CHAPTER 3

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Answers to Questions

1 A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a
controlling financial interest (generally over 50 percent) of its outstanding voting stock.

2 Amounts assigned to identifiable assets and liabilities in excess of recorded amounts on the books of the
subsidiary are not recorded separately by the parent. Instead, the parent records the fair value/purchase
price of the interest acquired in an investment account. The assignment to identifiable asset and liability
accounts is made through working paper entries when the parent and subsidiary financial statements are
consolidated.

3 The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the
purchase price of the subsidiary is greater than the book value of the subsidiary’s net assets. If the parent
had acquired an 80 percent interest and the implied fair value of the subsidiary was greater than the book
value of the subsidiary’s net assets, the land would still appear in the consolidated balance sheet at
$100,000. Under GAAP, the noncontrolling interest is also reported based on fair values at the acquisition
date.

4 Parent and subsidiaries should maintain separate accounting record because legally they are separate
entities. However, in parent-subsidiary relationship, the parent has a control over the subsidiary. Thus there
is only one economic entity because all resources are under control of a single management, which is the
management of parent. Therefore, the separate accounting record should be consolidated for reporting
purposes.

5 A noncontrolling interest is the equity interest in a subsidiary that is owned by stockholders outside of the
affiliation structure. In other words, it is the equity interest in a subsidiary (recorded at fair value) that is not
held by the parent or subsidiaries of the parent.

6 Under GAAP, a subsidiary will not be consolidated if control does not rest with the majority owner, such as
in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under severe
foreign exchange restrictions or other governmentally imposed uncertainties. Other conditions for not
consolidating a subsidiary are: (1) formation of joint ventures, (2) the acquisition of an asset or group of
assets that does not constitute a business, (3) combination between entities under common control and (4)
combination between not-for-profit entities or the acquisition of a for-profit business by a not-for-profit
entity.

7 Cash is not the only permissible options to finance the acquisition. Investor may also sell shares of
authorized but previously unissued common stock, issue preferred shares, sell debt securities (bonds), or
combine these possible options.

8 The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of
the outstanding capital stock of the parent.

9 All elimination entries are not recorded in a ledger because the purpose of the entries is to help the process
of consolidating the parent and subsidiary financial statement. These entries are fictitious and do not need
to be journalized or posted in either parent accounting records or subsidiary accounting records.

10 The parent’s investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is
consolidated. It would appear in the parent’s separate balance sheet under the heading “investments” or
“other assets.” Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as
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3-2 An Introduction to Consolidated Financial Statements

investments or other assets. They are accounted for under the equity method if the parent can exercise
significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost method.

11 Parent’s books: Reciprocal accounts on subsidiary’s books:

Investment in subsidiary Capital stock and retained earnings
Sales Cost of Goods Sold
Accounts receivable Accounts payable
Interest income Interest expense
Dividends receivable Dividends payable
Advance to subsidiary Advance from parent

12 Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order to
show the financial position and results of operations of the total economic entity that is under the control of
a single management team. Sales by a parent to a subsidiary are internal transactions from the viewpoint of
the economic entity and the same is true of interest income and interest expense and rent income and rent
expense arising from intercompany transactions. Similarly, receivables from and payables to affiliates do
not represent assets and liabilities of the economic entity for which consolidated financial statements are
prepared.

13 The stockholders’ equity of a parent under the equity method is the same as the consolidated stockholders’
equity of a parent and its subsidiaries except for the noncontrolling interest.

14 No. The amounts that appear in the parent’s statement of retained earnings under the equity method and the
amounts that appear in the consolidated statement of retained earnings are identical, assuming that the
noncontrolling interest is included as a separate component of stockholders’ equity.

15 Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total
income to the consolidated entity between controlling and noncontrolling stockholders. From the viewpoint
of the controlling interest (the stockholders of the parent), income attributable to noncontrolling interest has
the same effect on consolidated net income as an expense. This is because consolidated net income is
income to all stockholders. Alternatively, you can view total consolidated net income as being allocated to
the controlling and noncontrolling interests.

