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Chapter Outline

CHAPTER 4
CONSOLIDATED FINANCIAL STATEMENTS
AND OUTSIDE OWNERSHIP

I.

Outside ownership may be present within any business combination


A. Complete ownership of a subsidiary is not a prerequisite for consolidationonly
enough voting shares need be owned so that the acquiring company has the ability
to control the decision-making process of the acquired company
B. Any ownership retained in a subsidiary corporation by a party unrelated to the
acquiring company is termed a noncontrolling interest

II.

Measurement of subsidiary assets and liabilities requires analysis when a


noncontrolling interest is present under the acquisition method
1. The accounting emphasis is placed on the entire entity that results from the
business combination as measured by the sum of the acquisition-date fair
values of the controlling and noncontrolling interests.
2. Measurement of subsidiary accounts is based on the acquisition-date fair value
of the company (frequently determined by the consideration transferred and the
fair value of the noncontrolling interest); specific subsidiary assets and liabilities
are consolidated at their fair values.
3. The noncontrolling interest balance is reported as a component of stockholders'
equity in the consolidated balance sheet.

III.

Consolidations involving a noncontrolling interestsubsequent to the date of


acquisition
A. According to the parent company concept, all noncontrolling interest amounts are
calculated in reference to the book value of the subsidiary company
B. Four noncontrolling interest figures are determined for reporting purposes
1. Beginning of year balance
2. Noncontrolling interest in subsidiarys current income
3. Dividends attributable to the noncontrolling interest during the period
4. End of year balance
C. Noncontrolling interest balances are accumulated in a separate column in the
consolidation worksheet
1. The beginning of year figure is recorded on the worksheet as a component of
Entries S and A
2. The noncontrolling interest's share of the subsidiary's income is established by a
columnar entry that simultaneously reports the balance in both the consolidated
income statement and the noncontrolling interest column
3. Dividends paid to these outside owners are reflected by extending the
subsidiary's Dividends Paid balance (after eliminating intra-entity transfers) into
the noncontrolling interest column as a reduction
4. The end of year noncontrolling interest total is the summation of the three items
above and is reported in stockholders' equity.

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IV.

Step acquisitions
A. An acquiring company may make several different purchases of a subsidiary's stock
in order to gain control
B. Upon attaining control, all of the parents previous investments in the subsidiary are
adjusted to fair value and a gain or loss recognized as appropriate
C. Upon attaining control, the valuation basis for the subsidiary is established at its
total fair value (the sum of the fair values of the controlling and noncontrolling
interests)

Vl.

Sales of subsidiary stock


A. The proper book value must be established within the parent's Investment account
so that the sales transaction can be correctly recorded
B. The investment balance is adjusted as if the equity method had been applied during
the entire period of ownership
C. If only a portion of the shares are being sold, the book value of the investment
account is reduced using either a FIFO or a weighted-average cost flow assumption
D. If the parent maintains control, any difference between the proceeds of the sale and
the equity-adjusted book value of the share sold is recognized as an adjustment to
additional paid-in capital.
E. If the parent loses control with the sale of the subsidiary shares, the difference
between the proceeds of the sale and the equity-adjusted book value of the share
sold is recognized as a gain or loss.
F. Any interest retained by the parent company should be accounted for by either
consolidation, the equity method, or the fair value method depending on the
influence remaining after the sale.

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Answers to Questions
1.

"Noncontrolling interest" refers to an equity interest that is held in a member of a


business combination by an unrelated (outside) party.

2.

$220,000 (fair value). Under the acquisition method, all assets acquired and liabilities
assumed in a business combination are recorded at their acquisition-date fair values.

3.

A control premium is the portion of an acquisition price (above currently traded market
values) paid by a parent company to induce shareholders to sell a sufficient number of
shares to obtain control. The extra payment typically becomes part of the goodwill
acquired in the acquisition attributable to the parent company.

4.

Current accounting standards require the noncontrolling interest to appear in various


locations within consolidated financial statements. The end of year balance can be
found in the stockholders' equity section of the balance sheet. The noncontrolling
interest's share of net income is shown as an allocated component of consolidated net
income in the income statement.

5.

The ending noncontrolling interest can be determined on a consolidation worksheet by


adding the four components found in the noncontrolling interest column: (1) the
beginning balance of the subsidiarys book value, (2) the noncontrolling interest share
of the adusted acquisition-date excess fair over book value allocation, (3) its share of
current year subsidiary income, (4) less dividends paid to these outside owners.

6.

Allsports should remove the pre-acquisition revenues and expenses from the
consolidated totals. These amounts were earned (incurred) prior to ownership by
Allsports and therefore should are not earnings for the current parent company owners.

7.

Following the second acquisition, consolidation is appropriate. Once Tree gains control,
the 10% previous ownership is included at fair value as part of the total consideration
transferred by Tree in the acquisition.

8.

When a company sells a portion of an investment, it must remove the carrying value of
that portion from its investment account. The carrying value is based upon application
of the equity method. Thus, if either the initial value method or the partial equity method
has been used, Duke must first restate the account to the equity method before
recording the sales transaction. This same method is also applied to the operations of
the current period occurring prior to the time of sale.

9.

Unless control is surrendered, the acquisition method views the sale of subsidiary's
stock as a transaction with its owners. Thus, no gain or loss is recognized. The
difference between the sale proceeds and the carrying value of the shares sold (equity
method) is accounted for as an adjustment to the parents additional paid in capital.

10.

The accounting method choice for the remaining shares depends upon the current
relationship between the two firms. If Duke retains control, consolidation is still required.
However, if the parent now can only significantly influence the decision-making
process, the equity method is applied. A third possibility is Duke may have lost the
power to exercise even significant influence. The fair value method then is appropriate.

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Answers to Problems
1. C
2. D At the date control is obtained, the parent consolidates subsidiary assets
at fair value ($500,000 in this case) regardless of the parents percentage
ownership.
3. D In consolidating the subsidiary's figures, all intra-entity balances must be
eliminated in their entirety for external reporting purposes. Even though
the subsidiary is less than fully owned, the parent nonetheless controls it.
4. C An asset acquired in a business combination is initially valued at 100%
acquisition-date fair value and subsequently amortized over its useful life.
Patent fair value at January 1, 2012................................................
Amortization for 2 years (10 year life).............................................
Patent reported amount December 31, 2013..................................

$45,000
(9,000)
$36,000

5. C
6. B Combined revenues......................................................................... $1,100,000
Combined expenses......................................................................... (700,000)
Excess acquisition-date fair value amortization...........................
(15,000)
Consolidated net income................................................................. $385,000
Less: noncontrolling interest ($85,000 40%)..............................
(34,000)
Consolidated net income to controlling interest........................... $351,000
7. C Consideration transferred by Pride.................................................
Noncontrolling interest fair value....................................................
Star acquisition-date fair value........................................................
Star book value.................................................................................
Excess fair over book value.............................................................
to equipment (8 year remaining life)............................
to customer list (4 year remaining life)........................

$ 80,000
100,000

Combined revenues..........................................................................
Combined expenses...................................................... $545,000
Excess fair value amortization.....................................
35,000
Consolidated net income.................................................................

$540,000
60,000
$600,000
420,000
$180,000
Amort.
$10,000
25,000
$35,000
$783,000
580,000
$203,000

8. A Under the equity method, consolidated RE = parents RE.


9. B

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10. A Amie, Inc. fair value at July 1, 2013:


30% previously owned fair value (30,000 shares $5) ................
60% new shares acquired (60,000 shares $6)............................
10% NCI fair value (10,000 shares $5).........................................
Acquisition-date fair value...............................................................
Net assets' fair value........................................................................
Goodwill ............................................................................................

$150,000
360,000
50,000
$560,000
500,000
$ 60,000

12. B Fair value of 30% noncontrolling interest on April 1.....................


30% of net income for remainder of year ($240,000 30%).........
Noncontrolling interest December 31.............................................

$165,000
72,000
$237,000

11. C

13. C Proceeds of $80,000 less $64,000 ( $192,000) book value = $16,000


Control is maintained so excess proceeds go to APIC.
14. B Combined revenues.......................................................................... $1,300,000
Combined expenses......................................................................... (800,000)
Trademark amortization....................................................................
(6,000)
Patented technology amortization..................................................
(8,000)
Consolidated net income ................................................................ $486,000
15. C Subsidiary income ($100,000 $14,000 excess amortizations). .
Noncontrolling interest percentage................................................
Noncontrolling interest in subsidiary income...............................

$86,000
40%
$34,400

Fair value of noncontrolling interest at acquisition date.............


40% change in Solar book value since acquisition.......................
Excess fair value amortization ($14,000 40% 2 years)............
Noncontrolling interest at end of year............................................

$200,000
52,000
(11,200)
$240,800

16. A West trademark balance...................................................................


Solar trademark balance..................................................................
Acquisition-date fair value allocation.............................................
Excess fair value amortization for two years.................................
Consolidated trademarks.................................................................

$260,000
200,000
60,000
(12,000)
$508,000

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17. A Acquisition-date fair value ($60,000 80%)...................................


