Solution Manual Advanced Accounting 11E by Beams 11 chapter - Accounting | Trường Đại học Hà Nội

lOMoARcPSD|46958826 lOMoARcPSD|46958826 Chapter 11
CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND CORPORATE JOINT VENTURES ANSWERS TO QUESTIONS 1
Parent company theory views consolidated financial statements from the viewpoint of the parent and
entity theory views consolidated financial statements from the viewpoint of the business entity under
which all resources are controlled by a single management team. By contrast, traditional theory
sometimes reflects the parent viewpoint and at other times it reflects the viewpoint of the business entity.
A detailed comparison of these theories is presented in Exhibit 11–1 of the text. 2
Only contemporary theory is changed by current pronouncements of the Financial Accounting Standards
Board. While such pronouncements can and do change the current accounting and reporting practices,
they do not change the logic or the consistency of either parent company or entity theory. 3
The valuation of subsidiary assets on the basis of the price paid for the controlling interest seems
justified conceptually when substantially all of the subsidiary stock is acquired by the parent. But the
conceptual support for this approach is less when only a slim majority of subsidiary stock is acquired. In
addition, the valuation of the noncontrolling interest based on the price paid by the parent has practical
limitations because noncontrolling interest does not represent equity ownership in the usual sense. The
ability of noncontrolling stockholders to participate in management is limited and noncontrolling shares
do not possess the usual marketability of equity securities. 4
Consolidated assets are equal to their fair values under entity theory only when the book values of parent
assets are equal to their fair values. Otherwise, consolidated assets are not equal to their fair values under
either parent company or entity theories. 5
The valuation of the noncontrolling interest at book value might overstate the equity of noncontrolling
shareholders because of the limited marketability of shares held by noncontrolling stockholders and
because of the limited ability of noncontrolling stockholders to share in management through their
voting rights. Valuation of the noncontrolling interest at book value also overstates or understates the
noncontrolling interest unless the subsidiary assets are recorded at fair values. 6
Consolidated net income under parent company theory and income to the controlling stockholders under
entity theory should be the same. This is illustrated in Exhibit 11–5, which shows different income
statement amounts for cost of sales, operating expenses, and income allocated to noncontrolling
stockholders, but the same income to controlling stockholders. Note that consolidated net income under
parent company and traditional theories reflects income to controlling stockholders. 7
Income to the parent stockholders under the equity method of accounting is the same as income to the
controlling stockholders under entity theory. But income to controlling stockholders is not identified as
consolidated net income as it would be under parent company or traditional theories. 8
Consolidated income statement amounts under entity theory are the same as under traditional theory
when subsidiary investments are made at book value because traditional theory follows entity theory in
eliminating the effects of intercompany transactions from consolidated financial statements.
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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures 9
Traditional theory corresponds to entity theory in matters relating to unrealized and constructive gains and losses from
intercompany transactions. In other words, unrealized and constructive gains and losses are allocated between
controlling and noncontrolling interests in the same manner under these two theories. 10
Push-down accounting simplifies the consolidation process. The push-down adjustments are recorded in
the subsidiary’s separate books at the time of the business combination; thus, it is not necessary to
allocate the unamortized fair values in the consolidation working papers. 11
A joint venture is an entity that is owned, operated, and jointly controlled by a small group of investor-
venturers to operate a business for the mutual benefit of the venturers. Some joint ventures are organized
as corporations, while others are organized as partnerships or undivided interests. Each venturer
typically participates in important decisions of a joint venture irrespective of ownership percentage. 12
Investors in corporate joint ventures use the equity method of accounting and reporting for their
investment earnings and investment balances as required by GAAP. The cost method would be used
only if the investor could not exercise significant influence over the corporate joint venture.
