Solution manual advanced accounting 11th by beams chapter04

In other words, the investment in subsidiary, income from subsidiary, and the capital stock, additional paid-in capital, retained earnings, and other stockholders’ equity accounts of the

Chapter 4

CONSOLIDATION TECHNIQUES AND PROCEDURES

Answers to Questions

1 Under the equity method, a parent amortizes patents from its subsidiary investments by adjusting its

subsidiary investment and income accounts Since patents and patent amortization accounts are not recorded on the parent’s books, they are created for consolidated statement purposes through workpaper entries

2 Noncontrolling interest share is entered in the consolidation workpapers by preparing a workpaper

adjusting entry in which noncontrolling interest share is debited, noncontrolling interest’s share of dividends is credited and noncontrolling interest is credited The noncontrolling interest share (debit) is carried to the consolidated income statement as a deduction, and the credit to noncontrolling interest for noncontrolling interest share is added to the beginning noncontrolling interest The noncontrolling interest share is calculated based on the subsidiary’s reported net income adjusted to reflect fair value through the amortization of the excess of fair value over book value This is the approach illustrated throughout this text

3 Workpaper procedures for the investment in subsidiary, income from subsidiary, and subsidiary equity

accounts are alike in regard to the objectives of consolidation Regardless of the configuration of the workpaper entries, the final result of adjustments for these items is to eliminate them through workpaper entries In other words, the investment in subsidiary, income from subsidiary, and the capital stock, additional paid-in capital, retained earnings, and other stockholders’ equity accounts of the subsidiary never appear in consolidated financial statements

4 When the parent does not amortize fair value/book value differentials on its separate books, the parent’s

income from subsidiary and investment in subsidiary accounts are overstated in the year of acquisition In subsequent years, the income from the subsidiary, investment in subsidiary, and parent’s beginning retained earnings will be overstated (This assumes that the asset is undervalued).The error may be corrected in the workpapers with the following entries:

Year of acquisition

Subsequent year

Retained earnings — parent XXX

By entering a correcting entry, all other workpaper entries are the same as if the parent provided for amortization on its separate books

If the errors are not corrected through the workpaper entries suggested above, the entry to eliminate the income from subsidiary in the year of acquisition is prepared in the usual manner without further complications because neither the beginning investment nor retained earnings accounts are affected

by the omission In subsequent years the entry to eliminate income from subsidiary and dividends from subsidiary will have to be changed to correct the beginning-of-the-period retained earnings as follows:

Income from subsidiary XXX Retained earnings — parent XXX

5 No Workpaper adjustments are not entered in the general ledger of the parent or any other entity They are

used in the preparation of consolidated financial statements for a conceptual entity for which there are no formal accounting records

6 Workpapers are tools of the accountant that facilitate the consolidation of parent and subsidiary financial

statements Given the tools available, the accountant should select those that are most convenient in the circumstances If financial statements are to be consolidated, the financial statement approach is the appropriate tool The trial balance approach is most convenient when the data are presented in the form of

a trial balance The accountant needs to be familiar with both approaches to perform the work as efficiently

as possible

7 Workpaper adjustment and elimination entries as illustrated in this text are exactly the same when the trial

balance approach is used as when the financial statement approach is used This is possible through a check-off system that nullifies the closing process when the financial statement approach is used

8 The retained earnings of the parent will equal consolidated retained earnings if the equity method of

accounting has been correctly applied In consolidating the financial statements of affiliated companies, the beginning retained earnings of the parent are used as beginning consolidated retained earnings If the equity method has not been correctly applied, parent beginning retained earnings will not equal beginning consolidated retained earnings In this case, retained earnings of the parent are adjusted to a correct equity basis in order to establish the correct amount of beginning consolidated retained earnings Thus, workpaper adjustments to beginning retained earnings of the parent are needed whenever the beginning retained earnings of the parent do not correctly reflect the equity method

