BUAD 462 Chapter 5 assignment solutions Page 1 of 20

Problem 5-7
Step 1: AD Table at acquisition:
Purchase price for 80% of shares 70,000
Implied cost of 100% investment 87,500
Book value of Sub’s net assets ****
Common shares 25,000
Retained earnings 30,000
55,000
Acquisition differential – at purchase 32,500
Fair value differentials: FV – BV
Inventory 5,000
Patents 10,000 15,000
Balance – goodwill 17,500

**** same as the book value of Sub’s shareholders’ equity at purchase date:

Step 2: AD Amortization Table at Consolidation:

Step 3: Intercompany trx

Dividend income to eliminate – none, so parent net income 230,000 = PANI (no adj. to parent NI)
However, there is an interco pble/rcble so Cr Accts rcbl Dr Accts pbl 30,000
Step 4: Determine INCI and BNCI

Remember we flip the sign!

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BUAD 462 Chapter 5 assignment solutions Page 2 of 20
Step 5: Consolidated Net Income (Add together PANI and parent portion of SANI)

Step 6: Calculation of consolidated retained earnings – Jan.1, Year 6

Step 7: Consolidate

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BUAD 462 Chapter 5 assignment solutions Page 3 of 20

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Problem 5-9 (a)
Step 1: AD Table at acquisition:

Purchase price for 80% of shares 122,080

Implied cost of 100% investment 152,600
Book value of Sub’s net assets ****
Common shares 54,000
Retained earnings 32,400
86,400
Acquisition differential – at purchase 66,200
Fair value differentials: FV – BV
Government contract 50,000
Equipment (21,600) 28,400
Balance – goodwill 37,800

**** same as the book value of Sub’s shareholders’ equity at purchase date:

Step 2: Amortization Schedule as of consolidation date:

Step 3: Intercompany Trx.

Dividend income to eliminate 13,500 Cr Stmt of R/E*80%10,800Dr …….. PANI
Eliminate Sub accumulated depreciation at purchase:
Plant & equipment (20,000)Cr Accumulated depreciation 20,000Dr

Step 4: INCI and BNCI Remember to flip the signs!

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BUAD 462 Chapter 5 assignment solutions Page 5 of 20

Step 5: Calculation of consolidated net income – Year 6

Step 6: Calculation of opening retained earnings: Since this is the first year of consolidation, opening
consolidated retained earnings will be the same as the parent’s opening retained earnings, $459,000, we
basically eliminate all of the sub’s opening r/e of 32,400
Proof:

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BUAD 462 Chapter 5 assignment solutions Page 6 of 20
Step 7: Note the below text solution does not show the same level of detail as our worksheets, but can be
used as check figures for your line by line statement balances.
Big
Consolidated Income Statement
for the Year Ended June 30, Year 6
Sales (270,000 + 162,000) 432,000
Investment income (10,800 – 10,800)      -   
Cost of sales (140,100 + 94,380) 234,480
Misc. expense (31,080 + 28,200 – 2,700 + 10,000) 66,580
Goodwill impairment loss 17,800
318,860
Net income – entity 113,140
Less: non-controlling interest 2,864
Net income 110,276

Big
Consolidated Retained Earnings Statement
for the Year Ended June 30, Year 6
Balance July 1, Year 5 459,000
Net income 110,276
569,276
Dividends 32,400
Balance June 30, Year 6 536,876

Big
Consolidated Balance Sheet
June 30, Year 6
Miscellaneous assets (835,940 + 128,820) 964,760
Equipment (162,000 + 95,600 – 21,600 – 20,000) 216,000
Accumulated depreciation (60,000 + 50,000 – 2,700 – 20,000 (87,300)
Government contract 40,000
Goodwill 20,000
1,153,460

Liabilities (253,800 + 62,100) $315,900

Common shares 270,000
Retained earnings 536,876
Non-controlling interest 30,684
1,153,460

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BUAD 462 Chapter 5 assignment solutions Page 7 of 20
Problem 5-13 (a)
Step 1: AD Table at Acquisition:

