Solutions Guide: This is meant as a solutions guide.

Please try reworking the questions and reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own. Exercise 3-4 Purchase, Date of Acquisition On January, 1 2010, Peach Company issued 1,500 of its $20 par value common shares with a fair value of $60 per share in exchange for the 2,000 outstanding common shares of Swartz Company in a purchase transaction. Registration costs amounted to $1,700, paid in cash. Just prior to the acquisition, the balance sheets of the two companies were as follows: Peach Company Swartz Company Cash $73,000 $13,000 Accounts receivable (net) $95,000 $19,000 Inventory $58,000 $25,000 Plant and equipment (net) $95,000 $43,000 Land $26,000 $22,000 Total assets $347,000 $122,000 Accounts payable $66,000 $18,000 Notes payable $82,000 $21,000 Common stock, $20 par value $100,000 $40,000 Other contributed capital $60,000 $24,000 Retained earnings $39,000 $19,000 Total equities $347,000 $122,000 Any difference between the book value of equity and the value implied by the purchase price relates to goodwill. Required: a. Prepare the journal entry on Peach Companys books to record the exchange of stock. b. Prepare a Computation and Allocation Schedule for the difference between book value and value implied by the purchase price. c. Prepare a consolidated balance sheet at the date of acquisition. Part A Investment in Swartz Company ($60 1,500) Common Stock ($20 1,500) 90,000 30,000

Other Contributed Capital ($40 1,500) Other Contributed Capital Cash Part B Computation and Allocation of Difference Parent Share 1,700

60,000 1,700 NonControlling Share $90,000 0 83,000* 0 7,000 0 (7,000) (0) -0-0Entire Value 90,000 83,000 7,000 (7,000) -0-

Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Goodwill Balance * $40,000 + $24,000 + $19,000 = $83,000 Part C Peach Company and Subsidiary Consolidated Balance Sheet January 1, 2010 Assets Cash ($73,000 + $13,000 - $1,700) Accounts Receivable Inventory Plant and Equipment Land Goodwill* Total Assets Liabilities and Stockholders Equity Accounts Payable Notes Payable

$ 84,300 114,000 83,000 138,000 48,000 7,000 $ 474,300 $84,000 103,000

Total Liabilities Common Stock ($100,000 + $30,000) Other Contributed Capital ($60,000 + $60,000 - $1,700) Retained Earnings Total Stockholders Equity Total Liabilities and Stockholders Equity

$187,000 $130,000 118,300 39,000 287,300 $ 474,300

* Cost of investment less fair value acquired equals goodwill or ($90,000 $83,000 = $7,000). Recall that the book value of net assets equals the fair value of net assets in this problem.

Exercise 4-6 Elimination Entry, Consolidated Balance Sheet On December 31, 2010, Price Company purchased a controlling interest in Shipley Company. The balance sheet of Price Company and the consolidated balance sheet on December 31, 2010, were as follows: Price Company Consolidated Cash $22,000 $37,900 Accounts receivable $35,000 $57,000 Inventory $127,000 $161,600 Investment in Shipley Company $212,000 0 Plant and equipment (net) $190,000 $337,000 Land $120,000 $220,412 Total $706,000 $813,912 Accounts payable $42,000 $112,500 Note payable $100,000 $100,000 Noncontrolling interest in Shipley Company $0 $37,412 Common stock $300,000 $300,000 Other contributed capital $164,000 $164,000 Retained earnings $100,000 $100,000 Total $706,000 $813,912

On the date of acquisition, the stockholders equity section of Shipley Companys balance sheet was as follows: Common stock $90,000 Other contributed capital $90,000 Retained earnings $56,000 Total $236,000 Required: A. Prepare the investment elimination entry made to complete a consolidated balance sheet workpaper. Any difference between book value and the value implied by the purchase price relates to subsidiary land. B. Prepare Shipley Companys balance sheet as it appeared on December 31, 2010. Journal and Workpaper Entries - Equity Method Part A Journal Entries Investment in Sales Cash Investment in Sales ($148,000)(.85) Equity in Subsidiary Income Cash ($50,000)(.85) Investment in Sales Part B Workpaper Entries Equity in Subsidiary Income Dividends Declared - Sales Investment in Sales Common Stock - Sales Other Contributed Capital Sales Retained Earnings 1/1 Sales Difference between Implied and Book Value Investment in Sales Noncontrolling Interest Goodwill

