Find more slides, ebooks, solution manual and testbank on www.downloadslide.com CHAPTER CONSOLIDATIONS—SUBSEQUENT TO THE DATE OF ACQUISITION I Several factors serve to complicate the consolidation process when it occurs subsequent to the date of acquisition In all combinations within its own internal records the acquiring company will utilize a specific method to account for the investment in the acquired company Three alternatives are available a Initial value method (formerly called the cost method prior to SFAS 141R) b Equity method c Partial equity method Depending upon the method applied, the acquiring company will record earnings from its ownership of the acquired company This total must be eliminated on the consolidation worksheet and be replaced by the subsidiary’s revenues and expenses Under each of these three methods, the balance in the Investment account will also vary It too must be removed in producing consolidated statements and be replaced by the subsidiary’s assets and liabilities II For combinations being consolidated after the acquisition date, certain procedures are required If the acquiring company has applied the equity method, the following process is appropriate A Assuming that the acquisition was made during the current fiscal period The parent adjusts its own Investment account to reflect the subsidiary’s income and dividend payments as well as any amortization expense relating to excess acquisition-date fair value over book value allocations and goodwill Worksheet entries are then used to establish consolidated figures for reporting purposes a Entry S offsets the subsidiary’s stockholders’ equity accounts against the book value component of the Investment account (as of the acquisition date) b Entry A recognizes the excess fair over book value allocations made to specific subsidiary accounts and/or to goodwill c Entry I eliminates the investment income balance accrued by the parent d Entry D removes intercompany dividend payments e Entry E records the current excess amortization expenses on the excess fair over book value allocations f Entry P eliminates any intercompany payable/receivable balances B Assuming that the acquisition was made during a previous fiscal period Most of the consolidation entries described above remain applicable regardless of the time that has elapsed since the combination was formed McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 3-1 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com The amount of the subsidiary’s stockholders’ equity to be removed in Entry S will differ each period to reflect the balance as of the beginning of the current year The allocations established by entry A will also change in each subsequent consolidation Only the unamortized balances remaining as of the beginning of the current period are recognized in this entry III For a combination where the parent has applied an accounting method other than the equity method, the consolidation procedures described above must be modified A If the initial value method is applied by the parent company, the intercompany dividends eliminated in Entry I will only consist of the dividends transferred from the subsidiary No separate Entry D is needed B If the partial equity method is in use, the intercompany income to be removed in Entry I is the equity accrual only; no amortization expense is included Intercompany dividends are eliminated through Entry D C In any time period after the year of acquisition The initial value method recognizes neither income in excess of dividend payments nor amortization expense Thus, for all years prior to the current period, both of these figures must be entered directly into the consolidation Entry*C is used for this purpose; it converts all prior amounts to equity method balances The partial equity method does not recognize excess amortization expenses Therefore, Entry*C converts the appropriate account balances to the equity method by recognizing the expense that relates to all of the past years IV Bargain purchases A As discussed in Chapter Two, bargain purchases occur when the parent company transfers consideration less than net fair values of the subsidiary’s assets acquired and liabilities assumed B According to SFAS 141R, the parent recognizes an excess of net asset fair value over the consideration transferred as a ―gain on bargain purchase.