CHAPTER 3 AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS Answers to Questions 1
A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a controlling financial interest (generally over 50 percent) of its outstanding voting stock.
2
Amounts assigned to identifiable assets and liabilities in excess of recorded amounts on the books of the subsidiary are not recorded separately by the parent. Instead, the parent records the fair value/purchase price of the interest acquired in an investment account. The assignment to identifiable asset and liability accounts is made through working paper entries when the parent and subsidiary financial statements are consolidated.
3
The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the purchase price of the subsidiary is greater than the book value of the subsidiary’s net assets. If the parent had acquired an 80 percent interest and the implied fair value of the subsidiary was greater than the book value of the subsidiary’s net assets, the land would still appear in the consolidated balance sheet at $100,000. Under GAAP, the noncontrolling interest is also reported based on fair values at the acquisition date.
4
Parent company—a corporation that owns a controlling interest in the outstanding voting stock of another corporation (its subsidiary). Subsidiary company—a corporation that is controlled by a parent that owns a controlling interest in its outstanding voting stock, either directly or indirectly. Affiliates—companies that are controlled by a single management team through parent-subsidiary relationships. (Although the term affiliate is a synonym for subsidiary, the parent is included in the total affiliation structure.) In many annual reports, the term includes all investments accounted for by the equity method. Associates—companies that are controlled through parent-subsidiary relationships or whose operations can be significantly influenced through equity investments of 20 percent to 50 percent.
5
A noncontrolling interest is the equity interest in a subsidiary that is owned by stockholders outside of the affiliation structure. In other words, it is the equity interest in a subsidiary (recorded at fair value) that is not held by the parent or subsidiaries of the parent.
6
Under GAAP, a subsidiary will not be consolidated if control does not rest with the majority owner, such as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under severe foreign exchange restrictions or other governmentally imposed uncertainties. Other conditions for not consolidating a subsidiary are: (1) formation of joint ventures, (2) the acquisition of an asset or group of assets that does not constitute a business, (3) combination between entities under common control and (4) combination between not-for-profit entities or the acquisition of a for-profit business by a not-for-profit entity.
7
Consolidated financial statements are intended primarily for the stockholders and creditors of the parent, according to GAAP.
8
The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of the outstanding capital stock of the parent.
9
Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or consolidation accounted for as an acquisition. But goodwill from consolidation would not appear in the
general ledger of a parent or its subsidiary. Goodwill is entered in consolidation working papers when the reciprocal investment and equity amounts are eliminated. Working paper entries affect consolidated financial statements, but they are not entered in any general ledger. 10
The parent’s investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is consolidated. It would appear in the parent’s separate balance sheet under the heading “investments” or “other assets.” Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as investments or other assets. They are accounted for under the equity method if the parent can exercise significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost method.
11
Parent’s books: Investment in subsidiary Sales Accounts receivable Interest income Dividends receivable Advance to subsidiary
12
Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order to show the financial position and results of operations of the total economic entity that is under the control of a single management team. Sales by a parent to a subsidiary are internal transactions from the viewpoint of the economic entity and the same is true of interest income and interest expense and rent income and rent expense arising from intercompany transactions. Similarly, receivables from and payables to affiliates do not represent assets and liabilities of the economic entity for which consolidated financial statements are prepared.
13
The stockholders’ equity of a parent under the equity method is the same as the consolidated stockholders’ equity of a parent and its subsidiaries except for the noncontrolling interest.
14
No. The amounts that appear in the parent’s statement of retained earnings under the equity method and the amounts that appear in the consolidated statement of retained earnings are identical, assuming that the noncontrolling interest is included as a separate component of stockholders’ equity.
15
Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total income to the consolidated entity between controlling and noncontrolling stockholders. From the viewpoint of the controlling interest (the stockholders of the parent), income attributable to noncontrolling interest has the same effect on consolidated net income as an expense. This is because consolidated net income is income to all stockholders. Alternatively, you can view total consolidated net income as being allocated to the controlling and noncontrolling interests.