350,000 125,800 42,500

350,000 125,800 42,500

125,800

42,500 83,300

100,000 40,000 140,000 131,765 131,765

350,000 61,765

Difference between Implied and Book Value

131,765

Computation and Allocation of Difference between Implied and Book Value Acquired Parent Share Purchase price and implied value Less: Book value of equity acquired: Difference between implied and book value Goodwill Balance * $350,000/.85 PROBLEM 3-1 Consolidated Workpaper: Two Cases The two following separate cases show the financial position of a parent company and its subsidiary company on November 30, 2011, just after the parent had purchased 90% of the subsidiary??s stock: Case I Case II P Company S Company P Company S Company Current assets $ 880,000 $260,000 $ 780,000 $280,000 Investment in S Company 190,000 190,000 Long-term assets 1,400,000 400,000 1,200,000 400,000 Other assets 90,000 40,000 70,000 70,000 Total $2,560,000 $700,000 $2,240,000 $750,000 Current liabilities $ 640,000 $270,000 $ 700,000 $260,000 Long-term liabilities 850,000 290,000 920,000 270,000 Common stock 600,000 180,000 600,000 180,000 Retained earnings 470,000 (40,000) 20,000 40,000 350,000 238,000 112,000 (112,000) -0NonEntire Controlling Value Share 61,765 411,765 * 42,000 280,000 19,765 131,765 (19,765) (131,765) -0-0-

Total $2,560,000 $700,000 $2,240,000 $750,000 Required: Prepare a November 30, 2011, consolidated balance sheet workpaper for each of the foregoing cases. In Case I, any difference between book value of equity and the value implied by the purchase price relates to subsidiary long-term assets. In Case II, assume that any excess of book value over the value implied by purchase price is due to overvalued long-term assets.
P COMPANY AND SUBSIDIARY Consolidated Balance Sheet Workpaper November 30, 2011 P S Company Company 880,000 260,000 190,000 1,400,000 90,000 2,560,000 640,000 850,000 600,000 180,000 (1) 180,000 470,000 (40,000) 2,560,000 700,000 (1) 40,000 (2) 21,111 322,222 322,222 21,111 470,000 21,111 3,141,111 Eliminations Dr. Cr. (1) 190,000 (1) 71,111 (2) 71,111 1,871,111 130,000 3,141,111 910,000 1,140,000 600,000 Noncontrolling Consolidated Interest Balance 1,140,000

Part I Current Assets Investment in S Company Difference between Implied and Book Value Long-term Assets Other Assets Total Assets Current Liabilities Long-term Liabilities Common Stock: P Company S Company Retained Earnings P Company S Company Noncontrolling Interest Total Liabilities and Equity

400,000 (2) 71,111 40,000 700,000 270,000 290,000

Part II Current Assets Investment in S Company Difference between Implied & Book Value Long-term Assets Other Assets Total Assets

780,000 190,000 1,200,000 70,000 2,240,000

280,000 (2) 400,000 70,000 750,000 (1) 190,000 8,889 (1) 8,889 (2) 8,889

1,060,000

1,591,111 140,000 2,791,111 960,000 1,190,000 600,000 20,000 21,111 21,111 2,791,111

Current Liabilities 700,000 260,000 Long-term Liabilities 920,000 270,000 Common Stock: P Company 600,000 S Company 180,000 (1) 180,000 Retained Earnings P Company 20,000 S Company 40,000 (1) 40,000 Noncontrolling Interest (1) 21,111 Total Liabilities and Equity 2,240,000 750,000 228,889 228,889 (1) To eliminate investment account and create noncontrolling interest account (2) To allocate the difference between implied value and book value to long-term assets. Computation and Allocation of Difference (Case 2) Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Decrease long-term assets to fair value Balance * $190,000/.90 190,000 198,000 (8,000) 8,000 -0NonControlling Share 21,111 22,000 (889) 889 -0-

Entire Value 211,111* 220,000 (8,889) 8,889 -0

Problem 3-8 Intercompany items, Two subsidiaries On February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company and 85% of the outstanding common stock of Rob Company. Immediately before the two acquisitions, balance sheets of the three companies were as follows: Punta Sara Rob Cash $165,000 $45,000 $17,000 Accounts receivable $35,000 $35,000 $26,000 Notes receivable $18,000 $0 $0 Merchandise inventory $106,000 $35,500 $14,000 Prepaid insurance $13,500 $2,500 $500 Advances to Sara Company $10,000 Advances to Rob Company $5,000 Land $248,000 $43,000 $15,000 Buildings (net) $100,000 $27,000 $16,000 Equipment (net) $35,000 $10,000 $2,500 Total $735,500 $198,000 $91,000 Accounts payable $25,500 $20,000 $10,500 Income taxes payable $30,000 $10,000 $0 Notes payable $0 $6,000 $10,500 Bonds payable $100,000 $0 $0 Common stock, $10 par value $300,000 $144,000 $42,000 Other contributed capital $150,000 $12,000 $38,000 Retained earnings (deficit) $130,000 $6,000 ($10,000) Total $735,500 $198,000 $91,000 The following additional information is relevant. 1. One week before the acquisitions, Punto Company had advanced $10,000 to Sara Company and $5,000 to Rob Company. Sara Company recorded an increase to Accounts Payable for its advance, but Rob Company had not recorded the transaction. 2. On the date of acquisition, Punto Company owed Sara Company $12,000 for purchases on account, and Rob Company owed Punto Company $3,000 and Sara Company $6,000 for such purchases. The goods purchased had all been sold to outside

