Solutions to Homework Assignment - Chapter 3

CHAPTER 3

CONSOLIDATIONS—SUBSEQUENT TO THE DATE OF ACQUISITION

Answers to Discussion Questions

How Does a Company Really Decide which Investment Method to Apply?

Students can come up with dozens of factors that Pilgrim should consider in choosing its internal method of accounting for its subsidiary, Crestwood Corporation. The following is only a partial list of possible points to consider.

Use of the information. If Pilgrim does not monitor its subsidiary’s income levels closely, applying the equity method may be not be fruitful. A company must plan to use the data before the task of accumulation becomes worthwhile. For example, Crestwood may use the information for evaluating the performance of the subsidiary’s managers.

Size of the subsidiary. If the subsidiary is large in comparison to Pilgrim, the effort required of the equity method may be important. Income levels would probably be significant. However, if the subsidiary is actually quite small in relation to the parent, the impact might not be material enough to warrant the extra effort.

Size of dividend payments. If Crestwood distributes most of its income as dividends, that figure will approximate equity income. Little additional information would be accrued by applying the equity method. In contrast, if dividends are small or not paid on a regular basis, a Dividend Income balance might vastly understate the profits to be recognized by the business combination.

Amount of excess amortizations. If Pilgrim has paid a significant amount in excess of book value, its annual amortization charges are high, and use of the equity method might be preferred to show the amortization effect each reporting period. In this case, waiting until year end and recording all of the expense at one time through a worksheet entry might not be the best way to reflect the impact of the expense.

Amount of intra-entity transactions. As with amortization, the volume of transfers can be an important element in deciding which accounting method to use. If few intra-entity sales are made, monitoring the subsidiary through the application of the equity method is less essential. Conversely, if the amount of these transactions IS significant, the added data can be helpful to company administrators evaluating operations.

Sophistication of accounting systems. If Pilgrim and Crestwood both have advanced accounting systems, application of the equity method may be relatively easy. Unfortunately, if these systems are primitive, the cost and effort necessary to apply the equity method may outweigh any potential benefits.

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The timeliness and accuracy of income figures generated by Crestwood. If the subsidiary reports operating results on a regular basis (such as weekly or monthly) and these figures prove to be reliable, equity totals recorded by Pilgrim may serve as valuable information to the parent. However, if Crestwood's reports are slow and often require later adjustment, Pilgrim's use of the equity method will provide only questionable results.

Answers to Questions

1. a. CCES Corp., for its own recordkeeping, may apply the equity method to its Investment in Schmaling. Under this approach, the parent's records parallel the activities of the subsidiary. The parent accrues income as it is earned by the subsidiary. Dividends paid by Schmaling reduce its book value; therefore, CCES reduces the investment account. In addition, any excess amortization expense associated CCES's acquisition-date fair value allocations is recognized through a periodic adjustment. By applying the equity method, both the parent’s income and investment balances accurately reflect consolidated totals. The equity method is especially helpful in monitoring the income of the business combination. This method can be, however, rather difficult to apply and a time consuming process.

b. The initial value method. The initial value method can also be utilized by CCES Corporation. Any dividends received are recognized as income but no other investment entries are made. Thus, the initial value method is easy to apply. However, the resulting account balances of the parent may not provide a reasonable representation of the totals that result from consolidating the two companies.

c. The partial equity method combines the advantages of the previous two techniques. Income is accrued as earned by the subsidiary as under the equity method. Similarly, dividends reduce the investment account. However, no other entries are recorded; more specifically, amortization is not recognized by the parent. The method is, therefore, easier to apply than the equity method but the subsidiary's individual totals will still frequently approximate consolidated balances.

2. a. The consolidated total for equipment is made up of the sum of Maguire’s book value, Williams’ book value, and any unamortized excess acquisition-date fair value over book value attributable to Williams’ equipment.

b. Although an Investment in Williams account is appropriately maintained by the parent, from a consolidation perspective the balance is intra-entity in nature. Thus, the entire amount is eliminated in arriving at consolidated financial statements.

c. Only dividends paid to outside parties are included in consolidated statements. Because Maguire owns 100 percent of Williams, all of the subsidiary's dividends are intra-entity. Consequently, only the dividends paid by the parent company will be reported in the financial statements for this business combination.

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3-2 Solutions Manual

d. Any acquisition-date goodwill must still be reported for consolidation purposes. Reductions to goodwill are made if goodwill is determined to be impaired.

e. Unless intra-entity revenues have been recorded, consolidation is achieved in subsequent periods by adding the two book values together.

f. Consolidated expenses are determined by combining the parent's and subsidiary amounts and then including any amortization expense associated with the acquisition-date fair value allocations. As will be discussed in detail in Chapter Five, intra-entity expenses can also be present which require elimination in arriving at consolidated figures.

g. Only the parent’s common stock outstanding is included in consolidated totals.

h. The net income for a business combination is calculated as the difference between consolidated revenues and consolidated expenses.

3. Under the equity method, the parent accrues subsidiary earnings and amortization expense (from allocation of acquisition-date fair values) in the same manner as in the consolidation process. The equity method parallels consolidation. Thus, the parent’s net income and retained earnings each year will equal the consolidated totals.

4. In the consolidation process, excess amortizations must be recorded annually for any portion of the purchase price that is allocated to specific accounts (other than land or to goodwill opr other indefinite-lived assets). Although this expense can be simulated in total on the parent's books by an equity method entry, the actual amortization of each allocated fair value adjustment is appropriate for consolidation. Hence, the effect of the parent's equity method amortization entry is removed as part of Entry I so that the amortization of specific accounts (e.g., depreciation) can be recorded (in consolidation Entry E).

5. When a parent applies the initial value method, no accrual is recorded to reflect the subsidiary's change in book value subsequent to acquisition. Recognition of excess amortizations relating to the acquisition is also omitted by the parent. The partial equity method, in contrast, records the subsidiary’s book value increases and decreases but not amortizations. Consequently, for both of these methods, a technique must be employed in the consolidation process to record the omitted figures. Entry *C simply brings the parent's records (more specifically, the beginning retained earnings balance and the investment account) up-to-date as of the first day of the current year. If the acquirer applies the initial value method, changes in the subsidiary's book value in previous years are recognized on the worksheet along with the appropriate amount of amortization expense. For the partial equity method, only the amortization relating to these prior years needs to be recognized.

No similar entry to *C is needed when the parent applies the equity method. The parent will record changes in the subsidiary's book value as well as excess amortization each



year. Thus, under the equity method, the parent's investment and beginning retained earnings balances are both correctly established and need no further adjustment.

6. Lambert's loan payable and the receivable held by Jenkins are intra-entity accounts. The consolidation process offsets these reciprocal balances. The $100,000 is neither a debt to nor a receivable from an unrelated (or outside) party and is, therefore, not reported in consolidated financial statements. Any interest income/expense recognized on this loan is also intra-entity in nature and must likewise be eliminated.

7. Because Benns applies the equity method, the $920,000 is composed of four balances:

a. The original consideration transferred by the parent;

b. The annual accruals made by Benns to recognize subsidiary income as it is earned

c. The reductions that are created by the subsidiary's payment of dividends

d. The periodic amortization recognized by Benns in connection with the identified acquisition-date fair value allocations.

8. The $100,000 attributed to goodwill is reported at its original amount unless a portion of goodwill is impaired or a unit of the business where goodwill resides is sold.

9. A parent should consider recognizing an impairment loss for goodwill associated with a subsidiary when, at the reporting unit level, the fair value is less than its carrying amount. A firm has the option to perform a qualitative assessment of whether a reporting unit’s fair value is more likely than not to be less than its carrying value before proceeding to the quantitative 2-step goodwill impairment testing procedure. Goodwill is reduced when its carrying value is less than its implied fair value. To compute an implied fair value for goodwill, the fair values of the reporting unit’s identifiable net assets are subtracted from its total fair value. The impairment is recognized as a loss from continuing operations.

10. The acquisition-date fair value of the contingent payment is part of the consideration transferred by Reimers to acquire Rollins and thus is part of the overall fair value assigned to the acquisition. If the contingency is a liability (to be settled in cash or other assets) then the liability is adjusted to fair value through time. If the contingency is a component of equity (e.g., to be settled by the parent issuing equity shares), then the equity instrument is not adjusted to fair value over time.

11. At present, the Securities and Exchange Commission requires the use of push-down accounting for the separate financial statements of a subsidiary where no substantial outside ownership exists. Thus, if Company A owns all of Company B, the push-down method of accounting is appropriate for the separately issued statements of Company B. The SEC normally requires push-down accounting where 95 percent of a subsidiary is acquired and the company has no outstanding public debt or preferred stock.

Push-down accounting may be required if 80-95 percent of the outstanding voting stock is acquired. Push-down accounting uses the consideration transferred as the valuation



basis for the subsidiary in consolidated reports. For example, if a piece of land costs Company B $10,000 but Company A allocates a $13,000 fair value to the land in acquiring Company B, the land has a basis to the current owners of B of $13,000. If B's financial records had been united with A at the time of the acquisition, the land would have been reported at $13,000. Thus, keeping the $10,000 figure simply because separate incorporation is maintained is viewed, by proponents of push-down accounting, as unjustified.

12. When push-down accounting is applied, the subsidiary adjusts the book value of its assets and liabilities based on the acquisition-date fair value allocations. The subsidiary then recognizes periodic amortization expense on those allocations with definite lives. Therefore, the subsidiary’s recorded income equals its impact on consolidated earnings.

The parent uses no special procedures when push-down accounting is being applied. However, if the equity method is in use, amortization need not be recognized by the parent since that expense is included in the figure reported by the subsidiary.



