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Chapter 11 CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND CORPORATE JOINT VENTURES Answers to Questions 1

Parent-company theory is implemented under the assumptions that the consolidated statements will benefit significantly for the parent stockholders and not the noncontrolling stockholders, hence it poses problems in the case of less-than-100 percent-owned subsidiaries. Noncontrolling interest is viewed as liability under the parent-company theory and similarly, the noncontrolling interest share is viewed as an expense.

2

Under the parent-company theory, goodwill is calculated based on the % of ownerships against its underlying equity and under the entity theory goodwill is calculated based on a 100% of implied fair value of ownership. This means the amount of goodwill will be different. For example, A purchased 80% of B for $500,000 when B’s equity is at $400,000. Assuming there are no fair value to book value difference of B’s net assets, goodwill is calculated as follows: Parent-company theory Goodwill = $500,000 –(80% * $400,000) = $180,000 Entity theory Goodwill = ($500,000 / 80%) - $400,000 = $225,000

3

There are three similar relationships under the three different theories: a. If book value of net assets is equal to the fair value, and investments is made at book value, then the income statement amounts should be the same under the entity theory as under the traditional theory. b. The income statement amounts should also be the same under parent-company theory as under traditional theory if no intercompany transactions occur. c. If the ownerships is at 100%, the income statement amounts for all three theories should be the same.

4

Consolidated assets are equal to their fair values under entity theory only when the book values of parent assets are equal to their fair values. Otherwise, consolidated assets are not equal to their fair values under either parent company or entity theories.

5

The valuation of the noncontrolling interest at book value might overstate the equity of noncontrolling shareholders because of the limited marketability of shares held by noncontrolling stockholders and because of the limited ability of noncontrolling stockholders to share in management through their voting rights. Valuation of the noncontrolling interest at book value also overstates or understates the noncontrolling interest unless the subsidiary assets are recorded at fair values.

6

Consolidated net income under parent company theory and income to the controlling stockholders under entity theory should be the same. This is illustrated in Exhibit 11–5, which shows different income statement amounts for cost of sales, operating expenses, and income allocated to noncontrolling stockholders, but the same income to controlling stockholders. Note that consolidated net income under parent company and traditional theories reflects income to controlling stockholders.

7

Income to the parent stockholders under the equity method of accounting is the same as income to the controlling stockholders under entity theory. But income to controlling stockholders is not identified as consolidated net income as it would be under parent company or traditional theories.

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11-2

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

8

Consolidated income statement amounts under entity theory are the same as under traditional theory when subsidiary investments are made at book value because traditional theory follows entity theory in eliminating the effects of intercompany transactions from consolidated financial statements.

9

Traditional theory corresponds to entity theory in matters relating to unrealized and constructive gains and losses from intercompany transactions. In other words, unrealized and constructive gains and losses are allocated between controlling and noncontrolling interests in the same manner under these two theories.

10

Push-down accounting simplifies the consolidation process. The push-down adjustments are recorded in the subsidiary’s separate books at the time of the business combination; thus, it is not necessary to allocate the unamortized fair values in the consolidation working papers.

11

A joint venture is an entity that is owned, operated, and jointly controlled by a small group of investorventurers to operate a business for the mutual benefit of the venturers. Some joint ventures are organized as corporations, while others are organized as partnerships or undivided interests. Each venturer typically participates in important decisions of a joint venture irrespective of ownership percentage.

12

Investors in corporate joint ventures use the equity method of accounting and reporting for their investment earnings and investment balances as required by GAAP. The cost method would be used only if the investor could not exercise significant influence over the corporate joint venture. Alternatively, investors in unincorporated joint ventures use the equity method of accounting and reporting or proportional consolidation for undivided interests specified as a special industry practice.

Copyright © 2015 Pearson Education Limited

Chapter 11

11-3

SOLUTIONS TO EXERCISES Solution E11-1 1 2 3 4

A A C A

5 6 7

B C D

4 5

D C

Solution E11-2 1 2 3

B B D

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11-4

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-3 1

c Total value of Sit implied by purchase price ($1,440,000/.8) Noncontrolling interest percentage Noncontrolling interest

$1,800,000 20% $360,000

2

a Only the parent’s percentage of unrealized profits from upstream sales is eliminated under parent company theory.

