CHAPTER AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS Answers to Questions A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a controlling financial interest (generally over 50 percent) of its outstanding voting stock Amounts allocated to identifiable assets and liabilities in excess of recorded amounts on the books of the subsidiary are not recorded separately by the parent Instead, the parent records the fair value/purchase price of the interest acquired in an investment account The allocation to identifiable asset and liability accounts is made through working paper entries when the parent and subsidiary financial statements are consolidated The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the purchase price is equal to or greater than the total fair value of the subsidiary If the parent had acquired an 80 percent interest and the purchase price was equal to or greater than the fair value of the interest acquired, the land would still appear in the consolidated balance sheet at $100,000 Under SFAS No 141R, the noncontrolling interest is also reported based on fair values at the acquisition date Parent company—a corporation that owns a controlling interest in the outstanding voting stock of another corporation (its subsidiary) Subsidiary company—a corporation that is controlled by a parent company that owns a controlling interest in its outstanding voting stock, either directly or indirectly Affiliated companies—companies that are controlled by a single management team through parent-subsidiary relationships (Although the term affiliate is a synonym for subsidiary, the parent company is included in the total affiliation structure.) Associated companies—companies that are controlled through parent-subsidiary relationships or whose operations can be significantly influenced through equity investments of 20 percent to 50 percent A noncontrolling interest is the equity interest in a subsidiary company that is owned by stockholders outside of the affiliation structure In other words, it is the equity interest in a subsidiary (recorded at fair value) that is not held by the parent company or subsidiaries of the parent company Under the provisions of FASB Statement No 94, “Consolidation of All Majority-owned Subsidiaries,” a subsidiary will not be consolidated if control is temporary or if control does not rest with the majority owner, such as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under severe foreign exchange restrictions or other governmentally imposed restrictions Consolidated financial statements are intended primarily for the stockholders and creditors of the parent company, according to SFAS No 160 (and ARB No 51) The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of the outstanding capital stock of the parent company Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or consolidation accounted for as an acquisition But goodwill from consolidation would not appear in the general ledger of a parent company or its subsidiary Goodwill is entered in consolidation working papers when the reciprocal investment and equity amounts are eliminated Working paper entries affect consolidated financial statements, but they are not entered in any general ledger ©2009 Pearson Education, Inc publishing as Prentice Hall 3-1 3-2 An Introduction to Consolidated Financial Statements 10 The parent company’s investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is consolidated It would appear in the parent company’s separate balance sheet under the heading “investments” or “other assets.” Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as investments or other assets They are accounted for under the equity method if the parent can exercise significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost method 11 Parent’s books: Investment in subsidiary Sales Accounts receivable Interest income Dividends receivable Advance to subsidiary 12 Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order to show the financial position and results of operations of the total economic entity that is under the control of a single management team Sales by a parent to a subsidiary are internal transactions from the viewpoint of the economic entity and the same is true of interest income and interest expense and rent income and rent expense arising from intercompany transactions Similarly, receivables from and payables to affiliated companies not represent assets and liabilities of the economic entity for which consolidated financial statements are prepared 13 The stockholders’ equity of a parent company under the equity method is the same as the consolidated stockholders’ equity of a parent company and its subsidiaries provided that the noncontrolling interest, if any, is reported outside of the consolidated stockholders’ equity If noncontrolling interest is included in consolidated stockholders’ equity, it represents the sole difference between the parent company’s stockholders’ equity under the equity method and consolidated stockholders’ equity 14 No The amounts that appear in the parent company’s statement of retained earnings under the equity method and the amounts that appear in the consolidated statement of retained earnings are identical, assuming that the noncontrolling interest is included as a separate component of stockholders’ equity 15 Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total income to the consolidated entity between controlling and noncontrolling stockholders From the viewpoint of the controlling interest (the stockholders of the parent company), income attributable to noncontrolling interest has the same effect on consolidated net income as an expense This is because consolidated net income is income to the parent company stockholders Alternatively, you can view total consolidated net income as being allocated to the controlling and noncontrolling interests 16 The computation of noncontrolling interest is comparable to the computation of retained earnings It is computed: Reciprocal accounts on subsidiary’s books: Capital stock and retained earnings Purchases Accounts payable Interest expense Dividends payable Advance from parent Noncontrolling interest beginning of the period Add: Income attributable to noncontrolling interest Deduct: Noncontrolling interest dividends Noncontrolling interest end of the period 17 XX XX –XX XX It is acceptable to consolidate the annual financial statements of a parent company and a subsidiary with different fiscal periods, provided that the dates of closing are not more than three months apart Any significant developments that occur in the intervening three-month period should be disclosed in notes to the financial statements In the situation described, it is acceptable to consolidate the financial statements of the subsidiary with an October 31 closing date with the financial statements of the parent with a December 31 closing date ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 18 3-3 The acquisition of shares held by noncontrolling stockholders does not constitute a business combination Rather, it must be accounted for as a treasury stock transaction It is not possible, by definition, to acquire a controlling interest from noncontrolling stockholders SOLUTIONS TO EXERCISES Solution E3-1 Solution E3-2 6 b c d d b a d b d d a d c Solution E3-3 [AICPA adapted] c Advance to Hill $75,000 + receivable from Ward $200,000 = $275,000 a Goodwill has an indeterminate life and is not amortized a Owen accounts for Sharp using the equity method, therefore, consolidated retained earnings is equal to Owen’s retained earnings, or $1,240,000 d All intercompany receivables and payables are eliminated Solution E3-4 Implied fair value of Santa Maria ($900,000 / 90%) Less: Book value of Santa Maria Excess fair value over book value Equipment undervalued Goodwill at January 1, 2009 Goodwill at December 31, 2009 = Goodwill from consolidation Since goodwill is not amortized Consolidated net income Pinto’s reported net income Less: Correction for depreciation on excess allocated to equipment ($30,000/3 years) Consolidated net income $1,000,000 (900,000) $ 100,000 30,000 $ 70,000 $ 70,000 $490,000 (10,000) $480,000 