Solution manual advanced accounting 11th edition joe ben hoyle chap004

Chapter 04 - Consolidated Financial Statements and Outside Ownership Chapter Outline CHAPTER CONSOLIDATED FINANCIAL STATEMENTS AND OUTSIDE OWNERSHIP I Outside ownership may be present within any business combination A Complete ownership of a subsidiary is not a prerequisite for consolidation—only enough voting shares need be owned so that the acquiring company has the ability to control the decision-making process of the acquired company B Any ownership retained in a subsidiary corporation by a party unrelated to the acquiring company is termed a noncontrolling interest II Measurement of subsidiary assets and liabilities requires analysis when a noncontrolling interest is present under the acquisition method The accounting emphasis is placed on the entire entity that results from the business combination as measured by the sum of the acquisition-date fair values of the controlling and noncontrolling interests Measurement of subsidiary accounts is based on the acquisition-date fair value of the company (frequently determined by the consideration transferred and the fair value of the noncontrolling interest); specific subsidiary assets and liabilities are consolidated at their fair values The noncontrolling interest balance is reported as a component of stockholders' equity in the consolidated balance sheet III Consolidations involving a noncontrolling interest—subsequent to the date of acquisition A According to the parent company concept, all noncontrolling interest amounts are calculated in reference to the book value of the subsidiary company B Four noncontrolling interest figures are determined for reporting purposes Beginning of year balance Noncontrolling interest in subsidiary’s current income Dividends attributable to the noncontrolling interest during the period End of year balance C Noncontrolling interest balances are accumulated in a separate column in the consolidation worksheet The beginning of year figure is recorded on the worksheet as a component of Entries S and A The noncontrolling interest's share of the subsidiary's income is established by a columnar entry that simultaneously reports the balance in both the consolidated income statement and the noncontrolling interest column Dividends paid to these outside owners are reflected by extending the subsidiary's Dividends Paid balance (after eliminating intra-entity transfers) into the noncontrolling interest column as a reduction The end of year noncontrolling interest total is the summation of the three items above and is reported in stockholders' equity 4-1 Chapter 04 - Consolidated Financial Statements and Outside Ownership IV Step acquisitions A An acquiring company may make several different purchases of a subsidiary's stock in order to gain control B Upon attaining control, all of the parent’s previous investments in the subsidiary are adjusted to fair value and a gain or loss recognized as appropriate C Upon attaining control, the valuation basis for the subsidiary is established at its total fair value (the sum of the fair values of the controlling and noncontrolling interests) V Sales of subsidiary stock A The proper book value must be established within the parent's Investment account so that the sales transaction can be correctly recorded B The investment balance is adjusted as if the equity method had been applied during the entire period of ownership C If only a portion of the shares are being sold, the book value of the investment account is reduced using either a FIFO or a weighted-average cost flow assumption D If the parent maintains control, any difference between the proceeds of the sale and the equity-adjusted book value of the share sold is recognized as an adjustment to additional paid-in capital E If the parent loses control with the sale of the subsidiary shares, the difference between the proceeds of the sale and the equity-adjusted book value of the share sold is recognized as a gain or loss F Any interest retained by the parent company should be accounted for by either consolidation, the equity method, or the fair value method depending on the influence remaining after the sale Answers to Questions "Noncontrolling interest" refers to an equity interest that is held in a member of a business combination by an unrelated (outside) party $220,000 (fair value) Under the acquisition method, all assets acquired and liabilities assumed in a business combination are recorded at their acquisition-date fair values A control premium is the portion of an acquisition price (above currently traded market values) paid by a parent company to induce shareholders to sell a sufficient number of shares to obtain control The extra payment typically becomes part of the goodwill acquired in the acquisition attributable to the parent company Current accounting standards require the noncontrolling interest to appear in various locations within consolidated financial statements The end of year balance can be found in the stockholders' equity section of the balance sheet The noncontrolling interest's share of net income is shown as an allocated component of consolidated net income in the income statement 4-2 Chapter 04 - Consolidated Financial Statements and Outside Ownership The ending noncontrolling interest can be determined on a consolidation worksheet by adding the four components found in the noncontrolling interest column: (1) the beginning balance of the subsidiary’s book value, (2) the noncontrolling