What Is The Consolidated Net Income Before Allocation To The Controlling and Noncontrolling Interests?

Ch 4 Quiz #1
West Company acquired 60 percent of Solar Company for $300,000 when Solar’s book value
was $400,000. The newly comprised 40 percent noncontrolling interest had an assessed fair
value of $200,000. Also at the acquisition date, Solar had a trademark (with a 10-year remaining
life) that was undervalued in the financial records by $60,000. Also, patented technology (with a
5-year remaining life) was undervalued by $40,000. Two years later, the following figures are
reported by these two companies (stockholders’ equity accounts have been omitted):
West Company Solar Company Solar Company

Book Value Book Value Fair Value
Current assets $ 620,000 $ 300,000 $ 320,000
Trademarks 260,000 200,000 280,000
Patented
410,000 150,000 150,000
technology
Liabilities (390,000) (120,000) (120,000)
Revenues (900,000) (400,000)
Expenses 500,000 300,000
Investment
Not given
income
Note: Parentheses indicate a credit balance.
What is the consolidated net income before allocation to the controlling and
noncontrolling interests? $486,000
Explanation
Combined revenues $1,300,000

Combined expenses (800,000)
Trademark amortization (6,000)
Patented technology amortization (8,000)
Consolidated net income $ 486,000

Current assets $ 620,000 $ 300,000 $ 320,000
Trademarks 260,000 200,000 280,000
Patented
410,000 150,000 150,000
technology
Liabilities (390,000) (120,000) (120,000)
Revenues (900,000) (400,000)
Expenses 500,000 300,000
Investment
Not given
income
Assuming Solar Company has declared no dividends, what are the

noncontrolling interest’s share of the subsidiary’s income and the ending
balance of the noncontrolling interest in the subsidiary? $34,400 and
$240,800
Explanation
Subsidiary net income

($100,000 − $14,000 excess amortizations) $ 86,000
Noncontrolling interest percentage 40%
Noncontrolling interest in consolidated net income $ 34,400
Fair value of noncontrolling interest at acquisition
$200,000
date
40% change in previous year Solar book value
($430,000 − $400,000) × 40% 12,000
40% of excess fair value amortization—year one (5,600)
NCI share of current year consolidated net income
34,400
(above)
Noncontrolling interest at end of year $240,800
Alternative noncontrolling interest year 2 solution:

Solar and NCI valuations:
Current assets $ 300,000
Trademarks 200,000
Patented technology 150,000
Liabilities (120,000)
Solar book value at end of year 2 $ 530,000
Solar book value at acquisition date (400,000)
Increase in book value (2 years) $ 130,000
NCI percentage 40%
NCI share of book value increase 52,000
NCI share of excess fair value amortization (2
(11,200)
years)
Increase in NCI since acquisition 40,800
200,000
date
Noncontrolling interest at end of year 2 $ 240,800

Current assets $ 620,000 $ 300,000 $ 320,000
Trademarks 260,000 200,000 280,000
Patented
410,000 150,000 150,000
technology
Liabilities (390,000) (120,000) (120,000)
Revenues (900,000) (400,000)
Expenses 500,000 300,000
Investment
Not given
income
What is the consolidated trademarks balance? $508,000

Explanation
West trademark balance $260,000
Solar trademark balance 200,000
Acquisition-date fair value allocation 60,000
Excess fair value amortization for two years (12,000)
Consolidated trademarks $508,000
On January 1, Park Corporation and Strand Corporation had condensed balance sheets as
follows:
Park Strand
Current assets $ 70,000 $20,000
Noncurrent assets 90,000 40,000
Total assets $160,000 $60,000
Current liabilities $ 30,000 $10,000
Long-term debt 50,000
Stockholders' equity 80,000 50,000
Total liabilities and equities$160,000 $60,000
On January 2, Park borrowed $60,000 and used the proceeds to obtain 80 percent of the
outstanding common shares of Strand. The acquisition price was considered proportionate to
Strand’s total fair value. The $60,000 debt is payable in 10 equal annual principal payments,
plus interest, beginning December 31. The excess fair value of the investment over the
underlying book value of the acquired net assets is allocated to inventory (60 percent) and to
goodwill (40 percent).
On a consolidated balance sheet as of January 2, what should be the amount
for current assets? $105,000
Explanation
Acquisition-date fair value ($60,000

$ 75,000
÷ 80%)
Strand's book value (50,000)
Fair value in excess of book value $ 25,000
Excess assigned to inventory (60%) $15,000
Excess assigned to goodwill (40%) $10,000
Park current assets $ 70,000
Strand current assets 20,000
Excess inventory fair value 15,000
Consolidated current assets $105,000
follows:
Park Strand
Total assets $160,000 $60,000
for noncurrent assets? $140,000
Explanation
Park noncurrent assets $ 90,000
Strand noncurrent assets 40,000
Excess fair value to goodwill 10,000
Consolidated noncurrent assets $140,000

follows:
Park Strand
Total assets $160,000 $60,000
for current liabilities? $46,000
Explanation
Add the two book values and include 10% (the $6,000 current portion) of the loan taken out by
Park to acquire Strand.
follows:
Park Strand
Total assets $160,000 $60,000
for noncurrent liabilities? $104,000
Explanation
Add the two book values and include 90% (the $54,000 noncurrent portion) of the loan taken out
by Park to acquire Strand.
follows:
Park Strand
Total assets $160,000 $60,000
for stockholders' equity? $95,000
Explanation
Park stockholders' equity $80,000
Noncontrolling interest at fair value (20% × $75,000) 15,000
Total stockholders' equity $95,000

When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book
value of $70,000 and a fair value of $100,000.
What amount should have been reported for the land in a consolidated
balance sheet at the acquisition date? $30,000
Explanation
FV $100,000 – BV $70,000 = $30,000.
When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book
value of $70,000 and a fair value of $100,000.
What is the total amount of excess land allocation at the acquisition date?
$100,000
Explanation
$100,000 FV of Land at Acquisition.
CH 4 Quiz 2
When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned
land with a book value of $70,000 and a fair value of $100,000
What is the amount of excess land allocation attributed to the controlling interest at the
acquisition date? $22,500
Explanation
FV – BV ($30,000) × .75 = $22,500.
When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned
land with a book value of $70,000 and a fair value of $100,000.
What is the amount of excess land allocation attributed to the noncontrolling interest at
the acquisition date? $7,500
MacHeath Inc. bought 60% of the outstanding common stock of Nomes Inc. in an
acquisition that resulted in the recognition of goodwill. Nomes owned a piece of
land that cost $250,000 but was worth $600,000 at the date of acquisition. What
value would be attributed to this land in a consolidated balance sheet at the date
of acquisition? $600,000
Explanation
FV of the Land $600,000
Kordel Inc. acquired 75% of the outstanding common stock of Raxston Corp.
Raxston currently owes Kordel $500,000 for inventory acquired over the past few
months. In preparing consolidated financial statements, what amount of
Raxston’s liability should be eliminated? $500,000
Explanation
BV & FV of the Existing Receivable $500,000
Keefe, Inc., a calendar-year corporation, acquires 70% of George Company on
September 1, 2019, and an additional 10% on January 1, 2020. Total annual
amortization of $6,000 relates to the first acquisition. George reports the following
figures for 2020:
Revenues $ 500,000
Expenses 400,000
Retained earnings, 1/1/20 300,000
Dividends paid 50,000
Common stock 200,000
Without regard for this investment, Keefe independently earns $300,000 in net income
during 2020.
All net income is earned evenly throughout the year.
What is the controlling interest in consolidated net income for 2020?
$375,200
Explanation
Keefe owns 80% of George for the entire year of 2020. Keefe’s share of consolidated net
income: 100,000 sub income – 6,000 amortization = 94,000 × .80= 75,200 from Sub + 300,000
internally generated
McGuire Company acquired 90 percent of Hogan Company on January 1,
2019, for $234,000 cash. This amount is reflective of Hogan’s total
acquisition-date fair value. Hogan's stockholders' equity consisted of common
stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's
net assets revealed the following:
Book Value Fair Value

Buildings (10-year
$10,000 $ 8,000
life)
Equipment (4-year life) 14,000 18,000
Land 5,000 12,000
Any excess consideration transferred over fair value is attributable to an

unamortized patent with a useful life of 5 years.
$26,000
Explanation
$234,000 / .90 = $260,000 × .10 = $26,000


Buildings (10-year
$10,000 $ 8,000
life)
Land 5,000 12,000

In consolidation at January 1, 2019, what adjustment is necessary for Hogan's Buildings
account?
$2,000 DECREASE
Explanation
FV $8,000 – BV $10,000 = <$2,000> Reduction


Buildings (10-year
$10,000 $ 8,000
life)
Land 5,000 12,000

In consolidation at December 31, 2019, what adjustment is necessary for

Hogan's Buildings account? $1,800 DECREASE
Explanation
<$2,000> Reduction – 2019 Excess Amortization of <$200> = <$1,800> Reduction

Buildings (10-year
$10,000 $ 8,000
life)
Land 5,000 12,000

In consolidation at December 31, 2020, what adjustment is necessary for
Hogan's Buildings account? $1,600 DECREASE
Explanation
<$1,800> 2019 BV – 2020 Excess Amortization of <$200> = <$1,600> Reduction


Buildings (10-year
$10,000 $ 8,000
life)
Land 5,000 12,000

In consolidation at January 1, 2019, what adjustment is necessary for Hogan's
Equipment account? $4,000 INCREASE
ExplanationFV $18,000 – BV $14,000 = Increase $4,000

CH 4 Homework
Mittelstaedt Inc., buys 60 percent of the outstanding stock of Sherry, Inc. Sherry
owns a piece of land that cost $212,000 but had a fair value of $549,000 at the
acquisition date. What value should be attributed to this land in a consolidated
balance sheet at the date of takeover? $549,000
Explanation
At the date control is obtained, the parent consolidates subsidiary assets at fair value ($549,000
in this case) regardless of the parent’s percentage ownership.
Jordan, Inc., holds 75 percent of the outstanding stock of Paxson Corporation.

