Advanced Accounting Chap003

CHAPTER 03CONSOLIDATIONS—SUBSEQUENT TOTHE DATE OF ACQUISITIONAnswers to Problems1. A2. B3. A4. D Willkom’s equipment book value—12/31/12 ...................... $210,000Szabo’s equipment book value—12/31/12 .......................... 140,000Original purchase price allocation to Szabo's equipment($300,000 – $200,000) ........................................................... 100,000Amortization of allocation($100,000 ÷ 10 years for 3 years) ................................... (30,000) Consolidated equipment ...................................................... $420,0005. A6. B7. D8. B9. B10. C11. C The $60,000 excess acquisition-date fair value allocation to equipment is"pushed-down" to the subsidiary and increases its balance from $330,000to $390,000. The consolidated balance is $810,000 ($420,000 plus$390,000).12. (35 Minutes) (Determine consolidated retained earnings when parent usesvarious accounting methods. Determine Entry *C for each of these methods)a. CONSOLIDATED RETAINED EARNINGS▪EQUITY METHODHerbert (parent) balance—1/1/11 .................................. $400,000Herbert income—2011 ................................................... 40,000Herbert dividends—2011 (subsidiary dividends areintercompany and, thus, eliminated) ....................... (10,000) Rambis income—2011 (not included in parent's income) 20,000Amortization—2011 ........................................................ (12,000)Herbert income—2012 ................................................... 50,000Herbert dividends—2012 ................................................ (10,000)Rambis income—2012 ................................................... 30,000Amortization—2012 ....................................................... (12,000)Consolidated Retained Earnings, 12/31/12 ................... $496,000 ▪PARTIAL EQUITY METHOD AND INITIAL VALUE METHODConsolidated retained earnings are the same regardless of the methodin use: the beginning balance plus the income of the parent less thedividends of the parent plus the income of the subsidiary lessamortization expense. Thus, consolidated retained earnings onDecember 31, 2012 are $496,000 as computed above.b. Investment in Rambis—equity methodRambis fair value 1/1/11 ............................................................ $574,000Rambis income 2011 .................................................................. 20,000Rambis dividends 2011 ............................................................. (5,000)Herbert’s 2011 excess fair over book value amortization ..... (12,000)$577,000Investment in Rambis—partial equity methodRambis fair value 1/1/11 ............................................................ $574,000Rambis income 2011 .................................................................. 20,000Rambis dividends 2011 ............................................................. (5,000)$589,000Investment in Rambis—Initial value methodRambis fair value 1/1/11 ............................................................ $574,000$574,0003-212. (continued)c. ENTRY *C▪EQUITY METHODNo entry is needed to convert the past figures to the equity methodsince that method has already been applied.▪PARTIAL EQUITY METHODAmortization for the prior years (only 2011 in this case) has not beenrecorded and must be brought into the consolidation throughworksheet entry *C:ENTRY *CRetained Earnings, 1/1/12 (Parent) .................... 12,000Investment in Rambis .................................... 12,000 (To record 2011 amortization in consolidated figures. Expense wasomitted because of application of partial equity method.) ▪INITIAL VALUE METHODAmortization for the prior years (only 2011 in this case) has not beenrecorded and must be brought into the consolidation throughworksheet entry *C. In addition, only dividend income has beenrecorded by the parent ($5,000 in 2011). In this prior year, Rambisreported net income of $20,000. Thus, the parent has not recorded the$15,000 income in excess of dividends. That amount must also beincluded in the consolidation through entry *C:ENTRY *CInvestment in Rambis ......................................... 3,000Retained Earnings, 1/1/12 (Parent) ............... 