Strand's book value .........................................................................
Fair value in excess of book value .................................................

$75,000
(50,000)
$25,000

Excess assigned to inventory (60%) .................................$15,000


Excess assigned to goodwill (40%) ..................................$10,000
Park current assets...........................................................................
Strand current assets.......................................................................
Excess inventory fair value..............................................................
Consolidated current assets............................................................

$70,000
20,000
15,000
$105,000

18. D Park noncurrent assets....................................................................


Strand noncurrent assets.................................................................
Excess fair value to goodwill...........................................................
Consolidated noncurrent assets.....................................................

$90,000
40,000
10,000
$140,000

19. B Add the two book values and include 10% (the $6,000 current portion) of
the loan taken out by Park to acquire Strand.
20. B Add the two book values and include 90% (the $54,000 noncurrent portion)
of the loan taken out by Park to acquire Strand.
21. C Park stockholders' equity................................................................
Noncontrolling interest at fair value (20% $75,000)...................
Total stockholders' equity................................................................
22.

$80,000
15,000
$95,000

(15 minutes) (Compute consolidated income and noncontrolling interests)


2012
2013
a. Harrison income.............................................................. $220,000 $260,000
Starr income.....................................................................
70,000
90,000
Acquisition-date excess fair value amortization.........
(8,000)
(8,000)
Consolidated net income............................................... $282,000 $342,000
b. Starr fair value................................................................................... $1,200,000
Fair value of consideration transferred.......................................... 1,125,000
Noncontrolling interest fair value....................................................
$75,000
Noncontrolling interest fair value January 1, 2012 (above)...........
2012 income to NCI ([$70,000 $8,000] 10%).................................
2012 dividends to NCI ......................................................................
Noncontrolling interest reported value December 31, 2012....
2013 income to NCI ([$90,000 $8,000] 10%).................................
2013 dividends to NCI ......................................................................
Noncontrolling interest reported value December 31, 2013

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$75,000
6,200
(3,000)
78,200
8,200
(3,000)
$83,400

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23. (30 minutes) (Consolidated balances, allocation of consolidated net income to


controlling and noncontrolling interest, calculation of noncontrolling
interest).
a. Harlans technology processes:
Acquisition-date fair value (20 year remaining life)
2013 amortization
Technology processes 12/31/13

$1,000,000
(50,000)
$ 950,000

b. Harlans building:
Acquisition-date fair value (10 year remaining life)
2013 depreciation:
On Harlans books ($195,000 10 years)
$19,500
Depreciation of acquisition-date fair value allocation
($150,000 10 years)
15,000
Building 12/31/13
c. Controlling interest in combined entity net income:
Pepper Enterprises separate net income
Harlans reported net income
Excess fair value amortization:
Technology processes
Building ($345,000 $195,000) 10 years
Harlans adjusted net income
Peppers ownership percentage
Controlling interest in combined entity net income
d. Noncontrolling interest in Harlans net income:
Harlans reported net income
Excess fair value amortization:
Technology processes
Building ($345,000 $195,000) 10 years
Harlans adjusted net income
Noncontrolling interest percentage
Noncontrolling interest in Harlans net income

$345,000

(34,500)
$310,500
$700,000

350,000
(50,000)
(15,000)
285,000
80%

228,000
$928,000
350,000
(50,000)
(15,000)
285,000
20%
$57,000

e. Noncontrolling interest:
Acquisition-date balance 1/1/13
Total Harlan fair value ($3,000,000 80%)
$3,750,000
Noncontrolling interest percentage
20%
Noncontrolling interest acquisition-date fair value
$750,000
Noncontrolling interest in Harlans net income
57,000
Noncontrolling interest share of Harlan dividends (20% $50,000)
(10,000)
Noncontrolling interest 12/31/13
$ 797,000

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24. (40 minutes) (Several valuation and income determination questions for a
business combination involving a noncontrolling interest.)
a. Business combinations are recorded generally at the fair value of the
consideration transferred by the acquiring firm plus the acquisition-date fair
value of the noncontrolling interest.
Pattersons consideration transferred ($31.25 80,000 shares).......... $2,500,000
Noncontrolling interest fair value ($30.00 20,000 shares).................
600,000
Sorianos total fair value January 1...................................................... $3,100,000
b. Each identifiable asset acquired and liability assumed in a business
combination is initially reported at its acquisition-date fair value.
c. In periods subsequent to acquisition, the subsidiarys assets and liabilities are
reported at their acquisition-date fair values adjusted for amortization and
depreciation. Except for certain financial items, they are not continually
adjusted for changing fair values.
d. Sorianos total fair value January 1...................................................... $3,100,000
Sorianos net assets book value........................................................... 1,290,000
Excess acquisition-date fair value over book value........................... $1,810,000
Adjustments from book to fair values..................................................
Buildings and equipment.......................................... (250,000)
Trademarks.................................................................
200,000
Patented technology.................................................. 1,060,000
Unpatented technology.............................................
600,000
1,610,000
Goodwill
............................................................................................ $ 200,000
e. Combined revenues............................................................................... $4,400,000
Combined expenses............................................................................... (2,350,000)
Building and equipment excess depreciation.....................................
50,000
Trademark excess amortization............................................................
(20,000)
Patented technology amortization........................................................
(265,000)
Unpatented technology amortization................................................... (200,000)
Consolidated net income....................................................................... $1,615,000
To noncontrolling interest:
Sorianos revenues........................................................................... $1,400,000
Sorianos expenses.......................................................................... (600,000)
Total excess amortization expenses (above)................................ (435,000)
Sorianos adjusted net income........................................................ $ 365,000
Noncontrolling interest percentage ownership.............................
20%
Noncontrolling interest share of consolidated net income......... $ 73,000

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24. (continued)
To controlling interest:
Consolidated net income................................................................. $1,615,000
Noncontrolling interest share of consolidated net income.........
(73,000)
Controlling interest share of consolidated net income................ $1,542,000
-ORPattersons revenues........................................................................ $3,000,000
Pattersons expenses....................................................................... 1,750,000
Pattersons separate net income..................................................... $1,250,000
Pattersons share of Sorianos adjusted net income
(80% $365,000).....................................................................
292,000
Controlling interest share of consolidated net income................ $1,542,000
f. Fair value of noncontrolling interest January 1.................................. $ 600,000
Current year income allocation.............................................................
73,000
Dividends (20% $30,000).....................................................................
(6,000)
Noncontrolling interest December 31.................................................. $ 667,000
g. If Sorianos acquisition-date total fair value was $2,250,000, then a bargain
purchase has occurred.
Collective fair values of Sorianos net assets..................................... $2,900,000
Sorianos total fair value January 1...................................................... $2,250,000
Bargain purchase................................................................................... $ 650,000
The acquisition method requires that the subsidiary assets acquired and
liabilities assumed be recognized at their acquisition date fair values
regardless of the assessed fair value. Therefore, none of Sorianos identifiable
assets and liabilities would change as a result of the assessed fair value.
When a bargain purchase occurs, however, no goodwill is recognized.

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25. (30 minutes) Step acquisition.


a. Investment in Sellinger
Cash
Additional Paid-In Capital

445,000
415,000
30,000

Acquisition-date fair value ($1,141,000 .7)


Sellinger income 2012
Excess fair value amortization 2012
Sellinger dividends 2012
Acquisition-date adjusted subsidiary value 12/31/12
Percent acquired 1/1/13
Acquisition-date based value of newly acquired shares
Acquisition price for 25% interest
Credit to Palkas APIC

$1,630,000
340,000
(40,000)
(150,000)
1,780,000
0.25
$ 445,000
415,000
$ 30,000

b. Initial value for 70% acquisition


$1,141,000
70% of adjusted subsidiary income 2012 ($340,000 $40,000)
210,000
70% of subsidiary dividends 2012
(105,000)
Adjusted fair value of newly acquired shares
445,000
95% of adjusted subsidiary 2013 income ($440,000 $40,000)
380,000
95% of subsidiary dividends 2013
(171,000)
Investment in Sellinger 12/31/13
$1,900,000

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26. (20 Minutes) (Determine consolidated income balances, includes a mid-year


acquisition)
a.

Acquisition-date total fair value ..........................


Book value of net assets......................................
Fair value in excess of book value .....................
Excess fair value assigned to
Patent ............................................................
Land
............................................................
Buildings.........................................................
Goodwill...........................................................
Total
............................................................

$594,000
(400,000)
$194,000

Annual Excess
Life Amortizations
140,000 5 years
$28,000
10,000
30,000 10 years
3,000
14,000
-0$31,000

Consolidated figures following January 1 acquisition date:


Combined revenues .............................................................................. $1,500,000
Combined expenses............................................................................... (1,031,000)
Consolidated net income.......................................................................
469,000
NCI in Sawyers income ([200,000 31,000] 30%)..........................
(50,700)
Controlling interest in consolidated net income ............................... $418,300
b. Consolidated figures following April 1 acquisition date:
Combined revenues (1).......................................................................... $1,350,000
Combined expenses (2)......................................................................... (923,250)
Consolidated net income ...................................................................... $ 426,750
Noncontrolling interest in subsidiary income (3)................................
(38,025)
Controlling interest in consolidated net income ............................... $388,725
(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues
(2) $600,000 Parker expenses plus $300,000 of post-acquisition Sawyer expenses
plus $23,250 amortization expenses for 9 months
(3) ($200,000 31,000) adjusted subsidiary income 30% year

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27.

