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Chapter 3
Consolidated Financial Statements—Date 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. stockholders of the parent company.

b. creditors of the parent company.
c. minority stockholders.
d. 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:
Pell Sand
Current assets $ 280,000 $ 80,000
Noncurrent assets _360,000 __160,000
Total assets $ 640,000 $240,000
Chapter 3 Consolidated Financial Statements—Date of Acquisition 3-3
Current liabilities $ 120,000 $ 40,000

Long-term debt 200,000 -0-
Stockholders' equity __320,000 200,000
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 company’s 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 subsidiary’s 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.
c. 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.
d. Subsidiary is foreign.
20. 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 Shelter
Current assets $ 210,000 $ 60,000

Noncurrent assets 270,000 120,000
Total assets $480,000 $180,000

Long-term debt 150,000 -0-
Stock holders' equity 240,000 150,000
Total liabilities & stockholders' equity $ 480,000 $ 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.
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 Sunder’s 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 entity’s 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 entity’s 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 $ 1,680,000

Plant and equipment 1,580,000
Land 280,000
Total assets $3,540,000
Liabilities $ 1,320,000
Common stock, $10 par value 1,440,000
Other contributed capital 700,000
Retained earnings 240,000
Total $3,700,000
Treasury stock at cost, 5,000 shares <160,000>

Total equities $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:
P Company S Company
Current assets $ 166,000 $ 96,000
Investment in S Company 380,000 -0-
Plant and equipment (net) 560,000 224,000
Land 40,000 120,000
$1,146,000 $440,000

Long-term notes payable -0- 36,000
Common stock 480,000 160,000
Other contributed capital 244,000 64,000
Retained earnings 302,000 136,000
$1,146,000 $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 $600,000

Total $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.
3-4 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:
Pope Smithwick
Cash $ 650,000 $ 160,000
Accounts Receivable (net) 360,000 60,000
Inventory 290,000 140,000
Plant and Equipment (net) 970,000 240,000
Land 150,000 80,000
Total Assets $2,420,000 $680,000
Accounts Payable $ 260,000 $ 120,000

Mortgage Payable 180,000 100,000
Common Stock, $2 par value 1,000,000 170,000
Other Contributed Capital 520,000 50,000
Retained Earnings 460,000 240,000
Total Equities $2,420,000 $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 Corporation’s $10 par common stock on December 31, 2013, when
S Corporation’s stockholders’ equity was made up of $300,000 of Common Stock, $90,000 of Other
Contributed Capital and $60,000 of Retained Earnings. S’s identifiable assets and liabilities reflected their
fair values on December 31, 2013, except for S’s 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.
Eliminations
P S Debit Credit Noncontrolling Consolidated
Interest Balances
ASSETS
Cash $40,000 $30,000
Accounts
receivable-net 30,000 45,000
Inventories 185,000 165,000
Land 45,000 120,000
Plant assets-
net 480,000 240,000
Investment in
S Corp. 420,000
Difference
between implied
and book value
Goodwill
Total Assets $1,200,000 $600,000
EQUITIES
Current
liabilities $170,000 $150,000
Capital stock 600,000 300,000
Additional paid-in
capital 150,000 90,000
Noncontrolling
interest
Total Equities $1,200,000 $600,000
Required:
Complete the consolidated balance sheet workpaper for P Corporation and Subsidiary.
3-6 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

Percent of Investment Other Contributed Retained
Cash Common Stock
Stock Owned Cost Capital 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 $520,000

Total 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:
Prima Swatch
Cash $ 73,000 $13,000

Accounts Receivable (net) 95,000 19,000
Inventory 58,000 25,000
Plant and Equipment (net) 95,000 43,000
Land 26,000 20,000
Total Assets $ 347,000 $ 120,000
Accounts Payable $ 66,000 16,000

Notes Payable 82,000 21,000
Common Stock, $20 par value 100,000 40,000
Other Contributed Capital 60,000 24,000
Retained Earnings 39,000 19,000
Total Liabilities and Equities $ 347,000 $ 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 Prima’s 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. There are several reasons why a company would acquire a subsidiary’s 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.
2. 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.
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 year’s annual
report. The CFO stops by and asks you to reduce the reserve by enough to increase the current year’s EPS by 2 cents a
share. The company’s policy has always been to use the previous year’s actual bad debt percentage adjusted for a
specific economic index. The CFO’s 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.
ANSWER KEY
Multiple Choice
1. d 8. d 15. b 22. b
2. b 9. d 16. c 23. b
3. c 10. c 17. b 24. a
4. d 11. b 18. b 25. c
5. b 12. a 19. a 26. d
6. d 13. d 20. a 27. b
7. d 14. b 21. d
Problems
3-1 Common Stock – Snead 1,440,000

