Solution Manual(Updated through November 11, 2013)
Chapter 3 - Consolidated Financial Statements Subsequent to the
Date of Acquisition
1. If the parent uses the equity method of accounting, it
recognizes the Equity Income of the subsidiary, less the
depreciation and amortization of the [A] AAP net assets, in the
Equity Income account on its income statement. In the consolidation
process, this Equity Income account is eliminated and replaced with
the revenues and expenses to which it relates. Net income is
unaffected because we are replacing the subsidiarys net income
(reported in Equity Income) with its revenues and expenses.
2. The parent and the subsidiary it controls are viewed as one
entity under GAAP. Therefore, only payments of dividends outside of
the controlled group affect consolidated Retained Earnings. Another
way of looking at it is this: consolidated Retained Earnings
represent the cumulative earnings that are available for dividends
to the parents stockholders. The payment of cash from the
subsidiary to its parent only transfers cash from one company to
another. That cash is still available to pay dividends up to the
remaining balance in consolidated Retained Earnings.
3. The Equity Investment account appears on the balance sheet of
the parent and represents the proportion of the Stockholders Equity
of the subsidiary that it owns. In the consolidation process, we
eliminate the Equity Investment account and replace it with the
assets and liabilities of the subsidiary to which it relates. Since
assets = liabilities + equity (equity = assets liabilities), the
dollar amount of the Equity Investment account must equal the
subsidiarys assets less its liabilities (i.e., net assets).
Although total assets and total liabilities change, consolidated
Stockholders Equity remains unchanged in the consolidation
process.
4. The Equity Investment account on the parents balance sheet
includes all of the assets it purchased less the liabilities it
assumed in the acquisition (less any subsequent depreciation and
amortization of the AAP). In the consolidation process, those
unrecorded net assets and liabilities, that were previously
included in the Equity Investment account, are broken out
separately on the consolidated balance sheet.
5. The consolidated statement of cash flows reports the cash
inflows and outflows between the consolidated entity and outside
parties. Intercompany transfers of cash do not generate or use cash
on a consolidated basis. The consolidation process eliminates
intercompany transactions. As a result, the consolidated statement
of cash flows should be prepared from the consolidated income
statement and comparative consolidated balance sheets.
6. Goodwill is a residual asset, which means that it is the
amount left over after we have first allocated the purchase price
to all other assets (tangible and intangible) purchased and
liabilities assumed. The FASB ASC Glossary defines goodwill as an
asset representing the future economic benefits arising from other
assets acquired in a business combination that are not individually
identified and separately recognized. Goodwill is not valued
directly as are all other assets and liabilities that are acquired
in an acquisition. Instead, the value of Goodwill is inferred from
the total consideration given to the acquiree less the fair value
of the net tangible and intangible assets (other than Goodwill)
that are acquired.
7. In the absence of a market price for the subsidiarys shares,
the parent can use any reasonable basis for determining the value
of the subsidiary, including discounted cash flows (DCF) and a
multiple of earnings (ASC 350-20-35-22 through 35-24).
8. There are a number of situations that would require
impairment testing in between annual reviews (FASB ASC
350-20-35-30):
a. A significant adverse change in legal factors or an adverse
action or assessment by a regulator,b. A significant adverse change
in the business climate or unanticipated competition,c. A loss of
key personnel,d. An expectation that the investee company will be
sold, ande. Recognition of a goodwill impairment loss in the
financial statements of a subsidiary that is a component of a
reporting unit.
9. FASB ASC 805-10-50-1 requires the following general
disclosures in the footnotes in the year of acquisition and for
each year in which comparative information is provided (the
subsequent two years):
a. The name and a description of the acquiree.b. The acquisition
date.c. The percentage of voting equity interests acquired.d. The
primary reasons for the business combination and a description of
how the acquirer obtained control of the acquiree.e. A qualitative
description of the factors that make up the goodwill.f. The
acquisition-date fair value of the total consideration
transferred.g. A description of the contingent consideration
arrangements, if any.
10. Following are some of the limitations of consolidated
financial statements:
a. Consolidated income does not imply that the parent company
has received any or all of the subsidiaries net income as cash. b.
Unguaranteed debts of a subsidiary are not obligations of the
consolidated group. c. Consolidated balance sheets and income
statements are a mix of the various subsidiaries, often from
different industries. d. Segment disclosures on individual
subsidiaries are affected by intercorporate transfer pricing
policies. e. Segment disclosures are often too summarized for
effective analysis.
11. The following guidance is provided in the FASB ASC
350-30-55-2 through 55-20:
a. The customer list would be amortized over 18 months,
managements best estimate of its useful life, following the pattern
in which the expected benefits will be consumed or otherwise used
up.
b. The patent would be amortized over its five-year useful life
to the reporting entity following the pattern in which the expected
benefits will be consumed or otherwise used up. The amount to be
amortized is 40 percent of the patents fair value at the
acquisition date (residual value is 60 percent).
c. The copyright would be amortized over its 30-year estimated
useful life following the pattern in which the expected benefits
will be consumed or otherwise used.
d. The broadcast license would be deemed to have an indefinite
useful life because cash flows are expected to continue
indefinitely. Therefore, the license would not be amortized until
its useful life is deemed to be no longer indefinite. The license
would be tested for impairment annually.
e. The trademark would be deemed to have an indefinite useful
life because it is expected to contribute to cash flows
indefinitely. Therefore, the trademark would not be amortized until
its useful life is no longer indefinite. The trademark would be
tested for impairment at least annually.
12. The following guidance is provided in FASB ASC 350-30-35-1
through 35-20: as a result of the projected decrease in future cash
flows, since the company determines that the estimated fair value
of the trademark ($10 million) is less than its carrying amount
($30 million), an impairment loss of $20 million should recognized.
The amount not written off ($10 million) will continue to not be
amortized because it is still deemed to have an indefinite useful
life. The remaining balance of the trademark will, however,
continue to be tested for impairment.
13. Following are provisions of FASB ASC 805-20-25-2 and FASB
Concept Statement #6 relating to restructuring activities.
a. Typical restructuring activities include the costs of a plan
to exit an activity of an acquiree or to terminate the employment
of or relocate an acquirees employees.
b. A liability is defined in FASB Concepts Statement No. 6,
Elements of Financial Statements as, probable future sacrifices of
economic benefits arising from present obligations of a particular
entity to transfer assets or provide services to other entities in
the future as a result of past transactions or events. FASB ASC
805-20-25-2 provides the following guidance with respect to the
accounting for restructuring costs: costs the acquirer expects but
is not obligated to incur in the future to affect its plan to exit
an activity of an acquiree or to terminate the employment of or
relocate an acquirees employees are not liabilities at the
acquisition date. Therefore, the acquirer does not recognize those
costs as part of applying the acquisition method. Instead, the
acquirer recognizes those costs in its post-combination financial
statements in accordance with other applicable generally accepted
accounting principles (GAAP). (emphasis added) Bottom line, unless
the subsidiary has already adopted a plan and is obligated for its
completion (in which case the expense would have already been
recognized in its financial statements), the restructuring
liability and related expense should not be recognized at
acquisition. Instead, those costs should be recognized in the
future when the restructuring plan is adopted.
14. Answer: d
Each statement is true, except for d. For passive noncontrolling
marketable equity investments, the investor can account for the
securities as trading or available for sale (AFS). Changes in the
fair value of AFS securities are recorded in other comprehensive
income. Changes in the fair value of trading securities are
reported as part of net income. This question reviews a wide
variety of concepts that should have been covered in previous
courses and that integrate with topics in this textbook.
15. Answer: a
Each statement is true, except for a. The fair value option is
available for all equity investments, except for controlling
investments in subsidiaries.