Answers to Problems

1. A

2. B

3. A

4. D Willkom’s equipment book value—12/31/13....................... $210,000

Szabo’s equipment book value—12/31/13.......................... 140,000

Original purchase price allocation to Szabo's equipment

($300,000 – $200,000)............................................................ 100,000

Amortization of allocation

($100,000 ÷ 10 years for 3 years).................................... (30,000)

Consolidated equipment...................................................... $420,000

5. A

6. B

7. D

8. B

9. B Phoenix revenues $498,000

Phoenix expenses 350,000

Net income before Sedona effect 148,000

Equity income from Sedona 55,000



Consolidated net income $203,000

-or-

Consolidated revenues $783,000

Consolidated expenses (includes $35K amortization) 580,000

Consolidated net income $203,000

10. A (same as Phoenix because of equity method use).

11. C Consideration transferred at fair value $600,000

Book value acquired 420,000

Excess fair over book value 180,000

to equipment 80,000

to customer list (4 year life) $100,000

Three years since acquisition, ¼ of acquisition-date value ($25,000)remains.

12.B

13.C

14.C The $60,000 excess acquisition-date fair value allocation to equipment is "pushed-down" to the subsidiary and increases its balance to $390,000. The consolidated balance is $810,000 ($420,000 plus $390,000).



15. (35 Minutes) (Determine consolidated retained earnings when parent uses various accounting methods. Determine Entry *C for each of these methods)

a. CONSOLIDATED RETAINED EARNINGS--EQUITY METHOD

Herbert (parent) balance—1/1/12 ................................... $400,000

Herbert income—2012 .................................................... 40,000

Herbert dividends—2012 (subsidiary dividends are

intercompany and, thus, eliminated) ....................... (10,000)

Rambis income—2012 (not included in parent's income) 20,000

Amortization—2012 ........................................................ (12,000)

Herbert income—2013 .................................................... 50,000

Herbert dividends—2013................................................. (10,000)

Rambis income—2013 .................................................... 30,000

Amortization—2013 ....................................................... (12,000)

Consolidated retained earnings, 12/31/13..................... $496,000

PARTIAL EQUITY METHOD AND INITIAL VALUE METHOD

Consolidated retained earnings are the same regardless of the method in use: the beginning balance plus the income less the dividends of the parent plus the income of the subsidiary less amortization expense. Thus, December 31, 2013 consolidated retained earnings are $496,000 as computed above.

b. Investment in Rambis—equity method

Rambis fair value 1/1/12............................................................. $574,000



Rambis income 2012.................................................................. 20,000

Rambis dividends 2012.............................................................. (5,000)

Herbert’s 2012 excess fair over book value amortization ...... (12,000)

Investment account balance 1/1/13........................................... $577,000

Investment in Rambis—partial equity method


Rambis income 2012.................................................................. 20,000

Rambis dividends 2012.............................................................. (5,000)


Investment in Rambis—Initial value method





15. (continued)

c. ENTRY *C

EQUITY METHOD

No entry is needed to convert the past figures to the equity method since that method has already been applied.

PARTIAL EQUITY METHOD

Amortization for the prior years (only 2012 in this case) has not been recorded and must be brought into the consolidation through worksheet entry *C:

ENTRY *C

Retained Earnings, 1/1/13 (Parent) ..................... 12,000

Investment in Rambis ..................................... 12,000

(To record 2012 amortization in consolidated figures. Expense was

omitted because of application of partial equity method.)

INITIAL VALUE METHOD

Amortization for the prior years (only 2012 in this case) has not been recorded and must be brought into the consolidation through worksheet entry *C. In addition, only dividend income has been recorded by the parent ($5,000 in 2012). In this prior year, Rambis reported net income of $20,000. Thus, the parent has not recorded the $15,000 income in excess of dividends. That amount must also be included in the consolidation through entry *C:



ENTRY *C

Investment in Rambis .......................................... 3,000

Retained Earnings, 1/1/13 (Parent) ................ 3,000

(To record 2012 unrecognized subsidiary earnings as part of the parent’s retained earnings. $15,000 income of subsidiary was not recorded by parent (income in excess of dividends). Amortization expense of $12,000 was not recorded under the initial value method.

Note that *C adjustments bring the parent’s January 1, 2013 Retained Earnings balance equal to that of the equity method.



16. (30 Minutes) (A variety of questions on equity method, initial value method, and partial equity method.)

a. An allocation of the acquisition price (based on the fair value of the shares Issued) must be made first.

Acquisition fair value (consideration paid by Haynes) $135,000

Book value equivalency ................................................. (100,000)

Excess of Turner fair value over book value ................ $ 35,000

Excess fair value assigned to specific Annual excess

accounts based on fair value Life amortizations

Equipment ......................... $5,000 5 yrs. $1,000

Customer List .......................30,000 10 yrs. 3,000

$4,000

Acquisition fair value....................................................... $135,000

2012 Income accrual ....................................................... 110,000

2012 Dividends paid by Turner ...................................... (50,000)

2012 Amortizations (above) ........................................... (4,000)

2013 Income accrual ....................................................... 130,000

2013 Dividends paid by Turner ...................................... (40,000)

2013 Amortizations ......................................................... (4,000)

Investment in Turner account balance ......................... $277,000



b. Net income of Haynes .................................................... $240,000

Net Income of Turner ...................................................... 130,000

Depreciation expense...................................................... (1,000)

Amortization expense...................................................... (3,000)

Consolidated net income 2013 ................................. $366,000

c. Equipment balance Haynes ........................................... $500,000

Equipment balance Turner ............................................. 300,000

Allocation based on fair value (above) ......................... 5,000

Depreciation for 2012-2013 ............................................ (2,000)

Consolidated equipment—December 31, 2013............. $803,000

Parent's choice of an investment method has no impact on consolidated totals.



16. (continued)

d. If the initial value method was applied during 2012, the parent would have recorded dividend income of $50,000 rather than $110,000 (as equity income). Net income is, therefore, understated by $60,000. In addition, amortization expense of $4,000 was not recorded. Thus, the January 1, 2013, retained earnings is understated by $56,000 ($60,000 – $4,000). An Entry *C is necessary on the worksheet to correct this equity figure:

Investment in Turner ............................................ 56,000

Retained Earnings, 1/1/13 (Haynes) .............. 56,000

If the partial equity method was applied during 2012, the parent would have failed to record amortization expense of $4,000. Retained earnings are overstated by $4,000 and are corrected through Entry *C:

Retained Earnings, 1/1/13 (Haynes) .................... 4,000

Investment in Turner ...................................... 4,000

If the equity method was applied during 2012, the parent's retained earnings are the same as the consolidated figure so that no adjustment is necessary.



17. (20 minutes) (Record a merger combination with subsequent testing for goodwill impairment).

a. In accounting for the combination, the total fair value of Beltran (consideration transferred) is allocated to each identifiable asset acquired and liability assumed with any remaining excess as goodwill.

Cash paid $450,000

Fair value of shares issued 1,248,000

Fair value consideration transferred $1,698,000

Consideration transferred (above) $1,698,000

Fair value of net assets acquired and

liabilities assumed 1,298,000

Goodwill recognized in the combination $ 400,000

Entry by Francisco to record assets acquired and liabilities assumed in the combination with Beltran:

Cash 75,000

Receivables 193,000

Inventory 281,000

Patents 525,000

Customer relationships 500,000

Equipment 295,000

Goodwill 400,000



Accounts payable 121,000

Long-term liabilities 450,000

Cash 450,000

Common stock (Francisco Co., par value) 104,000

Additional paid-in capital 1,144,000

b. Step one in quantitative goodwill impairment test:

Fair value of reporting unit as a whole 1,425,000

Book value of reporting unit's net assets 1,585,000

Because the total fair value of the reporting unit is less than its carrying value, a potential goodwill impairment loss exists, step two is performed:

Fair value of reporting unit as a whole $1,425,000

Fair values of reporting unit's net assets (excluding goodwill) 1,325,000

Implied fair value of goodwill 100,000

Book value of goodwill 400,000

Goodwill impairment loss $ 300,000



18. (20 minutes) (Goodwill impairment testing.)

a. Goodwill Impairment

Step 1

Fair value of reporting unit = $650

Carrying value of reporting unit = 780

Because fair value < carrying value, there is a potential goodwill impairment loss.

Step 2

Fair value of reporting unit $650

Fair value of net assets excluding goodwill

Tangible assets $110

Recognized intangibles 230

Unrecognized intangibles 200 540

Implied value of goodwill 110

Carrying value of goodwill 500

Goodwill impairment loss $390

b.

Tangible assets, net $80

Goodwill 110

Customer list -0-

Patent -0-



19. (30 minutes) (Goodwill impairment and intangible assets.)

Part a: Goodwill Impairment Test—Step 1

Total fair Carrying Potential goodwill

value value impairment?

Sand Dollar $510,000 < $530,000 yes

Salty Dog 580,000 < 610,000 yes

Baytowne 560,000 > 280,000 no

Part b: Goodwill Impairment Test—Step 2 (Sand Dollar and Salty Dog only)

Sand Dollar—total fair value $510,000

Fair values of identifiable net assets

Tangible assets $190,000

Trademark 150,000

Customer list 100,000

Liabilities (30,000 ) 410,000

Implied value of goodwill 100,000

Carrying value of goodwill 120,000

Impairment loss $20,000

Salty Dog—total fair value $580,000

Fair values of identifiable net assets

Tangible assets $200,000



Unpatented technology 125,000

Licenses 100,000 425,000

Implied value of goodwill 155,000

Carrying value of goodwill 150,000

No impairment—implied value > carry value - 0 -

Part c:

No changes in tangible assets or identifiable intangibles are reported based on goodwill impairment testing. The sole purpose of the valuation exercise is to estimate an implied value for goodwill. Destin will report a goodwill impairment loss of $20,000, which will reduce the amount of goodwill allocated to Sand Dollar.

However, because the fair value of Sand Dollar’s trademarks is less than its carrying amount, the account should be subjected to a separate impairment testing procedure to see if the carrying value is “recoverable” in future estimated cash flows.