3

b Subsidiary’s income of $400,000 ´ 10% noncontrolling interest Less: Patent amortization ($140,000/10 years ´ 10%) Noncontrolling interest share

4

5

a Implied fair value — $1,680,000 = patents at acquisition Book value of 100% of identifiable net assets Add: Patents at acquisition ($108,000/90%) Total implied value Percent acquired Purchase price under entity theory

$ 40,000 (1,400) $ 38,600

$1,680,000 120,000 1,800,000 80% $1,440,000

b Purchase price — ($1,680,000 ´ 80%) = patents at acquisition $1,344,000 Book value $1,680,000 ´ 80% = underlying equity Add: Patents at acquisition ($108,000/90%) 120,000 Purchase price (traditional theory) $1,464,000

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Chapter 11

11-5

Solution E11-4 1

2

3

Goodwill Parent company theory Cost of investment in Sad Fair value acquired ($400,000 ´ 80%) Goodwill Entity theory Implied value based on purchase price ($500,000/.8) Fair value of Sad’s net assets Goodwill Noncontrolling interest Parent company theory Book value of Sad’s net assets Noncontrolling interest percentage Noncontrolling interest Entity theory Total valuation of Sad Noncontrolling interest percentage Noncontrolling interest Total assets Parent company theory Pod Current assets $ 20,000 Plant assets — net 480,000 Goodwill $500,000 Entity theory Current assets $ 20,000 Plant assets — net 480,000 Goodwill $500,000

Sad $ 50,000 250,000

$ $ $

$ $ $ $

Adjustment $ 40,000 ´ 80% 110,000 ´ 80%

$300,000 $ 50,000 250,000

$

$ 40,000 ´ 100% 110,000 ´ 100%

$300,000

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500,000 320,000 180,000 625,000 400,000 225,000

260,000 20% 52,000 625,000 20% 125,000

Total 102,000 818,000 180,000 $1,100,000 $

$

110,000 840,000 225,000 $1,175,000

11-6

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-5 1

2

Goodwill under entity theory Undervalued plant assets Excess over book value Implied fair value (cost of interest $280,000 / 80%)

$ 40,000 $ 50,000 $ 90,000 $350,000

Book value of equity at 100%

$260,000

Cost of 80% of interests Underlying equity (80% x book value of equity) Excess over book value Undervalued plant assets (80% x $50,000)

$280,000 $208,000 $ 72,000 $(25,000)

Alllocated to goodwill under parent company theory

$ 47,000

Preliminary computations Ping's portion of Singh's income (80% x $50,000) Depreciation of excess (5 years x 80%)

$ 40,000 $ (4,000)

Income from Singh

$ 36,000

Equity theory Ping's separate income Income from Singh

$200,000 $ 36,000

Consolidated net income

$236,000

Singh separate income Depreciation of excess (10 years) Singh's income

$ 50,000 $ (5,000) $ 45,000

Noncontrolling interest share (20%)

$

Parent company theory Ping's separate income Income from Singh

$200,000 $ 36,000

Consolidated net income

$236,000

Noncontrolling interest share (20% x $50,000 Singh's separate income)

$ 10,000

Solution E11-6 Copyright © 2015 Pearson Education Limited

9,000

Chapter 11

11-7

Preliminary computation Interest acquired in Sal: 36,000 shares ¸ 40,000 shares = 90% 1

Sal’s net assets under entity theory Implied value from purchase price: $900,000/90% interest

2

Goodwill a

b

c 3

Entity theory Implied value Less: Fair value and book value of net assets Goodwill Parent company theory Cost of 90% interest Fair values of net assets acquired ($855,000 ´ 90%) Goodwill Traditional theory (same as parent theory)

$1,000,000 855,000 $ 145,000 $ $

900,000 769,500 130,500

$

130,500

$

18,000

Investment income from Sal Income from Sal ($40,000 ´ 1/2 year ´ 90% interest)

4

$1,000,000

Noncontrolling interest under entity theory Imputed value of Sal at July 1, 2012 Add: Income for 1/2 year Noncontrolling percentage Noncontrolling interest

$1,000,000 20,000 1,020,000 10% $ 102,000

Alternatively, $100,000 noncontrolling interest at July 1, plus $2,000 share of reported income = $102,000

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11-8

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-7 1

Parent company theory Combined separate incomes of Pal and Sal Less: Pal’s share of unrealized profits from upstream inventory sales ($30,000 ´ 80%) Less: Noncontrolling interest share ($300,000 ´ 20%) Consolidated net income

2

$800,000 (24,000) (60,000) $716,000

Entity theory Combined separate incomes Less: Unrealized profits from upstream sales Total consolidated income

$800,000 (30,000) $770,000

Income allocated to controlling stockholders ($500,000 + [$270,000 ´ 80%])