16. Answer: c
Under the equity method, when there are no intercompany profits
between affiliated companies, the pre-consolidation investment at
any point in time can be determined via the following equation:
Investment in Subsidiary = p% x stockholders equity of S +
unamortized p% AAP
Given that this is a 100% investment and there is no AAP or fair
value-book value differences for the net assets of the subsidiary
on the acquisition date, then, on any date, the pre-consolidation
investment account will equal the stockholders equity of the
Subsidiary on that date. SE(S) on 12/31/13 = $600,000
17. Answer: d
Under the equity method, when there are no intercompany profits
between affiliated companies, the pre-consolidation income from
investee for any given year can be determined via the following
equation:
Income from Subsidiary = p% x NI(S) - p% AAP for the period
Given that this is a 100% investment and there is no AAP or fair
value-book value differences for the net assets of the subsidiary,
then, for any period after the acquisition, the Income from
Subsidiary account will equal the net income of the Subsidiary for
that period. NI(S) for the year ended 12/31/13 = $94,000
18. A Answer: a
Under the cost method, the pre-consolidation investment at any
point in time will equal the investment on the acquisition date.
Given that there is no AAP or fair value-book value differences,
the investment account equals p% x the stockholders equity on the
acquisition date. In this problem, we are given the stockholder
equity at 12/31/11. We need to back out the changes in stockholders
equity during 2011 to back into the stockholders equity on 1/1/11
(i.e., SE(S)12/31/11 NI(S)2011 + Div(S)2011 = SE(S)1/1/11). Thus,
the pre-consolidation investment account on 1/1/11 equals $450,000
(i.e., $500,000 - $75,000 + $25,000), which is also the balance
under the cost method on December 31, 2013.
19. A Answer: a
Under the cost method, the pre-consolidation income from
investee is equal to the dividends received from the investee
(i.e.,$39,000 for the year ended 12/31/13).
20. Answer: b
Under the equity method, when there are no intercompany profits
between affiliated companies, the pre-consolidation investment at
any point in time can be determined via the following equation:
Investment in Subsidiary = p% x stockholders equity of S +
unamortized p% AAP
In this case, the acquisition-date AAP was equal to $300,000
(i.e., $100,000 + $200,000). The $100,000 is amortized over 10
years, which means it is amortized at a rate of $10,000/year. After
three years, it has an unamortized balance of $70,000. The $200,000
represents goodwill, which is not amortized. Thus, the
pre-consolidation balance in the investment account can be
calculated as follows:
Investment in Subsidiary12/31/13= (100% x 600,000) of S +
($70,000 + $200,000) = $870,000
21. Answer: c
Under the equity method, when there are no intercompany profits
between affiliated companies, the pre-consolidation income from
investee for any given year can be determined via the following
equation:
Income from Subsidiary = p% x NI(S) - p% AAP for the period
In this case, the acquisition-date AAP was equal to $300,000
(i.e., $100,000 + $200,000). The $100,000 is amortized over 10
years, which means it is amortized at a rate of $10,000/year. After
three years, it has an unamortized balance of $70,000. The $200,000
represents goodwill, which is not amortized.
Thus, the pre-consolidation amount in the income from investee
account can be calculated as follows:
Income from Subsidiary2013= p% x NI(S) - p% AAP for the period=
(100% x $94,000) - $10,000= $84,000
22. Answer: a
Goodwill = FV entire subsidiary FV Identifiable net assets of
the subsidiary
When an investor purchases 100% of a subsidiary in a single
transaction, the purchase price is presumed to represent the FV of
the entire subsidiary (i.e., $6,000,000 in this case). We can
determine the FV of the identifiable net assets (FVINA) by taking
the reported book value of the net assets (BVNA) of the subsidiary
and adding any fair-value book value differences. In this case, the
FVINA(S) equals $5,600,000 (i.e., $4,400,000 + $1,200,000). Thus
the goodwill equals $400,000 (i.e., $6,000,000 - $5,600,000).
Note: For questions 23-26, the following is the implied
consolidation spreadsheet based on the facts in the problem. Note
that this competed spreadsheet was not required. However, this
worksheet could be used as an effective took in discussing the
various subparts of the multiple choice problems.
InvestorInvesteeDrCrConsolidated
Income Statement
Revenues2,400,000320,0002,720,000
Income from Investee150,0000[C]150,000-
Expenses(1,600,000)(160,000)[D]10,000(1,770,000)
Net Income950,000160,000950,000
Retained Earnings Statement
Retained Earnings, January 1752,00040,000[E]40,000752,000
Net Income950,000160,000950,000
Dividends declared(64,000)(40,000)[C]40,000(64,000)
Retained Earnings, December 311,638,000160,0001,638,000
Balance Sheet
Investment in Investee290,000-[C]110,000-
[E]120,000
[A]60,000
All Other Assets4,788,000400,000[A]60,000[D]10,0005,238,000
Total Assets5,078,000400,0005,238,000
Liabilities2,640,000160,0002,800,000
Common Stock & APIC800,00080,000[E]80,000800,000
Retained Earnings1,638,000160,0001,638,000
Total Liabilities and
Equity5,078,000400,000340,000340,0005,238,000
23. Answer: c
Given that there are no intercompany transactions between the
investor and the investee, the amount of consolidated expenses will
equal the parents expenses plus the subsidiary expenses, adjusted
of any acquisition accounting premium (AAP) amortization. Although
we are not given the AAP amortization, we can infer the amount by
comparing the Income from Investee account to the Net income of the
investee. Because p% = 100%, any difference is equal to the AAP
amortization. In this case, AAP amortization during the year ended
December 31, 2013 equals $10,000 (i.e., $160,000 - $150,000). Thus,
consolidated expenses can be determined as follows:
Consolidated expenses= Expenses (P) + Expenses (S) + AAP
Amortization= $1,600,000 + $160,000 + $10,000= $1,770,000
24. Answer: c
Given that there are no intercompany transactions between the
investor and the investee (or related intercompany profits) and the
parent uses the equity method, then the reported pre-consolidation
net income of the parent company equals consolidated net income
(i.e., $950,000).
25. Answer: a
Given that the parent uses the equity method, then the reported
pre-consolidation retained earnings of the parent company equals
consolidated retained earnings (i.e., $1,638,000).
26. Answer: c
Given that there are no intercompany transactions or related
balances, then the amount of consolidated totals assets will equal
the Parents total assets after deducting the investment account
plus the subsidiarys total assets plus the unamortized AAP implicit
in the investment account at the end of the year. We will compute
each of these items separately:
Parents total assets after deducting the investment account =
$5,078,000 - $290,000 = $4,788,000 Subsidiarys total assets =
$400,000 Unamortized AAP at December 31, 2013 =
Investment12/31/2013 SE(S)12/31/2013 = $290,000 ($80,000 +
$160,000) = $50,000
Adding these components together yields consolidated total
assets equal to $5,238,000 (i.e., $4,788,000 + $400,000 +
$50,000).
27. Total value of the consideration given$1,500,000
-Fair value of the tangible and intangible assets1,410,000
=Goodwill90,000
The Goodwill asset is not amortized since it is deemed to have
an indefinite life. Instead, it is tested at least annually for
impairment and written down if found to be impaired.
28. a.The amount of goodwill in this acquisition is computed as
follows:
Total value of the consideration given$5,000,000
-Fair value of the tangible and intangible assets3,500,000
=Goodwill$1,500,000
The Goodwill asset is not amortized since it is deemed to have
an indefinite life. Instead, it is tested at least annually for
impairment and written down if found to be impaired.
b. The total value of the consideration increases by $500,000.