Paxson currently owes Jordan $400,000 for inventory acquired over the past few
months. In preparing consolidated financial statements, what amount of this debt
should be eliminated? $400,000
Explanation
In consolidating the subsidiary's figures, all intra-entity balances must be eliminated in their
entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the
parent nonetheless controls it.
On January 1, 2017, Grand Haven, Inc., reports net assets of $760,000 although
equipment (with a four-year remaining life) having a book value of $440,000 is
worth $500,000 and an unrecorded patent is valued at $45,000. Van Buren
Corporation pays $692,000 on that date to acquire an 80 percent equity
ownership in Grand Haven. If the patent has a remaining life of nine years, at
what amount should the patent be reported on Van Buren's consolidated balance
sheet at December 31, 2018? $35,000
Explanation
An asset acquired in a business combination is initially valued at 100% acquisition-date fair
value and subsequently amortized its useful life
On January 1, 2017, Chamberlain Corporation pays $388,000 for a 60 percent

ownership in Neville. Annual excess fair-value amortization of $15,000 results
from the acquisition. On December 31, 2018, Neville reports revenues of
$400,000 and expenses of $300,000 and Chamberlain reports revenues of
$700,000 and expenses of $400,000. The parent figures contain no income from
the subsidiary. What is consolidated net income attributable to Chamberlain
Corporation? $351,000
Explanation
Excess acquisition-date fair value amortization (15,000)
Less: noncontrolling interest share($85,000 × 40%) (34,000)
Consolidated net income to Chamberlain Corporation$ 351,000
On January 1, 2016, Pride Corporation purchased 90 percent of the

outstanding voting shares of Star, Inc. for $540,000 cash. The acquisition-date
fair value of the noncontrolling interest was $60,000. At January 1, 2016,
Star’s net assets had a total carrying amount of $420,000. Equipment (eight-
year remaining life) was undervalued on Star’s financial records by $80,000.
Any remaining excess fair value over book value was attributed to a customer
list developed by Star (four-year remaining life), but not recorded on its books.
Star recorded net income of $70,000 in 2016 and $80,000 in 2017. Each year
since the acquisition, Star has declared a $20,000 dividend. At January 1,
2018, Pride’s retained earnings show a $250,000 balance.
Selected account balances for the two companies from their separate
operations were as follows:
Pride Star
2018 Revenues $498,000 $285,000
2018 Expenses 350,000 195,000
$203,000
Explanation
Consideration transferred by Pride$540,000
Noncontrolling interest fair value 60,000
Star acquisition-date fair value $600,000
Star book value 420,000
Excess fair over book value $180,000
Amort.
To equipment (8 year remaining life) $ 80,000 $10,000
To customer list (4 year remaining life) 100,000 25,000
$35,000
Combined revenues $783,000
Combined expenses $545,000
Excess fair value amortization 35,000 580,000
Consolidated net income $203,000
On January 1, 2016, Pride Corporation purchased 90 percent of the

outstanding voting shares of Star, Inc. for $540,000 cash. The acquisition-date
fair value of the noncontrolling interest was $60,000. At January 1, 2016,
Star’s net assets had a total carrying amount of $420,000. Equipment (eight-
year remaining life) was undervalued on Star’s financial records by $80,000.
Any remaining excess fair value over book value was attributed to a customer
list developed by Star (four-year remaining life), but not recorded on its books.
Star recorded net income of $70,000 in 2016 and $80,000 in 2017. Each year
since the acquisition, Star has declared a $20,000 dividend. At January 1,
2018, Pride’s retained earnings show a $250,000 balance.
Selected account balances for the two companies from their separate
operations were as follows:
Pride Star
2018 Revenues $498,000 $285,000
2018 Expenses 350,000 195,000
$250,000
Explanation
Under the equity method, consolidated RE = parent’s RE
James Company acquired 85 percent of Mark-Right Company on April 1. On its December 31

consolidated income statement, how should James account for Mark-Right’s revenues and
expenses that occurred before April 1?
Exclude 100 percent of the preacquisition revenues and 100 percent of the preacquisition expenses from their
respective consolidated totals
Amie, Inc., has 100,000 shares of $2 par value stock outstanding. Prairie Corporation acquired 30,000 of
Amie’s shares on January 1, 2015, for $120,000 when Amie’s net assets had a total fair value of
$350,000. On July 1, 2018, Prairie bought an additional 60,000 shares of Amie from a single stockholder
for $6 per share. Although Amie’s shares were selling in the $5 range around July 1, 2018, Prairie
forecasted that obtaining control of Amie would produce significant revenue synergies to justify the
premium price paid. If Amie’s identifiable net assets had a fair value of $500,000 at July 1, 2018, how
much goodwill should Prairie report in its postcombination consolidated balance sheet? $60,000
Explanation
Amie, Inc. fair value at July 1, 2018:
30% previously owned fair value (30,000 shares × $5)$150,000
60% new shares acquired (60,000 shares × $6) 360,000
10% NCI fair value (10,000 shares × $5) 50,000
Acquisition-date fair value $560,000
Net assets' fair value 500,000
Goodwill $ 60,000
On April 1, Pujols, Inc., exchanges $430,000 fair-value consideration for 70 percent

of the outstanding stock of Ramirez Corporation. The remaining 30 percent of the
outstanding shares continued to trade at a collective fair value of $165,000. Ramirez’s
identifiable assets and liabilities each had book values that equaled their fair values on
April 1 for a net total of $500,000. During the remainder of the year, Ramirez
generates revenues of $600,000 and expenses of $360,000 and declared no dividends.
On a December 31 consolidated balance sheet, what amount should be reported as
noncontrolling interest? $237,000
Explanation
Fair value of 30% noncontrolling interest on April 1 $165,000
30% of net income for remainder of year ($240,000 × 30%) 72,000
Noncontrolling interest December 31 $237,000
McKinley, Inc., owns 100 percent of Jackson Company’s 45,000 voting shares. On June 30, McKinley’s
internal accounting records show a $192,000 equity method adjusted balance for its investment in
Jackson. McKinley sells 15,000 of its Jackson shares on the open market for $80,000 on June 30. How
should McKinley record the excess of the sale proceeds over its carrying amount for the shares? Increase
its additional paid-in capital by $16,000.
Explanation
Proceeds of $80,000 less $64,000 (1/3 × $192,000) book value = $16,000
Control is maintained so excess proceeds go to APIC.
CH 5 Quiz 1
Edgar Co. acquired 60% of Stendall Co. on January 1, 2018. During 2018, Edgar
made several sales of inventory to Stendall. The cost and sales price of the goods
were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the
goods at the end of 2018. Consolidated cost of goods sold for 2018 was $2,140,000
due to a consolidating adjustment for intra-entity transfers less intra-entity gross profit
in Stendall’s ending inventory.
MC Qu. 2 How would consolidated cost of goods sold...
How would consolidated cost of goods sold have differed if the inventory transfers had
been for the same amount and cost, but from Stendall to Edgar?
ANSWER---Consolidated cost of goods sold would have remained $2,140,000

Explanation
$2,140,000 COGS is unaffected by intra-entity gross profits in Consolidated Ending Inventory
value
Edgar Co. acquired 60% of Stendall Co. on January 1, 2018. During 2018, Edgar
made several sales of inventory to Stendall. The cost and sales price of the goods
were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the
goods at the end of 2018. Consolidated cost of goods sold for 2018 was $2,140,000
due to a consolidating adjustment for intra-entity transfers less intra-entity gross profit
in Stendall’s ending inventory.
MC Qu. 3 How would net income attributable to the...
How would net income attributable to the noncontrolling interest be different if the transfers had
been for the same amount and cost, but from Stendall to Edgar?
Net income attributable to the noncontrolling interest would have decreased by $6,000
Explanation
$200,000 Revenue − $140,000 COGS = $60,000 Gross Profit on Intra-Entity Transfer × 25%
(Amount in Ending Inventory) = $15,000 Reduction in consolidated net income.
Consolidation Adjustment to Net Income × 40% for Noncontrolling Interest = $6,000 Reduction
in Net Income Attributable to the Noncontrolling Interest
On January 1, 2018, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the
year, Race sold to Gallow for $450,000 goods that cost $330,000. At year-end, Gallow owned 15% of the
goods transferred. Gallow reported net income of $204,000, and Race's net income was $806,000. Race
decided to use the equity method to account for this investment. Assuming there are no excess
amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net
income attributable to the noncontrolling interest?
Explanation
Subsidiary’s Net Income $204,000 × .20 (Noncontrolling Interest) = $40,800
Webb Co. acquired 100% of Rand Inc. on January 5, 2018. During 2018, Webb sold goods to Rand for
$2,400,000 that cost Webb $1,800,000. Rand still owned 40% of the goods at the end of the year. Cost of
goods sold was $10,800,000 for Webb and $6,400,000 for Rand. What was consolidated cost of goods
sold?
Explanation
Intra-Entity Gross Profit ($2,400,000 – $1,800,000) $600,000 × Intra-Entity Gross Profit
Remaining in Ending Inventory (40%) = $240,000
Consolidated COGS = Parent’s COGS ($10,800,000) + Subsidiary’s COGS ($6,400,000) –

COGS in Intra-Entity Transfer ($2,400,000) + Intra-Entity Gross Profit Deferred ($240,000) =
$15,040,000
Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2017. During 2017, Gentry sold Gaspard
Farms $625,000 of goods, which had cost $425,000. Gaspard Farms still owned 12% of the goods at the
end of the year. In 2018, Gentry sold goods with a cost of $800,000 to Gaspard Farms for $1,000,000,
and Gaspard Farms still owned 10% of the goods at year-end. For 2018, the cost of goods sold totaled
$5,400,000 for Gentry, and $1,200,000 for Gaspard Farms. What was consolidated cost of goods soldfor
2018?
Explanation
Intra-Entity Gross Profit ($1,000,000 – $800,000) $200,000 × Intra-Entity Gross Profit
Remaining in Ending Inventory (10%) = $20,000.
Consolidated COGS = Parent’s COGS ($5,400,000) + Subsidiary’s COGS ($1,200,000) – Total

COGS in Intra-Entity Transfer ($1,000,000) – Intra-Entity Gross Profit Deferred from 2017
($24,000) + Intra-Entity Gross Profit Deferred from 2018 ($20,000) = $5,596,000
X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2018, Kent made several
sales of inventory to X-Beams. The total selling price was $180,000 and the cost was $100,000. At the
end of the year, 20% of the goods were still in X-Beams' inventory. Kent's reported net income was
$300,000. Assuming there are no excess amortizations associated with the consolidation, and no other
intra-entity asset transfers, what was the net income attributable to the noncontrolling interest in Kent?
Explanation
Subsidiary’s Net Income ($300,000) – Intra-Entity Gross Profit Deferred ($16,000) = $284,000 ×
Noncontrolling Interest (30%) = $85,200 Net Income Attributable to the Noncontrolling Interest
During 2017, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The
inventory cost $30,000 and was sold to Lord for $44,000. For consolidation reporting
purposes, when is the $14,000 intra-entity gross profit recognized?
ANSWER: When goods are transferred to a third party by Lord
Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2017, Devin made frequent
sales of inventory to Bauerly. There was deferred intra-entity gross profit of $40,000 in the beginning
inventory and $25,000 of intra-entity gross profit at the end of the year. Devin reported net income of
$137,000 for 2017. Bauerly decided to use the equity method to account for the investment. Assuming
there are no excess amortizations associated with the consolidation, and no other intra-entity asset
transfers, what is the net income attributable to the noncontrolling interest for 2017?
Explanation
Subsidiary’s Net Income $137,000 + Recognition of prior year Deferred Recognized Gross profit
$40,000 – Deferred gross profit at end of the year $25,000 = $152,000 X Noncontrolling Interest
30% = $45,600 Net Income Attributable to the Noncontrolling Interest
Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of inventory to Gibson.
The sales, which include a markup over cost of 25%, were $420,000 in 2017 and $500,000 in 2018. At
the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was $912,000 during
2018. Assuming there are no excess amortizations associated with the consolidation, and no other intra-
entity asset transfers, what was the net income attributable to the noncontrolling interest for 2018?
Explanation
Gross Profit Rate = Gross Profit ÷ COGS = GPR ÷ (1 – GPR) = 25% ÷ (1 + 25%) = .2
Intra-Entity Gross Profit = Transfer Price × GPR (.2)
Gross Profit 2017: 84,000 × 30% = $25,200
Gross Profit 2018: 100,000 × 30% = $30,000
Subsidiary’s Net Income ($912,000) + Intra-Entity Gross Profit in Ending Inventory for 2017
($25,200) – Intra-Entity Gross Profit in 2018 Inventory Deferred ($30,000) = $907,200 ×
Noncontrolling Interest 10% = $90,720 Net Income Attributable to the Noncontrolling Interest
Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2018.
During the year, Yukon made sales of inventory to Ontario. The inventory cost Yukon $260,000 and was
sold to Ontario for $390,000. Ontario held $60,000 of the goods in its inventory at the end of the year.
The amount of intra-entity gross profit for which recognition is deferred, and should therefore be
eliminated in the consolidation process at the end of 2018, is:
Explanation
Intra-Entity Gross Profit ($390,000 - $260,000) $130,000 X Intra-Entity Gross Profit Remaining
In Ending Inventory ($60,000 / $390,000) = $20,000
CH 5 QUIZ 2
Prince Co. owned 80% of Kile Corp.'s common stock. During October 2018, Kile sold merchandise to
Prince for $140,000. At December 31, 2018, 50% of this merchandise remained in Prince's inventory.
For 2018, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of
intra-entity gross profit remaining in ending inventory at December 31, 2018 that should be eliminated in
the consolidation process is:
Explanation
Intra-Entity Gross Profit ($140,000 X .40 (Kile GP Percentage)) $56,000 X Intra-Entity transfers
Remaining In Ending Inventory (50%) = $28,000
Pot Co. holds 90% of the common stock of Skillet Co. During 2018, Pot reported
sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet
had sales of $420,000 and cost of goods sold of $252,000.
MC Qu. 19 Included in the amounts for...
Included in the amounts for Pot’s sales were Pot’s sales of merchandise to Skillet for
$140,000. There were no intra-entity transfers from Skillet to Pot. Intra-entity
transfers had the same markup as sales to outsiders. Skillet still held 40% of the intra-
entity gross profit remaining in ending inventory at the end of 2018. What are
consolidated sales and cost of goods sold, respectively for 2018?
Explanation
Consolidated Sales = Parent’s Sales ($1,120,000) + Subsidiary’s Sales ($420,000) = $1,540,000
– Intra-Entity Transfers ($140,000) = $1,400,000
Consolidated COGS = Parent’s COGS ($840,000) + Subsidiary’s COGS ($252,000) – Total