Other Contributed Capital – Snead 700,000
Retained Earnings – Snead 240,000
Investment in Snead Company 1,670,000
Treasury Stock - Snead 160,000
Difference Between Implied and Book Value 106,000
Noncontrolling Interest 444,000

Land 106,000
3-2 P COMPANY AND SUBSIDIARY

Consolidated Balance Sheet
January 2, 2013
Current assets $246,000

Plant and equipment (net) 784,000
Land ($160,000 + $115,000 excess cost) 275,000
Total $1,305,000
Current liabilities $ 148,000

Long-term notes payable 36,000
Common stock 480,000
Noncontrolling interest 95,000
Total $1,305,000
3-3 Accounts Payable (to P) 10,000

Accounts Receivable (from S) 10,000
Common Stock - S 600,000

Other Contributed Capital - S 80,000
Retained Earnings - S 320,000
Investment in S Company 950,000
Land 50,000
3-4
A. Investment in Smithwick Company 480,000
Cash 480,000
B. POPE COMPANY AND SUBSIDIARY

Consolidated Balance Sheet
January 2, 2013
Assets
Cash (650,000 + 160,000 - $480,000) $330,000
Accounts Receivable 420,000
Inventory 430,000
Plant and Equipment (net) 1,210,000
Land ($150,000 + $80,000 + $73,333*) 303,333
Total Assets $2,693,333
Liabilities and Stockholders’ Equity

Accounts Payable $380,000
Mortgage Payable 280,000
Total liabilities $660,000
Noncontrolling Interest
($170,000 + $50,000 + $240,000 + 73,333) × .10 $ 53,333
Common Stock $1,000,000

Other Contributed Capital 520,000
Retained Earnings 460,000
Total Stockholders’ Equity 1,980,000
Total Liabilities and Stockholders’ Equity $2,693,333
* $480,000/.9 - ($170,000 + $50,000 + $240,000)

3-5
Eliminations
P S Debit Credit Noncontrolling Consolidated
Interest Balances
ASSETS
Cash $40,000 $30,000 $70,000
Accounts
receivable-net 30,000 45,000 75,000
Inventories 185,000 165,000 (b) 60,000 410,000
Land 45,000 120,000 (b) 25,000 190,000
Plant assets-
net 480,000 240,000 720,000
Investment in
S Corp. 420,000 (a) 420,000
Difference
between
implied and
book value (a) 150,000 (b) 150,000
Goodwill (b) 65,000 65,000
Total Assets $1,200,000 $600,000 $1,530,000
EQUITIES
Current
liabilities $170,000 $150,000 $320,000
Capital stock 600,000 300,000 (a) 300,000 600,000
Additional paid-
in capital 150,000 90,000 (a) 90,000 150,000
Retained
earnings 280,000 60,000 (a) 60,000 280,000
Noncontrolling
interest (a) 180,000 180,000 180,000
Total Equities $1,200,000 $600,000 $750,000 $750,000 $1,530,000
3-6 A. Common Stock – Sewell 450,000

Other Contributed Capital – Sewell 180,000
Difference between Implied and Book Values 45,000
Retained Earnings – Sewell 75,000
Investment in Sewell 675,000
Noncontrolling Interest in Equity 75,000
B. Common Stock – Sewell 620,000

Other Contributed Capital – Sewell 140,000
Retained Earnings – Sewell 20,000
Investment in Sewell 318,000
Gain on Purchase of Business - Porter 306,000
3-7 A. 265,000/(1,060,000 +265,000) = 20% Noncontrolling interest

B. Common Stock – Shelter 520,000

Other Contributed Capital – Shelter 380,000
Retained Earnings – Shelter 280,000
Investment in Shelter Company 1,060,000
3-8
A. Investment in Swatch Company ($50 × 1,500) 75,000
Common Stock ($20 × 1,500) 30,000
Other Contributed Capital ($30 × 1,500) 45,000
Other Contributed Capital 1,700