Since the fair value of the net tangible and intangible assets is
unchanged, the amount assigned to the Goodwill asset increases by
$500,000.
c. The goodwill computation is as follows:
Total value of the consideration given$5,000,000
-Fair value of the tangible and intangible assets6,000,000
=Goodwill$(1,000,000)
This is a bargain purchase. Assuming a cash purchase for all of
the outstanding voting shares of the acquiree, the acquisition
would be recorded as follows:
Equity investment6,000,000
Cash5,000,000
Gain on bargain purchase1,000,000
(to record the acquisition and bargain purchase)
29. a.Since the value of the Equity Investment ($4.5 million) is
below its carrying amount ($5 million), Goodwill is potentially
impaired and you should proceed to the second part of the test for
impairment.
b.The implied value of goodwill is computed as follows:
Fair value of the subsidiary$4,500,000
Fair value of the net assets exclusive of goodwill4,300,000
Implied fair value of goodwill$200,000
Book value of goodwill500,000
Goodwill impairment$(300,000)
The goodwill asset is found to be impaired.
c. Goodwill must be written down to its implied value of
$200,000 with the following journal entry:
Equity income from S300,000
Equity investment300,000
(to write down the book value of goodwill)
Goodwill will now be reported on the consolidated balance sheet
at $200,000, and a loss on the write-down of goodwill will be
reported in the consolidated income statement. The goodwill asset
cannot be subsequently written up should the fair value of the
subsidiary improve.
30. a.The allocation of the purchase price to the restructuring
liability reduced the dollar amount of net identifiable assets
recognized and, as a result, increased the dollar amount of
goodwill recognized by $10.86 million.
b. The restructuring liability was accrued by Omniture (the
target company) prior to the acquisition. As a result, the
associated expense was reflected in Omnitures income statement
before the acquisition.
c. As Adobe makes payments under the restructuring plan, the
debit will be to the restructuring liability that it recognized in
the acquisition, not to an expense account. As a result, Adobes
post-acquisition pretax profit will be $10.86 million higher.
31. Working capital normal accounting for collection of
receivables, payment of payables, etc. Inventories normal
accounting for removal of inventories and recognition of cost of
goods sold.Identifiable intangible assets amortization over useful
life.In-process research & development write off if abandoned,
amortize over useful life when completed if not abandoned.Other
noncurrent assets depreciate/amortize over useful life and test for
impairment annually.Long-term debt amortize (increase) the carrying
amount with the offsetting debit to expense. Benefit obligations
amortize (increase) the carrying amount with the offsetting debit
to expense.Net tax accounts record reduction of the liability as
taxes are paid as is customary for deferred tax liabilities. Other
noncurrent liabilities reduce when paid. Goodwill no amortization.
Test annually for impairment.
32. a.The 6.742 billion balance in the PPE account is the book
value on Anheuser-Buschs balance sheet on the date of the
acquisition. The addition of 1.783 billion reflects the AAP and the
8.525 billion is the fair value of the PPE assets on the date of
acquisition.
b. The Goodwill account represents the Goodwill asset on
Anheuser-Buschs balance sheet on the date of the acquisition. InBev
does not recognize the previously, existing goodwill asset.
Instead, it only recognizes goodwill that is implicit in the
assignment of the purchase price in the acquisition of
Anheuser-Busch.
c. The adjustment to the Investment in Associates account
represents the difference between fair value and the recorded
equity-method values for noncontrolling investments by Anheuser
Busch.
d. The reduction of the interest-bearing loans and borrowings
account represents a reduction in the reported amount to the
liabilities which may reflect an increase in the general levels of
interest rates subsequent to the issuance of the debt (or possibly
a worsening of the credit rating on the debt).
e. The increase in Deferred Tax Liabilities reflects the
expected taxes that will be paid on the higher value of the net
assets acquired.
33. a.Sales = $5,500,000 + $1,200,000 = $6,700,000b.Equity
income = $0c.Operating expenses = $825,000 + $312,000 + $15,000 =
$1,152,000d.Accounts receivable = $1,408,000 + $278,400 =
$1,686,400e.Equity investment = $0 f.PPE, net = $11,365,200 +
$661,600 + $285,000 - $15,000 = $12,296,800g.Goodwill =
$300,000h.Common stock = $512,450i.Retained earnings =
$4,406,200
34. a.Cost of goods sold = $1,800,000 + $450,000 =
$2,250,000b.Equity income = $0c.Operating expenses = $375,000 +
$195,000 + $50,000 = $620,000d.Cash = $513,750 + $193,250 =
$707,000 e.Equity investment = $0 f.PPE, net = $5,166,000 +
$413,500 = $5,579,500g.Goodwill = $300,000h.Common stock = $444,000
i.Retained earnings = $3,520,000
35. a.Sales = $6,000,000 + $1,350,000 = $7,350,000b.Equity
income = $0c.Operating expenses = $900,000 + $351,000 + $65,000 =
$1,316,000d.Inventories = $2,328,000 + $402,300 = $2,730,300
e.Equity Investment = $0 f.PPE, net = $12,398,400 + $744,300 +
$425,000 - $25,000 = $13,542,700 g.Patent = $280,000 - $40,000 =
$240,000h.Common Stock = $704,850 i.Retained Earnings =
$5,828,600
36. a.Equity investment1,400,000
Common stock35,000
APIC1,365,000
(to record the acquisition)
b.Beginning Equity Investment$1,400,000
Equity income294,000
Dividends(44,100)
Ending Equity Investment$1,649,900
c.[C]Equity income (P)294,000
Dividends (S)44,100
Equity investment (P)249,900
(to eliminate all changes in the Equity Investment account,
leaving only beginning balance in the account)
[E]Common stock (S) @ BOY140,000
APIC (S) @ BOY175,000
Retained earnings (S) @ BOY1,085,000
Equity Investment (P) @ BOY1,400,000
(to eliminate the portion of the investment account related to
the book value of the subsidiary's Stockholders' Equity @ BOY)
[A]No Accounting Acquisition Premium
[D](AAP) in problem
[I]No intercompany items in problem
d.
Consolidation Entries
Parent SubsidiaryDrCrConsolidated
Income statement:
Sales$3,700,000 $2,100,000 $ 5,800,000
Cost of goods sold(2,590,000)(1,260,000)(3,850,000)
Gross profit1,110,000 840,000 1,950,000
Equity income294,000 [C]294,0000
Operating expenses(703,000)(546,000)(1,249,000)
Net income$ 701,000 $ 294,000 $ 701,000
Statement of retained earnings:
BOY retained earnings$2,352,000 $1,085,000
[E]1,085,000$2,352,000
Net income701,000 294,000 701,000
Dividends(140,200)(44,100)[C]44,100(140,200)
Ending retained earnings$2,912,800 $1,334,900 $2,912,800
Balance sheet:
Assets
Cash$ 877,400 $ 541,100 $1,418,500
Accounts receivable473,600 487,200 960,800
Inventory 717,800 625,800 1,343,600
Equity investment1,649,900 [E]1,400,000 0
[C]249,900
PPE, net2,712,840 1,157,800 3,870,640
$6,431,540 $2,811,900 $7,593,540
Liabilities and Stockholders Equity
Accounts payable$ 270,840 $ 200,200 $ 471,040
Accrued liabilities321,900 261,800 583,700
Long-term liabilities 0 700,000 700,000
Common stock518,000 140,000 [E]140,000518,000
APIC2,408,000 175,000 [E]175,0002,408,000
Retained earnings2,912,800 1,334,900 2,912,800
$6,431,540 $2,811,900 $7,593,540
37. a.Equity investment1,700,000
Common stock42,500
APIC1,657,500
(to record the acquisition)
b.Subsidiary net income$231,000
Depreciation / amortization(35,000 )
Equity income$196,000
c.Beginning Equity Investment$1,700,000
Equity Income196,000
Dividends(34,650)
Ending Equity Investment$1,861,350
d.[C]Equity income (P)196,000
Dividends (S)34,650
Equity Investment (P)161,350
(to eliminate all changes in the Equity Investment account,
leaving only beginning balance in the account)
[E]Common stock (S) @ BOY110,000
APIC (S) @ BOY137,500
Retained earnings (S) @ BOY852,500
Equity investment (P) @ BOY1,100,000
(to eliminate the portion of the investment account related to
the book value of the subsidiary's Stockholders' Equity @ BOY)
[A]PPE, net (S) @ BOY100,000
Patent (S) @ BOY300,000
Goodwill (S) @ BOY200,000
Equity investment (P) @ BOY600,000
(to assign the remaining Equity Investment account (i.e.,
unamortized BOY AAP) to appropriate asset & liability
accounts)
[D]Operating expenses (S)35,000
PPE, net (S)5,000
Patent (S) 30,000
(depreciates/amortizes AAP so that income statement includes the
activity and the balance sheet accounts include ending balances in
appropriate accounts)
[I]No intercompany items in problem
37. continued e.