$716,000

Income allocated to noncontrolling stockholders ($300,000 - $30,000) ´ 20%

$ 54,000

Solution E11-8 1

2

Parent company theory Cost to investment (80%) Underlying equity [80% x (common stock + retained earnings)]

$ 280,000

Excess of book value

$ 80,000

Allocate excess to Accounts receivables (80% x $50,000) Inventory (80% x $20,000) Plant assets (80% x $20,000)

$ 40,000 $ 16,000 $ 16,000

Goodwill

$

Excess of book value Less: Retained earnings

$ 80,000 $(50,000)

Push down capital

$ 30,000

$ 200,000

8,000

Entity theory Implied fair value of cost to investment ($280,000 / 80%) Book value of equity

$ 350,000 $ 250,000

Excess of book value

$ 100,000

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Chapter 11

11-9

Allocate excess to Accounts receivable Inventory Plant asssets

$ 50,000 $ 20,000 $ 20,000

Goodwill

$ 10,000

Excess of book value Less: Retained earnings

$100,000 $(50,000)

Push down capital

$ 50,000

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11-10

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-9

[Push-down accounting]

1

Push down under parent company theory Retained earnings 800,000 Inventories 90,000 Land 450,000 270,000 Buildings — net Goodwill 360,000 Equipment 180,000 Other liabilities 90,000 Push down equity 1,700,000 To record revaluation of 90% of the net assets and elimination of retained earnings as a result of a business combination with Pin Corporation. Push down equity = ($600,000 fair value -- book value differential ´ 90%) + $360,000 goodwill + $800,000 retained earnings.

2

Push down under entity theory Retained earnings 800,000 Inventories 100,000 Land 500,000 300,000 Buildings — net Goodwill 400,000 200,000 Equipment — net Other liabilities 100,000 Push down equity 1,800,000 To record revaluation of 100% of the net assets and elimination of retained earnings as a result of a business combination with Pin. Push down equity = $600,000 fair value -- book value differential + $400,000 goodwill + $800,000 retained earnings.

Solution E11-10 It is stated that all venturers have control over the corporation, this means that each of the investments are to be consolidated using one line consolidation, thus equity method is used. Under equity method, the corporate’s income will be distributed in accordance to the proportion of ownership: Preliminary computations Retained earnings - beginning Add: Net income for the year Less: Dividend

$ $ $

500,000 300,000 (50,000)

Retained earnings - ending

$

750,000

Common stock

$8,000,000

Total stockholders' equity on December 31, 2014

$8,750,000

40% Corporate net

$ 300,000 Copyright © 2015 Pearson Education Limited

25%

20%

15%

Chapter 11

income Stockholders' equity

11-11

$8,750,000

Income from Mill Investment on December 31, 2014

$

120,000

$ 3,500,000

$

75,000

$2,187,500

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$ 60,000 $ 1,750,000

$ 45,000 $1,312,50 0

11-12

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-11 In general, VIE accounting follows normal consolidation principles. Under that approach, the noncontrolling interest share would be 90% of VIE earnings, or $900,000. However, the intercompany fees must be allocated to the primary beneficiary, not to noncontrolling interests. Therefore, in this case, noncontrolling interest share would be 90% of $920,000, or $828,000. Solution E11-12 As primary beneficiary, Pal must include Pot in its consolidated financial staements. Additionally, Pal must make the following disclosures: (a) the nature, purpose, size, and activities of the variable interest entity, (b) the carrying amount and classification of consolidated assets that are collateral for the variable interest entity’s obligations, and (c) lack of recourse if creditors (or beneficial interest holders) of a consolidated variable interest entity have no recourse to the general credit of the primary beneficiary. Den will not consolidate Pot, since they are not the primary beneficiary. As in traditional consolidations, only one firm consolidates a subsidiary. However, since Den has a significant interest in Pot, they must disclose: (a) the nature of its involvement with the variable interest entity and when that involvement began, (b) the nature, purpose, size, and activities of the variable interest entity, and (c) the enterprise’s maximum exposure to loss as a result of its involvement with the variable interest entity. Den accounts for the investment using the equity method. Solution E11-13 According to GAAP, if an enterprise absorbs a majority of a variable interest entity’s expected losses and another receives a majority of expected residual returns, the enterprise absorbing the losses is the primary beneficiary and if condition one is also met. Laura meets condition one, since as CEO, she had the power over economic decisions. Laura must consolidate the variable interest entity. The contractual arrangement makes Laura the primary beneficiary.

