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CHAPTER 3

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Answers to Questions

1 A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a controlling financial interest (generally over 50 percent) of its outstanding voting stock.

2 Amounts allocated to identifiable assets and liabilities in excess of recorded amounts on the books of the subsidiary are not recorded separately by the parent. Instead, the parent records the fair value/purchase price of the interest acquired in an investment account. The allocation to identifiable asset and liability accounts is made through working paper entries when the parent and subsidiary financial statements are consolidated.

3 The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the purchase price is equal to or greater than the total fair value of the subsidiary. If the parent had acquired an 80 percent interest and the purchase price was equal to or greater than the fair value of the interest acquired, the land would still appear in the consolidated balance sheet at $100,000. Under SFAS No. 141R, the noncontrolling interest is also reported based on fair values at the acquisition date.

4 Parent company—a corporation that owns a controlling interest in the outstanding voting stock of another corporation (its subsidiary).

Subsidiary company—a corporation that is controlled by a parent company that owns a controlling interest in its outstanding voting stock, either directly or indirectly.

Affiliated companies—companies that are controlled by a single management team through parent-subsidiary relationships. (Although the term affiliate is a synonym for subsidiary, the parent company is included in the total affiliation structure.)

Associated companies—companies that are controlled through parent-subsidiary relationships or whose operations can be significantly influenced through equity investments of 20 percent to 50 percent.

5 A noncontrolling interest is the equity interest in a subsidiary company that is owned by stockholders outside of the affiliation structure. In other words, it is the equity interest in a subsidiary (recorded at fair value) that is not held by the parent company or subsidiaries of the parent company.

6 Under the provisions of FASB Statement No. 94, “Consolidation of All Majority-owned Subsidiaries,” a subsidiary will not be consolidated if control is temporary or if control does not rest with the majority owner, such as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under severe foreign exchange restrictions or other governmentally imposed restrictions.

7 Consolidated financial statements are intended primarily for the stockholders and creditors of the parent company, according to SFAS No. 160 (and ARB No. 51).

8 The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of the outstanding capital stock of the parent company.

9 Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or consolidation accounted for as an acquisition. But goodwill from consolidation would not appear in the general ledger of a parent company or its subsidiary. Goodwill is entered in consolidation working papers when the reciprocal investment and equity amounts are eliminated. Working paper entries affect consolidated financial statements, but they are not entered in any general ledger.

©2009 Pearson Education, Inc. publishing as Prentice Hall3-1

3-2 An Introduction to Consolidated Financial Statements

10 The parent company’s investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is consolidated. It would appear in the parent company’s separate balance sheet under the heading “investments” or “other assets.” Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as investments or other assets. They are accounted for under the equity method if the parent can exercise significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost method.

11 Parent’s books: Reciprocal accounts on subsidiary’s books:Investment in subsidiary Capital stock and retained earningsSales PurchasesAccounts receivable Accounts payableInterest income Interest expenseDividends receivable Dividends payableAdvance to subsidiary Advance from parent

12 Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order to show the financial position and results of operations of the total economic entity that is under the control of a single management team. Sales by a parent to a subsidiary are internal transactions from the viewpoint of the economic entity and the same is true of interest income and interest expense and rent income and rent expense arising from intercompany transactions. Similarly, receivables from and payables to affiliated companies do not represent assets and liabilities of the economic entity for which consolidated financial statements are prepared.

13 The stockholders’ equity of a parent company under the equity method is the same as the consolidated stockholders’ equity of a parent company and its subsidiaries provided that the noncontrolling interest, if any, is reported outside of the consolidated stockholders’ equity. If noncontrolling interest is included in consolidated stockholders’ equity, it represents the sole difference between the parent company’s stockholders’ equity under the equity method and consolidated stockholders’ equity.

14 No. The amounts that appear in the parent company’s statement of retained earnings under the equity method and the amounts that appear in the consolidated statement of retained earnings are identical, assuming that the noncontrolling interest is included as a separate component of stockholders’ equity.

