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Chapter 3

Consolidated Financial StatementsDate of Acquisition


Multiple Choice
1.

A majority-owned subsidiary that is in legal reorganization should normally be accounted for using
a. consolidated financial statements.
b. the equity method.
c. the market value method.
d. the cost method.

2.

Under the acquisition method, indirect costs relating to acquisitions should be


a. included in the investment cost.
b. expensed as incurred.
c. deducted from other contributed capital.
d. none of these.

3.

Eliminating entries are made to cancel the effects of intercompany transactions and are made on the
a. books of the parent company.
b. books of the subsidiary company.
c. workpaper only.
d. books of both the parent company and the subsidiary.

4.

One reason a parent company may pay an amount less than the book value of the subsidiary's stock
acquired is
a. an undervaluation of the subsidiary's assets.
b. the existence of unrecorded goodwill.
c. an overvaluation of the subsidiary's liabilities.
d the existence of unrecorded contingent liabilities.

5.

In a business combination accounted for as an acquisition, registration costs related to common stock issued
by the parent company are
a. expensed as incurred.
b. deducted from other contributed capital.
c. included in the investment cost.
d. deducted from the investment cost.

6.

On the consolidated balance sheet, consolidated stockholders' equity is


a. equal to the sum of the parent and subsidiary stockholders' equity.
b. greater than the parent's stockholders' equity.
c. less than the parent's stockholders' equity.
d. equal to the parent's stockholders' equity.

7.

Majority-owned subsidiaries should be excluded from the consolidated statements when


a. control does not rest with the majority owner.
b. the subsidiary operates under governmentally imposed uncertainty.
c. a foreign subsidiary is domiciled in a country with foreign exchange restrictions or controls.
d. any of these circumstances exist.

8.

Under the economic entity concept, consolidated financial statements are intended primarily for the benefit
of the

3-2

Test Bank to accompany Jeter and Chaney Advanced Accounting


a.
b.
c.
d.

stockholders of the parent company.


creditors of the parent company.
minority stockholders.
all of the above.

9.

Reasons a parent company may pay more than book value for the subsidiary company's stock include all of
the following except
a. the fair value of one of the subsidiary's assets may exceed its recorded value because of appreciation.
b. the existence of unrecorded goodwill.
c. liabilities may be overvalued.
d. stockholders' equity may be undervalued.

10.

What is the method of presentation required by SFAS 160 of non-controlling interest on a consolidated
balance sheet?
a. As a deduction from goodwill from consolidation.
b. As a separate item within the long-term liabilities section.
c. As a part of stockholders' equity.
d. As a separate item between liabilities and stockholders' equity.

11.

Which of the following is a limitation of consolidated financial statements?


a. Consolidated statements provide no benefit for the stockholders and creditors of the parent company.
b. Consolidated statements of highly diversified companies cannot be compared with industry standards.
c. Consolidated statements are beneficial only when the consolidated companies operate within the same
industry.
d. Consolidated statements are beneficial only when the consolidated companies operate in different
industries.

12.

Pina Corp. owns 60% of Simon Corp.'s outstanding common stock. On May 1, 2013, Pina advanced Simon
$90,000 in cash, which was still outstanding at December 31, 2013. What portion of this advance should be
eliminated in the preparation of the December 31, 2013 consolidated balance sheet?
a. $90,000.
b. $54,000.
c. $36,000.
d. $-0-.

Use the following information for questions 13-15.


On January 1, 2013, Pell Company and Sand Company had condensed balance sheets as follows:
Sand
Pell
Current assets
$ 280,000
$ 80,000
Noncurrent assets
_360,000
__160,000
Total assets
$ 640,000
$240,000

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-3

Current liabilities
$ 120,000
$ 40,000
Long-term debt
200,000
-0200,000
Stockholders' equity
__320,000
Total liabilities & stockholders' equity
$ 640,000
$240,000
On January 2, 2013 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common
stock of Sand. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2013.
Any difference between book value and the value implied by the purchase price relates to land.
On Pell's January 2, 2013 consolidated balance sheet,
13.

Noncurrent assets should be


a. $520,000.
b. $536,000.
c. $544,000.
d. $586,667.

14.

Current liabilities should be


a. $200,000.
b. $184,000.
c. $160,000.
d. $120,000.

15.

Noncurrent liabilities should be


a. $440,000.
b. $416,000.
c. $240,000.
d. $216,000.

16.

A newly acquired subsidiary has pre-existing goodwill on its books. The parent companys consolidated
balance sheet will:
a.
treat the goodwill the same as other intangible assets of the acquired company.
b. will always show the pre-existing goodwill of the subsidiary at its book value.
c.
not show any value for the subsidiarys pre-existing goodwill.
d. do an impairment test to see if any of it has been impaired.

17.
The Difference between Implied and Book Value account titles s/b in Caps, but not italics - you have not done
this consistentlyaccount is:
a.
an asset or liability account reflected on the consolidated balance sheet.
b. used in allocating the amounts paid for recorded balance sheet accounts that are different than
their fair values.
c.
the excess implied value assigned to goodwill.
d. the unamortized excess that cannot be assigned to any related balance sheet accounts
18.

The main evidence of control for purposes of consolidated financial statements involves
a. possessing majority ownership
b. having decision-making ability that is not shared with others.
c. being the sole shareholder
d. having the parent company and the subsidiary participating in the same industry.

19.

In which of the following cases would consolidation be inappropriate?


a. The subsidiary is in bankruptcy.
b. Subsidiary's operations are dissimilar from those of the parent.

3-4

Test Bank to accompany Jeter and Chaney Advanced Accounting


c.
d.

20.

The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's nonvoting
preferred stock is held by a single investor.
Subsidiary is foreign.

Price Company acquired 75 percent of the common stock of Shandie Corporation on December 31, 2013. On
the date of acquisition, Price held land with a book value of $150,000 and a fair value of $300,000; Shandie
held land with a book value of $100,000 and fair value of $500,000. What amount would land be reported in
the consolidated balance sheet prepared immediately after the combination?
a. $650,000
b. $500,000
c. $550,000
d. $375,000

Use the following information to answer questions 21 - 23.


On January 1, 2013, Pent Company and Shelter Company had condensed balanced sheets as follows:
Pent
Current assets
Noncurrent assets
Total assets
Current liabilities
Long-term debt
Stock holders' equity
Total liabilities & stockholders' equity

$ 210,000
270,000
$480,000
$

90,000

150,000
240,000
$ 480,000

Shelter
$ 60,000
120,000
$180,000
$ 30,000
-0150,000
$ 180,000

On January 2, 2013 Pent borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common
stock of Shelter. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30,
2013. Any difference between book value and the value implied by the purchase price relates to land.
On Pent's January 2, 2013 consolidated balance sheet,
21.

Noncurrent assets should be


a. $390,000.
b. $402,000.
c. $408,000.
d. $440,000.

22.

Current liabilities should be


a. $150,000.
b. $138,000.
c. $120,000.
d. $90,000.

23.

Noncurrent liabilities should be


a. $330,000.
b. $312,000.
c. $180,000.
d. $162,000.

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-5

24.

On January 1, 2013, Prima Corporation acquired 80 percent of Sunder Corporation's voting common stock.
Sunders's buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of
acquisition. At what amount will Sunders buildings and equipment will be reported in the consolidated statements ?
a. $350,000
b. $340,000
c. $280,000
d. $300,000

25.

The primary beneficiary of a variable interest entity (VIE) must consolidate the VIE into its financial statements
whenever
a. substantially all of the entitys activities are conducted on behalf of an investor who has disproportionally few
voting rights.
b. the voting rights are not proportional to the obligations to absorb the expected losses or receive expected
residual returns.
c. the total equity at risk is not sufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties.
d. the holders of the equity investment at risk have the right to receive the residual returns of the legal entity

26.

If an entity is not considered a VIE, the determination of consolidation is based on whether


a. the voting rights are proportional to the obligations to absorb expected losses or receive expected residual
returns.
b. the total equity at risk is sufficient to permit the entity to finance its activities without additional subordinated
financial support from other parties.
c. the equity investments or investments in subordinated debt are at risk.
d. one of the entities in the consolidated group directly or indirectly has a controlling financial interest (usually
ownership of a majority voting interest) in the other entities.

27.

IFRS defines control as


a. the direct or indirect ability to determine the direction of management and policies through ownership, contract,
or otherwise.
b. the power to govern the entitys financial and operating policies as to obtain benefits from its activities.
c. the power to direct the activities that impact economic performance, the obligation to absorb expected losses,
and the right to receive expected residual returns.
d. having a majority of the ownership interests entitled to elect management.

Problems
3-1

On December 31, 2013, Pinta Company purchased 80% of the outstanding common stock of Snead Company
for cash. At the time of acquisition, Snead Company's balance sheet was as follows:
Current assets
Plant and equipment
Land
Total assets

$ 1,680,000
1,580,000
280,000
$3,540,000

Liabilities
Common stock, $10 par value
Other contributed capital
Retained earnings
Total

$ 1,320,000
1,440,000
700,000
240,000
$3,700,000

3-6

Test Bank to accompany Jeter and Chaney Advanced Accounting


Treasury stock at cost, 5,000 shares
Total equities

<160,000>
$3,540,000

Required:
Prepare the elimination entry(s) required for the preparation of a consolidated balance sheet workpaper on
December 31, 2013, assuming the purchase price of the stock was $1,670,000. Any difference between the
value implied by the purchase price of the investment and the book value of net assets acquired relates to
subsidiary land.
3-2

P Company purchased 80% of the outstanding common stock of S Company on January 2, 2013, for
$380,000. Balance sheets for P Company and S Company immediately after the stock acquisition were as
follows:
Current assets
Investment in S Company
Plant and equipment (net)
Land
Current liabilities
Long-term notes payable
Common stock
Other contributed capital
Retained earnings

P Company
$ 166,000
380,000
560,000
40,000
$1,146,000

S Company
$ 96,000
-0224,000
120,000
$440,000

$ 120,000
-0480,000
244,000
302,000
$1,146,000

$ 44,000
36,000
160,000
64,000
136,000
$440,000

S Company owed P Company $16,000 on open account on the date of acquisition.


Required:
Prepare a consolidated balance sheet for P and S Companies on the date of acquisition. Any difference
between the value implied by the purchase price of the investment and the book value of net assets
acquired relates to subsidiary land. The book values of S Company's other assets and liabilities are equal to
their fair values.
3-3

P Company acquired 54,000 shares of the common stock of S Company on January 1, 2013, for $950,000
cash. The stockholders' equity section of S Company's balance sheet on that date was as follows:
Common stock, $10 par value
Other contributed capital
Retained earnings
Total

$600,000
80,000
320,000
$1,000,000

On the date of acquisition, S Company owed P Company $10,000 on open account.


Required:
Present, in general journal form, the elimination entries for the preparation of a consolidated balance sheet
workpaper on January 1, 2013. The difference between the value implied by the purchase price of the
investment and the book value of the net assets acquired relates to subsidiary land.

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-4

3-7

On January 2, 2013, Pope Company acquired 90% of the outstanding common stock of Smithwick Company
for $480,000 cash. Just before the acquisition, the balance sheets of the two companies were as follows:
Cash
Accounts Receivable (net)
Inventory
Plant and Equipment (net)
Land
Total Assets

Pope
$ 650,000
360,000
290,000
970,000
150,000
$2,420,000

Smithwick
$ 160,000
60,000
140,000
240,000
80,000
$680,000

Accounts Payable
Mortgage Payable
Common Stock, $2 par value
Other Contributed Capital
Retained Earnings
Total Equities

$ 260,000
180,000
1,000,000
520,000
460,000
$2,420,000

$ 120,000
100,000
170,000
50,000
240,000
$680,000

The fair values of Smithwick's assets and liabilities are equal to their book values with the exception of
land.

Required:
A. Prepare the journal entry necessary to record the purchase of Smithwick's common stock.
B. Prepare a consolidated balance sheet at the date of acquisition.
3-5

P Corporation paid $420,000 for 70% of S Corporations $10 par common stock on December 31, 2013, when
S Corporations stockholders equity was made up of $300,000 of Common Stock, $90,000 of Other
Contributed Capital and $60,000 of Retained Earnings. Ss identifiable assets and liabilities reflected their
fair values on December 31, 2013, except for Ss inventory which was undervalued by $60,000 and their land
which was undervalued by $25,000. Balance sheets for P and S immediately after the business combination
are presented in the partially completed work-paper below.

P
ASSETS
Cash
Accounts
receivable-net
Inventories
Land
Plant assetsnet
Investment in
S Corp.
Difference

$40,000

$30,000

30,000
185,000
45,000

45,000
165,000
120,000

480,000

240,000

420,000

Eliminations
Debit
Credit

Noncontrolling
Interest

Consolidated
Balances

3-8

Test Bank to accompany Jeter and Chaney Advanced Accounting


between implied
and book value
Goodwill
Total Assets
EQUITIES
Current
liabilities
Capital stock
Additional paid-in
capital
Retained earnings
Noncontrolling
interest
Total Equities

$1,200,000

$600,000

$170,000
600,000

$150,000
300,000

150,000
280,000

90,000
60,000

$1,200,000

$600,000

Required:
Complete the consolidated balance sheet workpaper for P Corporation and Subsidiary.

