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 111 of the text. 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. 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. 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. 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. 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 115, 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. 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. 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

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. Push-down accounting simplifies the consolidation process. The push-down adjustments are recorded in the subsidiarys 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. A joint venture is an entity that is owned, operated, and jointly controlled by a small group of investorventurers 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. 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.

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SOLUTIONS TO EXERCISES Solution E11-1 1 2 3 4 A A C A 5 6 7 B C D

Solution E11-2 1 2 3 B B D 4 5 D C

Solution E11-3 1 c Total value of Sit implied by purchase price ($1,440,000/.8) Noncontrolling interest percentage Noncontrolling interest

$1,800,000 20% $360,000

a Only the parents percentage of unrealized profits from upstream sales is eliminated under parent company theory. b Subsidiarys income of $400,000 10% noncontrolling interest Less: Patent amortization ($140,000/10 years 10%) Noncontrolling interest share

$ 40,000 (1,400) $ 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 Add: Patents at acquisition ($108,000/90%) Total implied value Percent acquired Purchase price under entity theory

$1,680,000 120,000 1,800,000 80% $1,440,000

b Purchase price ($1,680,000 80%) = patents at acquisition $1,344,000 Book value $1,680,000 80% = underlying equity 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 Fair value acquired ($400,000 80%) Goodwill Entity theory Implied value based on purchase price ($500,000/.8) Fair value of Sads net assets Goodwill Noncontrolling interest Parent company theory Book value of Sads net assets Noncontrolling interest percentage Noncontrolling interest Entity theory Total valuation of Sad Noncontrolling interest percentage Noncontrolling interest Total assets Parent company theory Pod Current assets $520,000 Plant assets net 480,000 Goodwill $1,000,000 Entity theory Current assets $ 520,000 Plant assets net 480,000 Goodwill $1,000,000

$ $ $ $

500,000 320,000 180,000 625,000 400,000 225,000

$ $ $ $

260,000 20% 52,000 625,000 20% 125,000

Sad $ 50,000 250,000 $300,000 $ 50,000 250,000 $300,000

Adjustment $ 40,000 80% 110,000 80%

Total 602,000 818,000 180,000 $1,600,000 $ 610,000 840,000 225,000 $1,675,000

$ 40,000 100% 110,000 100%

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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 Fair value acquired ($350,000 80%) Goodwill Entity theory Implied total value ($300,000 cost 80%) Fair value of Sals net identifiable assets Goodwill 1

$300,000 280,000 $ 20,000 $375,000 350,000 $ 25,000

Consolidated net income and noncontrolling interest share for 2011: Entity Theory Combined separate incomes Depreciation on excess allocated to equipment: $75,000 excess 5 years Total consolidated income Less: Noncontrolling interest share ($50,000 -15,000) 20% Controlling interest share of NI(Income Attributable to controlling stockholders) Combined separate incomes Depreciation on excess allocated to equipment: ($75,000 excess x 80% acquired)/5 years Less: Noncontrolling interest share ($50,000 x 20%) Consolidated net income Goodwill at December 31, 2011: Parent Company Theory $550,000 $550,000

(15,000) 535,000 (7,000) $528,000

(12,000) (10,000) $528,000 $ 20,000

$ 25,000

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Solution E11-6 Preliminary computation Interest acquired in Sal: 72,000 shares 80,000 shares = 90% 1 Sals net assets under entity theory Implied value from purchase price: $1,800,000/90% interest 2 Goodwill a Entity theory Implied value Less: Fair value and book value of net assets Goodwill $2,000,000

$2,000,000 1,710,000 $ 290,000

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 Traditional theory (same as parent theory) $ 261,000

c 3

Investment income from Sal Income from Sal ($80,000 1/2 year 90% interest) $ 36,000

Noncontrolling interest under entity theory Implied value of Sal at July 1, 2011 Add: Income for 1/2 year Noncontrolling percentage Noncontrolling interest $2,000,000 40,000 2,040,000 10% $ 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 Less: Pals share of unrealized profits from upstream inventory sales ($30,000 80%) Less: Noncontrolling interest share ($300,000 20%) Consolidated net income 2 Entity theory Combined separate incomes Less: Unrealized profits from upstream sales Total consolidated income Income allocated to controlling stockholders ($500,000 + [$270,000 80%]) Income allocated to noncontrolling stockholders ($300,000 - $30,000) 20% Solution E11-8 Traditional Theory $180,000 (15,000) Parent Company Theory $180,000 (15,000) Entity Theory $180,000 (15,000) $800,000 (30,000) $770,000 $716,000 $800,000 (24,000) (60,000) $716,000

$ 54,000

Combined separate incomes Less: Unrealized inventory profits from downstream sales ($60,000 - $30,000) 50% Less: Unrealized profit on upstream sale of land ($96,000 - $70,000) 100% ($96,000 - $70,000) 80% Less: Noncontrolling interest share ($60,000 - $26,000) 20% $60,000 20% Consolidated net income Total consolidated income Allocated to controlling stockholders Allocated to noncontrolling Stockholders ($60,000 - $26,000) 20%

(26,000) (20,800) (6,800) $132,200 (12,000) $132,200

(26,000)

$139,000 $132,200 $ 6,800

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Solution E11-9 1

[Push-down accounting]

Push down under parent company theory 800,000 Retained earnings Inventories 90,000 450,000 Land 270,000 Buildings net 360,000 Goodwill 180,000 Equipment Other liabilities 90,000 1,700,000 Push down equity 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. Push down under entity theory 800,000 Retained earnings Inventories 100,000 500,000 Land 300,000 Buildings net 400,000 Goodwill 200,000 Equipment net Other liabilities 100,000 1,800,000 Push down equity 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 oneline 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%) Investment in Sun ($8,500,000 40%) The 15 percent venturer Income from Sun ($500,000 15%) Investment in Sun ($8,500,000 15%) Solution E11-11 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. $ 200,000 $3,400,000

$ 75,000 $1,275,000
Field Code Changed

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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Field Code Changed

Solution E11-12 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 entitys 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 enterprises 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 According to GAAP, if an enterprise absorbs a majority of a variable interest entitys 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.