Step 2 : AD Amortization Schedule at Consolidation

* 652,000/8 = 81,500 per year. 81,500/2 = 40,750

** 81,500*3
Step 3: Intercompany Transactions
Dividends 290,000 Cr. St of r/e x 80% 232,000 Dr
PANI Dr
Intercompany loan (84,000)Cr A/R
84,000Dr A/P
Accumulated amortization at acquisition: Dr. Accumulated Amort. 69,000, Cr. P&E

Step 4: INCI and BNCI

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BUAD 462 Chapter 5 assignment solutions Page 8 of 20

Step 5: Consolidated Net income

Step 6: Consolidated opening R/E

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BUAD 462 Chapter 5 assignment solutions Page 9 of 20
Problem 5-13 (a) continued:
Step 7: Consolidate
Income Statement Pearl Silver Adjustments Consolidated
Sales 4,450,000 1,450,000 5,900,000
Dividend income 232,000 (232,000) DR -
Total revenues 4,682,000 1,450,000 5,900,000
Cost of sales 2,590,000 490,000 3,080,000
Misc expense 365,000 79,000 81,500 DR 525,500
Admin. expense 89,000 19,000 108,000
Income tax expense 295,000 165,000 460,000
Impairment loss 29,000 DR 29,000
Net income - entity 1,697,500
NCI 117,300 DR 117,300

Net income 1,343,000 697,000 1,580,200

Retained Earnings
Opening 3,800,000 890,000 (1,086,200) DR 3,603,800
Net income 1,343,000 697,000 1,580,200
Dividends 590,000 290,000 (290,000) CR 590,000
Closing 4,553,000 1,297,000 4,594,000

Balance sheet
Cash 390,000 190,000 580,000
Accounts rcbl 290,000 (84,000) CR 206,000
Inventory 2,450,000 510,000 2,960,000
Plant & equip 3,450,000 3,590,000 652,000 DR (69,000) CR 7,623,000
Accum depr (840,000) (400,000) (366,750) CR 69,000 DR (1,537,750)
Investment in Silver 3,300,000 (3,300,000) CR -
Goodwill 544,000 DR 544,000

 Total assets 9,040,000 3,890,000 10,375,250

Liabilities 737,000 543,000 (84,000) DR 1,196,000

-
NCI 835,250 CR 835,250
Common stock 3,750,000 2,050,000 (2,050,000) DR 3,750,000
Retained earnings 4,533,000 1,297,000 4,594,000
Total liab & equity  9,040,000 3,890,000 10,375,250

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BUAD 462 Chapter 5 assignment solutions Page 10 of 20
Problem 5-11 – Parent used the equity method
Step 1: AD Table
Purchase price for 80% of shares 543,840
Implied cost of 100% investment 679,800
Book value of Sub’s net assets ****
Common shares 120,000
Retained earnings 508,800
628,800
Acquisition differential – at purchase 51,000
Fair value differentials: FV – BV
Accounts receivable 24,004
Inventory 48,000
Plant assets (90,000)
Bonds payable 13,466 (4,530)
Balance – goodwill 55,530

**** same as the book value of Sub’s shareholders’ equity at purchase date:

Step 2: AD Amortization Schedule

* amounts given in Outline

** No adjustments required to opening retained earnings if the parent has used the equity method.

Step 3: Intercompany transactions

Remove investment income from sub (equity method) $4,394
No other adjustments, as intercompany dividends would have been recorded as a reduction of the investment
account, and there are no intercompany payables/receivables in this case. No statement of r/e is given, if it
was, the entire amount of the sub’s dividends would still have to be removed from the statement of r/e.

Step 4: INCI and BNCI (remember to flip signs)

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BUAD 462 Chapter 5 assignment solutions Page 11 of 20

Step 5: Not required; consolidated net income equals the parent’s net income on its own income statement
if the equity method has been used, so our check figure for consolidated NI is $126,394.
Step 6: Not required; consolidated opening and closing retained earnings equal the parent’s amounts if the
equity method has been used, so we just eliminate all of the sub’s r/e of 558,200.