‖ V Goodwill Impairment – SFAS No 142 A When is goodwill impaired? Goodwill is considered impaired when the fair value of its related reporting unit falls below its carrying value Goodwill should not be amortized, but should be tested for impairment at the reporting unit level (operating segment or lower identifiable level) Goodwill should be tested for impairment at least annually Interim impairment testing may be necessary in the presence of negative indicators such as an adverse change in the business climate or market, legal factors, regulatory action, an introduction of competition, or a loss of key personnel B How is goodwill tested for impairment? All acquired goodwill should be assigned to reporting units It would not be unusual for the total amount of acquired goodwill to be divided among a number McGraw-Hill/Irwin 3-2 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com of reporting units Goodwill may be assigned to reporting units of the acquiring entity that are expected to benefit from the synergies of the combination even though other assets or liabilities of the acquired entity may not be assigned to that reporting unit Goodwill is tested for impairment using a two-step approach a The first step simply compares the fair value of a reporting unit to its carrying amount If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired and no further analysis is necessary b The second step is a comparison of goodwill to its carrying amount If the implied value of a reporting unit’s goodwill is less than its carrying value, goodwill is considered impaired and a loss is recognized The loss is equal to the amount by which goodwill exceeds its implied value The implied value of goodwill should be calculated in the same manner that goodwill is calculated in a business combination That is, an entity should allocate the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the value assigned at a subsidiary’s acquisition date The excess ―acquisition-date‖ fair value over the amounts assigned to assets and liabilities is the implied value of goodwill This allocation is performed only for purposes of testing goodwill for impairment and does not require entities to record the ―stepup‖ in net assets or any unrecognized intangible assets C How is the impairment recognized in financial statements? A The aggregate amount of goodwill impairment losses should be presented as a separate line item in the operating section of the income statement unless a goodwill impairment loss is associated with a discontinued operation B A goodwill impairment loss associated with a discontinued operation should be included (on a net-of-tax basis) within the results of discontinued operations VI Push-down accounting A A subsidiary may record any acquisition-date fair value allocations directly onto its own financial records rather than through the use of a worksheet Subsequent amortization expense on these allocations could also be recorded by the subsidiary B Push-down accounting reports the assets and liabilities of the subsidiary at the amount the new owner paid It also assists the new owner in evaluating the profitability that the subsidiary is adding to the business combination C Push-down accounting can also make the consolidation process easier since allocations and amortization need not be included as worksheet entries VII Contingent consideration A Under SFAS 141R, the fair value of any contingent consideration is included as part of the consideration transferred B If the contingency is based on earnings or other financial performance measures, changes in the fair value of the contingency are recognized in income as they occur McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 3-3 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com C If the contingency requires additional stock to be issued at a later date (or any other equity issues), the acquisition-date fair value of the contingency is not adjusted over time Any subsequent shares issued as a consequence of the contingency are simply recorded at the original acquisition-date fair value Learning Objectives Having completed Chapter Three, ―Consolidations—Subsequent to the Date of Acquisition,‖ students should be able to fulfill each of the following learning objectives: Identify and describe the three basic methods that an acquiring company can use in accounting for its investment in an acquired company Discuss the advantages and disadvantages of each of the three accounting methods that an acquiring company can use in recording its investment Determine consolidated balances at the end of the year in which a business combination occurs if the parent uses either the initial value method, the equity method, or the partial equity method Determine consolidated balances for any period subsequent to the year in which a purchase combination is formed if the parent uses either the initial value method, the equity method, or the partial equity method Understand the necessity for consolidation purposes of converting parent company figures to the equity method when another method has been used during previous years Understand the process of goodwill impairment and the techniques needed to calculate a goodwill impairment for a reporting unit of a business combination Account for additional amounts paid by a parent company or additional shares of stock issued subsequent to the creation of a business combination Explain the process of push-down accounting, identify its reporting advantages, and indicate when this method is appropriate for external reporting Answers to Discussion Questions How Does a Company Really Decide which Investment Method to Apply? Students can come up with literally dozens