3,000 (To record 2011 unrecognized subsidiary earnings as part of theparent’s retained earnings. $15,000 income of subsidiary was notrecorded by parent (income in excess of dividends). Amortizationexpense of $12,000 was not recorded under the initial value method.Note that *C adjustments bring the parent’s January 1, 2012 RetainedEarnings balance equal to that of the equity method.14. (20 minutes) (Record a merger combination with subsequent testing forgoodwill impairment).a. In accounting for the combination, the total fair value of Beltran (considerationtransferred) is allocated to each identifiable asset acquired and liabilityassumed with any remaining excess as goodwill.Cash paid $450,000Fair value of shares issued 1,248,000Fair value transferred $1,698,000Fair value transferred (above) $1,698,000Fair value of net assets acquired andliabilities assumed 1,298,000Goodwill recognized in the combination $400,000 Entry by Francisco to record assets acquired and liabilities assumed in the combination with Beltran:Cash 75,000Receivables 193,000Inventory 281,000Patents 525,000Customer relationships 500,000Equipment 295,000Goodwill 400,000Accounts payable 121,000Long-term liabilities 450,000Cash 450,000Common stock (Francisco Co., par value) 104,000Additional paid-in capital 1,144,000b. Step one in goodwill impairment test:Fair value of reporting unit as a whole 1,425,000Book value of reporting unit's net assets 1,585,000 Because the total fair value of the reporting unit is less than its carrying value,a potential goodwill impairment loss exists, step two is performed:Fair value of reporting unit as a whole $1,425,000Fair values of reporting unit's net assets (excluding goodwill) 1,325,000Implied fair value of goodwill 100,000Book value of goodwill 400,000Goodwill impairment loss $300,0003-416. (30 minutes) (Goodwill impairment and intangible assets.)Part aGoodwill Impairment Test—Step 1Total fair Carrying Potential goodwillvalue value impairment?Sand Dollar $510,000 < $530,000 yesSalty Dog 580,000 < 610,000 yesBaytowne 560,000 > 280,000 no Part bGoodwill Impairment Test—Step 2 (Sand Dollar and Salty Dog only) Sand Dollar—total fair value $510,000Fair values of identifiable net assetsTangible assets $190,000Trademark 150,000Customer list 100,000Liabilities (30,000) 410,000 Implied value of goodwill 100,000Carrying value of goodwill 120,000Impairment loss $20,000Salty Dog—total fair value $580,000Fair values of identifiable net assetsTangible assets $200,000Unpatented technology 125,000Licenses 100,000 425,000 Implied value of goodwill 155,000Carrying value of goodwill 150,000No impairment—implied value > carry value -0- Part cNo changes in tangible assets or identifiable intangibles are reported based on goodwill impairment testing. The sole purpose of the valuation exercise is to estimate an implied value for goodwill. Destin will report a goodwillimpairment loss of $20,000, which will reduce the amount of goodwillallocated to Sand Dollar. However, because the fair value of Sa nd Dollar’s trademarks is less than its carrying amount, the account should besubjected to a separate impairment testing procedure to see if the carrying value is ―recoverable‖ in future estimated cash flows.20. (45 Minutes) (Variety of questions about the three methods of recording anInvestment in a subsidiary for internal reporting purposes.)a. Purchase Price Allocation and Annual Amortization:Clay’s acquisition-date fair value ............ $510,000Book value (assets minus liabilitiesor stockholders' equity) ......................Fair value in excess of book value .......... 60,000 Annual ExcessAllocation to equipment based on Life Amortizationsdifference between fair and book value .. 50,000 5 yrs. $10,000Goodwill ..................................................... $10,000 indefinite -0-Total .......................................................... $10,000 EQUITY METHODInvestment Income—2011:Equity accrual (based on Clay's income) .................... $55,000Amortization (above) ..................................................... (10,000) Investment income for 2011 ................................................ $45,0003-620. (continued)Investment in Clay—December 31, 2011:Consideration transferred for Clay ............................... $510,0002010:Equity accrual (based on Clay's Income) ............... 55,000Excess amortizations (above) ................................. (10,000)Dividends received ................................................... (5,000) 2011:Equity accrual (based on Clay's Income) ................ 60,000Excess amortizations ............................................... (10,000)Dividends received ................................................... (8,000) Total ................................................................................ $592,000 INITIAL VALUE METHODInvestment Income—2011:Dividend Income ........................................................... $8,000 Investment in Clay—December 31, 2011:Consideration transferred for Clay ............................... $510,000b. The reported consolidated balances are not affected by the parent’sinvestment accounting method. Thus, consolidated expenses ($480,000or $290,000 + $180,000 + amortizations of $10,000) are the sameregardless of whether the equity method, the partial equity method, orthe initial value method is applied by Adams.c. The reported consolidated balances are not affected by the parent’sinvestment accounting method. Thus, consolidated equipment($970,000 or $520,000 + $420,000 + allocation of $50,000 – two years ofexcess depreciation totaling $20,000) is the same regardless of whetherthe equity method or the initial value method is applied by Adams.d. Adams Retained Earnings—Equity MethodAdams Retained Earnings—1/1/10 ..................................... $860,000Adams income 2010 ............................................................. 125,0002010 equity accrual for Clay income .................................. 55,0002010 excess amortization .................................................... (10,000)Adams Retained Earnings—1/1/11 ..................................... $1,030,000Adams Retained Earnings—Initial value methodAdams Retained Earnings—1/1/10 ..................................... $860,000Adams income 2010 ............................................................. 125,0002010 dividend income from Clay ........................................ 5,000Adams Retained Earnings—1/1/11 ..................................... $990,00020. (continued)e. EQUITY METHOD—Entry *C is not utilized since parent's retainedearnings balance is correct.INITIAL VALUE METHOD—Entry *C is needed to record increase insubsidiary's book value ($55,000 income less 5,000 dividends) andamortization ($10,000) for prior year.Investment in Clay ............................................... 40,000Retained earnings, 1/1/11 (parent) ............... 40,000f. Consolidated worksheet entry S for 2011:Common stock (Clay) .................................... 150,000Retained earnings, 1/1/11 (Clay) .................... 350,000Investment in Clay .................................... 500,000g. Consolidated revenues (combined) .................. $640,000Consolidated expenses (combined plusexcess amortization) ..................................... (480,000) Consolidated net income ................................... $160,000 25. (65 Minutes) (Consolidated totals and worksheet five years after acquisition.Parent uses equity method. Includes goodwill impairment.)a. Acquisition-date fair value allocations (given) Life ExcessAmortizations Land $90,000 -- --Equipment 50,000 10 yrs. $5,000Goodwill 60,000 indefinite -0- Total $200,000 $5,000 Because Giant uses the equity method, the $135,000 "Equity in Incomeof Small" reflects a $140,000 equity accrual (100% of Small’s reportedearnings) less $5,000 in amortization expense computed above.b.▪Revenues = $1,535,000 (both balances are added together)▪Cost of Goods Sold = $640,000 (both balances are added)▪Depreciation Expense = $307,000 (both balances are added along with excess equipment depreciation)▪Equity in Income of Small = $0 (the parent's income balance is removed and replaced with Small's individual revenue and expense accounts) ▪Net Income = $588,000 (consolidated expenses are subtracted from consolidated revenues)3-8▪Retained Earnings, 1/1/13 = $1,417,000 (the parent’s balance)▪Dividends Paid = $310,000 (the parent number alone because the subsidiary's dividends are intercompany, paid to Giant)▪Retained Earnings, 12/31/13 = $1,695,000 (the parent’s balance at beginning of the year plus consolidated net income less consolidated dividends paid)▪Current Assets = $706,000 (both book balances are added together while the $10,000 intercompany receivable is eliminated)▪Investment in Small = $0 (the parent's asset is removed so that Small's individual asset and liability accounts can be brought into theconsolidation)▪Land = $695,000 (both book balances are added together along with the purchase price allocation of $90,000)▪Buildings = $723,000 (both book balances are added together)▪Equipment = $959,000 (both book balances are added plus the unamortized portion of the purchase price allocation [$50,000 less$25,000 after 5 years of excess depreciation])25. b. (continued)▪Goodwill = $60,000(represents the original price allocation)▪Total Assets = $3,143,000(summation of all consolidated assets)▪Liabilities = $1,198,000(both balances are added together while the $10,000 intercompany payable is eliminated)▪Common Stock = $250,000(parent balance only)▪Retained Earnings, 12/31/13 = $1,695,000(see above)▪Total Liabilities and Equity = $3,143,000(summation of allconsolidated liabilities and equity)a. Worksheet is presented on following page.b. If all goodwill from the Small investment was determined to be impaired,Giant would make the following journal entry on its books:Goodwill impairment loss 60,000Investment in Small 60,000After this entry, the worksheet process would no longer require anadjustment in Entry (A) to recognize goodwill. The impairment loss wouldsimply carry over to the consolidated income column. The impairment loss would be reported as a separate line item in the operating section of theconsolidated income statement.3-1025. c. (continued)GIANT COMPANY AND SMALL COMPANYConsolidation WorksheetFor Year Ending December 31, 2013Consolidation Entries Consolidated Accounts Giant Small Debit Credit Totals Revenues ............................................................ (1,175,000) (360,000) (1,535,000) Cost of goods sold ............................................ 550,000 90,000 640,000 Depreciation expense ........................................ 172,000 130,000 (E) 5,000 307,000 Equity income of Small...................................... (135,000) -0- (I) 135,000 -0- Net income .................................................... (588,000) (140,000) (588,000) Retained earnings 1/1 ........................................ (1,417,000) (620,000) (S) 620,000 (1,417,000) Net income (above) ............................................ (588,000) (140,000) (588,000) Dividends paid ................................................... 310,000 110,000 (D) 110,000 310,000 Retained earnings 12/31 .............................. (1,695,000) (650,000) (1,695,000) Current assets .................................................... 398,000 318,000 (P) 10,000 706,000 Investment in Small ........................................... 995,000 -0- (D) 110,000 (S) 790,000 -0-(A) 180,000(I) 135,000Land ................................................................. 440,000 165,000 (A) 90,000 695,000 Buildings (net) .................................................... 304,000 419,000 723,000 Equipment (net) ................................................. 648,000 286,000 (A) 30,000 (E) 5,000 959,000 Goodwill ............................................................. -0- -0- (A) 60,000 60,000 Total assets .................................................. 2,785,000 1,188,000 3,143,000 Liabilities ............................................................ (840,000) (368,000) (P) 10,000 (1,198,000) Common stock ................................................... (250,000) (170,000) (S)170,000 (250,000) Retained earnings (above) ................................ (1,695,000) (650,000) (1,695,000) Total liabilities and equity ........................... (2,785,000) (1,188,000) (3,143,000)Parentheses indicate a credit balance.3-1127. (30 Minutes) (Determine parent company and consolidated accountbalances for a bargain purchase combination. Parent applies equitymethod)a. Acquisition-Date Fair Value Allocation and Annual Excess AmortizationConsideration transferred ............ $1,090,000Santiago book value (given) .......... $950,000Technology undervaluation (6 yr. life) 240,000Acquisition fair value of net assets 1,190,000Gain on bargain purchase .............. $(100,000)Santiago income .............................. $(200,000)Technology amortization ................ 40,000Equity earnings in Santiago ........... $(160,000)Fair value of net assets at acquisition-date $1,190,000Equity earnings from Santiago ....... 160,000Dividends received .......................... (50,000)Investment in Santiago 12/31/11 .... $1,300,000Because a bargain purchase occurred, Santiago’s net asset fair value replaces the fair value of the consideration transferred as the initial value assigned to the subsidiary on Peterson’s books.3-12b.Income Statement Peterson Santiago Adj. & Elim. Consolidated Revenues (535,000) (495,000) (1,030,000) Cost of goods sold 170,000 155,000 325,000 Gain on bargain purchase (100,000) -0- (100,000) Depreciation andamortization 125,000 140,000 (E) 40,000 305,000 Equity earnings in Santiago (160,000) -0- (I) 160,000 -0- Net income (500,000) (200,000) (500,000) Statement of RetainedEarningsRetained earnings, 1/1 (1,500,000) (650,000) (S) 650,000 (1,500,000) Net income (above) (500,000) (200,000) (500,000) Dividends paid 200,000 50,000 (D) 50,000 200,000 Retained earnings, 12/31 (1,800,000) (800,000) (1,800,000) Balance SheetCurrent assets 190,000 300,000 490,000 Investment in Santiago 1,300,000 -0- (D) 50,000 (I) 160,000(S) 950,000 -0-(A) 240,000Trademarks 100,000 200,000 300,000 Patented technology 300,000 400,000 (A) 240,000 (E) 40,000 900,000 Equipment 610,000 300,000 910,000 Total assets 2,500,000 1,200,000 2,600,000 Liabilities (165,000) (100,000) (265,000) Common stock (535,000) (300,000) (S) 300,000 (535,000) Retained earnings, 12/31 (1,800,000) (800,000) (1,800,000) Total liabilities and equity (2,500,000) (1,200,000) 1,440,000 1,440,000 (2,600,000)29. (45 Minutes) (Prepare consolidation worksheet five years after purchase.Parent applies equity method. Includes question on push-down accounting.)a. Allocation of Acquisition-Date Fair Value and Determination ofAmortization:Storm’s acquisition-date fair value .................... $140,000Book value of Storm (acquisition date) ............. (105,000)Fair value in excess of book value .................... $35,000Excess assigned to specific accounts: Annual ExcessLife Amortizations Land ........................................... $10,000 ––Equipment ................................. 