Step 7: Note that no statement of R/E is given. Because the parent has used the equity method, we can
consolidate without its information.
Aaron Co.
Consolidated Financial Statements
December 31, Year 6

Income Statement

Sales (1,261,000 + 1,200,000) 2,461,000

Income – other investments 25,000
2,486,000
Raw materials used (880,000 + 1,005,000) 1,885,000
Change in inventory (-40,000 + 15,000) (25,000)
Depreciation (60,000 + 54,000 – 6,000) 108,000
Interest (37,000 + 26,400 + 3,354) 66,754
Other (227,000 + 91,200) 318,200
Goodwill impairment 5,553
2,358,507
Net income – entity 127,493
Non-controlling interest 1,099
Consolidated net income 126,394

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BUAD 462 Chapter 5 assignment solutions Page 12 of 20
Statement of Financial Position

Plant assets (net) (720,000 + 540,000 - 75,000) 1,185,000

Other investments 250,666
Goodwill 41,648
Inventory (300,000 + 276,000) 576,000
Accounts receivable (180,000 + 114,000) 294,000
Cash (120,000 + 84,000) 204,000
2,551,314

Ordinary shares 300,600

Retained earnings 1,295,185
Non-controlling interest 130,080
Bonds payable (315,000 + 200,000 – 5,551) 509,449
Current liabilities (180,200 + 135,800) 316,000
2,551,314
Aaron’s equity method journal entries
Investment revenue from Bondi:
Share of net income: 8,400*.8 ..........(6,720.00)
FVI amortization plant assets: (450,000 - 540,000)*.8/15 ..........(4,800.00)
Bond amortization: 3,354*.8 ...........2,683.20
Goodwill impairment: 5,553*.8 ...........4,442.40
Total agrees to income statement .........(4,394.00)

Share of net income:

Investment in Bondi shares........................................4,394
Investment revenue from Bondi.............................................4,394

Receipt of dividends:
Assumed none (no information given in the problem to do this entry)

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BUAD 462 Chapter 5 assignment solutions Page 13 of 20
Problem 5-5 Note: We are not performing full consolidation; we are just calculating all of the necessary
adjustments. Highlighting is still being provided, to show which numbers would be used to adjust the
income statement, balance sheet and retained earnings consolidated amounts (yellow, blue and pink
highlights), as well as those that are used in intermediate calculations for SANI, SANA, and SORE (green).
Step 1: Calculate goodwill at the purchase date.
Purchase price for 85% of shares 646,000
Implied cost of 100% investment 760,000
Book value of Sub’s net assets ****
Common shares 500,000
Retained earnings 100,000
600,000
Acquisition differential – at purchase 160,000
Fair value differentials: FV – BV
Inventory 70,000
Patents 90,000 160,000
Balance – goodwill -

**** same as the book value of Sub’s shareholders’ equity at purchase date:

Step 2: Prepare the Acquisition Differential amortization schedule from the purchase date to the current date.

Step 3: Intercompany trx:

-eliminate dividend income from Sub to Parent, intercompany payables/receivables, the amount of
accumulated depreciation (if given) from the Subsidiary at the purchase date.
15,000Cr Stmt of R/E*85% = 12,750Dr …….. PANI
Interco. payables/receivables or Sub accumulated depreciation at purchase: none in this problem
Step 4: Calculate BNCI and INCI for Year 3
BNCI: Non-controlling percentage of SANA. Recall that this is calculated by using the sub net assets
combined with the unamortized AD multiplied by the non-controlling percentage. Net assets are
represented by common stock plus retained earnings, and these must be as of the end of the year. We
assume no changes in common stock unless informed otherwise; retained earnings at the end of Year
3 will be retained earnings at the purchase date (end of Year 1) plus total net income less dividends:
100,000 + 30,000 + 52,000 – 15,000 = 167,000

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BUAD 462 Chapter 5 assignment solutions Page 14 of 20
Calculation of SANA and BNCI:
Sub’s common shares (assumed no change) 500,000
Sub’s retained earnings 167,000
Sub’s net assets, end of Year 3 667,000
remaining acquisition differential (from amortization
72,000
schedule)
SANA 739,000
NCI’s share 15%
BNCI (appears in equity section of consolidated balance sheet) (110,850) Cr

INCI: Non-controlling percentage of SANI.