Intra-Entity Inventory transfers ($140,000) + Deferred Unrecognized Gross Profit ($14,000) =
$966,000
Included in the amounts for Skillet’s sales were intra-entity gross profits related to Skillet’s intra-
entity transfer of merchandise to Pot for $140,000. There were no intra-entity transfers from Pot
to Skillet. Intra-entity transfers had the same markup as sales to outsiders. Pot still had 40% of
the intra-entity gross profit remaining in ending inventory at the end of 2018. What
are consolidated sales and cost of goods sold for 2018?
Explanation
Consolidated Sales = Parent’s Sales ($1,120,000) + Subsidiary’s Sales ($420,000) = $1,540,000
– Intra-Entity Transfers ($140,000) = $1,400,000
Consolidated COGS = Parent’s COGS ($840,000) + Subsidiary’s COGS ($252,000) – Total

Intra-Entity Gross Profit Remaining in Ending Inventory ($140,000) + Intra-Entity Gross Profit
Deferred ($22,400) = $974,400
Included in the amounts for Pot’s sales were Pot’s sales for merchandise to Skillet for
$140,000. There were no sales from Skillet to Pot. Intra-entity transfers had the same
markup as sales to outsiders. Skillet had resold all of the intra-entity transfers
(purchases) from Pot to outside parties during 2018. What are consolidated sales and
cost of goods sold for 2018?
Explanation
Consolidated Sales = Parent’s Sales $1,120,000 + Subsidiary’s sales $420,000 = $1,540,000 –
Intra-Entity Transfers $140,000 = $1,400,000
Consolidated COGS = Parent’s COGS $840,000 + Subsidiary’s COGS $252,000 – Total Intra-
Entity Transfers $140,000 = $952,000
On January 1, 2018, Pride, Inc. acquired 80% of the outstanding voting common stock
of Strong Corp. for $364,000. There is no active market for Strong’s stock. Of this
payment, $28,000 was allocated to equipment (with a five-year life) that had been
undervalued on Strong's books by $35,000. Any remaining excess was attributable to
goodwill, which has not been impaired.
As of December 31, 2018, before preparing the consolidated worksheet, the financial
statements appeared as follows:
Strong
Pride, Inc. Corp.
Revenues $ 420,000 $ 280,000
Cost of goods sold (196,000) (112,000)
Operating expenses (28,000) (14,000)
Net income $ 196,000) $ 154,000
Retained earnings, 1/1/18 $ 420,000 $ 210,000
Net income (above) 196,000 154,000
Dividends paid 0 0
Cash and receivables $ 294,000 $ 126,000
Inventory 210,000 154,000
Investment in Strong Corp 364,000 0
Equipment (net) 616,000 420,000
Total assets $1,484,000 $ 700,000
Liabilities $ 588,000 $ 196,000
Common stock 280,000 140,000
Retained earnings, 12/31/18 (above) 616,000 364,000
Total liabilities and stockholders’
$1,484,000 $ 700,000
equity
During 2018, Pride bought inventory for $112,000 and sold it to Strong for $140,000.
Only half of the inventory purchase price had been remitted to Pride by Strong at
year-end. As of December 31, 2018, 60% of these goods remained in the company's
possession.
What is the total of consolidated revenues? Explanation
Parent’s Revenue ($420,000) + Subsidiary’s Revenue ($280,000) – Intra-Entity Transfers
($140,000) = $560,000
Strong
Pride, Inc. Corp.
Revenues $ 420,000 $ 280,000
Net income $ 196,000) $ 154,000
Dividends paid 0 0
Inventory 210,000 154,000
Equipment (net) 616,000 420,000
Total assets $1,484,000 $ 700,000
Liabilities $ 588,000 $ 196,000
Common stock 280,000 140,000
$1,484,000 $ 700,000
equity
possession.
MC Qu. 24 What is the total of consolidated...
What is the total of consolidated operating expenses?Explanation

Parent’s Operating Expenses ($28,000) + Subsidiary’s Operating Expenses ($14,000) + Excess
Amortization on Equipment (($35,000 / 5) $7,000) = $49,000
Strong
Pride, Inc. Corp.
Revenues $ 420,000 $ 280,000
Net income $ 196,000) $ 154,000
Dividends paid 0 0
Inventory 210,000 154,000
Equipment (net) 616,000 420,000
Total assets $1,484,000 $ 700,000
Liabilities $ 588,000 $ 196,000
Common stock 280,000 140,000
$1,484,000 $ 700,000
equity
possession.
MC Qu. 25 What is the total of consolidated...
What is the total of consolidated cost of goods sold?ExplanationConsolidated COGS = Parent’s COGS
($196,000) + Subsidiary’s COGS ($112,000) – Total Intra-Entity Transfer ($140,000) + Intra-Entity Transfer
Goods Remaining in Ending Inventory ($28,000 X .60 = $16,800) = $184,800
Strong
Pride, Inc. Corp.
Revenues $ 420,000 $ 280,000
Net income $ 196,000) $ 154,000
Dividends paid 0 0
Inventory 210,000 154,000
Equipment (net) 616,000 420,000
Total assets $1,484,000 $ 700,000
Liabilities $ 588,000 $ 196,000
Common stock 280,000 140,000
$1,484,000 $ 700,000
equity
possession.
MC Qu. 26 What is the consolidated total of...
What is the consolidated total of noncontrolling interest appearing in the balance

sheet?Explanation[$364,000 / 80% = $455,000 + Net Income ($154,000 - $7,000) $147,000] $602,000 X
.20 = $120,400
Strong
Pride, Inc. Corp.
Revenues $ 420,000 $ 280,000
Net income $ 196,000) $ 154,000
Dividends paid 0 0
Inventory 210,000 154,000
Equipment (net) 616,000 420,000
Total assets $1,484,000 $ 700,000
Liabilities $ 588,000 $ 196,000
Common stock 280,000 140,000
$1,484,000 $ 700,000
equity
possession.
MC Qu. 28 What is the consolidated total for...
What is the consolidated total for inventory at December 31, 2018?Explanation

BV Parent’s Inventory $210,000 + BV Subsidiary’s Inventory $154,000 – Deferred Recognition
of Intra-Entity Gross Profit on Inventory Transfer ($28,000 X .60) $16,800 = $347,200
Strickland Company sells inventory to its parent, Carter Company, at a profit during
2017. Carter sells one-third of the inventory in 2017.
MC Qu. 29 In the consolidation worksheet for 2017, which...
In the consolidation worksheet for 2017, which of the following accounts would be debited to
eliminate the intra-entity transfer of inventory?
Sales
CH 5 HOMEWORK
What is the primary reason we defer financial statement recognition of gross profits on intra-entity sales
for goods that remain within the consolidated entity at year-end?
When intra-entity sales remain in ending inventory, control of the goods has not changed.
James Corporation owns 80 percent of Carl Corporation's common stock. During October, Carl sold
merchandise to James for $250,000. At December 31, 40 percent of this merchandise remains in James's
inventory. Gross profit percentages were 20 percent for James and 30 percent for Carl. The amount of
intra-entity gross profit in inventory at December 31 that should be eliminated in the consolidation
process is:
Explanation
Merchandise remaining in James’s inventory $250,000 × 40% = $100,000.
Intra-entity gross profit (based on subsidiary's gross profit rate as the seller) $100,000 × 30% =
$30,000. James’s ownership percentage of Carl has no impact on this computation.
In computing the noncontrolling interest’s share of consolidated net income, how should the subsidiary's
net income be adjusted for intra-entity transfers?
The subsidiary’s reported net income is adjusted for the impact of upstream transfers prior to computing the
noncontrolling interest’s allocation.
Parkette, Inc., acquired a 60 percent interest in Skybox Company several years ago. During 2017, Skybox
sold inventory costing $160,000 to Parkette for $200,000. A total of 18 percent of this inventory was not
sold to outsiders until 2018. During 2018, Skybox sold inventory costing $297,500 to Parkette for
$350,000. A total of 30 percent of this inventory was not sold to outsiders until 2019. In 2018, Parkette
reported cost of goods sold of $607,500 while Skybox reported $450,000. What is the consolidated cost
of goods sold in 2018?
Explanation
Intra-Entity Gross Profit, 12/31/17
Intra-entity gross profit ($200,000 –

$40,000
$160,000)
Inventory remaining at year's end 18%
Intra-entity gross profit, 12/31/17 $ 7,200
Intra-entity gross profit ($350,000 – $297,500) $52,500

Intra-entity gross profit in inventory,
$15,750
12/31/18
Consolidated cost of goods sold
Parent balance $ 607,500

