CHAPTER 3CONSOLIDATIONS—SUBSEQUENT TO

THE DATE OF ACQUISITION

Answers to Questions

1. a. CCES Corp., for its own recordkeeping, may apply the equity method to the investment in Schmaling. Under this approach, the parent's records parallel the activities of the subsidiary. Income will be accrued by the parent as it is earned by the subsidiary. Dividends paid by Schmaling cause a reduction in book value; therefore, the investment account is reduced by CCES in a corresponding manner. In addition, any excess amortization expense associated with the allocation of CCES's purchase price is recognized through a periodic adjustment. By applying the equity method, both the income and investment balances maintained by the parent 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 will be accounted for as income but no other investment entries are recorded. Thus, the initial value method is quite easy to apply. However, the balances found within the parent's financial records may not provide a reasonable representation of the totals that will 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 in the same manner as the equity method. Similarly, dividends are reported as a reduction in 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 intercompany in nature. Thus, the entire amount will be 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 intercompany. Consequently, only the dividends paid by the parent company will be reported in the financial statements for this business combination.

d. Any goodwill recognized within Maguire's original acquisition price must still be reported for consolidation purposes. Reductions to the goodwill balance are made if goodwill is determined to be impaired.

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

f. Consolidated expenses can be determined by adding the parent's book value to that of the subsidiary and then including any amortization expense associated with the purchase price. As will be discussed in detail in Chapter Five, intercompany expenses can also be present which require elimination in arriving at consolidated figures.

g. Only the common stock outstanding for the parent company 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. When using the equity method, subsidiary earnings are accrued and amortization expense (associated with the acquisition price in a purchase) is recognized in the same manner as in the consolidation process. The equity method parallels consolidation. Thus, the net income and retained earnings reported by the parent company 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). 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 the initial value method is applied by the parent company, no accrual is recorded to reflect the subsidiary's change in book value during the years following acquisition. Furthermore, recognition of excess amortizations relating to the acquisition price 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 established within 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 initial value method has been applied by the acquiring company, any changes in the subsidiary's book value in previous years must be recorded 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 is needed if the equity method has been applied; changes in the subsidiary's book value as well as excess amortization expense will be recorded each year by the parent. Thus, under the equity method, the parent's investment and beginning retained earnings balances are both correctly established without further adjustment.

6. Lambert's loan payable and the receivable held by Jenkins are intercompany accounts. As such, the reciprocal balances should be offset in the consolidation process. The $100,000 is not a debt to or a receivable from an unrelated (or outside) party and should, therefore, not be reported in consolidated financial statements. Additionally any interest income/expense recognized on this loan is also intercompany in nature and must likewise be eliminated.

7. Since the equity method has been applied by Benns, 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 income as it is earned by the

subsidiary;c. The reductions that are created by the subsidiary's payment of dividends;d. The periodic amortization recognized by Benns in connection with the allocations

identified with its purchase price.

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 purchased subsidiary when, at the reporting unit level, the fair value is less than its carrying amount. Goodwill is reduced when its carrying value is less than its fair value. To compute fair value for goodwill, its implied value is calculated by subtracting the fair values of the reporting unit’s identifiable net assets from its total fair value. The impairment is recognized as a loss from continuing operations.

10. The additional consideration is merely an extra component of the price paid by Remo to purchase Albane. Thus, any goodwill recognized at the original date of acquisition will be increased in 2009 by $100,000. However, if a bargain purchase occurred on January 1, 2009, this new payment reduces the allocations to noncurrent assets previously recognized for consolidation purposes.

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 would be 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 purchased. Push-down accounting is justified in that the consideration transferred by the present owners is reported. For example, if a piece of land costs Company B $10,000 but Company A pays $13,000 for the land when 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, leaving 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 allocations made at the date of the acquisition.

Periodic amortization expense is recognized subsequently by the subsidiary on each of these allocations (except for land). Therefore, the income recorded by the subsidiary is a fair representation of that company's 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.

13. Push-down accounting has become popular for the parent's internal reporting purposes for two reasons. First, this method simplifies the consolidation process each year. If purchase price allocations and subsequent amortization are recorded by the subsidiary, they do not need to be repeated each year on a consolidation worksheet. Second, recording of amortization by the subsidiary enables that company's information to provide a good representation of the impact that the acquisition has on the earnings of the business combination. For example, if the subsidiary earns $100,000 each year but annual amortization is $80,000, the acquisition is only adding $20,000 to the income of the combination each year rather than the $100,000 that is reported by the subsidiary unless push-down accounting is used.

Answers to Problems1. A2. B3. A

4. D Willkom equipment book value—12/31/11.......................... $210,000Szabo book value—12/31/11................................................ 140,000Original purchase price allocation to Szabo's equipment($300,000 – $200,000)............................................................ 100,000Amortization of allocation

($100,000/10 years for 3 years)....................................... (30,000)Consolidated equipment...................................................... $420,000

5. A

6. B

7. D

8. B

9. A and B are correct

10.C

11.C $60,000 allocation to equipment is "pushed-down" to subsidiary and increases balance from $330,000 to $390,000. Consolidated balance is $420,000 plus $390,000.