Alternatively, investors in unincorporated joint ventures use the equity method of accounting and
reporting or proportional consolidation for undivided interests specified as a special industry practice. SOLUTIONS TO EXERCISES Solution E11-1 1 A 5 B 2 A 6 C 3 C 7 D 4 A Solution E11-2 1 B 4 D 2 B 5 C 3 D Solution E11-3 1 c
Total value of Sit implied by purchase price $1,800,000 ($1,440,000/.8)
Noncontrolling interest percentage 20% Noncontrolling interest $360,000 2 a
Only the parent’s percentage of unrealized profits from upstream
sales is eliminated under parent company theory. 3 b
Subsidiary’s income of $400,000 10% noncontrolling $ 40,000 interest
Less: Patent amortization ($140,000/10 years 10%) (1,400) Noncontrolling interest share $ 38,600
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Solution E11-3 (continued) 4 a
Implied fair value — $1,680,000 = patents at acquisition
Book value of 100% of identifiable net assets $1,680,000
Add: Patents at acquisition ($108,000/90%) 120,000 Total implied value 1,800,000 Percent acquired 80%
Purchase price under entity theory $1,440,000 5 b
Purchase price — ($1,680,000 80%) = patents at acquisition
Book value $1,680,000 80% = underlying equity $1,344,000
Add: Patents at acquisition ($108,000/90%) 120,000 Purchase price (traditional theory) $1,464,000 Solution E11-4 1 Goodwill Parent company theory Cost of investment in Sad $ 500,000
Fair value acquired ($400,000 80%) 320,000 Goodwill $ 180,000 Entity theory
Implied value based on purchase price ($500,000/.8) $ 625,000
Fair value of Sad’s net assets 400,000 Goodwill $ 225,000 2 Noncontrolling interest
Parent company theory
Book value of Sad’s net assets $ 260,000
Noncontrolling interest percentage 20% Noncontrolling interest $ 52,000 Entity theory Total valuation of Sad $ 625,000
Noncontrolling interest percentage 20% Noncontrolling interest $ 125,000 3 Total assets Parent company theoryPod Sad Adjustment Total Current assets $520,000 $ 50,000 $ 40,000 80% $ 602,000 Plant assets — net 480,000 250,000 110,000 80% 818,000 Goodwill 180,000 $1,000,000 $300,000 $1,600,000 Entity theory Current assets $ 520,000 $ 50,000 $ 40,000 100% $ 610,000 Plant assets — net 480,000 250,000 110,000 100% 840,000 Goodwill 225,000 $1,000,000 $300,000 $1,675,000
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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution E11-5 Preliminary computations Parent company theory Cost of 80% interest $300,000
Fair value acquired ($350,000 80%) 280,000 Goodwill $ 20,000 Entity theory
Implied total value ($300,000 cost ÷ 80%) $375,000
Fair value of Sal’s net identifiable assets 350,000 Goodwill $ 25,000 1
Consolidated net income and noncontrolling interest share for 2011: Entity Theory Combined separate incomes $550,000
Depreciation on excess allocated to equipment: $75,000 excess ÷ 5 years (15,000) Total consolidated income 535,000
Less: Noncontrolling interest share ($50,000 -15,000) 20% (7,000)
Controlling interest share of NI(Income $528,000
Attributable to controlling stockholders) Parent Company Theory Combined separate incomes $550,000
Depreciation on excess allocated to equipment:
($75,000 excess x 80% acquired)/5 years (12,000)
Less: Noncontrolling interest share ($50,000 x 20%) (10,000) Consolidated net income $528,000 2 Goodwill at December 31, 2011: $ 20,000 $ 25,000
© 2011 Pearson Education, Inc. publishing as Prentice Hall lOMoARcPSD|46958826 Chapter 11 11-5 Solution E11-6 Preliminary computation
Interest acquired in Sal: 72,000 shares 80,000 shares = 90% 1
Sal’s net assets under entity theory
Implied value from purchase price: $1,800,000/90% interest $2,000,000 2 Goodwill a Entity theory Implied value $2,000,000
Less: Fair value and book value of net assets 1,710,000 Goodwill $ 290,000 b Parent company theory Cost of 90% interest $1,800,000
Fair values of net assets acquired ($1,710,000 90%) 1,539,000 Goodwill $ 261,000 c
Traditional theory (same as parent theory) $ 261,000 3 Investment income from Sal
Income from Sal ($80,000 1/2 year 90% interest) $ 36,000 4
Noncontrolling interest under entity theory
Implied value of Sal at July 1, 2011 $2,000,000 Add: Income for 1/2 year 40,000 2,040,000 Noncontrolling percentage 10% Noncontrolling interest $ 204,000
Alternatively, $200,000 noncontrolling interest at July 1, plus
$4,000 share of reported income = $204,000
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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution E11-7 1 Parent company theory
Combined separate incomes of Pal and Sal $800,000
Less: Pal’s share of unrealized profits from upstream inventory sales ($30,000 80%) (24,000)
Less: Noncontrolling interest share ($300,000 20%) (60,000) Consolidated net income $716,000 2 Entity theory Combined separate incomes $800,000