16 The computation of noncontrolling interest is comparable to the computation of retained earnings. It is

computed:

Noncontrolling interest beginning of the period XX

Add: Income attributable to noncontrolling interest XX
Deduct: Noncontrolling interest dividends (XX)
Deduct: Noncontrolling interest of amortization of
excess of fair value over book value (XX)
Add: Noncontrolling interest of amortization of
excess of book value over fair value XX
Noncontrolling interest end of the period XX

17 It is acceptable to consolidate the annual financial statements of a parent and a subsidiary with different
fiscal periods, provided that the dates of closing are not more than three months apart. Any significant
developments that occur in the intervening three-month period should be disclosed in notes to the financial
statements. In the situation described, it is acceptable to consolidate the financial statements of the
subsidiary with an October 31 closing date with the financial statements of the parent with a December 31
closing date.

18 The acquisition of shares from noncontrolling stockholders is not a business combination. It must be
accounted for as a treasury stock transaction if the acquirer is the controlling interest. It is not possible, by
definition, to acquire a controlling interest from noncontrolling stockholders.
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Chapter 3 3-3

SOLUTIONS TO EXERCISES

Solution E3-1 Solution E3-2

1 b 1 d
2 c 2 b
3 d 3 d
4 d 4 d
5 a 5 a
6 b
7 c

Solution E3-3 [AICPA adapted]

1 c Advance to Hill $75,000 + receivable from Ward $200,000 = $275,000

2 a Zero, goodwill has an indeterminate life and is not amortized.

3 a Pow accounts for Sap using the equity method, therefore,

consolidated retained earnings is equal to Pow’s retained earnings, or
$2,480,000.

4 d On the consolidated balance sheet, intercompany receivables should

be zero.

Solution E3-4 (in thousands)

1 Implied fair value of San ($3,600 / 90%) $4,000

Less: Book value of San (3,600)
Excess fair value over book value $ 400
Equipment undervalued 120
Goodwill at January 1, 2011 $ 280
Goodwill at December 31, 2011 = Goodwill from consolidation $ 280
Since goodwill is not amortized

2 Consolidated net income

Pin’s reported net income $1,960

Less: Correction to income from San for
depreciation on excess allocated
to equipment [($120,000/3 years)x 90%] (36)
Controlling share of consolidated net income $1,924

Noncontrolling share of consolidated net income:

($400,000 - $40,000 depreciation) x 10% $36
Controlling share of consolidated net income 1,924
Consolidated net income $1,960

Solution E3-5 (in thousands)

1. Implied fair value of Matt Inc. $2,000,000

($1,400,000 / 70%)
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3-4 An Introduction to Consolidated Financial Statements
Less: book value of Matt Inc. $1,500,000
Goodwill $500,000

2. Noncontrolling interest at January 1 $600,000

($2,000,000 x 30%)
Add: noncontrolling interest share ($600,000 x 30%) $180,000
Less: Dividends declared ($300,000 x 30%) $90,000
Noncontrolling interest at December 31 $690,000

Check:
Investment in Matt Inc. at January 1 $1,400,000
Add: controlling interest share ($600,000 x 70%) $420,000
Less: dividends declared ($300,000 x 70%) $210,000
Investment in Matt Inc. at December 31 $1,610,000

Noncontrolling interest at December 31 $690,000

($1,610,000 x 30% / 70%)

Solution E3-6 (in thousands)

1.Cost of acquiring Patricia NV’s stocks [$45 x 10,000] $450,000

Implied fair value [$40,000 + $20,000 + $80,000 + $380,000
$280,000 -$40,000]
Goodwill $ 70,000

2.Journal entries to record push-down value:

Inventories (+A) 30
Plant assets (+A) 50
Accounts payable (-L) 10
Goodwill (+A) 70
Retained earnings (-SE) 200
Accounts receivable (-A) 10
Push-down capital (+SE) 350

Push-down capital in the balance sheet of Patricia NV is $350,000

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Chapter 3 3-5
Solution E3-7

1. Sooseck Co Ltd net income $240,000

Percentage of ownership 80%
Income allocated to controlling interest $192,000

2. Controlling share of net income is equal to parent’s net income.

Yum Co Ltd separate net income $350,000

Income from Sooseck Co Ltd $192,000
Controlling share of net income $542,000

Solution E3-8 (in thousands)

1 Capital stock

The capital stock appearing in the consolidated balance sheet at

December 31, 2011 is $7,200, the capital stock of Pob,the parent
company.