interest share of the adusted acquisition-date excess fair over book value allocation, (3) its share of current year subsidiary income, (4) less dividends paid to these outside owners Allsports should remove the pre-acquisition revenues and expenses from the consolidated totals These amounts were earned (incurred) prior to ownership by Allsports and therefore should are not earnings for the current parent company owners Following the second acquisition, consolidation is appropriate Once Tree gains control, the 10% previous ownership is included at fair value as part of the total consideration transferred by Tree in the acquisition When a company sells a portion of an investment, it must remove the carrying value of that portion from its investment account The carrying value is based upon application of the equity method Thus, if either the initial value method or the partial equity method has been used, Duke must first restate the account to the equity method before recording the sales transaction This same method is also applied to the operations of the current period occurring prior to the time of sale Unless control is surrendered, the acquisition method views the sale of subsidiary's stock as a transaction with its owners Thus, no gain or loss is recognized The difference between the sale proceeds and the carrying value of the shares sold (equity method) is accounted for as an adjustment to the parent’s additional paid in capital 10 The accounting method choice for the remaining shares depends upon the current relationship between the two firms If Duke retains control, consolidation is still required However, if the parent now can only significantly influence the decision-making process, the equity method is applied A third possibility is Duke may have lost the power to exercise even significant influence The fair value method then is appropriate Answers to Problems C D At the date control is obtained, the parent consolidates subsidiary assets at fair value ($500,000 in this case) regardless of the parent’s percentage ownership D In consolidating the subsidiary's figures, all intra-entity balances must be eliminated in their entirety for external reporting purposes Even though the subsidiary is less than fully owned, the parent nonetheless controls it C An asset acquired in a business combination is initially valued at 100% acquisition-date fair value and subsequently amortized its useful life Patent fair value at January 1, 2012 Amortization for years (10 year life) Patent reported amount December 31, 2013 4-3 $45,000 (9,000) $36,000 Chapter 04 - Consolidated Financial Statements and Outside Ownership C B Combined revenues $1,100,000 Combined expenses (700,000) Excess acquisition-date fair value amortization (15,000) Consolidated net income $385,000 Less: noncontrolling interest ($85,000 × 40%) (34,000) Consolidated net income to controlling interest $351,000 C Consideration transferred by Pride Noncontrolling interest fair value Star acquisition-date fair value Star book value Excess fair over book value to equipment (8 year remaining life) to customer list (4 year remaining life) $ 80,000 100,000 Combined revenues Combined expenses $545,000 Excess fair value amortization 35,000 Consolidated net income $540,000 60,000 $600,000 420,000 $180,000 Amort $10,000 25,000 $35,000 $783,000 580,000 $203,000 A Under the equity method, consolidated RE = parent’s RE B 10 A Amie, Inc fair value at July 1, 2013: 30% previously owned fair value (30,000 shares × $5) 60% new shares acquired (60,000 shares × $6) 10% NCI fair value (10,000 shares × $5) Acquisition-date fair value Net assets' fair value Goodwill $150,000 360,000 50,000 $560,000 500,000 $ 60,000 12 B Fair value of 30% noncontrolling interest on April 30% of net income for remainder of year ($240,000 × 30%) Noncontrolling interest December 31 $165,000 72,000 $237,000 11 C 4-4 Chapter 04 - Consolidated Financial Statements and Outside Ownership 13 C Proceeds of $80,000 less $64,000 (⅓ × $192,000) book value = $16,000 Control is maintained so excess proceeds go to APIC 14 B Combined revenues $1,300,000 Combined expenses (800,000) Trademark amortization (6,000) Patented technology amortization (8,000) Consolidated net income $486,000 15 C Subsidiary income ($100,000 – $14,000 excess amortizations) Noncontrolling interest percentage Noncontrolling interest in subsidiary income $86,000 40% $34,400 Fair value of noncontrolling interest at acquisition date 40% change in Solar book value since acquisition Excess fair value amortization ($14,000 × 40% × years) Noncontrolling interest at end of year $200,000 52,000 (11,200) $240,800 16 A West trademark balance Solar trademark balance Acquisition-date fair value allocation Excess fair value amortization for two years Consolidated trademarks $260,000 200,000 60,000 (12,000) $508,000 17 A Acquisition-date fair value ($60,000 ÷ 80%) Strand's book value Fair value in excess of book value $75,000 (50,000) $25,000 Excess assigned to inventory (60%) .