Cash 1,700
B. Computation and Allocation of Difference

Non-
Parent Controlling Entire
Share Share Value
Purchase price and implied value $75,000 0 75,000
Less: Book value of equity acquired 83,000* 0 83,000
Difference between implied and book value 7,000 0 7,000
Land (7,000) (0) (7,000)
Balance -0- -0- -0-
* $40,000 + $24,000 + $19,000 = $83,000
C.
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.
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) Stock acquisition is greatly simplified by avoiding the lengthy negotiations required in an exchange of stock
for stock in a complete takeover.
(2) 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.
(3) An individual affiliate’s legal existence provides a measure of protection of the parent’s 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 parent’s 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
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 parent’s acquisition of additional shares of the subsidiary’s
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 subsidiary’s 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 company’s share of the subsidiary’s earnings
subsequent to the date of the investment. How will the parent company’s investment account be affected
by those dividends under each of the following accounting methods?
Cost Method Partial Equity Method

a. No effect No effect
b. Decrease No effect
c. No effect Decrease
d. 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 Company’s 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
Company’s stockholders’ equity at various dates was:
1/1/10 1/1/14 12/31/14
Common stock $400,000 $400,000 $400,000
Retained earnings 120,000 380,000 460,000
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 Company’s 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 company’s
a. recorded net income.
b. recorded net income plus the subsidiary’s recorded net income.
c. recorded net income plus the its share of the subsidiary’s recorded net income.
d. income from independent operations plus subsidiary’s 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 4-3
14. On October 1, 2014, Perma Company acquired for cash all of the voting common stock of Street Company.
The purchase price of Street’s stock equaled the book value and fair value of Street’s net assets. The
separate net income for each company, excluding Perma’s share of income from Street was as follows:
Perma Street
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 Perma’s 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 company’s share of the
subsidiary’s earnings subsequent to the date of the investment. The amount of dividend income that should
be reported in the parent company’s 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 parent’s share of subsidiary’s
earnings subsequent to the date of investment.
d. the portion of the dividends received this year that were NOT in excess of the parent’s share of
subsidiary’s 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
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 Prime’s 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 Pall’s 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 Company’s 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
22. P Company purchased 90% of the outstanding common stock of S Company on January 1, 2012. S
Company’s stockholders’ equity at various dates was:
1/1/12 1/1/14 12/31/14
Common stock $200,000 $200,000 $200,000
Retained earnings 60,000 190,000 230,000
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 Company’s 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 Prime’s 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

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 Company’s common stock; no goodwill resulted
from the acquisition. Panda Company appropriately carries the investment using the equity method of
accounting and the balance in Panda’s 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 Company’s 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
Company’s operating and financial policies. Stratton’s 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 Pantera’s 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.
c. 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.
d. 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 subsidiary’s land.
The following information is from the consolidated retained earnings section of the consolidated statements
workpaper for the year ended December 31, 2014:
SIVET CONSOLIDATED
COMPANY BALANCES
1/01/14 retained earnings $300,000 $1,400,000
Net income 220,000 680,000
Dividends declared (80,000) (140,000)
12/31/14 retained earnings $440,000 $1,940,000
Sivet’s 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. Compute the total noncontrolling interest to be reported on the consolidated balance sheet on
December 31, 2014.
4-2 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:
PAMELA SHINGLE
Common stock $300,000 $90,000
Retained Earnings, 1/1 240,000 50,000
Net Income 260,000 160,000
Dividends declared (10/31) 40,000 8,000
Any difference between implied and book value relates to Shingle’s land. Pamela uses the cost method to
record its investment in Shingle. Shingle Company’s 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.
B. Calculate the controlling interest in consolidated net income for 2014.
4-3 On January 1, 2014, Pioneer Company purchased 80% of the common stock of Shipley Company for
$600,000. At that time, Shipley’s stockholders’ equity consisted of the following:
Common stock $220,000

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 Company’s books journal entries to record the investment related activities for
2014.
B. Prepare the workpaper eliminating entries for a workpaper on December 31, 2014.
4-4 Prune Company purchased 80% of the outstanding common stock of Selma Company on January 2, 2004, for
$680,000. The composition of Selma Company’s stockholders’ equity on January 2, 2004, and December 31,
2014, was:
1/2/04 12/31/1112/31/14
Common stock $540,000 $540,000
Retained earnings (deficit) (60,000) 295,000
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. Prepare, in general journal form, all workpaper entries needed for the preparation of a consolidated
statements workpaper on December 31, 2014.
4-5 P Company purchased 90% of the common stock of S Company on January 2, 2014 for $900,000. On that
date, S Company’s stockholders’ equity was as follows:
Common stock, $20 par value $400,000

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, Saxxon’s total stockholders’ equity amounted to $1,000,000. Saxxon Company
reported net income and dividends for the last two years as follows:
2013 2014
Reported net income $45,000 $60,000
Dividends distributed 35,000 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 Company’s 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 Company’s 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 Company’s 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 Company’s books for 2014.
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
Corporation’s balance sheet at the time of acquisition was as follows:
Cash $30,000 Current Liabilities $40,000