(15 minutes) Consolidated figures with noncontrolling interest


Fair value of company (given)
Book value
Fair value in excess of book value
to machine ($50,000 $10,000)
to process trade secret

$60,000
(10,000)
50,000
40,000 10 = $4,000 per year
$10,000 4 = 2,500 per year
$6,500 per year

Consolidated figures:

Noncontrolling interest in subsidiary income


= 40% ($50,000 revenues less $26,500 expenses) = $9,400

End-of-year noncontrolling interest:


Beginning balance (40% $60,000)
Income allocation
Dividend reduction (40% $5,000)
End-of-year noncontrolling interest

$24,000
9,400
(2,000)
$31,400

Machine (net) = $45,000 ($9,000 book value plus $40,000 excess


allocation less $4,000 excess depreciation for one year).

Process trade secret (net) = $10,000 $2,500 = $7,500

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28. (45 minutes) Noncontrolling interest in the presence of a control premium.


a.

Goodwill allocation:
Parflex
Acquisition-date fair value
$344,000
Share of identifiable net assets ($324,000 + $18,000) 307,800
Goodwill allocation
$36,200

NCI
$36,000
34,200
$1,800

b. Investment in Eagle
Initial value
$344,000
Change in Eagles RE (date of acquisition to 1/1/13):
($278,000 $174,000) 90%
93,600
Excess fair value amortization (two prior years)
(3,600)
Equity income 2013 (below)
79,200
Eagle 2013 dividends 90%
(24,300)
Investment in Eagle 12/31/13
$488,900
Equity in Eagles earnings:
Eagles reported 2013 income
Excess equipment amortization
Adjusted net income
Parflex ownership share
Equity in Eagles earnings

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$90,000
(2,000)
$88,000
90%
$79,200

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28. continuedpart c.
December 31, 2013

Eagle

(862,000)

(366,000)

(1,228,000)

Cost of goods sold

515,000

209,000

724,000

Depreciation expense

191,200

67,000

Equity in Eagle's earnings

(79,200)

Separate company income

(235,000)

(90,000)

Sales

Adjustments

E
I

NCI

Consolidate
d

Parflex

2,000

260,200

79,200

Consolidated net income

(243,800)

to noncontrolling interest

(8,800)

to parent

8,800
(235,000)

Retained earnings, 1/1

(500,000)

(278,000)

Net income (above)

(235,000)

(90,000)

130,000

27,000

(605,000)

(341,000)

(605,000)

Cash and receivables

135,000

82,000

217,000

Inventory

255,000

136,000

Investment in Eagle

488,900

Dividends paid
Retained earnings, 12/31

Property & equipment (net)

964,000

328,000

Goodwill
Total assets

S 278,000

(500,000)
(235,000)
24,300

2,700

130,000

391,000
D

24,300

A1

14,000

A2

38,000

385,200

12,600

A1

36,200

A2

79,200

2,000

-0-

1,304,000
38,000

1,842,900

546,000

1,950,000

Liabilities

(722,900)

(55,000)

(777,900)

Common stock

(515,000)

(150,000)

S 150,000

NCI 1/1

(515,000)
42,800

1,400

A1

1,800

A2

NCI 12/31
Retained earnings, 12/31
Total liabilities and equities

(46,000)
52,100

(605,000)

(341,000)

(1,842,900)

(546,000)

McGraw-Hill/Irwin
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(52,100)
(605,000)

585,500

585,500

(1,950,000)

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29. (25 Minutes) (Determine consolidated balances for a step acquisition).


a. Amsterdam fair value implied by price paid by Morey
$560,000 70% =

$800,000

b. Revaluation gain:
1/1 equity investment in Amsterdam (book value)
25% income for 1st 6 months
Investment book value at 6/30
Fair value of investment at 6/30 (25% $800,000)
Gain on revaluation to fair value

$178,000
8,750
186,750
200,000
$ 13,250

c. Goodwill at 12/31:
Fair value of Amsterdam at 6/30
Book value at 6/30 (700,000 + [70,000 2])
Excess fair value
Allocation to goodwill (no impairment)

$800,000
735,000
$ 65,000
$ 65,000

d. Noncontrolling interest:
5% fair value balance at 6/30
5% Income from 6/30 to 12/31
5% dividends
Noncontrolling interest 12/31

McGraw-Hill/Irwin
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$40,000
1,750
(1,000)
$40,750

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30. (30 Minutes) (Reporting the sale of a portion of an investment in a subsidiary.)


a. Posada records an accrual of $7,950 (see computation below) as
"Equity Income from Sold Shares of Sabathia" for the January 1, 2013 to
October 1, 2013 period which will appear in the 2013 consolidated
income statement. The consolidation will continue to include all of
Sabathia's accounts but now recognizing a 40% noncontrolling interest.
Sabathia fair value 1/1/11 ........................................... $1,200,000
Sabathia book value .................................................. (1,130,000)
Excess to Patent .........................................................
$70,000
Life of patent ...............................................................
5 years
Annual amortization ...................................................
$14,000
Posadas share of Sabathias income accruing to shares sold:
Sabathia's net income................................................
$120,000
Excess patent fair value amortization.......................
(14,000)
Sabathia's adjusted net income................................
106,000
Fraction of year held...................................................
9/12
Sabathias adjusted income for 9 months................
79,500
Percentage owned by Posada...................................
70%
Posadas share of Sabathias 9 month income .......
55,650
Shares sold1,000 out of 7,000 ...............................
1/7
Posadas income for shares sold .............................
$7,950
b. As long as control is maintained, the acquisition method considers
transactions in the stock of a subsidiary, whether purchases or sales,
as transactions in the equity of the consolidated entity.
Posadas investment book value 10/1/13
1/1/13 balance (givenequity method) .................... $1,085,000
Recognition of 1/1/1310/1/13 period:
Income accrual ($120,000 70% ) .................
63,000
Dividends ($40,000 70% ) ............................
(21,000)
Amortization ($14,000 70% ) .......................
(7,350)
Pre-sale investment book value10/1/13................. $1,119,650
Computation of income effectsale transaction
10/1/13 book value (above) .......................................
Portion of investment sold (1,000/7,000 shares) ....
Book value of investment sold .................................
Proceeds .....................................................................
Credit to Posadas additional paid-in capital ..........

$1,119,650
1/7
$159,950
191,000
$ 31,050

c. Because Posada continues to hold 6,000 shares of Sabathia, control is


still maintained and consolidated financial statements would be
appropriate with a noncontrolling interest of 40 percent.

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31.

(35 Minutes) (Consolidation entries and the effect of different investment


methods)
a. From the original fair value allocation, $30,000 is assigned based on the
fair value of the patent. With a 5-year life, excess amortization will be
$6,000 per year.
Because the equity method is in use, no Entry *C is required.
Entry S
Common Stock (Bandmor) ............................. 300,000
Retained Earnings, 1/1/13 (Bandmor) ........... 268,000
Investment in Bandmor (70%) ...................
397,600
Noncontrolling Interest in Bandmor, 1/1/13
170,400
(To eliminate stockholders' equity accounts of subsidiary and
recognize outside ownership. Retained earnings figure includes 2011
and 2012 income and dividends.)
Entry A
Patent ................................................................ 18,000
Goodwill ........................................................... 190,000
Investment in Bandmor .............................
145,600
Noncontrolling Interest in Bandmor (30%)
62,400
(To recognize unamortized portions of acquisition-date fair value
allocations. No control premium, so goodwill is allocated
proportionately. Patent has undergone two years amortization)
Entry I
Equity in Subsidiary Earnings ........................ 72,800
Investment in Bandmor .............................
72,800
(To eliminate intra-entity income balance. Equity accrual of $72,800
[70% ($110,000 6,000 amortization)] has been recorded)
Entry D
Investment in Bandmor ................................... 42,000
Dividends Paid ...........................................
42,000
(To eliminate current intra-entity dividend transfers70% of $60,000)
Entry E
Amortization Expense......................................
Patent...........................................................
(To recognize amortization for current year)

6,000

Entry P
Accounts Payable ............................................ 22,000
Accounts Receivable .................................
(To eliminate intra-entity payable/receivable balance)

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6,000

22,000

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31. (continued)
b. If the initial value method had been applied, the parent would have
recorded only the dividends received as income rather than an equity
accrual. Therefore, Entry *C is needed to adjust the parent's beginning
retained earnings for 2013 to the equity method. During 2011 and 2012,
the subsidiary earned a total net income of $171,000 but paid dividends
of only $83,000. The parent's share of the difference is $61,600 (70% of
$88,000 [$171,000 - $83,000]). In addition, the parents 70% share of
excess amortization expense for two years must also be included
($8,400 = 2 years $6,000 per year 70%). The net amount to be
recognized is $53,200 ($61,600 - $8,400).
ENTRY *C
Investment in Bandmor ...................................
Retained Earnings, 1/1/13 .........................