2 Goodwill at December 31, 2011

Investment cost at January 2, 2011 (80% interest) $2,800

Implied total fair value of Sof ($2,800 / 80%) $3,500
Book value of Sof(100%) (2,400)
Excess is considered goodwill since no other fair value
information is given. $1,100

3 Consolidated retained earnings at December 31, 2011

Pob’s retained earnings January 2 (equal to

beginning consolidated retained earnings $3,200
Add: Net income of Pob (equal to controlling share of
consolidated net income) 1,200
Less: Dividends declared by Pob (720)
Consolidated retained earnings December 31 $3,680

4 Noncontrolling interest at December 31, 2011

Capital stock and retained earnings of Sof on

January 2 $2,400
Add: Sof’s net income 360
Less: Dividends declared by Sof (200)
Sof’s stockholders’ equity December 31 2,560
Noncontrolling interest percentage 20%

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3-6 An Introduction to Consolidated Financial Statements
Noncontrolling interest at book value $ 512
Add: 20% Goodwill 220
Noncontrolling interest December 31 $ 732

5 Dividends payable at December 31, 2011

Dividends payable to stockholders of Pob $ 360

Dividends payable to noncontrolling stockholders ($100 ´
20%) 20
Dividends payable to stockholders outside the
Consolidated entity $ 380

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Chapter 3 3-7
Solution E3-9 (in thousands)

Pas Corporation and Subsidiary

Partial Balance Sheet
at December 31, 2011

Stockholders’ equity:
Capital stock, $10 par $1,200
Additional paid-in capital 200
Retained earnings 260
Equity of controlling stockholders 1,660
Noncontrolling interest 164
Total stockholders’ equity $1,824

Supporting computations
Computation of consolidated retained earnings:
Pas’s December 31, 2010 retained earnings $ 140
Add: Pas’s reported income for 2011 220
Less: Pas’s dividends (100)
Consolidated retained earnings December 31, 2011 $ 260

Computation of noncontrolling interest at December 31, 2011

Sal’s December 31, 2010 stockholders’ equity $800
Income less dividends for 2011 ($80 - $60) 20
Sal’s December 31, 2011 stockholders’ equity 820
Noncontrolling interest percentage 20%
Noncontrolling interest December 31, 2011 $164

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3-8 An Introduction to Consolidated Financial Statements
Solution E3-10

Pek Corporation and Subsidiary

Consolidated Income Statement
for the year ended December 31, 2013
(in thousands)
Sales $8,400
Cost of goods sold 4,400
Gross profit 4,000
Deduct: Operating expenses 2,220
Consolidated net income 1,780
Deduct: Noncontrolling interest share 58
Controlling interest share $1,722

Supporting computations

Investment cost January 1, 2011 (90% interest) $ 3,240

Implied total fair value of Slo ($3,240 / 90%) $ 3,600
Slo’s Book value acquired (100%) (2,800)
Excess of fair value over book value $ 800

Excess allocated to:

Inventories (sold in 2011) $ 120
Equipment (4 years remaining useful life) 80
Goodwill 600
Excess of fair value over book value $ 800

Operating expenses:
Combined operating expenses of Pek and Slo $2,200
Add: Depreciation on excess allocated to equipment
($80/4 years) 20
Consolidated operating expenses $2,220

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Chapter 3 3-9
SOLUTIONS TO PROBLEMS

Solution P3-1

1 Pen Corporation and Subsidiary

Consolidated Balance Sheet
at December 31, 2011
(in thousands)

Assets
Cash ($128 + $72) $ 200
Accounts receivable ($180 + $136 - $20) 296
Inventories ($572 + $224) 796
Equipment — net ($1,520 + $700) 2,220
Total assets $3,512

Liabilities and Stockholders’ Equity

Liabilities:
Accounts payable ($160 + $132 - $20) $ 272
Stockholders’ equity:
Common stock, $10 par 1,840
Retained earnings 1,200
Noncontrolling interest ($600 + $400) ´ 20% 200
Total liabilities and stockholders’ equity $3,512

2 Consolidated net income for 2012

Pen’s separate income $ 680

Add: Income from Sut (80% x $360,000) 288
Controlling interest share 968
Add: Noncontrolling interest share (20% x $360,000) 72
Consolidated net income $1,040

Pen’s separate income $ 680

Add: Sut’s net income 360
Consolidated net income 1,040
Less: Noncontrolling interest share (20% x $360,000) 72
Controlling share of consolidated net income $ 968

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3-10 An Introduction to Consolidated Financial Statements
Solution P3-2 (in thousands)