Accounts Receivable 120,000 Bonds Payable 200,000
Inventory 80,000 Common Stock 200,000
Land 150,000 Additional Paid in Capital 40,000
Buildings & Equipment 300,000 Retained Earnings 80,000
Less: Acc. Depreciation (120,000)
Total Assets $560,000 Total Liabilities and Equities $560,000
During 2014, Snuggie Corporation reported net income of $30,000 and paid dividends of $9,000. The fair
values of Snuggie’s 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?
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 subsidiary’s 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 subsidiary’s retained earnings had increased to $461,430. What
adjustment will be made on the consolidated work paper at December 31, 2014, to recognize the parent’s 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?
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.

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 doesn’t collect personal data. Is
there an ethical issue for the company? Comment on and justify your position.
ANSWER KEY
Multiple Choice
1. b 8. d 15. a 22. b 29. c

2. c 9. a 16. d 23. c 30. b
3. d 10. b 17. c 24. C 31. b
4. d 11. d 18. c 25. d
5. a 12. d 19. d 26. d
6. d 13. a 20. d 27. b
7. b 14. c 21. a 28. a
Problems
4-1 A. Dividend Income (80,000 × .80) 64,000

Dividends Declared – Sivet 64,000
Common Stock – Sivet 925,000*

Retained Earnings, 1/1 – Sivet 300,000
Difference Between Implied and Book Value 75,000**
Investment in Sivet Company 1,040,000
*[(1,040,000 – 60,000)/.8] – 300,000

**60,000/.8 = 75,000
Land 75,000
B. Noncontrolling Interest:
In 1/1/111/1/14 retained earnings 300,000 × .20 $60,000
In 2014 net income 220,000 × .20 44,000
In dividends declared 80,000 × .20 (16,000)
In common stock of Sivet 925,000 × .20 185,000
In difference between implied and book value 75,000 x .20 15,000
Total noncontrolling interest $288,000
4-2 A. Dividend Income (8,000 × .90) 7,200

Dividends Declared – Shingle 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 290,000
Noncontrolling Interest in Equity (.10 x $322,222) 32,222
*BV=[90,000 + 40,000 + 50,000 + (160,000 × 9/12)] = $300,000

#Implied Value = Purchase Price/90% = $322,222
Land 22,222
B. Controlling interest in Consolidated Net Income

Pamela’s reported net income $260,000
– dividend income from Shingle 7,200
Pamela’s income from independent operations 252,800
+ Pamela’s share of Shingle’s net income in 2014
since acquisition (.90 × 40,000) 36,000
Controlling Interest in Consolidated Net Income $288,800
4-3 A. Investment in Shipley Company 600,000

Cash 600,000
Investment in Shipley Company

(.80 × 320,000) 256,000
Equity in Subsidiary Income 256,000
Cash (.80 × 120,000) 96,000

Investment in Shipley Company 96,000
B. Equity in Subsidiary Income 216,000

Dividends Declared – Shipley 96,000
Common Stock – Shipley 220,000

Other Contributed Capital – Shipley 90,000
Retained Earnings 1/1 – Shipley 320,000
Goodwill 120,000
4-4 A. Cash 48,000

Dividend Income (.8 × $60,000) 48,000
B. To Establish Reciprocity
Investment in Selma Company 164,000
1/1 Retained Earnings - Prune Company 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 Company’s share of increase = (.8 × $205,000) = $164,000
Eliminating Entries
Dividend Income 48,000
Dividends Declared – Selma Company 48,000
Common Stock – Selma 540,000

Other Contributed Capital – Selma 325,000
1/1 Retained Earnings – Selma 145,000
Difference Between Implied and Book Value 45,000*
Investment in Selma Company 844,000
Implied Value = $680,000/.80 = $850,000. Diff = $850,000 – $805,000BV.
Land 45,000
4-5 Equity in Subsidiary Income 270,000

Dividends Declared - S Company 90,000
Common Stock – S 400,000

Other Contributed Capital – S 100,000
1/1 Retained Earnings – S 450,000
Land 50,000
4-6
A. 2013
Investment in Saxxon Company 675,000
Cash 675,000
Cash 28,000
Dividend Income (.8 × $35,000) 28,000
2014
Cash (.8 × $75,000) 60,000
Investment in Saxxon Company (.8 × $5,000) 4,000
B. 2013
Cash 675,000
Cash 28,000

