Solution Manual Advanced Accounting 11E by Beams 03 chapter PDF

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©2011 Pearson Education, Inc. publishing as Prentice Hall 3-CHAPTER 3AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTSAnswers to Questions1 A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a controlling financial interest (generally over 50 percen...

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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.

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. ©2011 Pearson Education, Inc. publishing as Prentice Hall 3-1

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An Introduction to Consolidated Financial Statements

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 provided that the noncontrolling interest, if any, is reported outside of the consolidated stockholders’ equity. If noncontrolling interest is included in consolidated stockholders’ equity, it represents the sole difference between the parent’s stockholders’ equity under the equity method and consolidated stockholders’ equity.

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 Purchases 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

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 ©2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 3

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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 1 2 3 4 5

b c d d a

Solution E3-2 1 2 3 4 5 6 7

d b d d a b c

Solution E3-3 [AICPA adapted] 1

c

Advance to Hill $75,000 + receivable from Ward $200,000 = $275,000

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

Zero, all intercompany receivables and payables are eliminated.

Solution E3-4 (in thousands) 1

Implied fair value of San ($1,800 / 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

$2,000 (1,800) $ 200 60 $ 140 $ 140

Pin’s reported net income Less: Correction to income from San for depreciation on excess allocated to equipment [($60,000/3 years)x 90%] Controlling share of consolidated net income

$980 (18) $962

Noncontrolling share of consolidated net income [$200,000 - $20,000 depreciation] x 10% Controlling share of consolidated net income Consolidated net income

$ 18 962 $980

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An Introduction to Consolidated Financial Statements

©2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 3

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Solution E3-5 (in thousands) 1

$1,200, the dividends of Pan

2

$660, equal to $600 dividends payable of Pan plus $60 (30% of $200) 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

$2,500 2,000 $ 500

Journal entry to record push down values Inventories Land Buildings — net Equipment — net Goodwill Retained earnings Note payable Push-down capital

2

40 100 300 160 500 420 20 1,500 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

$

140 160 200 400 1,000 600 500 $3,000 $

200 300 500

$1,000 1,500 2,500 $3,000

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An Introduction to Consolidated Financial Statements

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Solution E3-7 1

Pas Corporation and Subsidiary Consolidated Income Statement for the year 2012 (in thousands) Sales ($2,000 + $800) Less: Cost of sales ($1,200 + $400)

$2,800 (1,600)

Gross profit Less: Depreciation expense ($100 + $80) Other expenses ($398 + $180) Consolidated net income Less: Noncontrolling interest share ($140  30%) Controlling interest share of cnsolidated net income 2

1,200 (180) (578) 442 (42) 400

$

Pas Corporation and Subsidiary Consolidated Income Statement for the year 2012 (in thousands) Sales ($2,000 + $800) Less: Cost of sales ($1,200 + $400)

$2,800 (1,600)

Gross profit Less: Depreciation expense ($100 + $80 - $12) Other expenses ($398 + $180) Consolidated net income Less: Noncontrolling interest share [($140  30%)+ ($12 depreciation x 30%)] Controlling interest share of consolidated net income

1,200 (168) (578) 454

$

Supporting computations Depreciation of excess allocated to overvalued equipment: $60/5 years = $12

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(45.6) 408.4

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Solution E3-8 (in thousands) 1

Capital stock The capital stock appearing in the consolidated balance sheet at December 31, 2011 is $3,600, 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 ($1,400 / 80%) Book value of Sof(100%) Excess is considered goodwill since no other fair value information is given.

