Pearson Education, Inc publishing as Prentice Hall 11-20 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-8 Parent company theory Preliminary computation: Cost of 80% interest in Sanue Book value acquired ($2,000,000 ´ 80%) Excess cost over book value acquired Excess allocated to: Inventories $1,600,000 ´ 80% Equipment — net $(500,000) ´ 80% Goodwill for the remainder Excess fair value over book value acquired $3,000,000 1,600,000 $1,400,000 $1,280,000 (400,000) 520,000 $1,400,000 Entry on Sanue’s books to reflect 80% push down: Inventories 1,280,000 Goodwill 520,000 Retained earnings 1,200,000 Equipment — net Push-down capital Entity theory Preliminary computation: Implied value of net assets ($3,000,000/.8) Book value of net assets Total excess Excess allocated to: Inventories Equipment — net Goodwill for remainder Total excess 400,000 2,600,000 $3,750,000 2,000,000 $1,750,000 $1,600,000 (500,000) 650,000 $1,750,000 Entry on Sanue’s books to reflect 100% push down: Inventories 1,600,000 Goodwill 650,000 Retained earnings 1,200,000 Equipment Push-down capital Noncontrolling interest (Parent company theory) Sanue’s stockholders’ equity $2,000,000 ´ 20% 500,000 2,950,000 $ 400,000 Noncontrolling interest (Entity theory) Capital stock Push-down capital Stockholders’ equity Noncontrolling interest percentage Noncontrolling interest $ 800,000 2,950,000 3,750,000 20% $ 750,000 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 11 11-21 Solution P11-9 Push down under parent company theory 18,000 Buildings — net 27,000 Equipment — net Goodwill 36,000 Retained earnings 20,000 Inventories 9,000 Push-down capital 92,000 To record revaluation of 90% of net assets and elimination of retained earnings as a result of a business combination with Power Corporation Push down under entity theory Buildings — net Equipment — net Goodwill Retained earnings Inventories Push-down capital To record revaluation of net assets imputed 90% interest acquired by Power Corporation 20,000 30,000 40,000 20,000 10,000 100,000 from purchase price of Swing Corporation Comparative Balance Sheets at January 1, 2010 Parent Company Theory Entity Theory Assets Cash Accounts receivable — net Inventories Land Buildings — net Equipment — net Goodwill Total assets $ 20,000 50,000 31,000 15,000 48,000 97,000 36,000 $297,000 $ 20,000 50,000 30,000 15,000 50,000 100,000 40,000 $305,000 Liabilities and stockholders’ equity Accounts payable Other liabilities Capital stock Push-down capital Retained earnings Total equities $ 45,000 60,000 100,000 92,000 $297,000 $ 45,000 60,000 100,000 100,000 $305,000 © 2009 Pearson Education, Inc publishing as Prentice Hall 11-22 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-10 a Power Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 Push down 90% — parent company theory 90% Swing Power Adjustments and Eliminations Income Statement Sales $ 310,800 $ 110,000 Income from Swing 37,800 b Cost of sales 140,000 * 33,000 * Depreciation expense 29,000 * 24,200 * Other operating expenses 45,000 * 11,000 * Consolidated NI Noncontrolling share e Controlling share of NI $ 134,600 $ 41,800 Retained Earnings Retained earnings — Power $ 134,600ü 60,000 * $ 31,800 Balance Sheet Cash $ $ 27,000 40,000 Buildings — net Equipment — net Investment in Swing 9,000 20,000 40,000 140,000 35,000 15,000 43,200 165,000 77,600 $ 736,600 $ 125,000 15,000 75,000 300,000 221,600ü $ 56,000 * 138,000 4,000 * 134,600 $ 147,000 $ 4,000 134,600 b e a 9,000 1,000 8,000 208,800 Goodwill Accounts payable Dividends payable Other liabilities Capital stock Push-down capital Retained earnings 173,000 * 53,200 * 41,800ü 10,000 * $ 221,600 63,800 90,000 420,800 Retained earnings December 31 Accounts receivable — net Dividends receivable Inventories Land $ 37,800 $ 147,000 Retained earnings — Swing Controlling share of NI Dividends Consolidated Statements a 8,000 d 9,000 60,000 * $ 221,600 $ 98,800 122,000 55,000 55,000 183,200 242,600 b 28,800 c 180,000 36,000 $ 273,800 $ $ $ 20,000 10,000 d 9,000 20,000 100,000 c 100,000 92,000 c 92,000 31,800ü © 2009 