20. (30 Minutes) (Consolidation entries for two years. Parent uses equity method.)

Fair Value Allocation and Annual Amortization:

Acquisition fair value (consideration transferred) . $490,000

Book value (assets minus

liabilities or total stockholders'

equity) ................................................................... (400,000)

Excess fair value over book value ........................... $ 90,000

Excess fair value assigned to specific

accounts based on individual fair values Annual excess

Life amortizations

Land ..................................... $10,000 -- --

Buildings ........................... 40,000 4 yrs. $10,000

Equipment ........................... (20,000) 5 yrs. (4,000)

Total assigned to specific

accounts ...................... 30,000

Goodwill .............................. 60,000 Indefinite -0-

Total ..................................... $90,000 $6,000

Consolidation Entries as of December 31, 2012

Entry S



Common Stock—Abernethy................................. 250,000

Additional Paid-in Capital—Abernethy.............. 50,000

Retained Earnings—1/1/12 .................................. 100,000

Investment in Abernethy ................................ 400,000

(To eliminate stockholders' equity accounts of subsidiary)

Entry A

Land ....................................................................... 10,000

Buildings ............................................................... 40,000

Goodwill ................................................................ 60,000

Equipment ....................................................... 20,000


(To recognize allocations attributed to fair value of specific accounts at acquisition date with residual fair value recognized as goodwill).

Entry I

Equity in Earnings of Subsidiary......................... 74,000


(To eliminate $80,000 income accrual for 2012 less $6,000 amortization

recorded by parent using equity method)



20. (continued)

Entry D

Investment in Abernethy ..................................... 10,000

Dividend Paid .................................................. 10,000

(To eliminate intercompany dividend transfers)

Entry E

Depreciation Expense........................................... 6,000

Equipment.............................................................. 4,000

Buildings.......................................................... 10,000

(To record current year amortization expense)


Entry S

Common Stock—Abernethy ................................ 250,000

Additional Paid-in Capital—Abernethy .............. 50,000

Retained Earnings—1/1/13................................... 170,000


(To eliminate beginning stockholders' equity of subsidiary—the Retained Earnings account has been adjusted for 2012 income and dividends. Entry *C is not needed because equity method was applied.)

Entry A

Land ....................................................................... 10,000McGraw-Hill/ Irwin © The McGraw-Hill Companies, Inc., 2013


Buildings ............................................................... 30,000

Goodwill ................................................................ 60,000

Equipment ....................................................... 16,000


(To recognize allocations relating to investment—balances shown here are as of beginning of current year [original allocation less excess amortizations for the prior period])

Entry I



(To eliminate $110,000 income accrual less $6,000 amortization recorded by parent during 2013 using equity method)

Entry D


Dividend Paid .................................................. 30,000


Entry E

Same as Entry E for 2012

21. (35 Minutes) (Consolidation entries for two years. Parent uses initial value method.)

Purchase price allocation and annual excess fair value amortizations:



Acquisition date value (consideration paid) ...... $500,000

Book value ............................................................ (400,000)

Excess price paid over book value ..................... $100,000

Excess price paid assigned to specific Annual excess

accounts based on fair values Life amortizations

Equipment $ 20,000 5 yrs. $4,000

Long-term liabilities 30,000 4 yrs. 7,500

Goodwill 50,000 Indefinite -0-

Total $100,000 $11,500

Consolidation entries as of December 31, 2012

Entry S

Common Stock—Abernethy .............................. 250,000


Retained Earnings—1/1/12 ................................. 100,000

Investment in Abernethy................................ 400,000


Entry A

Equipment ........................................................... 20,000

Long-term Liabilities ........................................... 30,000

Goodwill ............................................................... 50,000



Investment in Abernethy ............................... 100,000

(To recognize allocations determined above in connection with acquisition-date fair values)

Entry I

Dividend Income ................................................. 10,000

Dividends Paid ............................................... 10,000

(To eliminate intercompany dividend payments recorded by parent as income)

Entry E

Depreciation Expense ........................................ 4,000

Interest Expense.................................................. 7,500

Equipment....................................................... 4,000

Long-term Liabilities...................................... 7,500

(To record 2012 amortization expense)



21. (continued)


Entry *C

Investment in Abernethy .................................... 58,500

Retained Earnings—1/1/13 (Chapman) ........ 58,500

(To convert parent company figures to equity method by recognizing subsidiary's increase in book value for prior year [$80,000 net income less $10,000 dividend payment] and excess amortizations for that period [$11,500])

Entry S

Common Stock—Abernethy .............................. 250,000


Retained Earnings—1/1/13 ................................. 170,000


(To eliminate beginning of year stockholders' equity accounts of subsidiary. The retained earnings balance has been adjusted for 2012 income and dividends)

Entry A

Equipment ........................................................... 16,000

Long-term Liabilities ........................................... 22,500

Goodwill ............................................................... 50,000


(To recognize allocations relating to investment—balances shown here are as of the beginning of the current year [original allocation less excess amortizations for the prior period])



Entry I

Dividend income ................................................. 30,000

Dividends Paid ......................................... 30,000

(To eliminate intercompany dividend payments recorded by parent as income)

Entry E

Same as Entry E for 2012



22. (20 Minutes) (Consolidation entries for two years. Parent uses partial equity method.)

Fair value allocation and annual excess amortizations:

Abernethy fair value (consideration paid) ............... $520,000

Book value ................................................................. (400,000)

Excess fair value over book value (all goodwill) .... $120,000

Life assigned to goodwill .......................................... Indefinite

Annual excess amortizations ................................... -0-


Entry S

Common Stock—Abernethy ................................ 250,000

Additional Paid-in Capital—Abernethy .............. 50,000

Retained Earnings—Abernethy—1/1/12 ............. 100,000



Entry A

Goodwill ................................................................ 120,000


(To recognize goodwill portion of the original acquisition fair value)

Entry IMcGraw-Hill/ Irwin © The McGraw-Hill Companies, Inc., 2013




(To eliminate intercompany income accrual for the current year based on the parent's usage of the partial equity method)

Entry D


Dividend Paid .................................................. 10,000


Entry E—Not needed. Goodwill is not amortized.


Entry *C—Not needed. Goodwill is not amortized.

Entry S

Common Stock—Abernethy................................. 250,000

Additional Paid-in Capital—Abernethy............... 50,000

Retained Earnings —Abernethy—1/1/13 ............ 170,000




22. (continued)

(To eliminate beginning of year stockholders' equity accounts of subsidiary—the retained earnings balance has been adjusted for 2012 income and dividends.)

Entry A

Goodwill ................................................................ 120,000


(To recognize original goodwill balance.)

Entry I



(To eliminate Intercompany Income accrual for the current year.)

Entry D


Dividends Paid ................................................ 30,000

(To eliminate Intercompany dividend transfers.)

Equity E—not needed

23. (45 Minutes) (Variety of questions about the three methods of recording an Investment in a subsidiary for internal reporting purposes.)

a. Purchase Price Allocation and Annual Amortization:McGraw-Hill/ Irwin © The McGraw-Hill Companies, Inc., 2013


Clay’s acquisition-date fair value ............. $510,000

Book value (assets minus liabilities,

or stockholders' equity) ....................... 450,000

Fair value in excess of book value .......... 60,000 Annual excess

Allocation to equipment based on Life amortizations

difference between fair and book value . . 50,000 5 yrs. $10,000

Goodwill ..................................................... $10,000 indefinite -0-

Total ........................................................... $10,000

Investment in Clay—December 31, 2013:

Consideration transferred for Clay ................................ $510,000

2012:

Equity accrual (based on Clay's Income) ................ 55,000

Excess amortizations (above) .................................. (10,000)

Dividends received .................................................... (5,000)

2013:

Equity accrual (based on Clay's Income)................. 60,000

Excess amortizations ................................................ (10,000)

Dividends received .................................................... (8,000 )

Total ................................................................................. $592,000



23. (continued)

INITIAL VALUE METHOD

Investment Income—2013:

Dividend income ............................................................ $8,000

Investment in Clay—December 31, 2013:

Consideration transferred for Clay ................................ $510,000

b. Consolidated balances are not affected by the parent’s investment accounting method. Thus, consolidated expenses ($480,000 or $290,000 + $180,000 + amortizations of $10,000) are the same regardless of the internal accounting method applied by Adams.

c. Consolidated balances are not affected by the parent’s investment accounting method. Thus, consolidated equipment ($970,000 or $520,000 + $420,000 + allocation of $50,000 – two years of excess depreciation totaling $20,000) is the same regardless of the internal accounting method applied by Adams.

d. Adams retained earnings—Equity method

Adams retained earnings—1/1/12........................................ $860,000

Adams income 2012.............................................................. 125,000

2012 equity in earnings of Clay (above).............................. 45,000

Adams retained earnings—1/1/13........................................ $1,030,000

Adams retained earnings—Initial value methodMcGraw-Hill/ Irwin © The McGraw-Hill Companies, Inc., 2013



Adams income 2012.............................................................. 125,000

2012 dividend income from Clay......................................... 5,000


e. EQUITY METHOD—Entry *C is unnecessary because the parent's retained earnings balance is correct.

INITIAL VALUE METHOD—Entry *C recognizes the increase in subsidiary's book value ($55,000 income less 5,000 dividends) and amortization ($10,000) for prior year.