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Chapter 11

11-13

SOLUTION TO PROBLEMS Solution P11-1 Preliminary Computations Total stockhoolders' equity Less: Preferred stock 1,000 shares call $105

$ 450,000

Common stockholders' equity

$ 345,000

Sung's income for common ($50,000 $10,000) Pom's portion of Sung's separate income Less: Realization of accounts receivable Realization of inventories Realization of plant assets Add: Realization of other current assets Income from Sung - common

1. Parent company theory Cost of investment Underlying equity (90% x $345,000) Excess over book value Allocate excess to: Accounts receivables $ 9,000 Inventories $18,000 Other current assets $(9,000) Plant assets $18,000 Total excess allocated Goodwill

$(105,000)

$

40,000

$

36,000

$ (9,000) $ (18,000) $ (1,800) $

9,000

$

16,200

360,000 $ 310,500 $ 49,500

$ 36,000 $ 13,500

Preferred stock Sung (-SE) Retained earnings (SE) Noncontrolling interest preferred (+SE) To reclassify referred stock to

$ 100,000 $

5,000

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$ 105,000

11-14

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

noncontrolling interest

Income from Sung - common (-SE) Dividends (-SE) Investment in Sung (-A) To eliminate income from Sung

$

Noncontrolling interest share - common (SE) Dividends (SE) Noncontrolling interest - common (+SE) To record noncontrolling interest share ( 10% x Sung's separate income $50,000)

$

16,200 $ $

9,000 7,200

$

1,000

$

4,000

5,000

Common stock (-SE) $ 220,000 Retained earnings (SE) $ 125,000 Unamortized excess (+A) $ 49,500 Investment in Sung $ 360,000 Noncontrolling interest - common* $ 34,500 To eliminate equity accounts Under parent company theory, 10% of excess is allocated to noncontrolling interest Cost of Sales (E, -SE) Operating expense (E, -SE) Plant assets (+A) Goodwill (+A) Unamortized excess (-A) Other current assets (-A) To eliminate unamortized excess and allocate to goodwill

$ 18,000 $ 9,000 $ 18,000 $ 13,500 $ 49,500 $ 9,000 net assets and

2. Entity theory Implied fair value of cost of investment Stockholders' equity Excess over book value Allocate excess to: Accounts receivables $ 10,000

$ 400,000 $ 345,000 $ 55,000

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Chapter 11

11-15

Inventories Other current assets Plant assets Total excess allocated

$ 20,000 $(10,000) $ 20,000

Goodwill

$ 40,000 $ 15,000

All workpaper entries are the same with parent company theory, except for these two: Common stock (-SE) Retained earnings (-SE) Unamortized excess (+A) Investment in Sung Noncontrolling interest common To eliminate equity accounts

$ 220,000 $ 125,000 $ 55,000

Cost of Sales (E, -SE) Operating expense (E, -SE) Plant assets (+A) Goodwill (+A) Unamortized excess (-A) Other current assets (-A)

$ $ $ $

$ 360,000 $

40,000

20,000 10,000 20,000 15,000 $ 55,000 $ 10,000

To eliminate unamortized excess and allocate to net assets and goodwill Solution P11-2 Preliminary calculations Pus has control, so Pus needs to record using equity method: Income from Tod (50% x Tod's net income)

$ 15,000

Investment in Tod - beginning Income from Tod

$300,000 $ 15,000

Investment in Tod - ending

$315,000

Venture capital - beginning Tod's net income

$600,000 $ 30,000

Venture capital - ending

$630,000

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11-16

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Pus and Ventures Proportional Consolidation Workpaper For the year end December 31, 2014 Pus

Tod

Proportionate Consolidation

Income Statement Revenue Sales Income from Tod Total revenue Expenses including COGS

$ 300,000 $ 15,000 $ 315,000

$ 130,000 $ 130,000

$ 365,000 $ 15,000 $ 380,000

$(100,000)

$(100,000)

$(150,000)

Net income

$ 215,000

$

$ 230,000

Balance Sheet Other assets Investment in Tod Total assets Other liabilities Common stock Retained earnings Venture Capital Total Liabilities and Equity

30,000

$ 800,000 $ 315,000 $ 1,115,000

$680,000

$1,140,000 $ 315,000

$680,000

$1,455,000

$120,000 $500,000 $495,000

$ 50,000

$

145,000

$630,000

$

315,000

$680,000

$1,455,000

$ 1,115,000

Solution P11-3 Parent company theory 1a Income from Sin for 2012 ($180,000 ´ 70%)

$126,000

1b

Goodwill at December 31, 2012 ($1,190,000 cost - $1,050,000 fair value)

$140,000

1c

Consolidated net income for 2012 Pal’s separate income Add: Income from Sin

1d

Noncontrolling interest share for 2012 Copyright © 2015 Pearson Education Limited