15 Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total income to the consolidated entity between controlling and noncontrolling stockholders. From the viewpoint of the controlling interest (the stockholders of the parent company), income attributable to noncontrolling interest has the same effect on consolidated net income as an expense. This is because consolidated net income is income to the parent company stockholders. Alternatively, you can view total consolidated net income as being allocated to the controlling and noncontrolling interests.

16 The computation of noncontrolling interest is comparable to the computation of retained earnings. It is computed:

Noncontrolling interest beginning of the period XXAdd: Income attributable to noncontrolling interest

XX

Deduct: Noncontrolling interest dividends –XXNoncontrolling interest end of the period XX

17 It is acceptable to consolidate the annual financial statements of a parent company and a subsidiary with different fiscal periods, provided that the dates of closing are not more than three months apart. Any significant developments that occur in the intervening three-month period should be disclosed in notes to the financial statements. In the situation described, it is acceptable to consolidate the financial statements of the subsidiary with an October 31 closing date with the financial statements of the parent with a December 31 closing date.

©2009 Pearson Education, Inc. publishing as Prentice Hall

Chapter 3 3-3

18 The acquisition of shares held by noncontrolling stockholders does not constitute a business combination. Rather, it must be accounted for as a treasury stock transaction. It is not possible, by definition, to acquire a controlling interest from noncontrolling stockholders.

SOLUTIONS TO EXERCISES

Solution E3-1 Solution E3-2

1 b 1 d2 c 2 b3 d 3 d4 d 4 d5 b 5 a6 a 6 d

7 c

Solution E3-3 [AICPA adapted]

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

2 a Goodwill has an indeterminate life and is not amortized.

3 a Owen accounts for Sharp using the equity method, therefore, consolidated retained earnings is equal to Owen’s retained earnings, or $1,240,000.

4 d All intercompany receivables and payables are eliminated.

Solution E3-4

1 Implied fair value of Santa Maria ($900,000 / 90%) $1,000,000Less: Book value of Santa Maria (900,000 )Excess fair value over book value $ 100,000Equipment undervalued 30,000 Goodwill at January 1, 2009 $ 70,000 Goodwill at December 31, 2009 = Goodwill from consolidation $ 70,000 Since goodwill is not amortized

2 Consolidated net income

Pinto’s reported net income $490,000Less: Correction for depreciation on excess allocated to equipment ($30,000/3 years) (10,000 )

Consolidated net income $480,000

Solution E3-5

1 $600,000, the dividends of Panderman



2 $330,000, equal to $300,000 dividends payable of Panderman plus $30,000 (30% of $100,000) dividends payable to noncontrolling interests of Sadisman.


Chapter 3 3-5

Solution E3-6

Preliminary computationCost of Slider stock (Fair value) $1,250,000Book value of Slider 1,000,000

Goodwill $ 250,000

1 Journal entry to record push down values

Inventories 20,000Land 50,000Buildings — net 150,000Equipment — net 80,000Goodwill 250,000Retained earnings 210,000

Note payable 10,000Push-down capital 750,000

2 Slider CorporationBalance SheetJanuary 1, 2010(in thousands)

AssetsCash $ 70Accounts receivable 80Inventories 100Land 200Buildings — net 500Equipment — net 300Goodwill 250 Total assets $1,500

LiabilitiesAccounts payable $ 100Note payable 150 Total liabilities 250

Stockholders’ equityCapital stock $ 500Push-down capital 750 Total stockholders’ equity 1,250 Total liabilities and stockholders’ equity $1,500



Solution E3-7

1 Pasture Corporation and SubsidiaryConsolidated Income Statement

for the year 2010(in thousands)

Sales ($1,000 + $400) $1,400Less: Cost of sales ($600 + $200) (800 )

Gross profit 600Less: Depreciation expense ($50 + $40) (90)

Other expenses ($199 + $90) (289 )

Total consolidated income 221Less: Noncontrolling interest share ($70 ´ 30%) (21 ) Controlling interest share of cnsolidated net income $ 200

2 Pasture Corporation and SubsidiaryConsolidated Income Statement

for the year 2010(in thousands)

Sales ($1,000 + $400) $1,400Less: Cost of sales ($600 + $200) (800 )