Equity in Subsidiary Income (.8 × $45,000) 36,000
Equity in Subsidiary Income ($75,000*/20) 3,750

* $675,000/.8 – $750,000 = $93,750 write-up of PPE; Parent’s share = 80%, or $75,000
2014
Cash 60,000

Equity in Subsidiary Income (.8 × $60,000) 48,000

4-7 Workpaper entries 12/31/111/1/14

Investment in Salton Company 396,000
Retained Earnings 1/1 - Pell company 396,000
To establish reciprocity (.90 × ($640,000 – $200,000))

Dividends Declared - Salton Company 36,000
Common Stock - Salton Company# 1,800,000

Retained Earnings 1/1/111/1/14 - Salton Company 640,000
Investment in Salton Company ($1,860,000 + $396,000) 2,256,000
Noncontrolling Interest in Equity ($206,667 + $44,000##) 250,667
#$2,000,000– $200,000
##NCI share of change in R/E = .10($640,000 - $200,000)
Goodwill* 66,667
*See computation of difference between implied and book values on following page.
Computation and Allocation of Difference between Implied and Book Value
Parent Non- Entire

Share Controlling Value
Share
Purchase price and implied value $1,860,000 206,667 2,066,667
Equity at book value 1,800,000* 200,000 2,000,000**
Difference between Implied value and bv 60,000 6,667 66,667
Allocated to undervalued land (60,000) (6,667) (66,667)
Balance -0- -0- -0-
* $1,860,000 – $60,000
** $1,800,000/.9
4-8 A. Investment in Salty 525,000

Cash 525,000
Investment in Salty ($222,000)(.85) 188,700

Cash ($75,000)(.85) 63,750

Investment in Salty 63,750
B. Equity in Subsidiary Income 188,700

Dividends Declared - Salty 63,750
Common Stock - Salty 150,000

Other Contributed Capital - Salty 60,000
Retained Earnings 1/1 - Salty 210,000
Difference between Implied and Book Value 197,647
Land 197,647
Computation and Allocation of Difference between Implied and Book Value

Parent Non- Entire
Share controlling value
share
Purchase price and implied value $ 525,000 92,647 617,647
Book Value of Equity Acquired 357,000 63,000 420,000
Difference between Implied and Book Value 168,000 29,647 197,647
Adjust Land Upward (168,000) (29,647) (197,647)
Balance -0- -0- -0-
4-9
Solution:delete
A. Pinta Company 2014 equity-method income:
Proportionate share of reported income ($30,000 x .40) $ 12,000

Amortization of differential assigned to:
Buildings and equipment [($35,000 x .40) / 5 years] (2,800)
Goodwill ($8,000: not impaired) -0-
Investment Income $ 9,200
Assignment of differential
Purchase price $150,000

Proportionate share of book value of
net assets ($320,000 x .40) (128,000)
Proportionate share of fair value increase in buildings and
equipment ($35,000 x .40) (14,000)
Goodwill $ 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 $150,000
Investment income 9,200
Dividends received (3,600)
Balance, December 31, 2014 $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.
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 company’s 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 company’s 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.
6. Investment in S Company 356,144

1/1 Retained Earnings, P Company
80% × ($461,430 - $16,250)] 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 parent’s 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.
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
computer’s 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.
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 Company’s 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.
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:
Snicker Co. Snicker Co.

Pamela Co. Book Values Fair Values
Cash $ 18,000 $155,000 $155,000

Accounts receivable 108,000 20,000 20,000
Inventory 99,000 26,000 45,000
Land 60,000 24,000 45,000
Plant assets 525,000 225,000 300,000
Acc. depreciation (180,000) (45,000)
Investment in Snicker Co. 330,000
Total assets $960,000 $405,000 $565,000
Accounts payable $156,000 $105,000 $105,000

Total liabilities & equities $960,000 $405,000
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
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 Company’s 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:
Swimmer Co. Swimmer Co.

Poole Co. Book Values Fair Values
Cash $ 24,000 $206,000 $206,000
Accounts receivable 144,000 26,000 26,000
Inventory 132,000 38,000 60,000
Land 78,000 32,000 60,000
Plant assets 700,000 300,000 350,000
Acc. depreciation (240,000) (60,000)
Investment in Swimmer Co. 440,000
Total assets $1,278,000 $542,000 $702,000
Accounts payable $206,000 $142,000 $142,000

Total liabilities & equities $1,278,000 $542,000
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.
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.
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:
Book Value Fair Value