of factors that should be considered by Pilgrim in making the decision as to the method of accounting for its subsidiary, Crestwood Corporation The following is simply a partial list of possible points to consider Use of the information If Pilgrim does not monitor its own income levels closely, applying the equity method would seem to be a waste of time and energy A company must plan to use the additional data before the task of accumulation becomes worthwhile Size of the subsidiary If the subsidiary is large in comparison to Pilgrim, the effort required of the equity method may be important Income levels would probably be significant McGraw-Hill/Irwin 3-4 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com However, if the subsidiary is actually quite small in relation to the parent, the impact might not be material enough to warrant the extra effort Size of dividend payments If Crestwood pays out most of its earnings each period as dividends, that figure will approximate equity income Little additional information would be accrued by applying the equity method In contrast, if dividends are small or not paid on a regular basis, a Dividend Income balance might vastly understate the profits to be recognized by the business combination Amount of excess amortizations If Pilgrim has paid a significant amount in excess of book value so that annual amortization charges are quite high, use of the equity method might be preferred to show the effect of this expense each month (or whenever internal reporting is made) In this case, waiting until the end of the year and recording all of the expense at one time through a worksheet entry might not be the best way to reflect the impact of the expense Amount of intercompany transactions As with amortization, the volume of transfers can be an important element in deciding which accounting method to use If few intercompany sales are made, monitoring the subsidiary through the application of the equity method is less essential Conversely, if the amount of these transactions IS significant, the added data can be helpful to company administrators evaluating operations Sophistication of accounting systems If Pilgrim and Crestwood both have advanced accounting systems, application of the equity method may be relatively simple Unfortunately, if these systems are primitive, the cost and effort necessary to apply the equity method may outweigh any potential benefits The timeliness and accuracy of income figures generated by Crestwood If the subsidiary reports operating results on a regular basis (such as weekly or monthly) and these figures prove to be reliable, equity totals recorded by Pilgrim may serve as valuable information to the parent However, if Crestwood's reports are slow and often require later adjustment, Pilgrim's use of the equity method will provide only questionable results Answers to Questions a CCES Corp., for its own recordkeeping, may apply the equity method to the investment in Schmaling Under this approach, the parent's records parallel the activities of the subsidiary Income will be accrued by the parent as it is earned by the subsidiary Dividends paid by Schmaling cause a reduction in book value; therefore, the investment account is reduced by CCES in a corresponding manner In addition, any excess amortization expense associated with the allocation of CCES's purchase price is recognized through a periodic adjustment By applying the equity method, both the income and investment balances maintained by the parent accurately reflect consolidated totals The equity method is especially helpful in monitoring the income of the business combination This method can be, however, rather difficult to apply and a time-consuming process b The initial value method The initial value method can also be utilized by CCES Corporation Any dividends received will be accounted for as income but no other investment entries are recorded Thus, the initial value method is quite easy to apply McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 3-5 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com However, the balances found within the parent's financial records may not provide a reasonable representation of the totals that will result from consolidating the two companies c The partial equity method combines the advantages of the previous two techniques Income is accrued as earned by the subsidiary in the same manner as the equity method Similarly, dividends are reported as a reduction in the investment account However, no other entries are recorded; more specifically, amortization is not recognized by the parent The method is, therefore, easier to apply than the equity method but the subsidiary's individual totals will still frequently approximate consolidated balances a The consolidated total for equipment is made up of the sum of Maguire’s book value, Williams’ book value, and any unamortized excess acquisition-date fair value over book value attributable to Williams’ equipment b Although an Investment in Williams account is