Consolidation Entries
Parent SubsidiaryDrCrConsolidated
Income statement:
Sales$5,500,000 $1,650,000 $7,150,000
Cost of goods sold(3,850,000)(990,000)(4,840,000)
Gross profit1,650,000 660,000 2,310,000
Equity income196,000 [C]196,0000
Operating expenses(1,045,000)(429,000)[D]35,000(1,509,000)
Net income$ 801,000 $ 231,000 $ 801,000
Statement of retained earnings:
BOY retained earnings$2,856,000 $ 852,500
[E]852,500$2,856,000
Net income801,000 231,000 801,000
Dividends(160,200)(34,650)[C]34,650(160,200)
Ending retained earnings$3,496,800 $1,048,850 $3,496,800
Balance sheet:
Assets
Cash$ 265,950 $ 425,150 $ 691,100
Accounts receivable704,000 382,800 1,086,800
Inventory 1,067,000 491,700 1,558,700
Equity investment1,861,350 [E]1,100,000 0
[A]600,000
[C]161,350
PPE, net4,032,600 909,700 [A]100,000[D]5,000 5,037,300
Patent[A]300,000[D]30,000 270,000
Goodwill[A]200,000200,000
$7,930,900 $2,209,350 $8,843,900
Liabilities and stockholders equity
Accounts payable$ 402,600 $ 157,300 $ 559,900
Accrued liabilities478,500 205,700 684,200
Long-term liabilities 0 550,000 550,000
Common stock629,000 110,000 [E]110,000629,000
APIC2,924,000 137,500 [E]137,5002,924,000
Retained earnings3,496,800 1,048,850 3,496,800
$7,930,900 $2,209,350 $8,843,900
37. continued
f. We have recognized the additional PPE assets, the Patent
asset, and the Goodwill asset in the consolidation process. These
assets were included in the Equity Investment account on the
parents balance sheet and are now reported explicitly on the
consolidated balance sheet.
38. a.Equity investment2,200,000
Common stock55,000
APIC2,145,000
(to record the acquisition)
b.Subsidiary net income$273,000
Depreciation / amortization(65,000)
$208,000
c.Beginning Equity Investment$2,200,000
Equity Income208,000
Dividends(40,950)
Ending Equity Investment$2,367,050
d.Total value of the consideration given$2,200,000
-Fair value of the tangible and intangible assets*2,050,000
=Goodwill$150,000
* BOY Book value of subsidiary net assets$1,300,000
PPE asset200,000
License asset250,000
Customer List asset300,000
Fair value of net assets acquired$2,050,000
38. continued
e. The consolidation spreadsheet yields the amounts for the
requested balance sheet accounts:
Consolidation Entries
Parent SubsidiaryDrCrConsolidated
Income statement:
Sales$7,200,000 $1,950,000 $9,150,000
Cost of goods sold(5,040,000)(1,170,000)(6,210,000)
Gross profit2,160,000 780,000 2,940,000
Equity income208,000 [C]208,0000
Operating expenses(1,368,000)(507,000)[D]65,000(1,940,000)
Net income (e.1.)$1,000,000 $ 273,000 $1,000,000
Statement of retained earnings:
BOY retained earnings$3,696,000 $1,007,500
[E]1,007,500$3,696,000
Net income1,000,000 273,000 1,000,000
Dividends(200,000)(40,950)[C]40,950(200,000)
Ending retained earnings$4,496,000 $1,239,550 $4,496,000
Balance sheet:
Cash $ 622,950 $ 502,450 $ 1,125,400
Accounts receivable (e.2.)921,600 452,400 1,374,000
Inventory 1,396,800 581,100 1,977,900
Equity investment (e.3.)2,367,050 [E]1,300,000 0
[A]900,000
[C]167,050
PPE, net (e.4.)7,439,040 1,075,100 [A]200,000[D]10,000
8,704,140
License[A]250,000[D]25,000 225,000
Customer list[A]300,000[D]30,000 270,000
Goodwill (e.5.)[A]150,000150,000
$12,747,440 $2,611,050 $13,826,440
Liabilities and stockholders equity
Accounts payable$ 527,040 $ 185,900 $ 712,940
Accrued liabilities626,400 243,100 869,500
Long-term liabilities 2,500,000 650,000 3,150,000
Common stock (e.6.)814,000 130,000 [E]130,000814,000
APIC (e.7.)3,784,000 162,500 [E]162,5003,784,000
Retained earnings (e.8.)4,496,000 1,239,550 4,496,000
$12,747,440 $2,611,050 $13,826,440
38. continued
f. The intangible assets reported on the year-end consolidated
balance sheet include the License ($225,000 with one year of
amortization), the Customer List ($270,000 with one year of
amortization) and Goodwill ($150,000).
39. a.The balance of the Equity Investment at the beginning of
the year equals the stockholders equity of the subsidiary plus the
undepreciated and unamortized balances of the [A] assets. Since the
[A] assets with a useful life have now been depreciated or
amortized for two years, the beginning balance of the Equity
Investment account is as follows:
BOY Stockholders
Equity$1,246,000($965,650+$124,600+$155,750)
PPE, net90,000($100,000 2 x $5,000)
Patent160,000($200,000 2 x $20,000)
License240,000($300,000 2 x $30,000)
Goodwill300,000
$2,036,000
b.Subsidiary net income$261,660
Depreciation / amortization(55,000)
$206,660
c.Beginning Equity investment$2,036,000
Equity Income206,660
Dividends(39,249)
Ending Equity Investment$2,203,411
39. continued
d.
[C]Equity income (P)206,660
Dividends (S)39,249
Equity investment (P)167,411
(to eliminate all changes in the Equity Investment account,
leaving only beginning balance in the account)
[E]Common stock (S) @ BOY124,600
APIC (S) @ BOY155,750
Retained earnings (S) @ BOY965,650
Equity investment (P) @ BOY1,246,000
(to eliminate the portion of the investment account related to
the book value of the subsidiary's Stockholders' Equity @ BOY)
[A]PPE, net (S) @ BOY90,000
Patent (S) @ BOY160,000
License (S) @ BOY240,000
Goodwill (S) @ BOY300,000
Equity investment (P) @ BOY790,000
(to assign the remaining Equity Investment account (i.e.,
unamortized BOY AAP) to appropriate asset & liability
accounts)
[D]EOY Operating expenses (depreciation and amort.)55,000
PPE, net5,000
Patent20,000
License30,000
(to record depreciation and amortization expense for the [A]
assets)
[I]No intercompany transactions
39. continued
e.