1 Schedule to allocate fair value/book value differential

Cost of investment in Set $ 700

Implied fair value of Set ($700 / 70%) $1,000
Book value of Set (440)
Excess fair value over book value $ 560
Excess allocated:
Fair Value Book Value Allocation
Inventories ($200 - $120) $ 80
Land ($240 - $200) 40
Buildings — net ($360 - $280) 80
Equipment — net ($120 - $160) (40)
Other liabilities ($160 - $200) 40
Allocated to identifiable net assets 200
Goodwill for the remainder 360
Excess fair value over book value $560

2 Par Corporation and Subsidiary

Consolidated Balance Sheet
at January 1, 2011

Assets
Current assets:
Cash ($140 + $80) $220
Receivables — net ($320 + $120) 440
Inventories ($280 + $120 + $80) 480 $1,140

Property, plant and equipment:

Land ($400 + $200 + $40) $640
Buildings — net ($440 + $280 + $80) 800
Equipment — net ($320 + $160 - $40) 440 1,880
Goodwill (from consolidation) 360
Total assets $3,380

Liabilities and Stockholders’ Equity

Liabilities:
Accounts payable ($360 + $320) $ 680
Other liabilities ($40 + $200 - $40) 200 $ 880

Stockholders’ equity:
Capital stock $2,000
Retained earnings 200
Equity of controlling stockholders 2,200
Noncontrolling interest * 300 2,500
Total liabilities and stockholders’ equity $3,380

* 30% of implied fair value of $1,000 = $300.

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Chapter 3 3-11
Solution P3-3 (in thousands)

Schedule to allocate excess of investment fair value over book value:

TOBIAS AG AND ITS 90%-OWNED SUBSIDIARY

MARK AG (IN THOUSANDS)
Fair value (purchase price) of 90% interest
acquired $ 8,100
Implied fair value of sad ($8,100 /
90%) $ 9,000
Book value of Mark AG net assets $ 7,200
Excess of fair value over book value
acquired $ 1,800

Fair Book Excess

Value Value Allocated
Inventories $ 2,000 $ 1,600 $ 400
Land $ 4,000 $ 3,000 $ 1,000
Buildings-net $ 2,500 $ 2,800 -$ 300
Equipment-net $ 4,000 $ 3,900 $ 100
Notes payable $ 2,000 $ 1,800 -$ 200
Bonds payable $ 2,000 $ 2,400 $ 400
Patents $ 100 $ 0 $ 100
Total assigned to
identifiable net assets $ 1,500
Remainder assigned to goodwill $ 300
Total excess of cost over book value
acquired $ 1,800

Solution P3-4 (in thousands)

Noncontrolling interest of $260 (fair value) plus $1,040 (fair value of Pam’s
investment) equals total fair value of $1,300. Therefore, Pam’s interest is
80% ($1,040 / $1,300), and noncontrolling interest is 20% ($260 / $1,300).

Total fair value $1,300

Book value of Sap (1,040)
Excess fair value over book value $ 260

Excess allocated to

Fair Value - Book Value

Plant assets — net $840 - $800 $ 40
Goodwill 220
Total $ 260

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3-12 An Introduction to Consolidated Financial Statements
Solution P3-5

Pal Corporation and Subsidiary

Consolidated Balance Sheet
at December 31, 2011
(in thousands)
Assets
Current assets $1,360
Plant assets 3,320
Goodwill 800
$5,480
Equities
Liabilities $2,640
Capital stock 1,200
Retained earnings 1,640
$5,480

Supporting computations
Sor’s net income ($1,600 - $1,200 - $200) $ 200
Less: Excess allocated to inventories that were sold in 2011 (80)
Less: Depreciation on excess allocated to plant
assets ($160 /4 years) (40)
Income from Sor $ 80

Plant assets ($2,000 + $1,200 + $160 - $40) $3,320

Pal’s retained earnings:

Beginning retained earnings $1,360
Add: Operating income 400
Add: Income from Sor 80
Deduct: Dividends (200)
Retained earnings December 31, 2011 $1,640

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 Chapter 3 3-13
Solution P3-6

1. Preliminary computations:

Fair value (purchase price) of 80% interest acquired $2,080,000

Implied fair value of David PLC [$2,080,000 / 80%] $2,600,000
David PLC stockholders’ equity on January 1 $2,500,000
[$1,000,000 + $1,800,000 + $200,000 - $500,000]
Excess allocated to goodwill $ 100,000