$600,000 126,000

$726,000

Chapter 11

11-17

Net income of Sin of $180,000 ´ 30% 1e

$ 54,000

Noncontrolling interest December 31, 2012 Sin’s stockholders’ equity $1,580,000 ´ 30%

$474,000

Entity theory 2a

Income from Sin for 2012 ($180,000 ´ 70%)

2b

Goodwill at December 31, 2012 Imputed value ($1,190,000/70%) Fair value of Sin’s net assets Goodwill

2c

$126,000

$1,700,000 1,500,000 $ 200,000

Total consolidated income for 2012 Income to controlling stockholders ($600,000 + $126,000) Add: Noncontrolling interest share ($180,000 ´ 30%) Total consolidated income

$726,000 54,000 $780,000

2d

Noncontrolling interest share (computed in 2c above)

$ 54,000

2e

Noncontrolling interest at December 31, 2012 (Book equity $1,580,000 + $200,000 goodwill) ´ 30%

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$534,000

11-18

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-4 Preliminary computations Parent company theory Investment in Sam Fair value of 80% interest acquired ($2,400,000 ´ 80%) Goodwill

$2,240,000 1,920,000 $ 320,000

Entity Theory Implied value of Sam ($2,240,000/.8) Fair value of identifiable net assets Goodwill

$2,800,000 2,400,000 $ 400,000

Pit used an incomplete equity method in accounting for its investment in Sam. It ignored the intercompany upstream sales of inventory. Income from Sam on an equity basis would be: $ 400,000 Share of Sam’s income ($500,000 ´ .8) Less: Unrealized profits in ending inventory from (32,000) upstream sale ($80,000 ´ 50% ´ 80%) Income from Sam $ 368,000 Pit Corporation and Subsidiary Comparative Consolidated Income Statements for the year ended December 31, 2012 (in thousands) Parent Traditional Company Theory Theory Sales($10,000 - $230) $9,770 $9,770 Less: Cost of sales ($5,750 - $230 + $32) (5,552) ($5,750 - $230 + $40) (5,560) Gross profit 4,210 4,218 Expenses

(2,000)

Noncontrolling interest share $500 ´ 20% ($500 - $40) x 20% Consolidated net income Total consolidated income Allocated to controlling Stockholders Allocated to noncontrolling Stockholders ($500 - $40) ´ 20%

Entity Theory $9,770 (5,560) 4,210

(2,000)

(2,000)

(100) (92) $2,118

$

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2,118

________ $ 2,210 $

2,118

$

92

Chapter 11

11-19

Solution P11-4 (continued) Pit Corporation and Subsidiary Comparative Statements of Retained Earnings for the year ended December 31, 2012 (in thousands)

Retained earnings December 31, 2011 Add: Consolidated net income Add: Net income to controlling stockholders Less: Dividends to controlling stockholders Retained earnings December 31, 2012

Parent Traditional Company Theory Theory $ 3,600 $ 3,600 2,118 2,118

Entity Theory $ 3,600 2,118

5,718 (1,200) $

4,518

5,718 (1,200) $

4,518

5,718 (1,200) $

4,518

Pit Corporation and Subsidiary Comparative Consolidated Balance Sheets at December 31, 2012 (in thousands) Parent Company Theory

Traditional Theory Assets Cash Accounts receivable Inventory Land Buildings — net Goodwill Total assets

$

Liabilities Accounts payable Noncontrolling interest Total liabilities

1,108 1,200 1,960 2,800 8,400 320 $ 15,788

$

1,108 1,200 1,968 2,800 8,400 320 $ 15,796

$

$

$

2,758 520 3,278

$

8,000 4,518

8,000 4,518 592 13,110 $ 15,868

2,758 2,758

Stockholders’ equity Capital stock Retained earnings Noncontrolling interest Total stockholders’ equity Total equities

Entity Theory

8,000 4,518 512 13,030 $ 15,788

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12,518 $ 15,796

1,108 1,200 1,960 2,800 8,400 400 $ 15,868 2,758 2,758

11-20

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-5 Pad Corporation and Subsidiary Comparative Balance Sheets at December 31, 2012 Traditional Theory

Entity Theory

Assets Cash Receivables — net Inventories Plant assets — net Goodwill Total assets

$ 70,000 110,000 120,000 300,000 40,000 $640,000

$ 70,000 110,000 120,000 300,000 50,000 $650,000

Liabilities Accounts payable Other liabilities Total liabilities

$ 95,000 25,000 120,000

$ 95,000 25,000 120,000

300,000 194,000

300,000 194,000

Stockholders’ equity Capital stock Retained earnings Noncontrolling interest ($150,000 - $20,000) ´ 20% ($150,000 + $50,000 - $20,000) ´ 20% Total stockholders’ equity Total equities Supporting computations

