CHAPTER 12 ACQUISITIONS AND CONSOLIDATED CONSOLIDATED STATEMENTS STATEMENTS Changes from Eleventh Edition
Updated from Eleventh Edition. Approach The results under the purchase method are of considerable importance, and also of considerable interest to the student. The results results are my mystify stifying ing at first, first, but something something worth learning learning about. It is probably probably desirable to go through the illustrative situation in some detail.
The material on consolidated statements is brief, but we believe adequate for the objective of this book. tudents should be able to grasp the general idea of what is going on without much difficulty and therefore should understand the meaning of consolidated statements when they read them. They should not, of course, be left with the impression that they know all about how to prepare such statements, and reference to the number of pages devoted to this topic in an intermediate or advanced te!t may be desirable" in some te!ts, #$$ pages. If instructors wish to go further, they can develop worksheets for the asset valuation or minority interest situations. Cases
gives a simple simple set of num number berss to illust illustrat ratee the effect effect of purcha purchase se method method Hardin Tool Tool Company gives accounting, both at the time of acquisition and subsequently. subsequently. It provides an e!cellent overview. statements. Carter Corporation is a straightforward problem on the preparation of consolidated statements. Keane’s Keane’s Acquisition of Metro Information Services is an actual merger that can be used to illustrate the purchase method. Productos Productos Finas a consolidation e!ercise. This case is new with the Twelfth Edition. Problems Problem 12-1 %ompany & should use the equity method. It owns more that #$ percent of %ompany .
Investment on 'anuary ( dr. Investment Investment.............. ............................. ............................. ............................. )$$,$$$ ............................. ............................. .............................. ............................. ............................. .............................. ............................. ................... ..... cr. %ash................ %ash.............................. ............................. ............................. ............................. .............................. )$$,$$$ ............................. ............................. .............................. ............................. ............................. ........................ ......... Income and *ividends dr. Investment Investment.............. ............................. ............................. ............................. (#$,$$$+ ............................. ............................. .............................. ............................. ............................. .............................. ............................. ................... ..... cr. Equity Income............................................................................................................................................................ (#$,$$$ + -$$,$$$ ! ./0 dr. %ash................ %ash.............................. ............................. .............................. ............................. /$,$$$+............................. .............................. ............................. ............................. ............................. ............................. ........................... ............ cr. Investmen Investment............ t.......................... ............................. .............................. ............................. /$,$$$ ............................. .............................. ............................. ............................. .............................. ............................. .................. .... + -($$,$$$ ! ./0 1n *ecember (, the investment in %ompany & would be reported as -)2$,$$$ -)$$,$$$ 3 -(#$,$$$ 4 -/$,$$$0.
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Accounting Te!t and Cases "#e $ Instructor’s Manual
Ant%ony&Ha'(ins&Merc%ant
Problem 12-2
%ompany & should use the cost method to account for its investment in %ompany . %ompany & own less than #$ percent of %ompany . 1riginal Investment dr. Investment................................................................................................................................................................................. (,$$$,$$$ cr. %ash....................................................................................................................................................................................... (,$$$,$$$ *ividend &ayment received dr. %ash.......................................................................................................................................................................................... #5,$$$ cr. *ividend Income.................................................................................................................................................................... #5,$$$ Problem 12-3 6ear ( (0 dr. Investment....................................................................................................................................................................... 7$$,$$$ cr. %ash............................................................................................................................................................................. 7$$,$$$
#0
dr. Investment....................................................................................................................................................................... #/,5$$+ cr. Equity Income............................................................................................................................................................. #/,5$$ + -7$,$$$ ! .50
0
dr. %ash................................................................................................................................................................................ #(,$$$+ cr. Investment................................................................................................................................................................... #(,$$$ +-)$,$$$ ! .50
6ear # (0 dr. Investment....................................................................................................................................................................... 75,$$$ cr. %ash............................................................................................................................................................................. 75,$$$ #0
8o entry.