12. (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—1/1/09 ................................... $400,000Herbert income—2009 .................................................... 40,000Herbert dividends—2009 (subsidiary dividends are

intercompany and, thus, eliminated) ....................... (10,000)Rambis income—2009 (not included in parent's income) 20,000Amortization—2009 ........................................................ (12,000)Herbert income—2010 .................................................... 50,000Herbert dividends—2010................................................. (10,000)Rambis income—2010 .................................................... 30,000Amortization—2010 ....................................................... (12,000)Consolidated Retained Earnings, 12/31/10................... $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 of the parent less the dividends of the parent plus the income of the subsidiary less amortization expense. Thus, consolidated retained earnings on December 31, 2010 are $496,000 as computed above.

b. Investment in Rambis—Equity Method

Rambis fair value 1/1/09............................................................. $574,000Rambis income 2009.................................................................. 20,000Rambis dividends 2009.............................................................. (5,000)Herbert’s 2009 excess fair over book value amortization ..... (12,000)Investment account balance 1/1/10.......................................... $577,000

Investment in Rambis—Partial Equity Method

Rambis fair value 1/1/09............................................................. $574,000Rambis income 2009.................................................................. 20,000Rambis dividends 2009.............................................................. (5,000)Investment account balance 1/1/10.......................................... $589,000

Investment in Rambis—Initial value method

Rambis fair value 1/1/09............................................................. $574,000Investment account balance 1/1/10.......................................... $574,000

12. (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 METHODAmortization for the prior years (only 2009 in this case) has not been recorded and must be brought into the consolidation through worksheet entry *C:ENTRY *CRetained Earnings, 1/1/10 (Parent) ..................... 12,000

Investment in Rambis .................................... 12,000(To record 2009 amortization in consolidated figures. Expense wasomitted because of application of partial equity method.)

INITIAL VALUE METHODAmortization for the prior years (only 2009 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 2009). 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 *CInvestment in Rambis .......................................... 3,000

Retained Earnings, 1/1/10 (Parent) ............... 3,000(To record 2009 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, 2010 Retained Earnings balance equal to that of the equity method.

13. (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) $135,000Book value equivalency ................................................. (100,000)Excess of Turner fair value over book value ............... $35,000Excess fair value assigned to specific Annual Excessaccounts based on fair value Life Amortizations

Equipment ......................... $5,000 5 yrs. $1,000Customer List ......................30,000 10 yrs. 3,000

$4,000

Acquisition fair value...................................................... $135,0002009 Income accrual ....................................................... 110,0002009 Dividends paid by Turner ..................................... (50,000)2009 Amortizations (above) ........................................... (4,000)2010 Income accrual ....................................................... 130,0002010 Dividends paid by Turner ..................................... (40,000)2010 Amortizations ......................................................... (4,000)Investment in Turner account balance ......................... $277,000

b. Net income of Haynes .................................................... $240,000Net Income of Turner ...................................................... 130,000Depreciation expense...................................................... (1,000)Amortization expense..................................................... (3,000)

Consolidated net income 2010 ................................ $366,000

c. Equipment balance Haynes ........................................... $500,000Equipment balance Turner ............................................ 300,000Allocation based on fair value (above) ......................... 5,000Depreciation for 2009-2010 ............................................ (2,000)Consolidated equipment—December 31, 2010............. $803,000

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

13. (continued)

d. If the initial value method was applied during 2009, the parent would have recorded dividend income of $50,000 rather than $110,000 (as equity income). Income is, therefore, understated by $60,000. In addition, amortization expense of $4,000 was not recorded. Thus, the January 1, 2010, 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 ........................................... 56,000Retained Earnings, 1/1/10 (Haynes) .............. 56,000

If the partial equity method was applied during 2009, 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, 1/1/10 (Haynes) ................... 4,000Investment in Turner ...................................... 4,000

If the equity method was applied during 2009, the parent's retained earnings are the same as the consolidated figure so that no adjustment is necessary.

14. (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 $450,000Fair value of shares issued 1,248,000Fair value transferred $1,698,000

Fair value transferred (above) $1,698,000Fair value of net assets acquired and liabilities assumed 1,298,000Goodwill recognized in the combination $400,000

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

Cash $ 75,000Receivables 193,000Inventory 281,000Patents 525,000Customer relationships 500,000Equipment 295,000Goodwill 400,000

Accounts Payable $ 121,000Long-Term Liabilities 450,000Cash 450,000Common Stock (Francisco Co., par value) 104,000Additional Paid-in Capital 1,144,000

b. Step one in goodwill impairment test:Fair value of reporting unit as a whole 1,425,000Book 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 $1,425,000Fair values of reporting unit's net assets (excluding goodwill) 1,325,000Implied fair value of goodwill 100,000Book value of goodwill 400,000Goodwill impairment loss $300,000

15. (20 minutes) (Goodwill impairment testing.)a. Goodwill ImpairmentStep 1

Fair value of reporting unit = $650Carrying value of reporting unit = 780

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

Step 2 Fair value of reporting unit $650Fair value of net assets excluding goodwill

Tangible assets $110 Recognized intangibles 230 Unrecognized intangibles 200 540

Implied value of goodwill 110Carrying value of goodwill 500Goodwill impairment loss $390

b. Tangible assets, net $80Goodwill 110Customer list -0-Patent -0-

16. (30 minutes) (Goodwill impairment and intangible assets.)