appropriately maintained by the parent, from a consolidation perspective the balance is intercompany in nature Thus, the entire amount will be eliminated in arriving at consolidated financial statements c Only dividends paid to outside parties are included in consolidated statements Because Maguire owns 100 percent of Williams, all of the subsidiary's dividends are intercompany Consequently, only the dividends paid by the parent company will be reported in the financial statements for this business combination d Any goodwill recognized within Maguire's original acquisition price must still be reported for consolidation purposes Reductions to the goodwill balance are made if goodwill is determined to be impaired e Unless intercompany revenues have been recorded, consolidation is achieved in subsequent periods by adding the two book values together f Consolidated expenses can be determined by adding the parent's book value to that of the subsidiary and then including any amortization expense associated with the purchase price As will be discussed in detail in Chapter Five, intercompany expenses can also be present which require elimination in arriving at consolidated figures g Only the common stock outstanding for the parent company is included in consolidated totals h The net income for a business combination is calculated as the difference between consolidated revenues and consolidated expenses When using the equity method, subsidiary earnings are accrued and amortization expense (associated with the acquisition price in a purchase) is recognized in the same manner as in the consolidation process The equity method parallels consolidation Thus, the net income and retained earnings reported by the parent company each year will equal the consolidated totals In the consolidation process, excess amortizations must be recorded annually for any portion of the purchase price that is allocated to specific accounts (other than land or to McGraw-Hill/Irwin 3-6 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com goodwill) Although this expense can be simulated in total on the parent's books by an equity method entry, the actual amortization of each allocated fair value adjustment is appropriate for consolidation Hence, the effect of the parent's equity method amortization entry is removed as part of Entry I so that the amortization of specific accounts (e.g., depreciation) can be recorded (in consolidation Entry E) When the initial value method is applied by the parent company, no accrual is recorded to reflect the subsidiary's change in book value during the years following acquisition Furthermore, recognition of excess amortizations relating to the acquisition price is also omitted by the parent The partial equity method, in contrast, records the subsidiary’s book value increases and decreases but not amortizations Consequently, for both of these methods, a technique must be established within the consolidation process to record the omitted figures Entry *C simply brings the parent's records (more specifically, the beginning retained earnings balance and the investment account) up-to-date as of the first day of the current year If the initial value method has been applied by the acquiring company, any changes in the subsidiary's book value in previous years must be recorded on the worksheet along with the appropriate amount of amortization expense For the partial equity method, only the amortization relating to these prior years needs to be recognized No similar entry is needed if the equity method has been applied; changes in the subsidiary's book value as well as excess amortization expense will be recorded each year by the parent Thus, under the equity method, the parent's investment and beginning retained earnings balances are both correctly established without further adjustment Lambert's loan payable and the receivable held by Jenkins are intercompany accounts As such, the reciprocal balances should be offset in the consolidation process The $100,000 is not a debt to or a receivable from an unrelated (or outside) party and should, therefore, not be reported in consolidated financial statements Additionally any interest income/expense recognized on this loan is also intercompany in nature and must likewise be eliminated Since the equity method has been applied by Benns, the $920,000 is composed of four balances: a The original consideration transferred by the parent; b The annual accruals made by Benns to recognize income as it is earned by the subsidiary; c The reductions that are created by the subsidiary's payment of dividends; d The periodic amortization recognized by Benns in connection with the allocations identified with its purchase price The $100,000 attributed to goodwill is reported at its original amount unless a portion of goodwill is impaired or a unit of the business where goodwill resides is sold A parent should consider recognizing an impairment loss for goodwill associated with a purchased subsidiary when, at the reporting unit level, the fair value