Investment in Clay ............................................... 40,000

Retained Earnings, 1/1/13 (parent) ................ 40,000

f. Consolidated worksheet entry S for 2013:

Common Stock (Clay) ..................................... 150,000

Retained Earnings, 1/1/13 (Clay)................... 350,000

Investment in Clay ..................................... 500,000



23. (continued)

g. Consolidated revenues (combined) ................... $640,000

Consolidated expenses (combined plus

excess amortization) ...................................... (480,000)

Consolidated net income ..................................... $160,000

24. (15 Minutes) (Consolidated accounts one year after acquisition)

Stanza acquisition fair value ($10,000 in

stock issue costs reduce APIC............$680,000

Book value of subsidiary

(1/1/13 stockholders' equity balances)..... (480,000 )

Fair value in excess of book value ..........$200,000

Excess fair value allocated to copyrights Life amortizations

based on fair value ............................... 120,000 6 yrs. $20,000

Goodwill ..................................................... $ 80,000 indefinite -0-

Total ...................................................... $20,000

a. Consolidated copyrights

Penske (book value) ....................................... $900,000

Stanza (book value) ........................................ 400,000

Allocation (above) ........................................... 120,000

Excess amortizations, 2013 ........................... (20,000)

Total ............................................................ $1,400,000



Annual

excess

b. Consolidated net income, 2013

Revenues (add book values) ......................... $1,100,000

Expenses:

Combined book values ............................. $700,000

Excess amortizations ................................ 20,000 720,000

Consolidated net income................................ $380,000

c. Consolidated retained earnings, 12/31/13

Retained Earnings 1/1/13 (Penske) ............... $600,000

Net income 2013 (above) ................................ 380,000

Dividend Paid 2013 (Penske) ......................... (80,000)

Total ............................................................ $900,000

Stanza's January 1, 2013 retained earnings balance, is not included because they represent pre-acquisition earnings. Stanza's dividends paid to Penske are excluded because they are intra-entity in nature.

d. Consolidated goodwill, 12/31/13

Allocation (above) ........................................... $80,000



25. (30 Minutes) (Consolidated balances three years after the date of acquisition. Includes questions about parent's method of recording investment for internal reporting purposes.)

a. Acquisition-Date Fair Value Allocation and Amortization:

Consideration transferred 1/1/11 ............. $600,000

Book value (given) ..................................... (470,000) Annual

Fair value in excess of book value ..... 130,000 excess

Allocation to equipment based on Life amortizations

difference in fair value and

book value ............................................ 90,000 10 yrs. $9,000

Goodwill ..................................................... $40,000 indefinite - 0 -

Total ...................................................... $9,000

CONSOLIDATED BALANCES

Depreciation expense = $659,000 (book values plus $9,000 excess depreciation)

Dividend Paid = $120,000 (parent balance only. Subsidiary's dividends are eliminated as intra-entity transfer)

Revenues = $1,400,000 (add book values)

Equipment = $1,563,000 (add book values plus $90,000 allocation less three years of excess depreciation [$27,000])

Buildings = $1,200,000 (add book values)

Goodwill = $40,000 (original residual allocation)

Common Stock = $900,000 (parent balance only)



b. The parent's choice of an investment method has no impact on the consolidated totals. The choice of an investment method only affects the internal reporting of the parent.

c. The initial value method is used. The parent's Investment in Subsidiary account still retains the original consideration transferred of $600,000. In addition, the Investment Income account equals the amount of dividends paid by the subsidiary.

d. If the partial equity method had been utilized, the investment income account would have shown an equity accrual of $100,000. If the equity method had been applied, the Investment Income account would have included both the equity accrual of $100,000 and excess amortizations of $9,000 for a balance of $91,000.

e. Initial value method—Foxx’s retained earnings—1/1/13

Foxx’s 1/1/13 balance (initial value method was employed) $1,100,000

Partial equity method—Foxx’s retained earnings—1/1/13

25. (continued)

Foxx’s 1/1/13 balance (initial value method)........................... $1,100,000

2011 net equity accrual for Greenburg ($90,000 – $20,000). 70,000

2012 net equity accrual for Greenburg ($100,000 – $20,000) 80,000

Foxx’s 1/1/13 retained earnings........................................... $1,250,000

Equity method—Foxx’s retained earnings—1/1/13



Foxx’s 1/1/13 balance (initial value method)...................... $1,100,000

2011 net equity accrual for Greenburg ($90,000 – $20,000). 70,000

2011 excess fair over book value amortization.................. (9,000)

2012 net equity accrual for Greenburg ($100,000 – $20,000) 80,000

2012 excess fair over book value amortization.................. (9,000)

Foxx’s 1/1/13 retained earnings........................................... $1,232,000

26. (50 Minutes) (Consolidated totals for an acquisition. Worksheet is

produced as a separate requirement.)

a. O’Brien acquisition-date fair value ..................... $550,000

O’Brien book value .............................................. (350,000)

Fair value in excess of book value ..................... $200,000

Excess assigned to specific Annual

accounts based on fair value Life excess

amortizations

Trademarks ............................... $100,000 indefinite -0-

Customer relationships........... 75,000 5 yrs. $15,000

Equipment ................................ (30,000) 10 yrs. (3,000)

Goodwill .................................... 55,000 indefinite -0-

Total .......................................... $200,000 $12,000

If the partial equity method were in use, the Income of O’Brien account would have had a balance of $222,000 (100% of O’Brien's reported income for the period). If the initial value method were in use, the Income of O’Brien account



would have had a balance of $80,000 (100% of the dividends paid by O’Brien). The Income of O’Brien balance is an equity accrual of $222,000 (100% of O’Brien’s reported income) less excess amortizations of $12,000 (as computed above). Thus, the equity method must be in use.

b. Students can develop consolidated figures conceptually, without relying on a worksheet or consolidation entries. Thus, part b. asks students to determine independently each balance to be reported by the business combination.

Revenues = $1,645,000 (the accounts of both companies combined)

Cost of goods sold = 528,000 (the accounts of both companies combined)

Amortization expense = $40,000 (the accounts of both companies and the acquisition-related adjustment of $15,000)

26. (continued)

Depreciation expense = $142,000 (the accounts for both companies and the acquisition-related depreciation adjustment of $3,000)

Income of O’Brien = $0 (the balance reported by the parent is removed and replaced with the subsidiary’s individual revenue and expense accounts)

Net Income = 935,000 (consolidated revenues less expenses)

Retained earnings, 1/1 = $700,000 (only the parent's retained earnings figure is included)

Dividend Paid = $142,000 (the subsidiary's dividends were paid to the parent and, thus, as an intra-entity transfer are eliminated)

Retained earnings, 12/31 = $1,493,000 (the beginning balance for the parent plus consolidated net income less consolidated [parent] dividends)

Cash = $290,000 (the accounts of both companies are added together)

Receivables = $281,000 (the accounts of both companies are combined)

Inventory = $310,000 (the accounts of both companies are combined)



Investment in O’Brien = $0 (the parent’s balance is removed and replaced with the subsidiary’s individual asset and liability accounts)

Trademarks = $634,000 (the accounts of both companies are added together plus the 100,000 fair value adjustment)

Customer relationships = $60,000 (the initial $75,000 fair value adjustment less $15,000 amortization expense)

Equipment = $1,170,000 (both company’s balances less the $30,000 fair value adjustment net of $3,000 in depreciation expense reduction)

Goodwill = $55,000 (the original allocation)

Total assets = $2,800,000 (summation of consolidated balances)

Liabilities = $907,000 (the accounts of both companies are combined)

Common stock = $400,000 (parent balance only)

Retained earnings, 12/31 = $1,493,000 (computed above)

Total liabilities and equities = 2,800,000 (summation of consolidated balances)



26. (Continued)

c. PATRICK COMPANY AND CONSOLIDATED SUBSIDIARY

Consolidation Worksheet

For Year Ending December 31

Consolidation Entries Consolidated

Accounts Patrick O’Brien Debit Credit Totals

Revenues (1,125,000) (520,000) (1,645,000)

Cost of goods sold 300,000 228,000 528,000

Depreciation expense 75,000 70,000 (E) 3,000 142,000

Amortization expense 25,000 -0- (E) 15,000 40,000

Income of O’Brien (210,000) -0 - (I) 210,000 -0-

Net income (935,000) (222,000) (935,000)

Retained earnings, 1/1 (700,000) (250,000) (S) 250,000 (700,000)

Net income (above) (935,000) (222,000) (935,000)

Dividends paid 142,000 80,000 (D) 80,000 142,000

Retained earnings, 12/31 (1,493,000) (392,000) (1,493,000)

Cash 185,000 105,000 290,000

Receivables 225,000 56,000 281,000



Inventory 175,000 135,000 310,000

Investment in O’Brien 680,000 (D) 80,000 (S) 350,000

(A) 200,000 -0-

(I) 210,000

Trademarks 474,000 60,000 (A) 100,000 634,000

Customer relationships -0- -0- (A) 75,000 (E) 15,000 60,000

Equipment (net) 925,000 272,000 (E) 3,000 (A) 30,000 1,170,000

Goodwill -0 - -0 - (A) 55,000 55,000

Total assets 2,664,000 628,000 2,800,000

Liabilities (771,000) (136,000) (907,000)

Common stock (400,000) (100,000) (S) 100,000 (400,000)

Retained earnings (above) (1,493,000) (392,000) (1,493,000)

Total liabilities and equity (2,664,000) (628,000) 888,000 888,000 (2,800,000)



27. (60 Minutes) (Consolidation worksheet five years after acquisition with parent using initial value method. Effects of using equity method also included)

Acquisition-date fair value allocation and annual amortization:

a. Aaron fair value (stock exchanged

at fair value) ....................................... $470,000

Book value of subsidiary ....................... (360,000)

Excess fair value over book value ........ $110,000

Excess assigned to specific

accounts based on fair values Annual excess

Life amortizations

Royalty agreements $ 60,000 6 yrs. $10,000

Trademark 50,000 10 yrs. 5,000

Total $110,000 $15,000

The parent company is apparently applying the initial value method: only dividend income is recognized during the current year and the investment account retains its original $470,000 balance. Therefore, both the subsidiary's change in retained earnings during 2009–2012 as well as the amortization for that period must be brought into the consolidation.