Subsidiary balance 450,000
Remove intra-entity transfer (350,000)
Recognize 2017 deferred gross
(7,200)
profit
Defer 2018 intra-entity gross
15,750
profit
Cost of goods sold $ 716,050
Top Company holds 90 percent of Bottom Company’s common stock. In the current year, Top reports
sales of $800,000 and cost of goods sold of $600,000. For this same period, Bottom has sales of $300,000
and cost of goods sold of $180,000. During the current year, Top sold merchandise to Bottom for
$100,000. The subsidiary still possesses 40 percent of this inventory at the current year-end. Top had
established the transfer price based on its normal gross profit rate. What are the consolidated sales and
cost of goods sold?
Explanation
Intra-entity sales and purchases of $100,000 must be eliminated. Additionally, an intra-entity
gross profit of $10,000 must be removed from ending inventory based on a gross profit rate of 25
percent ($200,000 gross profit ÷ $800,000 sales) which is multiplied by the $40,000 ending
balance. This deferral increases cost of goods sold because ending inventory is a negative
component of that computation. Thus, cost of goods sold for consolidation purposes is $690,000
($600,000 + $180,000 – $100,000 + $10,000). $1,000,000 and $690,000
Top Company holds 90 percent of Bottom Company’s common stock. In the current year, Top
reports sales of $800,000 and cost of goods sold of $600,000. For this same period, Bottom has
sales of $300,000 and cost of goods sold of $180,000. During the current year, Bottom sold
merchandise to Top for $100,000. The parent still possesses 40 percent of this inventory at the
current year-end. Bottom had established the transfer price based on its normal gross profit rate.
What are the consolidated sales and cost of goods sold? $1,000,000 and $696,000
Explanation
percent ($120,000 gross profit / $300,000 Thus, the intra-entity gross profit to be deferred is
$16,000 ($40,000 × 40%). Consequently, consolidated cost of goods sold is $696,000 ($600,000
+ $180,000 – $100,000 + $16,000).
Angela, Inc., holds a 90 percent interest in Corby Company. During 2017, Corby sold inventory costing
$77,000 to Angela for $110,000. Of this inventory, $40,000 worth was not sold to outsiders until 2018.
During 2018, Corby sold inventory costing $72,000 to Angela for $120,000. A total of $50,000 of this
inventory was not sold to outsiders until 2019. In 2018, Angela reported separate net income of $150,000
while Corby's net income was $90,000 after excess amortizations. What is the noncontrolling interest in
the 2018 income of the subsidiary?
Explanation
Intra-entity gross profit, 12/31/17
Ending inventory $40,000

Gross profit rate ($33,000 ÷ $110,000) 30%
Intra-entity gross profit in ending inventory,
$12,000
12/31/17
Intra-entity gross profit, 12/31/18
Ending inventory $50,000

Gross profit rate ($48,000 ÷ $120,000) 40%
Intra-entity gross profit in ending inventory,
$20,000
12/31/18
Net Income Attributable To Noncontrolling Interest
Reported net income for 2018 $ 90,000

Intra-entity gross profit deferred in
12,000
2017
Deferral of 2018 intra-entity gross
(20,000)
profit
Adjusted net income of subsidiary $ 82,000
Outside ownership 10%
Noncontrolling interest $ 8,200
Use the following information to answer questions 10-15
On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for $260,000
cash consideration. The remaining 20 percent of Suarez had an acquisition-date fair value of
$65,000. On January 1, Suarez possessed equipment (five-year remaining life) that was
undervalued on its books by $25,000. Suarez also had developed several secret formulas that
Jarel assessed at $50,000. These formulas, although not recorded on Suarez's financial records,
were estimated to have a 20-year future life.
As of December 31, the financial statements appeared as follows:
Jarel Suarez
Revenues $ (300,000) $(200,000)
Cost of goods sold 140,000 80,000
Expenses 20,000 10,000
Net income $ (140,000) $(110,000)
Retained earnings, 1/1 $ (300,000) $(150,000)
Net income (140,000) (110,000)
Dividends declared 0 0
Inventory 150,000 110,000
Investment in Suarez 260,000 0
Equipment (net) 440,000 300,000
Total assets $ 1,060,000 $ 500,000
Liabilities $ (420,000) $(140,000)
Common stock (200,000) (100,000)
Retained earnings, 12/31 (440,000) (260,000)
Total liabilities and equities $(1,060,000) $(500,000)
Included in the above statements, Jarel sold inventory costing $80,000 to Suarez for $100,000.
Of these goods, Suarez still owns 60 percent on December 31.
What is the total of consolidated revenues? ANSWER: $400,000.
Explanation
Add the two book values and remove $100,000 intra-entity transfers.
Use the following information to answer questions 10-15
On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for $260,000
cash consideration. The remaining 20 percent of Suarez had an acquisition-date fair value of
$65,000. On January 1, Suarez possessed equipment (five-year remaining life) that was
undervalued on its books by $25,000. Suarez also had developed several secret formulas that
Jarel assessed at $50,000. These formulas, although not recorded on Suarez's financial records,
were estimated to have a 20-year future life.
Jarel Suarez
Revenues $ (300,000) $(200,000)
Expenses 20,000 10,000
Net income $ (140,000) $(110,000)
Net income (140,000) (110,000)
Inventory 150,000 110,000
Equipment (net) 440,000 300,000
Total assets $ 1,060,000 $ 500,000
Liabilities $ (420,000) $(140,000)
Common stock (200,000) (100,000)
Total liabilities and equities $(1,060,000) $(500,000)

Included in the above statements, Jarel sold inventory costing $80,000 to Suarez for $100,000.
Of these goods, Suarez still owns 60 percent on December 31. What is the total of consolidated
cost of goods sold?
Explanation
Intra−entity gross profit ($100,000 − $80,000)$20,000

Intra−entity gross profit in ending inventory $12,000

Remove intra−entity transfer (100,000)
Defer intra−entity gross profit (above) 12,000
On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for
$260,000 cash consideration. The remaining 20 percent of Suarez had an acquisition-
date fair value of $65,000. On January 1, Suarez possessed equipment (five-year
remaining life) that was undervalued on its books by $25,000. Suarez also had
developed several secret formulas that Jarel assessed at $50,000. These formulas,
although not recorded on Suarez's financial records, were estimated to have a 20-year
future life.
Jarel Suarez
Revenues $ (300,000) $(200,000)
Expenses 20,000 10,000
Net income $ (140,000) $(110,000)
Net income (140,000) (110,000)
Inventory 150,000 110,000
Equipment (net) 440,000 300,000
Total assets $ 1,060,000 $ 500,000
Liabilities $ (420,000) $(140,000)
Common stock (200,000) (100,000)
Total liabilities and
$(1,060,000) $(500,000)
equities
Included in the above statements, Jarel sold inventory costing $80,000 to Suarez for
$100,000. Of these goods, Suarez still owns 60 percent on December 31.
Problem 5-12 (LO 5-1)
What is the total of consolidated expenses?
Explanation
Consideration transferred $ 260,000

Noncontrolling interest fair
65,000
value
Suarez total fair value $ 325,000
Book value of net assets (250,000)
Excess fair over book value $ 75,000
Remaining Annual Excess
Excess fair value to
undervalued assets: Life Amortizations
Equipment $ 25,000 5 years $ 5,000
20
Secret formulas 50,000 2,500
years
Total 0 $ 7,500
Consolidated expenses = $37,500 (add the two book values and include current year amortization
expense)
FINAL EXAM CH’S 1-5

On January 1, Puckett Company paid $1.85 million for 92,500 shares of Harrison’s voting common stock,
which represents a 40 percent investment. No allocation to goodwill or other specific account was made.
Significant influence over Harrison is achieved by this acquisition and so Puckett applies the equity
method. Harrison distributed a dividend of $3 per share during the year and reported net income of
$608,000. What is the balance in the Investment in Harrison account found in Puckett’s financial records
as of December 31?
Explanation
Acquisition price $1,850,000

Equity income ($608,000 × 40%) 243,200
Dividends (92,500 shares × $3) (277,500)
Investment in Harrison Corporation as of December
$1,815,700
31
In January 2017, Domingo, Inc., acquired 20 percent of the outstanding common stock of
Martes, Inc., for $848,000. This investment gave Domingo the ability to exercise significant
influence over Martes, whose balance sheet on that date showed total assets of $4,669,000 with
liabilities of $989,000. Any excess of cost over book value of the investment was attributed to a
patent having a remaining useful life of 10 years.
In 2017, Martes reported net income of $194,000. In 2018, Martes reported net income of
$237,000. Dividends of $114,000 were declared in each of these two years. What is the equity
method balance of Domingo’s Investment in Martes, Inc., at December 31, 2018? 866,200
Explanation
Acquisition price $848,000

Income accruals: 2017—$194,000 × 20% 38,800
2018—$237,000 × 20% 47,400
Amortization (see below): 2017 (11,200)
Amortization: 2018 (11,200)
Dividends: 2017—$114,000 × 20% (22,800)
2018—$114,000 × 20% (22,800)
Investment in Martes, December 31, 2018$866,200
Acquisition price of Martes $ 848,000
Acquired net assets (book value) ($3,680,000 × 20%) (736,000)
Excess cost over book value to patent $ 112,000
Annual amortization (10 year remaining life) $ 11,200
Franklin purchases 40 percent of Johnson Company on January 1 for $638,700. Although Franklin did not
use it, this acquisition gave Franklin the ability to apply significant influence to Johnson’s operating and
financing policies. Johnson reports assets on that date of $1,494,000 with liabilities of $566,000. One
building with a seven-year remaining life life is undervalued on Johnson’s books by $306,250. Also,
Johnson’s book value for its trademark (10-year life) is undervalued by $362,500. During the year,
Johnson reports net income of $91,000 while declaring dividends of $30,000. What is the Investment in
Johnson Company balance (equity method) in Franklin’s financial records as of December 31?
Explanation
Purchase price of Johnson

$ 638,700
stock
Book value of Johnson
(371,200)
($928,000 × 40%)
Cost in excess of book
$ 267,500
value
Payment identified with Annual
undervalued Life Amortization
7
Building ($306,250 × 40%) 122,500 $ 17,500
yrs.
10
Trademark ($362,500 × 40%) 145,000 14,500
yrs.
Total $ 0 $ 32,000
Investment purchase price $638,700

Basic income accrual ($91,000 × 40%) 36,400
Amortization (above) (32,000)
Dividends declared ($30,000 × 40%) (12,000)
Investment in Johnson $631,100
Evan Company reports net income of $182,000 each year and declares an annual cash
dividend of $90,000. The company holds net assets of $1,500,000 on January 1, 2017.
On that date, Shalina purchases 40 percent of Evan's outstanding common stock for
$735,000, which gives it the ability to significantly influence Evan. At the purchase
date, the excess of Shalina’s cost over its proportionate share of Evan’s book value
was assigned to goodwill. On December 31, 2019, what is the Investment in Evan
Company balance (equity method) in Shalina’s financial records?
Explanation
The 2017 purchase is reported using the equity method.
Purchase price of Evan stock $ 735,000

Book value of Evan stock ($1,500,000 × 40%) (600,000)
Goodwill $ 135,000
Life of goodwill indefinite
Annual amortization (0)
Cost on January 1, 2017 $735,000

2017 Income accrued ($182,000 × 40%) 72,800
2017 Dividend ($90,000 × 40%) (36,000)
2018 Income accrued ($182,000 × 40%) 72,800
2018 Dividend ($90,000 × 40%) (36,000)
2019 Income accrued ($182,000 × 40%) 72,800
2019 Dividend ($90,000 × 40%) (36,000)
Investment in Evan, 12/31/19 $845,400
On July 1, TruData Company issues 11,400 shares of its common stock with a $5 par
value and a $45 fair value in exchange for all of Webstat Company’s outstanding
voting shares. Webstat’s precombination book and fair values are shown below along
with book values for TruData’s accounts.
TruData Webstat Webstat