9 The noncontroling interest that appears in the consolidated balance sheet can be checked by first adjusting

the equity of the subsidiary on the consolidated balance sheet date to fair value (i.e., adjusting for any unamortized excess of fair value over book value) and then multiplying by the noncontrolling interest percentage Consolidated retained earnings at a balance sheet date can be checked by comparing the amount with the parent’s retained earnings on the same date If consolidated retained earnings and parent retained earnings are not equal, either consolidated retained earnings have been computed incorrectly, or parent retained earnings do not reflect a correct equity method of accounting

10 Consolidated assets and liabilities are reported for all equity holders—noncontrolling as well as

controlling Therefore, the change in net assets from operations for a period results from noncontrolling interest share and controlling interest share

11 A change in cash relates to all interests in the consolidated entity This difference is one of many

inconsistencies in the concepts underlying consolidated financial statements Consider, for example, the error that could result from dividing cash provided by operations by outstanding parent shares to compute cash flow per share

Preliminary computations (in thousands)

Implied total fair value of Sal ($600 / 80%) $750

Excess allocated to:

1 Income from Sal

Less: Excess allocated to inventory (sold in 2011) (25)

2 Noncontrolling interest share

Sal’s adjusted income $115  20% noncontrolling interest

$ 23

3 Noncontrolling interest December 31

4 Investment in Sal December 31

* Assumes this is based on Sal’s adjusted income

5 Consolidated net income

Noncontrolling interest share

Controlling interest share equals Parent NI under equity

method

$383.4

$ 23

$360.4

Solution E4-3

1 $700,000 ($300,000 + $440,000 - $40,000 intercompany)

Preliminary computations for 2 and 3

Investment cost on January 1, 2011 $28,000 Implied total fair value of Sar ($28,000 / 70%) $40,000

Excess allocated entirely to Goodwill $10,000

Loss from investment in Sar ($1,000  70%) (700) Controlling share of consolidated net income $23,300

Add: Share of income less dividends 2011 — 2013

($1,400 income - $1,000 dividends)  70% 280 Investment balance December 31, 2013 $28,280

Total excess fair value over book value $125,000

Excess allocated to:

Total excess fair value over book value $125,000

Less: Depreciation of excess allocated to equipment (10,000) (10,000) Less: Amortization of patents (7,500) (7,500)

1a Consolidated net income for 2011

Pen’s net income = controlling share of consolidated net

Add: Noncontrolling interest share 20,500

1b Investment in Sin December 31, 2011

Less: Dividends from Sin — 2011 ($80,000  80%) (64,000)

1c Noncontrolling interest share — 2011

1d Noncontrolling interest December 31, 2012

Sin’s equity book value at acquisition date $600,000 Add: Income less dividends for 2011 and 2012 (see note) 100,000 Sin’s equity book value at December 31, 2012 700,000

Noncontrolling interest percentage 20%

Noncontrolling interest December 31, 2012 $158,000

Solution E4-4 (continued)

Note: Sin’s income less dividends:

Pat Corporation and Subsidiary

Partial Consolidated Cash Flows Statement for the year ended December 31,

Cash Flows from Operating Activities

Controlling interest share of consolidated net income $100,000

Adjustments to reconcile net income to cash

provided by operating activities:

Noncontrolling interest share $ 50,000

Undistributed income of equity investees (5,000)

Increase in accounts receivable (105,000)

Decrease in accounts payable (20,000) 111,000

Net cash flows from operating activities $211,000

Solution E4-7

Pro Corporation and Subsidiary

Partial Consolidated Cash Flows Statement for the year ended December 31,

Cash Flows from Operating Activities

Dividends received from equity investees 7,000

Cash paid for other operating items 23,500

Cash paid for interest expense 12,000 245,000

Net cash flows from operating activities $ 84,500

SOLUTIONS TO PROBLEMS

Solution P4-1 (in thousands of $)