53,200
53,200

c. If the partial equity method had been applied, only the excess
amortization expenses for the previous two years would have been
omitted from the parent's retained earnings. As shown above, that
figure is $8,400 (2 years $6,000 per year 70%).
ENTRY *C
Retained Earnings, 1/1/13 ...............................
Investment in Bandmor .............................

8,400
8,400

d. Noncontrolling interest in Bandmor's income2013


[($110,000 6,000) 30%] ..............................

$31,200

Noncontrolling interest fair value January 1, 2011


$210,000
Adjustments to original basis:
2011 Net Income to NCI.......................................
$20,700
Dividends paid ...........................................
(11,700)
9,000
2012 Net income to noncontrolling interest .....
Dividends to noncontrolling interest .......

$27,000
(13,200)

2013 Net income to noncontrolling interest .....


Dividends to noncontrolling interest .......
Noncontrolling interest in Bandmor 12/31/13.....

$31,200
(18,000)

13,800
13,200
$246,000

OR
Worksheet adjustment S......................................................
Worksheet adjustment A......................................................
2013 income to noncontrolling interest ............................
2013 dividends to noncontrolling interest ........................
Noncontrolling interest in Bandmor 12/31/13....................

McGraw-Hill/Irwin
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$170,400
62,400
31,200
(18,000)
$246,000

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32.

(45 Minutes) (Asks about several consolidated balances and consolidation


process. Includes the different accounting methods to record investment.)
a. Schedule 1Fair Value Allocation and Excess Amortizations
Consideration transferred by Miller .........
Noncontrolling interest fair value.............
Taylors fair value........................................
Taylors book value.....................................
Fair value in excess of book value .........
Excess fair value assigned to buildings

$664,000
166,000
$830,000
(600,000)
230,000

Annual Excess
Life Amortizations

80,000
20 years

$4,000
Goodwill ...................................................... $150,000 indefinite
Total.......................................................

-0$4,000

b. $150,000 (see schedule 1 above)


c. Entry (S)
Common Stock (Taylor) .......................................
Additional Paid-In Capital (Taylor) ......................
Retained Earnings (Taylor) ..................................
Investment in Taylor Company (80%) ............
Noncontrolling Interest in Taylor (20%) ........

300,000
90,000
210,000
480,000
120,000

Entry (A)no control premium


Buildings ................................................................
Goodwill .................................................................
Investment in Taylor Company (80%) ............
Noncontrolling Interest in Taylor (20%) ........

80,000
150,000
184,000
46,000

d. (1) Equity method


Income accrual (80%) .............................................
Excess amortization expense ...............................
Investment income ...........................................

$56,000
(3,200)
$52,800

(2) Partial equity method


Income accrual (80%) .............................................

$56,000

(3) Initial value method


Dividends received (80%) ......................................

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32. (continued)
e. (1) Equity method
Initial fair value paid................................................ $664,000
Income accrual 20112013 ($260,000 80%) ...... 208,000
Dividends 20112013 ($45,000 80%) ................. (36,000)
Excess Amortizations 20112013 ($3,200 3) ....
(9,600)
Investment in Taylor12/31/13 ....................... $826,400
(2) Partial Equity Method
Investment in Taylor12/31/13 = $836,000 (initial value paid plus
income accrual of $208,000 less dividends of $36,000 [no excess
amortizations])
(3) Initial Value Method
Investment in Taylor12/31/13 = $664,000 (original value paid)
f. Using the acquisition method, the allocation will be the total difference
($80,000) between the buildings' book value and fair value. Based on a
20 year life, annual excess amortization is $4,000.
Miller book valuebuildings ............................... $800,000
Taylor book valuebuildings ..............................
300,000
Allocation ...............................................................
80,000
Excess amortizations for 20112012 ($4,000 2)
(8,000)
Consolidated buildings account ............. $1,172,000
g. Acquisition-date fair value allocated to goodwill
(see schedule 1 above) ................................... $150,000
h. If the parent has been applying the equity method, the stockholders'
equity accounts on its books will already represent consolidated totals.
The common stock and additional paid-in capital figures to be reported
are the parent balances only. As to retained earnings, the equity method
will properly record all subsidiary income and amortization so that the
parent balance is also a reflection of the consolidated total.

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33.

(20 Minutes) (A variety of consolidated balances-midyear acquisition)


Consideration transferred by Karson
(cash and contingent consideration)......... $1,360,000
Noncontrolling interest fair value ..................
340,000
Reilly fair value (given).................................... $1,700,000
Book value of Reilly........................................ (1,450,000)*
Fair value in excess of book value................. $250,000
Annual Excess
Excess fair value assigned
Life Amortizations
Trademarks ...................................................
150,000 5 years $30,000
Goodwill ........................................................ $100,000 indefinite
-0Total
............................................................
$30,000
*Reilly book value, January 1
(Common stock + APIC + RE) .......................
Increase in book value:
Net income (revenues less cost of
goods sold and expenses) ...................
Dividends ................................................
Change during year ..................................
Change during first 6 months of year.....
Reilly book value, July 1 (acquisition date)......
CONSOLIDATION TOTALS:
Sales (1)

$1,400,000
$120,000
(20,000)
$100,000
50,000
$1,450,000
$1,050,000

Cost of goods sold (2)

540,000

Operating expenses (3)

265,000

Consolidated net Income

Noncontrolling Interest in sub. Income (4)

$245,000
$9,000

(1)

$800,000 Karson revenues plus $250,000 (post-acquisition subsidiary


revenue)

(2)

$400,000 Karson COGS plus $140,000 (post-acquisition subsidiary


COGS)

(3)

$200,000 Karson operating expenses plus $50,000 (post-acquisition


subsidiary operating expenses) plus year excess amortization of $15,000

(4)

20% of post-acquisition subsidiary income less excess fair value


amortization [20% year (120,000 30,000)] = $9,000

Retained earnings, 1/1 = $1,400,000 (the parents balance because the


subsidiary was acquired during the current year)

Trademarks = $935,000 (add the two book values and the excess fair
value allocation after taking one-half year excess amortization)

Goodwill = $100,000 (the original allocation)

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34.

(25 Minutes) (A variety of consolidated questions and balances)


a. Nascent applies the initial value method because the original price of
$414,000 is still in the Investment in Sea-Breeze account. In addition, the
Investment Income account is equal to 60 percent of the dividends paid
by the subsidiary during the year.
b. Consideration transferred in acquisition.
Noncontrolling interest fair value.............
Sea-Breeze fair value 1/1/10.......................
Sea-Breeze book value 1/1/10
Excess fair value over book value

$414,000
276,000
$690,000
550,000
$140,000

Excess fair assignments:


Buildings................................................ 60,000
Equipment.............................................. (20,000)
Patent...................................................... 100,000
Total ......................................................
-0-

Annual Excess
Life Amortizations
6 years
$10,000
4 years
(5,000)
10 years
10,000
$15,000

c. If the equity method had been applied, the Investment Income account
would show the basic equity accrual less amortization: 60% of (the
subsidiary's income of $90,000 less $15,000 excess fair value
amortization) = $45,000.
d. The initial value method recognizes neither the increase in the
subsidiary's book value nor the excess amortization expenses for prior
years. At the acquisition date, the subsidiarys book value was $550,000
as indicated by the assets less liabilities. At the beginning of the current
year, the book value of the subsidiary is $780,000 as indicated by
beginning stockholders' equity balances.
Increase in book value during prior years
($780,000 $550,000)............................................................
Less excess amortization ..........................................................
Net increase in book value.........................................................
Ownership ...................................................................................
Increase required in parent's retained earnings, 1/1/13 .........
Parent's retained earnings, 1/1/13 as reported .......................
Parents share of consolidated retained earnings, 1/1/13.......
e. Consolidated net income and allocation
Revenues (add book values)
Expenses (add book values and excess amortization)
Consolidated net Income
Noncontrolling interest in consolidated net income
($90,000 15,000) 40%
Controlling interest in consolidated net income

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 11/e

$230,000
(45,000)
$185,000
60%
$111,000
700,000
$811,000
$900,000
(635,000)
$265,000
30,000
$235,000

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34. (continued)
f. Consolidated buildings, 1/1/10 (subsidiary):
Book value..............................................................................
Acquisition-date fair-value allocation .................................
Consolidation figure .............................................................

$300,000
60,000
$360,000

g. Consolidated buildings, 12/31/13:


Parent's book value ..............................................................
Subsidiary's book value .......................................................
Original allocation .................................................................
Amortization ($10,000 4 years) .........................................
Consolidated balance ...........................................................