0
dr. Investment....................................................................................................................................................................... )$,$$$ cr. Equity Income............................................................................................................................................................ )$,$$$ (5$,$$$ ! ./0
/0
dr. %ash................................................................................................................................................................................ /$,$$$ cr. Investment................................................................................................................................................................... /$,$$$
Problem 12-4 9oodwill %alculation
Ba Be %urrent assets................................................................................................................................................................................. -(5$,$$$ :ppraised value0 8et fi!ed assets............................................................................................................................................................................ 555,)$$ :ppraised value0 1ther assets.................................................................................................................................................................................... (/,/$$ :ppraised value0 Total :ssets.............................................................................................................................................................................. 2/$,$$$ ;iabilities....................................................................................................................................................................................... (<#,$$$ 8et :ssets............................................................................................................................................................................... )/2,$$$ &urchase price................................................................................................................................................................................ 27$,$$$ 9oodwill........................................................................................................................................................................................ -###,$$$
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Consolidated Balance Sheet
Elder BaBe Consolidated %urrent assets..................................................................................................................................................................... - (,($/,$$$ -(5$,$$$ - (,#5/,$$$ 8et fi!ed assets.................................................................................................................................................................. #,2(/,$$$ 555,)$$ ,)<,)$$ 1ther assets........................................................................................................................................................................ (/,/(#,$$$ (/,/$$ (/,5/),/$$ 9oodwill............................................................................................................................................................................ 444 444 ###,$$$ Total assets.................................................................................................................................................................. -/<,<#,$$$
%urrent liabilities............................................................................................................................................................... - ,)$$,$$$ - /#,$$$ - ,)/#,$$$ ;ong4term debt.................................................................................................................................................................. (5,52#,$$$ (5$,$$$ (5,7#,$$$ %ommon stock................................................................................................................................................................... #/,$$$,$$$ 444 #/,$$$,$$$ &aid4in capital.................................................................................................................................................................... 5,/(2,$$$ 444 5,/(2,$$$ >etained earnings............................................................................................................................................................... )$$,$$$ 444 )$$,$$$ Total liabilities and equity........................................................................................................................................... -/<,<#,$$$ Problem 12-5
(0
dr. ales ubsidiary0............................................................................................................................................... 7,$$$ cr. %ost of 9oods old......................................................................................................................................... 7,$$$
#0
dr. :ccounts &ayable &arent0.................................................................................................................................. 7,$$$ cr. :ccounts >eceivable ubsidiary0.................................................................................................................. 7,$$$
0
dr. ;oan &ayable ubsidiary0.................................................................................................................................. <),$$$ cr. ;oan >eceivable &arent0................................................................................................................................ <),$$$
/0 :n entry to eliminate &ebble?s investment in andvel is necessary, although the problem does not provide the equity amounts for andvel. The entry would be structured as follows" %apital tock ubsidiary0@@@@@.. A >etained Earnings ubsidiary0.............................................................................................................................. .( million 4 A Investment in andvel &arent0............................................................................................................................ .( million Problem 12- a.
Pooling of !nterests
Compan" Compan" Pooling of A B !nterests %urrent assets......................................................................................................................................................... - 5$$,$$$ -(5$,$$$ - )5$,$$$ Bi!ed assets............................................................................................................................................................ 7$$,$$$ #5$,$$$ <5$,$$$ Totals................................................................................................................................................................ -(,#$$,$$$ -/$$,$$$ -(,)$$,$$$