Less: Unrealized profits from upstream sales (30,000) Total consolidated income $770,000
Income allocated to controlling stockholders ($500,000 + [$270,000 80%]) $716,000
Income allocated to noncontrolling stockholders ($300,000 - $30,000) 20% $ 54,000 Solution E11-8 Parent Traditional Company Entity Theory Theory Theory Combined separate incomes $180,000 $180,000 $180,000
Less: Unrealized inventory profits from downstream sales ($60,000 - $30,000) 50% (15,000) (15,000) (15,000)
Less: Unrealized profit on upstream sale of land ($96,000 - $70,000) 100% (26,000) (26,000) ($96,000 - $70,000) 80% (20,800)
Less: Noncontrolling interest share ($60,000 - $26,000) 20% (6,800) $60,000 20% (12,000) Consolidated net income $132,200 $132,200 Total consolidated income $139,000
Allocated to controlling stockholders $132,200 Allocated to noncontrolling Stockholders ($60,000 - $26,000) 20% $ 6,800
© 2011 Pearson Education, Inc. publishing as Prentice Hall lOMoARcPSD|46958826 Chapter 11 11-7 Solution E11-9 [Push-down accounting] 1
Push down under parent company theory Retained earnings 800,000 Inventories 90,000 Land 450,000 Buildings — net 270,000 Goodwill 360,000 Equipment 180,000 Other liabilities 90,000 Push down equity 1,700,000
To record revaluation of 90% of the net assets and elimination
of retained earnings as a result of a business combination with
Pin Corporation. Push down equity = ($600,000 fair value/book
value differential 90%) + $360,000 goodwill + $800,000 retained earnings. 2
Push down under entity theory Retained earnings 800,000 Inventories 100,000 Land 500,000 Buildings — net 300,000 Goodwill 400,000 Equipment — net 200,000 Other liabilities 100,000 Push down equity 1,800,000
To record revaluation of 100% of the net assets and elimination
of retained earnings as a result of a business combination with
Pin. Push down equity = $600,000 fair value/book value
differential + $400,000 goodwill + $800,000 retained earnings. Solution E11-10
Each of the investments should be accounted for by the equity method as a
one-line consolidation because the joint venture agreement requires consent
of each venturer for important decisions. Thus, each venturer is able to
exercise significant influence over its joint venture investment
irrespective of ownership interest. The 40 percent venturer: Income from Sun ($500,000 40%) $ 200,000
Investment in Sun ($8,500,000 40%) $3,400,000 The 15 percent venturer Income from Sun ($500,000 15%) $ 75,000
Investment in Sun ($8,500,000 15%) $1,275,000 Solution E11-11 Field Code Changed
In general, VIE accounting follows normal consolidation principles.
Under that approach, the noncontrolling interest share would be 90% of VIE
earnings, or $900,000. However, the intercompany fees must be allocated to
the primary beneficiary, not to noncontrolling interests. Therefore, in this
case, noncontrolling interest share would be 90% of $920,000, or $828,000.
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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution E11-12 Field Code Changed
As primary beneficiary, Pal must include Pot in its consolidated financial
staements. Additionally, Pal must make the following disclosures:
(a) the nature, purpose, size, and activities of the variable interest entity,
(b) the carrying amount and classification of consolidated assets that are
collateral for the variable interest entity’s obligations, and (c) lack of
recourse if creditors (or beneficial interest holders) of a consolidated
variable interest entity have no recourse to the general credit of the primary beneficiary.
Den will not consolidate Pot, since they are not the primary beneficiary. As
in traditional consolidations, only one firm consolidates a subsidiary.
However, since Den has a significant interest in Pot, they must disclose:
(a) the nature of its involvement with the variable interest entity and when
that involvement began, (b) the nature, purpose, size, and activities of the
variable interest entity, and (c) the enterprise’s maximum exposure to loss
as a result of its involvement with the variable interest entity. Den
accounts for the investment using the equity method. Solution E11-13 Field Code Changed
According to GAAP, if an enterprise absorbs a majority of a variable
interest entity’s expected losses and another receives a majority of
expected residual returns, the enterprise absorbing the losses is the
primary beneficiary and if condition one is also met. Laura meets condition
one, since as CEO, she had the power over economic decisions. Laura must
consolidate the variable interest entity. The contractual arrangement makes Laura the primary beneficiary.
