Find more at www.downloadslide.com CHAPTER SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS MULTIPLE CHOICE QUESTIONS d The major motivation for off-balance-sheet financing is to avoid the impact on leverage b The fair values of the entity’s assets and liabilities are included with those of the U.S company on the consolidated balance sheet The fair value of the net assets is owned by outside parties, and is labeled noncontrolling interest d Cash Present Expected Residual Expected Expected flow value Prob PV Investment returns gains losses $156,000 $150,000 0.65 $ 97,500 $111,000 $39,000 $25,350 46,800 45,000 0.20 9,000 111,000 (66,000) $(13,200) 31,200 30,000 0.15 4,500 111,000 (81,000) _ (12,150) Total $111,000 $25,350 $ 25,350 b a The entry on PR’s books is: Investment in SX Merger expenses 50,000 200 Cash Capital stock 10,600 39,600 a Elimination E is: Capital stock Retained earnings 5,000 8,000 Accumulated OCI Treasury stock Investment in SX Solutions Manual, Chapter 1,000 9,600 2,400 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com c Elimination R is: Current assets Identifiable intangible assets (1) Long-term debt Goodwill (2) (1) (2) 2,200 15,000 400 34,400 PP&E 4,000 Current liabilities 400 Investment in SX 47,600 $(14,000 – $4,000) + $4,000 + $1,000 = $15,000 $50,000 – ($4,200 + $6,000 + $14,000 + $4,000 + $1,000 - $2,000 - $11,600) = $34,400 d See elimination R above d 10 c IFRS requires consolidation of a less-than-majority-owned equity investment if the investor controls the investee If PX owns 40% of SC’s stock, and the other 60% is spread among small investors, it is likely that PX controls SC Alternative d is not correct because PX does not have a majority vote and cannot make decisions unilaterally; other investors owning 45% of the stock (= 85% shares voted - 40% shares voted by PX) participate in the decision making process and influence decisions ©Cambridge Business Publishers, 2013 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com EXERCISES E3.1 Combination and Consolidation a Investment in Sylvan 48,000,000 Common stock Additional paid-in capital 400,000 47,600,000 b (E) Common stock Additional paid-in capital Retained earnings 5,000,000 10,000,000 2,000,000 Investment in Sylvan (R) Goodwill 17,000,000 31,000,000 Investment in Sylvan 31,000,000 c Other assets Goodwill Total assets Solutions Manual, Chapter $175,000,000 Total liabilities 31,000,000 Common stock Additional paid-in capital _ Retained earnings $206,000,000 Total liabilities and equity $ 38,000,000 15,400,000 92,600,000 60,000,000 $206,000,000 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com E3.2 Eliminating Entries—Various Cases In each case, Pluto acquires 100,000 shares of Saturn (=$200,000/$2) Entry (E): (amounts in thousands) Case a 200 1,300 350 150 Common stock Additional paid-in capital Retained earnings AOCI Treasury stock Investment in S Case b 200 1,300 350 150 100 1,900 Case c 200 1,300 350 150 100 1,900 100 1,900 Entry (R): (amounts in thousands) Case a -600 Investment in S Goodwill Investment in S Gain on acquisition E3.3 Case b 600 Case c 300 Simple Consolidation, Previously Unreported Intangibles (E) Stockholders’ equity–Senyo 6,000,000 Investment in Senyo (R) Land Intangibles–in-process R&D Goodwill 500,000 1,000,000 2,500,000 Investment in Senyo ©Cambridge Business Publishers, 2013 6,000,000 4,000,000 Advanced Accounting, 2nd Edition -300 Find more at www.downloadslide.com E3.4 Eliminating Entries, Acquisition Expenses (E) Capital stock Retained earnings 200,000 1,800,000 Investment in Stengl 2,000,000 (R) Long-term debt Identifiable intangible assets Goodwill 25,000 1,200,000 7,575,000 Plant assets, net 600,000 Inventories 200,000 Investment in Stengl 8,000,000 Note: Acquisition costs are expensed separately on Pinnacle’s books and not affect consolidation eliminating entries E3.5 Acquisition and Eliminating Entries—Bargain Purchase (amounts in millions) a Publix acquisition entry: Investment in Sherman Merger expenses 2,980 40 Cash Gain on acquisition 2,790 230 Calculation of gain on acquisition: Fair value of Sherman = $2,500 + $100 + $100 + $250 + $30 = $2,980 $2,980 – $2,750 = $230 gain b Consolidation working paper elimination entries: (E) Stockholders’ equity– Sherman Investment in Sherman (R) Inventories Land Other plant assets, net Long-term debt 2,500 2,500 100 100 250 30 Investment in