Gross profit 600Less: Depreciation expense ($50,000 + $40,000 - $6,000) (84)

Other expenses ($199,000 + $90,000) (289 )

Total consolidated income 227Less: Noncontrolling interest share [($70 ´ 30%)+ ($6 depreciation x 30%)] (22.8 ) Controlling interest share of cnsolidated net income $ 204.2

Supporting computations

Depreciation of excess allocated to overvalued equipment:$30/5 years = $6


Chapter 3 3-7

Solution E3-8

1 Capital stock

The capital stock appearing in the consolidated balance sheet at December 31, 2009 is $1,800,000, the capital stock of Poball, the parent company.

2 Goodwill at December 31, 2009

Investment cost at January 2, 2009 (80% interest) $700,000Implied total fair value of Softcan ($700,000 / 80%) $875,000Book value of Softcan(100%) (600,000)Excess is considered goodwill since no other fair value information is given. $275,000

3 Consolidated retained earnings at December 31, 2009

Poball’s retained earnings January 2 (equal to beginning consolidated retained earnings $800,000Add: Net income of Poball (equal to controlling share of consolidated net income) 300,000Less: Dividends declared by Poball (180,000)

Consolidated retained earnings December 31 $920,000

4 Noncontrolling interest at December 31, 2009

Capital stock and retained earnings of Softcan on January 2 $600,000Add: Softcan’s net income 90,000Less: Dividends declared by Softcan (50,000 )

Softcan’s stockholders’ equity December 31 640,000Noncontrolling interest percentage 20 %

Noncontrolling interest December 31 $128,000

5 Dividends payable at December 31, 2009

Dividends payable to stockholders of Poball $ 90,000Dividends payable to noncontrolling stockholders ($25,000 ´ 20%) 5,000 Dividends payable to stockholders outside the Consolidated entity $ 95,000



Solution E3-9

Paskey Corporation and SubsidiaryPartial Balance Sheetat December 31, 2010

Stockholders’ equity:Capital stock, $10 par $300,000Additional paid-in capital 50,000Retained earnings 65,000 Equity of controlling stockholders 415,000Noncontrolling interest 41,000 Total stockholders’ equity $456,000

Supporting computationsComputation of consolidated retained earnings:Paskey’s December 31, 2009 retained earnings $ 35,000Add: Paskey’s reported income for 2010 55,000Less: Paskey’s dividends (25,000 )

Consolidated retained earnings December 31, 2010 $ 65,000

Computation of noncontrolling interest at December 31, 2010Salam’s December 31, 2009 stockholders’ equity $200,000Income less dividends for 2010 ($20,000 - $15,000) 5,000 Salam’s December 31, 2010 stockholders’ equity 205,000Noncontrolling interest percentage 20 %Noncontrolling interest December 31, 2010 $ 41,000


Chapter 3 3-9

Solution E3-10

Peekos Corporation and SubsidiaryConsolidated Income Statement

for the year ended December 31, 2011(in thousands)

Sales $2,100Cost of goods sold 1,100 Gross profit 1,000Deduct: Operating expenses 560 Total consolidated income 440Deduct: Noncontrolling interest share 14 Controlling interest share of consolidated net income $ 426

Supporting computations

Investment cost January 2, 2009 (90% interest) $ 810Implied total fair value of Slogger ($810,000 / 90%) $ 900Slogger’s Book value acquired (100%) (700 )

Excess of fair value over book value $ 200

Excess allocated to:Inventories (sold in 2009) $ 30Equipment (4 years remaining use life) 40Goodwill 130

Excess of fair value over book value $ 200

Operating expenses:Combined operating expenses of Peekos and Slogger $ 550Add: Depreciation on excess allocated to equipment ($40,000/4 years) 10 Consolidated operating expenses $ 560



SOLUTIONS TO PROBLEMS

Solution P3-1

1 Pennyvale Corporation and SubsidiaryConsolidated Balance Sheet

at December 31, 2009

AssetsCash ($32,000 + $18,000) $ 50,000Accounts receivable ($45,000 + $34,000 - $5,000) 74,000Inventories ($143,000 + $56,000) 199,000Equipment — net ($380,000 + $175,000) 555,000 Total assets $878,000