Consolidation Entries
Parent SubsidiaryDrCrConsolidated
Income statement:
Sales$6,860,000 $1,869,000 $8,729,000
Cost of goods sold(4,939,200)(1,121,400)(6,060,600)
Gross profit1,920,800 747,600 2,668,400
Equity income206,660 [C]206,6600
Operating expenses(1,029,000)(485,940)[D]55,000(1,569,940)
Net income$1,098,460 $ 261,660 $1,098,460
Statement of retained earnings:
BOY retained earnings$5,456,480 $ 965,650
[E]965,650$5,456,480
Net income1,098,460 261,660 1,098,460
Dividends(219,692)(39,249)[C]39,249(219,692)
Ending retained earnings$6,335,248 $1,188,061 $6,335,248
Balance sheet:
Cash$ 1,027,677 $ 481,579 $ 1,509,256
Accounts receivable1,756,160 433,608 2,189,768
Inventory 2,661,680 556,962 3,218,642
Equity investment2,203,411 [E]1,246,000 0
[A]790,000
[C]167,411
PPE, net14,175,504 1,030,442 [A]90,000[D]5,000 15,290,946
Patent[A]160,000[D]20,000 140,000
License[A]240,000[D]30,000 210,000
Goodwill[A]300,000300,000
$21,824,432 $2,502,591 $22,858,612
Liabilities and stockholders equity
Accounts payable$ 1,004,304 $ 178,178 $ 1,182,482
Accrued liabilities1,193,640 233,002 1,426,642
Long-term liabilities 7,000,000 623,000 7,623,000
Common stock753,320 124,600 [E]124,600753,320
APIC5,537,920 155,750 [E]155,7505,537,920
Retained earnings6,335,248 1,188,061 6,335,248
$21,824,432 $2,502,591 $22,858,612
40.
40. a.Subsidiary net income$26,040
Depreciation / amortization(15,000)
$11,040
b. Beginning Equity Investment$414,000*
Equity Income11,040
Dividends(3,906)
Ending Equity Investment$421,134
*BOY stockholders equity$124,000($96,100 + $12,400 +
$15,500)
PPE, net30,000($50,000 4 x $5,000)
Customer list60,000($100,000 4 x $10,000)
Goodwill200,000
$414,000
c. 1.PPE, net= $3,357,900 + $102,548 + $30,000 - $5,000 =
$3,485,4482. Customer list= $60,000 - $10,000 = $50,0003. Retained
earnings = $1,109,520 + $222,290 - $44,458= $1,287,352 d. The
intangible assets reported on the year-end consolidated balance
sheet include the Customer List ($50,000 after five years of
amortization) and Goodwill ($200,000). e. Consolidated net income
will always equal the net income of the parent so long as the
parent employs the equity method to account for its Equity
Investment. f. The subsidiarys stockholders equity is not held by a
party outside of the economic entity represented in the
consolidated financial statements and, as a result, should not be
included in the consolidated stockholders equity.
41.
41.a.The balance at the beginning of the year of the Equity
Investment account equals the Stockholders Equity of the subsidiary
plus the undepreciated and unamortized balances of the [A] assets.
Since the [A] assets with a useful life have now been depreciated
or amortized for three years, the beginning balance of the Equity
Investment account is as follows:
BOY Stockholders
Equity$1,327,000($1,028,425+$132,700+$165,875)
PPE, net85,000($100,000 3 x $5,000)
Customer List250,000($400,000 3 x $50,000)
Royalty Agreement240,000($300,000 3 x $20,000)
Database140,000($200,000 3 x $20,000)
Goodwill500,000
$2,542,000
b. Subsidiary net income$278,670
Depreciation / amortization(95,000 )
$183,670
c. Beginning Equity Investment$2,542,000
Equity Income183,670
Dividends(41,801)
Ending Equity Investment$2,683,869
41. continued
d.
[C]Equity income (P)183,670
Dividends (S)41,801
Equity investment (P)141,869
(to eliminate all changes in the Equity Investment account,
leaving only beginning balance in the account)
[E]Common stock (S) @ BOY132,700
APIC (S) @ BOY165,875
Retained earnings (S) @ BOY1,028,425
Equity investment (P) @ BOY1,327,000
(to eliminate the portion of the investment account related to
the book value of the subsidiary's stockholders' equity @ BOY)
[A]PPE, net (S) @ BOY85,000
Customer List (S) @ BOY250,000
Royalty agreement (S) @ BOY240,000
Database (S) @ BOY140,000
Goodwill (S) @ BOY500,000
Equity investment (P) @ BOY1,215,000
(to assign the remaining Equity Investment account (i.e.,
unamortized BOY AAP) to appropriate asset & liability
accounts)
[D]EOY Operating expenses (depreciation and amort)95,000
PPE, net5,000
Customer list50,000
Royalty Agreement20,000
Database20,000
(to record depreciation and amortization expense for the [A]
assets)
[I]No intercompany transactions
41. continued
e.
Consolidation Entries
Parent SubsidiaryDrCrConsolidated
Income statement:
Sales$4,185,000 $1,990,500 $6,175,500
Cost of goods sold(3,013,200)(1,194,300)(4,207,500)
Gross profit1,171,800 796,200 1,968,000
Equity income183,670 [C]183,670 0
Operating expenses(627,750)(517,530)[D]95,000 (1,240,280)
Net income$ 727,720 $ 278,670 $ 727,720
Statement of retained earnings:
BOY retained earnings$6,812,560 $1,028,425 [E]1,028,425
$6,812,560
Net income727,720 278,670 727,720
Dividends(145,544)(41,801)[C]41,801 (145,544)
Ending retained earnings$7,394,736 $1,265,294 $7,394,736
Balance sheet:
Cash$ 1,541,497 $ 512,885 $ 2,054,382
Accounts receivable1,071,360 461,796 1,533,156
Inventory 1,623,780 593,169 2,216,949
Equity investment2,683,869 [E]1,327,000 0
[A]1,215,000
[C]141,869
PPE, net13,669,884 1,097,429 [A]85,000 [D]5,000 14,847,313
Customer list[A]250,000 [D]50,000 200,000
Royalty agreement[A]240,000 [D]20,000 220,000
Database[A]140,000 [D]20,000 120,000
Goodwill[A]500,000 500,000
$20,590,390 $2,665,279 $21,691,800
Liabilities and stockholders equity
Accounts payable$ 612,684 $ 189,761 $ 802,445
Accrued liabilities728,190 248,149 976,339
Long-term liabilities 4,000,000 663,500 4,663,500
Common stock940,540 132,700 [E]132,700 940,540
APIC6,914,240 165,875 [E]165,875 6,914,240
Retained earnings7,394,736 1,265,294 7,394,736
$20,590,390 $2,665,279 $21,691,800
41. continued
f. The fair value of the subsidiary ($2.5 million) is less than
the book value of the Equity Investment account ($2,683,869).
Goodwill is, therefore, potentially impaired. The second part of
the test computes the implied fair value of goodwill as
follows:
Fair value of the subsidiary$2,500,000
Fair value of the net assets exclusive of goodwill2,300,000
Implied fair value of goodwill$200,000
Book value of goodwill500,000
Goodwill impairment$(300,000)
The goodwill asset is found to be impaired.
Goodwill must be written down to its implied value of $200,000
with the following journal entry:
Equity income from S300,000
Equity investment300,000
(to write down the book value of goodwill)
Goodwill will now be reported on the consolidated balance sheet
at $200,000, and a loss on the write-down of goodwill will be
reported in the consolidated income statement. The goodwill asset
cannot be subsequently written up should the fair value of the
subsidiary improve.