is less than its carrying amount Goodwill is reduced when its carrying value is less than its fair value To compute fair value for goodwill, its implied value is calculated by subtracting the fair McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 3-7 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 10 11 values of the reporting unit’s identifiable net assets from its total fair value The impairment is recognized as a loss from continuing operations The additional consideration is merely an extra component of the price paid by Remo to purchase Albane Thus, any goodwill recognized at the original date of acquisition will be increased in 2009 by $100,000 However, if a bargain purchase occurred on January 1, 2009, this new payment reduces the allocations to noncurrent assets previously recognized for consolidation purposes At present, the Securities and Exchange Commission requires the use of push-down accounting for the separate financial statements of a subsidiary where no substantial outside ownership exists Thus, if Company A owns all of Company B, the push-down method of accounting would be appropriate for the separately issued statements of Company B The SEC normally requires push-down accounting where 95 percent of a subsidiary is acquired and the company has no outstanding public debt or preferred stock Push-down accounting may be required if 80-95 percent of the outstanding voting stock is purchased Push-down accounting is justified in that the consideration transferred by the present owners is reported For example, if a piece of land costs Company B $10,000 but Company A pays $13,000 for the land when acquiring Company B, the land has a basis to the current owners of B of $13,000 If B's financial records had been united with A at the time of the acquisition, the land would have been reported at $13,000 Thus, leaving the $10,000 figure simply because separate incorporation is maintained is viewed, by proponents of push-down accounting, as unjustified 12 When push-down accounting is applied, the subsidiary adjusts the book value of its assets and liabilities based on the allocations made at the date of the acquisition Periodic amortization expense is recognized subsequently by the subsidiary on each of these allocations (except for land) Therefore, the income recorded by the subsidiary is a fair representation of that company's impact on consolidated earnings The parent uses no special procedures when push-down accounting is being applied However, if the equity method is in use, amortization need not be recognized by the parent since that expense is included in the figure reported by the subsidiary 13 Push-down accounting has become popular for the parent's internal reporting purposes for two reasons First, this method simplifies the consolidation process each year If purchase price allocations and subsequent amortization are recorded by the subsidiary, they not need to be repeated each year on a consolidation worksheet Second, recording of amortization by the subsidiary enables that company's information to provide a good representation of the impact that the acquisition has on the earnings of the business combination For example, if the subsidiary earns $100,000 each year but annual amortization is $80,000, the acquisition is only adding $20,000 to the income of the combination each year rather than the $100,000 that is reported by the subsidiary unless push-down accounting is used McGraw-Hill/Irwin 3-8 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Answers to Problems A B A D Willkom equipment book value—12/31/11 Szabo book value—12/31/11 Original purchase price allocation to Szabo's equipment ($300,000 – $200,000) Amortization of allocation ($100,000/10 years for years) Consolidated equipment $210,000 140,000 100,000 (30,000) $420,000 A B D B A 10 C 11 C $60,000 allocation to equipment is "pushed-down" to subsidiary and increases balance from $330,000 to $390,000 Consolidated balance is $420,000 plus $390,000 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 3-9 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 12 (35 Minutes) (Determine consolidated retained earnings when parent uses various accounting methods Determine Entry *C for each of these methods) a CONSOLIDATED RETAINED EARNINGS EQUITY METHOD Herbert (parent) balance—1/1/09 $400,000 Herbert income—2009 40,000 Herbert dividends—2009 (subsidiary dividends are intercompany and, thus, eliminated) (10,000) Rambis income—2009 (not included in parent's income) 20,000 Amortization—2009 (12,000) Herbert income—2010 50,000 Herbert dividends—2010 (10,000) Rambis income—2010 30,000 Amortization—2010 (12,000) Consolidated Retained Earnings, 12/31/10 $496,000 PARTIAL EQUITY METHOD AND INITIAL VALUE METHOD Consolidated retained earnings are the same regardless of the method in use: the beginning balance plus the income of the parent less the dividends of the parent plus the income of the subsidiary less amortization expense Thus, consolidated retained earnings on December 31, 2010 are $496,000 as computed above b Investment in Rambis—Equity Method Rambis fair value 1/1/09 $574,000 Rambis income 2009 20,000 Rambis dividends 2009 (5,000) Herbert’s 2009 excess fair over book value amortization (12,000) Investment account balance 1/1/10 $577,000 Investment in Rambis—Partial Equity Method Rambis fair value 1/1/09 $574,000 Rambis income 2009 20,000 Rambis dividends 2009 (5,000) Investment account balance 1/1/10 $589,000 Investment in Rambis—Initial value method Rambis fair value 1/1/09 $574,000 Investment account balance 1/1/10 $574,000 McGraw-Hill/Irwin 3-10 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com The rationale is to improve the financial reporting The accounting treatment for goodwill should better reflect the underlying economics of goodwill Instead of regarding goodwill as a steadily ―wasting‖ asset, the impairment method regards the goodwill as one that sporadically declines or even conceivably maintains its value in perpetuity, which is consistent with the concept of representational faithfulness McGraw-Hill/Irwin 3-58 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Excel Case Solution a Innovus employs initial value method to account for ChipTech Revenues Cost of good sold Depreciation expense Amortization expense Dividend income Net Income Retained earnings 1/1 Net income Dividends paid Retained earnings 12/31 Current assets Investment in Chiptech Innovus (990,000) 500,000 100,000 55,000 (40,000) (375,000) ChipTech (210,000) 90,000 5,000 18,000 -0(97,000) (1,555,000) (375,000) 250,000 (1,680,000) (450,000) (97,000) 40,000 (507,000) 960,000 670,000 355,000 Adjustments (E) 20,000 (I) 40,000 (S)450,000 (C*) 60,000 (I) 40,000 Liabilities Common stock Additional paid-in capital Retained earnings 12/31 Total liabilities and equity (1,615,000) (412,000) 250,000 (1,777,000) 1,315,000 (C*) 60,000 (S) 580,000 (A) 150,000 Equipment (net) Trademark Existing technology Goodwill Total assets Consolidated (1,200,000) 590,000 105,000 93,000 -0(412,000) 765,000 235,000 450,000 3,080,000 225,000 100,000 45,000 -0725,000 (780,000) (500,000) (120,000) (1,680,000) (3,080,000) (88,000) (100,000) (30,000) (507,000) (725,000) McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e (A) 36,000 (A) 64,000 (A) 50,000 (E) 4,000 (E) 16,000 (S)100,000 (S) 30,000 850,000 850,000 -0990,000 367,000 93,000 500,000 3,265,000 (868,000) (500,000) (120,000) (1,777,000) (3,265,000) © The McGraw-Hill Companies, Inc., 2009 3-59 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Excel Case Solution (continued) b Innovus employs initial value method to account for ChipTech and goodwill is impaired Revenues Cost of good sold Depreciation expense Amortization expense Impairment loss Dividend income Net Income Retained earnings 1/1 Net income Dividends paid Retained earnings 12/31 Current assets Investment in Chiptech Innovus (990,000) 500,000 100,000 55,000 ChipTech (210,000) 90,000 5,000 18,000 (40,000) (375,000) -0(97,000) (1,555,000) (375,000) 250,000 (1,680,000) (450,000) (97,000) 40,000 (507,000) 960,000 670,000 355,000 Consolidated (1,200,000) 590,000 105,000 93,000 50,000 -0(362,000) 20,000 50,000 40,000 450,000 60,000 40,000 1,315,000 60,000 580,000 150,000 Equipment (net) Trademark Existing technology Goodwill Total assets Liabilities Common stock Additional paid-in capital Retained earnings 12/31 Total liabilities and equity (1,615,000) (362,000) 250,000 (1,727,000) 765,000 235,000 -0450,000 3,080,000 225,000 100,000 45,000 -0725,000 (780,000) (500,000) (120,000) (1,680,000) (3,080,000) (88,000) (100,000) (30,000) (507,000) (725,000) 36,000 64,000 50,000 4,000 16,000 50,000 100,000 30,000 900,000 900,000 -0990,000 367,000 93,000 450,000 3,215,000 (868,000) (500,000) (120,000) (1,727,000) (3,215,000) Alternatively, the goodwill impairment loss could have been recorded directly on the accounting records of Innovus McGraw-Hill/Irwin 3-60 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Excel Case Solution Part a: Investment in Wi-Free account balance 12/31/10 Wi-Free’s acquisition-date fair value $730,000 Change in Wi-Free’s book value 2009 $80,000 2009 amortization (includes in-process R&D) ($79,500) 2010 reported Wi-Free income $180,000 2010 Wi-Free dividend ($50,000) 2010 amortization ($4,500) Balance 12-31-10 $856,000 Part b Revenues Cost of good sold Depreciation expense Amortization expense Equity in subsidiary earnings Net Income Retained earnings 1/1 Net income Dividends paid Retained earnings 12/31 Current assets Investment in Wi-Free Equipment (net) Computer software Internet domain name Goodwill Total assets Liabilities Common stock Additional paid-in capital Retained earnings 12/31 Total liab and equity Consolidation Entries Debit Credit Consolidated Totals (1,425,000) 747,000 152,000 (E) 7,500 65,500 Hi-Speed (1,100,000) 625,000 140,000 50,000 Wi-Free (325,000) 122,000 12,000 11,000 (175,500) (460,500) -0(180,000) (I)175,500 -0(460,500) (1,552,500) (460,500) 250,000 (1,763,000) (450,000) (180,000) 50,000 (580,000) (S)450,000 (1,552,500) (460,500) 