Sherman 480 Note: Acquisition costs are expensed separately and not affect consolidation eliminating entries Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com E3.6 Interpreting Eliminating Entries a The stockholders’ equity (book value) of Seaboard is $48,000,000, based on the first eliminating entry b The acquisition cost is $88,000,000, so the excess paid over book value is $40,000,000 c Acquisition cost Book value Excess of acquisition cost over book value Fair value less book value: Noncurrent assets (overvalued) Goodwill $88,000,000 48,000,000 40,000,000 (2,000,000) $42,000,000 E3.7 Acquisition Entry and Consolidation Working Paper a Phoenix makes the following entry to record the acquisition (amounts in millions): Investment in Spark Merger expenses 2,650 Cash Common stock Additional paid-in capital 413 250 1,995 This entry is reflected in Phoenix’s account balances in the consolidation working paper below ©Cambridge Business Publishers, 2013 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com E3.7 continued b Consolidation Working Paper (in millions) Accounts Taken From Books Current assets Plant and equipment, net Investment in Spark Brand names and trademarks Goodwill Total assets Current liabilities Long-term liabilities Common stock, par value Additional paid-in capital Retained earnings Total liabilities and equity Phoenix $ 587 3,500 Spark $ 200 700 2,650 - $ 6,737 - $ 900 $ $ $ 500 2,000 550 2,595 1,092 6,737 $ 150 300 100 50 300 900 Eliminations Dr Cr 10 (R) (R) 200 Consolidated Balances $ 777 4,400 450 (E) 2,200 (R) (R) 300 (R) 1,710 -300 1,710 $ 7,187 $ (E) 100 (E) 50 (E) 300 $ 2,660 _ $ 2,660 650 2,300 550 2,595 1,092 $ 7,187 E3.8 Identifying and Analyzing Variable Interest Entities a The equity interests are traditional variable interests However, because minority shareholder C guarantees 92% of A’s debt, which is most of A’s capital, and will absorb 92% of A’s expected losses by protecting the subordinated debtholders, A is a VIE C has decision-making power through its majority representation on the board C has the obligation to absorb A’s significant losses and benefits through its equity interest and guarantee of A’s bank loans, and will likely be designated as A’s primary beneficiary One could also note that because A’s equity is less than 10% of its total assets (.08 = 92) a presumption exists that A is a VIE b Without any other information, B is not a VIE D is the sole owner of B through its 100% equity ownership, and should consolidate B under ASC Topic 810 Although contractual and other arrangements could suggest that B is a VIE, the problem is silent on these matters Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com E3.8 continued c The 15% equity could be enough to avoid identifying A as a VIE, if that amount of equity is deemed adequate to absorb A’s expected losses In that case, E is the controlling investor and C does not consolidate A If the 15% equity is not adequate, A is a VIE C has the decision making power, and by agreeing to compensate E for any of A’s losses, C absorbs significant losses Therefore C is likely A’s primary beneficiary and should consolidate A If A reports income that exceeds 10% of its average equity, the excess is distributed to C A’s shareholders could view this as a kind of insurance payment for being protected from losses, and would report it as an expense Suppose A earns $18 on average equity of $100 Of this, $8 (= $18 – 10% x $100) is C=s share, accounted for as follows: Dr Expense Cr Payable to C A therefore reports final net income of $10 (= $18 - $8) d B’s stockholders’ equity is only 10% of its total assets, and is insulated from losses by the guarantees provided by C and D Moreover, D’s unsecured loan to B provides additional subordinated financial support These factors indicate that B is a VIE D has decision making power through its control of B’s board Losses in guaranteed residual values on D’s specialized property, and its unsecured loan to B, require D to absorb a potentially significant amount of B’s losses Therefore it is likely that D is B’s primary beneficiary and must consolidate B ©Cambridge Business Publishers, 2013 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com E3.9 Reconstructing Eliminating Entries and Book Value a Consolidated total assets Less: Cove’s current assets Less: Cove’s noncurrent assets Fair value of Bay’s total