$700,000
200,000
60,000
(40,000)
$920,000

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35. (Acquisition Method Consolidated Balances)


December 31, 2013
Revenues
Cost of goods sold
Depreciation expense
Amortization expense
Interest expense
Equity in Steele Income
Separate company
net income
Consolidated net income
NCI in Steele Income
Controlling interest in CNI

Pierson
(1,843,000)
1,100,000
125,000
275,000
27,500
(121,500)

Steele
(675,000)
322,000
120,000
11,000
7,000

(437,000)

(215,000)

Retained earnings 1/1


Net Income
Dividends paid
Retained earnings 12/31

(2,625,000)
(437,000)
350,000
(2,712,000)

(395,000)
(215,000)
25,000
(585,000)

1,204,000
1,854,000

430,000

Current assets
Investment in Steele

Customer base
Buildings and equipment
Copyrights
Goodwill
Total assets
Accounts payable
Notes payable
NCI in Steele

Common stock
Additional paid-in capital
Retained earnings 12/31
Total liabilities and SE

Adjustments
& Eliminations

NCI

(E) 80,000
(I)121,500

(13,500)

(S)395,000
(D) 22,500

2,500

Consolidated
(2,518,000)
1,422,000
245,000
366,000
34,500
-0-

(450,500)
(13,500)
(437,000)
(2,625,000)
(437,000)
350,000
(2,712,000)
1,634,000

(D) 22,500

(A)720,000

(S)769,500
(A)985,500
(I) 121,500
(E) 80,000

-0-

-0931,000
950,000

-0863,000
107,000

4,939,000

1,400,000

640,000
1,794,000
1,057,000
375,000
5,500,000

(485,000)
(542,000)

(200,000)
(155,000)

(685,000)
(697,000)

(A)375,000

(S) 85,500
(A)109,500
(900,000)
(300,000)
(2,712,000)
(4,939,000)

(400,000)
(60,000)
(585,000)
(1,400,000)

McGraw-Hill/Irwin
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(S)400,000
(S) 60,000
2,174,000

2,174,000

(195,000)
(206,000)

(206,000)
(900,000)
(300,000)
(2,712,000)
(5,500,000)

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35. (Continued)

Fair value at acquisition date


Relative fair values of identifiable net assets
90% and 10% of $1,525,000 (acquisition date
recorded fair value plus customer base)
Goodwill

Controlling
Noncontrolling
Interest
$1,710,000
1,372,500
$ 337,500

Interest
$190,000
152,500
$37,500

b. If the fair value of the noncontrolling interest was $152,500, both goodwill and
the noncontrolling interest balance would be reduced equally by $37,500 as
follows:
Fair value of Steele Company (1,710,000 + 152,500)
Carrying amount acquired
Excess fair value
to customer base
to goodwill

$1,862,500
725,000
1,137,500
800,000
$337,500

Noncontrolling interest balance beginning of year


Noncontrolling interest in consolidated net income
Dividends paid to noncontrolling interest
Noncontrolling interest end of year

$(157,500)
(13,500)
2,500
$ 168,500

Fair value at acquisition date


Relative fair values of identifiable net assets
90% and 10% of $1,525,000 (acquisition date
recorded fair value plus customer base)
Goodwill

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 11/e

Controlling
Noncontrolling
Interest
$1,710,000
1,372,500
$ 337,500

Interest
$152,500
152,500
-0-

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36.

(60 Minutes) (Consolidation worksheet and income statement with parent


using initial value method. Also consolidated balances with a control
premium paid by parent.)

a.

Fair Value Allocation and Amortization


Consideration transferred by Krause.............
Noncontrolling interest fair value...................
Leahy total fair value 1/1/12............................
Leahy book value 1/1/12.................................
Fair value in excess of book value ................

$504,000
126,000
$630,000
(380,000)
$250,000

Annual Excess
Life Amortizations

Excess price allocated to undervalued


Building........................................................ 45,000 5 years
Trademark .................................................. 60,000 10 years
Goodwill....................................................... $145,000 indefinite

$9,000
6,000
-0$15,000

Explanation of Consolidation Entries Found on Worksheet


Entry *C: Convert the parents 1/1/13 retained earnings balance from the
cash basis to the accrual basis.
Entry S: Eliminates stockholders' equity accounts of subsidiary while
recognizing noncontrolling interest balance (20%) as of the beginning of
the current year.
Entry A: Recognizes acquisition-date fair value allocations less 1 year
amortization for building and trademark and increases beginning
balance of the noncontrolling interest for its share.
Entry I: Eliminates intra-entity dividend payments recorded as income by
parent.
Entry E: Recognizes amortization expense for current year.
Columnar entryRecognizes noncontrolling interest's share of
subsidiary's net income ($90,000 15,000) 20%).

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36. a. (continued)

Accounts

KRAUSE CORPORATION AND LEAHY, INC.


Consolidation Worksheet
For Year Ending December 31, 2013

Sales
Cost of goods sold
Operating expenses
Dividend income
Separate company net income
Consolidated net income
NCI in Leahy's income
Krauses interest in consolidated income
Retained earnings, 1/1
Net income (above)
Dividends paid
Retained earnings, 12/31
Current assets
Investment in Leahy
Buildings and equipment (net)
Trademarks
Goodwill
Total assets
Liabilities
Common stock
Retained earnings, 12/31 (above)
NCI in Leahy, 1/1
NCI in Leahy, 12/31
Total liabilities and equities

Krause
Corporation

(584,000)
194,000
246,000
(16,000)
(160,000)

Leahy
Inc.

(250,000)
95,000
65,000
______
(90,000)

Consolidation Entries
Debit
Credit

Noncontrolling Consolidated
Interest
Totals

(834,000)
289,000
326,000
-0-

(E) 15,000
(I) 16,000
(15,000)

(700,000)
(160,000)
70,000
(790,000)

(350,000)
(90,000)
20,000
(420,000)

296,000
504,000

191,000

680,000
100,000
0
1,580,000

390,000
144,000
0
725,000

(470,000)
(320,000)
(790,000)

(205,000)
(100,000)
(420,000)

(S)350,000 (*C) 44,000


(I)

16,000

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 11/e

(725,000)

1,097,000
292,000
145,000
2,021,000
(675,000)
(320,000)
(878,000)

(S)100,000

760,000

(744,000)
(204,000)
70,000
(878,000)
487,000
-0-

(*C) 44,000 (S)360,000


(A)188,000
(A) 36,000 (E) 9,000
(A) 54,000 (E) 6,000
(A)145,000

(S) 90,000
(A) 47,000
(1,580,000)

4,000

219,000
15,000
(204,000)

760,000

The McGraw-Hill Companies, Inc., 2013


4-27

(137,000)
148,000

(148,000)
(2,021,000)

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

36. (continued)
b.

KRAUSE CORPORATION AND LEAHY, INC.


Consolidated Income Statement
For Year Ending December 31, 2013

Sales
Cost of goods sold
Operating expenses
Total expenses
Consolidated net income

$834,000

$289,000
326,000
615,000
$219,000

To 20% noncontrolling interest in CNI


To controlling interest in CNI

$15,000
$204,000

c. Consideration transferred by Krause for 80% of Leahy


Noncontrolling interest fair value ($4.85 20,000 shares)
Leahy fair value
Fair value of Leahys underlying net assets
Goodwill

$504,000
97,000
$601,000
485,000
$116,000

If the noncontrolling interest fair value was $4.85 per share at the acquisition
date, then goodwill declines to $116,000 and the noncontrolling interest total
would also decline from $148,000 to $119,000.
Worksheet entries (S), (A1) and (A2) assuming a $4.85 noncontrolling interest
acquisition-date fair value:
(S)

Common Stock-Leahy
Retained Earnings- Leahy 1/1
Investment in Leahy
Noncontrolling Interest

100,000
350,000
360,000
90,000

(A1) Buildings and Equipment (net)


Trademarks
Investment in Leahy
Noncontrolling Interest

36,000
54,000
72,000
18,000

(A2) Goodwill
Investment in Leahy

116,000
116,000

Fair value at acquisition date


Relative fair values of identifiable net assets
80% and 20% of $485,000 (acquisition date
fair value of net identifiable assets)
Goodwill

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 11/e

Controlling
Noncontrolling
Interest
$504,000
388,000
$116,000

Interest
$97,000
97,000
-0-

The McGraw-Hill Companies, Inc., 2013


4-28

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

37.

(40 Minutes) (Determine consolidated balances.)