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Pin Corporation and Subsidiary
Comparative Consolidated Balance Sheets at December 31, 2012 (in thousands) Parent Company Theory Entity Theory Assets Cash $ 52 $ 52 Receivables — net 300 300 Inventories 450 450 Plant assets — neta 1,998 2,010 Patentsb 64 80 Total assets $2,864 $2,892 Liabilities Accounts payable $ 304 $ 304 Other liabilities 500 500 Noncontrolling interestc 160 Total liabilities 964 804 Capital stock 1,000 1,000 Retained earnings 900 900 Noncontrolling interestd 0 188 Total stockholders’ equity 1,900 2,088 Total liabilities and stockholders’ equity $2,864 $2,892 a
Parent company theory: Combined plant assets of $1,950 + ($80 3/5 undepreciated excess)
Entity theory: Combined plant assets of $1,950 + ($100 3/5 undepreciated excess) b
Parent company theory: $80 patents - $16 amortization
Entity theory: $100 patents - $20 amortization c
Parent company theory: Noncontrolling interest equals Son’s equity of $800 20%
d Entity theory: [Son’s equity of $800 + ($60 undepreciated plant assets + $80 unamortized patents)] 20%
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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-2 Preliminary computation
Implied value of Sip based on purchase price ($320,000/.8) $400,000 Book value 340,000
Excess to undervalued equipment $ 60,000 1
Par Corporation and Subsidiary Consolidated Income Statement
for the year ended December 31, 2011 Sales $1,200,000 Less: Cost of sales 760,000 Gross profit 440,000 Other expenses $ 160,000 Depreciationa 159,000 319,000 Total consolidated net income $ 121,000 Allocation of income to: Noncontrolling interestb $ 8,200 Controlling interest $ 112,800 a
$150,000 depreciation - $1,000 piecemeal recognition of gain on equipment
through depreciation + ($60,000 excess 6 years) excess depreciation b
($60,000 reported income - $10,000 unrealized gain on equipment + $1,000
piecemeal recognition of gain on equipment - $10,000 excess depreciation) 20% interest 2
Par Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011 Assets Current assets $ 483,200 Plant and equipment — net
($1,190,000 - $399,000 + 50,000) 841,000 Total assets $1,324,200 Liabilities and equity Liabilities $ 300,000 Capital stock 600,000 Retained earningsa 340,000 Noncontrolling interestb 84,200
Total liabilities and stockholders’ equity $1,324,200 a
Sip beginning retained earnings $327,200 + Sip net income $112,800 - Sip dividends of $100,000 b
($380,000 stockholders’ equity + $50,000 excess - $9,000 unrealized gain on equipment) 20%
Check: $80,000 beginning noncontrolling interest + $8,200 noncontrolling
interest share - $4,000 noncontrolling interest dividends = $84,200
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Income from Sin for 2011 ($90,000 70%) $ 63,000 1b Goodwill at December 31, 2011 $ 70,000
($595,000 cost - $525,000 fair value) 1c
Consolidated net income for 2011 Pal’s separate income $300,000 Add: Income from Sin 63,000 $363,000 1d
Noncontrolling interest share for 2011
Net income of Sin of $90,000 30% $ 27,000 1e
Noncontrolling interest December 31, 2011
Sin’s stockholders’ equity $790,000 30% $237,000 Entity theory 2a
Income from Sin for 2011 ($90,000 70%) $ 63,000 2b Goodwill at December 31, 2011 Imputed value ($595,000/70%) $850,000
Fair value of Sin’s net assets 750,000 Goodwill $100,000 2c
Total consolidated income for 2011
Income to controlling stockholders ($300,000 + $63,000) $363,000
Add: Noncontrolling interest share ($90,000 30%) 27,000 Total consolidated income $390,000
Noncontrolling interest share (computed in 2c above) $ 27,000 2d
Noncontrolling interest at December 31, 2011 2e
(Book equity $790,000 + $100,000 goodwill) 30% $267,000
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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-4 Preliminary computations Parent company theory Investment in Sam $224,000
Fair value of 80% interest acquired ($240,000 80%) 192,000 Goodwill $ 32,000 Entity Theory
Implied value of Sam ($224,000/.8) $280,000
Fair value of identifiable net assets 240,000 Goodwill $ 40,000