%urrent liabilities.................................................................................................................................................... - #5$,$$$ - 75,$$$ - #5,$$$ ;ong4term liabilities............................................................................................................................................... (75,$$$ 5$,$$$ ##5,$$$ %apital stock, -#$ per............................................................................................................................................. /$$,$$$ 444 ))$,$$$+ %apital stock, -($, per............................................................................................................................................ 444 (7$,$$$ 444 :dditional paid4in capital....................................................................................................................................... (75,$$$ )$,$$$ (/5,$$$3 >etained earnings................................................................................................................................................... #$$,$$$ /5,$$$ #/5,$$$ Totals................................................................................................................................................................ -(,#$$,$$$ -/$$,$$$ -(,)$$,$$$ + -/$$,$$$ 3 -)5$,$$$ C -5$0 ! -#$0 3 &lug figure D -(75,$$$ 3 -)$,$$$ 3 -(7$,$$$ 4 -#)$,$$$0
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P#rchase Acco#nting Compan" B $%ar&et Compan" A 'al#e( P#rchase %urrent assets...................................................................................................................................................................... - 5$$,$$$ -(75,$$$ - 575,$$$+ Bi!ed assets......................................................................................................................................................................... 7$$,$$$ #5,$$$ (,$#5,$$$ 9oodwill............................................................................................................................................................................. 444 444 #75,$$$3 Totals.............................................................................................................................................................................. -(,#$$,$$$ -5$$,$$$ -(,275,$$$
%urrent liabilities................................................................................................................................................................. - #5$,$$$ - 75,$$$ - #5,$$$ ;ong4term liabilities............................................................................................................................................................ (75,$$$ 5$,$$$ 775,$$$ %apital stock, -#$ per.......................................................................................................................................................... /$$,$$$ 444 /$$,$$$ %apital stock, -($ per.......................................................................................................................................................... 444 444 444 :dditional paid4in capital.................................................................................................................................................... (75,$$$ 444 (75,$$$ >etained earnings................................................................................................................................................................ #$$,$$$ 444 #$$,$$$ Totals.............................................................................................................................................................................. -(,#$$,$$$ -(#5,$$$ -(,275,$$$ + -5$$,$$$ 4 -($$,$$$0 3 -(75,$$$ 3 &lug -)5$,$$$ F -5$$,$$$ 4 -(#5,$$$0 -(75,$$$ 3 -55$,$$$0 3 -5$,$$$
Cases
Case 12-1: Hardin Tool Company * )ote* T%is case is unc%anged from t%e -levent% -dition . Approach
This is a straightforward e!ercise to give the student practice in applying the pooling of interests and purchase methods of accounting for a business combination. The case purposely avoids the complications of intercompany transactions, which are dealt with in %ase (#4#. .uestion "
+A,!) .//0 C/%PA) Consolidated Balance Sheets As of the Proposed Ac#isition ate $tho#sands of dollars(
Pooling P#rchase Assets %urrent assets................................................................................................................................................................................. - )72 - )72 &lant and equipment....................................................................................................................................................................... (,$$# (,()(( 9oodwill........................................................................................................................................................................................ 444 #$$# Total assets................................................................................................................................................................................ -(,)2$ -#,$< /ia0ilities and -quity %urrent liabilities............................................................................................................................................................................ - 7$ - 7$ ;ong4term debt............................................................................................................................................................................... #$5 #$5 %ommon stock -( par0.................................................................................................................................................................. #$$ #$$ :dditional paid4in capital............................................................................................................................................................... #5# <(2 +
This teaching note was prepared by 'ames . >eece. %opyright = 'ames . >eece.
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>etained earnings............................................................................................................................................................... )5 /) Total liabilities and equity............................................................................................................................................. -(,)2$ -#,$< (
*ifference between Gardin?s appraisal value -)$$,$$$0 and book value -//(,$$$0 is attributable to fi!ed assetsH hence &ratt?s fi!ed assets are shown at -(#,$$$ 3 -(5<,$$$ D -/7(,$$$ with purchase accounting, giving consolidated fi!ed assets of -)<$,$$$ Gardin0 3 -/7(,$$$ &ratt0 D -(,()(,$$$. # E!cess of purchase price ($$,$$$ + -2 D -2$$,$$$0 over fair value of net assets of Gardin -)$$,$$$0. &lugJ figure. tudents should note that with pooling treatment, owners? equity equals -(,($5,$$$, which is the sum of the preacquisition owners? equities of the two firms -( $$,$$$ 3 -#(2,$$$ 3 -/),$$$ for Gardin 3 -/$,$$$ 3 -
In addition, the instructor may wish to discuss determination of &ratt?s purchase price and the appraisal value of its net particularly fi!ed0 assets. Is the investment banker the best judge of the worth of ($$,$$$ new shares of Gardin?s stockL Khy not use a market priceL If a market price is used, should it be the price as of the date of the handshakeJ agreement, the signing of a formal agreement, or the effective date of the agreementH or should it be some sort of average market priceL Gow can an appraiser judge fair valueJ of &ratt?s fi!ed assetsL If an appraiser is not the best judge, then who isL hould several independent appraisals be madeL :nyone who has had a house appraised knows the appraisals will differ.0 1f course, there are no clear answers to these questions, and the student should recogniMe these gray mattersJ that underlie the straightforward application of accounting techniques.