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-6

3-9

Prepare in general journal form the workpaper entries to eliminate Porter Company's investment in Sewell
Company in the preparation of a consolidated balance sheet at the date of acquisition for each of the
following independent cases:
Sewell Company Equity Balances
Cash

Percent of
Stock Owned

Investment
Cost

Common Stock

Other Contributed
Capital

Retained
Earnings

a.

90

$675,000

$450,000

$180,000

$75,000

b.

80

318,000

620,000

140,000

20,000

Any difference between book value of net assets acquired and the value implied by the purchase price
relates to subsidiary property, plant, and equipment except for case (b). In case (b) assume that all book
values and fair values are the same.
3-7

On December 31, 2013, Priestly Company purchased a controlling interest in Shelter Company for
$1,060,000. The consolidated balance sheet on December 31, 2013 reported noncontrolling interest in
Shelter Company of $265,000.
On the date of acquisition, the stockholders' equity section of Shelter Company's balance sheet was as
follows:
Common stock
Other contributed capital
Retained earnings
Total

$520,000
380,000
280,000
1,180,000

Required:
A. Compute the noncontrolling interest percentage on December 31, 2013.
B. Prepare the investment elimination entry made to prepare a consolidated balance sheet workpaper.
Any difference between book value and the value implied by the purchase price relates to subsidiary
land.
3-8

On January 1, 2013, Prima Company issued 1,500 of its $20 par value common shares with a fair value of $50
per share in exchange for 2,000 outstanding common shares of Swatch Company in a purchase transaction.
Registration costs amounted to $1,700 paid in cash. Just prior to the acquisition, the balance sheets of the
two companies were as follows:

Cash
Accounts Receivable (net)
Inventory
Plant and Equipment (net)
Land
Total Assets

Prima

Swatch

$ 73,000
95,000
58,000
95,000
26,000
$ 347,000

$13,000
19,000
25,000
43,000
20,000
$ 120,000

3-10 Test Bank to accompany Jeter and Chaney Advanced Accounting

Accounts Payable
Notes Payable
Common Stock, $20 par value
Other Contributed Capital
Retained Earnings
Total Liabilities and Equities

$ 66,000
82,000
100,000
60,000
39,000
$ 347,000

16,000
21,000
40,000
24,000
19,000
$ 120,000

Any differences between the book value of equity and the value implied by the purchase price relates to Land.
Required:
A. Prepare the journal entry on Primas books to record the exchange of stock.
B. Prepare a Computation and Allocation Schedule for the Difference between book value and value implied by
the purchase price.
C. Calculate the consolidated balance for each of the following accounts as of December 31, 2013:
1. Cash
2. Land
3. Common Stock
4. Other Contributed Capital

Short Answer
1.
2.

There are several reasons why a company would acquire a subsidiarys voting common stock rather than its net
assets. Identify at least two advantages to acquiring a controlling interest in the voting stock of another company
rather than its assets.
A useful first step in the consolidating process is to prepare a Computation and Allocation of Difference (CAD)
Schedule. Identify the steps involved in preparing the CAD schedule.

Short Answer Questions from the Textbook


1.

What are the advantages of acquiring the majority of the voting stock of another company rather than acquiring
all its voting stock?

2.

What is the justification for preparing consolidated financial statements when, in fact, it is apparent that the
consolidated group is not a legal entity?

3.

Why is it often necessary to prepare separate financial statements for each legal entity in a consolidated group
even though consolidated statements provide a better economic picture of the combined activities?

4.

What aspects of control must exist before a subsidiary is consolidated?

5.

Why are consolidated work papers used in pre-paring preparing consolidated financial statements?

6.

Define noncontrolling (minority) interest. List three methods that might be used for reporting the noncontrolling
interest in a consolidated balance sheet, and state which is preferred under the SFAS No. 160[topic 810].

7.

Give several reasons why a parent company would be willing to pay more than book value for subsidiary stock
acquired.

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-11

8.

What effect do subsidiary treasury stock holdings have at the time the subsidiary is acquired? How should the
treasury stock be treated on consolidated work papers?

9.

What effect does a noncontrolling interest have on the amount of intercompany receivables and payables
eliminated on a consolidated balance sheet?

10A SFAS No. 109and SFAS No. 141R [ASC 740 and 805] require that a deferred tax asset or liability be recognized for
likely differences between the reported values and tax bases of assets and liabilities recognized in business
combinations (for example, in exchanges that are nontaxable to the selling shareholders). Does this decision
change the amount of consolidated net income reported in years subsequent to the business combination?
Explain.
Business Ethics Question from the Textbook
Part I. You are working on the valuation of accounts receivable, and bad debt reserves for the current years annual
report. The CFO stops by and asks you to reduce the reserve by enough to increase the current years EPS by 2 cents a
share. The companys policy has always been to use the previous years actual bad debt percentage adjusted for a
specific economic index. The CFOs suggested change would still be within acceptable GAAP. However, later, you
learn that with the increased EPS, the CFO would qualify for a significant bonus. What do you do and why?
Part II. Consider the following: Accounting firm KPMG created tax shelters called BLIPS, FLIP, OPIS, and SOS that were
based largely in the Cayman Islands and allowed wealthy clients (there were 186) to create $5 billion in losses, which
were then deducted from their income for IRS tax purposes. BLIPS (Bond Linked Issue Premium Structures) had clients
borrow from an offshore bank for purposes of purchasing currency. The client would then sell the currency back to
the lender for a loss. However, the IRS contends the losses were phony and that there was never any risk to the client
in the deals. The IRS has indicted eight former KPMG partners and an outside lawyer alleging that the transactions
were shams, illegal methods for avoiding taxes. KPMG has agreed to pay a$456 million fine, no longer to do tax
shelters, and to cooperate with the government in its prosecution of the nine individuals involved in the tax shelter
scheme. Many argue that the courts have not always held that such tax avoidance schemes show criminal intent
because the tax laws permit individuals to minimize taxes. However, the IRS argues that these shelters evidence
intent because of the lack of risk.
Question
In this case, the IRS contends that the losses generated by the tax shelters were phony and that the clients never
incurred any risk. Do tax avoidance schemes indicate criminal intent if the tax laws permit individuals to minimize
taxes? Justify your answer.

3-12 Test Bank to accompany Jeter and Chaney Advanced Accounting

ANSWER KEY
Multiple Choice
1.
d
2.
b
3.
c
4.
d
5.
b
6. d
7. d
Problems
3-1

8.
9.
10.
11.
12.
13.
14.

d
d
c
b
a
d
b

15.
16.
17.
18.
19.
20.
21.

b
c
b
b
a
a
d

22. b
23. b
24. a
25. c
26. d
27. b

Common Stock Snead


Other Contributed Capital Snead
Retained Earnings Snead
Investment in Snead Company
Treasury Stock - Snead
Difference Between Implied and Book Value
Noncontrolling Interest

1,440,000
700,000
240,000

Difference Between Implied and Book Value


Land
3-2

3-3

106,000

P COMPANY AND SUBSIDIARY


Consolidated Balance Sheet
January 2, 2013
Current assets
Plant and equipment (net)
Land ($160,000 + $115,000 excess cost)
Total

$246,000
784,000
275,000
$1,305,000

Current liabilities
Long-term notes payable
Common stock
Noncontrolling interest
Other contributed capital
Retained earnings
Total

$ 148,000
36,000
480,000
95,000
244,000
302,000
$1,305,000

Accounts Payable (to P)


Accounts Receivable (from S)
Common Stock - S
Other Contributed Capital - S
Retained Earnings - S
Difference Between Implied and Book Value
Investment in S Company
Noncontrolling Interest

10,000
600,000
80,000
320,000
50,000

10,000

950,000
100,000

1,670,000
160,000
106,000
444,000
106,000

Chapter 3 Consolidated Financial StatementsDate of Acquisition

Land
Difference Between Implied and Book Value
3-4
A.

Investment in Smithwick Company


Cash
B.

50,000

50,000

480,000

480,000

POPE COMPANY AND SUBSIDIARY


Consolidated Balance Sheet
January 2, 2013
Assets
Cash (650,000 + 160,000 - $480,000)
Accounts Receivable
Inventory
Plant and Equipment (net)
Land ($150,000 + $80,000 + $73,333*)
Total Assets
Liabilities and Stockholders Equity
Accounts Payable
Mortgage Payable
Total liabilities
Noncontrolling Interest
($170,000 + $50,000 + $240,000 + 73,333) .10
Common Stock
$1,000,000
Other Contributed Capital
520,000
460,000
Retained Earnings
Total Stockholders Equity
Total Liabilities and Stockholders Equity
* $480,000/.9 - ($170,000 + $50,000 + $240,000)

$330,000
420,000
430,000
1,210,000
303,333
$2,693,333
$380,000
280,000
$660,000
$ 53,333

1,980,000
$2,693,333

3-13

3-14 Test Bank to accompany Jeter and Chaney Advanced Accounting

3-5
P
ASSETS
Cash
Accounts
receivable-net
Inventories
Land
Plant assetsnet
Investment in
S Corp.
Difference
between
implied and
book value
Goodwill
Total Assets
EQUITIES
Current
liabilities
Capital stock
Additional paidin capital
Retained
earnings
Noncontrolling
interest
Total Equities
3-6

A.

B.

3-7

A.

$40,000

$30,000

30,000
185,000
45,000

45,000
165,000
120,000

480,000

240,000

Eliminations
Debit
Credit

Consolidated
Balances
$70,000
75,000
410,000
190,000

(b) 60,000
(b) 25,000

720,000

420,000

(a) 420,000

(a) 150,000
(b) 65,000
$1,200,000

$600,000

$170,000
600,000

$150,000
300,000

150,000

90,000

280,000

60,000

$1,200,000

Noncontrolling
Interest

$600,000

(b) 150,000
65,000
$1,530,000
$320,000
600,000

(a) 300,000
(a) 90,000

150,000

(a) 60,000

$750,000

280,000
(a) 180,000
$750,000

Common Stock Sewell


Other Contributed Capital Sewell
Difference between Implied and Book Values
Retained Earnings Sewell
Investment in Sewell
Noncontrolling Interest in Equity

450,000
180,000
45,000
75,000

Common Stock Sewell


Other Contributed Capital Sewell
Retained Earnings Sewell
Investment in Sewell
Gain on Purchase of Business - Porter
Noncontrolling Interest in Equity

620,000
140,000
20,000

265,000/(1,060,000 +265,000) = 20% Noncontrolling interest

180,000

675,000
75,000

318,000
306,000
156,000

180,000
$1,530,000

Chapter 3 Consolidated Financial StatementsDate of Acquisition

B.

3-8

A.

Common Stock Shelter


Other Contributed Capital Shelter
Retained Earnings Shelter
Difference between Implied and Book Values
Investment in Shelter Company
Noncontrolling Interest in Equity

520,000
380,000
280,000
145,000

Investment in Swatch Company ($50 1,500)


Common Stock ($20 1,500)
Other Contributed Capital ($30 1,500)

75,000

1,700

B. Computation and Allocation of Difference

C.

1,060,000
265,000

30,000
45,000

Other Contributed Capital


Cash

Purchase price and implied value


Less: Book value of equity acquired
Difference between implied and book value
Land
Balance
* $40,000 + $24,000 + $19,000 = $83,000

3-15

Parent
Share
$75,000
83,000*
7,000
(7,000)
-0-

NonControlling
Share
0
0
0
(0)
-0-

1,700

Entire
Value
75,000
83,000
7,000
(7,000)
-0-

Cash balance: 73,000 + 13,000 1,700 = $84,300


Land balance: 26,000 + 20,000 + 7,000= $ 53,000
Common Stock balance: 100,000 + 30,000 = $130,000
Other Contributed Capital: 60,000 + 45,000 1,700 = $ 103,300

Short Answer
1.

Reasons why a company would acquire a subsidiary rather than its net assets include the following:
a. Stock acquisition is relatively simple and avoids the often lengthy and difficult negotiations that are
required in a complete takeover.
b. Control of the subsidiary's operations can be accomplished with a much smaller investment.
c. The separate legal existence of the individual affiliates provides an element of protection of the parent's
assets from attachment by subsidiary creditors.

2.

Preparation of the Computation and Allocation of Difference Schedule involves the following process:
a. Determine the percentage of stock acquired in the subsidiary.
b. Compute the implied value of the subsidiary by dividing the purchase price by the percentage acquired.

3-16 Test Bank to accompany Jeter and Chaney Advanced Accounting


c.

Allocate any difference between the implied value and the book value of the subsidiary's equity to
adjust the underlying assets and/or liabilities of the acquired company.

Short Answer Questions from the Textbook Solutions


1. (1)
(2)
(3)

Stock acquisition is greatly simplified by avoiding the lengthy negotiations required in an exchange of stock
for stock in a complete takeover.
Effective control can be accomplished with more than 50% but less than all of the voting stock of a
subsidiary; thus the necessary investment is smaller.
An individual affiliates legal existence provides a measure of protection of the parents assets delete space
from attachment by creditors of the subsidiary.