Book Book Fair
Values Values Values
Revenues (1/1 to 7/1) $ (257,000) $(132,000)
Expenses (1/1 to 7/1) 182,000 88,000
Cash and receivables 152,000 62,000 $ 62,000
Inventory 174,000 144,000 190,000
Patented technology (net) 222,000 186,000 208,000
Land 420,000 208,000 230,000
Buildings and equipment
82,000 86,000 86,000
(net)
Liabilities (532,000) (362,000) (344,000)
Common stock (306,000) (80,000)
Additional paid-in
(11,000) (32,000)
capital
rev: 05_10_2017_QC_CS-88998, 05_18_2017_QC_CS-89463

Problem 2-15 (LO 2-5, 2-9, 2-10)
On its acquisition-date consolidated balance sheet, what amount should TruData report as
goodwill?
Explanation
Consideration transferred (fair value) $ 513,000

Book value of subsidiary (assets minus
(324,000)
liabilities)
Fair value in excess of book value 189,000
Allocation of excess fair over book value
identified with specific accounts:
Inventory 46,000
Patented technology 22,000
Land 22,000
Long-term liabilities 18,000
Goodwill $ 81,000

Book Book Fair
Revenues (1/1 to 7/1) $ (257,000) $(132,000)
Expenses (1/1 to 7/1) 182,000 88,000
Inventory 174,000 144,000 190,000
Land 420,000 208,000 230,000
82,000 86,000 86,000
(net)
Liabilities (532,000) (362,000) (344,000)
Common stock (306,000) (80,000)
Additional paid-in
(11,000) (32,000)
capital
rev: 05_10_2017_QC_CS-88998, 05_18_2017_QC_CS-89463

On its acquisition-date consolidated balance sheet, what amount should TruData

report as patented technology (net)?
Explanation
TruData patented technology $222,000

Webstat patented technology (fair value) 208,000
Acquisition-date consolidated balance sheet
$430,000
amount

Book Book Fair
Revenues (1/1 to 7/1) $ (257,000) $(132,000)
Expenses (1/1 to 7/1) 182,000 88,000
Inventory 174,000 144,000 190,000
Land 420,000 208,000 230,000
82,000 86,000 86,000
(net)
Liabilities (532,000) (362,000) (344,000)
Common stock (306,000) (80,000)
Additional paid-in
(11,000) (32,000)
capital
rev: 05_10_2017_QC_CS-88998, 05_18_2017_QC_CS-89463

Problem 2-17 (LO 2-5, 2-7)
On its acquisition-date consolidated balance sheet, what amount should TruData

report as common stock?
Explanation
TruData's common stock before acquisition $306,000

Common stock issued (par value) 57,000
$363,000
amount
Book Book Fair
Revenues (1/1 to 7/1) $ (257,000) $(132,000)
Expenses (1/1 to 7/1) 182,000 88,000
Inventory 174,000 144,000 190,000
Land 420,000 208,000 230,000
82,000 86,000 86,000
(net)
Liabilities (532,000) (362,000) (344,000)
Common stock (306,000) (80,000)
Additional paid-in
(11,000) (32,000)
capital
rev: 05_10_2017_QC_CS-88998, 05_18_2017_QC_CS-89463

Problem 2-18 (LO 2-5, 2-7)
On its acquisition-date consolidated balance sheet, what amount should TruData report as
retained earnings as of July 1?
Explanation
TruData’s 1/1 retained earnings $126,000

TruData’s income (1/1 to 7/1) 75,000
$201,000
amount
On January 1, 2018, Jay Company acquired all the outstanding ownership shares of Zee
Company. In assessing Zee’s acquisition-date fair values, Jay concluded that the carrying value
of Zee’s long-term debt (8-year remaining life) was less than its fair value by $28,800. At
December 31, 2018, Zee Company’s accounts show interest expense of $13,630 and long-term
debt of $470,000. What amounts of interest expense and long-term debt should appear on the
December 31, 2018, consolidated financial statements of Jay and its subsidiary Zee? Option D
Interest expense Long-term debt

a. $17,230 $498,800
b. $17,230 $495,200
c. $10,030 $498,800
d. $10,030 $495,200
Explanation Interest
expense is reduced by $3,600 resulting from
the acquisition-date fair value of long-term debt allocation.
The debt is increased by $28,800 less $3,600 (1 year of
interest amortization).
Paar Corporation bought 100 percent of Kimmel, Inc., on January 1, 2015. On that date, Paar’s equipment
(10-year life) has a book value of $412,500 but a fair value of $512,500. Kimmel has equipment (10-year
life) with a book value of $279,000 but a fair value of $372,000. Paar uses the equity method to record its
investment in Kimmel. On December 31, 2017, Paar has equipment with a book value of $288,750 but a
fair value of $429,950. Kimmel has equipment with a book value of $195,300 but a fair value of
$354,000. What is the consolidated balance for the Equipment account as of December 31, 2017?
Explanation
288,75
Paar’s equipment book value—12/31/17 $
0
195,30
Kimmel’s equipment book value—12/31/17
0
Original acquisition-date allocation to Kimmel's
equipment
($372,000 − $279,000) 93,000
Amortization of allocation (27,90
($93,000 ÷ 10 years for 3 years) 0)
Consolidated equipment $ 549,150
Dosmann, Inc., bought all outstanding shares of Lizzi Corporation on January 1, 2016, for $702,000 in
cash. This portion of the consideration transferred results in a fair-value allocation of $52,500 to
equipment and goodwill of $88,500. At the acquisition date, Dosmann also agrees to pay Lizzi’s previous
owners an additional $203,000 on January 1, 2018, if Lizzi earns a 10 percent return on the fair value of
its assets in 2016 and 2017. Lizzi’s profits exceed this threshold in both years. Which of the following is
true?
The fair value of the expected contingent payment increases goodwill at the acquisition date.
On January 1, 2016, Phoenix Co. acquired 100 percent of the outstanding voting
shares of Sedona Inc. for $662,000 cash. At January 1, 2016, Sedona’s net assets had
a total carrying amount of $463,400. Equipment (eight-year remaining life) was
undervalued on Sedona’s financial records by $96,000. Any remaining excess fair
over book value was attributed to a customer list developed by Sedona (four-year
remaining life), but not recorded on its books. Phoenix applies the equity method to
account for its investment in Sedona. Each year since the acquisition, Sedona has
declared a $20,500 dividend. Sedona recorded net income of $99,500 in 2016 and
$110,300 in 2017.
Selected account balances from the two companies’ individual records were as
follows:
Phoenix Sedona
2018 Revenues $544,000 $381,000
2018 Expenses 387,000 280,000
2018 Income from Sedona 64,500
Retained earnings 12/31/18 271,500 224,500
Explanation
Phoenix revenues $544,000

Phoenix expenses 387,000
Net income before Sedona effect 157,000
Equity income from Sedona 64,500
Mittelstaedt Inc., buys 60 percent of the outstanding stock of Sherry, Inc. Sherry owns
a piece of land that cost $210,000 but had a fair value of $588,000 at the acquisition
date. What value should be attributed to this land in a consolidated balance sheet at
the date of takeover?
Explanation
At the date control is obtained, the parent consolidates subsidiary assets at fair value ($588,000 in this case)
regardless of the parent’s percentage ownership.
Jordan, Inc., holds 75 percent of the outstanding stock of Paxson Corporation. Paxson currently owes
Jordan $565,000 for inventory acquired over the past few months. In preparing consolidated financial
statements, what amount of this debt should be eliminated? $565,000
Explanation
In consolidating the subsidiary's figures, all intra-entity balances must be eliminated in their entirety for
external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless
controls it.
On January 1, 2017, Grand Haven, Inc., reports net assets of $790,800 although equipment (with a four-
year remaining life) having a book value of $452,000 is worth $520,000 and an unrecorded patent is
valued at $54,900. Van Buren Corporation pays $730,960 on that date to acquire an 80 percent equity
ownership in Grand Haven. If the patent has a remaining life of nine years, at what amount should the
patent be reported on Van Buren's consolidated balance sheet at December 31, 2018?
Explanation
An asset acquired in a business combination is initially valued at 100% acquisition-date fair value and
subsequently amortized its useful life.
Patent fair value at January 1, 2017 $ 54,900

Amortization for 2 years (9 year remaining life) (12,200)
Patent reported amount December 31, 2018 $ 42,700
On January 1, 2017, Chamberlain Corporation pays $690,400 for a 60 percent ownership in Neville.
Annual excess fair-value amortization of $18,400 results from the acquisition. On December 31, 2018,
Neville reports revenues of $582,000 and expenses of $398,000 and Chamberlain reports revenues of
$762,000 and expenses of $432,000. The parent figures contain no income from the subsidiary. What is
consolidated net income attributable to Chamberlain Corporation?
Explanation

Less: noncontrolling interest share ($165,600 × 40%) (66,240)
Consolidated net income to Chamberlain Corporation $ 429,360
James Corporation owns 80 percent of Carl Corporation's common stock. During October, Carl sold
merchandise to James for $222,500. At December 31, 60 percent of this merchandise remains in James's
inventory. Gross profit percentages were 10 percent for James and 20 percent for Carl. The amount of
intra-entity gross profit in inventory at December 31 that should be eliminated in the consolidation
process is: $26,700
Explanation
Merchandise remaining in James’s inventory $222,500 × 60% = $133,500.
Intra-entity gross profit (based on subsidiary's gross profit rate as the seller) $133,500 × 20% =
$26,700. James’s ownership percentage of Carl has no impact on this computation.
Parkette, Inc., acquired a 60 percent interest in Skybox Company several years ago.
During 2017, Skybox sold inventory costing $149,600 to Parkette for $187,000. A
total of 15 percent of this inventory was not sold to outsiders until 2018. During 2018,
Skybox sold inventory costing $208,250 to Parkette for $245,000. A total of 30
percent of this inventory was not sold to outsiders until 2019. In 2018, Parkette
reported cost of goods sold of $582,500 while Skybox reported $352,500. What is the
consolidated cost of goods sold in 2018?
Explanation
Intra-entity gross profit ($187,000 –
$37,400
$149,600)
Intra-entity gross profit, 12/31/17 $ 5,610