Part a Goodwill Impairment Test—Step 1

Total fair Carrying Potential goodwillvalue value impairment?

Sand Dollar $510,000 < $530,000 yesSalty Dog 580,000 < 610,000 yesBaytowne 560,000 > 280,000 no

Part b

Goodwill Impairment Test—Step 2 (Sand Dollar and Salty Dog only)Sand Dollar—total fair value $510,000Fair 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 100,000Carrying value of goodwill 120,000Impairment loss $20,000

Salty Dog—total fair value $580,000Fair values of identifiable net assets

Tangible assets $200,000 Unpatented technology 125,000 Licenses 100,000 425,000

Implied value of goodwill 155,000Carrying value of goodwill 150,000No 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.

17. (30 Minutes) (Consolidation entries for two years. Parent uses equity method.)

Fair Value Allocation and Annual Amortization:Acquisition fair value (consideration paid) ............ $490,000Book value (assets minus

liabilities or total stockholders'equity) ................................................................... (400,000)

Excess fair value over book value ........................... $90,000Excess fair value assigned to specificaccounts based on individual fair values Annual Excess

Life AmortizationsLand ..................................... $10,000 -- --Buildings ........................... 40,000 4 yrs. $10,000Equipment ........................... (20,000) 5 yrs. (4,000)Total assigned to specific

accounts ...................... 30,000Goodwill .............................. 60,000 Indefinite -0-Total ..................................... $90,000 $6,000

Consolidation Entries as of December 31, 2009

Entry SCommon Stock—Abernethy................................ 250,000Additional Paid-in Capital .................................. 50,000Retained Earnings—1/1/09 .................................. 100,000

Investment in Abernethy ................................ 400,000(To eliminate stockholders' equity accounts of subsidiary)

Entry ALand ...................................................................... 10,000Buildings ............................................................... 40,000Goodwill ................................................................ 60,000

Equipment ....................................................... 20,000Investment in Abernethy ................................ 90,000

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

17. (continued)

Entry IEquity in Subsidiary Earnings ............................ 74,000

Investment in Abernethy ................................ 74,000(To eliminate $80,000 income accrual for 2009 less $6,000 amortizationrecorded by parent using equity method)

Entry DInvestment in Abernethy ..................................... 10,000

Dividends Paid ................................................ 10,000(To eliminate intercompany dividend transfers)

Entry EDepreciation expense........................................... 6,000Equipment............................................................. 4,000

Buildings.......................................................... 10,000(To record 2009 amortization expense)

Consolidation Entries as of December 31, 2010Entry S

Common Stock—Abernethy ............................... 250,000Additional Paid-in Capital ................................... 50,000Retained Earnings—1/1/10................................... 170,000

Investment in Abernethy ................................ 470,000(To eliminate beginning stockholders' equity of subsidiary—the Retained Earnings account has been adjusted for 2009 income and dividends. Entry *C is not needed because equity method was applied.)

Entry A Land ...................................................................... 10,000Buildings ............................................................... 30,000Goodwill ................................................................ 60,000

Equipment ....................................................... 16,000Investment in Abernethy ................................ 84,000

(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])

17. (continued)Entry I

Equity in Subsidiary Earnings ............................ 104,000Investment in Abernethy ................................ 104,000

(To eliminate $110,000 income accrual less $6,000 amortization recorded by parent during 2010 using equity method)

Entry DInvestment in Abernethy ..................................... 30,000

Dividends Paid ................................................ 30,000(To eliminate intercompany dividend transfers)

Entry ESame as Entry E for 2009

18. (35 Minutes) (Consolidation entries for two years. Parent uses initial value method.)Purchase Price Allocation and Annual Excess Amortizations:

Acquisition date value (consideration paid) ..... $500,000Book value ............................................................ (400,000)Excess price paid over book value .................... $100,000

Excess price paid assigned to specific Annual Excessaccounts based on fair values Life Amortizations

Equipment $20,000 5 yrs. $4,000Long-term liabilities 30,000 4 yrs. 7,500Goodwill $50,000 Indefinite -0-

Total $100,000 $11,500

Consolidation Entries as of December 31, 2009Entry S

Common Stock—Abernethy .............................. 250,000Additional Paid-in Capital .................................. 50,000Retained Earnings—1/1/09 ................................ 100,000

Investment in Abernethy............................... 400,000(To eliminate stockholders' equity accounts of subsidiary)

Entry AEquipment ........................................................... 20,000Long-term Liabilities .......................................... 30,000Goodwill .............................................................. 50,000

Investment in Abernethy .............................. 100,000(To recognize allocations determined above in connection with acquisition-date fair values)

18. (continued)Entry I

Dividend Income ................................................. 10,000Dividends Paid ............................................... 10,000

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

Entry EDepreciation expense ........................................ 4,000Interest expense.................................................. 7,500

Equipment....................................................... 4,000Long-term liabilities....................................... 7,500

(To record 2009 amortization expense)

Consolidation Entries as of December 31, 2010Entry *C

Investment in Abernethy .................................... 58,500Retained Earnings—1/1/10 (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 SCommon Stock—Abernethy .............................. 250,000Additional Paid-in Capital .................................. 50,000Retained Earnings—1/1/10 ................................ 170,000