$15,000 Excess assigned to goodwill (40%) $10,000 Park current assets Strand current assets Excess inventory fair value Consolidated current assets $70,000 20,000 15,000 $105,000 18 D Park noncurrent assets Strand noncurrent assets Excess fair value to goodwill Consolidated noncurrent assets $90,000 40,000 10,000 $140,000 19 B Add the two book values and include 10% (the $6,000 current portion) of the loan taken out by Park to acquire Strand 4-5 Chapter 04 - Consolidated Financial Statements and Outside Ownership 20 B Add the two book values and include 90% (the $54,000 noncurrent portion) of the loan taken out by Park to acquire Strand 21 C Park stockholders' equity Noncontrolling interest at fair value (20% × $75,000) Total stockholders' equity 22 $80,000 15,000 $95,000 (15 minutes) (Compute consolidated income and noncontrolling interests) 2012 2013 a Harrison income $220,000 $260,000 Starr income 70,000 90,000 Acquisition-date excess fair value amortization (8,000) (8,000) Consolidated net income $282,000 $342,000 b Starr fair value $1,200,000 Fair value of consideration transferred 1,125,000 Noncontrolling interest fair value $75,000 Noncontrolling interest fair value January 1, 2012 (above) 2012 income to NCI ([$70,000 – $8,000] × 10%) 2012 dividends to NCI Noncontrolling interest reported value December 31, 2012 2013 income to NCI ([$90,000 – $8,000] × 10%) 2013 dividends to NCI Noncontrolling interest reported value December 31, 2013 $75,000 6,200 (3,000) 78,200 8,200 (3,000) $83,400 23 (30 minutes) (Consolidated balances, allocation of consolidated net income to controlling and noncontrolling interest, calculation of noncontrolling interest) a Harlan’s technology processes: Acquisition-date fair value (20 year remaining life) 2013 amortization Technology processes 12/31/13 b Harlan’s building: Acquisition-date fair value (10 year remaining life) 2013 depreciation: On Harlan’s books ($195,000 ÷ 10 years) $19,500 Depreciation of acquisition-date fair value allocation ($150,000 ÷ 10 years) 15,000 Building 12/31/13 4-6 $1,000,000 (50,000) $ 950,000 $345,000 (34,500) $310,500 Chapter 04 - Consolidated Financial Statements and Outside Ownership c Controlling interest in combined entity net income: Pepper Enterprise’s separate net income Harlan’s reported net income Excess fair value amortization: Technology processes Building ($345,000 – $195,000) ÷ 10 years Harlan’s adjusted net income Pepper’s ownership percentage Controlling interest in combined entity net income $700,000 350,000 (50,000) (15,000) 285,000 80% d Noncontrolling interest in Harlan’s net income: Harlan’s reported net income Excess fair value amortization: Technology processes Building ($345,000 – $195,000) ÷ 10 years Harlan’s adjusted net income Noncontrolling interest percentage Noncontrolling interest in Harlan’s net income 228,000 $928,000 350,000 (50,000) (15,000) 285,000 20% $57,000 e Noncontrolling interest: Acquisition-date balance 1/1/13 Total Harlan fair value ($3,000,000 ÷ 80%) $3,750,000 Noncontrolling interest percentage 20% Noncontrolling interest acquisition-date fair value $750,000 Noncontrolling interest in Harlan’s net income 57,000 Noncontrolling interest share of Harlan dividends (20% × $50,000) (10,000) Noncontrolling interest 12/31/13 $ 797,000 24 (40 minutes) (Several valuation and income determination questions for a business combination involving a noncontrolling interest.) a Business combinations are recorded generally at the fair value of the consideration transferred by the acquiring firm plus the acquisition-date fair value of the noncontrolling interest Patterson’s consideration transferred ($31.25 × 80,000 shares) $2,500,000 Noncontrolling interest fair value ($30.00 × 20,000 shares) 600,000 Soriano’s total fair value January $3,100,000 b Each identifiable asset acquired and liability assumed in a business combination is initially reported at its acquisition-date fair value 4-7 Chapter 04 - Consolidated Financial Statements and Outside Ownership c In periods subsequent to acquisition, the subsidiary’s assets and liabilities are reported at their acquisition-date fair values adjusted for amortization and depreciation Except for certain financial items, they are not continually adjusted for changing fair values d Soriano’s total fair value January Soriano’s net assets book value Excess acquisition-date fair value over book value Adjustments from book to fair values Buildings and equipment (250,000) Trademarks 200,000 Patented technology 1,060,000 Unpatented technology 600,000 Goodwill $3,100,000 1,290,000 $1,810,000 1,610,000 $ 200,000 e Combined revenues $4,400,000 Combined expenses (2,350,000) Building and equipment excess depreciation 50,000 Trademark excess amortization (20,000) Patented technology amortization (265,000) Unpatented technology amortization (200,000) Consolidated net income $1,615,000 To noncontrolling interest: Soriano’s revenues $1,400,000 Soriano’s expenses (600,000) Total excess amortization expenses (above) (435,000) Soriano’s adjusted net income $ 365,000 Noncontrolling interest percentage ownership 20% Noncontrolling interest share of consolidated net income $ 73,000 24 (continued) To controlling interest: Consolidated net income $1,615,000 Noncontrolling interest share of consolidated net income (73,000) Controlling interest share of consolidated net income $1,542,000 -ORPatterson’s revenues $3,000,000 Patterson’s expenses 1,750,000 Patterson’s separate net income $1,250,000 Patterson’s share of Soriano’s adjusted net income (80% × $365,000) 292,000 4-8 Chapter 04 - Consolidated Financial Statements and Outside Ownership Controlling interest share of consolidated net income $1,542,000 f Fair value of noncontrolling interest January $ 600,000 Current year income allocation 73,000 Dividends (20% × $30,000) (6,000) Noncontrolling interest December 31 $ 667,000 g If Soriano’s acquisition-date total fair value was $2,250,000, then a bargain purchase has occurred Collective fair values of Soriano’s net assets $2,900,000 