.uestion #
+A,!) .//0 C/%PA) Condensed Consolidated !ncome Statement or the irst ear after Combination $!n tho#sands ecept per share amo#nts(
Pooling Treatment ales....................................................................................................................................................................... -,)$$ E!penses................................................................................................................................................................ #,7/$ Income................................................................................................................................................................... 2)$ Income ta! e!pense................................................................................................................................................ $( 8et income............................................................................................................................................................. - 55<
Earnings per share.................................................................................................................................................. -#.2$ Purc%ase Treatment Unadjusted income as above0............................................................................................................................... - 2)$ :dditional depreciation.......................................................................................................................................... ()( Ta!able income...................................................................................................................................................... 2// Income ta! e!pense................................................................................................................................................ #<5 8et income............................................................................................................................................................. - 5/< Earnings per share.................................................................................................................................................. -#.75 (
-(5<,$$$ 3 ($ years D -().$$$
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Accounting Te!t and Cases "#e $ Instructor’s Manual
Ant%ony&Ha'(ins&Merc%ant
.uestion 1
This question turns the case into an introductory finance case, with the opportunity to discuss financial leverage. Noth of these new alternatives would have to be accounted for as a purchase. :ssuming the common stock is still valued at -2 per share, the income statements would be as follows" Preferred Stoc& ebent#res Unadjusted income......................................................................................................................................................................... -2)$ -2)$ :dditional depreciation.................................................................................................................................................................. () () :dditional interest.......................................................................................................................................................................... 444 /$ Ta!able income.............................................................................................................................................................................. 2// 2$/ Income ta! e!pense........................................................................................................................................................................ #<5 #2( 8et income.................................................................................................................................................................................... 5/< 5# &referred dividend.......................................................................................................................................................................... /$ 444 Income available to common.......................................................................................................................................................... -5$< -5#
Earnings per share (5$,$$$ shares0............................................................................................................................................... -.< -./< The debenture alternative provides more leverage than the preferred stock alternative. In this simplified problem, this occurs solely because the interest cost on debt is ta! deductible, making the net interest cost -#) versus the nondeductible preferred dividend of -/$. If the company has the debt capacity to issue debentures rather than preferred stock, then they should do so. Gowever, calculation of long4term debtCequity ratios for the four alternatives suggests that the debt capacity probably does e!ist. >eturn on common equity figures are shown to quantify the effect of leverageH these can be omitted if the instructor wishes since they arc not formally covered until the ne!t chapter.0
ebt6E#it" ,/E $common( &ooling, stock e!change"....................................................................................................................................................... -#$5C-(,($5 D (2.)O -55
Case 12-2: Carter Corporation * )ote* T%is case is unc%anged from t%e -levent% -dition2 Approach
This case gives practice in construction of consolidated statements and is constructed in such a way that it progresses by stages from straightforward adjustments to the more difficult and intricate adjustments. Ans7ers to 8#estions
E!hibit : is a consolidation worksheet for the problem as originally presented. The resulting financial statements are shown in the first column of E!hibit N. It may be useful to reconcile with the beginning retained earnings before consolidation, as follows"
+
This teaching note was prepared by >obert 8. :nthony. %opyright = >obert 8. :nthony.
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%arter?s ending retained earnings were............................................................................................................... -<),($$ %arter added to retained earnings during #$!l..................................................................................................... 4#7,#$$ Therefore, %arter retained earnings on 'anuary (, #$!l were.............................................................................. )2,<$$ %onsolidated addition to retained earnings in #$!l.............................................................................................. //,#$$ %onsolidated retained earnings, *ecember (,#$!(............................................................................................ -/(,($$ Corrections 3.uestion #4
(. *iroff shareholders? equity at acquisition was -(/#,2$$ -(5<,2$$ 4 -(7,$$$0. %arter paid -(/#,2$$ for 75 percent of this equity, which had a book value of 75 percent of -(/#,2$$, or -($7,($$. Therefore, the initial consolidated balance sheet must show 9oodwill of -5,7$$ unless the assets are restated, and we have no evidence of this0. The offset, at the time of acquisition, is to Pinority interest. :mortiMation of goodwill disallowed by B: ( and #. Pinority interest would have increased by #5 percent of the increase in *iroff?s retained earnings since acquisition with a corresponding reduction in consolidated retained earnings. In summary, minority interest would be" :t time of acquisition................................................................................................................................ -5,7$$ #5 percent of -(7,$$$ increase to retained earnings.................................................................................. /,#5$ -<,<5$ #. The entire -7,/$$ listed as other income constitutes income to the consolidated entity, so the -$,)$$ erroneously subtracted from it should be added back. This increases net income and retained earnings by -$,)$$. Gowever, the assumed dividend was also subtracted erroneously from retained earnings, so this adjustment must be reversed, leaving no net effect on consolidated retained earnings. ince *iroff has not paid the dividend, it must appear as one of its current liabilities. The -##,<5$75 percent0 owed to %arter must be eliminated as an intercompany transaction, by decreasing current liabilities and increasing retained earnings. E9+!B!. A Consolidation :or&sheet Separate Statements Carter iroff Balance Sheets
Ad;#stments r< Cr<
Consolidated