HARRISON PLC AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET WORKPAPERS
DECEMBER 31, 2014 (IN THOUSANDS)
Adjustments
and
Eliminations Consolidate
Harrison 80 %David Credit d Balance
  PLC PLC Debits s Sheet
Assets          
Cash $ 300 $ 80     $ 380
Accounts receivable $ 400 $ 200   c 100 $ 500
Dividends receivable $ 160     b 160  
Equipment-net $ 1,000 $ 800     $ 1,800
Building-net $ 2,000 $ 1,000     $ 3,000
Land $ 1,600 $ 1,400     $ 3,000
Investment in David
PLC $ 2,320     a 2320  
Goodwill     a 100   $ 100
Total assets $ 7,780 $ 3,480     $ 8,780
           
Liabilities and
Equity          
Accounts payable $ 500 $ 80 c 100   $ 480
Dividends payable $ 100 $ 200 b 160   $ 140
Notes payable $ 1,000 $ 400     $ 1,400
Capital stock $ 2,000 $ 1,000 a 1000   $ 2,000
Retained earnings $ 4,180 $ 1,800 a 1800   $ 4,180
  $ 7,780 $ 3,480      
Noncontrolling
interest       a 580 $ 580
Total liabilities and
stockholders' equity         $ 8,780
a. To eliminate reciprocal subsidiary investment and equity balances,
establish noncontrolling interest, and enter goodwill
b.To eliminate reciprocal dividends receivable and dividends payable
accounts.
c.To eliminate reciprocal accountss receivable and accountss payable
accounts.

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3-14 An Introduction to Consolidated Financial Statements

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Chapter 3 3-15
Solution P3-7 (in thousands)

Preliminary computations
Cost of 80% investment January 3, 2011 $1,120
Implied total fair value of Sle ($1,120 / 80%) $1,400
Book value of Sle (1,000)
Excess fair value over book value on January 3 = Goodwill $ 400

1 Noncontrolling interest share of income:

Sle’s net income $200 ´ 20% noncontrolling interest $ 40

2 Current assets:
Combined current assets ($816 + $300) $1,116
Less: Dividends receivable ($40 ´ 80%) (32)
Current assets $1,084

3 Income from Sle: None Investment income is eliminated in consolidation.

4 Capital stock: $2,000 Capital stock of the parent, Por Corporation.

5 Investment in Sle: None The investment account is eliminated.

6 Excess of fair value over book value $400

7 Controlling share of consolidated net income: Equals Por’s

net income, or:
Consolidated sales $ 2,400
Less: Consolidated cost of goods sold (1,480)
Less: Consolidated expenses (320)
Consolidated net income $ 600
Less: Noncontrolling interest share (40)
Controlling share $ 560

8 Consolidated retained earnings December 31, 2011: $808 Equals Por’s

beginning retained earnings.

9 Consolidated retained earnings December 31, 2012

Equal to Por’s ending retained earnings:
Beginning retained earnings $ 808
Add: Controlling share of consolidated net income 560
Less: Por’s dividends for 2012 (240)
Ending retained earnings $1,128

10 Noncontrolling interest December 31, 2012

Sle’s capital stock and retained earnings $1,200
Add: Net income 200
Less: Dividends (100)
Sle’s equity December 31, 2012 at fair value 1,300
Noncontrolling interest percentage 20%
Noncontrolling interest December 31, 2012 using book value $ 260
Add: Noncontrolling interest share of Goodwill 80
Noncontrolling interest December 31, 2012 at fair value $ 340

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3-16 An Introduction to Consolidated Financial Statements
Solution P3-8 [AICPA adapted]

Preliminary computations Saw Sun

Investment cost:
Saw (2,000 shares ´ 80%) ´ $280
448,000
Sun (6,000 shares ´ 70%) ´ $160
672,000
Implied total fair values:
Saw ($448,000 / 80%)
560,000
Sun ($672,000/ 70%) 960,000

Book value of stockholders’ equity

Saw 280,000
Sun         480,000
Excess fair value over book value at acquisition
(Goodwill) 280,000 480,000

1 a. Journal entries to account for investments

January 1, 2011 — Acquisition of investments

Investment in Saw (80%) 448,000
Cash 448,000
To record acquisition of 1,600 shares of
Saw common stock at $280 per share.
Investment in Sun (70%) 672,000
Cash
672,000
To record acquisition of 4,200 shares of
Sun common stock at $160 per share.
b. During 2011 — Dividends from subsidiaries
Cash 51,200
Investment in Saw (80%) 51,200
To record dividends received from Saw ($64,000 ´ 80%).
Cash 25,200
Investment in Sun (70%) 25,200
To record dividends received from Sun ($36,000 ´ 70%).
c. December 31, 2011 — Share of income or loss
Investment in Saw (80%) 115,200
Income from Saw 115,200
To record investment income from Saw ($144,000 ´ 80%).
Loss from Sun 33,600
Investment in Sun (70%) 33,600
To record investment loss from Sun ($48,000 ´ 70%).