Liabilities and Stockholders’ EquityLiabilities:Accounts payable ($40,000 + $33,000 - $5,000) $ 68,000Stockholders’ equity:Common stock, $10 par 460,000Retained earnings 300,000Noncontrolling interest ($150,000 + $100,000) ´ 20% 50,000 Total liabilities and stockholders’ equity $878,000

2 Consolidated net income for 2010

Pennyvale’s separate income $170,000Add: Income from Sutherland Sales ($90,000 ´ 80%) 90,000

Consolidated net income $260,000Noncontrolling interest share (20% x $90,000) $ 18,000Controlling interest share (80%) $242,000


Chapter 3 3-11

Solution P3-2

1 Schedule to allocate fair value/book value differential

Cost of investment in Setting $175,000Implied fair value of Setting ($175,000 / 70%) $250,000Book value of Setting (110,000)

Excess fair value over book value $140,000Excess allocated:

Fair Value Book Value AllocationInventories ($50,000 - $30,000) $ 20,000Land ($60,000 - $50,000) 10,000Buildings — net ($90,000 - $70,000) 20,000Equipment — net ($30,000 - $40,000) (10,000)Other liabilities ($40,000 - $50,000) 10,000

Allocated to identifiable net assets 50,000Goodwill for the remainder 90,000

Excess fair value over book value $140,000

2 Parlor Corporation and SubsidiaryConsolidated Balance Sheet

at January 1, 2009

AssetsCurrent assets:Cash ($35,000 + $20,000) $ 55,000Receivables — net ($80,000 + $30,000) 110,000Inventories ($70,000 + $30,000 + $20,000) 120,000 $285,000

Property, plant and equipment:Land ($100,000 + $50,000 + $10,000) $160,000Buildings — net ($110,000 + $70,000 + $20,000) 200,000Equipment — net ($80,000 + $40,000 - $10,000) 110,000 470,000Goodwill (from consolidation) 90,000 Total assets $845,000

Liabilities and Stockholders’ EquityLiabilities:Accounts payable ($90,000 + $80,000) $170,000Other liabilities ($10,000 + $50,000 - $10,000) 50,000 $220,000

Stockholders’ equity:Capital stock $500,000Retained earnings 50,000 Equity of controlling stockholders 550,000Noncontrolling interest * 75,000 625,000 Total liabilities and stockholders’ equity $845,000

* 70% of implied fair value of $250,000 = $75,000.



Solution P3-3

Cost of investment in Softback Books January 1, 2009 $2,700,000Implied fair value of Softback ($2,700,000 / 80%) $3,375,000Book value of Softback 2,500,000 Excess of fair value over book value $ 875,000

Schedule to Allocate Fair Value — Book Value Differential

Fair Value- Book Value Allocation

Current assets $ 500,000 $ 500,000Equipment 1,000,000 1,000,000Other plant assetsBargain purchase * (625,000 )


* After recognizing acquired assets and liabilities at their fair values, we are left with a negative excess of $625,000. Under SFAS No. 141R, this difference is recorded as a gain in the consolidated income statement in the year of acquisition. The gain is attributable entirely to the controlling interest, and is recorded on the parent’s books by a debit to the Investment account and a credit to a Gain from bargain Purchase account. An alternative calculation of this amount takes the difference between the fair values of the net assets ($4,000,000) and their fair value implied by the acquisition price ($3,375,000), which equals $625,000.

Solution P3-4

Noncontrolling interest of $65,000 (it’s fair value) plus $260,000 (fair value of Pharm’s investment) equals total fair value of $325,000. Therefore, Pharm’s interest is 80% ($260,000 / $325,000), and noncontrolling interest is 20% ($65,000 / $325,000).