250,000 (1,763,000) 1,034,000 856,000 345,000 (D) 50,000 (D) 50,000 713,000 650,000 -03,253,000 305,000 130,000 100,000 -0880,000 (870,000) (500,000) (120,000) (1,763,000) (3,253,000) (170,000) (110,000) (20,000) (580,000) (880,000) McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e (E) 12,000 (E) 7,500 (A)108,000 (A) 65,000 (P) 30,000 (I) 175,500 (S)580,000 (A)150,500 (A) 22,500 (E) 12,000 (P) 30,000 (S)110,000 (S) 20,000 1,028,000 1,028,000 1,349,000 1,018,000 765,000 196,000 65,000 3,393,000 (1,010,000) (500,000) (120,000) (1,763,000) (3,393,000) © The McGraw-Hill Companies, Inc., 2009 3-61 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter - Computer Project PECOS COMPANY AND SUARO COMPANY Consolidated Information Worksheet Revenues Operating expenses Amortization of intangibles Goodwill impairment loss Income of Suaro Pecos (1,052,000) 821,000 Net income Retained earnings—Pecos, 1/1 Retained earnings—Suaro, 1/1 Net income (above) Dividends paid (165,000) 0 200,000 Retained earnings, 12/31 Cash Receivables Inventory Investment in Suaro Land Equipment (net) Software Other intangibles Goodwill Total liabilities and equity McGraw-Hill/Irwin 3-62 (201,000) (165,000) 35,000 (331,000) 195,000 247,000 415,000 341,000 240,100 145,000 Total assets Liabilities Common stock Retained earnings (above) Suaro (427,000) 262,000 0 95,000 143,000 197,000 85,000 100,000 312,000 0 932,000 (1,537,100) (500,000) (251,000) (350,000) (331,000) (932,000) © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidated Information Worksheet (continued) Fair Value Allocation Schedule Acquisition-date fair value 1,450,000 Book value 476,000 Excess fair value over book value 974,000 Amortizations and Write-off 2009 Land Brand Name Software IPR&D Goodwill Total 2010 (10,000) 60,000 100,000 300,000 524,000 0 50,000 300,000 0 50,000 0 974,000 350,000 50,000 Suaro's Retained Earnings Changes Income Dividends McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 2009 75,000 2010 165,000 35,000 © The McGraw-Hill Companies, Inc., 2009 3-63 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter - Computer Project Solution PECOS COMPANY AND SUARO COMPANY Consolidated Worksheet For the Year Ended December 31, 2010 EQUITY METHOD Consolidation Entries Pecos (1,052,000) 821,000 0 (115,000) Suaro (427,000) 262,000 0 Net income (346,000) (165,000) (346,000) Retained earnings—Pecos, 1/1 Retained earnings—Suaro, 1/1 Net income (above) Dividends paid (655,000) (346,000) 200,000 (201,000) (165,000) 35,000 (655,000) (346,000) 200,000 Retained earnings, 12/31 (801,000) (331,000) (801,000) 95,000 143,000 197,000 290,000 390,000 612,000 Revenues Operating expenses Amortization of intangibles Goodwill impairment loss Income of Suaro Cash Receivables Inventory Investment in Suaro 195,000 247,000 415,000 1,255,000 Debit Consolidated (E) 50,000 (I) 115,000 (S) Credit 201,000 (D) (D) 35,000 (S) (A) (I) Consolidated Worksheet (continued) McGraw-Hill/Irwin 3-62 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual 35,000 551,000 624,000 115,000 Totals (1,479,000) 1,133,000 0 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Land Equipment (net) Software Other intangibles Brand name Goodwill 341,000 240,100 145,000 0 85,000 100,000 312,000 0 2,838,100 932,000 3,089,100 Liabilities Common stock Retained earnings (above) (1,537,100) (500,000) (801,000) (251,000) (350,000) (331,000) 350,000 (1,788,100) (500,000) (801,000) Total liabilities and equity (2,838,100) (932,000) 1,385,000 1,385,000 (3,089,100) Total assets (A) (A) (A) (S) (A) 10,000 50,000 (E) 50,000 60,000 524,000 Shaded items were provided on the Consolidated Information Worksheet McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 3-63 416,000 340,100 312,000 145,000 60,000 524,000 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter – Computer Project Solution PECOS COMPANY AND SUARO COMPANY Consolidated Worksheet For the Year Ended December 31, 2010 PARTIAL EQUITY METHOD Consolidation Entries Pecos (1,052,000) 821,000 0 (165,000) Suaro (427,000) 262,000 0 (396,000) (165,000) Retained earnings—Pecos, 1/1 Retained earnings—Suaro, 1/1 Net income (above) Dividends paid (1,005,000) (396,000) 200,000 (201,000) (165,000) 35,000 Retained earnings, 12/31 (1,201,000) (331,000) (801,000) 195,000 247,000 415,000 1,655,000 95,000 143,000 197,000 290,000 390,000 612,000 Revenues Operating expenses Amortization of intangibles Goodwill impairment loss Income of Suaro Net income Cash Receivables Inventory Investment in Suaro McGraw-Hill/Irwin 3-64 Debit Consolidated (E) 50,000 (I) 165,000 Credit Totals (1,479,000) 1,133,000 0 (346,000) (*C) (S) 350,000 201,000 (D) (D) 35,000 (S) (A) (I) (*C) © The McGraw-Hill Companies, Inc., 2009 Solutions Manual 35,000 551,000 624,000 165,000 350,000 (655,000) (346,000) 200,000 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidated Worksheet (continued) Land Equipment (net) Software Other intangibles Brand name Goodwill 341,000 240,100 145,000 0 85,000 100,000 312,000 0 3,238,100 932,000 3,089,100 Liabilities