2. The purpose of consolidated financial statements is to present, primarily for the benefit of the shareholders and
creditors of the parent company, the results of operations and the financial position of a parent company and its
subsidiaries essentially as if the group were a single company with one or more branches or divisions. The
presumption is that these consolidated statements are more meaningful than separate statements and necessary
for fair presentation. Emphasis then is on substance rather than legal form, and the legal aspects of the separate
entities are therefore ignored in light of economic aspects.
3. Each legal entity must prepare financial statements for use by those who look to the legal entity for analysis.
Creditors of the subsidiary will use the separate statements in assessing the degree of protection related to their
claims. Noncontrolling shareholders, too, use these individual statements in determining risk and the amounts
available for dividends. Regulatory agencies are concerned with the net resources and results of operations of the
individual legal entities.
4. (1) Control should exist in fact, through ownership of more than 50% of the voting stock of the
subsidiary.
(2) The intent of control should be permanent. If there are current plans to dispose of a subsidiary, then the
entity should not be consolidated.
(3) Majority owners must have control. Such would not be the case if the subsidiary were in bankruptcy or legal
reorganization, or if the subsidiary were in a foreign country where political forces were such that control by
majority owners was significantly curtailed.
5.

Consolidated workpapers are used as a tool to facilitate the preparation of consolidated financial statements.
Adjusting and eliminating entries are entered on the workpaper so that the resulting consolidated data reflect
the operations and financial position of two or more companies under common control.

6.

Noncontrolling interest represents the equity in a partially owned subsidiary by those shareholders who are not
members in the affiliation and should be accounted and presented in equity, separately from the parents
shareholders equity. Alternative views have included: presenting the noncontrolling interest as a liability from
the perspective of the controlling shareholders; presenting the noncontrolling interest between liabilities and
shareholders equity to acknowledge its hybrid status; presenting it as a contra-asset so that total assets reflect
only the parents share; and presenting it as a component of owners equity (the choice approved by FASB in its
most recent exposure drafts).

7.

The fair, or current, value of one or more specific subsidiary assets may exceed its recorded value, or specific
liabilities may be overvalued. In either case, an acquiring company might be willing to pay more than book value.
Also, goodwill might exist in the form of above normal earnings. Finally, the parent may be willing to pay a
premium for the right to acquire control and the related economic advantages gained.

8.

The determination of the percentage interest acquired, as well as the total equity acquired, is based on shares
outstanding; thus, treasury shares must be excluded. The treasury stock account should be eliminated by

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-17

offsetting it against subsidiary stockholder equity accounts. The accounts affected as well as the amounts
involved will depend upon whether the cost or par method is used to account for the treasury stock.
9.

None. The full amount of all intercompany receivables and payables is eliminated without regard to the
percentage of control held by the parent.

10 A. The decision in SFAS No. 109 and SFAS No. 141R [topics 740 and 805] is primarily a display issue and would only
affect the calculation of consolidated net income if there were changes in expected future tax rates that resulted
in an adjustment to the balance of deferred tax assets or deferred tax liabilities. Prior to SFAS No. 109 and SFAS
No. 141R, purchased assets and liabilities were displayed at their net of tax amounts and related figures for
amortization and depreciation were based on the net of tax amounts. With the adoption of SFAS No. 109 and
SFAS No. 141R, assets and liabilities are displayed at fair values and the tax consequences for differences
between their assigned values and their tax bases are displayed separately as deferred tax assets or deferred tax
liabilities. Although the amounts shown for depreciation, amortization and income tax expense are different
under SFAS No. 109 and SFAS No. 141R, absent a change in expected future tax rates, the amount of
consolidated net income will be the same.
ANSWERS TO BUSINESS ETHICS CASE
Part 1
Even though the suggested changes by the CFO lie within GAAP, the proposed changes will unfairly increase the
EPS of the company, misleading the common investors and other users. It is evident that the CFO is doing it for
his or her personal gain rather than for the transparency of financial reporting. Thus, manipulating the reserve in
this case comes under the heading of unethical behavior. Taking a stand in such a situation is a difficult and
challenging test for an employee who reports to the CFO.
Part 2
The tax laws permit individuals to minimize taxes by means that are within the law like using tax deductions,
changing one's tax status through incorporation, or setting up a charitable trust or foundation. In the given case
the losses reported were phony and the whole scheme was fabricated to illegally benefit certain individuals;
hence there appears to be a criminal intent in the scheme. Although there is no reason to pay more tax than
necessary, the lack of risk in these types of shelters makes participation in such schemes of questionable ethics,
at the best.

Chapter 4
Consolidated Financial Statements after Acquisition
1.

An investor adjusts the investment account for the amortization of any difference between cost and book
value under the
a. cost method.
b. complete equity method.
c. partial equity method.
d. complete and partial equity methods.

2.

Under the partial equity method, the entry to eliminate subsidiary income and dividends includes a debit to
a. Dividend Income.
b. Dividends Declared - S Company.
c. Equity in Subsidiary Income.
d. Retained Earnings - S Company.

3.

On the consolidated statement of cash flows, the parents acquisition of additional shares of the subsidiarys
stock directly from the subsidiary is reported as
a. an investing activity.
b. a financing activity.
c. an operating activity.
d. none of these.

4.

Under the cost method, the workpaper entry to establish reciprocity


a. debits Retained Earnings - S Company.
b. credits Retained Earnings - S Company.
c. debits Retained Earnings - P Company.
d. credits Retained Earnings - P Company.

5.

Under the cost method, the investment account is reduced when


a. there is a liquidating dividend.
b. the subsidiary declares a cash dividend.
c. the subsidiary incurs a net loss.
d. none of these.

6.

The parent company records its share of a subsidiarys income by


a. crediting Investment in S Company under the partial equity method.
b. crediting Equity in Subsidiary Income under both the cost and partial equity methods.
c. debiting Equity in Subsidiary Income under the cost method.
d. none of these.

7.

In years subsequent to the year of acquisition, an entry to establish reciprocity is made under the
a. complete equity method.
b. cost method.
c. partial equity method.
d. complete and partial equity methods.

8.

A parent company received dividends in excess of the parent companys share of the subsidiarys earnings
subsequent to the date of the investment. How will the parent companys investment account be affected
by those dividends under each of the following accounting methods?
a.

Cost Method
No effect

Partial Equity Method


No effect

4-2

Test Bank to accompany Jeter and Chaney Advanced Accounting


b.
c.
d.

Decrease
No effect
Decrease

No effect
Decrease
Decrease

9.

P Company purchased 80% of the outstanding common stock of S Company on May 1, 2014, for a cash
payment of $1,272,000. S Companys December 31, 2013 balance sheet reported common stock of
$800,000 and retained earnings of $540,000. During the calendar year 2014, S Company earned $840,000
evenly throughout the year and declared a dividend of $300,000 on November 1. What is the amount
needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on
December 31, 2015?
a. $208,000
b. $260,000
c. $248,000
d. $432,000

10.

P Company purchased 90% of the outstanding common stock of S Company on January 1, 2010 . S
Companys stockholders equity at various dates was:
12/31/14
1/1/10
1/1/14
Common stock
$400,000
$400,000
$400,000
460,000
Retained earnings
120,000
380,000
Total
$520,000
$780,000
$860,000
The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated
statements workpaper on December 31, 2014 should include a credit to P Companys retained earnings of
a. $80,000.
b. $234,000.
c. $260,000.
d. $306,000.

11.

Consolidated net income for a parent company and its partially owned subsidiary is best defined as the
parent companys
a. recorded net income.
b. recorded net income plus the subsidiarys recorded net income.
c. recorded net income plus the its share of the subsidiarys recorded net income.
d. income from independent operations plus subsidiarys income resulting from transactions with outside
parties.

12.

In the preparation of a consolidated statements workpaper, dividend income recognized by a parent


company for dividends distributed by its subsidiary is
a. included with parent company income from other sources to constitute consolidated net income.
b. assigned as a component of the noncontrolling interest.
c. allocated proportionately to consolidated net income and the noncontrolling interest.
d. eliminated.

13.

In the preparation of a consolidated statement of cash flows using the indirect method of presenting cash
flows from operating activities, the amount of the noncontrolling interest in consolidated income is
a. combined with the controlling interest in consolidated net income.
b. deducted from the controlling interest in consolidated net income.
c. reported as a significant noncash investing and financing activity in the notes.
d. reported as a component of cash flows from financing activities.

Chapter 4 Consolidated Financial Statements after Acquisition


14.

4-3

On October 1, 2014, Perma Company acquired for cash all of the voting common stock of Street Company.
The purchase price of Streets stock equaled the book value and fair value of Streets net assets. The
separate net income for each company, excluding Permas share of income from Street was as follows:
Street
Perma
Twelve months ended 12/31/14
$4,500,000
$2,700,000
Three months ended 12/31/14
495,000
450,000
During September, Street paid $150,000 in dividends to its stockholders. For the year ended December 31,
2014, Perma issued parent company only financial statements. These statements are not considered those
of the primary reporting entity. Under the partial equity method, what is the amount of net income reported
in Permas income statement?
a. $7,200,000.
b. $4,650,000.
c. $4,950,000.
d. $1,800,000.

15.

A parent company uses the partial equity method to account for an investment in common stock of its
subsidiary. A portion of the dividends received this year were in excess of the parent companys share of the
subsidiarys earnings subsequent to the date of the investment. The amount of dividend income that should
be reported in the parent companys separate income statement should be
a. zero.
b. the total amount of dividends received this year.
c. the portion of the dividends received this year that were in excess of the parents share of subsidiarys
earnings subsequent to the date of investment.
d. the portion of the dividends received this year that were NOT in excess of the parents share of
subsidiarys earnings subsequent to the date of investment.

16.

Pine, Inc. owns 40% of Supra Corporation. During the year, Supra had net earnings of $200,000 and paid
dividends of $50,000. Masters used the cost method of accounting. What effect would this have on the
investment account, net earnings, and retained earnings, respectively?
a. understate, overstate, overstate.
b. overstate, understate, understate
c. overstate, overstate, overstate
d. understate, understate, understate

4-4

Test Bank to accompany Jeter and Chaney Advanced Accounting

Use the following information in answering questions 17 and 18.


17.

Prime Industries acquired a 70 percent interest in Suburbia Company by purchasing 14,000 of its 20,000
outstanding shares of common stock at book value of $210,000 on January 1, 2013. Suburbia reported net
income in 2013 of $90,000 and in 2014 of $120,000 earned evenly throughout the respective years. Prime
received no bold - inconsistent$24,000 dividends from Suburbia in 2013 and $36,000 in 2014. Prime uses
the equity method to record its investment.
Prime should record investment income from Suburbia during 2014 of:
a. $36,000
b. $120,000
c. $84,000
d. $48,000

18.

The balance of Primes Investment in Suburbia account at December 31, 2014 is:
a. $210,000
b. $285,000
c. $297,000
d. $315,000

19.

Park Company acquired a 90% interest in Southwestern Company on December 31, 2013, for $320,000.
During 2014 Southwestern had a net income of $22,000 and paid a cash dividend of $7,000. Applying the
cost method would give a debit balance in the Investment in Stock of Southwestern Company account at the
end of 2014 of:
a. $335,000
b. $333,500
c. $313,700
d. $320,000

20.

Pall, Inc., owns 40% of the outstanding stock of Sibil Company. During 2014, Pall received a $4,000 cash
dividend from Sibil. What effect did this dividend have on Palls 2014 financial statements?
a. Increased total assets.
b. Decreased total assets.
c. Increased income.
d. Decreased investment account.

21.

P Company purchased 80% of the outstanding common stock of S Company on May 1, 2014, for a cash
payment of $318,000. S Companys December 31, 2013 balance sheet reported common stock of $200,000
and retained earnings of $180,000. During the calendar year 2014, S Company earned $210,000 evenly
throughout the year and declared a dividend of $75,000 on November 1. What is the amount needed to
establish reciprocity under the cost method in the preparation of a consolidated workpaper on December
31, 2014?
a. $52,000
b. $65,000
c. $62,000
d. $108,000

Chapter 4 Consolidated Financial Statements after Acquisition


22.

4-5

P Company purchased 90% of the outstanding common stock of S Company on January 1, 2012. S
Companys stockholders equity at various dates was:
12/31/14
1/1/12
1/1/14
Common stock
$200,000
$200,000
$200,000
230,000
Retained earnings
60,000
190,000
Total
$260,000
$390,000
$430,000
The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated
statements workpaper on December 31, 2014 should include a credit to P Companys retained earnings of
a. $40,000.
b. $117,000.
c. $130,000.
d. $153,000.

Use the following information in answering questions 23 and 24.


23.

Prime Industries acquired an 80 percent interest in Sands Company by purchasing 24,000 of its 30,000
outstanding shares of common stock at book value of $105,000 on January 1, 2013. Sands reported net
income in 2013 of $45,000 and in 2014 of $60,000 earned evenly throughout the respective years. Prime
received no bold $12,000 dividends from Sands in 2013 and $18,000 in 2014. Prime uses the equity method
to record its investment.
Prime should record investment income from Sands during 2014 of:
a. $18,000.
b. $60,000.
c. $48,000.
d. $33,600.

24.

The balance of Primes Investment in Sands account at December 31, 2014 is:
a. $105,000.
b. $138,600.
c. $159,000.
d. $165,000.

25.