Intra-entity gross profit in inventory,
$11,025
12/31/18

Remove intra-entity transfer (245,000)
Recognize 2017 deferred gross
(5,610)
profit
Defer 2018 intra-entity gross
11,025
profit
Top Company holds 90 percent of Bottom Company’s common stock. In the current
year, Top reports sales of $880,000 and cost of goods sold of $616,000. For this same
period, Bottom has sales of $380,000 and cost of goods sold of $228,000. During the
current year, Top sold merchandise to Bottom for $180,000. The subsidiary still
possesses 60 percent of this inventory at the current year-end. Top had established the
transfer price based on its normal gross profit rate. What are the consolidated sales
and cost of goods sold? $1,080,000 and $696,400.
Explanation
percent ($264,000 gross profit ÷ $880,000 sales) which is multiplied by the $108,000 ending
balance. This deferral increases cost of goods sold because ending inventory is a negative
component of that computation. Thus, cost of goods sold for consolidation purposes is $696,400
($616,000 + $228,000 – $180,000 + $32,400).
Top Company holds 90 percent of Bottom Company’s common stock. In the current year, Top reports
sales of $908,000 and cost of goods sold of $681,000. For this same period, Bottom has sales of $379,000
and cost of goods sold of $303,200. During the current year, Bottom sold merchandise to Top for
$183,000. The parent still possesses 25 percent of this inventory at the current year-end. Bottom had
established the transfer price based on its normal gross profit rate. What are the consolidated sales and
cost of goods sold? $1,104,000 and $810,350.
Explanation
percent ($75,800 gross profit / $379,000 Thus, the intra-entity gross profit to be deferred is
$9,150 ($45,750 × 20%). Consequently, consolidated cost of goods sold is $810,350 ($681,000 +
$303,200 – $183,000 + $9,150).
CH 4 EXAM Questions
Mittelstaedt Inc., buys 60 percent of the outstanding stock of Sherry, Inc. Sherry owns a piece of land that
cost $295,000 but had a fair value of $660,000 at the acquisition date. What value should be attributed to
this land in a consolidated balance sheet at the date of takeover?
Explanation
At the date control is obtained, the parent consolidates subsidiary assets at fair value ($660,000 in this case)
regardless of the parent’s percentage ownership.
Jordan, Inc., holds 75 percent of the outstanding stock of Paxson Corporation. Paxson currently owes
Jordan $597,500 for inventory acquired over the past few months. In preparing consolidated financial
statements, what amount of this debt should be eliminated? $597,500
Explanation
In consolidating the subsidiary's figures, all intra-entity balances must be eliminated in their entirety for
external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless
controls it.
On January 1, 2017, Grand Haven, Inc., reports net assets of $933,350 although equipment (with a four-
year remaining life) having a book value of $512,000 is worth $582,750 and an unrecorded patent is
valued at $46,350. Van Buren Corporation pays $840,360 on that date to acquire an 80 percent equity
ownership in Grand Haven. If the patent has a remaining life of nine years, at what amount should the
patent be reported on Van Buren's consolidated balance sheet at December 31, 2018?
Explanation
An asset acquired in a business combination is initially valued at 100% acquisition-date fair value and
subsequently amortized its useful life.
Patent fair value at January 1, 2017 $ 46,350

Amortization for 2 years (9 year remaining life) (10,300)
Patent reported amount December 31, 2018 $ 36,050
On January 1, 2017, Chamberlain Corporation pays $532,000 for a 60 percent

ownership in Neville. Annual excess fair-value amortization of $19,000 results from
the acquisition. On December 31, 2018, Neville reports revenues of $471,000 and
expenses of $331,000 and Chamberlain reports revenues of $778,000 and expenses of
$466,000. The parent figures contain no income from the subsidiary. What is
consolidated net income attributable to Chamberlain Corporation?
Explanation

Less: noncontrolling interest share ($121,000 × 40%) (48,400)
Consolidated net income to Chamberlain Corporation $ 384,600
On January 1, 2016, Pride Corporation purchased 90 percent of the outstanding voting

shares of Star, Inc. for $586,000 cash. The acquisition-date fair value of the
noncontrolling interest was $65,000. At January 1, 2016, Star’s net assets had a total
carrying amount of $455,000. Equipment (eight-year remaining life) was undervalued
on Star’s financial records by $55,200. Any remaining excess fair value over book
value was attributed to a customer list developed by Star (four-year remaining life),
but not recorded on its books. Star recorded net income of $48,300 in 2016 and
$55,200 in 2017. Each year since the acquisition, Star has declared a $13,800
dividend. At January 1, 2018, Pride’s retained earnings show a $172,500 balance.
Selected account balances for the two companies from their separate operations were
as follows:
Pride Star
2018 Revenues $343,700 $196,800
2018 Expenses 241,800 134,700
What is consolidated net income for 2018?
Explanation
Consideration transferred by Pride$586,000

Noncontrolling interest fair value 65,000
Star acquisition-date fair value $651,000
Star book value 455,000
Excess fair over book value $196,000
Amort.
To equipment (8 year remaining life) $ 55,200 $ 6,900
To customer list (4 year remaining life) 140,800 35,200
$42,100
Combined revenues $540,500

Combined expenses $376,500
Excess fair value amortization 42,100 418,600
On January 1, 2016, Pride Corporation purchased 90 percent of the outstanding voting

shares of Star, Inc. for $586,000 cash. The acquisition-date fair value of the
noncontrolling interest was $65,000. At January 1, 2016, Star’s net assets had a total
carrying amount of $455,000. Equipment (eight-year remaining life) was undervalued
on Star’s financial records by $55,200. Any remaining excess fair value over book
value was attributed to a customer list developed by Star (four-year remaining life),
but not recorded on its books. Star recorded net income of $48,300 in 2016 and
$55,200 in 2017. Each year since the acquisition, Star has declared a $13,800
dividend. At January 1, 2018, Pride’s retained earnings show a $172,500 balance.
Selected account balances for the two companies from their separate operations were
as follows:
Pride Star
2018 Revenues $343,700 $196,800
2018 Expenses 241,800 134,700
Assuming that Pride, in its internal records, accounts for its investment in Star using the equity
method, what amount of retained earnings would Pride report on its January 1, 2018 consolidated
balance sheet?
Explanation
Under the equity method, consolidated RE = parent’s RE. answer: $172,500
Amie, Inc., has 141,000 shares of $1 par value stock outstanding. Prairie Corporation acquired
42,300 of Amie’s shares on January 1, 2015, for $84,600 when Amie’s net assets had a total fair
value of $305,750. On July 1, 2018, Prairie bought an additional 84,600 shares of Amie from a
single stockholder for $4 per share. Although Amie’s shares were selling in the $3 range around
July 1, 2018, Prairie forecasted that obtaining control of Amie would produce significant revenue
synergies to justify the premium price paid. If Amie’s identifiable net assets had a fair value of
$426,350 at July 1, 2018, how much goodwill should Prairie report in its postcombination
consolidated balance sheet?
Explanation
Amie, Inc. fair value at July 1, 2018:
30% previously owned fair value (42,300 shares × $3)$126,900

60% new shares acquired (84,600 shares × $4) 338,400
10% NCI fair value (14,100 shares × $3) 42,300
Acquisition-date fair value $507,600
Net assets' fair value 426,350
Goodwill $ 81,250
On April 1, Pujols, Inc., exchanges $606,000 fair-value consideration for 70 percent

of the outstanding stock of Ramirez Corporation. The remaining 30 percent of the
outstanding shares continued to trade at a collective fair value of $219,700. Ramirez’s
identifiable assets and liabilities each had book values that equaled their fair values on
April 1 for a net total of $670,000. During the remainder of the year, Ramirez
generates revenues of $660,000 and expenses of $379,000 and declared no dividends.
On a December 31 consolidated balance sheet, what amount should be reported as
noncontrolling interest?
Explanation
Fair value of 30% noncontrolling interest on April 1 $219,700

30% of net income for remainder of year ($281,000 ×
84,300
30%)
Noncontrolling interest December 31 $304,000
West Company acquired 60 percent of Solar Company for $331,500 when Solar’s
book value was $431,500. The newly comprised 40 percent noncontrolling interest
had an assessed fair value of $221,000. Also at the acquisition date, Solar had a
trademark (with a 10-year life) that was undervalued in the financial records by
$81,000. Also, patented technology (with a 5-year life) was undervalued by $61,000.
Two years later, the following figures are reported by these two companies
(stockholders’ equity accounts have been omitted):

Current assets $ 641,000 $ 321,000 $ 341,000
Trademarks 281,000 221,000 301,000
Patented
431,000 171,000 171,000
technology
Liabilities (411,000) (141,000) (141,000)
Revenues (921,000) (421,000)
Expenses 479,000 321,000
Investment
Not given
income
What is the consolidated net income before allocation to the controlling and noncontrolling
interests?
Explanation

Trademark amortization (8,100)
Patented technology amortization (12,200)
West Company acquired 60 percent of Solar Company for $331,500 when Solar’s
book value was $431,500. The newly comprised 40 percent noncontrolling interest
had an assessed fair value of $221,000. Also at the acquisition date, Solar had a
trademark (with a 10-year life) that was undervalued in the financial records by
$81,000. Also, patented technology (with a 5-year life) was undervalued by $61,000.
Two years later, the following figures are reported by these two companies
(stockholders’ equity accounts have been omitted):

Current assets $ 641,000 $ 321,000 $ 341,000
Trademarks 281,000 221,000 301,000
Patented
431,000 171,000 171,000
technology
Liabilities (411,000) (141,000) (141,000)
Revenues (921,000) (421,000)
Expenses 479,000 321,000
Investment
Not given
income
Problem 4-15 (LO 4-4, 4-5)
Assuming Solar Company has declared no dividends, what are the noncontrolling interest’s share
of the subsidiary’s income and the ending balance of the noncontrolling interest in the
subsidiary? Answer: $31,880 and $300,960.
Explanation
Subsidiary net income

($100,000 − $20,300 excess amortizations) $ 79,700
Noncontrolling interest in consolidated net income $ 31,880
$221,000
date
40% change in previous year Solar book value
($572,000 − $431,500) × 40% 56,200
40% of excess fair value amortization—year one (8,120)
NCI share of current year consolidated net income
31,880
(above)
Noncontrolling interest at end of year $300,960
CH 4 Homework from this semester
On January 1, Park Corporation and Strand Corporation had condensed balance sheets
as follows:
Park Strand
Current assets $118,250 $37,000
Total assets $216,750 $81,500
On January 2, Park borrowed $65,200 and used the proceeds to obtain 80 percent of
the outstanding common shares of Strand. The acquisition price was considered
proportionate to Strand’s total fair value. The $65,200 debt is payable in 10 equal
annual principal payments, plus interest, beginning December 31. The excess fair
value of the investment over the underlying book value of the acquired net assets is
allocated to inventory (60 percent) and to goodwill (40 percent).
On a consolidated balance sheet as of January 2, what should be the amount for
noncurrent liabilities? Answer: $133,180
Explanation
Add the two book values and include 90% (the $58,680 noncurrent portion) of the loan taken out by Park to
acquire Strand.
On January 1, 2017, Harrison, Inc., acquired 90 percent of Starr Company in

exchange for $1,125,000 fair-value consideration. The total fair value of Starr
Company was assessed at $1,200,000. Harrison computed annual excess fair-value
amortization of $8,000 based on the difference between Starr’s total fair value and its
underlying book value. The subsidiary reported net income of $70,000 in 2017 and
$90,000 in 2018 with dividend declarations of $30,000 each year. Apart from its
investment in Starr, Harrison had net income of $220,000 in 2017 and $260,000 in
2018.
a. What is the consolidated net income in each of these two years?

b. What is the balance of the noncontrolling interest in Starr at December 31,
2018?
Explanation
a.
2017 2018
Harrison net income $220,000 $260,000
Starr net income 70,000 90,000
Acquisition-date excess fair value amortization (8,000) (8,000)
Consolidated net income $282,000 $342,000
b.
Starr fair value $1,200,000
Fair value of consideration

1,125,000
transferred
Noncontrolling interest fair value $ 75,000
Noncontrolling interest fair value January 1, 2017 (above) $75,000
2017 income to NCI ([$70,000 − $8,000] × 10%) 6,200
2017 dividends to NCI (3,000)
Noncontrolling interest reported value December 31, 2017 78,200
2018 net income attributable to NCI ([$90,000 − $8,000] ×