Total fair value $ 325,000Book value of Specht (260,000 )Excess fair value over book value $ 65,000

Excess allocated to

Fair Value - Book ValuePlant assets — net $210,000 - $200,000 $ 10,000Goodwill 55,000 Total $ 65,000


Chapter 3 3-13

Solution P3-5

Palmer Corporation and SubsidiaryConsolidated Balance Sheet

at December 31, 2009(in thousands)

AssetsCurrent assets $ 340Plant assets 830Goodwill 200

$1,370EquitiesLiabilities $ 660Capital stock 300Retained earnings 410

$1,370

Supporting computationsSorrel’s net income ($400 - $300 - $50) $ 50Less: Excess allocated to inventories that were sold in 2009 (20)Less: Depreciation on excess allocated to plant assets ($40 /4 years) (10 )Income from Sorrel $ 20

Plant assets ($500 + $300 + $40 - $10) $ 830

Palmer’s retained earnings:Beginning retained earnings $ 340Add: Operating income 100Add: Income from Sorrel 20Deduct: Dividends (50 )Retained earnings December 31, 2009 $ 410



Solution P3-6

Perry Corporation and SubsidiaryConsolidated Balance Sheet Working Papers


Perryper books

Simper books

Adjustments andEliminations

ConsolidatedBalance Sheet

Cash $ 42 $ 20 $ 62

Receivables — net 50 130 b 9 171

Inventories 350 50 400

Land 150 200 350

Equipment — net 600 100 700

Investment in Sim 459 a 459

Goodwill a 100 100

Total assets $1,651 $ 500 $1,783

Accounts payable $ 410 $ 80 $ 490

Dividends payable 60 10 b 9 61

Capital stock 1,000 300 a 300 1,000

Retained earnings 181 110 a 110 181

Noncontrolling interest a 51 51

Total equities $1,651 $ 500 $1,783

a To eliminate reciprocal investment and equity accounts, record goodwill ($100), and enter noncontrolling interest [($410 equity + $100 goodwill) ´ 10%)].

b To eliminate reciprocal dividends receivable (included in receivables — net) and dividends payable amounts ($10 dividends ´ 90%).


Chapter 3 3-15

Solution P3-7

Preliminary computationsCost of 80% investment January 3, 2009 $280,000Implied total fair value of Slender ($280,000 / 80%) $350,000Book value of Slender (250,000)

Excess fair value over book value on January 3 = Goodwill $100,000

1 Noncontrolling interest share of income:Slender’s net income $50,000 ´ 20% noncontrolling interest $ 10,000

2 Current assets:Combined current assets ($204,000 + $75,000) $279,000Less: Dividends receivable ($10,000 ´ 80%) (8,000 ) Current assets $271,000

3 Income from Slender: None Investment income is eliminated in consolidation.

4 Capital stock: $500,000 Capital stock of the parent, Portly Corporation.

5 Investment in Slender: None The investment account is eliminated.

6 Excess of fair value over book value $100,000

7 Controlling share of consolidated net income: Equals Portly’s net income, or:Consolidated sales $600,000Less: Consolidated cost of goods sold (370,000)Less: Consolidated expenses (80,000 )Consolidated net income $150,000Less: Noncontrolling interest share (10,000 ) Controlling share of consolidated net income $140,000

8 Consolidated retained earnings December 31, 2009: $200,000 Equals Portly’s beginning retained earnings.

9 Consolidated retained earnings December 31, 2010Equal to Portly’s ending retained earnings:Beginning retained earnings $200,000Add: Controlling share of consolidated net income 140,000Less: Portly’s dividends for 2010 (60,000 )

Ending retained earnings $280,000

10 Noncontrolling interest December 31, 2010Slender’s capital stock and retained earnings $300,000Add: Net income 50,000Less: Dividends (25,000 )Slender’s equity December 31, 2010 at fair value 325,000Noncontrolling interest percentage 20 %Noncontrolling interest December 31, 2010 using book value $ 65,000Add: Noncontrolling interest share of Goodwill 20,000 Noncontrolling interest December 31, 2010 at fair value $ 85,000



Solution P3-8 [AICPA adapted]

Preliminary computations Meadow VanInvestment cost:

Meadow (1,000 shares ´ 80%) ´ $70 56,000Van (3,000 shares ´ 70%) ´ $40 84,000

Implied total fair values:Meadow ($56,000 / 80%) 70,000Van ($84,000 / 70%) 120,000

Book valueMeadow ($70,000 ´ 80%) 70,000Van ($120,000 ´ 70%) 120,000

Excess fair value over book value at acquisition 0 0

1 Journal entries to account for investments

January 1, 2009 — Acquisition of investmentsInvestment in Meadow (80%) 56,000

Cash 56,000To record acquisition of 800 shares of Meadow common stock at $70 per share.