Pendleton Company acquired a 70% interest in Sunflower Company on December 31, 2013, for $380,000.
During 2014 Sunflower had a net income of $30,000 and paid a cash dividend of $10,000. Applying the cost
method would give a debit balance in the Investment in Stock of Sunflower Company account at the end of
2014 of:
a. $400,000.
b. $394,000.
c. $373,000.
d. $380,000.

Use the following information to answer questions 26 and 27

4-6

Test Bank to accompany Jeter and Chaney Advanced Accounting

On January 1, 2014, Puma Corporation acquired 30 percent of Slume Company's stock for $150,000. On the
acquisition date, Slume reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value.
The difference was due to the increased value of buildings with a remaining life of 10 years. During 2014 Slume
reported net income of $25,000 and paid dividends of $10,000. Puma uses the equity method.
26.

What will be the balance in the Investment account as of Dec 31, 2014?
a. $150,000
b. $157,500
c. $154,500
d. $153,000

27.

What amount of investment income will be reported by Puma for the year 2014?
a. $7,500
b. $6,000
c. $4,500
d. $25,000

28.

On January 1, 2014, Panda Company purchased 25 % of Skill Companys common stock; no goodwill resulted
from the acquisition. Panda Company appropriately carries the investment using the equity method of
accounting and the balance in Pandas investment account was $190,000 on December 31, 2014. Skill
reported net income of $120,000 for the year ended December 31, 2014 and paid dividends on its common
stock totaling $48,000 during 2014. How much did Panda pay for its 25% interest in Skill?
a. $172,000
b. $202,000
c. $208,000
d. $232,000

Use the following information to answer questions 29 and 30.


29.

On January 1, 2014, Pantera Company purchased 40% of Stratton Companys 30,000 shares of voting common
stock for a cash payment of $1,800,000 when 40% of the net book value of Stratton Company was $1,740,000.
The payment in excess of the net book value was attributed to depreciable assets with a remaining useful life
of six years. As a result of this transaction Pantera has the ability to exercise significant influence over Stratton
Companys operating and financial policies. Strattons net income for the ended December 31, 2014 was
$600,000. During 2014, Stratton paid $325,000 in dividends to its shareholders. The income reported by
Pantera for its investment in Stratton should be:
a. $120,000
b. $130,000
c. $230,000
d. $240,000

30.

What is the ending balance in Panteras investment account as of December 31, 2014?
a. $1,800,000
b. $1,900,000
c. $1,910,000
d. $2,030,000

31.

Which one of the following describes a difference in how the equity method is applied under GAAP than under
IFRS?
a. the equity method is generally applied to limited partnerships under IFRS for investments of more than
3 to 5%, whereas GAAP adopts a significant influence principle.
b. IFRS requires uniform accounting policies, whereas GAAP does not.

Chapter 4 Consolidated Financial Statements after Acquisition


c.
d.

4-7

significant influence is presumed if the investor has 20% or more of the voting rights in a corporate
investee under GAAP, whereas IFRS adopts a facts and circumstances approach that looks beyond the
voting rights percentage.
GAAP requires consideration of potential voting rights on currently exercisable of convertible
instruments, whereas IFRS does not.

Problems
4-1

On January 1, 2014, Prince Company purchased an 80% interest in the common stock of Sivet Company for
$1,040,000, which was $60,000 greater than the book value of equity acquired. The difference between
implied and book value relates to the subsidiarys land.
The following information is from the consolidated retained earnings section of the consolidated statements
workpaper for the year ended December 31, 2014:

1/01/14 retained earnings


Net income
Dividends declared
12/31/14 retained earnings

SIVET
COMPANY
$300,000
220,000
(80,000)
$440,000

CONSOLIDATED
BALANCES
$1,400,000
680,000
(140,000)
$1,940,000

Sivets stockholders equity includes only common stock and retained earnings.
Required:
A. Prepare the workpaper eliminating entries for a consolidated statements workpaper on December 31,
2014. Prince uses the cost method.
B.

4-2

Compute the total noncontrolling interest to be reported on the consolidated balance sheet on
December 31, 2014.

On October 1, 2014, Pamela Company purchased 90% of the common stock of Shingle Company for
$290,000. Additional information for both companies for 2014 follows:
Common stock
Other contributed capital
Retained Earnings, 1/1
Net Income
Dividends declared (10/31)

PAMELA
$300,000
120,000
240,000
260,000
40,000

SHINGLE
$90,000
40,000
50,000
160,000
8,000

Any difference between implied and book value relates to Shingles land. Pamela uses the cost method to
record its investment in Shingle. Shingle Companys income was earned evenly throughout the year.
Required:
A. Prepare the workpaper entries that would be made on a consolidated statements workpaper on
December 31, 2014. Use the full year reporting alternative.

4-8

Test Bank to accompany Jeter and Chaney Advanced Accounting


B.

4-3

Calculate the controlling interest in consolidated net income for 2014.

On January 1, 2014, Pioneer Company purchased 80% of the common stock of Shipley Company for
$600,000. At that time, Shipleys stockholders equity consisted of the following:
Common stock
Other contributed capital
Retained earnings

$220,000
90,000
320,000

During 2014, Shipley distributed a dividend in the amount of $120,000 and at year-end reported a $320,000
net income. Any difference between implied and book value relates to subsidiary goodwill. Pioneer
Company uses the equity method to record its investment. No impairment of goodwill is observed in the
first year.
Required:
A. Prepare on Pioneer Companys books journal entries to record the investment related activities for
2014.
B.
4-4

Prepare the workpaper eliminating entries for a workpaper on December 31, 2014.

Prune Company purchased 80% of the outstanding common stock of Selma Company on January 2, 2004, for
$680,000. The composition of Selma Companys stockholders equity on January 2, 2004, and December 31,
2014, was:
12/31/1112/31/14
1/2/04
Common stock
$540,000
$540,000
Other contributed capital
325,000
325,000
295,000
Retained earnings (deficit)
(60,000)
Total stockholders equity
$805,000
$1,160,000
During 2014, Selma Company earned $210,000 net income and declared a $60,000 dividend. Any difference
between implied and book value relates to land. Prune Company uses the cost method to record its
investment in Selma Company.
Required:
A. Prepare any journal entries that Prune Company would make on its books during 2014 to record the
effects of its investment in Selma Company.
B.

4-5

Prepare, in general journal form, all workpaper entries needed for the preparation of a consolidated
statements workpaper on December 31, 2014.

P Company purchased 90% of the common stock of S Company on January 2, 2014 for $900,000. On that
date, S Companys stockholders equity was as follows:
Common stock, $20 par value
Other contributed capital
Retained earnings

$400,000
100,000
450,000

Chapter 4 Consolidated Financial Statements after Acquisition

4-9

During 2014, S Company earned $200,000 and declared a $100,000 dividend. P Company uses the partial
equity method to record its investment in S Company. The difference between implied and book value
relates to land.
Required:
Prepared, in general journal form, all eliminating entries for the preparation of a consolidated statements
workpaper on December 31, 2014.
4-6

Pure Company acquired 80% of the outstanding common stock of Saxxon Company on January 2, 2013 for
$675,000. At that time, Saxxons total stockholders equity amounted to $1,000,000. Saxxon Company
reported net income and dividends for the last two years as follows:
Reported net income
Dividends distributed

2013
$45,000
35,000

2014
$60,000
75,000

Required:
Prepare journal entries for Pure Company for 2013 and 2014 assuming Pure uses:
A. The cost method to record its investment
B. The complete equity method to record its investment. The difference between implied value and the
book value of equity acquired was attributed solely to a building, with a 20-year expected life.
4-7

Pell Company purchased 90% of the stock of Salton Company on January 1, 2007, for $1,860,000, an amount
equal to $60,000 in excess of the book value of equity acquired. All book values were equal to fair values at
the time of purchase (i.e., any excess payment relates to subsidiary goodwill). On the date of purchase,
Salton Companys retained earnings balance was $200,000. The remainder of the stockholders equity
consists of no-par common stock. During 2014, Salton Company declared dividends in the amount of
$40,000, and reported net income of $160,000. The retained earnings balance of Salton Company on
December 31, 2013 was $640,000. Pell Company uses the cost method to record its investment. No
impairment of goodwill was recognized between the date of acquisition and December 31, 2014.
Required:
Prepare in general journal form the workpaper entries that would be made in the preparation of a
consolidated statements workpaper on December 31, 2014.

4-8

On January 1, 2014, Pruit Company purchased 85% of the outstanding common stock of Salty Company for
$525,000. On that date, Salty Companys stockholders equity consisted of common stock, $150,000; other
contributed capital, $60,000; and retained earnings, $210,000. Pruit Company paid more than the book
value of net assets acquired because the recorded cost of Salty Companys land was significantly less than its
fair value.
During 2014 Salty Company earned $222,000 and declared and paid a $75,000 dividend. Pruit Company used
the partial equity method to record its investment in Salty Company.
Required:
A. Prepare the investment related entries on Pruit Companys books for 2014.

4-10 Test Bank to accompany Jeter and Chaney Advanced Accounting

B.

Prepare the workpaper eliminating entries for a workpaper on December 31, 2014.

4-9
Pinta Company purchased 40% of Snuggie Corporation on January 1, 2014 for $150,000. Snuggie
Corporations balance sheet at the time of acquisition was as follows:
Cash
Accounts Receivable
Inventory
Land
Buildings & Equipment
Less: Acc. Depreciation
Total Assets

$30,000
120,000
80,000
150,000
300,000
(120,000)
$560,000

Current Liabilities
Bonds Payable
Common Stock
Additional Paid in Capital
Retained Earnings
Total Liabilities and Equities

$40,000
200,000
200,000
40,000
80,000
$560,000

During 2014, Snuggie Corporation reported net income of $30,000 and paid dividends of $9,000. The fair
values of Snuggies assets and liabilities were equal to their book values at the date of acquisition, with the
exception of Building and Equipment, which had a fair value of $35,000 above book value. All buildings and
equipment had a remaining useful life of five years at the time of the acquisition. The amount attributed to
goodwill as a result of the acquisition in not impaired.
Required:
A. What amount of investment income will Pinta record during 2014 under the equity method of
accounting?
B. What amount of income will Pinta record during 2014 under the cost method of accounting?
C. What will be the balance in the investment account on December 31, 2014 under the cost and equity
method of accounting?

Chapter 4 Consolidated Financial Statements after Acquisition

4-11

Short Answer
1.

There are three levels of influence or control by an investor over an investee, delete ,which determine the
appropriate accounting treatment. Identify and briefly describe the three levels and their accounting
treatment.

2.

Two methods are available to account for interim acquisitions of a subsidiarys stock at the end of the first
year. Describe the two methods of accounting for interim acquisitions.

Short Answer Questions from the Textbook


1.

How should nonconsolidated subsidiaries be re-ported reported in consolidated financial statements?

2.

How are liquidating dividends treated on the books of an investor, assuming the investor uses the cost method?
Assuming the investor uses the equity method?

3.

How are dividends declared and paid by a subsidiary during the year eliminated in the consolidated work papers
under each method of ac-counting accountingfor investments?

4.

How is the income reported by the subsidiary reflected on the books of the investor under each of the methods
of accounting for investments?

5.

Define: Consolidated net income; consolidated retained earnings.

6.

At the date of an 80% acquisition, a subsidiary had common stock of $100,000 and retained earnings of $16,250.
Seven years later, at December 31, 2013, the subsidiarys retained earnings had increased to $461,430. What
adjustment will be made on the consolidated work paper at December 31, 2014, to recognize the parents share
of the cumulative undistributed profits (losses)of its subsidiary? Under which method(s) is this adjustment
needed? Why?

7.

On a consolidated work paper for a parent and its partially owned subsidiary, the noncontrolling interest column
accumulates the non controlling interests share of several account balances. What are these accounts?

8.

If a parent company elects to use the partial equity method rather than the cost method to record its
investments in subsidiaries, what effect will this choice have on the consolidated financial statements? If the
parent company elects the complete equity method?

9.

Describe two methods for treating the preacquisition revenue and expense items of a subsidiary purchased
during a fiscal period.

10. A principal limitation of consolidated financial statements is their lack of separate financial in-formation about
the assets, liabilities, revenues, and expenses of the individual companies included in the consolidation. Identify
some problems that the reader of consolidated financial statements would encounter as a result of this
limitation.
11. In the preparation of a consolidated statement of cash flows, what adjustments are necessary because of the
existence of a noncontrolling interest? (AICPA adapted)
12. What do potential voting rights refer to, and how do they affect the application of the equity method for
investments under IFRS? Under U.S.GAAP? What is the term generally used for equity method investments
under IFRS?

4-12 Test Bank to accompany Jeter and Chaney Advanced Accounting


13B.why the Bs? Is the recognition of a deferred tax asset or deferred tax liability when allocating the difference
between book value and the value implied by the purchase price affected by whether or not the affiliates file
a consolidated income tax re-turnreturn?
14B.

What assumptions must be made about the realization of undistributed subsidiary income when the
affiliates file separate income tax returns? Why? (Appendix)

15B.

The FASB elected to require that deferred tax effects relating to unrealized intercompany profits be
calculated based on the income tax paid by the selling affiliate rather than on the future tax benefit to the
purchasing affiliate. Describe circumstances where the amounts calculated under these approaches would
be different. (Appendix)

16B.