Solution E3-5 $600,000, the dividends of Panderman $330,000, equal to $300,000 dividends payable of Panderman plus $30,000 (30% of $100,000) dividends payable to noncontrolling interests of Sadisman ©2009 Pearson Education, Inc publishing as Prentice Hall 3-4 An Introduction to Consolidated Financial Statements ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 3-5 Solution E3-6 Preliminary computation Cost of Slider stock (Fair value) Book value of Slider Goodwill $1,250,000 1,000,000 $ 250,000 Journal entry to record push down values Inventories Land Buildings — net Equipment — net Goodwill Retained earnings Note payable Push-down capital 20,000 50,000 150,000 80,000 250,000 210,000 10,000 750,000 Slider Corporation Balance Sheet January 1, 2010 (in thousands) Assets Cash Accounts receivable Inventories Land Buildings — net Equipment — net Goodwill Total assets Liabilities Accounts payable Note payable Total liabilities Stockholders’ equity Capital stock Push-down capital Total stockholders’ equity Total liabilities and stockholders’ equity $ 70 80 100 200 500 300 250 $1,500 $ $ 100 150 250 500 750 1,250 $1,500 ©2009 Pearson Education, Inc publishing as Prentice Hall 3-6 An Introduction to Consolidated Financial Statements Solution E3-7 Pasture Corporation and Subsidiary Consolidated Income Statement for the year 2010 (in thousands) Sales ($1,000 + $400) Less: Cost of sales ($600 + $200) $1,400 (800) Gross profit Less: Depreciation expense ($50 + $40) Other expenses ($199 + $90) 600 (90) (289) Total consolidated income Less: Noncontrolling interest share ($70 ´ 30%) Controlling interest share of cnsolidated net income 221 (21) 200 $ Pasture Corporation and Subsidiary Consolidated Income Statement for the year 2010 (in thousands) Sales ($1,000 + $400) Less: Cost of sales ($600 + $200) $1,400 (800) Gross profit Less: Depreciation expense ($50,000 + $40,000 - $6,000) Other expenses ($199,000 + $90,000) 600 (84) (289) Total consolidated income Less: Noncontrolling interest share [($70 ´ 30%)+ ($6 depreciation x 30%)] Controlling interest share of cnsolidated net income 227 $ Supporting computations Depreciation of excess allocated to overvalued equipment: $30/5 years = $6 ©2009 Pearson Education, Inc publishing as Prentice Hall (22.8) 204.2 Chapter 3-7 Solution E3-8 Capital stock The capital stock appearing in the consolidated balance sheet at December 31, 2009 is $1,800,000, the capital stock of Poball, the parent company Goodwill at December 31, 2009 Investment cost at January 2, 2009 (80% interest) Implied total fair value of Softcan ($700,000 / 80%) Book value of Softcan(100%) Excess is considered goodwill since no other fair value information is given $800,000 300,000 (180,000) $920,000 Noncontrolling interest at December 31, 2009 Capital stock and retained earnings of Softcan on January Add: Softcan’s net income Less: Dividends declared by Softcan Softcan’s stockholders’ equity December 31 Noncontrolling interest percentage Noncontrolling interest December 31 $275,000 Consolidated retained earnings at December 31, 2009 Poball’s retained earnings January (equal to beginning consolidated retained earnings Add: Net income of Poball (equal to controlling share of consolidated net income) Less: Dividends declared by Poball Consolidated retained earnings December 31 $700,000 $875,000 (600,000) $600,000 90,000 (50,000) 640,000 20% $128,000 Dividends payable at December 31, 2009 Dividends payable to stockholders of Poball $ 90,000 Dividends payable to noncontrolling stockholders ($25,000 ´ 20%) 5,000 Dividends payable to stockholders outside the Consolidated entity $ 95,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 3-8 An Introduction to Consolidated Financial Statements Solution E3-9 Paskey Corporation and Subsidiary Partial Balance Sheet at December 31, 2010 Stockholders’ equity: Capital stock, $10 par Additional paid-in capital Retained earnings Equity of controlling stockholders Noncontrolling interest Total stockholders’ equity $300,000 50,000 65,000 415,000 41,000 $456,000 Supporting computations Computation of consolidated retained