Aaron's retained earnings January 1, 2013 ....................... $490,000

Retained earnings at date of acquisition ........................... (230,000)

Increase since date of acquisition ...................................... $260,000



Excess amortization expenses ($15,000 x 4 years) ........... (60,000)

Conversion to equity method for years prior to 2013

(Entry *C) .................................................................... $200,000

Explanations of consolidation worksheet entries

Entry*C: Converts 1/1/13 figures from initial value method to equity method as per computation above.

Entry S: Eliminates stockholders' equity accounts of subsidiary as of the beginning of current year.

Entry A: Recognizes allocations to royalty agreements and trademark. This entry establishes unamortized balances as of the beginning of the current year.

Entry I: Eliminates intra-entity dividends.

Entry E: Records excess amortization expenses for the current year.

See next page for worksheet.



27. a. (continued)

MICHAEL COMPANY AND CONSOLIDATED SUBSIDIARY


For Year Ending December 31, 2013


Accounts Michael Aaron Debit Credit Totals

Revenues (610,000) (370,000) (980,000)


Amortization expense 115,000 80,000 (E) 15,000 210,000

Dividend income (5,000) -0- (I) 5,000 - 0 -

Net income (230,000) (150,000) (360,000)

Retained earnings 1/1 (880,000) (*C) 200,000 (1,080,000)

(490,000) (S) 490,000 -0-

Net income (above) (230,000) (150,000) (360,000)

Dividends paid 90,000 5,000 (I) 5,000 90,000

Retained earnings 12/31 (1,020,000) (635,000) (1,350,000)

Cash $110,000 $15,000 $125,000



Receivables 380,000 220,000 600,000

Inventory 560,000 280,000 840,000

Investment in Aaron Co. 470,000 -0- (*C) 200,000 (S) 620,000 -0-

(A) 50,000

Copyrights 460,000 340,000 800,000

Royalty agreements 920,000 380,000 (A) 20,000 (E) 10,000 1,310,000

Trademark - 0 - - 0 - (A) 30,000 (E) 5,000 25,000

Total assets 2,900,000 1,235,000 3,700,000

Liabilities (780,000) (470,000) (1,250,000)

Preferred stock (300,000) -0- (300,000)

Common stock (500,000) (100,000) (S) 100,000 (500,000)

Additional paid-in capital (300,000) (30,000) (S) 30,000 (300,000)


Total liabilities and equity (2,900,000) (1,235,000) 890,000 890,000 (3,700,000)

Parentheses indicate a credit balance.



27. (continued)

b. If the equity method had been applied by Michael, three figures on that company's financial records would be different: Equity in Earnings of Aaron, Retained Earnings—1/1/13, and Investment in Aaron Co.

Equity in earnings of Aaron: $135,000 (the parent would accrue 100% of Aaron's $150,000 income but must also recognize $15,000 in amortization expense.)

Retained earnings, 1/1/13: $1,080,000 (increases by $200,000—the parent would have recognized the $260,000 increment in the subsidiary's book value during previous years as well as $60,000 in excess amortization expenses for these same four years [see Part a.])

Investment in Aaron: $800,000 (increases by $330,000—the parent would have recognized the $260,000 increment in the subsidiary's book value during previous years as well as $60,000 in excess amortization expenses for these same four years [see Part a.]. In the current year, income of $135,000 would have been recognized [see above] along with a reduction of $5,000 for dividends received).

c. No Entry *C is needed on the worksheet if the equity method is applied. Both the investment account as well as beginning retained earnings would be stated appropriately.

Entry I would have been used to eliminate the $135,000 Equity in Earnings of Aaron from the parent's income statement and from the Investment in Aaron Co. account.

Entry D would eliminate the $5,000 current year dividend from Dividends Paid and the Investment in Aaron account balances.

d. Consolidated figures are not affected by the investment method used by the parent. The parent company balances would differ and changes would be required in the worksheet entries. However, the figures to be reported do not depend on the parent's selection of a method.



28. (65 Minutes) (Consolidated totals and worksheet five years after acquisition. Parent uses equity method. Includes goodwill impairment.)

a. Acquisition-date fair value allocations (given) Life Annual excess

amortizations

Land $90,000 -- --

Equipment 50,000 10 yrs. $5,000

Goodwill 60,000 indefinite -0-

Total $200,000 $5,000

Because Giant uses the equity method, the $135,000 "Equity in Income of Small" reflects a $140,000 equity accrual (100% of Small’s reported earnings) less $5,000 in amortization expense computed above.

b.

Revenues = $1,535,000 (both balances are added together)

Cost of goods sold = $640,000 (both balances are added)

Depreciation expense = $307,000 (both balances are added along with excess equipment depreciation)

Equity in income of Small = $0 (the parent's income balance is removed and replaced with Small's individual revenue and expense accounts)

Net income = $588,000 (consolidated expenses are subtracted from consolidated revenues)

Retained earnings, 1/1/13 = $1,417,000 (the parent’s balance)

Dividends paid = $310,000 (the parent number alone because the subsidiary's dividends are intra-entity, paid to Giant)



Retained earnings, 12/31/13 = $1,695,000 (the parent’s balance at beginning of the year plus consolidated net income less consolidated dividends paid)

Current assets = $706,000 (both book balances are added together while the $10,000 intra-entity receivable is eliminated)

Investment in Small = $0 (the parent's asset is removed so that Small's individual asset and liability accounts can be brought into the consolidation)

Land = $695,000 (both book balances are added together along with the acquisition-date fair value allocation of $90,000)

Buildings = $723,000 (both book balances are added together)

Equipment = $959,000 (both book balances are added plus the unamortized portion of the acquisition-date fair value allocation [$50,000 less $25,000 after 5 years of excess depreciation])



28. b. (continued)

Goodwill = $60,000 (represents the original price allocation)

Total assets = $3,143,000 (summation of all consolidated assets)

Liabilities = $1,198,000 (both balances are added together while the $10,000 intercompany payable is eliminated)

Common stock = $250,000 (parent balance only)

Retained earnings, 12/31/13 = $1,695,000 (see above)

Total liabilities and equity = $3,143,000 (summation of all consolidated liabilities and equity)

a. Worksheet is presented on following page.

b. If all goodwill from the Small investment was determined to be impaired, Giant would make the following journal entry on its books:

Goodwill Impairment Loss 60,000

Investment in Small 60,000

After this entry, the worksheet process would no longer require an adjustment in Entry (A) to recognize goodwill. The impairment loss would simply carry over to the consolidated income column. The impairment loss would be reported as a separate line item in the operating section of the consolidated income statement.



28. c. (continued)

GIANT COMPANY AND SMALL COMPANY


For Year Ending December 31, 2013


Accounts Giant Small Debit Credit Totals

Revenues.............................................................. (1,175,000) (360,000) (1,535,000)

Cost of goods sold............................................... 550,000 90,000 640,000

Depreciation expense.......................................... 172,000 130,000 (E) 5,000 307,000

Equity income of Small....................................... (135,000) -0- (I) 135,000 -0-

Net income...................................................... (588,000) (140,000) (588,000)

Retained earnings 1/1.......................................... (1,417,000) (620,000) (S) 620,000 (1,417,000)

Net income (above).............................................. (588,000) (140,000) (588,000)

Dividends paid...................................................... 310,000 110,000 (D) 110,000 310,000

Retained earnings 12/31................................ (1,695,000) (650,000) (1,695,000)

Current assets...................................................... 398,000 318,000 (P) 10,000 706,000McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2013


Investment in Small............................................. 995,000 -0- (D) 110,000 (S) 790,000 -0-

(A) 180,000

(I) 135,000

Land ................................................................... 440,000 165,000 (A) 90,000 695,000

Buildings (net)...................................................... 304,000 419,000 723,000

Equipment (net).................................................... 648,000 286,000 (A) 30,000 (E) 5,000 959,000

Goodwill................................................................ -0- -0- (A) 60,000 60,000

Total assets.................................................... 2,785,000 1,188,000 3,143,000

Liabilities............................................................... (840,000) (368,000) (P) 10,000 (1,198,000)

Common stock..................................................... (250,000) (170,000) (S)170,000 (250,000)

Retained earnings (above).................................. (1,695,000) (650,000) (1,695,000)

Total liabilities and equity............................. (2,785,000) (1,188,000) 1,230,000 1,230,000 (3,143,000)




29. (45 Minutes) (Consolidated totals and worksheet two years after acquisition. Parent uses initial value method. Includes question comparing initial value and equity methods).

a. 12/31/2013 Pinnacle Strata Adjustments and Eliminations Consolidated

Sales (7,000,000) (3,000,000) (10,000,000)

Cost of goods sold 4,650,000 1,700,000 6,350,000

Interest expense 255,000 160,000 415,000

Depreciation expense 585,000 350,000 E 30,000 965,000

Amortization expense 600,000 E 20,000 580,000

Dividend income (50,000) D 50,000 0

Net Income (1,560,000) (190,000) (1,690,000)

Retained earnings 1/1/13 (5,000,000) (1,350,000) S 1,350,000 *C 240,000 (5,240,000)

Net income (1,560,000) (190,000) (1,690,000)

Dividends paid 560,000 50,000 D 50,000 560,000

Retained earnings 12/31/13 (6,000,000) (1,490,000) (6,370,000)

Cash 433,000 165,000 598,000

Accounts receivable 1,210,000 200,000 P 85,000 1,325,000

Inventory 1,235,000 1,500,000 2,735,000

Investment in Strata 3,200,000 *C 240,000 S 2,850,000 0

A 590,000

Buildings (net) 5,572,000 2,040,000 A 270,000 E 30,000 7,852,000

Licensing agreements 1,800,000 E 20,000 A 80,000 1,740,000

Goodwill 350,000 A 400,000 750,000



Total Assets 12,000,000 5,705,000 15,000,000

Accounts payable (300,000) (715,000) P 85,000 (930,000)

Long-term debt (2,700,000) (2,000,000) (4,700,000)

Common stock - Pinnacle (3,000,000) (3,000,000)

Common stock - Strata (1,500,000) S 1,500,000 0

Retained earnings 12/31/13 (6,000,000) (1,490,000) (6,370,000)

Total Liabilities and OE (12,000,000) (5,705,000) 3,945,000 3,945,000 (15,000,000)

b. Subsidiary income (190,000 – 10,000)........................................$180,000

1/1/13 retained earnings (5,000,000 + 240,000)......................$5,240,000

Investment in Strata:

Initial value basis ...............................................................$3,200,000

Conversion to equity as of 1/1/13 $240,000

Income for 2013 180,000

Dividends for 2013 (50,000 ) 370,000

Equity method balance 12/31/13.......................................$3,570,000

c. The internal method choice for investment accounting has no effect on consolidated financial statements.