16
The computation of noncontrolling interest is comparable to the computation of retained earnings. It is computed:
Reciprocal accounts on subsidiary’s books: Capital stock and retained earnings Cost of Goods Sold Accounts payable Interest expense Dividends payable Advance from parent
Noncontrolling interest beginning of the period Add: Income attributable to noncontrolling interest Deduct: Noncontrolling interest dividends Deduct: Noncontrolling interest of amortization of excess of fair value over book value Add: Noncontrolling interest of amortization of excess of book value over fair value Noncontrolling interest end of the period 17
XX XX (XX) (XX) XX XX
It is acceptable to consolidate the annual financial statements of a parent and a subsidiary with different fiscal periods, provided that the dates of closing are not more than three months apart. Any significant developments that occur in the intervening three-month period should be disclosed in notes to the financial statements. In the situation described, it is acceptable to consolidate the financial statements of the
subsidiary with an October 31 closing date with the financial statements of the parent with a December 31 closing date. 18
The acquisition of shares from noncontrolling stockholders is not a business combination. It must be accounted for as a treasury stock transaction if the acquirer is the controlling interest. It is not possible, by definition, to acquire a controlling interest from noncontrolling stockholders.
SOLUTIONS TO EXERCISES Solution E3-1
Solution E3-2
1 2 3 4 5
1 2 3 4 5 6 7
b c d d a
d b d d a b c
Solution E3-3 [AICPA adapted] 1 c $275,000
Advance to Hill $75,000 + receivable from Ward $200,000 =
2
a
Zero, goodwill has an indeterminate life and is not amortized.
3
a Pow accounts for Sap using the equity method, therefore, consolidated retained earnings is equal to Pow’s retained earnings, or $2,480,000.
4 d On the consolidated balance sheet, intercompany receivables should be zero. Solution E3-4 (in thousands) 1
Implied fair value of San ($3,600 / 90%) Less: Book value of San Excess fair value over book value Equipment undervalued Goodwill at January 1, 2011 Goodwill at December 31, 2011 = Goodwill from consolidation Since goodwill is not amortized
2
Consolidated net income Pin’s reported net income Less: Correction to income from San for depreciation on excess allocated to equipment [($120,000/3 years)x 90%] Controlling share of consolidated net income Noncontrolling share of consolidated net income: ($400,000 - $40,000 depreciation) x 10% Controlling share of consolidated net income
$4,000 (3,600) $ 400 120 $ 280 $ 280
$1,960 (36) $1,924 $36 1,924
Consolidated net income
$1,960
Solution E3-5 (in thousands) 1
$2,400, the dividends of Pan
2
$1,320, equal to $1,200 dividends payable of Pan plus $120 (30% of $400) dividends payable to noncontrolling interests of Sad.
Solution E3-6 (in thousands) Preliminary computation Cost of Sli stock (Fair value) Fair value of Sli’s identifiable net assets Goodwill 1
$5,000 4,000 $1,000
Journal entry to record push down values Inventories Land Buildings — net Equipment — net Goodwill Retained earnings Note payable Push-down capital
2
80 200 600 320 1,000 840 40 3,000 Sli Corporation Balance Sheet January 1, 2011 (in thousands)
Assets Cash Accounts receivable Inventories Land Buildings — net Equipment — net Goodwill Total assets Liabilities Accounts payable Note payable Total liabilities Stockholders’ equity Capital stock Push-down capital Total stockholders’ equity Total liabilities and stockholders’ equity
$
280 320 400 800 2,000 1,200 1,000 $6,000 $
400 600 1,000
$2,000 3,000 5,000 $6,000
Solution E3-7 1
2
Pas Corporation and Subsidiary Consolidated Income Statement for the year 2012 (in thousands) Sales ($4,000 + $1,600) Less: Cost of sales ($2,400 + $800)
$5,600 (3,200)
Gross profit Less: Depreciation expense ($200 + $160) Other expenses ($796 + $360)
2,400 (360) (1,156)
Consolidated net income Less: Noncontrolling interest share ($280 30%) Controlling interest share of cnsolidated net income
$
Pas Corporation and Subsidiary Consolidated Income Statement for the year 2012 (in thousands) Sales ($4,000 + $1,600) Less: Cost of sales ($2,400 + $800)
$5,600 (3,200)
Gross profit Less: Depreciation expense ($200 + $160 - $24) Other expenses ($796 + $360)
2,400 (336) (1,156)
Consolidated net income Less: Noncontrolling interest share [($280 30%)+ ($24 depreciation x 30%)] Controlling interest share of consolidated net income Supporting computations Depreciation of excess allocated to overvalued equipment: $120/5 years = $24
884 (84) 800
908
$
(91.2) 816.8
Solution E3-8 (in thousands) 1
Capital stock The capital stock appearing in the consolidated balance sheet at December 31, 2011 is $7,200, the capital stock of Pob,the parent company.