Investment in Abernethy .............................. 470,000(To eliminate beginning of year stockholders' equity accounts of subsidiary. The retained earnings balance has been adjusted for 2009 income and dividends)

Entry AEquipment ........................................................... 16,000Long-term Liabilities .......................................... 22,500Goodwill .............................................................. 50,000

Investment in Abernethy .............................. 88,500(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 IDividend Income ................................................. 30,000

Dividends Paid ......................................... 30,000(To eliminate intercompany dividend payments recorded by parent as income)

Entry ESame as Entry E for 2009

19. (20 Minutes) (Consolidation entries for two years. Parent uses partial equity method.) Fair Value Allocation and Annual Excess Amortizations:Abernethy fair value (consideration paid) .............. $520,000Book value ................................................................. (400,000)Excess fair value over book value (all goodwill) .... $120,000Life assigned to goodwill ......................................... IndefiniteAnnual excess amortizations ................................... -0-Consolidation Entries as of December 31, 2009Entry S

Common Stock—Abernethy ............................... 250,000Additional Paid-in Capital ................................... 50,000Retained Earnings—Abernethy—1/1/09 ............ 100,000

Investment in Abernethy ................................ 400,000(To eliminate stockholders' equity accounts of subsidiary)

Entry AGoodwill ................................................................ 120,000

Investment in Abernethy ................................ 120,000(To recognize goodwill portion of the original acquisition fair value)

Entry IEquity in Earnings of Subsidiary......................... 80,000

Investment in Abernethy ................................ 80,000(To eliminate intercompany income accrual for the current year based on the parent's usage of the partial equity method)

Entry DInvestment in Abernethy ..................................... 10,000

Dividends Paid ................................................ 10,000(To eliminate intercompany dividend transfers)

Entry E—Not needed. Goodwill is not amortized.

Consolidation Entries as of December 31, 2010Entry *C—Not needed. Goodwill is not amortized.

Entry SCommon Stock—Abernethy................................ 250,000Additional Paid-in Capital—Abernethy .............. 50,000Retained Earnings—Abernethy—1/1/10 ............ 170,000

Investment in Abernethy ................................ 470,000

19. (continued)

(To eliminate beginning of year stockholders' equity accounts of subsidiary—the retained earnings balance has been adjusted for 2009 Income and dividends.)

Entry AGoodwill ................................................................ 120,000

Investment in Abernethy ................................ 120,000(To recognize original goodwill balance.)

Entry IEquity in Earnings of Subsidiary......................... 110,000

Investment in Abernethy ................................ 110,000(To eliminate Intercompany Income accrual for the current year.)

Entry DInvestment in Abernethy ..................................... 30,000

Dividends Paid ................................................ 30,000(To eliminate Intercompany dividend transfers.)

Equity E—not needed

20. (45 Minutes) (Variety of questions about the three methods of recording an Investment in a subsidiary for internal reporting purposes.)

Correction note: To solve part d. of this problem, it must be assumed that Jefferson had identical income in 2009 and 2010.

a. Purchase Price Allocation and Annual Amortization:

Hamilton’s acquisition-date fair value .... $510,000Book value (assets minus liabilities

or stockholders' equity) ...................... 450,000Fair value in excess of book value .......... 60,000 Annual ExcessAllocation to equipment based on Life Amortizationsdifference between fair value andbook value ................................................. 50,000 5 yrs. $10,000Goodwill ..................................................... $10,000 indefinite -0-Total ........................................................... $10,000

EQUITY METHODInvestment Income—2010:

Equity accrual (based on Hamilton's income) $60,000Amortization (above) ...................................................... (10,000)Total.................................................................................. $50,000

20. (continued)

Investment in Hamilton—December 31, 2010:Consideration transferred for Hamilton ....................... $510,0002009:

Equity accrual (based on Hamilton's Income) ........ 55,000Excess amortizations (above) .................................. (10,000)Dividends received .................................................... (5,000)

2010:Equity accrual ............................................................ 60,000Excess amortizations ................................................ (10,000)Dividends received .................................................... -0-

Total ................................................................................. $600,000

PARTIAL EQUITY METHODInvestment Income—2010:

Equity accrual ................................................................. $60,000Investment in Hamilton—December 31, 2010:

Consideration transferred for Hamilton ....................... $510,0002009:

Equity accrual (based on Hamilton's Income) ........ 55,000Dividends received .................................................... (5,000)

2010:Equity accrual ............................................................ 60,000Dividends received .................................................... -0-Total ............................................................................ $620,000

INITIAL VALUE METHOD Investment Income—2010:

Dividend Income (none indicated) ................................ -0-

Investment in Hamilton—December 31, 2010:Consideration transferred for Hamilton ....................... $510,000

b. The consolidated account balances are not affected by the method of recording used by the parent. Thus, consolidated Expenses ($480,000 or $290,000 + $180,000 + amortizations of $10,000) are the same regardless of whether the equity method, the partial equity method, or the initial value method is applied by Jefferson.

20. (continued)

c. The consolidated account balances are not affected by the method of recording used by the parent. Thus, consolidated Equipment ($970,000 or $520,000 + $420,000 + allocation of $50,000 – two years of excess depreciation of $20,000) is the same regardless of whether the equity method, the partial equity method, or the initial value method is applied by Jefferson.

d. Correction note: To solve part d. of this problem, it must be assumed that Jefferson had identical income in 2009 and 2010.