Inventory $240,000 $300,000
Land 2,400,000 2,700,000
Equipment 1,620,000 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. Prepare the January 1, 2013, workpaper entries to eliminate the investment account and allocate the
difference between implied and book value.
5-2 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) $1,300,000 $1,500,000
Equipment (net) 1,500,000 1,900,000
Land 3,000,000 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.
Present Value
Present value of 1 of Annuity of 1
9%, 5 periods .64993 3.88965
8%, 5 periods .68058 3.99271
5-4 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:
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
Equipment – net 850,000 750,000
$3,750,000 $4,805,000
Accounts Payable $ 250,000 $250,000

Other Liabilities 740,000 670,000
Capital Stock 2,400,000
Retained Earnings 360,000
$3,750,000
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:
Current Assets $ 600,000 $ 600,000
Property & Equipment (net) 1,400,000 1,800,000
Land 700,000 900,000
Deferred Charge 300,000 300,000
Total Assets $3,000,000 $3,600,000
Less Liabilities 600,000 600,000
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.
5-6 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 $ 50,000 $ 85,000
Equipment (net) 540,000 720,000
Land 300,000 660,000
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:
A values are allocated on the basis of the fair value of Spectrum Company as a whole imputed from the
transaction.
B values are allocated on the basis of the proportional interest acquired by Pulman Company.
5-8 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.
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
Consolidated
Pruin Corp. Satto Corp. Debit Credit
Balances
INCOME STATEMENT
Sales 618,000 180,000
Equity from Subsidiary
Income 36,000
Cost of Sales
(450,000) (90,000)
Other Expenses
(114,000) (54,000)
Net Income to Ret. Earn.
90,000 36,000
Pruin Retained Earnings 1/1
72,000
Soto Retained Earnings 1/1
3,000
Add: Net Income
90,000 36,000
Less: Dividends
(60,000) (12,000)
Retained Earnings 12/31
102,000 54,000
BALANCE SHEET
Cash
42,000 21,000
Inventories
63,000 45,000
Land
33,000 18,000
Equipment and Buildings-
net 192,000 165,000
Investment in Satto Corp. 240,000
Total Assets
570,000 249,000
LIA & EQUITIES Liabilities
168,000 45,000
Common Stock
300,000 150,000
Retained Earnings
102,000 54,000
Total Equities
570,000 249,000
5-9 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:
Fair Market
Book Value Value
Inventories .................................................................................. $ 90,000 $165,000
Plant and equipment ...................................................................... 150,000 180,000
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.
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 company’s 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?
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 don’t 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 “Don’t 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.
ANSWER KEY
Multiple Choice
1. d 6. c 11. b 16. c 21. a

2. c 7. d 12. a 17. d 22. c
3. b 8. d 13. a 18. d 23. d
4. c 9. b 14. c 19. a 24. a
5. c 10. d 15. b 20. d 25. b
Problems
5-1 A. Allocation of Difference Between Implied and Book Value
Non-
Share Share Value
Less: Book value of equity acquired 2,430,000 270,000 2,700,000
Difference between implied and book value (90,000) (10,000) (100,000)
Inventory (54,000) (6,000) (60,000)
Land (270,000) (30,000) (300,000)
Equipment (162,000) (18,000) (180,000)
Balance (excess of FV over implied value) (576,000) (64,000) (640,000)
Gain 576,000
Increase Noncontrolling interest to fair value of assets 64,000
Total allocated bargain 640,000
Balance -0- -0- -0-
B. Common Stock – Standards 1,650,000

Beginning R/E – Standards 1,050,000
Investment in Standards Corp. 2,340,000

Inventory 60,000
Land 300,000
Equipment 180,000
Gain on Acquisition 576,000
5-2 Dividend Income (.90 × 60,000) 54,000

Dividends Declared 54,000
Beginning R/E – Sleeter 1,800,000

Common Stock – Sleeter 4,500,000
Difference Between Implied and Book Value 922,222*
Investment in Sleeter Company 6,500,000
*$6,500,000/.9 - $1,800,000 - $4,500,000 = $922,222
Allocated to: $922,222
Inventory (200,000)
Equipment (400,000)
Goodwill $ 322,222
Cost of Goods Sold 200,000

Depreciation Expense 400,000/10 40,000
Equipment 400,000– 40,000 360,000
Goodwill 322,222
5-3
Non-
Share Share Value
Difference between implied and book value 320,000 80,000 400,000
Land ($120,000 – $100,000) (16,000) (4,000) (20,000)
Premium on Bonds Payable (623,954*– 600,000) 19,163 4,791 23,954
Balance 323,163 80,791 403,954
Goodwill (323,163) (80,791) (403,954)
Balance -0- -0- -0-
Present Value of 9% Bonds Payable discounted at 8% for 5 periods:

$600,000 × .68058 = $408,348
54,000 × 3.99271 = 215,606
$623,954*
Land 20,000
Goodwill 403,954
Interest Expense 4,084**
Unamortized Premium on Bonds Payable 19,870
(23,954 – 4,084)
**[54,000 – (623,954 × .08)]

Alternative Entries
Land 20,000
Goodwill 403,954
Premium on Bonds Payable 23,954
Premium on Bonds Payable 4,084

Interest Expense 4,084
5-4 Non-
Share Share Value
Difference between implied and book value 992,000 248,000 1,240,000
Inventories (80,000) (20,000) (100,000)
Other Current assets (52,000) (13,000) (65,000)
Land(96,000) (24,000) (120,000)
Buildings (net) (696,000) (174,000) (870,000)
Other liabilities (56,000) (14,000) (70,000) *
Equipment (net) 80,000 20,000 100,000
Balance 92,000 23,000 115,000
Goodwill (92,000) (23,000) (115,000)
Balance -0- -0- -0-
*A debit to Other Liabilities is a reduction of their carrying value.
5-5 A. Beginning Retained Earnings (Swampy) 900,000

Capital Stock (Swampy) 1,500,000
Investment in Swampy 2,000,000
B. 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) × 0.75 250,000
Noncontrolling Interest ($200,000+$400,000-$266,667) × 0.25 83,333
5-6 Calculations
Cost of Investment and Implied Value ($3,600,000/0.8) $4,500,000
Book Value of Equity Acquired 3,600,000
Difference between Implied and Book Value $ 900,000
Annual Adjustment in
Determining Consolidated
Net Income
Difference Between
Implied and Book Value 2013 2014
Land $360,000 --- ---
Equipment (net) 180,000 $22,500 $22,500
Inventory 35,000 17,500 17,500
Goodwill 325,000 --- ---
$900,000 $40,000 $40,000
(1) Investment in Smalley 192,000

Beginning Retained Earnings (Pilsner) 192,000
(2) Beginning Retained Earnings (Smalley) 1,040,000

Common Stock (Smalley) 2,800,000
Investment in Smalley ($3,600,000 +
$192,000) 3,792,000
(3) Beginning Retained Earnings – PageSmalley 32,000

Depreciation Expense 22,500
Cost of Goods Sold (Beginning Inventory) 17,500
Goodwill 325,000
Land 360,000
Equipment (net)
($180,000 – $22,500 – $22,500) 135,000
5-7 A Net Assets

Imputed Value ($6,300,000/.9) $7,000,000
Recorded Value ($1,900,000 + $3,700,000) 5,600,000
Unrecorded Values $1,400,000
Allocate to identifiable assets
Inventory ($2,300,000 – $1,900,000) $400,000
Equipment ($3,300,000 – $2,800,000) 500,000 900,000
Goodwill $ 500,000
Inventory 400,000
Equipment 500,000
Goodwill 500,000
Revaluation Capital 1,400,000
B
Unrecorded Value Imputed by Pulman Company's

Proportionate Interest (.9 × $1,400,000) $1,260,000
Allocate to
Inventory ($2,300,000 – $1,900,000) × .9 $360,000
Equipment ($3,300,000 – $2,800,000) × .9 450,000 810,000
Goodwill $ 450,000
Inventory 360,000
Equipment 450,000
Goodwill 450,000
Revaluation Capital 1,260,000
5-8
Pruin Corporation and Satto Corporation