41. continued
g. Our consolidated income statement and balance sheet,
reflecting the entry for goodwill impairment, are as follows:
Consolidated Income Statement:Consolidated Balance Sheet:
Sales$ 6,175,500 Assets
Cost of goods sold4,207,500Cash$ 2,054,382
Gross profit1,968,000 Accounts receivable1,533,156
Less: operating expenses1,240,280Inventory 2,216,949
Loss on impairment of Goodwill300,000PPE, net14,847,313
Net income$ 427,720 Customer list200,000
Royalty Agreement220,000
Consolidated Statement of Retained Earnings:Database120,000
BOY retained earnings$ 6,812,560 Goodwill200,000
Net income427,720 $ 21,391,800
Less: Dividends145,544
Ending retained earnings$ 7,094,736 Accounts payable$
802,445
Accrued liabilities976,339
Long-term liabilities 4,663,500
Common stock940,540
APIC6,914,240
Retained earnings7,094,736
$ 21,391,800
42. a.The balance at the beginning of the year of the Equity
Investment account equals the stockholders equity of the subsidiary
plus the undepreciated and unamortized balances of the [A] assets.
Since the [A] assets with a useful life have now been depreciated
or amortized for four years, the beginning balance of the Equity
Investment account is as follows:
BOY Stockholders
Equity$2,045,000($1,584,875+$204,500+$255,625)
Patent240,000($400,000 4 x $40,000)
Goodwill500,000
$2,785,000
b.Subsidiary net income$429,450
Depreciation / amortization(40,000)
$389,450
c.Beginning Equity Investment$2,785,000
Equity Income389,450
Dividends(64,418)
Ending Equity Investment$3,110,032
d.[C]Equity income (P)389,450
Dividends (S)64,418
Equity Investment (P)325,032
(to eliminate all changes in the Equity Investment account,
leaving only beginning balance in the account)
[E]Common stock (S) @ BOY204,500
APIC (S) @ BOY255,625
Retained earnings (S) @ BOY1,584,875
Equity investment (P) @ BOY2,045,000
(to eliminate the portion of the investment account related to
the book value of the subsidiary's stockholders' equity @ BOY)
[A]Patent (S) @ BOY240,000
Goodwill (S) @ BOY500,000
Equity Investment (P) @ BOY740,000
(to assign the remaining Equity Investment account (i.e.,
unamortized BOY AAP) to appropriate asset & liability
accounts)
[D]EOY Operating expenses (amortization)40,000
Patent40,000
(to record depreciation and amortization expense for the [A]
assets)
[I]No intercompany transactions
42. continued
e.Consolidation Entries
Parent SubsidiaryDrCrConsolidated
Income statement:
Sales$6,615,000 $3,067,500 $9,682,500
Cost of goods sold(4,762,800)(1,840,500)(6,603,300)
Gross profit1,852,200 1,227,000 3,079,200
Equity income389,450 [C]389,450 0
Operating expenses(992,250)(797,550)[D]40,000 (1,829,800)
Net income$1,249,400 $ 429,450 $1,249,400
Statement of retained earnings:
BOY retained earnings$7,463,800 $1,584,875 [E]1,584,875
$7,463,800
Net income1,249,400 429,450 1,249,400
Dividends(249,880)(64,418)[C]64,418 (249,880)
Ending retained earnings$8,463,320 $1,949,907 $8,463,320
Balance sheet:
Assets
Cash$ 1,149,088 $ 790,392 $ 1,939,480
Accounts receivable1,693,440 711,660 2,405,100
Inventory 2,566,620 914,115 3,480,735
Equity investment3,110,032 [E]2,045,000 0
[A]740,000
[C]325,032
PPE, net13,669,236 1,691,215 15,360,451
Patent[A]240,000 [D]40,000 200,000
Goodwill[A]500,000 500,000
$22,188,416 $4,107,382 $23,885,766
Liabilities and stockholders equity
Accounts payable$ 968,436 $ 292,435 $ 1,260,871
Accrued liabilities1,151,010 382,415 1,533,425
Long-term liabilities 3,000,000 1,022,500 4,022,500
Common stock1,030,450 204,500 [E]204,500 1,030,450
APIC7,575,200 255,625 [E]255,625 7,575,200
Retained earnings8,463,320 1,949,907 8,463,320
$22,188,416 $4,107,382 $23,885,766
42. continued
f. The fair value of the subsidiary ($3 million) is less than
the book value of the Equity Investment account ($3,110,032).
Goodwill is, therefore, potentially impaired. The second part of
the test computes the implied fair value of Goodwill as
follows:
Fair value of the subsidiary$3,000,000
Fair value of the net assets exclusive of Goodwill2,600,000
Implied fair value of goodwill$400,000
Book value of goodwill500,000
Goodwill impairment$(100,000)
The goodwill asset is found to be impaired.
Goodwill must be written down to its implied value of $400,000
with the following journal entry:
Equity income from S100,000
Equity investment100,000
(to write down the book value of goodwill)
Goodwill will now be reported on the consolidated balance sheet
at $400,000, and a loss on the write-down of goodwill will be
reported in the consolidated income statement. The goodwill asset
cannot be subsequently written up should the fair value of the
subsidiary improve.
42. continued
g. Our consolidated income statement and balance sheet,
reflecting the entry for Goodwill impairment, are as follows:
Consolidated Income Statement:Consolidated Balance Sheet:
Sales$9,682,500 Assets
Cost of goods sold6,603,300Cash$ 1,939,480
Gross profit3,079,200 Accounts receivable2,405,100
Less: Operating expenses1,829,800Inventory 3,480,735
Less: Loss on impairment of goodwill100,000PPE,
net15,360,451
Net income$1,149,400 Patent200,000
Goodwill400,000
Consolidated Statement of Retained Earnings:$23,785,766
BOY retained earnings$7,463,800
Net income1,149,400
Dividends(249,880)Accounts payable$ 1,260,871
Ending retained earnings$8,363,320 Accrued
liabilities1,533,425
Long-term liabilities 4,022,500
Common stock1,030,450
APIC7,575,200
Retained earnings8,363,320
$23,785,766
43. a.The balance at the beginning of the year of the Equity
Investment account equals the stockholders equity of the subsidiary
plus the unamortized balance of the customer list. Since the
customer list has been amortized for four years, the beginning
balance of the Equity Investment account is as follows:
BOY stockholders equity$ 822,000($637,050+$82,200+$102,750)
Customer list200,000($400,000 4 x $50,000)
Goodwill250,000
$1,272,000
b. Subsidiary net loss(147,960)
Depreciation / amortization(50,000)
(197,960)
c. Beginning Equity investment1,272,000
Equity Income(197,960)
Dividends0
Ending Equity Investment1,074,040
d. [C]Equity investment (P)197,960
Equity income (P)197,960
(to eliminate all changes in the Equity Investment account,
leaving only beginning balance in the account. Note: debit and
credit are reversed since the subsidiary reports a loss.)