Preliminary computations

Investment in Sen (75%) January 1, 2011 $2,400

Implied fair value of Sen ($2,400 / 75%) $3,200

Total excess of fair value over book value $ 800

Excess allocated:

40% to plant assets (useful life 8 years) 320

Total excess of fair value over book value $ 800

1 Goodwill at December 31, 2015 (not amortized) $ 400

2 Noncontrolling interest share for 2015

Net income ($1,000 sales - $600 expenses) $ 400

Less: Amortization of excess

Plant assets ($320 / 8 yrs.) (40)

3 Consolidated retained earnings December 31, 2014

Equal to Pea’s December 31, 2014 retained earnings

Since this a trial balance, reported retained earnings

equals beginning of 2015 retained earnings $1,670

4 Consolidated retained earnings December 31, 2015

Pea’s retained earnings December 31, 2014 $1,670

Consolidated retained earnings December 31 $2,255

5 Consolidated net income for 2015

Less: Consolidated expenses ($3,785 + $40 depreciation) (3,825)

Less: Noncontrolling interest share (90) Controlling share of consolidated net income for 2015 $1,085

6 Noncontrolling interest December 31, 2014

Sen’s stockholders’ equity at book value $2,400 Unamortized excess after four years:

Sen’s stockholders’ equity at fair value $2,960

25% Sen’s stockholders’ equity at fair value $ 740

7 Noncontrolling interest December 31, 2015

Sen’s stockholders’ equity at book value $2,600 Unamortized excess after five years:

Solution P4-2

Consolidation Workpapers for the year ended December 31, 2011

Consolidated Statements

Income Statement

Income from Sal 21 a 21

Cost of goods sold 400 * 130 * 530 *

Retained earnings — Sal $ 22 b 22

Noncontrolling interest January 1 b 39

Noncontrolling interest December 31 c 3 42

2 Pal Corporation and Subsidiary

Consolidated Income Statement for the year ended December 31, 2011

Less: Noncontrolling interest share 9

Controlling share of consolidated net income $ 87

Pal Corporation and Subsidiary

Consolidated Retained Earnings Statement for the year ended December 31, 2011 Consolidated retained earnings January 1 $130

Add: Controlling share of onsolidated net income 87

Consolidated retained earnings December 31 $157

Pal Corporation and Subsidiary

Consolidated Balance Sheet

Consolidated retained earnings 157

Add: Noncontrolling interest 42 539 Total liabilities and stockholders’ equity $699

Solution P4-3

Pan Corporation and Subsidiary

Consolidation Workpapers for the year ended December 31, 2011

(in thousands) Pan Saf 75%

Adjustments and Eliminations

Consolidated Statements

Retained earnings — Saf $ 68 b 68

Noncontrolling interest December 31 f 1.2 121.2

*Deduct

Supporting Calculations

Saf’s value at acquisition

Saf’s fair value on January 1, 2011 $480

Purchase price (fair value) of Pan’s 75% share $360

Patents have a ten-year life, so amortization is $11,200 per year

Saf’s Adjusted Income

Less: Amortization of Patents (11.2)

Saf’s adjusted income $ 36.8

Noncontrolling interest 25% share $ 9.2

Solution P4-4

Pal Corporation and Subsidiary

Consolidation Workpapers for the year ended December 31, 2011

(in thousands) Pal Sun 75%

Adjustments and Eliminations

Consolidated Statements

Retained earnings — Sun $ 68 b 68

Noncontrolling interest December 31 c 4 124

* Deduct

Supporting Calculations

Sun’s value at acquisition:

Book value at December 31, 2011 $384

Book value on January 1, 2011 $368

Purchase price of Pal’s 75% share $360

Implied fair value of Sun ($360 / 75%) $480

Excess allocated to Goodwill $112

Noncontrolling interest (25% x $480) $120

Sun’sAdjusted Income

Less: Amortization of Goodwill (0)