2
Goodwill at December 31, 2011 Investment cost at January 2, 2011 (80% interest) Implied total fair value of Sof ($2,800 / 80%) Book value of Sof(100%) Excess is considered goodwill since no other fair value information is given.
3
$3,200 1,200 (720) $3,680
Noncontrolling interest at December 31, 2011 Capital stock and retained earnings of Sof on January 2 Add: Sof’s net income Less: Dividends declared by Sof Sof’s stockholders’ equity December 31 Noncontrolling interest percentage Noncontrolling interest at book value Add: 20% Goodwill Noncontrolling interest December 31
5
$1,100
Consolidated retained earnings at December 31, 2011 Pob’s retained earnings January 2 (equal to beginning consolidated retained earnings Add: Net income of Pob (equal to controlling share of consolidated net income) Less: Dividends declared by Pob Consolidated retained earnings December 31
4
$2,800 $3,500 (2,400)
$2,400 360 (200) 2,560 20% $ 512 220 $ 732
Dividends payable at December 31, 2011 Dividends payable to stockholders of Pob Dividends payable to noncontrolling stockholders ($100 20%) Dividends payable to stockholders outside the Consolidated entity
$ 360 20 $ 380
Solution E3-9 (in thousands) Pas Corporation and Subsidiary Partial Balance Sheet at December 31, 2011 Stockholders’ equity: Capital stock, $10 par Additional paid-in capital Retained earnings Equity of controlling stockholders Noncontrolling interest Total stockholders’ equity
$1,200 200 260 1,660 164 $1,824
Supporting computations Computation of consolidated retained earnings: Pas’s December 31, 2010 retained earnings Add: Pas’s reported income for 2011 Less: Pas’s dividends Consolidated retained earnings December 31, 2011
$ 140 220 (100) $ 260
Computation of noncontrolling interest at December 31, 2011 Sal’s December 31, 2010 stockholders’ equity Income less dividends for 2011 ($80 - $60) Sal’s December 31, 2011 stockholders’ equity Noncontrolling interest percentage Noncontrolling interest December 31, 2011
$800 20 820 20% $164
Solution E3-10 Pek Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2013 (in thousands) Sales Cost of goods sold Gross profit Deduct: Operating expenses Consolidated net income Deduct: Noncontrolling interest share Controlling interest share
$8,400 4,400 4,000 2,220 1,780 58 $1,722
Supporting computations Investment cost January 1, 2011 (90% interest) Implied total fair value of Slo ($3,240 / 90%) Slo’s Book value acquired (100%) Excess of fair value over book value Excess allocated to: Inventories (sold in 2011) Equipment (4 years remaining useful life) Goodwill Excess of fair value over book value Operating expenses: Combined operating expenses of Pek and Slo Add: Depreciation on excess allocated to equipment ($80/4 years) Consolidated operating expenses
$ 3,240 $ 3,600 (2,800) $ 800 $ $
120 80 600 800
$2,200 20 $2,220
SOLUTIONS TO PROBLEMS Solution P3-1 1
Pen Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011 (in thousands) Assets Cash ($128 + $72) Accounts receivable ($180 + $136 - $20) Inventories ($572 + $224) Equipment — net ($1,520 + $700) Total assets Liabilities and Stockholders’ Equity Liabilities: Accounts payable ($160 + $132 - $20) Stockholders’ equity: Common stock, $10 par Retained earnings Noncontrolling interest ($600 + $400) 20% Total liabilities and stockholders’ equity
2
$
200 296 796 2,220 $3,512
$
272
1,840 1,200 200 $3,512
Consolidated net income for 2012 Pen’s separate income Add: Income from Sut (80% x $360,000) Controlling interest share Add: Noncontrolling interest share (20% x $360,000) Consolidated net income
$
680 288 968 72 $1,040
Pen’s separate income Add: Sut’s net income Consolidated net income Less: Noncontrolling interest share (20% x $360,000) Controlling share of consolidated net income