3

550

$1,600 600 (360) $1,840

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

$

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

$1,400 $1,750 (1,200)

$1,200 180 (100) 1,280 20% $ 256 110 $ 366

Dividends payable at December 31, 2011 Dividends payable to stockholders of Pob $ 180 Dividends payable to noncontrolling stockholders ($50  20%) 10 Dividends payable to stockholders outside the Consolidated entity $ 190

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An Introduction to Consolidated Financial Statements

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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

$600 100 130 830 82 $912

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

$ 70 110 (50) $130

Computation of noncontrolling interest at December 31, 2011 Sal’s December 31, 2010 stockholders’ equity Income less dividends for 2011 ($40 - $30) Sal’s December 31, 2011 stockholders’ equity Noncontrolling interest percentage Noncontrolling interest December 31, 2011

$400 10 410 20% $ 82

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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

$4,200 2,200 2,000 1,110 890 29 $ 861

Supporting computations Investment cost January 1, 2011 (90% interest) Implied total fair value of Slo ($1,620 / 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 ($40/4 years) Consolidated operating expenses

$ 1,620 $ 1,800 (1,400) $ 400 $ $

60 40 300 400

$1,100 10 $1,110

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An Introduction to Consolidated Financial Statements

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SOLUTIONS TO PROBLEMS Solution P3-1 1

Pen Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011 (in thousands) Assets Cash ($64 + $36) Accounts receivable ($90 + $68 - $10) Inventories ($286 + $112) Equipment — net ($760 + $350) Total assets Liabilities and Stockholders’ Equity Liabilities: Accounts payable ($80 + $66 - $10) Stockholders’ equity: Common stock, $10 par Retained earnings Noncontrolling interest ($300 + $200)  20% Total liabilities and stockholders’ equity

2

$

100 148 398 1,110 $1,756

$

136

920 600 100 $1,756

Consolidated net income for 2012 Pen’s separate income Add: Income from Sut Consolidated net income Noncontrolling interest share (20% x $180,000) Controlling interest share (80%)

$340 180 $520 $ 36 $484

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Chapter 3

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Solution P3-2 (in thousands) 1

Schedule to allocate fair value/book value differential Cost of investment in Set Implied fair value of Set ($350 / 70%) Book value of Set Excess fair value over book value Excess allocated: Fair Value Book Value Inventories ($100 $60) Land ($120 $100) ($180 $140) Buildings — net ($60 $80) Equipment — net Other liabilities ($80 $100) Allocated to identifiable net assets Goodwill for the remainder Excess fair value over book value

2

$350 $500 (220) $280 Allocation $ 40 20 40 (20) 20 100 180 $280

Par Corporation and Subsidiary Consolidated Balance Sheet at January 1, 2011 Assets Current assets: Cash ($70 + $40) Receivables — net ($160 + $60) Inventories ($140 + $60 + $40) Property, plant and equipment: Land ($200 + $100 + $20) Buildings — net ($220 + $140 + $40) Equipment — net ($160 + $80 - $20) Goodwill (from consolidation) Total assets Liabilities and Stockholders’ Equity Liabilities: Accounts payable ($180 + $160) Other liabilities ($20 + $100 - $20) Stockholders’ equity: Capital stock Retained earnings Equity of controlling stockholders Noncontrolling interest * Total liabilities and stockholders’ equity

$110 220 240 $320 400 220

$

340 100

$1,000 100 1,100 150

$

570

940 180 $1,690

$

440

1,250 $1,690

* 70% of implied fair value of $500 = $150.

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An Introduction to Consolidated Financial Statements

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Solution P3-3 (in thousands) Cost of investment in Sof January 1, 2011 Implied fair value of Sof ($5,400 / 80%) Book value of Sof Excess of fair value over book value

$5,400 $6,750 5,000 $1,750

Schedule to Allocate Fair Value — Book Value Differential

Current assets Equipment

Fair Value - Book Value $1,000 2,000

Allocation $1,000 2,000

Bargain purchase * Excess fair value over book value

(1,250) $1,750

* After recognizing acquired assets and liabilities at fair values, we are left with a negative excess of $1,250. 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 ($8,000) and their fair value implied by the acquisition price ($6,750), which equals $1,250. Solution P3-4 (in thousands) Noncontrolling interest of $130 (fair value) plus $520 (fair value of Pam’s investment) equals total fair value of $650. Therefore, Pam’s interest is 80% ($520 / $650), and noncontrolling interest is 20% ($130 / $...