Jefferson Retained Earnings—Equity Method

Jefferson Retained Earnings—1/1/09.................................. $860,000Jefferson income 2009 (400,000 – 290,000)........................ 110,0002009 equity accrual for Hamilton income........................... 55,0002009 excess amortization..................................................... (10,000)Jefferson Retained Earnings—1/1/10.................................. $1,015,000

Jefferson Retained Earnings—Partial Equity Method

Jefferson Retained Earnings—1/1/09.................................. $860,000Jefferson income 2009 (400,000 – 290,000)........................ 110,0002009 equity accrual for Hamilton income........................... 55,000Jefferson Retained Earnings—1/1/10.................................. $1,025,000

Jefferson Retained Earnings—Initial value method

Jefferson Retained Earnings—1/1/09.................................. $860,000Jefferson income 2009 (400,000 – 290,000)........................ 110,0002009 dividend income from Hamilton................................. 5,000Jefferson Retained Earnings—1/1/10.................................. $975,000

20. (continued)e. EQUITY METHOD—Entry *C is not utilized since parent's retained

earnings balance is correct.PARTIAL EQUITY METHOD—Entry *C is needed to record amortization for prior year.Retained earnings, 1/1/10 (parent) ..................... 10,000

Investment in Hamilton .................................. 10,000INITIAL VALUE METHOD—Entry *C is needed to record increase in subsidiary's book value ($50,000) and amortization ($10,000) for prior year.Investment in Hamilton ....................................... 40,000

Retained earnings, 1/1/10 (parent) ................ 40,000f. Entry S is not affected by the method used by the parent to record the

Investment in Hamilton. Under each of these three methods, the following Entry S would be appropriate for 2010:

Common stock (Hamilton) ............................. 150,000Retained earnings, 1/1/10 (Hamilton)............ 350,000

Investment in Hamilton ............................. 500,000g. Consolidated revenues (add the two book values) $640,000

Consolidated expenses (add the two book valuesand excess amortizations) ............................. (480,000)

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

21. (15 Minutes) (Consolidated accounts one year after acquisition)Stanza acquisition fair value ($10,000 in

stock issue costs reduce additional paid-in capital) ...................$680,000

Book value of subsidiary(1/1/10 stockholders' equity balances)... . (480,000)Fair value in excess of book value ..........$200,000Excess fair value allocated to copyrights Life Amortizations

based on fair value .............................. 120,000 6 yrs. $20,000Goodwill ..................................................... $80,000 indefinite -0-

Total ...................................................... $20,000a. Consolidated copyrights

Penske (book value) ....................................... $900,000Stanza (book value) ........................................ 400,000Allocation (above) .......................................... 120,000Excess amortizations, 2010 ........................... (20,000)

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

AnnualExcess

21. (continued)b. Consolidated net income, 2010

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

Add book values ....................................... $700,000Excess amortizations ................................ 20,000 720,000

Consolidated net income................................ $380,000c. Consolidated retained earnings, 12/31/10

Retained earnings 1/1/10 (Penske) ............... $600,000Net income 2010 (above) ............................... 380,000Dividends paid 2010 (Penske) ....................... (80,000)

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

Stanza's retained earnings balance as of January 1, 2010, is not included because these operations occurred prior to the purchase. Stanza's dividends were paid to Penske and therefore are excluded because they are intercompany in nature.

d. Consolidated goodwill, 12/31/10Allocation (above) .......................................... $80,000

22. (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 1/1/09 ............. $600,000Book value (given) .................................... (470,000) Annual

Fair value in excess of book value ..... 130,000 ExcessAllocation 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) Dividends Paid = $120,000 (parent balance only. Subsidiary's

dividends are eliminated as intercompany 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])

22. (continued) 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—1/1/11Foxx’s 1/1/11 balance (initial value method was employed) $1,100,000

Partial Equity Method—Foxx’s Retained Earnings—1/1/11Foxx’s 1/1/11 balance (initial value method)..................... $1,100,0002009 net equity accrual for Greenburg (90,000 – 20,000).. 70,0002010 net equity accrual for Greenburg (100,000 – 20,000) 80,000Foxx’s 1/1/11 Retained Earnings......................................... $1,250,000

Equity Method—Foxx’s Retained Earnings—1/1/11Foxx’s 1/1/11 balance (initial value method)..................... $1,100,0002009 net equity accrual for Greenburg (90,000 – 20,000).. 70,0002009 excess fair over book value amortization.................. (9,000)2010 net equity accrual for Greenburg (100,000 – 20,000) 80,0002010 excess fair over book value amortization.................. (9,000)Foxx’s 1/1/11 Retained Earnings......................................... $1,232,000

23. (50 Minutes) (Consolidated totals for a purchase. Worksheet is produced as

a separate requirement.)

a. O’Brien acquisition-date fair value .................... $550,000O’Brien book value .............................................. (350,000)Fair value in excess of book value ..................... $200,000

23. (continued)

Excess assigned to specific Annualaccounts based on fair value Life Excess

Amortizations

Trademarks ............................... 100,000 indefinite -0-Customer relationships........... 75,000 5 yrs. $15,000Equipment ................................ (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). Thus, the equity method must be in use. 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).