assets Less: Goodwill Fair value of Bay’s identifiable assets $ 13,000,000 (5,200,000) (3,800,000) $ 4,000,000 (340,000) $ 3,660,000 b Acquisition cost Less: Goodwill Fair value of Bay’s identifiable net assets $ 1,600,000 (340,000) $ 1,260,000 Fair value of Bay’s identifiable assets (from a above) Less: Fair value of Bay’s identifiable net assets Fair value of Bay’s liabilities $ 3,660,000 (1,260,000) $ 2,400,000 Fair value of Bay’s identifiable net assets (from b above) Less: Fair value of previously unreported intangibles Book value of Bay’s net assets $ 1,260,000 (800,000) $ 460,000 c d (E) Stockholders’ equity–Bay 460,000 Investment in S (R) Identifiable intangibles Goodwill 800,000 340,000 Investment in S Solutions Manual, Chapter 460,000 1,140,000 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com E3.10 Identification of Variable Interest Entity and Primary Beneficiary a If qualitative factors are inconclusive, the answer to this question depends on a quantitative analysis of the ability of the equity interest to absorb Startek’s potential losses ASC Topic 810 specifies that if the equity interest is less than 10 percent of total assets, the entity is a VIE unless there is evidence to the contrary However, in this case, the equity interest is 13% of assets (= $4,000,000/$30,000,000) Using the quantitative analysis presented in the chapter (and illustrated in ASC para 810-10-55-53), expected gains and losses are computed as follows (in millions): Expected Present Expected Investment Residual Expected Expected cash flow value Prob PV fair value returns gains losses $ 11 $ 10 0.40 $ $ 30 $ (20) $ (8) 33 30 0.20 30 -55 50 0.40 20 30 20 $ _ $ 30 $ $ (8) Because the $4,000,000 equity interest is insufficient to absorb the expected losses of $8,000,000 computed above, the quantitative analysis indicates that Startek is a VIE b Softek must have (1) the power to direct Startek’s activities that most significantly affect its economic performance, and (2) be exposed to the losses and benefits that are potentially significant to Startek Because Softek guarantees Startek’s debt, it probably meets requirement (2) However, we don’t have enough information to assess Softek’s decision making power over Startek E3.11 Acquisition and Eliminating Entries: Statutory Merger and Stock Investment a Coca-Cola took control of CCE’s North American business in October, 2010 The investment is recorded at fair value at the time control changes hands Coca-Cola ―paid‖ cash, equity-based compensation, and the 33 percent equity interest for all of CCE’s North American business Previously, Coca-Cola used the equity method to account for its investment Equity method investments are not carried at fair value b Share-based compensation related to services performed by CCE employees prior to the acquisition are included in the acquisition cost, but compensation related to future services are reported as prepaid expenses and written off to expense in future years The compensation related to prior years is part of the cost of acquiring CCE’s North American business; it is not compensation for services performed for the consolidated entity ©Cambridge Business Publishers, 2013 10 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P3.3 Stock Acquisition and Consolidation Working Paper Eliminating Entries (amounts in millions) a Investment in Pharmacia (1) Merger expenses 55,873 101 Common stock Additional paid-in capital Cash 91 55,782 101 (1) $55,873 = 1,817 x $30.75 b Acquisition cost Pharmacia book value Excess of acquisition cost over book value Excess of fair value over book value: Inventory Long-term investments Property, plant and equipment In-process R&D Developed technology rights Long-term debt Other assets Goodwill $55,873 (7,236) $48,637 $ 2,939 40 (317) 5,052 37,066 (1,841) (15,606) 27,333 $21,304 c (E) Stockholders’ equity—Pharmacia 7,236 Investment in Pharmacia (R) Inventory Long-term investments In-process R&D Developed technology rights Goodwill 2,939 40 5,052 37,066 21,304 Property, plant and equipment Long-term debt Other assets Investment in Pharmacia Solutions Manual, Chapter 7,236 317 1,841 15,606 48,637 ©Cambridge Business Publishers, 2013 15 Find more at www.downloadslide.com P3.4 Consolidated Balance Sheet, Bargain Purchase (amounts in millions) a Calculation of gain on acquisition: Acquisition cost Book value Excess of acquisition