earnings: Paskey’s December 31, 2009 retained earnings Add: Paskey’s reported income for 2010 Less: Paskey’s dividends Consolidated retained earnings December 31, 2010 $ 35,000 55,000 (25,000) $ 65,000 Computation of noncontrolling interest at December 31, 2010 Salam’s December 31, 2009 stockholders’ equity Income less dividends for 2010 ($20,000 - $15,000) Salam’s December 31, 2010 stockholders’ equity Noncontrolling interest percentage Noncontrolling interest December 31, 2010 $200,000 5,000 205,000 20% $ 41,000 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 3-9 Solution E3-10 Peekos Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2011 (in thousands) Sales Cost of goods sold Gross profit Deduct: Operating expenses Total consolidated income Deduct: Noncontrolling interest share Controlling interest share of consolidated net income $2,100 1,100 1,000 560 440 14 $ 426 Supporting computations Investment cost January 2, 2009 (90% interest) Implied total fair value of Slogger ($810,000 / 90%) Slogger’s Book value acquired (100%) Excess of fair value over book value Excess allocated to: Inventories (sold in 2009) Equipment (4 years remaining use life) Goodwill Excess of fair value over book value Operating expenses: Combined operating expenses of Peekos and Slogger Add: Depreciation on excess allocated to equipment ($40,000/4 years) Consolidated operating expenses $ $ 810 900 (700) $ 200 $ $ 30 40 130 200 $ 550 $ 10 560 ©2009 Pearson Education, Inc publishing as Prentice Hall 3-10 An Introduction to Consolidated Financial Statements SOLUTIONS TO PROBLEMS Solution P3-1 Pennyvale Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2009 Assets Cash ($32,000 + $18,000) Accounts receivable ($45,000 + $34,000 - $5,000) Inventories ($143,000 + $56,000) Equipment — net ($380,000 + $175,000) Total assets Liabilities and Stockholders’ Equity Liabilities: Accounts payable ($40,000 + $33,000 - $5,000) Stockholders’ equity: Common stock, $10 par Retained earnings Noncontrolling interest ($150,000 + $100,000) ´ 20% Total liabilities and stockholders’ equity $ 50,000 74,000 199,000 555,000 $878,000 $ 68,000 460,000 300,000 50,000 $878,000 Consolidated net income for 2010 Pennyvale’s separate income Add: Income from Sutherland Sales ($90,000 ´ 80%) Consolidated net income Noncontrolling interest share (20% x $90,000) Controlling interest share (80%) $170,000 90,000 $260,000 $ 18,000 $242,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 3-12 An Introduction to Consolidated Financial Statements Solution P3-3 Cost of investment in Softback Books January 1, 2009 Implied fair value of Softback ($2,700,000 / 80%) Book value of Softback Excess of fair value over book value $2,700,000 $3,375,000 2,500,000 $ 875,000 Schedule to Allocate Fair Value — Book Value Differential Fair Value - Book Value $ 500,000 1,000,000 Current assets Equipment Other plant assets Bargain purchase * Excess fair value over book value Allocation $ 500,000 1,000,000 (625,000) $875,000 * After recognizing acquired assets and liabilities at their fair values, we are left with a negative excess of $625,000 Under SFAS No 141R, this difference is recorded as a gain in the consolidated income statement in the year of acquisition The gain is attributable entirely to the controlling interest, and is recorded on the parent’s books by a debit to the Investment account and a credit to a Gain from bargain Purchase account An alternative calculation of this amount takes the difference between the fair values of the net assets ($4,000,000) and their fair value implied by the acquisition price ($3,375,000), which equals $625,000 Solution P3-4 Noncontrolling interest of $65,000 (it’s fair value) plus $260,000 (fair value of Pharm’s investment) equals total fair value of $325,000 Therefore, Pharm’s interest is 80% ($260,000 / $325,000), and noncontrolling interest is 20% ($65,000 / $325,000) Total fair value Book value of Specht Excess fair value over book value $ 325,000 (260,000) $ 65,000 Excess allocated to Plant assets — net Goodwill Total Fair Value $210,000 - Book Value $200,000 $ $ 10,000 