Pearson Education, Inc publishing as Prentice Hall 36,000 792,600 145,000 16,000 95,000 300,000 221,600 Chapter 11 11-23 $ 736,600 $ 273,800 Noncontrolling interest January Noncontrolling interest December 31 c e 12,000 3,000 $ * Deduct © 2009 Pearson Education, Inc publishing as Prentice Hall 15,000 792,600 11-24 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-10 (continued) b Power Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 Push down 100% — entity theory 90% Swing Power Adjustments and Eliminations Income Statement Sales $ 310,800 $ 110,000 Income from Swing 37,800 b Cost of sales 140,000 * 32,000 * Depreciation expense 29,000 * 25,000 * Other operating expenses 45,000 * 11,000 * Consolidated NI Noncontrolling share e Controlling share of NI $ 134,600 $ 42,000 Retained Earnings Retained earnings — Power $ 134,600ü 60,000 * $ 32,000 Balance Sheet Cash $ $ 27,000 40,000 Buildings — net Equipment — net Investment in Swing 9,000 20,000 40,000 140,000 35,000 15,000 45,000 165,000 80,000 $ 736,600 $ 125,000 15,000 75,000 300,000 $ 56,000 * 138,800 4,200 * 134,600 $ 147,000 $ 4,200 134,600 b e a 9,000 1,000 8,000 208,800 Goodwill Accounts payable Dividends payable Other liabilities Capital stock Push-down capital Retained earnings 172,000 * 54,000 * 42,000ü 10,000 * $ 221,600 63,800 90,000 420,800 Retained earnings December 31 Accounts receivable — net Dividends receivable Inventories Land $ 37,800 $ 147,000 Retained earnings — Swing Controlling share of NI Dividends Consolidated Statements a 8,000 d 9,000 60,000 * $ 221,600 $ 98,800 122,000 55,000 55,000 185,000 245,000 b 28,800 c 180,000 40,000 $ 282,000 $ $ $ 20,000 10,000 d 9,000 20,000 100,000 c 100,000 100,000 c 100,000 221,600ü 32,000ü $ 736,600 $ 282,000 © 2009 Pearson Education, Inc publishing as Prentice Hall 40,000 800,800 145,000 16,000 95,000 300,000 221,600 Chapter 11 11-25 Noncontrolling interest January Noncontrolling interest December 31 c e 20,000 3,200 $ * Deduct © 2009 Pearson Education, Inc publishing as Prentice Hall 23,200 800,800 11-26 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-11 Pepper Corporation and Subsidiary Proportionate Consolidation Working Papers for the year ended December 31, 2009 Pepper Income Statement Sales Income from Jerry Cost of sales Depreciation expense Other expenses Net income $ $ Retained Earnings Retained earnings — Pepper $ 800,000 $ 20,000 400,000 * 100,000 * 120,000 * 200,000 $ 300,000 $ 400,000 $ 300,000 Balance Sheet Cash $ 100,000 130,000 $ 50,000 30,000 110,000 140,000 200,000 300,000 200,000ü 100,000 * Equipment — net Investment in Jerry $ Consolidated Statements $ 920,000 $ 460,000 * 116,000 * 144,000 * 200,000 $ 300,000 90,000 24,000 36,000 b 250,000 50,000ü 200,000 100,000 * $ 400,000 b b 30,000 $ 18,000 120,000 142,000 40,000 60,000 100,000 b b b 24,000 36,000 60,000 126,000 164,000 240,000 180,000 b 108,000 372,000 a 20,000 b 100,000 $ 460,000 120,000 $ 80,000 500,000 400,000ü 100,000 60,000 Venture equity — Jerry $1,164,000 b b 60,000 36,000 $ 160,000 104,000 500,000 400,000 300,000ü $1,100,000 * 250,000 120,000 $1,100,000 Accounts payable Other liabilities Common stock, $10 par Retained earnings b b b 300,000 $ Buildings — net b 180,000 a 20,000 150,000 * 40,000 * 60,000 * 50,000 Venture equity — Jerry Net income Dividends Retained earnings/ Venture equity Receivables — net Inventories Land Adjustments and Eliminations Jerry 40% $ 460,000 $1,164,000 Deduct © 2009 Pearson Education, Inc publishing as Prentice Hall ... special industry practice SOLUTIONS TO EXERCISES Solution E11-1 A A C A B C D D C Solution E11-2 B B D Solution E11-3 c Total value of Smith implied by purchase price ($720,000/.8) Noncontrolling... as Prentice Hall 6,800 11-8 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution E11-9 [Push-down accounting] Push down under parent company theory Retained earnings... Chapter 11 11-17 Solution P11-6 [AICPA adapted] X carries its investment in Y on a cost basis This is evidenced by the appearance of dividend revenue in X Company’s income statement and by the absence