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Chapter 3 3-17
Solution P3-8 (continued)

2 Noncontrolling interest December 31, 2011 *

Saw Sun
Common stock $200,000 $240,000
Capital in excess of par 80,000
Retained earnings 160,000 76,000
Equity December 31 360,000 396,000
Noncontrolling interest percentage 20% 30%
Noncontrolling interest December 31 $ 72,000 $118,800
Plus: Goodwill x 20%
$280,000 x 20% 56,000
$480,000 x 30% 144,000
Noncontrolling interest, December 31 $128,000 $262,800

* Fair value equals book value.

3 Consolidated retained earnings December 31, 2011

Consolidated retained earnings is reported at $1,218,400, equal to the

retained earnings of Pod Corporation, the parent, at December 31, 2011.

4 Investment balance December 31, 2011:

Saw Sun
Investment cost January 1 $448,000 $672,000

Add (deduct): Income (loss) 115,200 (33,600)

Deduct: Dividends received (51,200) (25,200)
Investment balances December 31 $512,000 $613,200

Check: Investment balances should be equal to the underlying book value

plus goodwill

Saw ($360,000 ´ 80%) + ($280,000 x 80%) = $512,000

Sun ($396,000 ´ 70%) + ($480,000 x 70%) = $613,200

After consolidation, the Investment balances are $0.

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3-18 An Introduction to Consolidated Financial Statements
Solution P3-9

Preliminary computations (in thousands)

Cost of 90% investment January 1, 2011 $14,400
Implied total fair value of Son ($14,400 / 90%) $16,000
Book value of Son (10,800)
Excess fair value over book value on January 1 $ 5,200
Allocation to equipment $ 3,200
Remainder is Goodwill $ 2,000
Additional annual depreciation on equipment ($3,200 / 8 years) $ 400

Pan Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2011
(in thousands)

90% Adjustments and Consolidated

Pan Son Eliminations Balance Sheet
Cash $ 1,200 $ 800 $ 2,000
Receivables — net 2,400 1,600 4,000
Dividends receivable 360 b 360
Inventory 2,800 2,400 5,200
Land 2,400 2,800 5,200
Buildings — net 8,000 4,000 12,000
Equipment — net 6,000 3,200 a 2,800 12,000
Investment in Son 15,120 a 15,120
Goodwill _______ ________ a 2,000 2,000
Total assets $38,280 $ 14,800 $42,400
Accounts payable $ 1,200 $ 2,400 $ 3,600
Dividends payable 2,000 400 b 360 2,040
Capital stock 28,000 8,000 a 8,000 28,000
Retained earnings 7,080 4,000 a 4,000 7,080
Noncontrolling interest _______ ________ _______ a 1,680 1,680

Total equities $38,280 $ 14,800 17,160 17,160 $42,400

a To eliminate reciprocal investment and equity accounts, enter unamortized excess

allocated to equipment, record goodwill, and enter noncontrolling interest (at fair
value).
b To eliminate reciprocal dividends receivable and dividends payable amounts.

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Chapter 3 3-19
Solution P3-10

1 Purchase price of investment in Sun (in thousands)

Underlying book value of investment in Sun:

Equity of Sun January 1, 2011 $ 880
Add: Excess investment fair value over book value:
Goodwill at December 31, 2015 240
Fair value of Sun January 1, 2011 $1,120

Purchase price of 80% investment at fair value($1,120 x 80%) $ 896

2 Sun’s stockholders’ equity on December 31, 2014 (in thousands)

20% noncontrolling interest at fair value $248

20% goodwill (48)
20% noncontrolling interest’s equity at book value $200
Total equity = Noncontrolling interest’s equity $200/20% = $1,000

3 Pan’s investment in Sun account balance at December 31, 2014

(in thousands)
Underlying book value in Sun December 31, 2014
($1,000 ´ 80%) $800
Add: 80% of Goodwill December 31, 2014
(20% is attributable to the noncontrolling interest) 192
Investment in Sun December 31, 2014 $992

Alternative solution:
Investment cost January 1, 2011 $896
Add: 80% of Sun’s increase since acquisition
($1,000 - $880) ´ 80% 96
Investment in Sun December 31, 2014 $992

4 Pan’s capital stock and retained earnings December 31, 2015

(in thousands)
Capital stock $1,600
Retained earnings $ 120

Amounts are equal to capital stock and retained earnings shown in the
consolidated balance sheet.