Pit used an incomplete equity method in accounting for its investment in Sam. It ignored
the intercompany upstream sales of inventory. Income from Sam on an equity basis would be:
Share of Sam’s income ($50,000 .8) $ 40,000
Less: Unrealized profits in ending inventory from upstream sale ($8,000 50% 80%) (3,200) Income from Sam $ 36,800
Pit Corporation and Subsidiary
Comparative Consolidated Income Statements
for the year ended December 31, 2012 Parent Traditional Company Entity Theory Theory Theory Sales $1,000,000 $1,000,000 $1,000,000 Less: Cost of sales (575,000) (575,000) (575,000) Gross profit 425,000 425,000 425,000 Expenses (200,000) (200,000) (200,000) Less: Unrealized profit on upstream sale of inventory ($23,000 - $15,000) 50% 100% (4,000) (4,000) ($23,000 - $15,000) 50% 80% (3,200) Noncontrolling interest share ($50,000 - $4,000) 20% (9,200) $50,000 20% (10,000) Consolidated net income $ 211,800 $ 211,800 Total consolidated income $ 221,000 Allocated to controlling Stockholders $ 211,800 Allocated to noncontrolling Stockholders ($50,000 - $4,000) 20% $ 9,200
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Solution P11-4 (continued)
Pit Corporation and Subsidiary Comparative
Statements of Retained Earnings for the year ended December 31, 2012 Parent Traditional Company Entity Theory Theory Theory
Retained earnings December 31, 2011 $360,000 $360,000 $ 360,000 Add: Consolidated net income 211,800 211,800 Add: Net income to controlling 211,800 stockholders 571,800 571,800 571,800 Less: Dividends to controlling (120,000) (120,000) (120,000) stockholders
Retained earnings December 31, 2012 $ 451,800 $ 451,800 $ 451,800
Pit Corporation and Subsidiary
Comparative Consolidated Balance Sheets at December 31, 2012 Parent Traditional Company Entity Theory Theory Theory Assets Cash $ 110,800 $ 110,800 $ 110,800 Accounts receivable 120,000 120,000 Inventory 196,000 196,800 120,000 Land 280,000 280,000 196,000 280,000 Buildings — net 840,000 840,000 840,000 Goodwill 32,000 32,000 40,000 Total assets $1,578,800 $1,579,600 $1,586,800 Liabilities Accounts payable $ 275,800 $ 275,800 Noncontrolling interest 52,000 $ 275,800 Total liabilities 275,800 327,800 275,800 Stockholders’ equity Capital stock 800,000 800,000 Retained earnings 451,800 451,800 800,000 Noncontrolling interest 51,200 451,800 Total stockholders’ equity 1,303,000 1,251,800 59,200 Total equities $1,578,800 $1,579,600 1,311,000 $1,586,800
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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-5
Pad Corporation and Subsidiary Comparative Balance Sheets at December 31, 2012 Traditional Entity Theory Theory Assets Cash $ 70,000 $ 70,000 Receivables — net 110,000 110,000 Inventories 120,000 120,000 Plant assets — net 300,000 300,000 Goodwill 40,000 50,000 Total assets $640,000 $650,000 Liabilities Accounts payable $ 95,000 $ 95,000 Other liabilities 25,000 25,000 Total liabilities 120,000 120,000 Stockholders’ equity Capital stock 300,000 300,000 Retained earnings 194,000 194,000 Noncontrolling interest ($150,000 - $20,000) 20% 26,000
($150,000 + $50,000 - $20,000) 20% 36,000 Total stockholders’ equity 520,000 530,000 Total equities $640,000 $650,000 Supporting computations Traditional Entity Theory Theory Cost or imputed value $128,000 $160,000 Book value of 80% 88,000 Book value of 100% 110,000 Goodwill $ 40,000 $ 50,000 Investment cost $128,000
Add: 80% of retained earnings increase ($50,000 - $10,000) 80% 32,000
Less: 80% of $20,000 unrealized profits (16,000) Investment balance $144,000
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Solution P11-6 [AICPA adapted] 1
P carries its investment in S on a cost basis. This is evidenced by
the appearance of dividend revenue in P Company’s income statement
and by the absence of income from subsidiary. 2
P holds 1,400 shares of S. P Company’s percentage ownership is 70%, as
determined by the relationship of P Company’s dividend revenues and S
Company’s dividends paid ($11,200/$16,000). S has 2,000 outstanding shares
($200,000/$100) and P holds 70% of these, or 1,400 shares. 3
S Company’s retained earnings at acquisition were $100,000.