55,000 65,000 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 3-13 Solution P3-5 Palmer Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2009 (in thousands) Assets Current assets Plant assets Goodwill Equities Liabilities Capital stock Retained earnings Supporting computations Sorrel’s net income ($400 - $300 - $50) Less: Excess allocated to inventories that were sold in 2009 Less: Depreciation on excess allocated to plant assets ($40 /4 years) Income from Sorrel Plant assets ($500 + $300 + $40 - $10) Palmer’s retained earnings: Beginning retained earnings Add: Operating income Add: Income from Sorrel Deduct: Dividends Retained earnings December 31, 2009 $ 340 830 200 $1,370 $ 660 300 410 $1,370 $ 50 (20) $ (10) 20 $ 830 $ 340 100 20 (50) 410 $ ©2009 Pearson Education, Inc publishing as Prentice Hall 3-14 An Introduction to Consolidated Financial Statements Solution P3-6 Perry Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2009 (in thousands) Cash Receivables — net Inventories Land Equipment — net Investment in Sim Goodwill Total assets Accounts payable Dividends payable Capital stock Retained earnings Noncontrolling interest Total equities a b Perry per books $ 42 50 Sim per books $ 20 130 350 150 600 Adjustments and Eliminations b Consolidated Balance Sheet $ 62 171 50 200 100 400 350 700 459 a 459 a $1,651 $ 500 $ 410 60 1,000 181 $ 80 10 300 110 $1,651 $ 100 100 $1,783 $ b a 300 a 110 a 500 51 490 61 1,000 181 51 $1,783 To eliminate reciprocal investment and equity accounts, record goodwill ($100), and enter noncontrolling interest [($410 equity + $100 goodwill) ´ 10%)] To eliminate reciprocal dividends receivable (included in receivables — net) and dividends payable amounts ($10 dividends ´ 90%) ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 3-15 Solution P3-7 Preliminary computations Cost of 80% investment January 3, 2009 Implied total fair value of Slender ($280,000 / 80%) Book value of Slender Excess fair value over book value on January = Goodwill $280,000 $350,000 (250,000) $100,000 Noncontrolling interest share of income: Slender’s net income $50,000 ´ 20% noncontrolling interest $ 10,000 Current assets: Combined current assets ($204,000 + $75,000) Less: Dividends receivable ($10,000 ´ 80%) Current assets $279,000 (8,000) $271,000 Income from Slender: None Investment income is eliminated in consolidation Capital stock: $500,000 Capital stock of the parent, Portly Corporation Investment in Slender: None The investment account is eliminated Excess of fair value over book value $100,000 Controlling share of consolidated net income: Equals Portly’s net income, or: Consolidated sales Less: Consolidated cost of goods sold Less: Consolidated expenses Consolidated net income Less: Noncontrolling interest share Controlling share of consolidated net income $600,000 (370,000) (80,000) $150,000 (10,000) $140,000 Consolidated retained earnings December 31, 2009: $200,000 Equals Portly’s beginning retained earnings Consolidated retained earnings December 31, 2010 Equal to Portly’s ending retained earnings: Beginning retained earnings Add: Controlling share of consolidated net income Less: Portly’s dividends for 2010 Ending retained earnings $200,000 140,000 (60,000) $280,000 Noncontrolling interest December 31, 2010 Slender’s capital stock and retained earnings Add: Net income Less: Dividends Slender’s equity December 31, 2010 at fair value Noncontrolling interest percentage Noncontrolling interest December 31, 2010 using book value Add: Noncontrolling interest share of Goodwill Noncontrolling interest December 31, 2010 at fair value $300,000 50,000 (25,000) 325,000 20% $ 65,000 20,000 $ 85,000 10 ©2009 Pearson Education, Inc publishing as Prentice Hall 3-16 An Introduction to Consolidated Financial Statements Solution P3-8 [AICPA adapted] Preliminary computations Investment cost: Meadow (1,000 shares ´ 80%) ´ $70 Van (3,000 shares ´ 70%) ´ $40 Implied total fair values: Meadow ($56,000 / 80%) Van ($84,000 / 70%) Book value Meadow ($70,000 ´ 80%) Van ($120,000 ´ 70%) Excess fair value over book value at acquisition Meadow Van 