Acquisition-date subsidiary fair value (given)....
$850,000
Book value of subsidiary (given) ........................
(600,000)
Fair value in excess of book value .....................
$250,000
Allocations to specific accounts based on difference
between fair value and book value
Land ..................................................................
$165,000
Buildings and equipment ...............................
(25,000)
Copyright ..........................................................
100,000
Notes payable ..................................................
10,000
250,000
Total........................................................
-0Annual excess amortizations:
Buildings and equipment [$(25,000) 10 years]
Copyright ($100,000 20 years)
Notes payable ($10,000 8 years)
Total

$(2,500)
5,000
1,250
$3,750

Consolidated Totals:

Revenues = $1,900,000 (add the two book values)

Cost of goods sold = $1,085,000 (add the two book values)

Depreciation expense = $267,500 (add the two book values less $2,500
excess adjustment)

Amortization expense = $10,000 (add the two book values plus $5,000
excess adjustment)

Interest expense = $50,250 (add the two book values plus $1,250 excess
adjustment)

Equity in income of Sam = -0- (eliminated so that the individual revenues


and expenses of the subsidiary can be included in the consolidated
figures)

Net income = $487,250 (revenues less expenses)

Retained earnings, 1/1 = $1,265,000 (parent company balance; subsidiary's


operations prior to acquisition do not affect consolidated figures)

Noncontrolling interest in income of subsidiary = $26,250 ($135,000


reported income of the subsidiary less $3,750 amortization expense
multiplied by 20 percent outside ownership)

Dividends paid = $260,000 (parent company balance; subsidiary's


payments to parent are intra-entity, payments to outside owners decrease
noncontrolling interest balance)

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 11/e

The McGraw-Hill Companies, Inc., 2013


4-29

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

37. (continued)

Retained earnings, 12/31 = $1,466,000 (consolidated balance on 1/1 plus


consolidated net income less noncontrolling interest in subsidiary's
income less consolidated dividends) or simply the parents RE because
parent employs the equity method.

Current assets = $1,493,000 (add the two book values)

Investment in Sam = -0- (eliminated so that the individual assets and


liabilities of the subsidiary can be included in the consolidated figures)

Land = $517,000 (add the book values plus the $165,000 excess allocation)

Buildings and equipment (net) = $1,119,500 (add the book values less the
$25,000 allocation [asset was overvalued] plus the excess amortization)

Copyright = $190,000 (book value + $100,000 excess allocation less


amortization for the year)

Total assets = $3,319,500

Accounts payable = $339,000 (add book values)

Notes payable = $581,250 (add the book values less $10,000 excess
allocation plus amortization)

Noncontrolling interest in subsidiary = $183,250 (20% of fair value as of 1/1


[$170,000] plus noncontrolling interest in income of subsidiary [$26,250]
less dividends paid to outside owners [$13,000])

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

Additional paid-in capital = 450,000 (parent company balance)

Retained earnings, 12/31 = $1,466,000 (computed above)

Total liabilities and equities = $3,319,500

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 11/e

The McGraw-Hill Companies, Inc., 2013


4-30

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

37. (continued) Acquisition Method


Accounts

Father

Revenues.........................................
(1,360,000)
Cost of goods sold..........................
700,000
Depreciation expense.....................
260,000
Amortization expense.....................
-0Interest expense.............................
44,000
Equity in income of Sam .............
(105,000)
Separate company net income......
(461,000)
Consolidated net income...............
Noncontrolling interest in Sam's income
Controlling interest in CNI .............
Retained earnings 1/1 ....................
(1,265,000)
Net income (above) ........................
(461,000)
Dividends paid ..........................
260,000
Retained earnings 12/31 ..........
(1,466,000)
Current assets ................................
965,000
Investment in Sam .........................
733,000
Land ................................................
Buildings and equipment (net)......
Copyright ...........................
Total assets ...............................
Accounts payable ..........................
Notes payable .................................
NCI in Sam 1/1.................................
NCI in Sam 12/31
....................................................
Common stock ...............................
Additional paid-in capital...............
Retained earnings 12/31(above)
Total liab. and stockholders' equity

292,000
877,000
-02,867,000
(191,000)
(460,000)

(300,000)
(450,000)
(1,466,000)
(2,867,000)

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 11/e

Sam

(540,000)
385,000
10,000
5,000
5,000
-0(135,000)

Consolidation Entries
Debit
Credit

(E)

Noncontrolling Consolidated
Interest
Totals

(1,900,000)
1,085,000
267,500
10,000
50,250
-0-

2,500

(E) 5,000
(E) 1,250
(I) 105,000
(26,250)

(440,000)
(135,000)
65,000
(510,000)
528,000

60,000
265,000
95,000
948,000
(148,000)
(130,000)

(100,000)
(60,000)
(510,000)
(948,000)

(S) 440,000
(D) 52,000

13,000

(D) 52,000 (S) 480,000


(I) 105,000
(A) 200,000
(A) 165,000
(E) 2,500 (A) 25,000
(A) 100,000 (E) 5,000

(A) 10,000 (E) 1,250


(S) 120,000
(A) 50,000
(S) 100,000
(S) 60,000
1,040,750

1,040,750

The McGraw-Hill Companies, Inc., 2013


4-31

(487,250)
26,250
(461,000)
(1,265,000)
(461,000)
260,000
(1,466,000)
1,493,000
-0517,000
1,119,500
190,000
3,319,500
(339,000)
(581,250)

(170,000)
(183,250)

(183,250)
(300,000)
(450,000)
(1,466,000)
(3,319,500)

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

38.

(55 Minutes) (Consolidated worksheet)

a.

Consideration transferred by Adams


Noncontrolling interest fair value
Acquisition-date total fair value
Book value of Barstow (CS + RE 12/31/11)
Excess fair value over book value

$603,000
67,000
$670,000
(460,000)
$210,000

Annual Excess
Land
Buildings
Equipment
Patents
Notes payable
Goodwill
Total
b.

Life Amortizations

10 years
($2,000)
5 years
8,000
10 years
5,000
5 years
4,000

$30,000
(20,000)
40,000
50,000
20,000

120,000
$90,000 indefinite

-0$15,000

Because investment income is exactly 90 percent of Barstow's reported


earnings, Adams apparently is applying the partial equity method.

c., d. Explanation of Consolidation Entries Found on Worksheet


Entry *CConverts Adams's financial records from the partial equity
method to the equity method by recognizing amortization for 2012. Total
expense was $15,000 but only 90 percent (or $13,500) applied to the parent.
Entry SEliminates subsidiary's stockholders' equity while recording
noncontrolling interest balance as of January 1, 2013.
Entry ARecords unamortized allocation balances as of January 1, 2013.
The acquisition method attributes 10 percent of these amounts to the noncontrolling interest.
Entry IEliminates intra-entity income accrual for 2013.
Entry DEliminates intra-entity dividend transfers.
Entry ERecords amortization expense for current year.
Columnar EntryRecognizes noncontrolling interest's share of Barstow's
net income as follows:
Noncontrolling Interest in Barstow's Income (Columnar Entry)
Barstow reported income ................................................................
Excess amortization expenses 2013..............................................
Adjusted income of Barstow .....................................................
Noncontrolling interest ownership ................................................
Noncontrolling interest in Barstow's income ..........................

$120,000
(15,000)
$105,000
10%
$10,500

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

38. c. and d. (continued)

Revenues
Cost of goods sold
Depreciation expense
Amortization expense
Interest expense
Investment income
Separate company net income
Consolidated net income
Income to noncontrolling interest
Income to controlling interest

ADAMS CORPORATION AND BARSTOW, INC.


Consolidation Worksheet-Acquisition Method
For Year Ending December 31, 2013
Adams Corp.

(940,000)
480,000
100,000

40,000
(108,000)
(428,000)

Barstow Inc.

(280,000)
90,000
55,000
15,000

Interest

(E) 6,000
(E) 5,000
(E) 4,000
(I) 108,000
(10,500)

(1,367,000)

(340,000)

Net income
Dividends paid
Retained earnings, 12/31

(428,000)
110,000
(1,685,000)

(120,000)
70,000
(390,000)

Current assets
Investment in Barstow

610,000
702,000

250,000

Land
Buildings
Equipment
Patents
Goodwill
Total assets

380,000
490,000
873,000

150,000
250,000
150,000

3,055,000

800,000

(860,000)
(510,000)
(1,685,000)

(230,000)
(180,000)
(390,000)

(C*) 13,500
(S) 340,000

(D) 63,000

(A)
(E)
(A)
(A)
(A)

30,000
2,000
32,000
45,000
90,000

(A) 16,000
(S) 180,000

(800,000)

934,500

7,000

Totals

(1,220,000)
570,000
161,000
5,000
59,000
-0(425,000)
10,500
(414,500)

560,000
724,000
1,047,000
40,000
90,000
3,321,000

(A) 18,000
(E) 8,000
(E) 5,000

(E)

4,000

934,500

(414,500)
110,000
(1,658,000)
860,000
-0-

(*C) 13,500
(S) 468,000
(A) 175,500
(I) 108,000

(S) 52,000
(A) 19,500
(3,055,000)

Consolidated

(1,353,500)
(D) 63,000

Noncontrolling interest
Total liabilities and stockholders' equity

Noncontrolling

Credit

(120,000)

Retained earnings, 1/1

Notes payable
Common stock
Retained earnings, 12/31

Debit

(1,078,000)
(510,000)
(1,658,000)
(71,500)
(75,000)

(75,000)
(3,321,000)

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

39. (25 minutes) (Consolidated balances after a mid-year acquisition)


a. Investment account balance indicates the initial value method.
Consideration transferred by Gibson.......
Noncontrolling interest fair value ............
Davis acquisition-date fair value ..............
Book value of Davis (see below)...............
Fair value in excess of book value ..........
Excess assigned based on fair value:
Equipment (overvalued)..................
Goodwill ...........................................
Total .......................................................
Amortization for 9 months ...................