Imputed value of S ($245,000 cost/70%) $ 350,000
Less: Patents (applicable to 100%) (50,000)
Book value and fair value of S’s identifiable net assets 300,000 Less: Capital stock (200,000) Retained earnings $ 100,000 4
The nonrecurring loss is a constructive loss on the purchase of P bonds by S Company. Working paper entry:
Mortgage bonds payable (5%) 100,000 Loss on retirement of P bonds 3,000 P bonds owned 103,000
To eliminate intercompany bond investment and bonds payable and
to recognize a loss on the constructive retirement of P bonds. 5
Intercompany sales P to S are $240,000 computed as follows:
Combined sales ($600,000 + $400,000) $1,000,000 Less: Consolidated sales 760,000 Intercompany sales $ 240,000 6
Yes, there are other intercompany debts: Intercompany Combined Consolidated Balances Cash and receivables $143,000 $97,400 $ 45,600 Current payables 93,000 53,000 40,000 Dividends payable 18,000 12,400 5,600
S Company owes P Company $40,000 on intercompany purchases and P
Company owes S Company $5,600 dividends.
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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures
Solution P11-6 (continued) 7
Adjustment to determine consolidated cost of goods sold:
Consolidated Cost of Goods Sold
Combined cost of goods $640,000 $240,000 Intercompany purchases Sold Unrealized profit in Unrealized profit in ending inventory 8,000 5,000 beginning inventory 403,000 To balance $648,000 $648,000 Consolidated cost of goods sold $403,000
Unrealized profit in ending inventory is equal to the combined
less consolidated inventories ($130,000 - $122,000).
Unrealized profit in beginning inventory is plugged as follows:
($640,000 + $8,000) - ($240,000 + $403,000) = $5,000 8
Noncontrolling interest share of $8,700 is computed as follows: Net income of S $ 34,000
Less: Patent amortization ($50,000/10 years) 5,000 Adjusted income of S 29,000
Noncontrolling interest percentage 30% Noncontrolling interest share $ 8,700 9
Noncontrolling interest of $117,000 at the balance sheet date is computed:
Stockholders’ equity of S Company $360,000 Add: Unamortized patents 30,000
Equity of S plus unamortized patents 390,000
Noncontrolling interest percentage 30%
Noncontrolling interest on balance sheet date $117,000 10 Consolidated retained earnings
Retained earnings of P at end of year $200,000
Add: P’s share of increase in S’s retained earnings since
acquisition ($160,000 - $100,000) 70% 42,000
Less: Unrealized profit in S’s ending inventory (8,000)
Less: P’s patent amortization since acquisition $20,000 70% (14,000)
Less: Loss on constructive retirement of P’s bonds (3,000)
Consolidated retained earnings — end of year $217,000
© 2011 Pearson Education, Inc. publishing as Prentice Hall lOMoARcPSD|46958826 Chapter 11 11-17 Solution P11-7 1
Entry on Sap’s books at acquisition Inventories 20,000 Land 25,000 Buildings — net 90,000 Other liabilities 10,000 Goodwill 70,000 Retained earnings 80,000 Equipment — net 15,000 Push-down capital 280,000
To push down fair value — book value differentials. 2 Sap Corporation Balance Sheet at January 1, 2012 Assets Cash $ 30,000 Accounts receivable — net 70,000 Inventories 80,000 Total current assets $180,000 Land $ 75,000 Buildings — net 190,000 Equipment — net 75,000 Total plant assets 340,000 Goodwill 70,000 Total assets $590,000
Liabilities And Stockholders’ Equity Accounts payable $ 50,000 Other liabilities 60,000 Total liabilities $110,000 Capital stock $200,000 Push-down capital 280,000 Total stockholders’ equity 480,000
Total liabilities and stockholders’ Equity $590,000 3
If Sap reports net income of $90,000 under the new push-down system
for the calendar year 2012, Pay’s income from Sap will also be $90,000
under a one-line consolidation.