Soriano’s total fair value January $2,250,000 Bargain purchase $ 650,000 The acquisition method requires that the subsidiary assets acquired and liabilities assumed be recognized at their acquisition date fair values regardless of the assessed fair value Therefore, none of Soriano’s identifiable assets and liabilities would change as a result of the assessed fair value When a bargain purchase occurs, however, no goodwill is recognized 25 (30 minutes) Step acquisition a Investment in Sellinger Cash Additional Paid-In Capital 445,000 415,000 30,000 Acquisition-date fair value ($1,141,000 ÷ 7) Sellinger income 2012 Excess fair value amortization 2012 Sellinger dividends 2012 Acquisition-date adjusted subsidiary value 12/31/12 Percent acquired 1/1/13 Acquisition-date based value of newly acquired shares Acquisition price for 25% interest Credit to Palka’s APIC $1,630,000 340,000 (40,000) (150,000) 1,780,000 0.25 $ 445,000 415,000 $ 30,000 b Initial value for 70% acquisition $1,141,000 70% of adjusted subsidiary income 2012 ($340,000 – $40,000) 210,000 70% of subsidiary dividends 2012 (105,000) Adjusted fair value of newly acquired shares 445,000 95% of adjusted subsidiary 2013 income ($440,000 – $40,000) 380,000 95% of subsidiary dividends 2013 (171,000) Investment in Sellinger 12/31/13 $1,900,000 4-9 Chapter 04 - Consolidated Financial Statements and Outside Ownership 26 (20 Minutes) (Determine consolidated income balances, includes a mid-year acquisition) a Acquisition-date total fair value Book value of net assets Fair value in excess of book value Excess fair value assigned to Patent Land Buildings Goodwill Total $594,000 (400,000) $194,000 Annual Excess Life Amortizations 140,000 years $28,000 10,000 30,000 10 years 3,000 14,000 -0$31,000 Consolidated figures following January acquisition date: Combined revenues $1,500,000 Combined expenses (1,031,000) Consolidated net income 469,000 NCI in Sawyer’s income ([200,000 – 31,000] × 30%) (50,700) Controlling interest in consolidated net income $418,300 b Consolidated figures following April acquisition date: Combined revenues (1) $1,350,000 Combined expenses (2) (923,250) Consolidated net income $ 426,750 Noncontrolling interest in subsidiary income (3) (38,025) Controlling interest in consolidated net income $388,725 (1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues (2) $600,000 Parker expenses plus $300,000 of post-acquisition Sawyer expenses plus $23,250 amortization expenses for months (3) ($200,000 – 31,000) adjusted subsidiary income × 30% ì ắ year 27 (15 minutes) Consolidated figures with noncontrolling interest Fair value of company (given) Book value Fair value in excess of book value to machine ($50,000 – $10,000) to process trade secret $60,000 (10,000) 50,000 40,000 ÷ 10 = $4,000 per year $10,000 ÷ = 2,500 per year $6,500 per year Consolidated figures:  Noncontrolling interest in subsidiary income = 40%  ($50,000 revenues less $26,500 expenses) = $9,400 4-10 Chapter 04 - Consolidated Financial Statements and Outside Ownership 37 (continued)  Retained earnings, 12/31 = $1,466,000 (consolidated balance on 1/1 plus consolidated net income less noncontrolling interest in subsidiary's income less consolidated dividends) or simply the parent’s RE because parent employs the equity method  Current assets = $1,493,000 (add the two book values)  Investment in Sam = -0- (eliminated so that the individual assets and liabilities of the subsidiary can be included in the consolidated figures)  Land = $517,000 (add the book values plus the $165,000 excess allocation)  Buildings and equipment (net) = $1,119,500 (add the book values less the $25,000 allocation [asset was overvalued] plus the excess amortization)  Copyright = $190,000 (book value + $100,000 excess allocation less amortization for the year)  Total assets = $3,319,500  Accounts payable = $339,000 (add book values)  Notes payable = $581,250 (add the book values less $10,000 excess allocation plus amortization)  Noncontrolling interest in subsidiary = $183,250 (20% of fair value as of 1/1 [$170,000] plus noncontrolling interest in income of subsidiary [$26,250] less dividends paid to outside owners [$13,000])  Common stock = $300,000 (parent company balance)  Additional paid-in capital = 450,000 (parent company balance)  Retained earnings, 12/31 = $1,466,000 (computed above)  Total liabilities and equities = $3,319,500 4-27 Chapter 04 - Consolidated Financial Statements and Outside Ownership 37 (continued) Acquisition Method Accounts Father Revenues (1,360,000) Cost of goods sold 700,000 Depreciation expense 260,000 Amortization expense -0Interest expense 44,000 Equity in income of Sam (105,000) Separate company net income (461,000) Consolidated net income Noncontrolling interest in Sam's income Controlling interest in CNI Retained earnings 1/1 (1,265,000) Net income (above) (461,000) Dividends paid 260,000 Retained earnings 12/31 (1,466,000) Current assets 965,000 Investment in Sam 733,000 Land Buildings and equipment (net) Copyright Total assets Accounts payable Notes payable NCI in Sam 1/1 NCI in Sam 12/31 Common stock Additional paid-in capital Retained earnings 12/31(above) … Total liab and stockholders' equity 292,000 877,000 -02,867,000 (191,000) (460,000) (300,000) (450,000) (1,466,000) (2,867,000) Sam (540,000) 385,000 10,000 5,000 5,000 -0(135,000) Consolidation Entries Debit Credit (E) Noncontrolling Consolidated Interest Totals (1,900,000) 1,085,000 267,500 10,000 50,250 -0- 2,500 (E) 5,000 (E) 1,250 (I) 105,000 (26,250) (440,000) (135,000) 65,000 (510,000) 528,000 60,000 265,000 95,000 948,000 (148,000) (130,000) (100,000) (60,000) (510,000) (948,000) 4-28 (S) 440,000 (D) 52,000 (D) 52,000 (S) (I) (A) (A) 165,000 (E) 2,500 (A) (A) 100,000 (E) 480,000 105,000 200,000 -0517,000 1,119,500 190,000 3,319,500 (339,000) (581,250) 25,000 5,000 (A) 10,000 (E) 1,250 (S) 120,000 (A) 50,000 (S) 100,000 (S) 60,000 1,040,750 13,000 1,040,750 (487,250) 26,250 (461,000) (1,265,000) (461,000) 260,000 (1,466,000) 1,493,000 (170,000) (183,250) (183,250) (300,000) (450,000) (1,466,000) (3,319,500) Chapter 04 - Consolidated Financial Statements and Outside Ownership 38 (55 Minutes) (Consolidated worksheet) a Consideration transferred by Adams Noncontrolling interest fair value Acquisition-date total fair value Book value of Barstow (CS + RE 12/31/11) Excess fair value over book value $603,000 67,000 $670,000 (460,000) $210,000 Annual Excess Land Buildings Equipment Patents Notes payable $30,000 (20,000) 40,000 50,000 20,000 120,000 $90,000 indefinite Goodwill Total b Life Amortizations — — 10 years ($2,000) years 8,000 10 years 5,000 years 4,000 -0$15,000 Because investment income is exactly 90 percent of Barstow's reported earnings, Adams apparently is applying the partial equity method c., d Explanation of Consolidation Entries Found on Worksheet Entry *C—Converts Adams's financial records from the partial equity method to the equity method by recognizing amortization for 2012 Total expense was $15,000 but only 90 percent (or $13,500) applied to the parent Entry S—Eliminates subsidiary's stockholders' equity while recording noncontrolling interest balance as of January 1, 2013 Entry A—Records unamortized allocation balances as of January 1, 2013 The acquisition method attributes 10 percent of these amounts to the noncontrolling interest Entry I—Eliminates intra-entity income accrual for 2013 Entry D—Eliminates intra-entity dividend transfers Entry E—Records amortization expense for current year Columnar Entry—Recognizes noncontrolling interest's share of Barstow's net income as follows: Noncontrolling Interest in Barstow's Income (Columnar Entry) Barstow reported income Excess amortization expenses 2013 Adjusted income of Barstow Noncontrolling interest ownership Noncontrolling interest in Barstow's income 38 c and d (continued) $120,000 (15,000) $105,000 10% $10,500 ADAMS CORPORATION AND BARSTOW, INC Consolidation Worksheet-Acquisition Method 4-29 Chapter 04 - Consolidated Financial Statements and Outside Ownership For Year Ending December 31, 2013 Revenues Cost of goods sold Depreciation expense Amortization expense Interest expense Investment income Separate company net income Consolidated net income Income to noncontrolling interest Income to controlling interest Adams Corp (940,000) 480,000 100,000 40,000 (108,000) (428,000) Barstow Inc (280,000) 90,000 55,000 15,000 Interest (E) 6,000 (E) 5,000 (E) 4,000 (I) 108,000 (10,500) (1,367,000) (340,000) Net income Dividends paid Retained earnings, 12/31 (428,000) 110,000 (1,685,000) (120,000) 70,000 (390,000) Current assets Investment in Barstow 610,000 702,000 250,000 Land Buildings Equipment Patents Goodwill Total assets 380,000 490,000 873,000 150,000 250,000 150,000 3,055,000 800,000 (860,000) (510,000) (1,685,000) (230,000) (180,000) (390,000) (C*) 13,500 (S) 340,000 (D) 63,000 (A) (E) (A) (A) (A) 30,000 2,000 32,000 45,000 90,000 (A) 16,000 (S) 180,000 (800,000) 4-30 934,500 7,000 (425,000) 10,500 (414,500 ) 560,000 724,000 1,047,000 40,000 90,000 3,321,000 (A) 18,000 (E) 8,000 (E) 5,000 (E) 4,000 934,500 (414,500) 110,000 (1,658,000) 860,000 -0- (*C) 13,500 (S) 468,000 (A) 175,500 (I) 108,000 (S) 52,000 (A) 19,500 (3,055,000) Totals (1,220,000) 570,000 161,000 5,000 59,000 -0- (1,353,500) (D) 63,000 Noncontrolling interest Total liabilities and stockholders' equity Credit Consolidated (120,000) Retained earnings, 1/1 Notes payable Common stock Retained earnings, 12/31 Debit Noncontrolling (1,078,000) (510,000) (1,658,000) (71,500) (75,000 ) (75,000) (3,321,000) Chapter 04 - Consolidated Financial Statements and Outside Ownership 39 (25 minutes) (Consolidated balances after a mid-year acquisition) a Investment account balance indicates the initial value method Consideration transferred by Gibson Noncontrolling interest fair value Davis acquisition-date fair value Book value of Davis (see below) Fair value in excess of book value Excess assigned based on fair value: Equipment (overvalued) Goodwill Total Amortization for months $528,000 352,000 880,000 (765,000) $115,000 Annual Excess Life Amortizations (30,000) years $(6,000) $145,000 indefinite -0$(6,000) $(4,500) Acquisition-date subsidiary book value: Book value of Davis, 1/1/13 (CS + 1/1 RE) $740,000 Increase in book value-net income (dividends were paid after acquisition) $100,000 Time prior to acquisition (3 months) ì ẳ year 25,000 Book value of Davis, 4/1/13 (acquisition date) $765,000 Consolidated income statement: Revenues (1) Cost of goods sold (2) Operating expenses (3) Consolidated net income Noncontrolling interest in CNI (4) Controlling interest in CNI $825,000 $405,000 214,500 619,500 205,500 31,800 $173,700 (1) $900,000 combined revenues less $75,000 (preacquisition subsidiary revenue) (2) $440,000 combined COGS less $35,000 (preacquisition subsidiary COGS) (3) $234,000 combined operating expenses less $15,000 (preacquisition subsidiary operating expenses) less nine month excess overvalued equipment depreciation reduction of $4,500 (4) 40% of