56,000 84,000 70,000 120,000 70,000 120,000 Journal entries to account for investments January 1, 2009 — Acquisition of investments Investment in Meadow (80%) 56,000 Cash 56,000 To record acquisition of 800 shares of Meadow common stock at $70 per share Investment in Van (70%) 84,000 Cash 84,000 To record acquisition of 2,100 shares of Van common stock at $40 per share During 2006 — Dividends from subsidiaries Cash 12,800 Investment in Meadow (80%) 12,800 To record dividends received from Meadow ($16,000 ´ 80%) Cash 6,300 Investment in Van (70%) 6,300 To record dividends received from Van ($9,000 ´ 70%) December 31, 2009 — Share of income or loss Investment in Meadow (80%) 28,800 Income from Meadow 28,800 To record investment income from Meadow ($36,000 ´ 80%) Loss from Van 8,400 Investment in Van (70%) 8,400 To record investment loss from Van ($12,000 ´ 70%) ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 3-17 Solution P3-8 (continued) Noncontrolling interest December 31, 2009 * Meadow $50,000 Common stock Capital in excess of par Retained earnings Equity December 31 Noncontrolling interest percentage Noncontrolling interest December 31 40,000 90,000 20% $18,000 Van $60,000 20,000 19,000 99,000 30% $29,700 * Fair value equals book value Consolidated retained earnings December 31, 2009 Consolidated retained earnings is reported at $304,600, equal to the retained earnings of Todd Corporation, the parent, at December 31, 2009 Investment balance December 31, 2009: Investment cost January Add (deduct): Income (loss) Deduct: Dividends received Investment balances December 31 Meadow $56,000 28,800 (12,800) $72,000 Van $84,000 (8,400) (6,300) $69,300 Check: Investment balances should be equal to the underlying book value Meadow $90,000 ´ 80% = $72,000 Van $99,000 ´ 70% = $69,300 ©2009 Pearson Education, Inc publishing as Prentice Hall 3-18 An Introduction to Consolidated Financial Statements Solution P3-9 Preliminary computations (in thousands) Cost of 90% investment January 1, 2009 Implied total fair value of Snowdrop ($3,600 / 90%) Book value of Snowdrop Excess fair value over book value on January Allocation to equipment Remainder is Goodwill Additional annual depreciation on equipment ($800 / years) $3,600 $4,000 (2,700) $1,300 $ 800 $ 500 $ 100 Pansy Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2009 (in thousands) Cash $ Receivables — net Dividends receivable Inventory Land Buildings — net Equipment — net Investment in Snowdrop Goodwill Total assets Pansy 300 600 90 700 600 2,000 600 700 1,000 1,500 800 b Adjustments and Eliminations B a 90 700 3,000 a 3,780 a $9,570 Consolidated Balance Sheet $ 500 1,000 1,300 1,300 3,000 3,780 Accounts payable $ 300 Dividends payable 500 Capital stock 7,000 Retained earnings 1,770 Noncontrolling interest Total equities $9,570 a 90% Snowdrop $ 200 400 $3,700 500 $10,600 $ $ 600 100 2,000 1,000 500 b 90 a 2,000 a 1,000 a $3,700 420 900 510 7,000 1,770 420 $10,600 To eliminate reciprocal investment and equity accounts, enter unamortized excess allocated to equipment, record goodwill, and enter noncontrolling interest (at fair value) To eliminate reciprocal dividends receivable and dividends payable amounts ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 3-19 Solution P3-10 Purchase price of investment in Snaplock (in thousands) Underlying book value of investment in Snaplock: Equity of Snaplock January 1, 2009 Add: Excess investment fair value over book value: Goodwill at December 31, 2013 Fair value of Snaplock January 1, 2009 $220 60 $280 Purchase price of 80% investment at fair value $224 Snaplock’s stockholders’ equity on December 31, 2013 (in thousands) 20% noncontrolling interest at fair value $ 62 20% goodwill (12) 20% noncontrolling interest’s equity at book value $ 50 Total equity = Noncontrolling interest’s equity $50 / 20% = $250 Pandora’s investment in Snaplock account balance at December 31, 2013 (in thousands) Underlying book value in Snaplock December 31, 2013 ($250 ´ 80%) $200 Add: 80% of Goodwill December 31, 2013 (20% is attributable to the noncontrolling interest) 48 Investment