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3-20 An Introduction to Consolidated Financial Statements
Solution P3-11

Preliminary computations (in thousands)

Cost of 70% investment in Stu $2,800
Implied fair of Stu($2,800 / 70%) $4,000
Book value of Stu (100%) 3,200
Excess $ 800
Excess allocated:
Inventories $ 80
Plant assets 320
Goodwill 400
Excess $ 800

Investment balance at January 1, 2011 $2,800

Share of Stu’s retained earnings increase ($240 ´ 70%) 168
Less: Amortization
70% of excess allocated to inventories (sold in 2011) (56)
70% of excess allocated to plant assets ($320 /8 years) (28)
Investment balance at December 31, 2011 $2,884

Noncontrolling interest at December 31

30% of Stu’s book value at December 31 ($3,440 x 30%) $1,032
30% of Goodwill 120
30% Unamortized excess for plant assets
30% x ($320 - $40 amortization) 84
Noncontrolling at December 31 (fair value) $1,236

Pop Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2011
(in thousands)
70% Adjustments and Consolidated
Pop Stu Eliminations Balance Sheet
Cash $ 240 $ 80 $ 320
Accounts receivable — net 1,760 800 2,560
Accounts receivable — Pop 40 b 40
Dividends receivable 28 c 28
Inventories 2,000 1,280 3,280
Land 400 600 1,000
Plant assets — net 2,800 1,400 A 280 4,480
Investment in Stu 2,884 a 2,884
Goodwill ______ ______ a 400 400
Assets $10,112 $ 4,200 $12,040

Accounts payable $ 1,200 $ 320 $ 1,520

Account payable to Stu 40 b 40
Dividends payable 160 40 c 28 172
Long-term debt 2,400 400 2,800
Capital stock 4,000 2,000 a 2,000 4,000
Retained earnings 2,312 1,440 a 1,440 2,312
Noncontrolling interest
($4,120,000 ´ 30%) _______ _______ _______ a 1,236 1,236

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Chapter 3 3-21

Equities $10,112 $ 4,200 4,188 4,188 $12,040

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3-22 An Introduction to Consolidated Financial Statements
Solution P3-12

Preliminary computations (in thousands)

80% Investment in Sam at cost January 1, 2011 $ 3,040
Implied total fair value of Sam ($3,040 / 80%) $ 3,800
Sam book value 3,600
Excess fair value over book value recorded as goodwill $ 200

Sam Sam 80% of

Dividends Net Income Net Income
2011 $160 $ 320 $256
2012 200 400 320
2013 240 480 384
$600 $1,200 $960

1 Sam’s dividends for 2012 ($160 / 80%) $ 200

2 Sam’s net income for 2012 ($320 / 80%) $ 400

3 Goodwill — December 31, 2012 $ 200

4 Noncontrolling interest share of income — 2013

Sam’s income for 2013
($192 dividends received/80%) ´ 2 $ 480
Noncontrolling interest percentage 20%
Noncontrolling interest share $ 96

5 Noncontrolling interest December 31, 2013

Equity of Sam January 1, 2011 $3,600
Add: Income for 2011, 2012 and 2013 1,200
Deduct: Dividends for 2011, 2012 and 2013 (600)
Equity book value of Sam December 31, 2013 4,200
Goodwill 200
Equity fair value of Sam December 31, 2013 $4,400
Noncontrolling interest percentage 20%
Noncontrolling interest December 31, 2013 $ 880

6 Controlling share of consolidated net income for 2013

Pen’s separate income $1,120
Add: Income from Sam 384
Controlling share of consolidated net income $1,504

Pen’s net income $1,120

Sam’s net income 480
Consolidated net income $1,600
Less: Noncontrolling interest share ($480 x 20%) 96
Controlling interest share $1,504

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