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) 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) Dividends Paid = $142,000 (the subsidiary's dividends were paid to the

parent and, thus, as an intercompany 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)

23. (continued) 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)

23. (Continued) c. PATRICK COMPANY AND CONSOLIDATED SUBSIDIARY

Consolidation WorksheetFor Year Ending December 31

Consolidation Entries ConsolidatedAccounts Patrick O’Brien Debit Credit Totals

Revenues $(1,125,000) $(520,000) $(1,645,000)Cost of goods sold 300,000 228,000 528,000Depreciation expense 75,000 70,000 (E) 3,000 142,000Amortization expense 25,000 -0- (E) 15,000 40,000Income 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) 80,000 142,000Retained earnings, 12/31 $(1,493,000) $(392,000) $(1,493,000)Cash $185,000 $105,000 $290,000Receivables 225,000 56,000 281,000Inventory 175,000 135,000 310,000Investment in O’Brien 680,000 (D) 80,000 (S) 350,000

(A) 200,000 -0-(I) 210,000

Trademarks 474,000 60,000 (A) 100,000 634,000Customer relationships -0- -0- (A) 75,000 (E) 15,000 60,000Equipment (net) 925,000 272,000 (E) 3,000 (A) 30,000 1,170,000Goodwill -0 - -0 - (A) 55,000 55,000Total assets $2,664,000 $628,000 $2,800,000Liabilities $(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) $(2,800,000)

24. (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) ....................................... $470,000Book value of subsidiary ....................... (360,000)Excess fair value over book value ........ $110,000Excess assigned to specific

accounts based on fair values Annual Excess Life Amortizations

Royalty agreements $60,000 6 yrs. $10,000Trademark 50,000 10 yrs. 5,000

Total $110,000 $15,000The 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' retained earnings January 1, 2013 ......................... $490,000Retained earnings at date of purchase .............................. (230,000)Increase since date of purchase ........................................ $260,000Excess amortization expenses ($15,000 x 4 years) .......... (60,000)

Conversion to equity method for years prior to 2013(Entry *C) .................................................................... $200,000

Explanation of Consolidation Entries Found on WorksheetEntry*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 intercompany dividends.Entry E: Records excess amortization expenses for the current year.

See next page for worksheet.

24. a. (continued)MICHAEL COMPANY AND CONSOLIDATED SUBSIDIARY

Consolidation WorksheetFor Year Ending December 31, 2013

Consolidation Entries ConsolidatedAccounts Michael Aaron Debit Credit Totals

Revenues $(610,000) $(370,000) $(980,000)Cost of goods sold 270,000 140,000 410,000Amortization expense 115,000 80,000 (E) 15,000 210,000Dividend 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 90,000Retained earnings 12/31 $(1,020,000) $(635,000) $(1,350,000)

Cash $110,000 $15,000 $125,000Receivables 380,000 220,000 600,000Inventory 560,000 280,000 840,000Investment in Aaron Co. 470,000 -0- (*C) 200,000 (S) 620,000 -0-

(A) 50,000Copyrights 460,000 340,000 800,000Royalty agreements 920,000 380,000 (A) 20,000 (E) 10,000 1,310,000Trademark - 0 - - 0 - (A) 30,000 (E) 5,000 25,000Total 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)Retained earnings 12/31 (1,020,000) (635,000) (1,350,000)Total liabilities and equity $(2,900,000) $(1,235,000) $(3,700,000)

Parentheses indicate a credit balance.

24. (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.

25. (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 Excess

Amortizations Land $90,000 -- --Equipment 50,000 10 yrs. $5,000Goodwill 60,000 indefinite 0

Total $200,000 $5,000

The problem states that the equity method is in use. Thus, the $135,000 "Equity in Income of Small" would be comprised of a $140,000 equity accrual (100% of the subsidiary'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 intercompany, 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 intercompany 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 purchase price 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 purchase price allocation [$50,000 less $25,000 after 5 years of excess depreciation])

25. 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 60,000Investment 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.

25. c. (continued)GIANT COMPANY AND SMALL COMPANY

Consolidation WorksheetFor Year Ending December 31, 2013

Consolidation Entries ConsolidatedAccounts Giant Small Debit Credit Totals Revenues............................................................. (1,175,000) (360,000) (1,535,000)Cost of goods sold.............................................. 550,000 90,000 640,000Depreciation expense......................................... 172,000 130,000 (E) 5,000 307,000Equity 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) 10,000 706,000Investment in Small............................................ 995,000 -0- (D) 110,000 (S) 790,000 -0-

(A) 180,000(I) 135,000

Land .................................................................. 440,000 165,000 (A) 90,000 695,000Buildings (net)..................................................... 304,000 419,000 723,000Equipment (net)................................................... 648,000 286,000 (A) 30,000 (E) 5,000 959,000Goodwill............................................................... -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) (3,143,000)Parentheses indicate a credit balance.