post-acquisition subsidiary income less excess amortization b Goodwill = $145,000 (original allocation) Equipment = $774,500 (add the two book values less $30,000 reduction to fair value plus $4,500 nine months excess amortization) Common stock = $630,000 (parent company balance only) Buildings = $1,124,000 (add the two book values) Dividends paid = $80,000 (parent company balance only) 4-31 Chapter 04 - Consolidated Financial Statements and Outside Ownership 40 (40 minutes) Determine consolidated balance for a mid-year acquisition a Consideration transferred by Truman $720,000 Noncontrolling interest fair value 290,000 Atlanta’s acquisition-date total fair value $1,010,000 Book value of Atlanta (840,000) Fair value in excess of book value $170,000 Annual Excess Excess fair value assigned Life Amortizations Patent 100,000 years $20,000 Goodwill $70,000 indefinite -0Total $20,000 b Goodwill allocation with control premium Noncontrolling Controlling Fair values at acquisition date Relative fair values of identifiable net assets 70% and 30% of $940,000 (acquisition date book value plus patent = net asset fair value) Goodwill c Initial value at acquisition date Truman’s share of Atlanta’s income for half year ([$120,000 – 20,000 amortization ì ẵ year] ì 70%) Dividends 2013 ($80,000 ì ½ year × 70%) Investment account balance 12/31/13 4-32 Interest $720,000 Interest $290,000 658,000 $ 62,000 282,000 $ 8,000 $720,000 35,000 (28,000) $727,000 Chapter 04 - Consolidated Financial Statements and Outside Ownership 40 (continued) d Consolidated Worksheet TRUMAN COMPANY AND SUBSIDIARY ATLANTA COMPANY Consolidation Worksheet For Year Ending December 31, 2013 Revenues Operating Expenses Income of subsidiary Separate company net income Consolidated net income NCI in Atlanta's income Controlling interest in CNI Truman (670,000) 402,000 (35,000) Atlanta (400,000) 280,000 (303,000) (120,000) (S)200,000 (E) 10,000 (I) 35,000 (823,000) (303,000) 145,000 (500,000) (120,000) 80,000 Retained earnings 12/31 (981,000) (540,000) Current assets Investment in Atlanta 481,000 727,000 390,000 Land Buildings Patent Goodwill Total assets 388,000 701,000 200,000 630,000 (S)140,000 (S) 500,000 (S) 40,000 (D) 28,000 (D) 28,000 Cons (870,000) 552,000 -0(318,000) 15,000 (303,000) (823,000) (303,000) 12,000 145,000 (981,000) 871,000 -0- (S)588,000 (I) 35,000 (A1) 70,000 (A2) 62,000 2,297,000 1,220,000 588,000 1,331,000 90,000 70,000 2,950,000 (816,000) (95,000) (405,000) (981,000) (360,000) (300,000) (20,000) (540,000) (1,176,000 ) (95,000) (405,000) (981,000) (A1)100,000 (A2) 70,000 (E) 10,000 (S) 300,000 (S) 20,000 (A1) 30,000 (A2) 8,000 (S) 252,000 Noncontrolling interest 12/31 Total liab and equity NCI (15,000) Retained earnings, 1/1 Net income (above) Dividends paid Liabilities Common stock Additional paid-in capital Retained earnings 12/31 Noncontrolling interest 7/1 Adjustments & Eliminations (290,000 ) 293,000 (2,297,000 ) (1,220,000 ) 4-33 1,263,000 1,263,000 (293,000 ) (2,950,000 ) Chapter 04 - Consolidated Financial Statements and Outside Ownership 41 (60 minutes) (Consolidated statements for a step acquisition) a Fair value of Sysinger 1/1/13 (given) Book value of Sysinger 1/1/13 (CS + APIC + RE) Excess fair value over book value To customer contract (4 year life) To goodwill b Equity in earnings of Sysinger 2013 income (150,000 × 95%) Amortization (100,000 × 95%) Equity in earnings of Sysinger $142,500 (95,000) $47,500 Revaluation of 15% block to fair value Consideration transferred 2012 Income (100,000 × 15%) 2012 dividends (30,000 × 15%) Book value at 1/1/13 Fair value at 1/1/13 Gain on revaluation $184,500 15,000 (4,500) 195,000 262,500 $67,500 Investment account balance Fair value at 1/1/13 (15% block) Consideration transferred 1/1/12 (80% block) Equity earnings 2013 Income (95% × 150,000) Customer contract amortization Dividends (40,000 × 95%) Investment in Sysinger 12/31/13 4-34 $1,750,000 1,300,000 450,000 400,000 $50,000 $262,500 1,400,000 142,500 (95,000) 47,500 (38,000) $1,672,000 Chapter 04 - Consolidated Financial Statements and Outside Ownership 41 (Continued) c Accounts Revenues Operating expenses Equity earnings of Sysinger Gain on revaluation Separate company net income Consolidated net income NCI in Sysinger’s income Allan’s share of CNI Allan and Sysinger Consolidation Worksheet For Year Ending December 31, 2013 Allan Sysinger Consolidation Entries Noncontrolling Consolidated Company Company Debit Credit Interest Totals (931,000) (380,000) (1,311,000) 615,000 230,000 (E)100,000 945,000 (47,500) -0(I) 47,500 -0(67,500 ) -0(67,500) (431,000) (150,000) (433,500) (2,500) 2,500 (431,000 ) Retained earnings, 1/1 Net income Dividends paid Retained earnings 12/31 (965,000) (431,000) 140,000 (1,256,000) (600,000) (150,000) 40,000 (710,000) Current assets Investment in Sysinger 288,000 1,672,000 540,000 -0- 826,000 850,000 -0- 590,000 370,000 -0-01,500,000 Property, plant, and equipment Patented technology Customer contract Goodwill Total assets 3,636,000 Liabilities Common stock Additional paid-in capital Retained earnings 12/31 NCI in Sysinger, 1/1 (1,300,000) (900,000) (180,000) (1,256,000) -0- (90,000) (500,000) (200,000) (710,000) -0- NCI in Sysinger, 12/31 Total liab and stockholders' equity -0(3,636,000) -0(1,500,000) 4-35 (S) 600,000 (D) (D) 38,000 (A) 400,000 (A) 50,000 38,000 2,000 828,000 -0- (S)1,235,000 (I) 47,500 (A) 427,500 1,416,000 1,220,000 300,000 50,000 3,814,000 (E) 100,000 (1,390,000) (900,000) (180,000) (1,256,000) (S) 500,000 (S) 200,000 (S) 