30. (30 Minutes) (Determine consolidated accounts and consolidation entries five years after purchase. Parent applies equity method.)

a. Fair value allocation and annual amortization

Annual excess

Allocation Life amortizations

Land .......................................... $20,000

Buildings ......................................... (30,000) 10 yrs. $(3,000)

Equipment ....................................... 60,000 5 yrs. 12,000

Customer List .................................. 100,000 20 yrs. 5,000

Total .......................................... $14,000

CONSOLIDATED TOTALS

Revenues = $850,000 (add the two book values)

Cost of goods sold = $380,000 (the accounts of both companies are added together)

Depreciation expense = $179,000 (the accounts are added and include the excess depreciation adjustment of $9,000)

Amortization expense = $5,000 (current amortization for customer list recognized in acquisition)

Buildings (net) = $625,000 (add the two book values less the acquisition-date fair value allocation [a $30,000 reduction] after removing 5 years of amortization totaling $15,000)

Equipment (net) = $450,000 (add the two book values. The acquisition-date fair value allocation is completely amortized at end of current year)

Customer list = $75,000 ($100,000 original allocation less $25,000 [5 years of amortization])



Common stock = $300,000 (parent company balance only)

Additional paid-in capital = $50,000 (parent company balance only)

b. The method used by the parent is only important in determining the parent's separate account balances (which are given here or are not needed) or consolidation worksheet entries (which are not required in a.)



30. (continued)

c. Consolidation entry S

Common Stock (Hill) ............................ 40,000

Additional Paid-in Capital (Hill) ........... 160,000

Retained Earnings 1/1 .......................... 600,000

Investment in Hill ............................ 800,000

(To eliminate beginning stockholders' equity of subsidiary)

Consolidation entry A

Land ...................................................... 20,000

Equipment (net) .................................... 12,000

Customer List (net) .............................. 80,000

Buildings (net) ................................. 18,000


(To enter unamortized allocation balances as of beginning of current year)

Consolidation entry I

Investment Income ............................... 86,000


(To remove equity income recognized during year—equity method accrual of $100,000 [based on subsidiary's income] less amortization of $14,000 for the year)

Consolidation entry D



Investment in Hill ................................. 40,000

Dividends Paid ................................ 40,000

(To remove intra-entity dividend payments)

Consolidation entry E

Amortization Expense.......................... 5,000

Depreciation Expense........................... 9,000

Buildings ............................................... 3,000

Equipment........................................ 12,000

Customer List................................... 5,000

(To recognize excess acquisition-date fair-value amortizations for

the period)



31. (30 Minutes) (Determine parent company and consolidated account balances for a bargain purchase combination. Parent applies equity method)

a. Acquisition-date fair value allocation and annual excess amortization

Consideration transferred ............. $1,090,000

Santiago book value (given) .......... $950,000

Technology undervaluation (6 yr. life) 240,000

Acquisition fair value of net assets 1,190,000

Gain on bargain purchase.............. $(100,000)

Santiago income.............................. $(200,000)

Technology amortization................ 40,000

Equity earnings in Santiago........... $(160,000)

Fair value of net assets at acquisition-date $1,190,000

Equity earnings from Santiago....... 160,000

Dividends received.......................... (50,000)

Investment in Santiago 12/31/13... . $1,300,000

Because a bargain purchase occurred, Santiago’s net asset fair value replaces the fair value of the consideration transferred as the initial value assigned to the subsidiary on Peterson’s books.



31 b.

Peterson and Subsidiary

Consolidated Worksheet

For the Year Ended December 31, 2013

Income Statement Peterson Santiago Adj. & Elim. Consolidated

Revenues (535,000) (495,000) (1,030,000)


Gain on bargain purchase (100,000) -0- (100,000)

Depreciation and amortization 125,000 140,000 (E) 40,000 305,000

Equity earnings in Santiago (160,000) -0- (I) 160,000 -0-

Net income (500,000) (200,000) (500,000)

Statement of Retained Earnings

Retained earnings, 1/1 (1,500,000) (650,000) (S) 650,000 (1,500,000)

Net income (above) (500,000) (200,000) (500,000)

Dividends paid 200,000 50,000 (D) 50,000 200,000


Balance Sheet

Current assets 190,000 300,000 490,000

Investment in Santiago 1,300,000 -0- (D) 50,000 (I) 160,000

(S) 950,000 -0-

(A) 240,000

Trademarks 100,000 200,000 300,000



Patented technology 300,000 400,000 (A) 240,000 (E) 40,000 900,000

Equipment 610,000 300,000 910,000

Total assets 2,500,000 1,200,000 2,600,000

Liabilities (165,000) (100,000) (265,000)

Common stock (535,000) (300,000) (S) 300,000 (535,000)


Total liabilities and equity (2,500,000) (1,200,000) 1,440,000 1,440,000 (2,600,000)



32. (35 minutes) (Contingent performance obligation and worksheet adjustments for equity and initial value methods.)

a. 1/1/12 Investment in Wolfpack, Inc. 500,000

Contingent Performance Obligation 35,000

Cash 465,000

b.12/31/12 Loss from Increase in Contingent Performance Obligation 5,000


12/31/13 Loss from Increase in Contingent Performance Obligation 10,000


12/31/13 Contingent Performance Obligation 50,000

Cash 50,000

c. Equity Method Worksheet Adjustments

Common Stock- Wolfpack 200,000

Retained Earnings-Wolfpack 180,000

Investment in Wolfpack 380,000

Royalty Agreements 90,000

Goodwill 60,000




Equity Earnings of Wolfpack 65,000



Dividends Paid 35,000

Amortization Expense 10,000


Investment account after worksheet adjustments =

(560,000 – 380,000 – 150,000 – 65,000 + 35,000) = 0

d. Initial Value Method


Retained Earnings-Branson 30,000

Common Stock- Wolfpack 200,000

Retained Earnings-Wolfpack 180,000

Investment in Wolfpack 380,000**



32. (continued)


Goodwill 60,000


Dividend Income 35,000

Dividends Paid 35,000

Amortization Expense 10,000


33. (45 Minutes) (Prepare consolidation worksheet five years after acquisition. Parent applies equity method. Includes question on push-down accounting.)

a. Allocation of Acquisition-Date Fair Value and Amortization:

Storm’s acquisition-date fair value ..................... $140,000

Book value of Storm (acquisition date) .............. (105,000)

Fair value in excess of book value ..................... $ 35,000

Excess assigned to specific accounts: Annual excess

Life amortizations

Land ............................................ $10,000 – –

Equipment .................................. 5,000 5 yrs. $1,000



Formula ...................................... 20,000 20 yrs. 1,000

Total ................................................. $35,000 $2,000

The equity in subsidiary earnings account reflects the equity method. The initial value method would have entered $40,000 (100% of dividend payments) as income while the partial equity method would have shown $68,000 (100% of the subsidiary's income). Under the equity method, an income accrual of $66,000 is recognized (100% of reported income less the $2,000 in excess amortization expenses computed above).

b. Explanation of Consolidation Entries Found on Worksheet

Entry S—Eliminates stockholders' equity accounts of the subsidiary as of the beginning of the current year.

Entry A—Enters remaining unamortized allocation from acquisition-date fair value adjustments. As of the beginning of the current year, equipment and formula have undergone four years of amortization.

Entry I—Eliminates subsidiary income accrual for the current year.

Entry D—Eliminates intra-entity dividend transfers.

Entry E—Recognizes excess amortization expenses for current year.



33. (continued) Palm and Subsidiary Consolidated Worksheet for the year ended December 31, 2013


Accounts Palm Co. Storm Co. Debit Credit Totals

Income Statement

Revenues........................................................... (485,000) (190,000) (675,000)

Cost of goods sold............................................ 160,000 70,000 230,000

Depreciation expense....................................... 130,000 52,000 (E) 1,000 183,000

Amortization expense....................................... -0- -0- (E) 1,000 1,000

Equity in subsidiary earnings.......................... (66,000) -0- (I) 66,000 -0-

Net income................................................... (261,000) (68,000) (261,000)

Statement of Retained Earnings

Retained earnings 1/1....................................... (659,000) (98,000) (S) 98,000 (659,000)

Net income (above)........................................... (261,000) (68,000) (261,000)

Dividends paid................................................... 175,500 40,000 (D) 40,000 175,500

Retained earnings 12/31............................. (744,500) (126,000) (744,500)

Balance Sheet



Current assets................................................... 268,000 75,000 343,000

Investment in Storm Co.................................... 216,000 -0- (D) 40,000 (S) 163,000 -0-

(A) 27,000

(I) 66,000

Land ................................................................ 427,500 58,000 (A) 10,000 495,500

Buildings and equipment (net)........................ 713,000 161,000 (A) 1,000 (E) 1,000 874,000

Formula.............................................................. -0- -0- (A) 16,000 (E) 1,000 15,000

Total assets................................................. 1,624,500 294,000 1,727,500

Current liabilities............................................... (110,000) (19,000) (129,000)

Long-term liabilities.......................................... (80,000) (84,000) (164,000)

Common stock.................................................. (600,000) (60,000) (S) 60,000 (600,000)

Additional paid-in capital................................. (90,000) (5,000) (S) 5,000 (90,000)

Retained earnings 12/31................................... (744,500) (126,000) (744,500)

Total liabilities and equity.......................... (1,624,500) (294,000) 298,000 298,000 (1,727,500)




33. (continued)

c. If push-down accounting had been applied, the acquisition=date fair value allocations to land ($10,000), equipment ($5,000), and formula ($20,000) would have been entered into the subsidiary's balances with an offsetting $35,000 increase in additional paid-in capital. The equipment and the formula would then have been amortized by the subsidiary as annual expenses of $1,000 each. For 2013, the subsidiary's expenses would have been $2,000 higher leaving reported net income at $66,000. At the end of 2013, land would still have been $10,000 higher because no amortization is recorded on that asset. Equipment would be no higher at this time since the $5,000 allocation is fully depreciated at the end of this fifth year. However, the secret formula would be recorded by the subsidiary as $15,000, the $20,000 allocation less five years of amortization at $1,000 per year.