26,000 520,000 $640,000 Traditional Theory $128,000 88,000

Cost or imputed value Book value of 80% Book value of 100% Goodwill

$ 40,000

Investment cost Add: 80% of retained earnings increase ($50,000 - $10,000) ´ 80% Less: 80% of $20,000 unrealized profits Investment balance

$128,000 32,000 (16,000) $144,000

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36,000 530,000 $650,000 Entity Theory $160,000 110,000 $ 50,000

Chapter 11

11-21

Solution P11-6 [AICPA adapted] 1

P carries its investment in S on a cost basis. This is evidenced by the appearance of dividend revenue in P Company’s income statement and by the absence of income from subsidiary.

2

P holds 1,400 shares of S. P Company’s percentage ownership is 70%, as determined by the relationship of P Company’s dividend revenues and S Company’s dividends paid ($11,200/$16,000). S has 2,000 outstanding shares ($200,000/$100) and P holds 70% of these, or 1,400 shares.

3

S Company’s retained earnings at acquisition were $100,000. Imputed value of S ($245,000 cost/70%) Less: Patents (applicable to 100%) Book value and fair value of S’s identifiable net assets Less: Capital stock Retained earnings

4

$

350,000 (50,000) 300,000 (200,000) $ 100,000

The nonrecurring loss is a constructive loss on the purchase of P bonds by S Company. Working paper entry: Mortgage bonds payable (5%) 100,000 Loss on retirement of P bonds 3,000 P bonds owned 103,000 To eliminate intercompany bond investment and bonds payable and to recognize a loss on the constructive retirement of P bonds.

5

Intercompany sales P to S are $240,000 computed as follows: Combined sales ($600,000 + $400,000) Less: Consolidated sales Intercompany sales

6

$1,000,000 760,000 $ 240,000

Yes, there are other intercompany debts: Cash and receivables Current payables Dividends payable

Combined $143,000 93,000 18,000

Consolidated $97,400 53,000 12,400

Intercompany Balances $ 45,600 40,000 5,600

S Company owes P Company $40,000 on intercompany purchases and P Company owes S Company $5,600 dividends.

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11-22

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-6 (continued) 7

Adjustment to determine consolidated cost of goods sold: Consolidated Cost of Goods Sold Combined cost of goods $640,000 $240,000 Intercompany purchases Sold Unrealized profit in Unrealized profit in ending inventory 8,000 5,000 beginning inventory To balance 403,000ü $648,000 $648,000 Consolidated cost of goods sold $403,000 Unrealized profit in ending inventory is equal to the combined less consolidated inventories ($130,000 - $122,000). Unrealized profit in beginning inventory is plugged as follows: ($640,000 + $8,000) - ($240,000 + $403,000) = $5,000

8

Noncontrolling interest share of $8,700 is computed as follows: Net income of S Less: Patent amortization ($50,000/10 years) Adjusted income of S Noncontrolling interest percentage Noncontrolling interest share

9

Noncontrolling interest of $117,000 at the balance sheet date is computed: Stockholders’ equity of S Company Add: Unamortized patents Equity of S plus unamortized patents Noncontrolling interest percentage Noncontrolling interest on balance sheet date

10

$ 34,000 5,000 29,000 30% $ 8,700

$360,000 30,000 390,000 30% $117,000

Consolidated retained earnings Retained earnings of P at end of year Add: P’s share of increase in S’s retained earnings since acquisition ($160,000 - $100,000) ´ 70% Less: Unrealized profit in S’s ending inventory Less: S’s patent amortization since acquisition $20,000 ´ 70% Less: Loss on constructive retirement of P’s bonds Consolidated retained earnings — end of year

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$200,000 42,000 (8,000) (14,000) (3,000) $217,000

Chapter 11

11-23

Solution P11-7 1

Entry on Sap’s books at acquisition Inventories 20,000 Land 25,000 90,000 Buildings — net Other liabilities 10,000 Goodwill 70,000 Retained earnings 80,000 Equipment — net Push-down capital To push down fair value — book value differentials.