parties prior to acquisition. 3. Punto Company exchanged 13,400 shares of its common stock with a fair value of $12 per share for 95% of the outstanding common stock of Sara Company. In addition, stock issue fees of $4,000 were paid in cash. The acquisition was accounted for as a purchase. 4. Punto Company paid $50,000 cash for the 85% interest in Rob Company. 5. Three thousand dollars of Sara Companys notes payable and $9,500 of Rob Companys notes payable were payable to Punto Company. 6. Assume that for Sara, any difference between book value and the value implied by the purchase price relates to subsidiary land. However, for Rob, assume that any excess of book value over the value implied by the purchase price is due to overvalued buildings. Required: a. Give the book entries to record the two acquisitions in the accounts of Punto Company. b. Prepare a consolidated balance sheet workpaper immediately after acquisition. c. Prepare a consolidated balance sheet at the date of acquisition for Punto Company and its subsidiaries. Part A Investment in Sara Co. (13,400 $12) Common Stock (13,400 $10) Other Contributed Capital ($26,800 $4,000) Cash 160,800 134,000 22,800 4,000

Investment in Rob Co. 50,000 Cash 50,000 Punto Company & Subsidiaries Consolidated Balance Sheet Workpaper at February 1, 2011
Part B Cash Account Receivable Notes Receivable Merchandise Inventory Prepaid Insurance Investment in Sara Company Punto Company 111,000 35,000 18,000 106,000 13,500 160,800 Sara Company 45,000 35,000 35,500 2,500 Rob Company 17,000 26,000 14,000 500 (4) 160,800 Eliminations Dr. Cr. (a) 5,000 (2) 21,000 (3) 12,500 Noncontrolling Interest Consolidated Balance 178,000 75,000 5,500 155,500 16,500

Investment in Rob Company Difference between Implied and Book Value Advances to Sara Company Advances to Rob Company Land Buildings (net) Equipment (net) Total Assets Accounts Payable Income Taxes Payable Notes Payable Bonds Payable Common Stock: Punto Company Sara Company Rob Company Other Contributed Capital: Punto Company Sara Company Rob Company Retained Earnings Punto Company Sara Company Rob Company Noncontrolling Interest Total Liabilities and Equity

50,000 10,000 5,000 248,000 100,000 35,000 892,300 25,500 30,000 100,000 434,000 144,000 42,000 172,800 12,000 38,000 130,000 6,000 (10,000) 892,300 198,000 91,000

43,000 27,000 10,000 198,000 20,000 10,000 6,000

15,000 16,000 2,500 91,000 10,500 10,500

(5) (4) 7,263 ** (5) (7) 11,176 (6) (1) (1) (6) 7,263 (7)

50,000 11,176 7,263 6,900* 10,000 5,000 11,176 313,263 131,824 47,500 923,087 25,000 40,000 4,000 100,000 434,000

(1) 15,000 (2) 21,000 (3) 12,500

(a)

5,000

(4) 144,000 (5) 42,000 172,800 (4) 12,000 (5) 38,000 130,000 (4) 6,000 (5) 10,000 (4)(5)17,287 * 321,202 17,287 17,287 923,087

321,202

(a) To adjust for cash in transit from Punto to Rob (1) To eliminate intercompany advances (2) To eliminate intercompany accounts receivable and accounts payable

(3) To eliminate intercompany notes receivable and notes payable (4) To eliminate investment in Sara Company and create noncontrolling interest account of $8,463 (5) To eliminate investment in Rob Company and create noncontrolling interest account of $8,824 (6) To allocate the difference between implied and book value to the under-valuation of Saras land (7) To allocate the difference between implied and book value to the over-valuation of Robs buildings * [$160,800/.95 x .05] = $8,463 $8,463 (entry 4) + $8,824 (entry 5) = $17,287 ** $160,800/.95 ($144,000 + $12,000 + $6,000) Computation and Allocation of Difference Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Decrease buildings to fair value Balance * $50,000/.85 Part C PUNTO COMPANY AND SUBSIDIARIES Consolidated Balance Sheet February 1, 2011 Assets Current Assets: Cash Accounts Receivable $178,000 75,000 50,000 59,500 (9,500) 9,500 -0NonControlling Share 8,824 10,500 (1,676) 1,676 -0Entire Value 58,824* 70,000 (11,176) 11,176 -0-

Notes Receivable Merchandise Inventory Prepaid Insurance Total Current Assets Long-Term Assets: Land Buildings(net) Equipment(net) Total Assets Liabilities and Stockholders' Equity Current Liabilities: Accounts Payable Income Tax Payable Notes Payable Total Current Liabilities Bonds Payable Total Liabilities Stockholders Equity: Noncontrolling Interest in Subsidiaries Common Stock Other Contributed Capital Retained Earnings Total Stockholders Equity Total Liabilities and Stockholders Equity

5,500 155,500 16,500 $ 430,500 313,263 131,824 47,500 $ 923,087

$25,000 40,000 4,000 $ 69,000 100,000 169,000 17,287 434,000 172,800 130,000 754,087 $ 923,087