$
680 360 1,040 72 $ 968
Solution P3-2 (in thousands) 1
Schedule to allocate fair value/book value differential Cost of investment in Set Implied fair value of Set ($700 / 70%) Book value of Set Excess fair value over book value Excess allocated: Fair Value Book Value Inventories ($200 $120) Land ($240 $200) ($360 $280) Buildings — net ($120 $160) Equipment — net Other liabilities ($160 $200) Allocated to identifiable net assets Goodwill for the remainder Excess fair value over book value
2
$ 700 $1,000 (440) $ 560 Allocation $ 80 40 80 (40) 40 200 360 $560
Par Corporation and Subsidiary Consolidated Balance Sheet at January 1, 2011 Assets Current assets: Cash ($140 + $80) Receivables — net ($320 + $120) Inventories ($280 + $120 + $80) Property, plant and equipment: Land ($400 + $200 + $40) Buildings — net ($440 + $280 + $80) Equipment — net ($320 + $160 - $40) Goodwill (from consolidation) Total assets Liabilities and Stockholders’ Equity Liabilities: Accounts payable ($360 + $320) Other liabilities ($40 + $200 - $40) Stockholders’ equity: Capital stock Retained earnings Equity of controlling stockholders Noncontrolling interest * Total liabilities and stockholders’ equity
* 30% of implied fair value of $1,000 = $300.
$220 440 480 $640 800 440
$
680 200
$2,000 200 2,200 300
$1,140
1,880 360 $3,380
$
880
2,500 $3,380
Solution P3-3 (in thousands) Cost of investment in Sof January 1, 2011 Implied fair value of Sof ($10,800 / 80%) Book value of Sof Excess of fair value over book value
$10,800 $13,500 10,000 $ 3,500
Schedule to Allocate Fair Value — Book Value Differential
Current assets Equipment
Fair Value - Book Value $2,000 4,000
Allocation $2,000 4,000
Bargain purchase gain* Excess fair value over book value
(2,500) $3,500
*After recognizing acquired assets and liabilities at fair values, we are left with a negative excess of $2,500. Under GAAP, this difference is recorded as a gain in the consolidated income statement in the year of acquisition. The gain is attributable entirely to the controlling interest, and is recorded on the parent’s books by a debit to the Investment account and a credit to a Gain from Bargain Purchase account. An alternative calculation of this amount takes the difference between the fair values of the net assets ($16,000) and their fair value implied by the acquisition price ($13,500), which equals $2,500. Solution P3-4 (in thousands) Noncontrolling interest of $260 (fair value) plus $1,040 (fair value of Pam’s investment) equals total fair value of $1,300. Therefore, Pam’s interest is 80% ($1,040 / $1,300), and noncontrolling interest is 20% ($260 / $1,300). Total fair value Book value of Sap Excess fair value over book value
$1,300 (1,040) $ 260
Excess allocated to Plant assets — net Goodwill Total
Fair Value $840
-
Book Value $800 $ $
40 220 260
Solution P3-5 Pal Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011 (in thousands) Assets Current assets Plant assets Goodwill Equities Liabilities Capital stock Retained earnings Supporting computations Sor’s net income ($1,600 - $1,200 - $200) Less: Excess allocated to inventories that were sold in 2011 Less: Depreciation on excess allocated to plant assets ($160 /4 years) Income from Sor
$1,360 3,320 800 $5,480 $2,640 1,200 1,640 $5,480 $
$
200 (80) (40) 80
Plant assets ($2,000 + $1,200 + $160 - $40)
$3,320
Pal’s retained earnings: Beginning retained earnings Add: Operating income Add: Income from Sor Deduct: Dividends Retained earnings December 31, 2011
$1,360 400 80 (200) $1,640
Solution P3-6 Per Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2011 (in thousands) Cash Receivables — net Inventories Land
Per per books $ 168 200
Sim per books $ 80 520