Investment in Van (70%) 84,000Cash 84,000To record acquisition of 2,100 shares of Van common stock at $40 per share.

During 2006 — Dividends from subsidiariesCash 12,800

Investment in Meadow (80%) 12,800To record dividends received from Meadow ($16,000 ´ 80%).

Cash 6,300Investment in Van (70%) 6,300To record dividends received from Van ($9,000 ´ 70%).

December 31, 2009 — Share of income or lossInvestment in Meadow (80%) 28,800

Income from Meadow 28,800To record investment income from Meadow ($36,000 ´ 80%).

Loss from Van 8,400Investment in Van (70%) 8,400To record investment loss from Van ($12,000 ´ 70%).


Chapter 3 3-17

Solution P3-8 (continued)

2 Noncontrolling interest December 31, 2009 *Meadow Van

Common stock $50,000 $60,000Capital in excess of par 20,000Retained earnings 40,000 19,000 Equity December 31 90,000 99,000Noncontrolling interest percentage 20 % 30 % Noncontrolling interest December 31 $18,000 $29,700

* Fair value equals book value.

3 Consolidated retained earnings December 31, 2009

Consolidated retained earnings is reported at $304,600, equal to the retained earnings of Todd Corporation, the parent, at December 31, 2009.

4 Investment balance December 31, 2009:Meadow Van

Investment cost January 1 $56,000 $84,000Add (deduct): Income (loss) 28,800 (8,400)Deduct: Dividends received (12,800) (6,300 ) Investment balances December 31 $72,000 $69,300

Check: Investment balances should be equal to the underlying book value

Meadow $90,000 ´ 80% = $72,000

Van $99,000 ´ 70% = $69,300



Solution P3-9

Preliminary computations (in thousands)Cost of 90% investment January 1, 2009 $3,600 Implied total fair value of Snowdrop ($3,600 / 90%) $4,000Book value of Snowdrop (2,700 )

Excess fair value over book value on January 1 $1,300 Allocation to equipment $ 800 Remainder is Goodwill $ 500 Additional annual depreciation on equipment ($800 / 8 years) $ 100

Pansy Corporation and SubsidiaryConsolidated Balance Sheet Working Papers


Pansy90%

SnowdropAdjustments andEliminations


Cash $ 300 $ 200 $ 500

Receivables — net 600 400 1,000

Dividends receivable 90 B 90

Inventory 700 600 1,300

Land 600 700 1,300

Buildings — net 2,000 1,000 3,000

Equipment — net 1,500 800 a 700 3,000

Investment in Snowdrop 3,780 a 3,780

Goodwill a 500 500

Total assets $9,570 $3,700 $10,600


Dividends payable 500 100 b 90 510

Capital stock 7,000 2,000 a 2,000 7,000

Retained earnings 1,770 1,000 a 1,000 1,770

Noncontrolling interest a 420 420

Total equities $9,570 $3,700 $10,600

a To eliminate reciprocal investment and equity accounts, enter unamortized excess allocated to equipment, record goodwill, and enter noncontrolling interest (at fair value).

b To eliminate reciprocal dividends receivable and dividends payable amounts.