Identify two types of temporary differences that may arise in the consolidated financial statements when
the affiliates file separate income tax returns.

Business Ethics Question from the Textbook


On April 5, 2006, the New York State Attorney sued a New York online advertising firm for surreptitiously installing
spyware advertising programs on consumers computers. The Attorney General claimed that con-sumers believed
they were downloading free games or browser enhancements. The company claimed that the spyware was
identified as advertising-supported and that the software is easy to remove and doesnt collect personal data. Is
there an ethical issue for the company? Comment on and justify your position.

Chapter 4 Consolidated Financial Statements after Acquisition


ANSWER KEY
Multiple Choice
1.
2.
3.
4.
5.
6.
7.

b
c
d
d
a
d
b

8.
9.
10.
11.
12.
13.
14.

d
a
b
d
d
a
c

15.
16.
17.
18.
19.
20.
21.

a
d
c
c
d
d
a

22.
23.
24.
25.
26.
27.
28.

b
c
C
d
d
b
a

29.
30.
31.

Problems
4-1

A. Dividend Income (80,000 .80)


Dividends Declared Sivet
Common Stock Sivet
Retained Earnings, 1/1 Sivet
Difference Between Implied and Book Value
Investment in Sivet Company
Noncontrolling Interest in Equity

64,000
925,000*
300,000
75,000**

64,000

1,040,000
260,000

*[(1,040,000 60,000)/.8] 300,000


**60,000/.8 = 75,000
Land
Difference Between Implied and Book Value
B.

4-2

75,000

Noncontrolling Interest:
In 1/1/111/1/14 retained earnings 300,000 .20
In 2014 net income 220,000 .20
In dividends declared 80,000 .20
In common stock of Sivet 925,000 .20
In difference between implied and book value 75,000 x .20
Total noncontrolling interest

A. Dividend Income (8,000 .90)


Dividends Declared Shingle

$60,000
44,000
(16,000)
185,000
15,000
$288,000
7,200

Common Stock - Shingle


90,000
Other Contributed Capital Shingle
40,000
Retained Earnings 1/1 Shingle
50,000
Difference between Implied# and Book Value
(290,000/.9 300,000*)
22,222
Subsidiary Income Purchased
(160,000 9/12)
120,000
Investment in Shingle Company
Noncontrolling Interest in Equity (.10 x $322,222)
*BV=[90,000 + 40,000 + 50,000 + (160,000 9/12)] = $300,000
#Implied Value = Purchase Price/90% = $322,222

75,000

7,200

290,000
32,222

c
b
b

4-13

4-14 Test Bank to accompany Jeter and Chaney Advanced Accounting

Land
Difference Between Implied and Book Value
B.

4-3

Controlling interest in Consolidated Net Income


Pamelas reported net income
dividend income from Shingle
Pamelas income from independent operations
+ Pamelas share of Shingles net income in 2014
since acquisition (.90 40,000)
Controlling Interest in Consolidated Net Income

A. Investment in Shipley Company


Cash
Investment in Shipley Company
(.80 320,000)
Equity in Subsidiary Income

B.

4-4

36,000
$288,800
600,000

256,000
96,000

Equity in Subsidiary Income


Dividends Declared Shipley
Investment in Shipley Company

216,000

Common Stock Shipley


Other Contributed Capital Shipley
Retained Earnings 1/1 Shipley
Difference Between Implied and Book Value
Investment in Shipley Company
Noncontrolling Interest in Equity

220,000
90,000
320,000
120,000

Goodwill
Difference Between Implied and Book Value

120,000

To Establish Reciprocity
Investment in Selma Company
1/1 Retained Earnings - Prune Company

22,222

$260,000
7,200
252,800

Cash (.80 120,000)


Investment in Shipley Company

A. Cash
Dividend Income (.8 $60,000)
B.

22,222

48,000

164,000

600,000

256,000
96,000
96,000
120,000

600,000
150,000
120,000

48,000

164,000

$295,000 $210,000 + $60,000 = $145,000 Retained Earnings on 1/1/111/1/14


$145,000 + $60,000 (deficit on date of acquisition) = $205,000 increase in retained earnings from date
of acquisition to 1/1/111/1/14
Prune Companys share of increase = (.8 $205,000) = $164,000

Chapter 4 Consolidated Financial Statements after Acquisition


Eliminating Entries
Dividend Income
Dividends Declared Selma Company
Common Stock Selma
Other Contributed Capital Selma
1/1 Retained Earnings Selma
Difference Between Implied and Book Value
Investment in Selma Company
Noncontrolling Interest in Equity

48,000
540,000
325,000
145,000
45,000*

48,000

844,000
211,000

Implied Value = $680,000/.80 = $850,000. Diff = $850,000 $805,000BV.


Land
45,000
Difference Between Implied and Book Value
4-5

Equity in Subsidiary Income


Dividends Declared - S Company
Investment in S Company

270,000

Common Stock S
Other Contributed Capital S
1/1 Retained Earnings S
Difference Between Implied and Book Value
Investment in S Company
Noncontrolling Interest in Equity

400,000
100,000
450,000
50,000

Land
Difference Between Implied and Book Value
4-6

A. 2013
Investment in Saxxon Company
Cash
Cash
Dividend Income (.8 $35,000)

50,000

675,000
28,000

2014
Cash (.8 $75,000)
60,000
Investment in Saxxon Company (.8 $5,000)
Dividend Income
B.

2013
Investment in Saxxon Company
Cash

Cash

Investment in Saxxon Company

675,000

28,000

45,000

90,000
180,000

900,000
100,000
50,000

675,000
28,000

4,000
56,000

675,000

28,000

4-15

4-16 Test Bank to accompany Jeter and Chaney Advanced Accounting

Investment in Saxxon Company


Equity in Subsidiary Income (.8 $45,000)
Equity in Subsidiary Income ($75,000*/20)
Investment in Saxxon Company

36,000
36,000
3,750

3,750

* $675,000/.8 $750,000 = $93,750 write-up of PPE; Parents share = 80%, or $75,000


2014
Cash
Investment in Saxxon Company

60,000

Investment in Saxxon Company


Equity in Subsidiary Income (.8 $60,000)
Equity in Subsidiary Income
Investment in Saxxon Company
4-7

60,000
48,000
48,000

3,750

Workpaper entries 12/31/111/1/14


Investment in Salton Company
Retained Earnings 1/1 - Pell company
To establish reciprocity (.90 ($640,000 $200,000))
Dividend Income
Dividends Declared - Salton Company

3,750

396,000

36,000

Common Stock - Salton Company#


1,800,000
Retained Earnings 1/1/111/1/14 - Salton Company
640,000
Difference between Implied and Book Values
66,667
Investment in Salton Company ($1,860,000 + $396,000)
Noncontrolling Interest in Equity ($206,667 + $44,000##)
#$2,000,000 $200,000
##NCI share of change in R/E = .10($640,000 - $200,000)
Goodwill*
Difference between Implied and Book Values

66,667

*See computation of difference between implied and book values on following page.

396,000

36,000

2,256,000
250,667

66,667

Chapter 4 Consolidated Financial Statements after Acquisition

4-17

Computation and Allocation of Difference between Implied and Book Value


Parent
Share
Purchase price and implied value
Equity at book value
Difference between Implied value and bv
Allocated to undervalued land
Balance
* $1,860,000 $60,000
** $1,800,000/.9

4-8

A. Investment in Salty
Cash
Investment in Salty ($222,000)(.85)
Equity in Subsidiary Income
Cash ($75,000)(.85)
Investment in Salty
B.

$1,860,000
1,800,000*
60,000
(60,000)
-0-

525,000
188,700
63,750

Equity in Subsidiary Income


Dividends Declared - Salty
Investment in Salty

188,700

Common Stock - Salty


Other Contributed Capital - Salty
Retained Earnings 1/1 - Salty
Difference between Implied and Book Value
Investment in Salty
Noncontrolling Interest in Equity

150,000
60,000
210,000
197,647

Land
Difference between Implied and Book Value

197,647

Computation and Allocation of Difference between Implied and Book Value


Parent
Share
Purchase price and implied value
Book Value of Equity Acquired
Difference between Implied and Book Value
Adjust Land Upward
Balance

$ 525,000
357,000
168,000
(168,000)
-0-

NonControlling
Share
206,667
200,000
6,667
(6,667)
-0-

Entire
Value
2,066,667
2,000,000**
66,667
(66,667)
-0-

525,000
188,700
63,750
63,750
124,950

525,000
92,647
197,647
Noncontrolling
share
92,647
63,000
29,647
(29,647)
-0-

Entire
value
617,647
420,000
197,647
(197,647)
-0-

4-18 Test Bank to accompany Jeter and Chaney Advanced Accounting

4-9
Solution:delete
A. Pinta Company 2014 equity-method income:
Proportionate share of reported income ($30,000 x .40)
Amortization of differential assigned to:
Buildings and equipment [($35,000 x .40) / 5 years]
Goodwill ($8,000: not impaired)
Investment Income

$ 12,000
(2,800)
-0$ 9,200

Assignment of differential
Purchase price
Proportionate share of book value of
net assets ($320,000 x .40)
Proportionate share of fair value increase in buildings and
equipment ($35,000 x .40)
Goodwill

$150,000
(128,000)
(14,000)
$ 8,000

B.

Dividend income, 2014 ($9,000 x .40)

$ 3,600

C.

Cost-method account balance (unchanged):

$150,000

Equity-method account balance:


Balance, January 1, 2014
Investment income
Dividends received
Balance, December 31, 2014

$150,000
9,200
(3,600)
$155,600

Short Answers
1.
The three levels of influence (control) over an investee are (1) no significant influence, (2)
significant influence, and (3) effective control. When an investor has no significant influence over an
investee, the investment is accounted for at fair value with year-end adjustment for market changes (the
cost method). If the investor has significant influence over the investee, the investment is accounted for
under the equity method. In the equity method, the investor adjusts the investment
account for changes in the investee's net assets.
When an investor has effective control over the investee, consolidated financial statements are prepared.
The investor's investment account is eliminated in the consolidated process.

Chapter 4 Consolidated Financial Statements after Acquisition

4-19

2.
The two methods of accounting for interim acquisitions are the full-year reporting alternative and the
partial-year reporting alternative. The full-year method includes the subsidiary's revenues and
expenses in the consolidated income statement for the entire year and then makes a deduction at the
bottom of the income statement for the preacquisition earnings.
The partial-year method includes in the consolidated income statement only the subsidiary's revenue and
expense amounts for the period after acquisition. The full-year method is preferred.
Short Answer Questions in Textbook Solutions
1

Nonconsolidated subsidiaries are expected to be relatively rare. In those situations where a subsidiary is not
consolidated, the investment in the subsidiary should be reported in the consolidated statement of financial
position at cost, along with other long-term investments.

2.

A liquidating dividend is a return of investment rather than a return on investment. Consequently, the
amount of a liquidating dividend should be credited to the investment account rather than to dividend
income when the cost method is used, whereas regular dividends are recorded as dividend income under the
cost method. If the equity method is used, all dividends are credited to the investment account.

3.

When the parent company uses the cost method, the work paper elimination of intercompany dividends is
made by a debit to Dividend Income and a credit to Dividends Declared. This elimination prevents the double
counting of income since the subsidiary's individual revenue and expense items are combined with the parent
company's in the determination of consolidated net income. When the parent company uses the equity
method, the work paper elimination for intercompany dividends is made by a debit to the investment
account and a credit to Dividends Declared.

4.

When the parent company uses the cost method, dividends received are recorded as dividend income. When
the parent company uses the partial equity method, the parent company recognizes equity income on its
books equal to its ownership percentage times the investee companys reported net income. When the
parent company uses the complete equity method, the parent recognizes income similar to the partial equity
method, but adjusts the equity income for additional charges or credits when the purchase price differs from
the fair value of the investee companys net assets, and for intercompany profits (addressed in chapters 6 and
7).

5.

Consolidated net income consists of the parent company's net income from independent operations plus
(minus) any income (loss) earned (incurred) by its subsidiaries during the period, adjusted for any
intercompany transactions during the period and for any excess depreciation or amortization implied by a
purchase price in excess of book values.
Consolidated retained earnings consist of the parent company's retained earnings from its independent
operations plus (minus) the parent company's share of the increase (decrease) in its subsidiaries' retained
earnings from the date of acquisition.

4-20 Test Bank to accompany Jeter and Chaney Advanced Accounting

6.

Investment in S Company
1/1 Retained Earnings, P Company
80% ($461,430 - $16,250)]

356,144
356,144

This adjustment recognizes that P Company's share of S Company's undistributed profits from the date of
acquisition to the beginning of the current year is properly a part of beginning-of-year consolidated retained
earnings. It also enhances the elimination of the investment account. This entry is only needed if the parent
company uses the cost method. If the equity method is used, the parents retained earnings already reflect
the undistributed earnings of the subsidiary.
7.

The noncontrolling interest column accumulates the noncontrolling stockholders' share of subsidiary income,
less their share of excess depreciation or amortization implied by fair value adjustments (addressed in detail
in chapter 5), dividends (as a reduction), and the beginning noncontrolling interest in equity carried forward
from the previous period.

8.