5,000 5 yrs. $1,000Formula ...................................... 20,000 20 yrs. 1,000 Total ................................................ $35,000 $2,000The equity in subsidiary earnings account reflects the equity method.The initial value method would have recorded $40,000 (100% of dividendpayments) as income while the partial equity method would have shown$68,000 (100% of the subsidiary's income). Under the equity method, anincome accrual of $66,000 is recognized (100% of reported income lessthe $2,000 in excess amortization expenses computed above).b. Explanation of Consolidation Entries Found on WorksheetEntry S—Eliminates stockholders' equity accounts of the subsidiary as of the beginning of the current year.Entry A—Records remaining unamortized allocation from acquisition-date fair value adjustments. As of the beginning of the current year,equipment and formula have undergone four years of amortization.Entry I—Eliminates intercompany income accrual for the current year.Entry D—Eliminates intercompany dividend transfers.Entry E—Recognizes excess amortization expenses for current year.3-1429. (continued) Palm and Subsidiary Consolidated Worksheet for year ended December 31, 2013Consolidation Entries Consolidated Accounts Palm Co. Storm Co. Debit Credit Totals Income StatementRevenues .......................................................... (485,000) (190,000) (675,000) Cost of goods sold .......................................... 160,000 70,000 230,000 Depreciation expense ...................................... 130,000 52,000 (E) 1,000 183,000 Amortization expense ...................................... -0- -0- (E) 1,000 1,000 Equity in subsidiary earnings ......................... (66,000) -0- (I) 66,000 -0- Net income .................................................. (261,000) (68,000) (261,000) Statement of Retained EarningsRetained earnings 1/1 ...................................... (659,000) (98,000) (S) 98,000 (659,000) Net income (above) .......................................... (261,000) (68,000) (261,000) Dividends paid ................................................. 175,500 40,000 (D) 40,000 175,500 Retained earnings 12/31 ............................ (744,500) (126,000) (744,500) Balance SheetCurrent assets .................................................. 268,000 75,000 343,000 Investment in Storm Co. .................................. 216,000 -0- (D) 40,000 (S) 163,000 -0-(A) 27,000(I) 66,000Land ............................................................... 427,500 58,000 (A) 10,000 495,500 Buildings and equipment (net) ....................... 713,000 161,000 (A) 1,000 (E) 1,000 874,000 Formula ............................................................ -0- -0- (A) 16,000 (E) 1,000 15,000 Total assets ................................................ 1,624,500 294,000 1,727,500 Current liabilities ............................................. (110,000) (19,000) (129,000) Long-term liabilities ......................................... (80,000) (84,000) (164,000) Common stock ................................................. (600,000) (60,000) (S) 60,000 (600,000) Additional paid-in capital ................................ (90,000) (5,000) (S) 5,000 (90,000) Retained earnings 12/31 .................................. (744,500) (126,000) (744,500) Total liabilities and equity ......................... (1,624,500) (294,000) (1,727,500) Parentheses indicate a credit balance.3-15Chapter 03 - Consolidations—Subsequent to the Date of Acquisition29. (continued)c. If push-down accounting had been applied, the purchase priceallocations to land ($10,000), equipment ($5,000), and formula ($20,000)would have been entered into the subsidiary's balances with anoffsetting $35,000 increase in additional paid-in capital. The equipmentand the formula would then have been amortized by the subsidiary asannual expenses of $1,000 each. For 2013, the subsidiary's expenseswould have been $2,000 higher leaving reported net income at $66,000.At the end of 2013, land would still have been $10,000 higher becauseno amortization is recorded on that asset. Equipment would be nohigher at this time since the $5,000 allocation is fully depreciated at theend of this fifth year. However, the secret formula would be recorded bythe subsidiary as $15,000, the $20,000 allocation less five years ofamortization at $1,000 per year.。