8,200
10%)
2018 dividends to NCI (3,000)
Noncontrolling interest in Starr at December 31, 2018 $83,400
On January 1, 2018, Morey, Inc., exchanged $176,425 for 25 percent of Amsterdam

Corporation. Morey appropriately applied the equity method to this investment. At
January 1, the book values of Amsterdam’s assets and liabilities approximated their
fair values.
On June 30, 2018, Morey paid $626,500 for an additional 70 percent of Amsterdam,
thus increasing its overall ownership to 95 percent. The price paid for the 70 percent
acquisition was proportionate to Amsterdam’s total fair value. At June 30, the
carrying amounts of Amsterdam’s assets and liabilities approximated their fair values.
Any remaining excess fair value was attributed to goodwill.
Amsterdam reports the following amounts at December 31, 2018 (credit balances
shown in parentheses):
Revenues $(313,000)
Expenses 218,000
Retained earnings, January 1 (275,100)
Dividends declared, October 1 20,000
Common stock (500,000)
Amsterdam’s revenue and expenses were distributed evenly throughout the year and
no changes in Amsterdam’s stock have occurred.
a. Using the acquisition method, calculate the acquisition-date fair value of

Amsterdam to be included in Morey's June 30 consolidated financial
statements.
b. Using the acquisition method, calculate the revaluation gain (or loss) reported
by Morey for its 25 percent investment in Amsterdam on June 30.
c. Using the acquisition method, calculate the amount of goodwill recognized by
Morey on its December 31 balance sheet (assume no impairments have been
recognized).
d. Using the acquisition method, calculate the noncontrolling interest amount
reported by Morey on its June 30 and December 31 consolidated balance sheet.
Explanation
a.
Amsterdam fair value implied by price paid by Morey $626,500 ÷ 70% = $895,000
b.
Revaluation gain:
1/1 equity investment in Amsterdam (book value) $176,425

25% net income for 1st 6 months 11,875
Investment book value at 6/30 188,300
Fair value of investment at 6/30 (25% × $895,000) 223,750
Gain on revaluation to fair value $ 35,450
c.
Goodwill at 12/31:
Fair value of Amsterdam at 6/30 $895,000

Book value at 6/30 (775,100 + [95,000 ÷ 2]) 822,600
Excess fair value $ 72,400
Allocation to goodwill (no impairment) $ 72,400
d.
Noncontrolling interest:
5% fair value balance at 6/30 $44,750

5% net income from 6/30 to 12/31 2,375
5% dividends (1,000)
Noncontrolling interest 12/31 $46,125
USE AS A GUIDE WITH Consolidated Totals:
 Revenues = $2,210,840 (add the two book values)

 Cost of goods sold = $1,180,000 (add the two book values)
 Depreciation expense = $370,600 (add the two book values less $2,000 excess adjustment)
 Amortization expense = $14,000 (add the two book values plus $6,700 excess adjustment)
 Interest expense = $64,100 (add the two book values plus $1,600 excess adjustment)
 Equity in income of Sierra = 0 (eliminated so that the individual revenues and expenses of the
subsidiary can be included in the consolidated figures)
 Consolidated net income = $582,140 (revenues less expenses)
 Net income attributable to noncontrolling interest= $42,140 ($217,000 reported subsidiary net income
less $6,300 net excess amortization expense multiplied by 20 percent outside ownership)
 Net income to Padre Company = $540,000 ($582,140 consolidated net income less noncontrolling
interest share of $42,140)
 Retained earnings, 1/1 = $1,377,500 (parent company balance only)
 Dividends declared = $260,000 (parent company balance; subsidiary's declarations to parent are intra-
entity, declarations to outside owners decrease noncontrolling interest balance)
 Retained earnings, 12/31 = $1,657,500(consolidated balance on 1/1 plus net income to Padre Co. less
Padre’s dividends declared) or simply the parent’s RE because parent employs the equity method.
 Current assets = $1,715,200 (add the two book values)
 Investment in Sierra = 0 (eliminated so that the individual assets and liabilities of the subsidiary can be
included in the consolidated figures)
 Land = $643,400 (add the book values plus the $261,000 excess allocation)
 Buildings and equipment (net) = $1,242,400 (add the book values less the $20,0000 allocation [asset
was overvalued] plus the excess amortization)
 Copyright = $266,000 (book value plus $138,700 excess allocation less amortization for the year)
 Total assets = $3,867,000
 Accounts payable = $484,000 (add book values)
 Notes payable = $739,800 (add the book values less $12,800 excess allocation plus amortization)
 Noncontrolling interest in subsidiary = $235,700 (20% of fair value as of 1/1 [$206,560] plus net
income attributable to noncontrolling interest [$42,140] less dividends declared to outside owners
[$13,000])
 Common stock = $300,000 (parent company balance)
 Additional paid-in capital = $450,000 (parent company balance)
 Retained earnings, 12/31 = $1,657,500 (computed above)
 Total liabilities and equities = $3,867,000
CH 5 Homework current class

Following are several figures reported for Allister and Barone as of December 31,
2018:
Allister Barone
Inventory $ 570,000 $370,000
Sales 1,140,000 940,000
Investment income not given
Operating expenses 265,000 335,000
Allister acquired 90 percent of Barone in January 2017. In allocating the newly

acquired subsidiary's fair value at the acquisition date, Allister noted that Barone had
developed a customer list worth $70,000 that was unrecorded on its accounting
records and had a 5-year remaining life. Any remaining excess fair value over
Barone's book value was attributed to goodwill. During 2018, Barone sells inventory
costing $137,000 to Allister for $194,000. Of this amount, 15 percent remains unsold
in Allister's warehouse at year-end.
Determine balances for the following items that would appear on Allister's
consolidated financial statements for 2018:
Explanation
Customer list amortization = $70,000 ÷ 5 years = $14,000 per year

Inventory remaining at year end 15%
Intra-entity gross profit in ending inventory, 12/31$ 8,550
Consolidated totals
 Inventory = $931,450 (add the two book values and subtract the ending intra-entity gross profit of
$8,550)
 Sales = $1,886,000 (add the two book values and subtract the $194,000 intra-entity transfer)
 Cost of goods sold = $854,550 (add the two book values and subtract the intra-entity transfer and add
[to defer] ending inventory intra-entity gross profit)
 Operating expenses = $614,000 (add the two book values and the amortization expense for the period)
Barone’s net income $135,000
Intra-entity gross profit deferral (8,550)
Excess fair value amortization (14,000)
Adjusted subsidiary net income $112,450
Net income attributable to noncontrolling interest$ 11,245
Gross profit deferral is allocated to the noncontrolling interest because the transfer was upstream from Barone
to Allister.
On January 1, 2017, Doone Corporation acquired 80 percent of the outstanding voting

stock of Rockne Company for $448,000 consideration. At the acquisition date, the fair
value of the 20 percent noncontrolling interest was $112,000 and Rockne's assets and
liabilities had a collective net fair value of $560,000. Doone uses the equity method in
its internal records to account for its investment in Rockne. Rockne reports net income
of $170,000 in 2018. Since being acquired, Rockne has regularly supplied inventory
to Doone at 25 percent more than cost. Sales to Doone amounted to $230,000 in 2017
and $330,000 in 2018. Approximately 30 percent of the inventory purchased during
any one year is not used until the following year.
a. What is the noncontrolling interest's share of Rockne's 2018 income?

b. Prepare Doone's 2018 consolidation entries required by the intra-entity
inventory transfers.
Explanation
a & b.
Conversion from markup on cost to gross profit rate
Markup (given as a percentage of cost) 25%
Convert to gross profit rate [0.25 ÷ (1.00 + 0.25)]20%
Noncontrolling interest's share of consolidated net income
Reported net income of subsidiary—2018 $170,000
2017 intra-entity gross profit recognized in 2018 ($230,000

13,800
× 30% × 20%)
2018 intra-entity gross profit deferred ($330,000 × 30% × (19,800)

20%)
Adjusted net income of subsidiary—2018 $164,000
Outside ownership 20%
Noncontrolling interest's share of consolidated net income $ 32,800
Protrade Corporation acquired 70 percent of the outstanding voting stock of Seacraft

Company on January 1, 2017, for $378,000 in cash and other consideration. At the
acquisition date, Protrade assessed Seacraft's identifiable assets and liabilities at a
collective net fair value of $595,000 and the fair value of the 30 percent
noncontrolling interest was $162,000. No excess fair value over book value
amortization accompanied the acquisition.
The following selected account balances are from the individual financial records of
these two companies as of December 31, 2018:
Protrade Seacraft
Sales $ 710,000 $430,000
Operating expenses 157,000 112,000
Retained earnings,
810,000 250,000
1/1/18
Inventory 353,000 117,000
Buildings (net) 365,000 164,000
Investment income Not given 0
Each of the following problems is an independent situation:

a. Assume that Protrade sells Seacraft inventory at a markup equal to 60 percent
of cost. Intra-entity transfers were $97,000 in 2017 and $117,000 in 2018. Of
this inventory, Seacraft retained and then sold $35,000 of the 2017 transfers in
2018 and held $49,000 of the 2018 transfers until 2019.
Determine balances for the following items that would appear on consolidated
financial statements for 2018:
b. Assume that Seacraft sells inventory to Protrade at a markup equal to 60
percent of cost. Intra-entity transfers were $57,000 in 2017 and $87,000 in
2018. Of this inventory, $28,000 of the 2017 transfers were retained and then
sold by Protrade in 2018, whereas $42,000 of the 2018 transfers were held until
2019.
c. Protrade sells Seacraft a building on January 1, 2017, for $94,000, although its
book value was only $57,000 on this date. The building had a five-year
remaining life and was to be depreciated using the straight-line method with no
salvage value.
Explanation
a.
Protrade’s cost of goods sold $ 325,000
Seacraft’s cost of goods sold 232,000

Elimination of 2018 intra-entity transfers (117,000)
Recognized gross profit deferred in 2017 (2018 beginning

inventory)
$35,000 transfer price ÷ 1.6 = $21,875 cost
$35,000 – $21,875 = $13,125 intra-entity gross profit (13,125)
Deferral of 2018 intra-entity gross profit in ending

inventory:
$49,000 – $30,625 = $18,375 intra-entity gross profit 18,375
Consolidated cost of goods sold $ 445,250
Consolidated inventory
Protrade book value $353,000
Seacraft book value 117,000
Defer ending intra-entity gross profit (see

(18,375)
above)
Consolidated Inventory $451,625
Net income attributable to noncontrolling interest:
Because all intra-entity sales were downstream, the deferrals do not affect Seacraft. Thus, the noncontrolling
interest share is 30% of the $86,000 reported net income (revenues minus cost of goods sold and expenses) or
$25,800.
b.
Elimination of 2018 intra-entity transfers (87,000)
Recognized gross profit deferred in 2017 (2018 beginning

inventory)
$28,000 – $17,500 = $10,500 intra-entity gross profit (10,500)
Deferral of 2018 intra-entity gross profit in ending

inventory:
$42,000 – $26,250 = $15,750 intra-entity gross profit 15,750
Consolidated cost of goods sold $475,250
Consolidated inventory
Defer ending intra-entity gross profit (see