The method used to record the investment on the books of the parent company (cost method, partial equity
method, or complete equity method) has no effect on the consolidated financial statements. Only the
workpaper elimination procedures are affected.

9.

The two methods for treating the preacquisition revenue and expense items of a subsidiary purchased during
a fiscal year are (1) including the revenue and expense items of the subsidiary for the entire period with a
deduction at the bottom of the consolidated income statement for the net income earned prior to acquisition
(this is the preferred method), and (2) including in the consolidated income statement only the subsidiary's
revenue earned and expenses incurred subsequent to the date of purchase.

10. (a)

Readers of consolidated financial statements will be unable to evaluate the financial position and results of
operations (neither of which is shown separately from the parent's) of the subsidiaries.

(b) Because consolidated assets are not generally available to meet the claims of the creditors of a subsidiary,
creditors will have to look to the financial statements of the debtor (subsidiary) corporation. Similarly, the
creditors of the parent company are most interested in only the assets of the parent company, although
large creditors are likely to gain control over or have indirect access to the assets of subsidiaries in the case
of parent company default.
(c) Because consolidated financial statements are a composite, it is impossible to distinguish a financially weak
subsidiary from financially strong ones.
(d) Ratio analyses based on consolidated data are not reliable guides, especially when the related group
produces a conglomerate of unrelated product lines and services.
(e) Consolidated financial statements often do not disclose data about subsidiaries that are not consolidated.
(f)

A reader of consolidated financial statements cannot assume that a certain amount of unrestricted
consolidated retained earnings will be available for dividends. Data on the ability of the individual
subsidiaries to pay dividends are frequently unavailable.

11. A consolidated statement of cash flows contains two adjustments that result from the existence of a
noncontrolling interest: (1) an adjustment for the noncontrolling interest in net income or loss of the subsidiary
in the determination of net cash flow from operating activities, and (2) subsidiary dividend payments to the
noncontrolling stockholders must be included with parent company dividends paid in determining cash paid as
dividends because the entire amount of the noncontrolling interest in net income (loss) is added back
(deducted) in determining net cash flows from operating activities.

Chapter 4 Consolidated Financial Statements after Acquisition

4-21

12. Potential voting rights refer to the rights associated with potentially dilutive securities such as convertible bonds
or stocks, or stock options, rights, or warrants that are currently exercisable. These are considered under
international standards in determining the applicability of the equity method for investments where the investor
may be considered to have significant influence. They are generally not considered under U.S. GAAP.
International standards (IFRS) refer to investments that are accounted for under the equity method as
investments in associates.
13B.again, why the Bs? No. The recognition and display of a deferred tax asset or deferred tax liability relating to
the
assignment of the difference between implied value and book value is necessary without regard to
whether the affiliates file consolidated income tax returns or separate income tax returns.
14B

An assumption must be made as to whether the undistributed income will be realized in a future dividend
distribution or as a result of the sale of the subsidiary. This is necessary because the calculation of the tax
consequences differs depending on the assumption made. Dividend distributions are subject to a dividends
received exclusion, whereas gains or losses on disposal are not. In addition, gains or losses on disposal may
be taxed at different tax rates than dividend distributions. Although capital gains are currently taxed at the
same rates as ordinary income, the rates have been different in the past and may be again in the future.

15B

The amounts calculated under these two approaches would be different (1) if the affiliates had different
marginal tax rates, (2) if the affiliates were in different tax jurisdictions, or (3) when expected future tax
rates differ from the tax rate used in determining the tax paid or accrued by the selling affiliate.

16B

When the affiliates file separate returns, two types of temporary differences may arise:
1. Deferred income tax consequences that arise in the consolidated financial statements because of
undistributed subsidiary income, and
2. Deferred income tax consequences that arise in the consolidated financial statements because of the
elimination of unrealized intercompany profit.

ANSWERS TO BUSINESS ETHICS CASE


Surreptitiously installing spyware on computers can be an unethical practice (the word surreptitious implies that the
customer is unaware of the activity). The programs run in the background and can significantly slow down the
computers operating performance. Sometimes these programs are used to pass on the consumer browsing history
and may leak personal information to the advertising firm. Installing spyware
without permission is unethical (and often illegal) especially if it collects personal data or interferes with the
operations of the computer.

Chapter 5
Allocation and Depreciation of
Differences Between Implied and Book Value
Multiple Choice
1.

When the implied value exceeds the aggregate fair values of identifiable net assets, the residual difference is
accounted for as
a. excess of implied over fair value.
b. a deferred credit.
c. difference between implied and fair value.
d. goodwill.

2.

Under which set of circumstances would it not be appropriate to assume the value the noncontrolling shares
is the same as the controlling shares?
a. The acquisition is for less than 100% of the subsidiary.
b. The fair value of the of the noncontrolling shares can be inferred from the value implied by the
acquisition price.
c. Active market prices for shares not obtained by the acquirer imply a different value.
d. The amount of the control premium cannot be determined .

3.

On January 1, 2013, Lester Company purchased 70% of Stork Corporation's $5 par common stock for
$600,000. The book value of Stork net assets was $640,000 at that time. The fair value of Stork's identifiable
net assets were the same as their book value except for equipment that was $40,000 in excess of the book
value. In the January 1, 2013, consolidated balance sheet, goodwill would be reported at
a. $152,000.
b. $177,143.
c. $80,000.
d. $0.

4.

When the value implied by the purchase price of a subsidiary is in excess of the fair value of identifiable net
assets, the workpaper entry to allocate the difference between implied and book value includes a
1. debit to Difference Between Implied and Book Value.
2. credit to Excess of Implied over Fair Value.
3. credit to Difference Between Implied and Book Value.
a. 1
b. 2
c. 3
d. Both 1 and 2

5.

If the fair value of the subsidiary's identifiable net assets exceeds both the book value and the value implied
by the purchase price, the workpaper entry to eliminate the investment account
a. debits Excess of Fair Value over Implied Value.
b. debits Difference Between Implied and Fair Value.
c. debits Difference Between Implied and Book Value.
d. credits Difference Between Implied and Book Value.

5-2

Test Bank to accompany Jeter and Chaney Advanced Accounting

6.

The entry to amortize the amount of difference between implied and book value allocated to an unspecified
intangible is recorded
1. on the subsidiary's books.
2. on the parent's books.
3. on the consolidated statements workpaper.
a. 1
b. 2
c. 3
d. Both 2 and 3

7.

The excess of fair value over implied value must be allocated to reduce proportionally the fair values initially
assigned to
a. current assets.
b. noncurrent assets.
c. both current and noncurrent assets.
d. none of the above.

8.

The SEC requires the use of push down accounting when the ownership change is greater than
a. 50%
b. 80%
c. 90%
d. 95%

9.

Under push down accounting, the workpaper entry to eliminate the investment account includes a
a. debit to Goodwill.
b. debit to Revaluation Capital.
c. credit to Revaluation Capital.
d. debit to Revaluation Assets.

10.

In a business combination accounted for as an acquisition, how should the excess of fair value of identifiable
net assets acquired over implied value be treated?
a. Amortized as a credit to income over a period not to exceed forty years.
b. Amortized as a charge to expense over a period not to exceed forty years.
c. Amortized directly to retained earnings over a period not to exceed forty years.
d. Recognized as an ordinary gain in the year of acquisition.

11.

On November 30, 2013, Piani Incorporated purchased for cash of $25 per share all 400,000 shares of the
outstanding common stock of Surge Company. Surge 's balance sheet at November 30, 2013, showed a book
value of $8,000,000. Additionally, the fair value of Surge's property, plant, and equipment on November 30,
2013, was $1,200,000 in excess of its book value. What amount, if any, will be shown in the balance sheet
caption "Goodwill" in the November 30, 2013, consolidated balance sheet of Piani Incorporated, and its
wholly owned subsidiary, Surge Company?
a. $0.
b. $800,000.
c. $1,200,000.
d. $2,000,000.

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value

5-3

12.

Goodwill represents the excess of the implied value of an acquired company over the
a. aggregate fair values of identifiable assets less liabilities assumed.
b. aggregate fair values of tangible assets less liabilities assumed.
c. aggregate fair values of intangible assets less liabilities assumed.
d. book value of an acquired company.

13.

Simple Company, a 70%-owned subsidiary of Punter Corporation, reported net income of $240,000 and paid
dividends totaling $90,000 during Year 3. Year 3 amortization of differences between current fair values and
carrying amounts of Simple's identifiable net assets at the date of the business combination was $45,000.
The noncontrolling interest in net income of Simple for Year 3 was
a. $58,500.
b. $13,500.
c. $27,000.
d. $72,000.

14.

Pinta Company acquired an 80% interest in Strummer Company on January 1, 2013, for $270,000 cash when
Strummer Company had common stock of $150,000 and retained earnings of $150,000. All excess was
attributable to plant assets with a 10-year life. Strummer Company made $30,000 in 2013 and paid no
dividends. Pinta Companys separate income in 2013 was $375,000. Controlling interest in consolidated net
income for 2013 is:
a. $405,000.
b. $399,000.
c. $396,000.
d. $375,000.

15.

In preparing consolidated working papers, beginning retained earnings of the parent company will be
adjusted in years subsequent to acquisition with an elimination entry whenever:
a. a noncontrolling interest exists.
b. it does not reflect the equity method.
c. the cost method has been used only.
d. the complete equity method is in use.

16.

Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent under the
a. partial equity method.
b. equity method.
c. cost method.
d. equity and partial equity methods.

5-4

Test Bank to accompany Jeter and Chaney Advanced Accounting

Use the following information to answer questions 17 through 20.


On January 1, 2013, Pamela Company purchased 75% of the common stock of Snicker Company. Separate balance
sheet data for the companies at the combination date are given below:
Pamela Co.

Snicker Co.
Book Values

Snicker Co.
Fair Values

Cash
Accounts receivable
Inventory
Land
Plant assets
Acc. depreciation
Investment in Snicker Co.
Total assets

$ 18,000
108,000
99,000
60,000
525,000
(180,000)
330,000
$960,000

$155,000
20,000
26,000
24,000
225,000
(45,000)

$155,000
20,000
45,000
45,000
300,000

$405,000

$565,000

Accounts payable
Capital stock
Retained earnings
Total liabilities & equities

$156,000
600,000
204,000
$960,000

$105,000
225,000
75,000
$405,000

$105,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2013.
17.

What amount of inventory will be reported?


a. $125,000
b. $132,750
c. $139,250
d. $144,000

18.

What amount of goodwill will be reported?


a. ($20,000)
b. ($25,000)
c. $25,000
d. $0

19.

What is the amount of consolidated retained earnings?


a. $204,000
b. $209,250
c. $260,250
d. $279,000

20.

What is the amount of total assets?


a. $921,000
b. $1,185,000
c. $1,525,000
d. $1,195,000

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value

5-5

21.

Sleepy Company, a 70%-owned subsidiary of Pickle Corporation, reported net income of $600,000 and paid
dividends totaling $225,000 during Year 3. Year 3 amortization of differences between current fair values
and carrying amounts of Sleepy's identifiable net assets at the date of the business combination was
$112,500. The noncontrolling interest in consolidated net income of Sleepy for Year 3 was
a. $146,250.
b. $33,750.
c. $67,500.
d. $180,000.

22.

Primer Company acquired an 80% interest in SealCoat Company on January 1, 2013, for $450,000 cash when
SealCoat Company had common stock of $250,000 and retained earnings of $250,000. All excess was
attributable to plant assets with a 10-year life. SealCoat Company made $50,000 in 2013 and paid no
dividends. Primer Companys separate income in 2013 was $625,000. The controlling interest in consolidated
net income for 2013 is:
a. $675,000.
b. $665,000.
c. $660,000.
d. $625,000.

Use the following information to answer questions 23 through 25.


On January 1, 2013, Poole Company purchased 75% of the common stock of Swimmer Company. Separate balance
sheet data for the companies at the combination date are given below:

Cash
Accounts receivable
Inventory
Land
Plant assets
Acc. depreciation
Investment in Swimmer Co.
Total assets

Poole Co.
$ 24,000
144,000
132,000
78,000
700,000
(240,000)
440,000
$1,278,000

Accounts payable
Capital stock
Retained earnings
Total liabilities & equities

$206,000
800,000
272,000
$1,278,000

Swimmer Co.
Book Values
$206,000
26,000
38,000
32,000
300,000
(60,000)

Swimmer Co.
Fair Values
$206,000
26,000
60,000
60,000
350,000

$542,000

$702,000

$142,000
300,000
100,000
$542,000

$142,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2013.
23.

What amount of inventory will be reported?


a. $170,000.
b. $177,000.
c. $186,500.
d. $192,000.

5-6

Test Bank to accompany Jeter and Chaney Advanced Accounting

24.

What amount of goodwill will be reported?


a. $26,667.
b. $20,000.
c. $42,000.
d. $86,667.

25.

What is the amount of total assets?


a. $1,626,667.
b. $1,566,667
c. $1,980,000.
d. $2,006,667.