Equipment — net Investment in Sim Goodwill Total assets
1,400 600 2,400
200 800 400
1,836 ______ $6,604
______ $2,000
Accounts payable Dividends payable Capital stock Retained earnings Noncontrolling interest Total equities
$1,640 240 4,000 724 ______ $6,604
a b
Adjustments and Eliminations b
36
Consolidated Balance Sheet $ 248 684 1,600 1,400 2,800
a 1,836
320 40 1,200 440 ______ $2,000
a
400
400 $7,132
$
b 36 a 1,200 a 440 _______ 2,076
a
204 2,076
$1,960 244 4,000 724 204 $7,132
To eliminate reciprocal investment and equity accounts, record goodwill ($400), and enter noncontrolling interest [($1,640 equity + $400 goodwill) 10%)]. To eliminate reciprocal dividends receivable (included in receivables — net) and dividends payable amounts ($40 dividends 90%).
Solution P3-7 (in thousands) Preliminary computations Cost of 80% investment January 3, 2011 Implied total fair value of Sle ($1,120 / 80%) Book value of Sle Excess fair value over book value on January 3 = Goodwill 1
2
$1,120 $1,400 (1,000) $ 400
Noncontrolling interest share of income: Sle’s net income $200 20% noncontrolling interest
$ 40
Current assets: Combined current assets ($816 + $300) Less: Dividends receivable ($40 80%) Current assets
$1,116 (32) $1,084
3
Income from Sle: None Investment income is eliminated in consolidation.
4
Capital stock: $2,000 Capital stock of the parent, Por Corporation.
5
Investment in Sle: None The investment account is eliminated.
6
Excess of fair value over book value
$400
7
Controlling share of consolidated net income: Equals Por’s net income, or: Consolidated sales Less: Consolidated cost of goods sold Less: Consolidated expenses Consolidated net income Less: Noncontrolling interest share Controlling share
$ 2,400 (1,480) (320) $ 600 (40) $ 560
8
Consolidated retained earnings December 31, 2011: $808 Equals Por’s beginning retained earnings.
9
Consolidated retained earnings December 31, 2012 Equal to Por’s ending retained earnings: Beginning retained earnings Add: Controlling share of consolidated net income Less: Por’s dividends for 2012 Ending retained earnings
10
Noncontrolling interest December 31, 2012 Sle’s capital stock and retained earnings Add: Net income Less: Dividends Sle’s equity December 31, 2012 at fair value Noncontrolling interest percentage Noncontrolling interest December 31, 2012 using book value Add: Noncontrolling interest share of Goodwill Noncontrolling interest December 31, 2012 at fair value
$
808 560 (240) $1,128 $1,200 200 (100) 1,300 20% $ 260 80 $ 340
Solution P3-8 [AICPA adapted] Preliminary computations Investment cost: Saw (2,000 shares 80%) $280
Saw
Sun
448,000
Sun (6,000 shares 70%) $160
672,000
Implied total fair values: Saw ($448,000 / 80%) 560,000 Sun ($672,000/ 70%) Book value of stockholders’ equity Saw Sun Excess fair value over book value at acquisition (Goodwill) 1
960,000 280,000 480,000 280,000
480,000
a. Journal entries to account for investments January 1, 2011 — Acquisition of investments Investment in Saw (80%) Cash To record acquisition of 1,600 shares of Saw common stock at $280 per share. Investment in Sun (70%) Cash
448,000 448,000 672,000
672,000 To record acquisition of 4,200 shares of Sun common stock at $160 per share. b. During 2011 — Dividends from subsidiaries Cash 51,200 Investment in Saw (80%) 51,200 To record dividends received from Saw ($64,000 80%). Cash 25,200 Investment in Sun (70%) 25,200 To record dividends received from Sun ($36,000 70%). c. December 31, 2011 — Share of income or loss Investment in Saw (80%) 115,200 Income from Saw 115,200 To record investment income from Saw ($144,000 80%). Loss from Sun 33,600 Investment in Sun (70%) 33,600 To record investment loss from Sun ($48,000 70%).