Common stock Retained earnings (above) (1,537,100) (500,000) (1,201,000) (251,000) (350,000) (331,000) 350,000 (1,788,100) (500,000) (801,000) Total liabilities and equity (3,238,100) (932,000) 1,785,000 1,785,000 (3,089,100) Total assets (A) (A) (A) (S) (A) 10,000 50,000 (E) 50,000 60,000 524,000 Shaded items were provided on the Consolidated Information Worksheet McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 3-65 416,000 340,100 312,000 145,000 60,000 524,000 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter – Computer Project Solution PECOS COMPANY AND SUARO COMPANY Consolidated Worksheet For the Year Ended December 31, 2010 INITIAL VALUE METHOD Consolidation Entries Pecos (1,052,000) 821,000 0 (35,000) Suaro (427,000) 262,000 0 Net income (266,000) (165,000) Retained earnings—Pecos, 1/1 Retained earnings—Suaro, 1/1 Net income (above) Dividends paid (930,000) (266,000) 200,000 (201,000) (165,000) 35,000 Retained earnings, 12/31 (996,000) (331,000) (801,000) 95,000 143,000 197,000 290,000 390,000 612,000 Revenues Operating expenses Amortization of intangibles Goodwill impairment loss Income of Suaro Cash Receivables Inventory Investment in Suaro McGraw-Hill/Irwin 3-66 195,000 247,000 415,000 1,450,000 Debit Consolidated (E) 50,000 (I) 35,000 Credit Totals (1,479,000) 1,133,000 0 (346,000) (*C) (S) 275,000 201,000 (I) (S) (A) (*C) © The McGraw-Hill Companies, Inc., 2009 Solutions Manual 35,000 551,000 624,000 275,000 (655,000) (346,000) 200,000 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidated Worksheet (continued) Land Equipment (net) Software Other intangibles Brand name Goodwill 341,000 240,100 145,000 0 85,000 100,000 312,000 0 3,033,100 932,000 3,089,100 Liabilities Common stock Retained earnings (above) (1,537,100) (500,000) (996,000) (251,000) (350,000) (331,000) 350,000 (1,788,100) (500,000) (801,000) Total liabilities and equity (3,033,100) (932,000) 1,545,000 1,545,000 (3,089,100) Total assets (A) (A) (A) (S) (A) 10,000 50,000 (E) 50,000 60,000 524,000 Shaded items were provided on the Consolidated Information Worksheet McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 3-67 416,000 340,100 312,000 145,000 60,000 524,000 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter – Computer Project PECOS COMPANY AND SUARO COMPANY Goodwill Impairment Loss Effects Without With Impairment Impairment Common shares outstanding 500,000 500,000 Consolidated net income/(loss) 346,000 (178,000) Consolidated assets, 1/1/10 2,943,100 2,943,100 Consolidated assets, 12/31/10 3,089,100 2,565,100 Consolidated equity, 1/1/10 1,155,000 1,155,000 Consolidated equity, 12/31/10 1,301,000 777,000 Consolidated liabilities 1,788,100 1,788,100 0.69 -0.36 Return on assets 11.47% -6.46% Return on equity 28.18% -18.43% 1.37 2.30 Earnings-per-share Debt-to-equity McGraw-Hill/Irwin 3-68 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter – Computer Project Solution PECOS COMPANY AND SUARO COMPANY Consolidated Worksheet For the Year Ended December 31, 2010 EQUITY METHOD – GOODWILL IMPAIRMENT LOSS Consolidation Entries Revenues Operating expenses Amortization of intangibles Goodwill impairment loss Income of Suaro Net income Pecos (1,052,000) 821,000 524,000 (115,000) Suaro (427,000) 262,000 0 Debit (E) 50,000 (I) 115,000 Consolidated Credit Totals (1,479,000) 1,133,000 524,000 178,000 (165,000) 178,000 Retained earnings—Pecos, 1/1 Retained earnings—Suaro, 1/1 Net income (above) Dividends paid (655,000) 178,000 200,000 (201,000) (165,000) 35,000 (655,000) 178,000 200,000 Retained earnings, 12/31 (277,000) (331,000) (277,000) 195,000 247,000 415,000 731,000 95,000 143,000 197,000 290,000 390,000 612,000 Cash Receivables Inventory Investment in Suaro McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e (S) 201,000 (D) (D) 35,000 (S) (A) (I) © The McGraw-Hill Companies, Inc., 2009 3-69 35,000 551,000 100,000 115,000 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidated Worksheet (continued) Land Equipment (net) Software Other intangibles Brand name Goodwill 341,000 240,100 145,000 0 85,000 100,000 312,000 0 2,314,100 932,000 2,565,100 Liabilities Common stock Retained earnings (above) (1,537,100) (500,000) (277,000) (251,000) (350,000) (331,000) 350,000 (1,788,100) (500,000) (277,000) Total liabilities and equity (2,314,100) (932,000) 861,000 861,000 (2,565,100) Total assets (A) 10,000 (A) 50,000 (E) 50,000 (A) 60,000 (S) Shaded items were provided on the Consolidated Information Worksheet McGraw-Hill/Irwin 3-70 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual 416,000 340,100 312,000 145,000 60,000 ... calculated by subtracting the fair McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 3-7 Find more slides, ebooks, solution manual and... is reported by the subsidiary unless push-down accounting is used McGraw-Hill/Irwin 3-8 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank... Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com goodwill) Although this expense can be simulated in total on the parent's books by an equity