[E]Common stock (S) @ BOY82,200
APIC (S) @ BOY102,750
Retained earnings (S) @ BOY637,050
Equity investment (P) @ BOY822,000
(to eliminate the portion of the investment account related to
the book value of the subsidiary's stockholders' equity @ BOY)
[A]Customer list (S) @ BOY200,000
Goodwill (S) @ BOY250,000
Equity investment (P) @ BOY450,000
(to assign the remaining Equity Investment account (i.e.,
unamortized BOY AAP) to appropriate asset & liability
accounts)
[D]EOY Operating expenses (amortization)50,000
Customer list50,000
(to record depreciation and amortization expense for the [A]
assets)
[I]No intercompany transactions
43. continued
e.Consolidation Entries
Parent SubsidiaryDrCrConsolidated
Income statement:
Sales$3,165,000 $1,233,000 $4,398,000
Cost of goods sold(2,278,800)(739,800)(3,018,600)
Gross profit886,200 493,200 1,379,400
Equity income(197,960)[C]197,960 0
Operating expenses(474,750)(641,160)[D]50,000 (1,165,910)
Net income$ 213,490 $ (147,960)$ 213,490
Statement of retained earnings:
BOY retained earnings$3,408,960 $637,050
[E]637,050$3,408,960
Net income213,490 (147,960)213,490
Dividends(42,698)0 (42,698)
Ending retained earnings$3,579,752 $489,090 $3,579,752
Balance sheet:
Assets
Cash$ 770,842 $ 23,016 $ 793,858
Accounts receivable810,240 286,056 1,096,296
Inventory 1,228,020 367,434 1,595,454
Equity investment1,074,040 [C]197,960 [E]822,000 0
[A]450,000
PPE, net4,641,156 679,794 5,320,950
Customer list[A]200,000[D]50,000 150,000
Goodwill[A]250,000250,000
$8,524,298 $1,356,300 $9,206,558
Liabilities and stockholders equity
Accounts payable$ 463,356 $ 117,546 $ 580,902
Accrued liabilities550,710 153,714 704,424
Long-term liabilities 0 411,000 411,000
Common stock470,640 82,200 [E]82,200470,640
APIC3,459,840 102,750 [E]102,7503,459,840
Retained earnings3,579,752 489,090 3,579,752
$8,524,298 $1,356,300 $9,206,558
43. continued
f. The entry to write-off the customer list is as follows:
Equity income from S150,000
Equity investment150,000
(to write down the book value of customer list)
In preparation of the consolidated financial statements, the
company will reclassify the $50,000 amortization of the customer
list (taken during the year) to the loss incurred on write-down of
the customer list. This means that the total loss on writing down
the customer list equals $200,000 for the year ($50,000 +
$150,000).
The fair value of the subsidiary ($800,000) is less than the
book value of the Equity investment account ($1,074,040). Goodwill
is, therefore, potentially impaired. The second part of the test
computes the implied fair value of goodwill as follows:
Fair value of the subsidiary$800,000
Fair value of the net assets after write-off of customer list
and exclusive of Goodwill750,000
Implied fair value of Goodwill$ 50,000
Book value of Goodwill250,000
Goodwill impairment$(200,000)
The Goodwill asset is found to be impaired.
Goodwill must be written down to its implied value of $50,000
with the following journal entry:
Equity income from S200,000
Equity investment200,000
(to write down the book value of Goodwill)
Goodwill will now be reported on the consolidated balance sheet
at $50,000, and a loss on the write-down of goodwill will be
reported in the consolidated income statement. The goodwill asset
cannot be subsequently written up should the fair value of the
subsidiary improve.
43. continued
g. Our consolidated income statement, statement of retained
earnings, and balance sheet, reflecting the entry for Goodwill
impairment, are as follows:Consolidated Income
statement:Consolidated Balance sheet:
Sales$4,398,000 Assets
Cost of goods sold3,018,600Cash$ 793,858
Gross profit1,379,400 Accounts receivable1,096,296
Operating expenses1,115,910Inventory 1,595,454
Write off of customer list200,000PPE, net5,320,950
Loss on impairment of goodwill200,000Goodwill50,000
Net loss$ (136,510)$8,856,558
Consolidated Statement of retained earnings:Accounts payable$
580,902
BOY retained earnings$3,408,960 Accrued liabilities704,424
Net loss(136,510)Long-term liabilities 411,000
Dividends(42,698)Common stock470,640
Ending retained earnings$3,229,752 APIC3,459,840
Retained earnings3,229,752
$8,856,558
44.Aa. The Equity Investment, using the equity method, would be
equal to the book value of the subsidiarys stockholders equity at
the beginning of the year plus the unamortized balance of the
Customer List at 1/1/13 (1 year has passed):
BOY Book value of subsidiarys Stockholders Equity$1,246,000
Unamortized balance of the Customer List135,000
BOY Equity investment (using equity method)$1,381,000
b. The [ADJ] consolidation journal entry increases the Equity
Investment from its current balance of $1,000,000 (the original
cost of the investment) to the $1,381,000 balance that the parent
would have reported for the Equity investment had it used the
equity method of accounting:
[ADJ]Equity investment381,000
Retained Earnings (parent)381,000
(to adjust the parents Retained Earnings to its proper balance
under equity method)
c. [C]Dividend income (P)39,249
Dividends (S)39,249
(to eliminate all changes in the Equity Investment account,
leaving only beginning balance in the account. Note: no equity
income since the parent uses the cost method.)
[E]Common stock (S) @ BOY124,600
APIC (S) @ BOY155,750
Retained earnings (S) @ BOY965,650
Equity investment (P) @ BOY1,246,000
(to eliminate the portion of the investment account related to
the book value of the subsidiary's stockholders' equity @ BOY)
[A]Customer list (S) @ BOY135,000
Equity investment (P) @ BOY135,000
(to assign the remaining Equity Investment account (i.e.,
unamortized BOY AAP) to appropriate asset & liability
accounts)
[D]EOY Operating expenses (amortization)15,000
Customer list15,000
(to record depreciation and amortization expense for the [A]
assets)
[I]No intercompany transactions
44A. continued
d. Consolidation Entries
Parent SubsidiaryDrCrConsolidated
Income statement:
Sales$6,860,000 $1,869,000 $8,729,000
Cost of goods sold(4,939,200)(1,121,400)(6,060,600)
Gross profit1,920,800 747,600 2,668,400
Operating expenses(1,029,000)(485,940)[D]15,000 (1,529,940)
Dividend income39,249 [C]39,249 0
Net income$ 931,049 $ 261,660 $1,138,460
Statement of retained earnings:
BOY retained earnings$2,587,942 $ 965,650 [E]965,650
[ADJ]381,000 $2,968,942
Net income931,049 261,660 1,138,460
Dividends(186,210)(39,249)[C]39,249 (186,210)
Ending retained earnings$3,332,781 $1,188,061 $3,921,192
Balance sheet:
Assets
Cash$ 949,931 $ 481,579 $ 1,431,510
Accounts receivable1,756,160 433,608 2,189,768
Inventory 2,661,680 556,962 3,218,642
Equity investment1,000,000 [ADJ]381,000 [E]1,246,000 0
[A]135,000
PPE, net7,315,504 1,030,442 8,345,946
Customer list[A]135,000 [D]15,000 120,000
$13,683,275 $2,502,591 $15,305,866
Liabilities and stockholders equity
Accounts payable$ 1,004,304 $ 178,178 $ 1,182,482
Accrued liabilities1,193,640 233,002 1,426,642
Long-term liabilities 7,000,000 623,000 7,623,000
Common stock373,800 124,600 [E]124,600 373,800
APIC778,750 155,750 [E]155,750 778,750
Retained earnings3,332,781 1,188,061 3,921,192
$13,683,275 $2,502,591 $15,305,866
44A. continued
e. GAAP requires the use of the equity method for all financial
statements that are issued to outside parties. Although the parent
can use another method to account for its equity investment for
internal reporting purposes, it cannot use that method when
reporting to outside parties. Consequently, we must adjust the
consolidated financial statements to equal those that would have
been reported had the parent used the equity method all along. The
[ADJ] consolidation journal entry adjusts the parents Retained
Earnings to the balance that the parent would have reported had it
used the equity method. The consolidated financial statements,
therefore, include the parents Retained Earnings that are
appropriately stated to reflect the equity method of
accounting.
f. Had the parent used a hybrid equity method to accrue its
proportionate share of the subsidiarys net income, but not the
amortization of the customer list, the Equity investment account
would be overstated by the amortization expense for the first year
of $15,000. The [ADJ] consolidation entry, therefore, reduces the
Equity investment account and Retained Earnings as follows:
[ADJ]Retained earnings (parent)15,000
Equity investment15,000
(to adjust the parents Retained Earnings to its proper balance
under equity method)
45.Aa. The Equity Investment, using the equity method, would be
equal to the book value of the subsidiarys Stockholders Equity at
the beginning of the year plus the unamortized balance of the
patent:
BOY Book value of subsidiarys stockholders equity$430,000
Unamortized balance of the patent240,000
Equity investment (using equity method)$670,000
b. The [ADJ] consolidation journal entry increases the Equity
Investment from its current balance of $590,000 (the original cost
of the investment) to the $670,000 balance that the parent would
have reported for the Equity Investment had it used the equity
method of accounting:
[ADJ]Equity investment80,000
Retained earnings (parent)80,000
(to adjust the parents Retained Earnings to its proper balance
under equity method)
45A. continued
c.