Assets %ash................................................................................................................................................................................... 57,2$$ #$,/$$ 72,#$$ :ccounts receivable........................................................................................................................................................... (($,5$$ 5,7$$ 5,($$ (/(,($$ Inventory............................................................................................................................................................................ (#$,7$$ 5/,/$$ (75,($$ Investment in subsidiary.................................................................................................................................................... (/#,2$$ 444 (/#,2$$ 444 &lant net0.......................................................................................................................................................................... /77,7$$ (/,$$ )(#,$$$ ;oans receivable................................................................................................................................................................ 444 #,$$ #,$$ 444 Total.............................................................................................................................................................................. <$<,5$$ #77,($$ (,$$),/$$ /ia0ilities and -quity %urrent liabilities............................................................................................................................................................... 22,/$$ )#,<$$ 5,($$ (/),#$$ 8oncurrent liabilities.......................................................................................................................................................... (7$,$$$ 5/,/$$ #,$$ (<#,($$ %apital stock...................................................................................................................................................................... #55,$$$ ($#,$$$ ($#,$$$ #55,$$$ >etained earnings............................................................................................................................................................... <),($$ 57,2$$ /$,2$$ QQQQQQ /(,($$ Total.............................................................................................................................................................................. <$<,5$$ #77,($$ (2$,#$$ (2$,2$$ (,$$),/$$ !ncome Statement ata 7
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Ant%ony&Ha'(ins&Merc%ant
ales............................................................................................................................................................................................... (,$/$,/$$ /$2,$$$ /,$$$ (,/(/,/$$ %ost of sales................................................................................................................................................................................... 2(),$$$ #<<,#$$ /,$$$ (,$2(,#$$ E!penses........................................................................................................................................................................................ #/,)$$ )(,#$$ #<5,2$$ 1ther income.................................................................................................................................................................................. 7,/$$ 444 $,)$$ ),2$$ *ividends....................................................................................................................................................................................... 444 $,)$$ $,)$$ $
The net effect on consolidated retained earnings is" :s stated in E!hibit :................................................................................................................................................................. -/(,($$ *educt minority interest in earnings........................................................................................................................................... /,#5$0 :dd elimination of dividend to %arter......................................................................................................................................... ##,<5$ >evised retained earnings........................................................................................................................................................ -/(,2$$ The financial statements after these revisions are shown in the second column of E!hibit N. 5nsold Merc%andise
The financial statements report -(,)$$ of %arter inventory that contains a #5 percent 2,5$$ C /,$$$0 unrealiMed profit, -,/$$. This profit must be eliminated from the consolidated inventory, minority interest, and consolidated retained earnings. Pinority interest is reduced by one4fourth of the unrealiMed profit, or -25$, and consolidated retained earnings is reduced by -#,55$. 6ividend
The big change between the original and revised consolidated statements came from the mishandling of dividend revenue. %orrection of this change increased net income by )7 percent, net profit margin percentage from .( percent to 5.# percent, and owners? equity by 2.( percent. The current redo was also affected by this correction, increasing from #.7$ to .(7. >eturn on investment ratios also changed, but these are not covered until the ne!t chapter.0 %orrection for the omission of minority interest had no impact in terms of ratio analysis, unless an analyst were to eliminate minority interest from owners? equity in doing an analysis as is the case with some analysts0. %orrection for unrealiMed profit on intracompany sales has a relatively minor impact on the current ratio and on inventory turnover from ).(7 to ).$0. Ehibit B CA,.E, C/,P/,A.!/) Consolidated inancial Statements Balance Sheet As of ecember 31 2=1 As /riginall" Prepared
Assets
As ,evised
%urrent :ssets" %ash............................................................................................................................................................................................ - 72,#$$ - 72,#$$ :ccounts receivable.................................................................................................................................................................... (/(,($$ (/(,($$ Inventory..................................................................................................................................................................................... (75,($$ (75,($$ Total current assets
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0iabilities and E#it" %urrent liabilities............................................................................................................................................................... - (/),#$$ - (#,#5$ 8oncurrent liabilities.......................................................................................................................................................... (<#,($$ (<#,($$ Pinority interest................................................................................................................................................................ <,<5$( %apital stock...................................................................................................................................................................... #55,$$$ #55,$$$ >etained earnings............................................................................................................................................................... /(,($$ /(,2$$( Total liabilities and equity........................................................................................................................................... -(,$$),/$$ -(,$/#,($$ !ncome Statement or the "ear ended ecember 31 2=1
ales................................................................................................................................................................................ -(,/(/,/$$ -(,/(/,/$$ %ost of sales....................................................................................................................................................................... (,$2(,#$$ (,$2(,#$$ 9ross margin............................................................................................................................................................... ,#$$ ,#$$ E!penses............................................................................................................................................................................ #<5,2$$0 #<5,2$$0 1ther income...................................................................................................................................................................... ),2$$ 7,/$$ 8et income.................................................................................................................................................................. - //,#$$ 7/,2$$ (
&er question , each of these amounts needs to be reduced.
<