cost over book value Excess of fair value over book value: Inventory Marketable securities Land Buildings and equipment, net Long-term debt Gain on acquisition $ 1,800 (1,295) $ 505 $ 100 (50) 245 300 110 $ 705 200 b Consolidation Working Paper (in millions) Accounts Taken From Books Paxon $ 1,060 1,700 Saxon $ 720 900 300 Land Buildings and equipment, net Accumulated depreciation Total assets 2,000 650 3,400 (1,000) $ 7,810 175 600 -$ 2,695 Current liabilities Long-term debt Common stock, par value Additional paid-in capital Retained earnings Total liabilities and equity $ 1,500 2,000 500 1,200 2,610 $ 7,810 $ 1,000 400 100 350 845 $ 2,695 Cash and receivables Inventory Marketable securities Investment in Saxon ©Cambridge Business Publishers, 2013 16 Eliminations Dr (R) 100 (R) 245 (R) 300 (R) 110 (E) 100 (E) 350 (E) 845 $ 2,050 Consolidated Balances $ 1,780 2,700 50 (R) 250 1,295 (E) 705 (R) -1,070 4,300 (1,000) $ 9,100 Cr $ 2,050 $ 2,500 2,290 500 1,200 2,610 $ 9,100 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P3.5 Consolidated Balance Sheet Working Paper, Previously Reported Goodwill (amounts in thousands) a Investment in Static Merger expenses 10,000 45 Common stock Additional paid-in capital Cash 200 9,450 395 b Acquisition cost Static’s book value Excess of acquisition cost over book value Excess of fair value over book value: Cash and receivables Inventory Equity method investments Plant assets, net Copyrights Goodwill (1) Noncurrent liabilities Goodwill $ 10,000 (4,000) $ 6,000 $ (500) (1,400) 1,800 (1,100) 4,800 (500) (200) 2,900 $ 3,100 (1) All pre-existing goodwill is eliminated, even though it may be deemed to have a nonzero fair value Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 17 Find more at www.downloadslide.com P3.5 continued c Consolidation Working Paper (in thousands) Accounts Taken From Books Cash and receivables Inventory Equity method investments Investment in Static Progressive $ 7,605 7,000 Static $ 2,000 2,400 600 Eliminations Dr Cr 500 (R) 1,400 (R) (R) 1,800 4,000 (E) 6,000 (R) 1,100 (R) Plant assets, net Copyrights Goodwill Total assets 10,000 10,000 1,000 -$ 35,605 3,600 200 500 $ 9,300 Current liabilities Noncurrent liabilities Common stock, par Additional paid-in capital Retained earnings Total liabilities and equity $ 6,000 4,000 300 10,350 14,955 $ 35,605 $ 2,000 3,300 200 (R) 100 (E) 100 400 (E) 400 3,500 (E) 3,500 _ $ 9,300 $ 13,700 $ 13,700 ©Cambridge Business Publishers, 2013 18 (R) 4,800 (R) 3,100 500 (R) Consolidated Balances $ 9,105 8,000 2,400 -12,500 6,000 3,100 $ 41,105 $ 8,000 7,500 300 10,350 14,955 $ 41,105 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P3.6 Consolidated Balances, Different Acquirers a Consolidation Working Paper (in millions) Accounts Taken From Books Current assets Property, plant and equipment, net Investment in Webnet Patents Goodwill Total assets Current liabilities Long-term debt Common stock, par Additional paid-in capital Retained earnings Total liabilities and equity Webnet Microtech Solutions $ 10 $ 10 50 50 200 -$ 265 $ 20 224 14 $ 265 Eliminations Dr Cr Consol Balances $ 20 100 41 (E) 159 (R) $ $ $ -65 20 25 14 65 (R) 159 $ $ (E) (E) 25 (E) 14 _ $ 200 $ 200 $ -10 159 289 40 224 14 289 b Consolidation Working Paper (in millions) Accounts Taken From Books Current assets Property, plant and equipment, net Investment in Microtech Patents Developed technology Client relationships Goodwill Total assets Current liabilities Long-term debt Common stock, par Additional paid-in capital Retained earnings Total liabilities and equity Solutions Manual, Chapter Eliminations Webnet Solutions Microtech Dr $ 10 $ 10 50 50 (R) 20 200 5 -$ 265 $ -65 $ $ 20 224 14 $ 265 $ (R) 10 (R) 100 (R) 29 Consol Cr Balances $ 20 120 41 (E) -159 (R) 20 100 29 -$ 289 20 (E) 25 (E) 25 14 (E) 14 _ 65 $ 200 $ 200 $ $ ©Cambridge Business Publishers, 2013 19 40 224 14 289 Find more at www.downloadslide.com P3.6 continued c Both sets of consolidated balances report the same total assets and the same individual liabilities and equities However, the individual asset accounts differ The acquirer’s assets are not revalued to fair value, nor are previously unreported assets recognized Microtech has understated property, plant and equipment and patents, as well as unreported identifiable intangible assets Webnet Solutions’ assets and liabilities are fairly reported, and