26. (30 Minutes) (Determine consolidated accounts and consolidation entries five years after purchase. Parent applies equity method.)

a. Fair Value Allocation and Annual AmortizationAnnual Excess

Allocation Life AmortizationsLand ...................................... $20,000Buildings .............................. (30,000) 10 yrs. $(3,000)Equipment ............................ 60,000 5 yrs. 12,000Customer List ....................... 100,000 20 yrs. 5,000Total ...................................... $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

purchase price allocation [a $30,000 reduction] after removing 5 years of amortization totaling $15,000)

Equipment (net) = $450,000 (add the two book values. The purchase price 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.)

26. (continued)

c. Consolidation Entry SCommon Stock (Hill) ............................ 40,000Additional paid-in capital (Hill) ........... 160,000Retained Earnings 1/1 ......................... 600,000

Investment in Hill ............................ 800,000(To eliminate beginning stockholders' equity of subsidiary)

Consolidation Entry ALand ...................................................... 20,000Equipment (net) ................................... 12,000Customer List (net) .............................. 80,000

Buildings (net) ................................ 18,000Investment in Hill ............................ 94,000

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

Consolidation Entry IInvestment Income .............................. 86,000

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

Dividends Paid ................................ 40,000(To remove Intercompany dividend payments)

Consolidation Entry EAmortization expense........................... 5,000Depreciation expense........................... 9,000Buildings ............................................... 3,000

Equipment........................................ 12,000Customer List.................................. 5,000

(To recognize excess acquisition-date fair-value amortizations for the period)

27. (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 AmortizationConsideration transferred ............ $1,090,000Santiago book value (given) .......... $950,000Technology undervaluation (6 yr. life) 240,000Acquisition fair value of net assets 1,190,000Gain on bargain purchase.............. $(100,000)

Santiago income.............................. $(200,000)Technology amortization................ 40,000Equity earnings in Santiago........... $(160,000)

Fair value of net assets at acquisition-date $1,190,000Equity earnings from Santiago...... 160,000Dividends received.......................... (50,000)Investment in Santiago 12/31/09.... $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.

c.

Income Statement Peterson Santiago Adj. & Elim.Consolidated

Revenues (535,000) (495,000) (1,030,000)Cost of goods sold 170,000 155,000 325,000 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 EarningsRetained 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 Retained earnings, 12/31 (1,800,000) (800,000) (1,800,000)

Balance SheetCurrent 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)Retained earnings, 12/31 (1,800,000) (800,000) (1,800,000)Total liabilities and equity (2,500,000) (1,200,000) 1,440,000 1,440,000 (2,600,000)

28. (35 minutes) (Acquisition method: Contingent performance obligation and worksheet adjustments for equity and initial value methods.)

a. Investment in Wolfpack, Inc. 500,000Contingent performance obligation 35,000Cash 465,000

b.

12/31/09 Loss from increase in contingent performance obligation 5,000Contingent performance obligation 5,000

12/31/10 Loss from increase in contingent performance obligation 10,000Contingent performance obligation 10,000

12/31/10 Contingent performance obligation 50,000Cash 50,000

c. Equity Method

Common stock- Wolfpack 200,000Retained earnings-Wolfpack 180,000

Investment in Wolfpack 380,000

Royalty agreements 90,000Goodwill 60,000

Investment in Wolfpack 150,000

Equity earnings of Wolfpack 65,000Investment in Wolfpack 65,000

Investment in Wolfpack 35,000Dividends paid 35,000

Amortization expense 10,000Royalty agreements 10,000

d. Initial Value Method

Investment in Wolfpack 30,000Retained earnings-Branson 30,000

Common stock 200,000Retained earnings-Wolfpack 180,000

Investment in Wolfpack 380,00028. (continued)

Royalty agreements 90,000Goodwill 60,000

Investment in Wolfpack 150,000

Dividend income 35,000Dividends paid 35,000

Amortization expense 10,000Royalty agreements 10,000

29. (45 Minutes) (Prepare consolidation worksheet five years after purchase. Parent applies equity method. Includes question on push-down accounting.)

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

Storm’s acquisition-date fair value .................... $140,000Book value of Storm (acquisition date) ............. (105,000)Fair value in excess of book value ..................... $35,000Excess assigned to specific accounts: Annual Excess

Life AmortizationsLand ............................................ $10,000 – –Equipment .................................. 5,000 5 yrs. $1,000Formula ...................................... 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 recorded $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—Records 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 intercompany income accrual for the current year.Entry D—Eliminates intercompany dividend transfers.Entry E—Recognizes excess amortization expenses for current year.

29. (continued) Palm and Subsidiary Consolidated Worksheet for year ended December 31, 2013 Consolidation Entries Consolidated

Accounts Palm Co. Storm Co. Debit Credit Totals Income StatementRevenues.......................................................... (485,000) (190,000) (675,000)Cost of goods sold........................................... 160,000 70,000 230,000Depreciation expense...................................... 130,000 52,000 (E) 1,000 183,000Amortization expense...................................... -0- -0- (E) 1,000 1,000Equity in subsidiary earnings......................... (66,000) -0- (I) 66,000 -0-

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

Statement of Retained EarningsRetained 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 SheetCurrent assets.................................................. 268,000 75,000 343,000Investment 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) 10,000 495,500Buildings and equipment (net)........................ 713,000 161,000 (A) 1,000 (E) 1,000 874,000Formula............................................................. -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) (1,727,500)

Parentheses indicate a credit balance.

29. (continued)

c. If push-down accounting had been applied, the purchase price 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.