34. (20 Minutes) (Consolidated balances three years after acquisition. Parent has

applied the equity method.)

a. Schedule 1—Acquisition-Date Fair Value Allocation and Amortization

Jasmine’s acquisition-date fair value $206,000

Book value of Jasmine ................... (140,000)

Fair value in excess of book value 66,000

Excess fair value assigned to specific

accounts based on individual fair values Annual excess

Life amortization



Equipment .................................. $54,400 8 yrs. $6,800

Buildings (overvalued) .............. (10,000) 20 yrs. (500)

Goodwill ..................................... $21,600 indefinite -0-

Total ............................................ $6,300

Investment in Jasmine Company—12/31/13

Jasmine’s acquisition-date fair value............................ $206,000

2010 Increase in book value of subsidiary ................... 40,000

2010 Excess amortizations (Schedule 1) ...................... (6,300)





Investment in Jasmine Company 12/31/13............... $257,100



34. (continued)

b. Equity in subsidiary earnings

Income accrual................................................................. $30,000

Excess amortizations (Schedule 1) ............................... (6,300)

Equity in subsidiary earnings ................................... $23,700

c. Consolidated net income

Consolidated revenues (add book values) ................... $414,000

Consolidated expenses (add book values) .................. (272,000)

Excess amortization expenses (Schedule 1) ................ (6,300)

Consolidated net income ............................................... $135,700

d. Consolidated equipment

Book values added together .......................................... $370,000

Allocation of acquisition-date fair value ....................... 54,400

Excess depreciation ($6,800 × 3) ................................... (20,400)

Consolidated equipment ........................................... $404,000

e. Consolidated buildings...................................................

Book values added together .......................................... $288,000

Allocation of acquisition-date fair value ....................... (10,000)

Excess depreciation ($500 × 3) ...................................... 1,500

Consolidated buildings.............................................. $279,500



f. Consolidated goodwill

Allocation of excess fair value to goodwill.................... $21,600

g. Consolidated common stock.......................................... $290,000

As an acquisition, the parent's balance of $290,000 is used (the acquired company's common stock will be eliminated each year on the consolidation worksheet).

h. Consolidated retained earnings..................................... $410,000

Tyler's balance of $410,000 is equal to the consolidated total because the equity method has been applied.

35. (35 minutes) (Consolidation with IPR&D, equity method)

a. Consideration transferred 1/1/12 $1,765,000

Increase in Salsa’s retained earnings to1/1/13 150,000

In-process R&D write-off in 2012 (44,000)

Amortizations 2012 (7,000)

Income 2013 210,000

Dividends paid 2013 (25,000)

Amortization 2013 (7,000 )

Investment balance 12/31/13 $2,042,000

35. (continued)

b. Picante and Subsidiary SalsaMcGraw-Hill/ Irwin © The McGraw-Hill Companies, Inc., 2013



For the Year Ended December 31, 2013

12/31/13 12/31/13

Accounts Picante Salsa Adjustments Consolidated

Sales (3,500,000) (1,000,000) (4,500,000)

Cost of goods sold 1,600,000 630,000 2,230,000

Depreciation expense 540,000 160,000 (E) 7,000 707,000

Subsidiary income (203,000 ) (I) 203,000 - 0 -

Net Income (1,563,000) (210,000) (1,563,000)

Retained earnings 1/1/13 (3,000,000) (800,000) (S) 800,000 (3,000,000)

Net Income (1,563,000) (210,000) (1,563,000)

Dividends paid 200,000 25,000 (D) 25,000 200,000

Retained earnings 12/31/13 (4,363,000) (985,000) (4,363,000)

Cash 228,000 50,000 278,000

Accounts receivable 840,000 155,000 995,000

Inventory 900,000 580,000 1,480,000

Investment in Salsa 2,042,000 (D) 25,000 (S)1,800,000 -0-

(A) 64,000

(I) 203,000

Land 3,500,000 700,000 4,200,000

Equipment (net) 5,000,000 1,700,000 (A) 49,000 (E) 7,000 6,742,000

Goodwill 290,000 - 0 - (A) 15,000 305,000

Total assets 12,800,000 3,185,000 14,000,000



Accounts payable (193,000) (400,000) (593,000)

Long-term debt (3,094,000) (800,000) (3,894,000)

Common stock—Picante (5,150,000) (5,150,000)

Common stock—Salsa (1,000,000) (S)1,000,000

Retained earnings 12/31/13 (4,363,000 ) (985,000 ) (4,363,000 )

(12,800,000) (3,185,000) 2,099,000 2,099,000 (14,000,000)



36. (55 minutes) (Goodwill impairment, consolidated balances, and worksheet)

a. Prine compares Lydia’s total fair value to its carrying value, as follows:

12/31 Carrying value (equity method balance) $120,070,000

12/31 Fair value 110,000,000

Excess carrying value over fair value $10,070,000

Because fair value is less than carrying value, Prine is required to further test whether goodwill is impaired.

b. 12/31 Fair value for Lydia $110,000,000

Fair values of assets and liabilities

Cash $109,000

Receivables (net) 897,000

Movie library 60,000,000

Broadcast licenses 20,000,000

Equipment 19,000,000

Current liabilities (650,000)

Long-term debt (6,250,000)

Total net fair value 93,106,000

Implied fair value for goodwill 16,894,000

Carrying value for goodwill 50,000,000

Impairment loss $33,106,000



Journal Entry by Prine:

Goodwill impairment loss 33,106,000

Investment in Lydia Co. 33,106,000

c. Combined revenues $30,000,000

Combined expenses (including excess amortization) 22,200,000

Income before impairment loss 7,800,000

Goodwill impairment loss—Lydia (33,106,000)

Net loss $(25,306,000)

d. Consolidated goodwill = $50,000,000 – $33,106,000 = $16,894,000

e. Consolidated broadcast licenses = $350,000 + $14,014,000 = $14,364,000

The consolidated balance is the parent’s book value plus the fair value of the subsidiary acquisition-date value adjusted for changes since acquisition. Because the subsidiary’s book value equaled fair value at acquisition date, there is no fair value adjustment. Because the broadcast licenses have indefinite lives, they are not amortized. Note that the 12/31 fair value, assessed for purposes of computing implied value for goodwill, is not used for financial reporting purposes.



36. f. (continued) Prine and Lydia


December 31

Adjusting Entries Consolidated

Accounts Prine, Inc. Lydia Co. Debit Credit Totals

Revenues (18,000,000) (12,000,000) (30,000,000)

Expenses 10,350,000 11,800,000 (E) 50,000 22,200,000

Equity in Lydia earnings (150,000) -0- (I) 150,000 -0-

Impairment loss 33,106,000 -0- 33,106,000

Net income/loss 25,306,000 (200,000) 25,306,000

Retained earnings 1/1 (52,000,000) (2,000,000) (S) 2,000,000 (52,000,000)

Dividends paid 300,000 80,000 (D) 80,000 300,000

Net income 25,306,000 (200,000) 25,306,000

Retained earnings 12/31 (26,394,000) (2,120,000) (26,394,000)

Cash 260,000 109,000 369,000

Receivables (net) 210,000 897,000 1,107,000



Investment in Lydia, Co. 86,964,000 -0- (D) 80,000 (S)69,500,000 -0-

(A)17,394,000

(I) 150,000

Broadcast licenses 350,000 14,014,000 14,364,000

Movie library 365,000 45,000,000 45,365,000

Equipment (net) 136,000,000 17,500,000 (A) 500,000 (E) 50,000 153,950,000

Goodwill -0- -0- (A)16,894,000 16,894,000

Total assets 224,149,000 77,520,000 232,049,000

Current liabilities (755,000) (650,000) (1,405,000)

Long-term debt (22,000,000) (7,250,000) (29,250,000)

Common stock (175,000,000) (67,500,000) (S)67,500,000 (175,000,000)

Retained earnings 12/31 (26,394,000) (2,120,000) (26,394,000)

Total liabilities and equity (224,149,000) (77,520,000) 87,114,000 87,114,000 (232,049,000)



RESEARCH CASE SOLUTION

Jonas recognized several identifiable intangibles from its acquisition of Innovation Plus. Jonas expresses the desire to expense these intangible assets in the acquisition period.

1. Advise Jonas on the acceptability of its suggested immediate write-off.

An intangible asset should not be written down or off in the period of acquisition unless it becomes impaired during that period.

2. Indicate the relevant factors to consider in allocating the values assigned to identifiable intangibles acquired in a business combination.

The accounting for a recognized intangible asset is based on its useful life to the reporting entity. An intangible asset with a finite useful life is amortized; an intangible asset with an indefinite useful life is not amortized. The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity. Other factors to be considered are legal, regulatory, or contractual provisions, effects of obsolescence, demand, competition, and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset (ASC 350-30-35-3).