Consolidated Statements Workpaper
at December 31, 2014
Eliminations
Consolidated
Pruin Corp. Satto Corp. Debit Credit
Balances
INCOME STATEMENT
Sales 618,000 180,000 798,000
Equity from Subsidiary
36,000 (a) 36,000
Income
Cost of Sales (450,000) (90,000)
(540,000)
Other Expenses (114,000) (54,000) (c) 3,000
(171,000)
Net Income to Ret. Earn. 90,000 36,000 39,000
87,000
(b) 9,000
Pruin Retained Earnings 1/1 72,000 (c) 3,000 60,000
Satto Retained Earnings 1/1 30,000 (b) 30,000
Add: Net Income 90,000 36,000 39,000 87,000
Less: Dividends (60,000) (12,000) (a) 12,000 (60,000)
Retained Earnings 12/31 102,000 54,000 81,000 12,000 87,000
BALANCE SHEET
Cash 42,000 21,000 63,000
Inventories 63,000 45,000 108,000
Land 33,000 18,000 51,000
Equipment and Buildings-
net 192,000 165,000 (b) 12,000 (c) 6,000 363,000
(a) 24,000
Investment in Satto Corp. 240,000 (b) 216,000
Goodwill (b) 15,000 15,000
Total Assets 570,000 249,000 600,000
LIA & EQUITIES Liabilities 168,000 45,000 213,000
Common Stock 300,000 150,000 (b) 150,000 300,000
Retained Earnings 102,000 54,000 81,000 12,000 87,000
Total Equities 570,000 249,000 258,000 258,000 600,000
5-9
A.
Phoenix Non- Entire
Share Controlling Value
Share
Purchase price and implied value $570,000 142,500 712,500
Less: Book value of equity acquired 480,000 120,000 600,000
Difference between implied and book value 90,000 22,500 112,500
Inventories (60,000) (15,000) (75,000)
Equipment (net) (24,000) (6,000) (30,000)
Balance 6,000 1,500 7,500
Goodwill (6,000) (1,500) (7,500)
Balance -0- -0- -0-
B. Common Stock – Skyler 150,000

Retained Earnings – Skyler 450,000
Investment in Skyler Company 570,000
Cost of Goods Sold 75,000

Depreciation Expense ($30,000/10 years) 3,000
Plant and Equipment ($30,000 – $3,000) 27,000
Goodwill 7,500
C. Skyler Company net income $180,000 × 80% = $144,000

Less: Inventory sold (60,000)
Plant & equipment depreciation ( 2,400)
Equity in subsidiary income $81,600
D. Investment balance 1/1/10 $570,000

+ Equity in subsidiary income 81,600
– Dividends ($90,000 × 80%) (72,000)
Investment balance 12/31/10 $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
Company’s cost of acquiring a subsidiary is used to establish a new accounting basis for the assets and
liabilities of the subsidiary in the subsidiary’s 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
subsidiary’s 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 subsidiary’s 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 parent’s 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 arm’s 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.
6. 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.

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Chapter 3

Consolidated Financial Statements—Date of Acquisition

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

6. On the consolidated balance sheet, consolidated stockholders' equity is

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

a. stockholders of the parent company.

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

Use the following information for questions 13-15.

Current liabilities $ 120,000 $ 40,000

On Pell's January 2, 2013 consolidated balance sheet,

13. Noncurrent assets should be

14. Current liabilities should be

15. Noncurrent liabilities should be

19. In which of the following cases would consolidation be inappropriate?

Use the following information to answer questions 21 - 23.

Current assets $ 210,000 $ 60,000

Current liabilities $ 90,000 $ 30,000

On Pent's January 2, 2013 consolidated balance sheet,

21. Noncurrent assets should be

22. Current liabilities should be

23. Noncurrent liabilities should be

27. IFRS defines control as

Current assets $ 1,680,000

Treasury stock at cost, 5,000 shares <160,000>

Current liabilities $ 120,000 $ 44,000

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

Common stock, $10 par value $600,000

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

Accounts Payable $ 260,000 $ 120,000

Sewell Company Equity Balances

Common stock $520,000

A. Compute the noncontrolling interest percentage on December 31, 2013.

Cash $ 73,000 $13,000

Accounts Payable $ 66,000 16,000

Short Answer Questions from the Textbook

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

Business Ethics Question from the Textbook

3-1 Common Stock – Snead 1,440,000

Difference Between Implied and Book Value 106,000

3-2 P COMPANY AND SUBSIDIARY

Current assets $246,000

Current liabilities $ 148,000

3-3 Accounts Payable (to P) 10,000

Common Stock - S 600,000

B. POPE COMPANY AND SUBSIDIARY

Liabilities and Stockholders’ Equity

Common Stock $1,000,000

* $480,000/.9 - ($170,000 + $50,000 + $240,000)

3-6 A. Common Stock – Sewell 450,000

B. Common Stock – Sewell 620,000

3-7 A. 265,000/(1,060,000 +265,000) = 20% Noncontrolling interest

B. Common Stock – Shelter 520,000

Other Contributed Capital 1,700

B. Computation and Allocation of Difference

Short Answer Questions from the Textbook Solutions

ANSWERS TO BUSINESS ETHICS CASE

4. Under the cost method, the workpaper entry to establish reciprocity

5. Under the cost method, the investment account is reduced when

6. The parent company records its share of a subsidiary’s income by

Cost Method Partial Equity Method

Use the following information in answering questions 17 and 18.

Use the following information in answering questions 23 and 24.

Use the following information to answer questions 26 and 27