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value

5-7

Problems
5-1

Phillips Company purchased a 90% interest in Standards Corporation for $2,340,000 on January 1, 2013.
Standards Corporation had $1,650,000 of common stock and $1,050,000 of retained earnings on that date.
The following values were determined for Standards Corporation on the date of purchase:
Inventory
Land
Equipment

Book Value
$240,000
2,400,000
1,620,000

Fair Value
$300,000
2,700,000
1,800,000

Required:
A. Prepare a computation and allocation schedule for the difference between the implied and book value
in the consolidated statements workpaper.
B.

5-2

Prepare the January 1, 2013, workpaper entries to eliminate the investment account and allocate the
difference between implied and book value.

Pullman Corporation acquired a 90% interest in Sleeter Company for $6,500,000 on January 1 2013. At that
time Sleeter Company had common stock of $4,500,000 and retained earnings of $1,800,000. The balance
sheet information available for Sleeter Company on January 1, 2013, showed the following:
Inventory (FIFO)
Equipment (net)
Land

Book Value
$1,300,000
1,500,000
3,000,000

Fair Value
$1,500,000
1,900,000
3,000,000

The equipment had a remaining useful life of ten years. Sleeter Company reported $240,000 of net income in
2013 and declared $60,000 of dividends during the year.
Required:
Prepare the workpaper entries assuming the cost method is used, to eliminate dividends, eliminate the
investment account, and to allocate and depreciate the difference between implied and book value for 2013.
5-3

On January 1, 2013, Preston Corporation acquired an 80% interest in Spiegel Company for $2,400,000. At
that time Spiegel Company had common stock of $1,800,000 and retained earnings of $800,000. The book
values of Spiegel Company's assets and liabilities were equal to their fair values except for land and bonds
payable. The land's fair value was $120,000 and its book value was $100,000. The outstanding bonds were
issued on January 1, 2005, at 9% and mature on January 1, 2015. The bond principal is $600,000 and the
current yield rate on similar bonds is 8%.
Required:
Prepare the workpaper entries necessary on December 31, 2013, to allocate, amortize, and depreciate the
difference between implied and book value.

5-8

Test Bank to accompany Jeter and Chaney Advanced Accounting

9%, 5 periods
8%, 5 periods
5-4

Present value of 1
.64993
.68058

Present Value
of Annuity of 1
3.88965
3.99271

Pennington Corporation purchased 80% of the voting common stock of Stafford Corporation for $3,200,000
cash on January 1, 2013. On this date the book values and fair values of Stafford Corporation's assets and
liabilities were as follows:
Fair Value
Book Value
Cash
$ 70,000
$ 70,000
Receivables
240,000
240,000
Inventories
600,000
700,000
Other Current Assets
340,000
405,000
Land
600,000
720,000
Buildings net
1,050,000
1,920,000
750,000
Equipment net
850,000
$3,750,000
$4,805,000
Accounts Payable
Other Liabilities
Capital Stock
Retained Earnings

$ 250,000
740,000
2,400,000
360,000
$3,750,000

$250,000
670,000

Required:
Prepare a schedule showing how the difference between Stafford Corporation's implied value and the book
value of the net assets acquired should be allocated.
5-5

Plain Corporation acquired a 75% interest in Swampy Company on January 1, 2013, for $2,000,000. The book
value and fair value of the assets and liabilities of Swampy Company on that date were as follows:
Fair Value
Book Value
Current Assets
$ 600,000
$ 600,000
Property & Equipment (net)
1,400,000
1,800,000
Land
700,000
900,000
300,000
Deferred Charge
300,000
Total Assets
$3,000,000
$3,600,000
600,000
Less Liabilities
600,000
Net Assets
$2,400,000
$3,000,000
The property and equipment had a remaining life of 6 years on January 1, 2013, and the deferred charge was
being amortized over a period of 5 years from that date. Common stock was $1,500,000 and retained
earnings was $900,000 on January 1, 2013. Plain Company records its investment in Swampy Company using
the cost method.
Required:
Prepare, in general journal form, the December 31, 2013, workpaper entries necessary to:
A. Eliminate the investment account.
B. Allocate and amortize the difference between implied and book value.

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value
5-6

5-9

On January 1, 2013, Pilsner Company acquired an 80% interest in Smalley Company for $3,600,000. On that
date, Smalley Company had retained earnings of $800,000 and common stock of $2,800,000. The book
values of assets and liabilities were equal to fair values except for the following:
Inventory
Equipment (net)
Land

Book Value
$ 50,000
540,000
300,000

Fair Value
$ 85,000
720,000
660,000

The equipment had an estimated remaining useful life of 8 years. One-half of the inventory was sold in 2013
and the remaining half was sold in 2014. Smalley Company reported net income of $240,000 in 2013 and
$300,000 in 2014. No dividends were declared or paid in either year. Pilsner Company uses the cost method
to record its investment in Smalley Company.
Required:
Prepare, in general journal form, the workpaper eliminating entries necessary in the consolidated
statements workpaper for the year ending December 31, 2014.
5-7

Pulman Company acquired 90% of the stock of Spectrum Company for $6,300,000 on January 1, 2013. On
this date, the fair value of the assets and liabilities of Spectrum Company was equal to their book value
except for the inventory and equipment accounts. The inventory had a fair value of $2,300,000 and a book
value of $1,900,000. The equipment had a fair value of $3,300,000 and a book value of $2,800,000.
The balances in Spectrum Company's capital stock and retained earnings accounts on the date of acquisition
were $3,700,000 and $1,900,000, respectively.
Required:
In general journal form, prepare the entries on Spectrum Company's books to record the effect of the
pushed down values implied by the acquisition of its stock by Pulman Company assuming that:

5-8

values are allocated on the basis of the fair value of Spectrum Company as a whole imputed from the
transaction.

values are allocated on the basis of the proportional interest acquired by Pulman Company.

Pruin Corporation acquired all of the voting stock of Satto Corporation on January 1, 2013, for $210,000 when
Satto had common stock of $150,000 and retained earnings of $24,000. The excess of implied over book value
was allocated $9,000 to inventories that were sold in 2013, $12,000 to equipment with a 4-year remaining
useful life under the straight-line method, and the remainder to goodwill.
Financial statements for Pruitt and Satto Corporations at the end of the fiscal year ended December 31, 2014
(two years after acquisition), appear in the first two columns of the partially completed consolidated
statements workpaper. Pruin Corp. has accounted for its investment in Satto using the partial equity method
of accounting.

5-10 Test Bank to accompany Jeter and Chaney Advanced Accounting


Required:
Complete the consolidated statements workpaper for Pruin Corporation and Satto Corporation for December
31, 2014.
Pruin Corporation and Satto Corporation
Consolidated Statements Workpaper
at December 31, 2014
Eliminations

INCOME STATEMENT
Sales
Equity from Subsidiary
Income
Cost of Sales
Other Expenses
Net Income to Ret. Earn.
Pruin Retained Earnings 1/1

Pruin Corp.

Satto Corp.

618,000

180,000

36,000
(450,000)

(90,000)

(114,000)

(54,000)

90,000

36,000

72,000

Soto Retained Earnings 1/1


Add: Net Income
Less: Dividends
Retained Earnings 12/31

3,000
90,000

36,000

(60,000)

(12,000)

102,000

54,000

42,000

21,000

63,000

45,000

33,000

18,000

192,000
240,000

165,000

570,000

249,000

168,000

45,000

300,000

150,000

102,000

54,000

570,000

249,000

BALANCE SHEET
Cash
Inventories
Land
Equipment and Buildingsnet
Investment in Satto Corp.
Total Assets
LIA & EQUITIES Liabilities
Common Stock
Retained Earnings
Total Equities

Debit

Credit

Consolidated
Balances

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value
5-9

5-11

On January 1, 2013, Phoenix Company acquired 80% of the outstanding capital stock of Skyler Company for
$570,000. On that date, the capital stock of Skyler Company was $150,000 and its retained earnings were
$450,000.
On the date of acquisition, the assets of Skyler Company had the following values:
Book Value
Inventories .................................................................................. $ 90,000
Plant and equipment ...................................................................... 150,000

Fair Market
Value
$165,000
180,000

All other assets and liabilities had book values approximately equal to their respective fair market values.
The plant and equipment had a remaining useful life of 10 years from January 1, 2013, and Skyler Company
uses the FIFO inventory cost flow assumption.
Skyler Company earned $180,000 in 2013 and paid dividends in that year of $90,000.
Phoenix Company uses the complete equity method to account for its investment in S Company.
Required:
A. Prepare a computation and allocation schedule.
B. Prepare the balance sheet elimination entries as of December 31, 2013.
C. Compute the amount of equity in subsidiary income recorded on the books of Phoenix Company on
December 31, 2013.
D. Compute the balance in the investment account on December 31, 2013.
Short Answer
1.

When the value implied by the acquisition price is below the fair value of the identifiable net assets the
residual amount will be negative (bargain acquisition). Explain the difference in accounting for bargain
acquisition between past accounting and proposed accounting requirements.

2.

Push down accounting is an accounting method required for the subsidiary in some instances such as the
banking industry. Briefly explain the concept of push down accounting.

5-12 Test Bank to accompany Jeter and Chaney Advanced Accounting


Questions from the Textbook
1.

Distinguish among the following concepts: (a) Difference between book value and the value implied by the
purchase price. (b) Excess of implied value over fair value. (c) Excess of fair value over implied value. (d)
Excess of book value over fair value.

2.

In what account is the difference between book value and the value implied by the purchase
price recorded on the books of the investor? In what account is the excess of implied over fair value
recorded?

3.

How do you determine the amount of the difference between book value and the value implied by the
purchase price to be allocated to a specific asset of a less than wholly owned subsidiary?

4.

The parent companys share of the fair value of the net assets of a subsidiary may exceed acquisition cost.
How must this excess be treated in the preparation of consolidated financial statements?

5.

What are the arguments for and against the alternatives for the handling of bargain acquisitions? Why are
such acquisitions unlikely to occur with great frequency?

6.

P Company acquired a 100% interest in S Company. On the date of acquisition the fair value of the assets
and liabilities of S Company was equal to their book value except for land that had a fair value of $1,500,000
and a book value of $300,000.
At what amount should the land of S Company be included in the consolidated balance sheet?
At what amount should the land of S Company be included in the consolidated balance sheet if P Company
acquired an80% interest in S Company rather than a 100%interest?

Business Ethics Question from the Textbook


Consider the following: Many years ago, a student in a consolidated financial statements class came to me and said
that Grand Central (a multi-store grocery and variety chain in Salt Lake City and surrounding towns and cities) was
going to be acquired and that I should try to buy the stock and make lots of money. I asked him how he knew and he
told me that he worked part-time for Grand Central and heard that Fred Meyer was going to acquire it. I did not know
whether the student worked in the accounting department at Grand Central or was a custodian at one of the stores. I
thanked him for the information but did not buy the stock. Within a few weeks, the announcement was made that
Fred Meyer was acquiring Grand Central and the stock price shot up, almost doubling. It was clear that I had missed
an opportunity to make a lot of money ... I dont know to this day whether or not that would have been insider
trading. How-everHowever, I have never gone home at night and asked my wife if the SEC called. From Dont go to
jail and other good advice for accountants, by Ron Mano, Accounting Today, October 25, 1999.
Question: Do you think this individual would have been guilty of insider trading if he had purchased the stock in
Grand Central based on this advice? Why or why not? Are there ever instances where you think it would be wise to
miss out on an opportunity to reap benefits simply because the behavior necessitated would have been in a gray
ethical
area,
though
not
strictly
illegal?
Defend
your
position.

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value
ANSWER KEY
Multiple Choice
1.
2.
3.
4.
5.

d
c
b
c
c

6.
7.
8.
9.
10.

c
d
d
b
d

11.
12.
13.
14.
15.

b
a
a
c
b

16.
17.
18.
19.
20.

c
d
d
a
d

21.
22.
23.
24.
25.

a
c
d
a
b

Problems
5-1

A. Allocation of Difference Between Implied and Book Value

Purchase price and implied value


Less: Book value of equity acquired
Difference between implied and book value
Inventory
(54,000)
Land
Equipment
Balance (excess of FV over implied value)
Gain
Increase Noncontrolling interest to fair value of assets
Total allocated bargain
Balance
B.