2

Sap Corporation Balance Sheet at January 1, 2012 Assets Cash Accounts receivable — net Inventories Total current assets Land Buildings — net Equipment — net Total plant assets Goodwill Total assets Liabilities And Stockholders’ Equity Accounts payable Other liabilities Total liabilities Capital stock Push-down capital Total stockholders’ equity Total liabilities and stockholders’ equity

3

15,000 280,000

$ 30,000 70,000 80,000 $180,000 $ 75,000 190,000 75,000 340,000 70,000 $590,000 $ 50,000 60,000 $110,000 $200,000 280,000 480,000 $590,000

If Sap reports net income of $90,000 under the new push-down system for the calendar year 2012, Pay’s income from Sap will also be $90,000 under a one-line consolidation.

Copyright © 2015 Pearson Education Limited

11-24

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-8 1

Parent company theory Preliminary computation: Cost of 80% interest in Son Book value acquired ($2,000,000 ´ 80%) Excess cost over book value acquired Excess allocated to: Inventories $1,600,000 ´ 80% Equipment — net $(500,000) ´ 80% Goodwill for the remainder Excess fair value over book value acquired Entry on Son’s books to reflect 80% push down: Inventories Goodwill Retained earnings Equipment — net Push-down capital

2

1,280,000 520,000 1,200,000 400,000 2,600,000

$3,750,000 2,000,000 $1,750,000 $1,600,000 (500,000) 650,000 $1,750,000 1,600,000 650,000 1,200,000 500,000 2,950,000

Noncontrolling interest (Parent company theory) Son’s stockholders’ equity $2,000,000 ´ 20%

4

$1,280,000 (400,000) 520,000 $1,400,000

Entity theory Preliminary computation: Implied value of net assets ($3,000,000/.8) Book value of net assets Total excess Excess allocated to: Inventories Equipment — net Goodwill for remainder Total excess Entry on Son’s books to reflect 100% push down: Inventories Goodwill Retained earnings Equipment Push-down capital

3

$3,000,000 1,600,000 $1,400,000

$

400,000

Noncontrolling interest (Entity theory) Capital stock Push-down capital Stockholders’ equity Noncontrolling interest percentage Noncontrolling interest

Copyright © 2015 Pearson Education Limited

$

800,000 2,950,000 3,750,000 20% $ 750,000

Chapter 11

11-25

Solution P11-9 1

Push down under parent company theory 18,000 Buildings — net 27,000 Equipment — net Goodwill 36,000 Retained earnings 20,000 Inventories 9,000 Push-down capital 92,000 To record revaluation of 90% of net assets and elimination of retained earnings as a result of a business combination with Paw Corporation.

2

Push down under entity theory Buildings — net Equipment — net Goodwill Retained earnings Inventories Push-down capital To record revaluation of net assets imputed 90% interest acquired by Paw Corporation.

3

20,000 30,000 40,000 20,000 10,000 100,000 from purchase price of

Sun Corporation Comparative Balance Sheets at January 1, 2012 Parent Company Theory

Entity Theory

Assets Cash Accounts receivable — net Inventories Land Buildings — net Equipment — net Goodwill Total assets

$ 20,000 50,000 31,000 15,000 48,000 97,000 36,000 $297,000

$ 20,000 50,000 30,000 15,000 50,000 100,000 40,000 $305,000

Liabilities and stockholders’ equity Accounts payable Other liabilities Capital stock Push-down capital Retained earnings Total equities

$ 45,000 60,000 100,000 92,000 0 $297,000

$ 45,000 60,000 100,000 100,000 0 $305,000

Copyright © 2015 Pearson Education Limited

11-26

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-10—Push down 90%--parent company theory a Paw Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2012 90% Sun

Power

Adjustments and Eliminations

Income Statement Sales $ 310,800 $ 110,000 Income from Sun 37,800 b Cost of sales 140,000 * 33,000 * Depreciation expense 29,000 * 24,200 * Other operating exp. 45,000 * 11,000 * Consolidated NI Noncontrolling share e Controlling share of NI $ 134,600 $ 41,800 Retained Earnings Retained earnings — Paw Retained earnings — Sun Controlling share of NI Dividends

134,600ü 60,000 *

$

31,800

Balance Sheet Cash

$

$

27,000 40,000

Buildings — net Equipment — net Investment in Sun

Dividends payable Other liabilities Capital stock Push-down capital Retained earnings

147,000 134,600

b e

a

9,000 1,000

8,000 a

8,000

d

9,000

60,000 * $

221,600

$

98,800 122,000

35,000 15,000 43,200

55,000 55,000 183,200

165,000

77,600

242,600

208,800

b 28,800 c 180,000

$ 736,600

36,000 $ 273,800

$

36,000 792,600

$ 125,000

$

$

145,000

20,000

15,000 75,000 300,000

10,000 d 9,000 20,000 100,000 c 100,000 92,000 c 92,000 221,600ü 31,800ü $ 736,600 $ 273,800