Step 5: Calculate consolidated net income for Year 3. The following has the additional complication of a
Parent loss in Year 3, which shows as a debit.
Dr (Cr)

* Eliminating dividend income increases the loss

Step 6: Calculate consolidated opening retained earnings for Year 3.
Opening consolidated retained earnings equals parent opening retained earnings plus the change in
sub retained earnings from the purchase date to the beginning of the year plus total past acquisition
differential amortization to the beginning of the year.
We were given that Pen’s closing retained earnings for Year 3 were $91,000. Given that they’d
incurred a net loss of $45,000 for Year 3, their opening retained earnings must have been 91,000 +
45,000 = $136,000
Silk’s opening retained earnings for Year 3 were the amount of opening retained earnings for Year 2
of $100,000 plus their Year 2 net income of 30,000 = $130,000.

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BUAD 462 Chapter 5 assignment solutions Page 15 of 20
Dr (Cr)

* Note that this adjustment is a debit, which changes the effect of the sub’s retained earnings to a debit.

Problem 5-12 – Based on revised instructions in outline

Step 1: AD Schedule

Purchase price for 75% of shares 117,000

Implied cost of 100% investment 156,000
Book value of Sub’s net assets ****
Common shares 50,000
Retained earnings 30,000
80,000
Acquisition differential – at purchase 76,000
Fair value differentials: FV – BV
Inventory (11,000)
Equipment 24,000
Software 15,000 28,000
Balance – goodwill 48,000

**** same as the book value of Sub’s shareholders’ equity at purchase date:

Step 2: AD Amortization Schedule

* goodwill 48,000 – 20,000 = 28,000

** software 15000-4500-1500=9000 (NBV) -8000 (FV) = 1000
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BUAD 462 Chapter 5 assignment solutions Page 16 of 20
Step 3: Intercompany Trx:
Dividend income to eliminate: 25% * 20,000Cr Stmt of R/E = 15,000 Dr PANI
Intercompany notes payable / notes receivable = 40,000
Eliminate depreciation at acquisition: Equipment Cr. 12,000
Accumulated Dep. Dr. 12,000

Step 4: BNCI and INCI (flip signs)

Step 5: Calculation of consolidated net income – Year 6

Step 6: Calculation of consolidated retained earnings January 1, Year 6

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Problem 5-15, cost method, with altered financial statements per the worksheet provided
Step 1 – AD Table

Purchase price for 80% of shares 4,320,000

Implied cost of 100% investment 4,320,000/.80 5,400,000
Book value of Sub’s net assets ****
Common shares 2,021,000
Retained earnings 2,620,000
4,641,000
Acquisition differential – at purchase 759,000
Fair value differentials: FV – BV
Inventory 220,000
Patents 520,000
Bonds payable (320,000) 420,000
Balance – goodwill 339,000

**** same as the book value of Sub’s shareholders’ equity at purchase date:

Step 2

Step 3 Interco Trx:

Step 4 INCI and BNCI (flip the signs)

Calculation of SANA and BNCI:
Sub’s common shares (assumed no change) 2,021,000
Sub’s retained earnings (from worksheet) 3,519,000
Sub’s net assets, end of Year 3 5,540,000

remaining acquisition differential (from amortization schedule) 430,000

SANA 5,970,000
NCI’s share 20%
BNCI (appears in equity section of consolidated balance sheet) (1,194,000) Cr

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BUAD 462 Chapter 5 assignment solutions Page 19 of 20
Subs’s profit (208,000)
Amortization of acquisition differential 38,000
SANI (170,000)
Non-controlling percentage 20%
INCI 34,000 Dr

Step 5 Consolidated NI

Step 6

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Problem 5-15, cost method continued
Step 7

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