65,000 (A) 22,500 1,935,500 (965,000) (431,000) 140,000 (1,256,000) 1,935,500 (87,500 ) (88,000) (88,000) (3,814,000) Chapter 04 - Consolidated Financial Statements and Outside Ownership 42 (60 minutes) (Step acquisition—control previously acquired.) a According to the acquisition method, the valuation basis for a subsidiary is established on the date control is obtained, in this case January 1, 2012 Subsequent acquisitions are valued consistent with this initial value after adjusting the investment for subsidiary income and other changes Because subsequent acquisitions are considered as transactions in the parent’s own equity, no gains or losses are recorded Differences in cash paid and the underlying value are recorded as adjustments to APIC Fair value of Keane Company 1/1/12 ($573,000 ÷ 60%) Keane income 2012 Excess fair value amortization for copyright Keane dividends 2012 Initial fair value adjusted to 1/1/13 Percent acquired in step acquisition Value assigned to 30% acquisition Cash paid for the 30% acquisition Credit to APIC from 30% step acquisition $955,000 150,000 (20,000)* (80,000) $1,005,000 30% 301,500 300,000 $ 1,500 *Fair value of Keane Company 1/1/12 ($573,000 ÷ 60%) Book value of Keane Company 1/1/12 (given) Excess fair value over book value To copyright (6 year life) To goodwill $955,000 810,000 145,000 120,000 $25,000 Entry to record 30% additional investment in Keane: 1/1/13 Investment in Keane Cash APIC from Step Acquisition 301,500 b Investment in Keane Company 1/1/12 2012 Equity earnings [60% × (150,000 – 20,000)] 2012 Dividends received (60% × $80,000) Additional acquisition of 30% interest 2013 Equity earnings [90% × (180,000 – 20,000)] 2013 Dividends received (90% × $60,000) Investment in Keane Company 12/31/13 4-36 300,000 1,500 $573,000 78,000 (48,000) 301,500 144,000 (54,000) $994,500 Chapter 04 - Consolidated Financial Statements and Outside Ownership 42 (continued) part c BRETZ, INC AND KEANE COMPANY Consolidation Worksheet Year Ending December 31, 2013 Accounts Revenues Operating expenses Equity in Keane’s income Separate company net income Consolidated net income NCI in Keane’s income Bretz’s share of CNI Bretz, Inc (402,000) 200,000 (144,000 ) (346,000) Retained earnings, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 (797,000) (346,000) 143,000 (1,000,000) Current assets Investment in Keane Company Trademarks Copyrights Equipment (net) Goodwill Total assets Liabilities Common stock Additional paid-in capital APIC-step acquisition Retained earnings,12/31 Non-controlling interest 1/1 Non-controlling interest 12/31 Total liabilities and equities Keane Co (300,000) 120,000 Consolidation Entries Noncontrolling Consolidated Debit Credit Interest Totals (702,000) (E) 20,000 340,000 (I) 144,000 (180,000 ) (16,000) 224,000 994,500 (500,000) (180,000) 60,000 (620,000) (S) 500,000 (D) 54,000 6,000 190,000 106,000 210,000 380,000 600,000 300,000 110,000 1,914,500 1,200,000 (D)54,000 (S) 792,000 (A) 112,500 (I) 144,000 (A)100,000 (E) 20,000 (200,000) (300,000) (80,000) 706,000 590,000 490,000 25,000 2,225,000 (653,000) (400,000) (60,000) (1,500) (1,000,000) (S)300,000 (S) 80,000 (620,000) (A) 12,500 (S) 88,000 (1,914,500) (1,200,000) 4-37 1,223,000 (797,000) (346,000) 143,000 (1,000,000) 414,000 (A) 25,000 (453,000) (400,000) (60,000) (1,500) (1,000,000) (362,000) 16,000 (346,000) 1,223,000 (100,500 ) 110,500 (110,500) (2,225,000 ) Chapter 04 - Consolidated Financial Statements and Outside Ownership ACCOUNTING THEORY RESEARCH CASE: NONCONTROLLING INTEREST In deliberations prior to the issuance of pre-Codification SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements,” the FASB considered three alternatives for displaying the noncontrolling interest in the consolidated balance sheet What were these three alternatives? As a liability As equity In the “mezzanine” area between liabilities and owners’ equity What criteria did the FASB use to evaluate the desirability of each alternative? The FASB evaluated whether the classifications conformed to current definitions of financial statement elements (assets, liabilities, or equity) as articulated in FASB Concept Statement No In what specific ways did FASB Concept Statement affect the FASB’s evaluation of these alternatives? From pre-Codification SFAS 160 paragraphs 32-34 If it required that the noncontrolling interest be reported in the mezzanine, the Board would have had to create a new element— noncontrolling interest in subsidiaries—specifically for consolidated financial statements The Board concluded that no compelling reason exists to create a new element specifically for consolidated financial statements to report the interests in a subsidiary held by owners other than the parent The Board believes that using the existing elements of financial statements along with appropriate labeling and disclosure provides financial information in the consolidated financial statements that is representationally faithful, understandable, and relevant to the entity’s owners, creditors, and other resource providers The Board concluded that a noncontrolling interest in a subsidiary does not meet the definition of a liability in the Board’s conceptual framework Paragraph 35 of Concepts Statement defines liabilities as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events” 4-38 Chapter 04 - Consolidated Financial Statements and Outside Ownership The Board concluded that a noncontrolling interest represents the residual interest in the net assets of a subsidiary within