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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-8 1 Parent company theory Preliminary computation: Cost of 80% interest in Son $3,000,000
Book value acquired ($2,000,000 80%) 1,600,000
Excess cost over book value acquired $1,400,000 Excess allocated to: Inventories $1,600,000 80% $1,280,000
Equipment — net $(500,000) 80% (400,000) Goodwill for the remainder 520,000
Excess fair value over book value acquired $1,400,000
Entry on Son’s books to reflect 80% push down: Inventories 1,280,000 Goodwill 520,000 Retained earnings 1,200,000 Equipment — net 400,000 Push-down capital 2,600,000 2 Entity theory Preliminary computation:
Implied value of net assets ($3,000,000/.8) $3,750,000 Book value of net assets 2,000,000 Total excess $1,750,000 Excess allocated to: Inventories $1,600,000 Equipment — net (500,000) Goodwill for remainder 650,000 Total excess $1,750,000
Entry on Son’s books to reflect 100% push down: Inventories 1,600,000 Goodwill 650,000 Retained earnings 1,200,000 Equipment 500,000 Push-down capital 2,950,000 3
Noncontrolling interest (Parent company theory)
Son’s stockholders’ equity $2,000,000 20% $ 400,000 4
Noncontrolling interest (Entity theory) Capital stock $ 800,000 Push-down capital 2,950,000 Stockholders’ equity 3,750,000
Noncontrolling interest percentage 20% Noncontrolling interest $ 750,000
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Push down under parent company theory Buildings — net 18,000 Equipment — net 27,000 Goodwill 36,000 Retained earnings 20,000 Inventories 9,000 Push-down capital 92,000
To record revaluation of 90% of net assets and elimination of
retained earnings as a result of a business combination with Paw Corporation. 2 Push down under entity theory Buildings — net 20,000 Equipment — net 30,000 Goodwill 40,000 Retained earnings 20,000 Inventories 10,000 Push-down capital 100,000
To record revaluation of net assets imputed from purchase price
of 90% interest acquired by Paw Corporation and eliminate retained earnings. 3 Sun Corporation Comparative Balance Sheets at January 1, 2012 Parent Company Theory Entity Theory Assets Cash $ 20,000 $ 20,000 Accounts receivable — net 50,000 50,000 Inventories 31,000 30,000 Land 15,000 15,000 Buildings — net 48,000 50,000 Equipment — net 97,000 100,000 Goodwill 36,000 40,000 Total assets $297,000 $305,000
Liabilities and stockholders’ equity Accounts payable $ 45,000 $ 45,000 Other liabilities 60,000 60,000 Capital stock 100,000 100,000 Push-down capital 92,000 100,000 Retained earnings 0 0 Total equities $297,000 $305,000
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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures Solution P11-10 a
Paw Corporation and Subsidiary Consolidation Working Papers
for the year ended December 31, 2012
Push down 90% — parent company theory 90% Adjustments and Consolidated Power Sun Eliminations Statements Income Statement Sales $ 310,800 $ 110,000 $ 420,800 Income from Sun 37,800 b 37,800 Cost of sales 140,000* 33,000* 173,000* Depreciation expense 29,000* 24,200* 53,200* Other operating expenses 45,000* 11,000* 56,000* Consolidated NI $ 138,600 Noncontrolling share e 4,000 4,000*
Controlling share of NI $ 134,600 $ 41,800 $ 134,600 Retained Earnings
Retained earnings — Paw $ 147,000 $ 147,000 Retained earnings — Sun $ 0 Controlling share of NI 134,600 41,800 134,600 Dividends 60,000* 10,000* b 9,000 e 1,000 60,000* Retained earnings December 31 $ 221,600 $ 31,800 $ 221,600 Balance Sheet Cash $ 63,800 $ 27,000 a 8,000 $ 98,800 Accounts receivable — net 90,000 40,000 a 8,000 122,000 Dividends receivable 9,000 d 9,000 Inventories 20,000 35,000 55,000 Land 40,000 15,000 55,000 Buildings — net 140,000 43,200 183,200 Equipment — net 165,000 77,600 242,600 Investment in Sun 208,800 b 28,800 c 180,000 Goodwill 36,000 36,000 $ 736,600 $ 273,800 $ 792,600 Accounts payable $ 125,000 $ 20,000 $ 145,000 Dividends payable 15,000 10,000 d 9,000 16,000 Other liabilities 75,000 20,000 95,000 Capital stock 300,000 100,000 c 100,000 300,000 Push-down capital 92,000 c 92,000 Retained earnings 221,600 31,800 221,600 $ 736,600 $ 273,800
Noncontrolling interest January 1 c 12,000
Noncontrolling interest December 31 e 3,000 15,000 $ 792,600
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