Solution P3-8 (continued) 2
Noncontrolling interest December 31, 2011 * Common stock Capital in excess of par Retained earnings Equity December 31 Noncontrolling interest percentage Noncontrolling interest December 31 Plus: Goodwill x 20% $280,000 x 20% $480,000 x 30% Noncontrolling interest, December 31
Saw $200,000 160,000 360,000 20% $ 72,000
Sun $240,000 80,000 76,000 396,000 30% $118,800
56,000 $128,000
144,000 $262,800
* Fair value equals book value. 3
Consolidated retained earnings December 31, 2011 Consolidated retained earnings is reported at $1,218,400, equal to the retained earnings of Pod Corporation, the parent, at December 31, 2011.
4
Investment balance December 31, 2011: Investment cost January 1
Saw $448,000
Sun $672,000
Add (deduct): Income (loss) Deduct: Dividends received Investment balances December 31
115,200 (51,200) $512,000
(33,600) (25,200) $613,200
Check: Investment balances should be equal to the underlying book value plus goodwill Saw ($360,000 80%) + ($280,000 x 80%) = $512,000 Sun ($396,000 70%) + ($480,000 x 70%) = $613,200 After consolidation, the Investment balances are $0.
Solution P3-9 Preliminary computations (in thousands) Cost of 90% investment January 1, 2011 Implied total fair value of Son ($14,400 / 90%) Book value of Son Excess fair value over book value on January 1 Allocation to equipment Remainder is Goodwill Additional annual depreciation on equipment ($3,200 / 8 years)
$14,400 $16,000 (10,800) $ 5,200 $ 3,200 $ 2,000 $ 400
Pan Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2011 (in thousands)
Cash Receivables — net Dividends receivable Inventory Land Buildings — net Equipment — net Investment in Son Goodwill Total assets
Pan $ 1,200 2,400 360 2,800 2,400 8,000
2,400 2,800 4,000
6,000
3,200
15,120 _______ $38,280
Accounts payable $ 1,200 Dividends payable 2,000 Capital stock 28,000 Retained earnings 7,080 Noncontrolling interest _______ Total equities a b
$
90% Son 800 1,600
$38,280
Adjustments and Eliminations
b
Consolidated Balance Sheet $ 2,000 4,000
360 5,200 5,200 12,000
a
2,800
12,000 a 15,120
________ $ 14,800 2,400 400 8,000 4,000 ________
a
2,000
2,000 $42,400
$
$ 14,800
b a a
360 8,000 4,000 _______ 17,160
a
1,680
$ 3,600 2,040 28,000 7,080 1,680
17,160
$42,400
To eliminate reciprocal investment and equity accounts, enter unamortized excess allocated to equipment, record goodwill, and enter noncontrolling interest (at fair value). To eliminate reciprocal dividends receivable and dividends payable amounts.
Solution P3-10 1
Purchase price of investment in Sun (in thousands) Underlying book value of investment in Sun: Equity of Sun January 1, 2011 Add: Excess investment fair value over book value: Goodwill at December 31, 2015 Fair value of Sun January 1, 2011
$
240 $1,120
Purchase price of 80% investment at fair value($1,120 x 80%) 2
$
Sun’s stockholders’ equity on December 31, 2014 (in thousands) 20% noncontrolling interest at fair value $248 20% goodwill (48) 20% noncontrolling interest’s equity at book value $200 Total equity = Noncontrolling interest’s equity $200/20% = $1,000
3
Pan’s investment in Sun account balance at December 31, 2014 (in thousands) Underlying book value in Sun December 31, 2014 $800 ($1,000 80%) Add: 80% of Goodwill December 31, 2014 (20% is attributable to the noncontrolling interest) 192 Investment in Sun December 31, 2014 $992 Alternative solution: Investment cost January 1, 2011 Add: 80% of Sun’s increase since acquisition ($1,000 - $880) 80% Investment in Sun December 31, 2014
4
880
$896 96 $992
Pan’s capital stock and retained earnings December 31, 2015 (in thousands) Capital stock $1,600 Retained earnings $ 120 Amounts are equal to capital stock and retained earnings shown in the consolidated balance sheet.