the consolidated group held by owners other than the parent The noncontrolling interest, therefore, meets the definition of equity in Concepts Statement Paragraph 49 of Concepts Statement defines equity (or net assets) as “the residual interest in the assets of an entity that remains after deducting its liabilities.” RESEARCH CASE: COCA-COLA’S ACQUISITION OF COCA-COLA ENTERPRISES How did Coca-Cola allocate the acquisition-date fair value of CCE among the assets acquired and liabilities assumed? Note (Acquisitions and Divestitures) of Coca-Cola’s 2010 10-K shows the following allocation for the CCE acquisition: Cash and cash equivalents Marketable securities Trade accounts receivable Inventories Other current assets Property, plant and equipment Bottlers' franchise rights with indefinite lives Other intangible assets Other noncurrent assets Total identifiable assets acquired $ Accounts payable and accrued expenses Loans and notes payable Long-term debt Pension and other postretirement liabilities Other noncurrent liabilities Total liabilities assumed 1,826 266 9,345 1,313 2,603 $15,353 Net liabilities assumed Goodwill Less: Noncontrolling interests 49 1,194 696 744 5,385 5,100 1,032 261 $14,468 (885) 7,746 (13) Net assets acquired $ 6,848 What are employee replacement awards? How did Coca-Cola account for the replacement award value provided to the former employees of CCE? Employee replacement award represent various share-based payments to employees that the acquiring firm replaces with new awards based on its shares The ASC requires that if replacement awards are based on past service, their fair value is included in consideration transferred If the replacement awards are for future service, their value is expensed as incurred Coca-Cola followed the ASC for its replacement awards (10-K Note 2) 4-39 Chapter 04 - Consolidated Financial Statements and Outside Ownership How did Coca-Cola account for its 33 percent interest in CCE prior to the acquisition of the 67 percent not already owned by Coca-Cola? Coca-Cola used the equity method to account for its previous 33 percent investment in CCE (10-K page 53) Upon acquisition of the additional 67 percent interest, how did Coca-Cola account for the change in fair value of its original 33 percent ownership interest? “We remeasured our equity interest in CCE to fair value upon the close of the transaction As a result, we recognized a gain of approximately $4,978 million, which was classified in the line item other income (loss) — net in our consolidated statement of income.” (10-K Note 2) CHARGING AHEAD: FASB ASC AND IFRS RESEARCH CASE What is the total consideration transferred by Nu-Auto to acquire its 90 percent controlling interest in Battery Tech? Cash Shares of Nu-Auto stock Contingency Total consideration transferred $60,000,000 27,000,000 10,000,000 $97,000,000 The shares of Nu-Auto stock and the contingency are both measured at their acquisition-date fair values (ASC 805-30-30-7, ASC 805-30-25-5) What values should Nu-Auto assign to identifiable assets and liabilities as part of the acquisition accounting? Cash Accounts receivable Land Building Machinery Trademark Research and development asset Accounts payable Total net asset fair value $ 270,000 800,000 2,930,000 19,000,000 46,000,000 8,000,000 14,000,000 (1,000,000) $90,000,000 (ASC 805-20-30-1) What is the acquisition-date value assigned to the 10 percent noncontrolling interest? What are the noncontrolling interest valuation alternatives available under IFRS? Under U.S GAAP, the acquisition-date noncontrolling interest is measured at its fair value In this case, a reasonable approximation is the average share price of $110 for the 100,000 noncontrolling interest shares surrounding the October acquisition date (ASC 805-20-30-1) IFRS allows two alternative measures for the noncontrolling interest The first is identical to the U.S measure The second alternative uses the noncontrolling interest percentage of the fair value of the subsidiary’s identifiable net assets In this case, the second alternative provides a value of $9,000,000 4-40 Chapter 04 - Consolidated Financial Statements and Outside Ownership Under U.S GAAP, what amount should Nu-Auto recognize as goodwill from the acquisition? What alternative valuations are available for goodwill under IFRS? Goodwill under U.S GAAP (ASC 805-30-30-1) and IFRS alternative (IFRS IN 8): Consideration transferred (above) Acquisition-date noncontrolling interest fair value Acquisition-date value assigned to subsidiary Net assets acquired fair value (above) Goodwill $ 97,000,000 11,000,000 $108,000,000 90,000,000 $ 18,000,000 Goodwill under IFRS alternative 2: Consideration transferred (above) Acquisition-date NCI value assigned (above) Acquisition-date value assigned to subsidiary Net assets acquired fair value (above) Goodwill 4-41 $ 97,000,000 9,000,000 $106,000,000 90,000,000 $ 16,000,000 ... becomes part of the goodwill acquired in the acquisition attributable to the parent company Current accounting standards require the noncontrolling interest to appear in various locations within consolidated... (equity method) is accounted for as an adjustment to the parent’s additional paid in capital 10 The accounting method choice for the remaining shares depends upon the current relationship between... Minutes) (Asks about several consolidated balances and consolidation process Includes the different accounting methods to record investment.) a Schedule 1—Fair Value Allocation and Excess Amortizations