$528,000
352,000
880,000
(765,000)
$115,000
Annual Excess
Life Amortizations
(30,000) 5 years
$(6,000)
$145,000 indefinite
-0$(6,000)
$(4,500)

Acquisition-date subsidiary book value:


Book value of Davis, 1/1/13 (CS + 1/1 RE) ...............
$740,000
Increase in book value-net income (dividends
were paid after acquisition) ................................. $100,000
Time prior to acquisition (3 months) ........................ year
25,000
Book value of Davis, 4/1/13 (acquisition date) ........
$765,000
Consolidated income statement:
Revenues (1)
Cost of goods sold (2)
Operating expenses (3)
Consolidated net income
Noncontrolling interest in CNI (4)
Controlling interest in CNI

$825,000
$405,000
214,500

619,500
205,500
31,800
$173,700

(1) $900,000 combined revenues less $75,000 (preacquisition subsidiary


revenue)
(2) $440,000 combined COGS less $35,000 (preacquisition subsidiary
COGS)
(3) $234,000 combined operating expenses less $15,000 (preacquisition
subsidiary operating expenses) less nine month excess overvalued
equipment depreciation reduction of $4,500
(4) 40% of post-acquisition subsidiary income less excess amortization

b.

Goodwill = $145,000 (original allocation)


Equipment = $774,500 (add the two book values less $30,000
reduction to fair value plus $4,500 nine months excess
amortization)
Common stock = $630,000 (parent company balance only)
Buildings = $1,124,000 (add the two book values)
Dividends paid = $80,000 (parent company balance only)

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

40. (40 minutes) Determine consolidated balance for a mid-year acquisition.


a.

Consideration transferred by Truman ........... $720,000


Noncontrolling interest fair value ..................
290,000
Atlantas acquisition-date total fair value...... $1,010,000
Book value of Atlanta......................................
(840,000)
Fair value in excess of book value................. $170,000
Annual Excess
Excess fair value assigned
Life Amortizations
Patent ..........................................................
100,000 5 years $20,000
Goodwill ........................................................
$70,000 indefinite
-0Total
............................................................
$20,000

b.

Goodwill allocation with control premium


Noncontrolling

Controlling

Fair values at acquisition date


Relative fair values of identifiable net assets
70% and 30% of $940,000 (acquisition date
book value plus patent = net asset fair value)
Goodwill
c.

Initial value at acquisition date


Trumans share of Atlantas income for half year
([$120,000 20,000 amortization year] 70%)
Dividends 2013 ($80,000 year 70%)
Investment account balance 12/31/13

Interest
$720,000

Interest
$290,000

658,000
$ 62,000

282,000
$ 8,000

$720,000
35,000
(28,000)
$727,000

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

40. (continued)
d. Consolidated Worksheet
TRUMAN COMPANY AND SUBSIDIARY ATLANTA COMPANY
Consolidation Worksheet
For Year Ending December 31, 2013
Revenues
Operating Expenses
Income of subsidiary
Separate company net income
Consolidated net income
NCI in Atlanta's income
Controlling interest in CNI
Retained earnings, 1/1
Net income (above)
Dividends paid
Retained earnings 12/31

Truman
(670,000)
402,000
(35,000)
(303,000)

Atlanta
(400,000)
280,000

NCI

(S)140,000

(15,000)

(823,000)
(303,000)
145,000

(500,000)
(120,000)
80,000
(540,000)

Current assets
Investment in Atlanta

481,000
727,000

390,000

Land
Buildings
Patent
Goodwill
Total assets

388,000
701,000

200,000
630,000

Noncontrolling interest 12/31


Total liab. and equity

(S)200,000
(E) 10,000
(I) 35,000

(S) 500,000

(D) 28,000

2,297,000

1,220,000

(816,000)
(95,000)
(405,000)
(981,000)

(360,000)
(300,000)
(20,000)
(540,000)

12,000
145,000
(981,000)
871,000
-0-

(S)588,000
(I) 35,000
(A1) 70,000
(A2) 62,000

588,000
1,331,000
90,000
70,000
2,950,000

(E) 10,000

(1,176,000)
(95,000)
(405,000)
(981,000)

(S) 300,000
(S) 20,000
(A1) 30,000
(A2) 8,000
(S) 252,000

(290,000)
293,000

(1,220,000)

1,263,000

(318,000)
15,000
(303,000)
(823,000)
(303,000)

(S) 40,000
(D) 28,000

(A1)100,000
(A2) 70,000

(2,297,000)

Cons.
(870,000)
552,000
-0-

(120,000)

(981,000)

Liabilities
Common stock
Additional paid-in capital
Retained earnings 12/31
Noncontrolling interest 7/1

Adjustments & Eliminations

1,263,000

(293,000
)
(2,950,000)

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

41. (60 minutes) (Consolidated statements for a step acquisition)


a.

Fair value of Sysinger 1/1/13 (given)


Book value of Sysinger 1/1/13 (CS + APIC + RE)
Excess fair value over book value
To customer contract (4 year life)
To goodwill

b.

Equity in earnings of Sysinger


2013 income (150,000 95%)
Amortization (100,000 95%)
Equity in earnings of Sysinger

$1,750,000
1,300,000
450,000
400,000
$50,000
$142,500
(95,000)
$47,500

Revaluation of 15% block to fair value


Consideration transferred
2012 Income (100,000 15%)
2012 dividends (30,000 15%)
Book value at 1/1/13
195,000
Fair value at 1/1/13
Gain on revaluation
Investment account balance
Fair value at 1/1/13 (15% block)
Consideration transferred 1/1/13 (80% block)
Equity earnings 2013
Income (95% 150,000)
Customer contract amortization
Dividends (40,000 95%)
Investment in Sysinger 12/31/13

$184,500
15,000
(4,500)
262,500
$67,500
$262,500
1,400,000
142,500
(95,000)

47,500
(38,000)
$1,672,000

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

41. (Continued) c.

Accounts
Revenues
Operating expenses
Equity earnings of Sysinger
Gain on revaluation
Separate company net income
Consolidated net income
NCI in Sysingers income
Allans share of CNI

Allan and Sysinger


Consolidation Worksheet
For Year Ending December 31, 2013
Allan
Sysinger
Consolidation Entries
Noncontrolling Consolidated
Company
Company
Debit
Credit
Interest
Totals
(931,000)
(380,000)
(1,311,000)
615,000
230,000
(E)100,000
945,000
(47,500)
-0(I) 47,500
-0(67,500)
-0(67,500)
(431,000)
(150,000)
(433,500)
(2,500)
2,500
(431,000)

Retained earnings, 1/1


Net income
Dividends paid
Retained earnings 12/31

(965,000)
(431,000)
140,000
(1,256,000)

(600,000)
(150,000)
40,000
(710,000)

Current assets
Investment in Sysinger

288,000
1,672,000

540,000
-0-

826,000
850,000
-0-

590,000
370,000
-0-01,500,000

Property, plant, and equipment


Patented technology
Customer contract
Goodwill
Total assets

3,636,000

Liabilities
Common stock
Additional paid-in capital
Retained earnings 12/31
NCI in Sysinger, 1/1

(1,300,000)
(900,000)
(180,000)
(1,256,000)
-0-

(90,000)
(500,000)
(200,000)
(710,000)
-0-

NCI in Sysinger, 12/31


Total liab. and stockholders' equity

-0(3,636,000)

-0(1,500,000)

(S) 600,000
(D)

(D) 38,000

(A) 400,000
(A) 50,000

38,000

2,000

828,000
-0-

(S)1,235,000
(I) 47,500
(A) 427,500

1,416,000
1,220,000
300,000
50,000
3,814,000

(E) 100,000

(1,390,000)
(900,000)
(180,000)
(1,256,000)

(S) 500,000
(S) 200,000
(S) 65,000
(A) 22,500
1,935,500

(965,000)
(431,000)
140,000
(1,256,000)

1,935,500

(87,500)
(88,000)

(88,000)
(3,814,000)

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42. (60 minutes) (Step acquisitioncontrol previously acquired.)


a. According to the acquisition method, the valuation basis for a subsidiary is
established on the date control is obtained, in this case January 1, 2012.
Subsequent acquisitions are valued consistent with this initial value after
adjusting the investment for subsidiary income and other changes.
Because subsequent acquisitions are considered as transactions in the parents
own equity, no gains or losses are recorded. Differences in cash paid and the
underlying value are recorded as adjustments to APIC.
Fair value of Keane Company 1/1/12 ($573,000 60%)
Keane income 2012
Excess fair value amortization for copyright
Keane dividends 2012
Initial fair value adjusted to 1/1/13
Percent acquired in step acquisition
Value assigned to 30% acquisition
Cash paid for the 30% acquisition
Credit to APIC from 30% step acquisition

$955,000
150,000
(20,000)*
(80,000)
$1,005,000
30%
301,500
300,000
$
1,500

*Fair value of Keane Company 1/1/12 ($573,000 60%)


Book value of Keane Company 1/1/12 (given)
Excess fair value over book value
To copyright (6 year life)
To goodwill

$955,000
810,000
145,000
120,000
$25,000

Entry to record 30% additional investment in Keane:


1/1/13

Investment in Keane
Cash
APIC from Step Acquisition

301,500

b. Investment in Keane Company 1/1/12


2012 Equity earnings [60% (150,000 20,000)]
2012 Dividends received (60% $80,000)
Additional acquisition of 30% interest
2013 Equity earnings [90% (180,000 20,000)]
2013 Dividends received (90% $60,000)
Investment in Keane Company 12/31/13

300,000
1,500
$573,000
78,000
(48,000)
301,500
144,000
(54,000)
$994,500

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42. (continued) part c.