Noncontrolling interest 25% share $12

Solution P4-5

Preliminary computations

Allocation of excess fair value over book value

Implied fair value of Sul ($490,000 / 70%) $700,000

Noncontrolling interest – 30% of fair value at acquisition $210,000

Excess allocated

Undervalued inventory items sold in 2011 $ 5,000 Undervalued buildings (7 year life) 14,000 Undervalued equipment (3 year life) 21,000

Calculation of income from Sul

Less: Undervalued inventories sold in 2011 (5,000) Less: Additional Depreciation on building ($14,000/7 years) (2,000) Less: Additional Depreciation on equipment ($21,000/3 years) (7,000) Less: Patent amortization ($40,000/40 years) (1,000)

Solution P4-5 (continued)

Workpaper entries for 2011

Retained earnings (Sul) January 1 100,000

Noncontrolling interest January 1 210,000

c Cost of sales (for inventory items) 5,000

Par Corporation and Subsidiary

Consolidation Workpapers for the year ended December 31, 2011

(in thousands) Par Sul 70%

Adjustments and Eliminations

Consolidated Statements

Retained earnings — Sul $ 100 b 100

Noncontrolling interest December 31 i 10.5 220.5

* Deduct

Solution P4-6

Supporting computations

Ownership percentage 13,500/15,000 shares = 90%

Implied fair value of Syn ($202,500 / 90%) $225,000

Excess allocated to

Income from Syn

Investment in Syn December 31, 2012

Pen’s share of the change in Syn’s retained earnings

Less: Pen’s share (90%) of Patent amortization for 2 years (7,200)

Pen Corporation and Subsidiary

Consolidation Workpapers for the year ended December 31, 2012

(in thousands) Pen 90% Syn

Adjustments and Eliminations

Consolidated Statements

Retained earnings — Syn $ 34 b 34

Noncontrolling interest December 31 g .4 24.4

* Deduct

Solution P4-7

Preliminary computations

Allocation of excess fair value over book value

Implied fair value of Sol ($490,000 / 70%) $700,000

Excess allocated

Undervalued inventory items sold in 2011 $ 5,000

Undervalued buildings (7 year life) 14,000

Undervalued equipment (3 year life) 21,000

Calculation of income from Sol

Less: Undervalued inventories sold in 2011 (5,000)

Less: Depreciation on building ($14,000/7 years) (2,000)

Less: Depreciation on equipment ($21,000/3 years) (7,000)

Workpaper entries for 2011

Retained earnings (Sol) - January 1 100,000

Noncontrolling interest - January 1 20,000

c Cost of sales (for inventory items) 5,000

Par Corporation and Subsidiary

Consolidation Workpapers for the year ended December 31, 2011

(in thousands) Par Sol 70%

Adjustments and Eliminations

Consolidated Statements

Retained earnings — Sol $ 100 b 100

Noncontrolling interest December 31 f 10.8 220.8

919 919 $2,102

* Deduct

Solution P4-8

Supporting computations

Ownership percentage 13,500/15,000 shares = 90%

Implied fair value of Son ($202,500 / 90%) $225,000

Excess allocated to

Income from Son

Pun’s controlling share of Son’s income ($24,000  90%) $ 21,600

Investment in Son December 31, 2012

Pun’s share of the change in Son’s retained earnings

Noncontrolling interest at December 31, 2012 (10% of fair value)

(($225,000 + $42,000 - $15,000) x 10%)

$ 25,200

Pun Corporation and Subsidiary

Consolidation Workpapers for the year ended December 31, 2012

(in thousands) Pun 90% Son

Adjustments and Eliminations

Consolidated Statements

Retained earnings — Son $ 34 b 34

Noncontrolling interest December 31 c .8 25.2

* Deduct

Solution P4-9

Pas Corporation and Subsidiary

Consolidation Workpapers for the year ended December 31, 2011

(in thousands) Pas 80% Sel

Adjustments and Eliminations

Consolidated Statements

Retained earnings — Sel $ 50 b 50

Noncontrolling interest December 31 c .25 52.75

* Deduct