there are no identifiable intangibles When Microtech is the acquirer, the difference between Webnet Solutions’ acquisition price and reported book value is reported as goodwill, and the difference between book and fair value of Microtech’s assets is not recognized When Webnet Solutions is the acquirer, its goodwill is not recognized, but Microtech’s property, patents, and identifiable intangibles are reported Does management want the $159 million purchase premium to be reported as the unspecified and possibly unproductive asset goodwill, or distributed among several potentially productive identifiable assets ($20 million to property, plant and equipment; $10 million to patents; $100 million to developed technology; $29 million to client relationships)? If Webnet Solutions is the acquirer, Microtech’s previously unreported assets will come to light To the extent that the existence of identifiable intangibles such as developed technology and client relationships indicate favorable future earnings potential, investors may view the new disclosures as a positive signal, increasing stock price If Microtech is the acquirer, no identifiable intangibles are recognized, and investors may wonder if Webnet Solutions will sustain its value in the future, as these assets would seem to be the lifeblood of a technology company Management will also consider the implications for future income Identifiable assets usually have limited lives and are depreciated or amortized over time, reducing earnings on a regular basis Goodwill is tested for impairment loss, and may never be written off If Microtech is the acquirer, future reported income may be higher because there are no identifiable intangibles to be amortized Note to instructor: This contrived problem illustrates the games companies can play to choose between different financial statement effects portraying the same transaction economics ©Cambridge Business Publishers, 2013 20 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P3.7 Tangible and Intangible Asset Revaluations (in millions) a Price Previously unrecorded intangibles acquired: Goodwill IPR&D Other identifiable intangibles Fair value of tangible net assets acquired b Symbol Technologies $3,528 $2,300 95 1,000 Good Technology $ 438 $301 (3,395) $ 133 158 Netopia $ 183 $122 (459) $ (21) 100 Terayon $ 137 $102 (222) $ (39) 52 (154) $ (17) The fair values of the tangible liabilities of Good Technology, Netopia, and Terayon are greater than the fair values of their assets, and since net book values are positive, the fair values of net tangible assets must be less than related book values Since book values of liabilities are generally close to fair value, the cause is likely to be a decline in the value of tangible assets For technology companies, tangible assets such as equipment are likely to lose resale value quickly Motorola lists identifiable intangibles acquired as completed technology, patents, customer-related assets, licensed technology and other intangibles Value is derived almost exclusively from the future earnings potential of these intangible assets Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 21 Find more at www.downloadslide.com P3.7 continued c (E) Stockholders’ equity Symbol Tech 100 Investment in acquiree (R) Goodwill IPR&D Other identifiable intangibles Tangible net assets Investment in acquiree d Good Tech 30 100 Netopia Terayon 10 30 15 10 15 2,300 95 301 122 102 1,000 33 158 100 52 3,428 51 49 32 408 173 122 IPR&D reflects the estimated fair value of projects that have not yet resulted in viable products Fair value is generally based on the present value of future expected cash flows Below is an excerpt from Motorola’s disclosure of Symbol Technologies, Inc inprocess R&D: At the date of acquisition, 31 projects were in process and are expected to be completed through 2008 The average risk adjusted rate used to value these projects is 15-16% The allocation of value to in-process research and development was determined using expected future cash flows discounted at average risk adjusted rates reflecting both technological and market risk as well as the time value of money (Source: Motorola, Inc annual report, 2007) ©Cambridge Business Publishers, 2013 22 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P3.8 Working Backwards—Eliminating Entries, Preparing Subsidiary’s Balance Sheet a (E) Stockholders’ equity–Sonara 5,000,000 Investment in Sonara (R) Plant assets Identifiable intangibles Goodwill 5,000,000 600,000 4,500,000 15,900,000 Current assets Investment in Sonara 1,000,000 20,000,000 b Sonara Company Balance Sheet, December 31, 2013 Current assets (1) $ 2,000,000 Liabilities (3) Plant assets, net (2) 9,400,000 Stockholders’ equity Total assets $ 11,400,000 Total liabilities and equity (1) (2) (3) $ 6,400,000 5,000,000 $ 11,400,000 $2,000,000 = $6,000,000 + $1,000,000 - $5,000,000 $9,400,000 = $35,000,000 - $600,000 - $25,000,000 $6,400,000 = $30,400,000 - $24,000,000 Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 23 Find more at www.downloadslide.com P3.9 Merger and Stock Acquisition, Merger-Related Costs (all amounts in thousands) a Fair value of net assets acquired Value of consideration given: 46,700,000 shares x $75.25 Stock options Total consideration given Apparent amount of merger-related costs capitalized b $3,556,500 $3,514,175 4,000 $3,518,175 $ 38,325 (entry on books of MCBC) Current assets Property, plant and equipment Other assets Identifiable intangibles Goodwill 486,700 1,011,600 489,600 3,734,900 1,837,600 Current liabilities Noncurrent liabilities Capital stock Stock options Cash (merger-related costs) c 688,300 3,315,600 3,514,175 4,000 38,325 Book value of Molson’s stockholders’ equity = net assets carried at fair value = $486,700 + 1,011,600 + 489,600 – 688,300 – 3,315,600 = $(2,016,000) (consolidated balance sheet working paper): (E) Investment in Molson, Inc 2,016,000 Stockholders’ equity– Molson, Inc 2,016,000 (R) Intangible assets Goodwill 3,734,900 1,837,600 Investment in Molson, Inc 5,572,500 This solution assumes Molson did not previously report recognized intangible assets If intangible assets already had a substantial book value, a positive stockholders’ equity could result ©Cambridge Business Publishers, 2013 24 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P3.9 Merger and Stock Acquisition, Merger-Related Costs d Using current GAAP, the $38,325 of merger-related costs would have been expensed and not capitalized Goodwill would therefore have been smaller by $38,325, or $1,799,275 The entries would be as follows: Requirement b (entry on books of MCBC) Current assets Property, plant and equipment Other assets Identifiable intangibles Goodwill Merger-related expenses 486,700 1,011,600 489,600 3,734,900 1,799,275 38,325 Current liabilities Noncurrent liabilities Capital stock Stock options Cash (merger-related costs) 688,300 3,315,600 3,514,175 4,000 38,325 Requirement c (consolidated balance sheet working paper) (E) Investment in Molson, Inc 2,016,000 Stockholders’ equity— Molson, Inc (R) Intangible assets Goodwill 2,016,000 3,734,900 1,799,275 Investment in Molson, Inc 5,534,175 Note: Because merger-related costs are not capitalized under current GAAP, the Investment account balance on the books of MCBC is $38,325 lower Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 25 Find more at www.downloadslide.com P3.10 Consolidation of Variable Interest Entities (dollar amounts in thousands) a MCBC owns about 50% of each of these joint ventures, close to the over 50% needed for traditional consolidation; its 52% interest in BRI suggests consolidation It reports guarantees of debt issued by BRI and RMMC but it is not clear how significant this is All of these ventures appear to be captive or near-captive entities largely designed to serve MCBC’s needs in beer production and distribution The ventures’ profits directly benefit MCBC and the other owners RMMC and RMBC are nontaxable entities and Grolsch is a taxable entity in the U.K., not the U.S Grolsch’s profits are limited by agreement These conditions point toward VIE status The captive nature of the entities leads to the conclusion that MCBC directs the activities the most significantly affect the performance of these ventures There may be other agreements not disclosed that also point toward MCBC being the primary beneficiary of all four ventures b At the end of 2007, total assets of the four VIEs sum to $580,341; half is $290,171, a little over 2% of MCBC’s $13,451,566 of total assets, with and without the $290,171 Half of the $38,356 in pre-tax income of the ventures (credited to cost of goods sold) is $19,178, about 4% of MCBC’s 2007 net income of $497,192 Neither of these are highly significant percentages of MCBC; the ventures’ liabilities (unknown) are not likely large enough to have much of an effect on MCBC’s leverage ratios c Considering that MCBC’s purchases from the ventures affect its cost of goods sold, offsetting ventures’ ―profits‖ against COGS to reduce the cost reported there seems reasonable ©Cambridge Business Publishers, 2013 26 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P3.11 Identifiable Intangibles and Goodwill a Prince makes the following entry to record the acquisition on its own books (in thousands): Investment in Squire Merger expenses 35,000 1,200 Capital stock Cash 34,400 1,800 The account balances for Prince, shown in the working paper below, reflect the above entry Merger expenses reduce retained earnings, a component of stockholders’ equity Consolidation Working Paper (in thousands) Accounts Taken From Books Cash Accounts receivable Parts inventory Vehicle inventory Equipment, net Investment in Squire Intangible: Lease Intangible: Service contracts Intangible: Trade name Goodwill Total assets Current liabilities Long-term liabilities Stockholders’ equity Solutions Manual, Chapter Prince $ 1,000 6,000 -15,000 40,000 35,000 Squire $ 300 2,700 5,200 -17,600 -$ 97,000 -$ 25,800 $ 5,000 25,000 67,000 $ 97,000 $ 3,100 8,600 14,100 $ 25,800 Eliminations Dr (R) Consolidated Balances $ 1,300 100 (R) 8,600 6,000 15,000 59,500 14,100 (E) -20,900(R) 1,250 2,000 200 14,250 $ 108,100 Cr 800 (R) 1,900 (R) 1,250 (R) 2,000 (R) 200 (R)14,250 $ (R) 600 (E)14,100 $ 35,100 _ $ 35,100 8,100 33,000 67,000 $ 108,100 ©Cambridge Business Publishers, 2013 27 Find more at www.downloadslide.com P3.11 Identifiable Intangibles and Goodwill b If Prince records the acquisition as a statutory merger, Prince makes the following entry (in thousands): Cash Accounts receivable Parts inventory Equipment, net Intangible: Lease Intangible: Service contracts Intangible: Trade name Goodwill Merger expenses 300 2,600 6,000 19,500 1,250 2,000 200 14,250 1,200 Cash Current liabilities Long-term liabilities Capital stock 1,800 3,100 8,000 34,400 When the above entry is reflected in Prince’s account balances, Prince’s balance sheet is identical to that shown in the consolidated working paper for a stock acquisition ©Cambridge Business Publishers, 2013 28 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P3.12 Consolidation Policy: U.S GAAP and IFRS Subcase (1) (2) (3) (4) (5) (6) U.S GAAP Do not consolidate Do not consolidate Do not consolidate Do not consolidate Do not consolidate Do not consolidate IFRS Consolidate Consolidate Consolidate Possibly consolidate Possibly consolidate Possibly consolidate Under ASC Topic 810, consolidation is not appropriate, as no case has majority ownership Under IFRS, the following considerations apply In cases (1), (2) and (3), Andrews owns a large minority interest (40 to 49 percent) and the remaining ownership is widely dispersed (no single party holds more than percent) A recent election has shown that Andrews is able to cast a majority of votes cast (53 to 58 percent) Absent evidence to the contrary, either one of these is sufficient to presume that Andrews has effective control, and that consolidated statements should be prepared In cases (4), (5) and (6), the conclusion is less clear While Andrews owns a fairly large minority interest (25 to 35 percent) and other ownership is widely dispersed, it would be a matter of judgment as to whether Andrews' interest is large enough Andrews was able to nominate its director candidates, solicit some proxies, and convince other stockholders to vote for its nominees in order to obtain a majority of the votes While a conclusion of effective control seems highly likely here, it is not automatic Further, case (4) is stronger than case (5), which in turn is stronger than case (6) Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 29 ... Additional paid-in capital Retained earnings Total liabilities and equity Solutions Manual, Chapter Eliminations Webnet Solutions Microtech Dr $ 10 $ 10 50 50 (R) 20 200 5 -$ 265 $ -65 $ $ 20 224... 17,000,000 31,000,000 Investment in Sylvan 31,000,000 c Other assets Goodwill Total assets Solutions Manual, Chapter $175,000,000 Total liabilities 31,000,000 Common stock Additional paid-in capital... Acquisition costs are expensed separately and not affect consolidation eliminating entries Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com E3.6