(15,750)
above)
Consolidated Inventory $454,250

Net income attributable to noncontrolling interest
Since all intra-entity sales are upstream, the effect on Seacraft's net income must be reflected in the
noncontrolling interest computation:
Seacraft reported net income $ 86,000
2017 intra-entity gross profit recognized in 2018 (above) 10,500
2018 intra-entity gross profit deferred until 2019 (above) (15,750)
Seacraft adjusted net income $ 80,750
Outside ownership percentage 30%
Net income attributable to noncontrolling interest $ 24,225
c.
Consolidated buildings (net):
Protrade’s buildings $365,000
Seacraft's buildings 164,000
Remove write-up created by transfer ($94,000 −

$57,000) $(37,000)
Remove excess depreciation created by transfer

($37,000 intra-entity gain ÷ 5-year remaining
life ×2 years) 14,800 (22,200)
Consolidated buildings (net) $506,800

Consolidated expenses:
Protrade’s book value $157,000
Seacraft's book value 112,000
Remove excess depreciation on transferred building ($37,000

intra-entity gain ÷ 5 year remaining life) (7,400)
Consolidated expenses $261,600
Net income attributable to noncontrolling interest:
Because the transfer was made downstream, it has no effect on the noncontrolling interest. Thus, Seacraft's
reported net income ($86,000 computed as revenues minus cost of goods sold and expenses) is used for this
computation. The 30 percent outside ownership will be allotted consolidated net income of $25,800 (30% ×
$86,000).
On January 1, 2016, Plymouth Corporation acquired 80 percent of the outstanding voting stock
of Sander Company in exchange for $1,200,000 cash. At that time, although Sander’s book value
was $925,000, Plymouth assessed Sander’s total business fair value at $1,500,000. Since that
time, Sander has neither issued nor reacquired any shares of its own stock.
The book values of Sander's individual assets and liabilities approximated their acquisition-date
fair values except for the patent account, which was undervalued by $350,000. The undervalued
patents had a five-year remaining life at the acquisition date. Any remaining excess fair value
was attributed to goodwill. No goodwill impairments have occurred.
Sander regularly sells inventory to Plymouth. Below are details of the intra-entity inventory sales
for the past three years:
Intra-Entity Gross Profit Rate

Intra-Entity Ending Inventory on Intra-Entity
Year Sales at Transfer PriceInventory Transfers
2016 $ 125,000 $ 80,000 25%
2017 220,000 125,000 28
2018 300,000 160,000 25
Separate financial statements for these two companies as of December 31, 2018, follow:
Plymouth Sander
Revenues $(1,740,000) $ (950,000)
Depreciation expense 104,000 85,000
Amortization expense 220,000 120,000
Interest expense 20,000 15,000
Equity in earnings of Sander (124,000) 0
Net income $ (700,000) $ (230,000)
Retained earnings 1/1/18 $(2,800,000) $ (345,000)
Net income (700,000) (230,000)
Dividends declared 200,000 25,000
Retained earnings 12/31/18 $(3,300,000) $ (550,000)
Cash $ 535,000 $ 115,000
Accounts receivable 575,000 215,000
Inventory 990,000 800,000
Investment in Sander 1,420,000 0
Buildings and equipment 1,025,000 863,000
Patents 950,000 107,000

Total assets $ 5,495,000 $ 2,100,000
Accounts payable $ (450,000) $ (200,000)
Notes payable (545,000) (450,000)
Common stock (900,000) (800,000)
Additional paid-in capital (300,000) (100,000)
Retained earnings 12/31/18 (3,300,000) (550,000)
Total liabilities and stockholders'

$(5,495,000) $(2,100,000)
equity
a. Prepare a schedule that calculates the Equity in Earnings of Sander account balance.
b. Prepare a worksheet to arrive at consolidated figures for external reporting purposes. At
year end, there are no intra-entity payables or receivables.
Explanation
a.
Excess patent fair value amortization ($350,000 ÷ 5 years) = $(70,000)
Deferred gross profit for 12/31/18 intra-entity inventory ($160,000 × 25%) = $(40,000)
Recognized gross profit for 1/1/18 intra-entity inventory ($125,000 × 28%) = $35,000
To controlling interest (80%) = $124,000
To noncontrolling interest (20%) = $31,000

CH 7 Homework from current class
Which of the following is correct for two companies that want to file a consolidated tax return as an
affiliated group? One company must hold at least 80 percent of the other company’s voting stock
How does the amortization of tax-deductible goodwill affect the computation of a parent company’s
income taxes? It is a deductible item over a 15-year period
Which of the following is not a reason for two companies to file separate tax returns? Intra-entity
dividends are tax-free only on separate returns
Plumas, Inc., owns 85 percent of Santa Cruz Corporation. Both companies have been profitable for many
years. During the current year, the parent sold for $100,000 merchandise costing $70,000 to the
subsidiary, which still held 20 percent of this merchandise at the end of the year. Assume that the tax rate
is 25 percent and that separate tax returns are filed. What deferred income tax asset amount is created?
Explanation
Explanation:
Intra-Entity Gross Profit:
Total gross profit $30,000

Portion still held 20%
Intra-entity gross profit in
$ 6,000
inventory
Tax rate 25%
Deferred tax asset $ 1,500
Plumas, Inc., owns 90 percent of Santa Cruz Corporation. Both companies have been
profitable for many years. During the current year, the parent sold for $143,500
merchandise costing $90,000 to the subsidiary, which still held 20 percent of this
merchandise at the end of the year. Assume that the tax rate is 40 percent and that a
consolidated tax return was filed. What deferred income tax asset amount is created? $0
Explanation
Explanation:
Recognition of this gross profit is not required on a consolidated tax return.
Garrison holds a controlling interest in Robertson's outstanding stock. For the current
year, the following information has been gathered about these two companies:
Garrison Robertson
Separate
$ 300,000 $200,000
operating income
(includes $50,000 intra-entity gross

profit in ending inventory)
Dividends paid 32,000 50,000
Tax rate 40% 40%

Garrison uses the initial value method to account for the investment in Robertson.
Garrison's separate operating income figure does not include dividend income for the
current year.
a. Assume that Garrison owns 80 percent of Robertson's voting stock. On a

consolidated tax return, what amount of income tax is paid?
b. Assume that Garrison owns 80 percent of Robertson's voting stock. On separate
tax returns, what total amount of income tax is paid?
c. Assume that Garrison owns 70 percent of Robertson's voting stock. What total
amount of income tax expense does a consolidated income statement
recognize?
d. Assume that Garrison holds 60 percent of Robertson's voting stock. On a
separate income tax return, what amount of income tax does Garrison have to
pay?
Explanation
a.
Operating income$450,000
Tax rate 40%
Taxes to be paid$180,000
The affiliated group would be taxed on its operating income of $450,000 (the $50,000 intra-entity gain is
deferred). Intra-entity income and dividends are not relevant because a consolidated return is filed.
b.
Total taxes to be paid are $200,000. Robertson would have to pay $80,000 or 40% of its $200,000 operating
income. Garrison would pay $120,000 or 40% of its $300,000 operating income. The intra-entity gain is not
deferred because separate returns are being filed. Intra-entity dividends are not taxable because the parties still
qualify as an affiliated group even though separate returns are being filed.
c.
Robertson must report an income tax expense of $80,000 or 40% of its $200,000 operating income.
Garrison records its expense based on the revenue recognized during the period. Thus, the expense is
computed on an operating income of $250,000 (the net intra-entity gain is not recognized in this period) along
with equity income from Robertson of $84,000 (70% of that company's $120,000 after-tax income). Garrison
will record an income tax expense of $100,000 in connection with the operating income ($250,000 × 40%) and
$6,720 resulting from its equity income ($84,000 × 20% × 40%). Total expense to be reported amounts to
$186,720 for Garrison and Robertson ($80,000 + $100,000 + $6,720).
d.
Garrison will pay $120,000 in connection with its operating income ($300,000 × 40%) and $2,400 because of
the dividends received from Robertson. Garrison will receive $30,000 in dividends based on its 60%
ownership. Of this total, only $6,000 (20%) is taxable. Thus, at a 40% rate, the tax on the dividends would
amount to $2,400 ($6,000 × 40%). The total income taxes payable by Garrison is $122,400 ($120,000 +
$2,400).

What Is The Consolidated Net Income Before Allocation To The Controlling and Noncontrolling Interests?

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Ch 4 Quiz #1

West Company Solar Company Solar Company

Note: Parentheses indicate a credit balance.

Combined revenues $1,300,000

West Company Solar Company Solar Company

Note: Parentheses indicate a credit balance.

Assuming Solar Company has declared no dividends, what are the

Subsidiary net income

Alternative noncontrolling interest year 2 solution:

West Company Solar Company Solar Company

Note: Parentheses indicate a credit balance.

What is the consolidated trademarks balance? $508,000

Acquisition-date fair value ($60,000

Park noncurrent assets $ 90,000

Strand noncurrent assets 40,000

Excess fair value to goodwill 10,000

Consolidated noncurrent assets $140,000

Park stockholders' equity $80,000

Noncontrolling interest at fair value (20% × $75,000) 15,000

Total stockholders' equity $95,000

Book Value Fair Value

Any excess consideration transferred over fair value is attributable to an

McGuire Company acquired 90 percent of Hogan Company on January 1,

Book Value Fair Value

Any excess consideration transferred over fair value is attributable to an

McGuire Company acquired 90 percent of Hogan Company on January 1,

Book Value Fair Value

Any excess consideration transferred over fair value is attributable to an

In consolidation at December 31, 2019, what adjustment is necessary for

Book Value Fair Value

Any excess consideration transferred over fair value is attributable to an

McGuire Company acquired 90 percent of Hogan Company on January 1,

Book Value Fair Value

Any excess consideration transferred over fair value is attributable to an

ExplanationFV $18,000 – BV $14,000 = Increase $4,000

Jordan, Inc., holds 75 percent of the outstanding stock of Paxson Corporation.

On January 1, 2017, Chamberlain Corporation pays $388,000 for a 60 percent

Combined revenues $1,100,000

Combined expenses (700,000)

Excess acquisition-date fair value amortization (15,000)

Consolidated net income $ 385,000

Less: noncontrolling interest share($85,000 × 40%) (34,000)

Consolidated net income to Chamberlain Corporation$ 351,000

On January 1, 2016, Pride Corporation purchased 90 percent of the

Consideration transferred by Pride$540,000

Noncontrolling interest fair value 60,000

Star acquisition-date fair value $600,000

Star book value 420,000

Excess fair over book value $180,000

To equipment (8 year remaining life) $ 80,000 $10,000

To customer list (4 year remaining life) 100,000 25,000

Combined expenses $545,000

Excess fair value amortization 35,000 580,000

Consolidated net income $203,000

On January 1, 2016, Pride Corporation purchased 90 percent of the

James Company acquired 85 percent of Mark-Right Company on April 1. On its December 31

30% previously owned fair value (30,000 shares × $5)$150,000

60% new shares acquired (60,000 shares × $6) 360,000

10% NCI fair value (10,000 shares × $5) 50,000

Acquisition-date fair value $560,000

Net assets' fair value 500,000

On April 1, Pujols, Inc., exchanges $430,000 fair-value consideration for 70 percent

Fair value of 30% noncontrolling interest on April 1 $165,000