[C]Dividend income (P)13,545
Dividends (S)13,545
(to eliminate all changes in the Equity Investment account,
leaving only beginning balance in the account. Note: no Equity
Income since the parent uses the cost method.)
[E]Common stock (S) @ BOY43,000
APIC (S) @ BOY53,750
Retained earnings (S) @ BOY333,250
Equity investment (P) @ BOY430,000
(to eliminate the portion of the investment account related to
the book value of the subsidiary's stockholders' equity @ BOY)
[A]Patent (S) @ BOY240,000
Equity investment (P) @ BOY240,000
(to assign the remaining Equity Investment account (i.e.,
unamortized BOY AAP) to appropriate asset & liability
accounts)
[D]EOY Operating expenses (amortization)30,000
Patent30,000
(to record depreciation and amortization expense for the [A]
assets)
[I]No intercompany transactions
45A. continued
d.Consolidation Entries
Parent SubsidiaryDrCrConsolidated
Income statement:
Sales$4,290,000 $645,000 $4,935,000
Cost of goods sold(3,088,800)(387,000)(3,475,800)
Gross profit1,201,200 258,000 1,459,200
Operating expenses(643,500)(167,700)[D]30,000(841,200)
Dividend income13,545 [C]13,5450
Net income $ 571,245 $ 90,300 $ 618,000
Statement of retained earnings:
BOY retained earnings$ 893,110 $333,250 [E]333,250[ADJ]80,000$
973,110
Net income571,245 90,300 618,000
Dividends(114,249)(13,545)[C]13,545(114,249)
Ending retained earnings$1,350,106 $410,005 $1,476,861
Balance sheet:
Assets
Cash$ 694,756 $166,195 $ 860,951
Accounts receivable1,098,240 149,640 1,247,880
Inventory 1,664,520 192,210 1,856,730
Equity investment590,000 [ADJ]80,000[E]430,000 0
[A]240,000
PPE, net4,574,856 355,610 4,930,466
Patent[A]240,000[D]30,000 210,000
$8,622,372 $863,655 $9,106,027
Liabilities and stockholders equity
Accounts payable$ 628,056 $ 61,490 $ 689,546
Accrued liabilities746,460 80,410 826,870
Long-term liabilities 5,500,000 215,000 5,715,000
Common stock129,000 43,000 [E]43,000129,000
APIC268,750 53,750 [E]53,750268,750
Retained earnings1,350,106 410,005 1,476,861
$8,622,372 $863,655 $9,106,027
45A. continued
e. GAAP requires the use of the equity method for all financial
statements that are issued to outside parties. Although the parent
can use another method to account for its Equity Investment for
internal reporting purposes, it cannot use that method when
reporting to outside parties. Consequently, we must adjust the
consolidated financial statements to equal those that would have
been reported had the parent used the equity method all along. The
[ADJ] consolidation journal entry adjusts the parents Retained
Earnings to the balance that the parent would have reported had it
used the equity method. The consolidated financial statements,
therefore, include the parents Retained Earnings that are
appropriately stated to reflect the equity method of
accounting.
f. Had the parent used a hybrid equity method to accrue its
proportionate share of the subsidiarys net income, but not the
amortization of the patent, the Equity Investment account would be
overstated by the accumulated amortization expense through the
first two years of $60,000 ($30,000 x 2). The [ADJ] consolidation
entry, therefore, reduces the Equity Investment account and
Retained Earnings as follows:
[ADJ]Retained earnings (parent)60,000
Equity investment60,000
(to adjust the parents Retained Earnings to its proper balance
under equity method)
46.Ca.[C]Equity income155,610
Dividends23,342
Equity investment132,268
(to eliminate equity income and intercompany dividends)
[E]Common stock74,100
APIC92,625
Retained earnings574,275
Equity investment741,000
(to eliminate subsidiary stockholders' equity)
46.C continued
b. Consolidation Entries
Parent SubsidiaryDrCrConsolidated
Income statement:
Sales$8,520,000 $1,111,500 $9,631,500
Cost of goods sold(5,964,000)(666,900)(6,630,900)
Gross profit2,556,000 444,600 3,000,600
Equity income155,610 [C]155,610 0
Operating expenses(1,618,800)(288,990)(1,907,790)
Net income$1,092,810 $ 155,610 $1,092,810
Statement of retained earnings:
BOY retained earnings$4,280,448 $574,275 [E]574,275
$4,280,448
Net income1,092,810 155,610 1,092,810
Dividends(218,562)(23,342)[C]23,342 (218,562)
Ending retained earnings$5,154,696 $706,543 $5,154,696
Balance sheet:
Assets
Cash$ 943,648 $ 281,034 $ 1,224,682
Accounts receivable1,090,560 257,868 1,348,428
Inventory 1,652,880 331,227 1,984,107
Equity investment873,268 [C]132,268 0
[E]741,000
PPE, net6,246,864 761,007 7,007,871
$10,807,220 $1,631,136 $11,565,088
Liabilities and stockholders equity
Current Liabilities$ 1,224,324 $ 257,868 $ 1,482,192
Long-term liabilities 2,000,000 500,000 2,500,000
Common stock1,393,020 74,100 [E]74,100 1,393,020
APIC1,035,180 92,625 [E]92,625 1,035,180
Retained earnings5,154,696 706,543 5,154,696
$10,807,220 $1,631,136 $11,565,088
47.C a.[C]Equity income261,870
Dividends39,281
Equity investment222,589
(to eliminate equity income and intercompany dividends)
[E]Common stock124,700
APIC155,875
Retained earnings966,425
Equity investment1,247,000
(to eliminate subsidiary Stockholders' Equity)
b. Consolidation Entries
Parent SubsidiaryDrCrConsolidated
Income statement:
Sales$7,330,000 $1,870,500 $9,200,500
Cost of goods sold(5,131,000)(1,122,300)(6,253,300)
Gross profit2,199,000 748,200 2,947,200
Equity income261,870 [C]261,870 0
Operating expenses(1,392,700)(486,330)(1,879,030)
Net income$1,068,170 $ 261,870 $1,068,170
Statement of retained earnings:
BOY retained earnings$3,604,030 $ 966,425 [E]966,425
$3,604,030
Net income1,068,170 261,870 1,068,170
Dividends(213,634)(39,281)[C]39,281 (213,634)
Ending retained earnings$4,458,566 $1,189,014 $4,458,566
Balance sheet:
Assets
Cash$ 396,732 $ 131,511 $ 528,243
Accounts receivable938,240 433,956 1,372,196
Inventory 1,422,020 557,409 1,979,429
Equity investment1,469,589 [C]222,589 0
[E]1,247,000
PPE, net5,374,356 1,280,669 6,655,025
$9,600,937$2,403,545 $10,534,893
Liabilities and stockholders equity
Current Liabilities$1,053,321 $ 433,956 $ 1,487,277
Long-term liabilities 2,000,000 500,000 2,500,000
Common stock1,198,455 124,700 [E]124,700 1,198,455
APIC890,595 155,875 [E]155,875 890,595
Retained earnings4,458,566 1,189,014 4,458,566
$9,600,937 $2,403,545 $10,534,893
Cambridge Business Publishers, 20143-18Advanced Accounting by
Halsey & Hopkins, 2nd EditionCambridge Business Publishers,
2014Solutions Manual, Chapter 33-43