The price paid by Jonas for Innovation Plus indicates a large amount was paid for goodwill. However, Jonas worries that any goodwill impairment may send the wrong signal to its investors about the wisdom of the acquisition. Jonas thus wishes to allocate all the goodwill to one account called “enterprise goodwill.” In this way, Jonas hopes to minimize the possibility of goodwill impairment because a decline in goodwill in one business unit may be offset by an increase in the value of goodwill in another business unit.

3. Jonas’ suggested treatment of goodwill is inappropriate. To ensure that goodwill increases in one reporting unit do not offset decreases in others, goodwill acquired in a business combination is allocated across business units that benefit from the goodwill.

4. Per the FASB ASC (350-20-35-41):

For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination shall be assigned to one or more reporting units as of the acquisition date. Goodwill shall be assigned to reporting units of the



acquiring entity that are expected to benefit from the synergies of the combination even though other assets or liabilities of the acquired entity may not be assigned to that reporting unit. The total amount of acquired goodwill may be divided among a number of reporting units. The methodology used to determine the amount of goodwill to assign to a reporting unit shall be reasonable and supportable and shall be applied in a consistent manner.

Therefore, Jonas’ desire to minimize the possibility of goodwill impairment should not be a factor in allocating goodwill to reporting units.

Nike Research Case Solution—Goodwill Impairment

1) Nike reported a $199.3 million goodwill impairment charge in 2009

2) Nike wrote down its goodwill in because “as a result of a significant decline in global consumer demand and continued weakness in the macroeconomic environment, as well as decisions by Company management to adjust planned investment in the Umbro brand, the Company concluded that sufficient indicators of impairment existed to require the performance of an interim assessment of Umbro's goodwill and indefinite lived intangible assets as of February 1, 2009.” (Nike 2009 10-K Note 4)

FASB ASC 350-20-35-3C provides the following examples as possible interim triggering events in assessing potential goodwill impairment:

Macroeconomic conditions

Industry and market considerations

Cost factors having negative effect on earnings and cash flows

Overall financial performance

3) Consolidated Balance Sheets: Goodwill down from $448.8 in 2008 to $193.5 in 2009 (in millions) from Umbro impairment and miscellaneous other charges.

Consolidated Statement of Operations: Goodwill impairment: $199.3 million



Consolidated Statement of Cash Flows: Goodwill and other impairments: $401.3 million

4) Nike reviews its goodwill for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Testing Steps (assuming adecision to forego the option of first performing a

qualitative analysis:

First step: compare the fair value of their Umbro reporting unit with its net book value. If the fair value of the Umbro reporting unit exceeds its net book value, goodwill is not impaired, and no further testing is necessary. If the net book value of the Umbro reporting unit exceeds its fair value, a second test is performed.

Second step: compare the implied fair value of goodwill with that recorded on the balance sheet. Implied fair value of goodwill is determined in the same manner as if the Umbro reporting unit were being acquired in a business combination. Specifically, fair value of the Umbro reporting unit is allocated to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on their balance sheet, an impairment charge is recorded for the difference.

5) Nike incurred a $202 million impairment charge for its long-lived assets in 2009, primarily attributable to Umbro’s trademark and an equity investment owned by Umbro.

Nike (2009 10-K p. 46) tests other indefinite-lived intangibles for impairment by comparing the asset’s respective net book value to estimates of fair value.



(One-step) The test is done annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. (Same as goodwill).

Nike (2009 10-K p. 45) reviews its long-lived assets (including intangible assets with a finite life) for impairment whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. The assets are impaired if the total of the projected undiscounted future cash flows is less than the carrying amount of their long-lived assets, a loss is recognized for the difference between the fair value and carrying value of the assets (Two-step).



FASB ASC AND IASB RESEARCH CASE

1. GAAP prohibits reversal of impairment losses for goodwill. IFRS also prohibits reversal of impairment losses for goodwill.

2. Requirements for goodwill impairment differ under IFRS. Under IFRS, goodwill impairment testing uses a one-step approach: The recoverable amount of the CGU (cash-generating unit) or group of CGUs (i.e., the higher of its fair value minus costs to sell and its value in use) is compared with its carrying amount. An impairment loss is recognized in operating results as the excess of carrying over the recoverable amount. The impairment loss is allocated first to goodwill and then pro rata to the other assets of the CGU or group of CGUs to the extent that the impairment exceeds goodwill’s book value.

IAS 36 Impairment of Assets:

88. When, as described in paragraph 81, goodwill relates to a cash-generating unit but has not been allocated to that unit, the unit shall be tested for impairment, whenever there is an indication that the unit may be impaired, by comparing the unit’s carrying amount, excluding any goodwill, with its recoverable amount. Any impairment loss shall be recognised in accordance with paragraph 104.

90. A cash-generating unit to which goodwill has been allocated shall be tested for impairment annually, and whenever there is an indication that the unit may be impaired, by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit. If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit shall be regarded as not impaired. If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity shall recognise the impairment loss in accordance with paragraph 104.



104. An impairment loss shall be recognised for a cash-generating unit (the smallest group of cash-generating units to which goodwill or a corporate asset has been allocated) if, and only if, the recoverable amount of the unit (group of units) is less than the carrying amount of the unit (group of units). The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order:

(a) first, to reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and

(b) then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount of each asset in the unit (group of units).

These reductions in carrying amounts shall be treated as impairment losses on individual assets and recognised in accordance with paragraph 60.



Excel Case 1 Solution

a. Innovus employs initial value method to account for ChipTech.

Innovus ChipTech Adjustments Consolidated

Revenues (990,000) (210,000) (1,200,000)

Cost of good sold 500,000 90,000 590,000

Depreciation expense 100,000 5,000 105,000


Dividend income (40,000) -0- (I) 40,000 -0-

Net Income (375,000) (97,000) (412,000)

Retained earnings 1/1 (1,555,000) (450,000) (S)450,000 (*C) 60,000 (1,615,000)

Net income (375,000) (97,000) (412,000)

Dividends paid 250,000 40,000 (I) 40,000 250,000


Current assets 960,000 355,000 1,315,000

Investment in Chiptech 670,000 (*C) 60,000

(S) 580,000

(A) 150,000 -0-

Equipment (net) 765,000 225,000 990,000

Trademark 235,000 100,000 (A) 36,000 (E) 4,000 367,000

Existing technology 0 45,000 (A) 64,000 (E) 16,000 93,000



Goodwill 450,000 -0- (A) 50,000 500,000

Total assets 3,080,000 725,000 3,265,000

Liabilities (780,000) (88,000) (868,000)

Common stock (500,000) (100,000) (S)100,000 (500,000)






Excel Case 1 Solution (continued)

b. Innovus employs initial value method to account for ChipTech and goodwill is impaired.

Innovus ChipTech Consolidated

Revenues (990,000) (210,000) (1,200,000)

Cost of good sold 500,000 90,000 590,000



Impairment loss 50,000 50,000

Dividend income (40,000) -0- (I) 40,000 -0-

Net Income (325,000) (97,000) (362,000)

Retained earnings 1/1 (1,555,000) (450,000) (S)450,000 (*C) 60,000 (1,615,000)

Net income (325,000) (97,000) (362,000)

Dividends paid 250,000 40,000 (I) 40,000 250,000


Current assets 960,000 355,000 1,315,000

Investment in Chiptech 620,000 (*C) 60,000

(S)580,000

(A)100,000 -0-

Equipment (net) 765,000 225,000 990,000

Trademark 235,000 100,000 (A) 36,000 (E) 4,000 367,000



Existing technology -0- 45,000 (A )64,000 (E) 16,000 93,000

Goodwill 450,000 -0- 450,000

Total assets 3,030,000 725,000 3,215,000

Liabilities (780,000) (88,000) (868,000)

Common stock (500,000) (100,000) (S)100,000 (500,000)




Alternatively, the goodwill impairment loss could have been recorded as an adjustment on the worksheet.



Excel Case 2 Solution

Part a: Investment in Wi-Free account balance 12/31/13

Wi-Free’s acquisition-date fair value $730,000

Change in Wi-Free’s retained earnings for 2012 80,000

2012 amortization (4,500)

2012 in-process R&D write-off (75,000)

2013 reported Wi-Free income 180,000

2013 Wi-Free dividend (50,000)

2013 amortization (4,500 )

Balance 12/31/13 $856,000

Part b: Consolidation Entries Consolidated

Hi-Speed Wi-Free Debit Credit Totals

Revenues (1,100,000) (325,000) (1,425,000)



Amortization expense 50,000 11,000 (E) 12,000 (E) 7,500 65,500

Equity in subsidiary earnings (175,500) -0- (I) 175,500 -0-

Net Income (460,500) (180,000) (460,500)

Retained earnings 1/1 (1,552,500) (450,000) (S)450,000 (1,552,500)



Net income (460,500) (180,000) (460,500)

Dividends paid 250,000 50,000 (D) 50,000 250,000


Current assets 1,034,000 345,000 (P) 30,000 1,349,000

Investment in Wi-Free 856,000 (D) 50,000 (I) 175,500

(S)580,000

(A)150,500 0

Equipment (net) 713,000 305,000 1,018,000

Computer software 650,000 130,000 (E) 7,500 (A) 22,500 765,000

Internet domain name -0- 100,000 (A)108,000 (E) 12,000 196,000

Goodwill -0- -0- (A) 65,000 65,000

Total assets 3,253,000 880,000 3,393,000

Liabilities (870,000) (170,000) (P) 30,000 (1,010,000)

Common stock (500,000) (110,000) (S)110,000 (500,000)



Total liab. and equity (3,253,000) (880,000) 1,028,000 1,028,000 (3,393,000)



Solutions to Homework Assignment - Chapter 3

Documents