30. (20 Minutes) (Consolidated balances three years after purchase. Parent has

applied the equity method.)a. Schedule 1—Acquisition-Date Fair Value Allocation and Amortization

Jasmine’s acquisition-date fair value $206,000Book value of Jasmine .................. (140,000)Fair value in excess of book value 66,000Excess fair value assigned to specificaccounts based on individual fair values Annual Excess

Life AmortizationEquipment .................................. 54,400 8 yrs. $6,800Buildings (overvalued) ............. (10,000) 20 yrs. (500)Goodwill ..................................... $21,600 indefinite -0-Total ............................................ $6,300

Investment in Jasmine Company—12/31/11Jasmine’s acquisition-date fair value............................ $206,0002009 Increase in book value of subsidiary ................... 40,0002009 Excess amortizations (Schedule 1) ...................... (6,300)2010 Increase in book value of subsidiary ................... 20,0002010 Excess amortizations (Schedule 1) ...................... (6,300)2011 Increase in book value of subsidiary ................... 10,0002011 Excess amortizations (Schedule 1) ...................... (6,300)

Investment in Jasmine Company ............................ $257,100

30. (continued)b. Equity in Subsidiary Earnings

Income accrual................................................................. $30,000Excess amortizations (Schedule 1) ............................... (6,300)

Equity in subsidiary earnings .................................. $23,700c. Consolidated Net Income

Consolidated revenues (add book values) .................. $414,000Consolidated expenses (add book values) .................. (272,000)Excess amortization expenses (Schedule 1) ............... (6,300)Consolidated net income ............................................... $135,700

d. Consolidated EquipmentBook values added together ......................................... $370,000Allocation of purchase price ......................................... 54,400Excess depreciation ($6,800 × 3) .................................. (20,400)

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

e. Consolidated Buildings..................................................Book values added together ......................................... $288,000Allocation of purchase price ......................................... (10,000)Excess depreciation ($500 × 3) ..................................... 1,500

Consolidated buildings............................................. $279,500f. Consolidated goodwill

Allocation of excess fair value to goodwill................... $21,600g. Consolidated Common Stock......................................... $290,000

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

31. (35 minutes) (Consolidation with IPR&D, equity method)

a. Consideration transferred 1/1/09 $1,765,000Increase in Salsa’s RE to1/1/10 150,000In-process R&D write-off in 2009 (44,000)Amortizations 2009 (7,000)Income 2010 210,000Dividends paid 2010 (25,000)Amortization 2010 (7,000)

Investment balance 12/31/10 $2,042,000

31. (continued)b. Picante and Subsidiary Salsa

Consolidated Worksheetfor the year ended December 31, 2010

12/31/10 12/31/10Accounts Picante Salsa Adjustments ConsolidatedSales (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)

Ret. Earnings 1/1/10 (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 Ret. Earnings 12/31/10 (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 Ret. Earnings 12/31/10 (4,363,000) (985,000) (4,363,000)

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

32. (55 minutes) (Goodwill impairment test, consolidated balances, and worksheet)

a. Prine should compare Lydia’s total fair value to its carrying value, as follows:12/31 Carrying value (equity method balance) $120,070,00012/31 Fair value 110,000,000Excess 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 $110,000,000Fair values of assets and liabilities

Cash $109,000Receivables (net) 897,000Movie library 60,000,000Broadcast licenses 20,000,000Equipment 19,000,000Current liabilities (650,000)Long-term debt (6,250,000)

Total net fair value 93,106,000Implied fair value for goodwill 16,894,000Carrying value for goodwill 50,000,000Impairment loss $33,106,000

Journal Entry by Prine:Goodwill impairment loss 33,106,000

Investment in Lydia Co. 33,106,000

c. Combined revenues $30,000,000Combined expenses (including excess amortization) 22,200,000Income before impairment loss 7,800,000Goodwill impairment loss—Lydia (33,106,000)Net loss $(25,306,000)

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

32. (continued)e. Consolidated broadcast licenses = $350,000 + $14,014,000 =

$14,364,000

The consolidated balance equals the sum of parent’s book value plus the fair value of the subsidiary broadcast licenses at acquisition date adjusted for any changes since acquisition. Because the subsidiary’s book value equaled fair value at acquisition date, no worksheet adjustment is needed. Because the broadcast licenses are considered to 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.

32. f. (continued) Prine and LydiaConsolidated Worksheet

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) 50,00022,200,000Equity in Lydia earnings (150,000) -0- (I) 150,000-0-Impairment loss 33,106,000 -0-33,106,000Net 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)

80,000 300,000Net income 25,306,000 (200,000) 25,306,000Retained earnings 12/31 (26,394,000) (2,120,000) (26,394,000)

Cash 260,000 109,000 369,000Receivables (net) 210,000 897,0001,107,000Investment in Lydia, Co. 86,964,000 -0- (D) 80,000(S)69,500,000 -0-

(A)17,394,000(I)

150,000Broadcast licenses 350,000 14,014,00014,364,000Movie library 365,000 45,000,00045,365,000Equipment (net) 136,000,000 17,500,000 (A) 500,000 (E)

50,000 153,950,000Goodwill -0- -0- (A)16,894,000 16,894,000Total 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)(232,049,000)