BRETZ, INC. AND KEANE COMPANY


Consolidation Worksheet
Year Ending December 31, 2013

Accounts
Revenues
Operating expenses
Equity in Keanes income
Separate company net income
Consolidated net income
NCI in Keanes income
Bretzs share of CNI

Bretz, Inc.
(402,000)
200,000
(144,000)
(346,000)

Retained earnings, 1/1


Net income (above)
Dividends paid
Retained earnings, 12/31

(797,000)
(346,000)
143,000
(1,000,000)

Current assets
Investment in Keane Company

Trademarks
Copyrights
Equipment (net)
Goodwill
Total assets
Liabilities
Common stock
Additional paid-in capital
APIC-step acquisition
Retained earnings,12/31
Non-controlling interest 1/1
Non-controlling interest 12/31
Total liabilities and equities

Keane Co.
(300,000)
120,000

Consolidation Entries Noncontrolling Consolidated


Debit
Credit
Interest
Totals
(702,000)
(E) 20,000
340,000
(I) 144,000

(180,000)
(16,000)

224,000
994,500

(500,000)
(180,000)
60,000
(620,000)

(S) 500,000
(D) 54,000

6,000

190,000

106,000
210,000
380,000

600,000
300,000
110,000

1,914,500

1,200,000

(D)54,000

(S) 792,000
(A) 112,500
(I) 144,000

(A)100,000

(E) 20,000

(200,000)
(300,000)
(80,000)

706,000
590,000
490,000
25,000
2,225,000
(653,000)
(400,000)
(60,000)
(1,500)
(1,000,000)

(S)300,000
(S) 80,000

(620,000)
(A) 12,500
(S) 88,000

(1,914,500)

(1,200,000)

1,223,000

(797,000)
(346,000)
143,000
(1,000,000)
414,000
0

(A) 25,000
(453,000)
(400,000)
(60,000)
(1,500)
(1,000,000)

(362,000)
16,000
(346,000)

1,223,000

(100,500)
110,500

(110,500)
(2,225,000)

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ACCOUNTING THEORY RESEARCH CASE: NONCONTROLLING INTEREST


In deliberations prior to the issuance of pre-Codification SFAS 160,
Noncontrolling Interests in Consolidated Financial Statements, the FASB
considered three alternatives for displaying the noncontrolling interest in the
consolidated balance sheet
What were these three alternatives?
1. As a liability
2. As equity
3. In the mezzanine area between liabilities and owners equity
What criteria did the FASB use to evaluate the desirability of each alternative?
The FASB evaluated whether the classifications conformed to current definitions
of financial statement elements (assets, liabilities, or equity) as articulated in
FASB Concept Statement No. 6.
In what specific ways did FASB Concept Statement 6 affect the FASBs evaluation
of these alternatives?
From pre-Codification SFAS 160 paragraphs 32-34
If it required that the noncontrolling interest be reported in the
mezzanine, the Board would have had to create a new element
noncontrolling interest in subsidiariesspecifically for consolidated
financial statements. The Board concluded that no compelling reason
exists to create a new element specifically for consolidated financial
statements to report the interests in a subsidiary held by owners other
than the parent. The Board believes that using the existing elements of
financial statements along with appropriate labeling and disclosure
provides financial information in the consolidated financial statements
that is representationally faithful, understandable, and relevant to the
entitys owners, creditors, and other resource providers.
The Board concluded that a noncontrolling interest in a subsidiary does
not meet the definition of a liability in the Boards conceptual framework.
Paragraph 35 of Concepts Statement 6 defines liabilities as probable
future sacrifices of economic benefits arising from present obligations
of a particular entity to transfer assets or provide services to other
entities in the future as a result of past transactions or events
The Board concluded that a noncontrolling interest represents the
residual interest in the net assets of a subsidiary within the consolidated
group held by owners other than the parent. The noncontrolling interest,
therefore, meets the definition of equity in Concepts Statement 6.
Paragraph 49 of Concepts Statement 6 defines equity (or net assets) as
the residual interest in the assets of an entity that remains after
deducting its liabilities.
RESEARCH CASE: COCA-COLAS ACQUISITION OF COCA-COLA ENTERPRISES

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1. How did Coca-Cola allocate the acquisition-date fair value of CCE among the assets
acquired and liabilities assumed?
Note 2 (Acquisitions and Divestitures) of Coca-Colas 2010 10-K shows the following
allocation for the CCE acquisition:
Cash and cash equivalents
Marketable securities
Trade accounts receivable
Inventories
Other current assets
Property, plant and equipment
Bottlers' franchise rights with indefinite lives
Other intangible assets
Other noncurrent assets
Total identifiable assets acquired

Accounts payable and accrued expenses


Loans and notes payable
Long-term debt
Pension and other postretirement liabilities
Other noncurrent liabilities
Total liabilities assumed

1,826
266
9,345
1,313
2,603
$15,353

Net liabilities assumed


Goodwill
Less: Noncontrolling interests
Net assets acquired

49
7
1,194
696
744
5,385
5,100
1,032
261
$14,468

(885)
7,746
(13)
$ 6,848

2. What are employee replacement awards? How did Coca-Cola account for the
replacement award value provided to the former employees of CCE?
Employee replacement award represent various share-based payments to employees
that the acquiring firm replaces with new awards based on its shares. The ASC
requires that if replacement awards are based on past service, their fair value is
included in consideration transferred. If the replacement awards are for future
service, their value is expensed as incurred. Coca-Cola followed the ASC for its
replacement awards (10-K Note 2).
3. How did Coca-Cola account for its 33 percent interest in CCE prior to the acquisition
of the 67 percent not already owned by Coca-Cola?
Coca-Cola used the equity method to account for its previous 33 percent investment in
CCE (10-K page 53).
4. Upon acquisition of the additional 67 percent interest, how did Coca-Cola account for
the change in fair value of its original 33 percent ownership interest?
We remeasured our equity interest in CCE to fair value upon the close of the
transaction. As a result, we recognized a gain of approximately $4,978 million, which
was classified in the line item other income (loss) net in our consolidated statement
of income. (10-K Note 2).

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CHARGING AHEAD: FASB ASC AND IFRS RESEARCH CASE


1. What is the total consideration transferred by Nu-Auto to acquire its 90 percent
controlling interest in Battery Tech?
Cash
Shares of Nu-Auto stock
Contingency
Total consideration transferred

$60,000,000
27,000,000
10,000,000
$97,000,000

The shares of Nu-Auto stock and the contingency are both measured at their
acquisition-date fair values (ASC 805-30-30-7, ASC 805-30-25-5).

2. What values should Nu-Auto assign to identifiable assets and liabilities as part of the
acquisition accounting?
Cash
Accounts receivable
Land
Building
Machinery
Trademark
Research and development asset
Accounts payable
Total net asset fair value

$ 270,000
800,000
2,930,000
19,000,000
46,000,000
8,000,000
14,000,000
(1,000,000)
$90,000,000 (ASC 805-20-30-1)

3. What is the acquisition-date value assigned to the 10 percent noncontrolling interest?


What are the noncontrolling interest valuation alternatives available under IFRS?
Under U.S. GAAP, the acquisition-date noncontrolling interest is measured at its fair
value. In this case, a reasonable approximation is the average share price of $110 for
the 100,000 noncontrolling interest shares surrounding the October 1 acquisition date.
(ASC 805-20-30-1)

IFRS allows two alternative measures for the noncontrolling interest. The first is
identical to the U.S. measure. The second alternative uses the noncontrolling interest
percentage of the fair value of the subsidiarys identifiable net assets. In this case, the
second alternative provides a value of $9,000,000.
4. Under U.S. GAAP, what amount should Nu-Auto recognize as goodwill from the
acquisition? What alternative valuations are available for goodwill under IFRS?
Goodwill under U.S. GAAP (ASC 805-30-30-1) and IFRS alternative 1 (IFRS 3 IN 8):
Consideration transferred (above)
Acquisition-date noncontrolling interest fair value
Acquisition-date value assigned to subsidiary
Net assets acquired fair value (above)
Goodwill

$ 97,000,000
11,000,000
$108,000,000
90,000,000
$ 18,000,000

Goodwill under IFRS alternative 2:


Consideration transferred (above)
Acquisition-date NCI value assigned (above)
Acquisition-date value assigned to subsidiary
Net assets acquired fair value (above)
Goodwill

$ 97,000,000
9,000,000
$106,000,000
90,000,000
$ 16,000,000

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