Chapter 3 3-19

Solution P3-10

1 Purchase price of investment in Snaplock (in thousands)

Underlying book value of investment in Snaplock:Equity of Snaplock January 1, 2009 $220Add: Excess investment fair value over book value:

Goodwill at December 31, 2013 60 Fair value of Snaplock January 1, 2009 $280

Purchase price of 80% investment at fair value $224

2 Snaplock’s stockholders’ equity on December 31, 2013 (in thousands)

20% noncontrolling interest at fair value $ 6220% goodwill (12)20% noncontrolling interest’s equity at book value $ 50Total equity = Noncontrolling interest’s equity $50 / 20% = $250

3 Pandora’s investment in Snaplock account balance at December 31, 2013(in thousands)Underlying book value in Snaplock December 31, 2013 ($250 ´ 80%) $200Add: 80% of Goodwill December 31, 2013 (20% is attributable to the noncontrolling interest) 48

Investment in Snaplock December 31, 2013 $248

Alternative solution:Investment cost January 1, 2009 $224Add: 80% of Snaplock’s increase since acquisition ($250 - $220) ´ 80% 24 Investment in Snaplock December 31, 2013 $248

4 Pandora’s capital stock and retained earnings December 31, 2013(in thousands)Capital stock $400Retained earnings $ 30

Amounts are equal to capital stock and retained earnings shown in the consolidated balance sheet.



Solution P3-11

Preliminary computations (in thousands)Cost of 70% investment in Stubb $ 670Implied fair of Stubb ($700 / 70%) $1,000Book value of Stubb (100%) 800

Excess $ 200Excess allocated:

Inventories $ 20Plant assets 80Goodwill 100 Excess $ 200

Investment balance at January 1, 2009 $ 700Share of Stubb’s retained earnings increase ($60 ´ 70%) 42Less: Amortization

70% of excess allocated to inventories (sold in 2009) (14)70% of excess allocated to plant assets ($80 /8 years) (7)

Investment balance at December 31, 2009 $ 721

Noncontrolling interest at December 3130% of Stubb’s book value at December 31 ($860 x 30%) $25830% of Goodwill 3030% Unamortized excess for plant assets 30% x ($80 - $10 amortization) 21 Noncontrolling at December 31 (fair value) $309

Pope Corporation and SubsidiaryConsolidated Balance Sheet Working Papers


Pope70%

StubbAdjustments andEliminations


Cash $ 60 $ 20 $ 80

Accounts receivable — net 440 200 640

Accounts receivable — Pope

10 b 10

Dividends receivable 7 c 7

Inventories 500 320 820

Land 100 150 250

Plant assets — net 700 350 a 70 1,120

Investment in Stubb 721 a 721

Goodwill a 100 100

Assets $2,528 $1,050 $3,010


Account payable to Stubb 10 b 10

Dividends payable 40 10 c 7 43

Long-term debt 600 100 700

Capital stock 1,000 500 a 500 1,000

Retained earnings 578 360 a 360 578


Chapter 3 3-21

Noncontrolling interest ($860,000 ´ 30%) a 309 309

Equities $2,528 $1,050 $3,010



Solution P3-12

Preliminary computations (in thousands)80% Investment in Shasti at cost January 1, 2009 $ 760Implied total fair value of Shasti ($760 / 80%) $ 950Shasti book value 900

Excess fair value over book value recorded as goodwill $ 50

ShastiDividends

ShastiNet Income

80% ofNet Income

2009 $ 40 $ 80 $ 642010 50 100 802011 60 120 96

$150 $300 $240

1 Shasti’s dividends for 2010 ($40 / 80%) $ 50

2 Shasti’s net income for 2010 ($50 dividends ´ 2) $ 100

3 Goodwill — December 31, 2010 $ 40

4 Noncontrolling interest share of income — 2011Shasti’s income for 2011 ($48 dividends received/80%) ´ 2 $ 120Noncontrolling interest percentage 20 %

Noncontrolling interest share $ 24

5 Noncontrolling interest December 31, 2011Equity of Shasti January 1, 2009 $ 900Add: Income for 2009, 2010 and 2011 300Deduct: Dividends for 2009, 2010 and 2011 (150 )Equity book value of Shasti December 31, 2011 1,050Goodwill 50 Equity fair value of Shasti December 31, 2011 $1,100 Noncontrolling interest percentage 20 %

Noncontrolling interest December 31, 2011 $ 220

6 Controlling share of consolidated net income for 2011Pendleton’s separate income $ 280Add: Income from Shasti 96

Controlling share of consolidated net income $ 376


Chapter 3 3-23

Solution P3-13

Preliminary computations80% Investment in Sidney (cost) January 2, 2010 $300Implied total fair value of Sidney ($300 / 80%) $375Book value of Sidney (100%) (250)