Noncontrolling interest January 1 Noncontrolling interest December 31 *

$

4,000

9,000 20,000 40,000 140,000

Goodwill Accounts payable

$

173,000 * 53,200 * 56,000 * 138,600 4,000 * 134,600

$

41,800ü 10,000 *

$ 221,600 63,800 90,000

420,800

0

Retained earnings December 31

Accounts receivable — net Dividends receivable Inventories Land

$ 37,800

$ 147,000 $

Consolidated Statements

c 12,000 _________ e 3,000 250,800 250,800 $

Deduct

Copyright © 2015 Pearson Education Limited

16,000 95,000 300,000 221,600

15,000 792,600

Chapter 11

11-27

Solution P11-10 (continued)—Push down 100%--entity theory b Paw Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2012 90% Sun

Paw

Adjustments and Eliminations

Income Statement Sales $ 310,800 $ 110,000 Income from Sun 37,800 b Cost of sales 140,000 * 32,000 * Depreciation expense 29,000 * 25,000 * Other operating exp. 45,000 * 11,000 * Consolidated NI Noncontrolling share e Controlling share of NI $ 134,600 $ 42,000 Retained Earnings Retained earnings — Paw Retained earnings — Sun Controlling share of NI Dividends

134,600ü 60,000 *

$

32,000

Balance Sheet Cash

$

$

27,000 40,000

Buildings — net Equipment — net Investment in Sun

Dividends payable Other liabilities Capital stock Push-down capital Retained earnings

147,000 134,600

b e

a

9,000 1,000

8,000 a

8,000

d

9,000

60,000 * $

221,600

$

98,800 122,000

35,000 15,000 45,000

55,000 55,000 185,000

165,000

80,000

245,000

208,800

b 28,800 c 180,000

$ 736,600

40,000 $ 282,000

$

40,000 800,800

$ 125,000

$

$

145,000

20,000

15,000 75,000 300,000

10,000 d 9,000 20,000 100,000 c 100,000 100,000 c 100,000 221,600ü 32,000ü $ 736,600 $ 282,000

Noncontrolling interest January 1 Noncontrolling interest December 31 *

$

4,200

9,000 20,000 40,000 140,000

Goodwill Accounts payable

$

172,000 * 54,000 * 56,000 * 138,800 4,200 * 134,600

$

42,000ü 10,000 *

$ 221,600 63,800 90,000

420,800

0

Retained earnings December 31

Accounts receivable — net Dividends receivable Inventories Land

$ 37,800

$ 147,000 $

Consolidated Statements

c 20,000 _________ e 3,200 259,000 259,000 $

Deduct

Copyright © 2015 Pearson Education Limited

16,000 95,000 300,000 221,600

23,200 800,800

11-28

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-11 Pep Corporation and Subsidiary Proportionate Consolidation Working Papers for the year ended December 31, 2011 Pep Income Statement Sales Income from Jay Cost of sales Depreciation expense Other expenses Net income Retained Earnings Retained earnings — Pep

$

$

800,000 $ 20,000 400,000 * 100,000 * 120,000 * 200,000 $

$

300,000

300,000

$

400,000

$

300,000

Balance Sheet Cash

$

100,000 130,000

$

50,000 30,000

110,000 140,000 200,000 300,000

$ 200,000ü 100,000 *

Buildings — net Equipment — net Investment in Jay

$

Consolidated Statements $

920,000

$

460,000 * 116,000 * 144,000 * 200,000

$

300,000

90,000 24,000 36,000

b 250,000 200,000 100,000 *

50,000ü

$

400,000

b b

30,000 $ 18,000

120,000 142,000

40,000 60,000 100,000

b b b

24,000 36,000 60,000

126,000 164,000 240,000

180,000

b 108,000

372,000

a 20,000 b 100,000 $

460,000

120,000 $ 80,000 500,000 400,000ü

100,000 60,000

Venture equity — Jay

$1,164,000 b b

60,000 36,000

$

160,000 104,000 500,000 400,000

300,000ü __________ __________ $1,100,000

*

250,000

b b b

120,000 $1,100,000

Accounts payable Other liabilities Common stock, $10 par Retained earnings

b 180,000 a 20,000

150,000 * 40,000 * 60,000 * 50,000

Venture equity — Jay Net income Dividends Retained earnings/ Venture equity

Receivables — net Inventories Land

Adjustments and Eliminations

Jay 40%

$

460,000

546,000

Deduct

Copyright © 2015 Pearson Education Limited

546,000 $1,164,000

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