in Snaplock December 31, 2013 $248 Alternative solution: Investment cost January 1, 2009 Add: 80% of Snaplock’s increase since acquisition ($250 - $220) ´ 80% Investment in Snaplock December 31, 2013 $224 24 $248 Pandora’s capital stock and retained earnings December 31, 2013 (in thousands) Capital stock $400 Retained earnings $ 30 Amounts are equal to capital stock and retained earnings shown in the consolidated balance sheet ©2009 Pearson Education, Inc publishing as Prentice Hall 3-20 An Introduction to Consolidated Financial Statements Solution P3-11 Preliminary computations (in thousands) Cost of 70% investment in Stubb Implied fair of Stubb ($700 / 70%) Book value of Stubb (100%) Excess Excess allocated: Inventories Plant assets Goodwill Excess $ 670 $1,000 800 $ 200 $ $ 20 80 100 200 Investment balance at January 1, 2009 Share of Stubb’s retained earnings increase ($60 ´ 70%) Less: Amortization 70% of excess allocated to inventories (sold in 2009) 70% of excess allocated to plant assets ($80 /8 years) Investment balance at December 31, 2009 $ 700 42 (14) (7) $ 721 Noncontrolling interest at December 31 30% of Stubb’s book value at December 31 ($860 x 30%) 30% of Goodwill 30% Unamortized excess for plant assets 30% x ($80 - $10 amortization) Noncontrolling at December 31 (fair value) $258 30 21 $309 Pope Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2009 (in thousands) Cash $ Accounts receivable — net Accounts receivable — Pope Dividends receivable Inventories Land Plant assets — net Investment in Stubb Goodwill Assets Accounts payable Account payable to Stubb Dividends payable Long-term debt Capital stock Retained earnings Noncontrolling interest ($860,000 ´ 30%) Pope 60 440 $ 70% Stubb 20 200 Adjustments and Eliminations 10 500 100 700 320 150 350 a b 10 c 820 250 1,120 70 721 a 721 a 100 $2,528 $1,050 $ $ 300 10 40 600 1,000 578 Consolidated Balance Sheet $ 80 640 100 $3,010 80 10 100 500 360 $ b c 10 380 43 700 1,000 578 a 500 a 360 a 309 ©2009 Pearson Education, Inc publishing as Prentice Hall 309 Chapter 3-21 Equities $2,528 $1,050 $3,010 ©2009 Pearson Education, Inc publishing as Prentice Hall 3-22 An Introduction to Consolidated Financial Statements Solution P3-12 Preliminary computations (in thousands) 80% Investment in Shasti at cost January 1, 2009 Implied total fair value of Shasti ($760 / 80%) Shasti book value Excess fair value over book value recorded as goodwill 2009 2010 2011 Shasti Dividends $ 40 50 60 $150 Shasti Net Income $ 80 100 120 $300 $ $ $ 80% of Net Income $ 64 80 96 $240 Shasti’s dividends for 2010 ($40 / 80%) $ 50 Shasti’s net income for 2010 ($50 dividends ´ 2) $ 100 Goodwill — December 31, 2010 $ 40 Noncontrolling interest share of income — 2011 Shasti’s income for 2011 ($48 dividends received/80%) ´ Noncontrolling interest percentage Noncontrolling interest share $ 120 20% 24 Noncontrolling interest December 31, 2011 Equity of Shasti January 1, 2009 Add: Income for 2009, 2010 and 2011 Deduct: Dividends for 2009, 2010 and 2011 Equity book value of Shasti December 31, 2011 Goodwill Equity fair value of Shasti December 31, 2011 Noncontrolling interest percentage Noncontrolling interest December 31, 2011 Controlling share of consolidated net income for 2011 Pendleton’s separate income Add: Income from Shasti Controlling share of consolidated net income $ $ 900 300 (150) 1,050 50 $1,100 20% $ 220 $ $ ©2009 Pearson Education, Inc publishing as Prentice Hall 280 96 376 760 950 900 50 Chapter 3-23 Solution P3-13 Preliminary computations 80% Investment in Sidney (cost) January 2, 2010 Implied total fair value of Sidney ($300 / 80%) Book value of Sidney (100%) Excess fair value over book value Excess allocated to Buildings (fair value $170 - book value $150) Remainder to goodwill Excess fair value over book value $300 $375 (250) $125 $ 20 105 $125 Part a b c d e Total current assets Cash ($50 + $20) Other current assets ($150 + $80) Total current assets $ 70 230 $300 Plant and equipment net of depreciation Land ($300 + $50) Buildings — net ($400 + $150) Excess allocated to buildings Plant and equipment — net $350 550 20 $920 Common stock Par value of Peyton’s stock December 31, 2009 Add: Par value of shares issued for Sidney Common stock $600 100 $700 Additional paid-in capital Additional paid-in capital of Peyton December 31, 2009 Add: Increase from shares issued from Sidney Additional paid-in capital $ 60 200 $260 Retained earnings Consolidated retained earnings = Peyton’s retained earnings December 31, 2009 $140 ©2009 Pearson Education, Inc publishing as Prentice Hall 3-24 An Introduction to Consolidated Financial Statements Solution P3-13 (continued) Part a b c d e Income from Sidney — 2010 Sidney’s reported net income Less: Depreciation on excess — buildings ($20 /5 years) Adjusted Net Income of Sidney $ 40 (4) $ 36.8 80% of Sidney’s Net Income = Income from Sidney $ 28.8 Investment in Sidney December 31, 2010 Cost January Add: Income from Sidney Less: Dividends from Sidney ($20 ´ 80%) Investment in Sidney December 31 $300 28.8 (16) $312.8 Controlling share of consolidated net income — 2010 Separate income of Peyton Add: Income from Sidney Controlling share of consolidated net income $ 90 28.8 $118.8 Consolidated retained earnings December 31, 2010 Retained earnings of Peyton December 31, 2009 Add: Consolidated net income Less: Peyton’s dividends Consolidated retained earnings December 31 $140 118.8 (50) $208.8 Noncontrolling interest December 31, 2010 Equity of Sidney December 31, 2009 Add: Net income Less: Dividends Equity book value of Sidney December 31 Unamortized excess for buildings Goodwill Equity fair value of Sidney December 31 Noncontrolling interest percentage Noncontrolling interest fair value - December 31 $250 40 (20) 270 16 105 $391 20% $ 78.2 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 3-25 Solution P3-14 Schedule to allocate the investment fair value — book value differential: (in thousands) 80% Investment cost January 2, 2009 $2,760 Implied total fair value ($2,760 / 80%) $3,450 Book value of interest acquired ($2,300 ´ 80%) (2,300) Excess fair value over book value $1,150 Excess allocated Fair Value - Book Value = Inventories $ 500 Other current assets 200 Land 600 1,800 Buildings — net 600 Equipment — net Other liabilities 560 Remainder to goodwill Total excess $ 400 150 500 1,000 800 610 Allocated $ 100 50 100 800 (200) 50 250 $1,150 ©2009 Pearson Education, Inc publishing as Prentice Hall 3-26 An Introduction to Consolidated Financial Statements Solution P3-14 (continued) Portland Corporation and Subsidiary Consolidated Balance Sheet at January 2, 2009 (in thousands) Assets Current Assets: Cash ($240 + $60) Receivables — net ($800 + $200) Inventories ($1,100 + $400 + $100) Other current assets ($900 + $150 + $50) Total current assets Fixed Assets: Land ($3,100 + $500 + $100) Buildings — net ($6,000 + $1,000 + $800) Equipment — net ($3,500 + $800 - $200) Goodwill Total fixed assets Total assets $ $ 3,700 7,800 4,100 250 15,850 $19,850 Liabilities and Stockholders’ Equity Liabilities: Accounts payable ($400 + $200) Other liabilities ($1,500 + $610 - $50) Total liabilities $ Stockholders’ equity: Capital stock Retained earnings Noncontrolling interest * Total stockholders’ equity Total liabilities and stockholders’ equity * Noncontrolling interest Sidney’s equity at book value Unamortized excess fair value Sidney’s equity at fair value 20% Noncontrolling interest 300 1,000 1,600 1,100 4,000 600 2,060 2,660 $15,000 1,500 690 17,190 $19,850 $2,300 1,150 $3,450 $ 690 ©2009 Pearson Education, Inc publishing as Prentice Hall ... a controlling interest from noncontrolling stockholders SOLUTIONS TO EXERCISES Solution E3-1 Solution E3-2 6 b c d d b a d b d d a d c Solution E3-3 [AICPA adapted] c Advance to Hill $75,000... acquisition of shares held by noncontrolling stockholders does not constitute a business combination Rather, it must be accounted for as a treasury stock transaction It is not possible, by definition, to... publishing as Prentice Hall 3-10 An Introduction to Consolidated Financial Statements SOLUTIONS TO PROBLEMS Solution P3-1 Pennyvale Corporation and Subsidiary Consolidated Balance Sheet at December