Excess fair value over book value $125

Excess allocated toBuildings (fair value $170 - book value $150) $ 20Remainder to goodwill 105

Excess fair value over book value $125

Part 1

a Total current assetsCash ($50 + $20) $ 70Other current assets ($150 + $80) 230

Total current assets $300

b Plant and equipment net of depreciationLand ($300 + $50) $350Buildings — net ($400 + $150) 550Excess allocated to buildings 20

Plant and equipment — net $920

c Common stockPar value of Peyton’s stock December 31, 2009 $600Add: Par value of shares issued for Sidney 100

Common stock $700

d Additional paid-in capitalAdditional paid-in capital of Peyton December 31, 2009 $ 60Add: Increase from shares issued from Sidney 200

Additional paid-in capital $260

e Retained earningsConsolidated retained earnings = Peyton’s retained earnings December 31, 2009 $140




Part 2

a Income from Sidney — 2010Sidney’s reported net income $ 40Less: Depreciation on excess — buildings ($20 /5 years) (4 )Adjusted Net Income of Sidney $ 36.8

80% of Sidney’s Net Income = Income from Sidney $ 28.8

b Investment in Sidney December 31, 2010Cost January 2 $300Add: Income from Sidney 28.8Less: Dividends from Sidney ($20 ´ 80%) (16 )

Investment in Sidney December 31 $312.8

c Controlling share of consolidated net income — 2010Separate income of Peyton $ 90Add: Income from Sidney 28.8

Controlling share of consolidated net income $118.8

d Consolidated retained earnings December 31, 2010Retained earnings of Peyton December 31, 2009 $140Add: Consolidated net income 118.8Less: Peyton’s dividends (50 )

Consolidated retained earnings December 31 $208.8

e Noncontrolling interest December 31, 2010Equity of Sidney December 31, 2009 $250Add: Net income 40Less: Dividends (20 )Equity book value of Sidney December 31 270Unamortized excess for buildings 16Goodwill 105 Equity fair value of Sidney December 31 $391Noncontrolling interest percentage 20 %

Noncontrolling interest fair value - December 31 $ 78.2


Chapter 3 3-25

Solution P3-14

1 Schedule to allocate the investment fair value — book value differential: (in thousands)80% Investment cost January 2, 2009 $2,760Implied total fair value ($2,760 / 80%) $3,450Book value of interest acquired ($2,300 ´ 80%) (2,300)


Excess allocated

Fair Value - Book Value = Allocated

Inventories $ 500 $ 400 $ 100Other current assets 200 150 50Land 600 500 100Buildings — net 1,800 1,000 800Equipment — net 600 800 (200)Other liabilities 560 610 50Remainder to goodwill 250

Total excess $1,150




2 Portland Corporation and SubsidiaryConsolidated Balance Sheet

at January 2, 2009(in thousands)

AssetsCurrent Assets:Cash ($240 + $60) $ 300Receivables — net ($800 + $200) 1,000Inventories ($1,100 + $400 + $100) 1,600Other current assets ($900 + $150 + $50) 1,100

Total current assets 4,000 Fixed Assets:Land ($3,100 + $500 + $100) $ 3,700Buildings — net ($6,000 + $1,000 + $800) 7,800Equipment — net ($3,500 + $800 - $200) 4,100Goodwill 250

Total fixed assets 15,850 Total assets $19,850

Liabilities and Stockholders’ EquityLiabilities:Accounts payable ($400 + $200) $ 600Other liabilities ($1,500 + $610 - $50) 2,060

Total liabilities 2,660

Stockholders’ equity:Capital stock $15,000Retained earnings 1,500Noncontrolling interest * 690

Total stockholders’ equity 17,190 Total liabilities and stockholders’ equity $19,850

* Noncontrolling interestSidney’s equity at book value $2,300Unamortized excess fair value 1,150Sidney’s equity at fair value $3,45020% Noncontrolling interest $ 690


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