Parent
Share
$2,340,000
2,430,000
(90,000)
(6,000)
(270,000)
(162,000)
(576,000)
576,000

Common Stock Standards


Beginning R/E Standards
Investment in Standards Corp.
Difference Between Implied and Book Value
Noncontrolling Interest in Equity
Difference Between Implied and Book Value
Inventory
Land
Equipment
Gain on Acquisition
Noncontrolling Interest

-01,650,000
1,050,000

100,000
60,000
300,000
180,000

NonControlling
Share
260,000
270,000
(10,000)
(60,000)
(30,000)
(18,000)
(64,000)
64,000
-0-

Entire
Value
2,600,000
2,700,000
(100,000)
(300,000)
(180,000)
(640,000)
640,000
-0-

2,340,000
100,000
260,000

576,000
64,000

5-13

5-14 Test Bank to accompany Jeter and Chaney Advanced Accounting


5-2

Dividend Income (.90 60,000)


Dividends Declared

54,000

Beginning R/E Sleeter


Common Stock Sleeter
Difference Between Implied and Book Value
Investment in Sleeter Company
Noncontrolling Interest
*$6,500,000/.9 - $1,800,000 - $4,500,000 = $922,222
Allocated to:
Inventory
Equipment
Goodwill
Cost of Goods Sold
Depreciation Expense 400,000/10
Equipment 400,000 40,000
Goodwill
Difference Between Implied and Book Value

1,800,000
4,500,000
922,222*

54,000

6,500,000
722,222

$922,222
(200,000)
(400,000)
$ 322,222
200,000
40,000
360,000
322,222

922,222

5-3

Purchase price and implied value


Less: Book value of equity acquired
Difference between implied and book value
Land ($120,000 $100,000)
Premium on Bonds Payable (623,954* 600,000)
Balance
Goodwill
Balance

Parent
Share
$2,400,000
2,080,000
320,000
(16,000)
19,163
323,163
(323,163)
-0-

NonControlling
Share
600,000
520,000
80,000
(4,000)
4,791
80,791
(80,791)
-0-

Entire
Value
3,000,000
2,600,000
400,000
(20,000)
23,954
403,954
(403,954)
-0-

Present Value of 9% Bonds Payable discounted at 8% for 5 periods:


$600,000 .68058 =
$408,348
215,606
54,000 3.99271 =
$623,954*
Land
Goodwill
Difference Between Implied and Book Value
Interest Expense
Unamortized Premium on Bonds Payable
(23,954 4,084)
**[54,000 (623,954 .08)]

20,000
403,954

400,000
4,084**
19,870

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value
Alternative Entries
Land
Goodwill
Premium on Bonds Payable
Difference Between Implied and Book Value

20,000
403,954

Premium on Bonds Payable


Interest Expense
5-4
Purchase price and implied value
Less: Book value of equity acquired
Difference between implied and book value
Inventories
Other Current assets
Land(96,000)
Buildings (net)
Other liabilities
Equipment (net)
Balance
Goodwill
Balance

23,954
400,000

4,084

Parent
Share
$3,200,000
2,208,000
992,000
(80,000)
(52,000)
(24,000)
(696,000)
(56,000)
80,000
92,000
(92,000)
-0-

4,084

NonControlling
Share
800,000
552,000
248,000
(20,000)
(13,000)
(120,000)
(174,000)
(14,000)
20,000
23,000
(23,000)
-0-

Entire
Value
4,000,000
2,760,000
1,240,000
(100,000)
(65,000)
(870,000)
(70,000) *
100,000
115,000
(115,000)
-0-

*A debit to Other Liabilities is a reduction of their carrying value.


5-5

A. Beginning Retained Earnings (Swampy)


Capital Stock (Swampy)
Difference Between Implied and Book Value
Investment in Swampy
Noncontrolling Interest in Equity
B.

900,000
1,500,000
266,667

Depreciation Expense ($400,000/6)


66,667
Equipment (net) ($400,000 $66,667)
333,333
Land ($900,000 - $700,000)
200,000
Gain on Acquisition ($200,000+$400,000-$266,667) 0.75
Difference Between Implied and Book Value
Noncontrolling Interest ($200,000+$400,000-$266,667) 0.25

2,000,000
666,667

250,000
266,667
83,333

5-15

5-16 Test Bank to accompany Jeter and Chaney Advanced Accounting


5-6

Calculations
Cost of Investment and Implied Value ($3,600,000/0.8)
Book Value of Equity Acquired
Difference between Implied and Book Value

$4,500,000
3,600,000
$ 900,000
Annual Adjustment in
Determining Consolidated
Net Income

Land
Equipment (net)
Inventory
Goodwill

Difference Between
Implied and Book Value 2013
$360,000
--180,000
$22,500
35,000
17,500
325,000
--$900,000
$40,000

(1) Investment in Smalley


Beginning Retained Earnings (Pilsner)
(2) Beginning Retained Earnings (Smalley)
Difference between Implied and Book Value
Common Stock (Smalley)
Investment in Smalley ($3,600,000 +
$192,000)
Noncontrolling Interest in Equity
(3) Beginning Retained Earnings PageSmalley
Noncontrolling Interest
Depreciation Expense
Cost of Goods Sold (Beginning Inventory)
Goodwill
Land
Equipment (net)
($180,000 $22,500 $22,500)
Difference between Implied and Book Value
5-7

Imputed Value ($6,300,000/.9)


Recorded Value ($1,900,000 + $3,700,000)
Unrecorded Values
Allocate to identifiable assets
Inventory ($2,300,000 $1,900,000)
Equipment ($3,300,000 $2,800,000)
Goodwill
Inventory
Equipment
Goodwill
Revaluation Capital

192,000

2014
--$22,500
17,500
--$40,000
192,000

1,040,000
900,000
2,800,000
3,792,000
948,000
32,000
8,000
22,500
17,500
325,000
360,000
135,000

900,000
Net Assets
$7,000,000
5,600,000
$1,400,000

$400,000
500,000
400,000
500,000
500,000

900,000
$ 500,000

1,400,000

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value
Unrecorded Value Imputed by Pulman Company's
Proportionate Interest (.9 $1,400,000)
Allocate to
Inventory ($2,300,000 $1,900,000) .9
Equipment ($3,300,000 $2,800,000) .9
Goodwill
Inventory
Equipment
Goodwill
Revaluation Capital

$1,260,000
$360,000
450,000

360,000
450,000
450,000

810,000
$ 450,000

1,260,000

5-17

5-18 Test Bank to accompany Jeter and Chaney Advanced Accounting


5-8
Pruin Corporation and Satto Corporation
Consolidated Statements Workpaper
at December 31, 2014
Eliminations
Pruin Corp.

Satto Corp.

618,000

180,000

Debit

Credit

Consolidated
Balances

INCOME STATEMENT
Sales
Equity from Subsidiary
Income
Cost of Sales

(450,000)

(90,000)

Other Expenses

(114,000)

(54,000)

90,000

36,000

39,000

60,000

30,000

(b) 9,000
(c) 3,000
(b) 30,000
39,000

87,000

Net Income to Ret. Earn.

36,000

798,000
(a) 36,000
(540,000)
(c)

3,000

(171,000)
87,000

Pruin Retained Earnings 1/1


Satto Retained Earnings 1/1

72,000

Add: Net Income

90,000

36,000

Less: Dividends

(60,000)

(12,000)

Retained Earnings 12/31

102,000

54,000

Cash

42,000

21,000

63,000

Inventories

63,000

45,000

108,000

Land

33,000

18,000

51,000

192,000

165,000

81,000

(a) 12,000

(60,000)

12,000

87,000

BALANCE SHEET

Equipment and Buildingsnet

(b) 12,000

(c) 6,000
(a) 24,000
(b) 216,000

363,000

Investment in Satto Corp.


Goodwill

240,000

Total Assets

570,000

249,000

600,000

LIA & EQUITIES Liabilities

168,000

45,000

213,000

Common Stock

300,000

150,000

(b) 150,000

Retained Earnings

102,000

54,000

81,000

12,000

87,000

Total Equities

570,000

249,000

258,000

258,000

600,000

(b) 15,000

15,000

300,000

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value
5-9

A.

Phoenix
Share

Purchase price and implied value


Less: Book value of equity acquired
Difference between implied and book value
Inventories
Equipment (net)
Balance
Goodwill
Balance
B.

$570,000
480,000
90,000
(60,000)
(24,000)
6,000
(6,000)
-0-

Common Stock Skyler


Retained Earnings Skyler
Difference Between Implied and Book Value
Investment in Skyler Company
Noncontrolling Interest in Equity
Cost of Goods Sold
Depreciation Expense ($30,000/10 years)
Plant and Equipment ($30,000 $3,000)
Goodwill
Difference Between Implied and Book Value

C.

Skyler Company net income $180,000 80% =


Less: Inventory sold
Plant & equipment depreciation
Equity in subsidiary income

D. Investment balance 1/1/10


+ Equity in subsidiary income
Dividends ($90,000 80%)
Investment balance 12/31/10

NonControlling
Share
142,500
120,000
22,500
(15,000)
(6,000)
1,500
(1,500)
-0150,000
450,000
112,500

75,000
3,000
27,000
7,500

5-19

Entire
Value
712,500
600,000
112,500
(75,000)
(30,000)
7,500
(7,500)
-0-

570,000
142,500

112,500

$144,000
(60,000)
( 2,400)
$81,600
$570,000
81,600
(72,000)
$579,600

Short Answer
1.

In the past, when a bargain acquisition occurred some of the acquired assets were reduced below their fair
values. Long-lived assets were recorded at fair market value less an adjustment for the bargain. In addition,
an extraordinary gain was recorded in certain instances.
Under proposed accounting requirements, no assets are reduced below fair value. Instead the credit
(negative) balance will be shown as an ordinary gain in the year of acquisition.

2.

Push down accounting is the establishment of a new accounting and reporting basis for a subsidiary
company in its separate financial statements based on the purchase price paid by the Parent Company to
acquire a controlling interest in the outstanding voting stock of the subsidiary company. The valuation
implied by the price of the stock to the Parent Company is pushed down to the subsidiary and used to
restate its assets and liabilities in its separate financial statements. Under push down accounting, the Parent

5-20 Test Bank to accompany Jeter and Chaney Advanced Accounting


Companys cost of acquiring a subsidiary is used to establish a new accounting basis for the assets and
liabilities of the subsidiary in the subsidiarys separate financial statements.
Solutions to Questions from the Textbook
1.

a. The difference between implied and book value is the total difference between the value of the subsidiary
in total, as implied by the acquisition cost of an investment in that subsidiary, and the book value of the
subsidiarys equity on the date of the acquisition (note that equity is the same as net assets).
b. The excess of implied value over fair value, or Goodwill, is the excess of the value of the subsidiary, as
implied by the amount paid by the parent, over the fair value of the identifiable net assets of that subsidiary on
the date of acquisition.
c. The excess of fair value over implied value is the excess of the fair value of the identifiable net assets of a
subsidiary (all assets other than goodwill minus liabilities) on the acquisition date over the value of the subsidiary
as implied by the amount paid by the parent. This may be referred to as a bargain acquisition.
d. An excess of book value over fair value describes a situation where some (or all) of the subsidiarys assets
need to be written down rather than up (or liabilities need to be increased, or both). It does not, however, tell us
whether the acquisition results in the recording of goodwill or an ordinary gain (in a bargain acquisition). That
determination depends on the comparison of fair value of identifiable net assets and the implied value (purchase
price divided by percentage acquired), referred to in parts (b) and (c) above.
2.

The difference between implied and book value and the Goodwill are a part of the cost of an investment and
are included in the amount recorded in the investment account. Although not recorded separately in the records
of the parent company, these amounts must be known in order to prepare the consolidated financial statements.

3.

In allocating the difference between implied and book value to specific assets of a less than wholly owned
subsidiary, the difference between the fair value and book value of each asset on the date of acquisition is
reflected by adjusting each asset upward or downward to fair value (marked to market) in its entirety, regardless
of the percentage acquired by the parent company.

4.

If the parents share of the fair value exceeds the cost, then the entire fair value similarly exceeds the implied
value of the subsidiary. This constitutes a bargain acquisition, and under proposed GAAP (ED No. 1204-001), the
excess is recorded as an ordinary gain in the period of the acquisition. Past GAAP (APB Opinion No. 16) differed
in that it provided that the excess of fair value over cost should be allocated to reduce proportionally the values
assigned to noncurrent assets with certain exceptions. If such noncurrent assets were reduced to zero (or to the
noncontrolling percentage, if there was one) by this allocation, any remaining excess was recorded as an
extraordinary gain.

5.

The recording of an ordinary (or extraordinary gain) on an acquisition flies in the face of the rules of revenue
recognition because no earnings process has been completed. On the other hand, a decision to record certain
assets below their fair values is arbitrary, and also rather confusing (how far should they be reduced?). The
reason that bargain acquisitions are unlikely to occur very often is because they suggest that the usual
assumptions of an arms length transaction have been violated. In most accounting scenarios, we assume that
both parties are negotiating for a reasonable exchange price and that price, once established, represents fair
value both for the item given up and the item received. In the case of a business combination, there is not a
single item being exchanged but rather a number of assets and liabilities. Nonetheless, the assumption is still
that both parties are negotiating for a fair valuation. If one party is able to obtain a bargain, it most likely
indicates that the other party was being influenced by non-quantitative considerations, such as a wish to retire
quickly, health concerns, etc.

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value
6.

5-21

If P Company acquires a 100 percent interest in S Company the land will be included in the consolidated financial
statements at its fair value on the date of acquisition of $1,500,000. If P Company acquires an 80 percent
interest in S Company, the land will still be included in the consolidated financial statements at $1,500,000, and
the noncontrolling interest would be charged with its share of the fair value adjustment.

Business Ethics Solution


This case brings an interesting question to the table for discussion. As the article by Mano points out, each individual
must decide for himself or herself how to respond to the gray issues that are bound to arise in life. Ultimately life is
more about being at peace with ourselves and leaving a legacy of a life well-lived and values taught through our
example to the generations that we leave behind us than it is about accumulating wealth (that we cannot take to the
grave). The individual, had he acted on the advice, may have been guilty of insider trading as the information
available to him was, apparently, not available publicly. Although there is no clear-cut definition of what constitutes
insider trading, the gray area implies uncertainty; and this uncertainty can in many cases result in decisions that have
severe implications both professionally and personally.