896
Solution P3-11 Preliminary computations (in thousands) Cost of 70% investment in Stu Implied fair of Stu($2,800 / 70%) Book value of Stu (100%) Excess Excess allocated: Inventories Plant assets Goodwill Excess
$2,800 $4,000 3,200 $ 800 $ $
Investment balance at January 1, 2011 Share of Stu’s retained earnings increase ($240 70%) Less: Amortization 70% of excess allocated to inventories (sold in 2011) 70% of excess allocated to plant assets ($320 /8 years) Investment balance at December 31, 2011
80 320 400 800
$2,800 168 (56) (28) $2,884
Noncontrolling interest at December 31 30% of Stu’s book value at December 31 ($3,440 x 30%) 30% of Goodwill 30% Unamortized excess for plant assets 30% x ($320 - $40 amortization) Noncontrolling at December 31 (fair value)
$1,032 120 84 $1,236
Pop Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2011 (in thousands) Cash Accounts receivable — net Accounts receivable — Pop Dividends receivable Inventories Land Plant assets — net Investment in Stu Goodwill Assets Accounts payable Account payable to Stu Dividends payable Long-term debt Capital stock Retained earnings Noncontrolling interest ($4,120,000 30%) Equities
Pop $ 240 1,760
$
70% Stu 80 800
Adjustments and Eliminations
40 28 2,000 400 2,800
1,280 600 1,400
2,884 ______ $10,112
______ $ 4,200
A
280
a
400
b c
40 28
b
40
c
28
Consolidated Balance Sheet $ 320 2,560
3,280 1,000 4,480 a 2,884 400 $12,040
$ 1,200 40 160 2,400 4,000 2,312
$
320
_______
_______
_______
a 1,236
1,236
$10,112
$ 4,200
4,188
4,188
$12,040
40 400 2,000 1,440
$ 1,520 172 2,800 4,000 2,312
a 2,000 a 1,440
Solution P3-12 Preliminary computations (in thousands) 80% Investment in Sam at cost January 1, 2011 Implied total fair value of Sam ($3,040 / 80%) Sam book value Excess fair value over book value recorded as goodwill
2011 2012 2013
Sam Dividends $160 200 240 $600
Sam Net Income $ 320 400 480 $1,200
$ 3,040 $ 3,800 3,600 $ 200
80% of Net Income $256 320 384 $960
1
Sam’s dividends for 2012 ($160 / 80%)
$
200
2
Sam’s net income for 2012 ($320 / 80%)
$
400
3
Goodwill — December 31, 2012
$
200
4
Noncontrolling interest share of income — 2013 Sam’s income for 2013 ($192 dividends received/80%) 2 Noncontrolling interest percentage Noncontrolling interest share
$
480 20% 96
5
6
$
Noncontrolling interest December 31, 2013 Equity of Sam January 1, 2011 Add: Income for 2011, 2012 and 2013 Deduct: Dividends for 2011, 2012 and 2013 Equity book value of Sam December 31, 2013 Goodwill Equity fair value of Sam December 31, 2013 Noncontrolling interest percentage Noncontrolling interest December 31, 2013
$3,600 1,200 (600) 4,200 200 $4,400 20% $ 880
Controlling share of consolidated net income for 2013 Pen’s separate income Add: Income from Sam Controlling share of consolidated net income
$1,120 384 $1,504
Pen’s net income Sam’s net income Consolidated net income Less: Noncontrolling interest share ($480 x 20%) Controlling interest share
$1,120 480 $1,600 96 $1,504