Field Code Changed

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SOLUTION TO PROBLEMS Solution P11-1 Pin Corporation and Subsidiary Comparative Consolidated Balance Sheets at December 31, 2012 (in thousands) Parent Company Theory Assets Cash Receivables net Inventories Plant assets neta Patentsb Total assets Liabilities Accounts payable Other liabilities Noncontrolling interestc Total liabilities Capital stock Retained earnings Noncontrolling interestd Total stockholders equity Total liabilities and stockholders equity
a

Entity Theory 52 300 450 2,010 80 $2,892 $ 304 500 $

52 300 450 1,998 64 $2,864 $ 304 500 160 964 1,000 900 0 1,900

804 1,000 900 188 2,088 $2,892

$2,864

b c d

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) Parent company theory: $80 patents - $16 amortization Entity theory: $100 patents - $20 amortization Parent company theory: Noncontrolling interest equals Sons equity of $800 20% Entity theory: [Sons 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) Book value Excess to undervalued equipment 1 Par Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2011 Sales Less: Cost of sales Gross profit Other expenses Depreciationa Total consolidated net income Allocation of income to: Noncontrolling interestb Controlling interest
a b

$400,000 340,000 $ 60,000

$1,200,000 760,000 440,000 $ 160,000 159,000 $ $ $ 319,000 121,000 8,200 112,800

$150,000 depreciation - $1,000 piecemeal recognition of gain on equipment through depreciation + ($60,000 excess 6 years) excess depreciation ($60,000 reported income - $10,000 unrealized gain on equipment + $1,000 piecemeal recognition of gain on equipment - $10,000 excess depreciation) 20% interest

Par Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011 Assets Current assets Plant and equipment net ($1,190,000 - $399,000 + 50,000) Total assets Liabilities and equity Liabilities Capital stock Retained earningsa Noncontrolling interestb Total liabilities and stockholders equity
a b

483,200

841,000 $1,324,200 300,000 600,000 340,000 84,200 $1,324,200 $

Sip beginning retained earnings $327,200 + Sip net income $112,800 - Sip dividends of $100,000 ($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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Solution P11-3 Parent company theory 1a Income from Sin for 2011 ($90,000 70%) 1b Goodwill at December 31, 2011 ($595,000 cost - $525,000 fair value) Consolidated net income for 2011 Pals separate income Add: Income from Sin 1d Noncontrolling interest share for 2011 Net income of Sin of $90,000 30% 1e Noncontrolling interest December 31, 2011 Sins stockholders equity $790,000 30% Entity theory 2a 2b Income from Sin for 2011 ($90,000 70%) Goodwill at December 31, 2011 Imputed value ($595,000/70%) Fair value of Sins net assets Goodwill 2c Total consolidated income for 2011 Income to controlling stockholders ($300,000 + $63,000) Add: Noncontrolling interest share ($90,000 30%) Total consolidated income 2d 2e Noncontrolling interest share (computed in 2c above) Noncontrolling interest at December 31, 2011 (Book equity $790,000 + $100,000 goodwill) 30% $267,000 $363,000 27,000 $390,000 $ 27,000 $850,000 750,000 $100,000 $ 63,000 $237,000 $ 27,000 $300,000 63,000 $363,000 $ 63,000 $ 70,000

1c

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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-4 Preliminary computations Parent company theory Investment in Sam Fair value of 80% interest acquired ($240,000 80%) Goodwill Entity Theory Implied value of Sam ($224,000/.8) Fair value of identifiable net assets Goodwill

$224,000 192,000 $ 32,000 $280,000 240,000 $ 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: $ 40,000 Share of Sams income ($50,000 .8) Less: Unrealized profits in ending inventory from (3,200) upstream sale ($8,000 50% 80%) Income from Sam $ 36,800 Pit Corporation and Subsidiary Comparative Consolidated Income Statements for the year ended December 31, 2012 Traditional Theory $1,000,000 (575,000) 425,000 (200,000) Parent Company Theory $1,000,000 (575,000) 425,000 (200,000) Entity Theory $1,000,000 (575,000) 425,000 (200,000)

Sales Less: Cost of sales Gross profit Expenses Less: Unrealized profit on upstream sale of inventory ($23,000 - $15,000) 50% 100% ($23,000 - $15,000) 50% 80% Noncontrolling interest share ($50,000 - $4,000) 20% $50,000 20% Consolidated net income Total consolidated income Allocated to controlling Stockholders Allocated to noncontrolling Stockholders ($50,000 - $4,000) 20%

(4,000) (3,200) (9,200) $ 211,800 $ (10,000) 211,800 $ $ $

(4,000)

221,000 211,800 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 Traditional Theory $360,000 211,800 571,800 (120,000) $ 451,800 $ Parent Company Theory $360,000 211,800 571,800 (120,000) 451,800 $ Entity Theory $ 360,000 211,800 571,800 (120,000) 451,800

Retained earnings December 31, 2011 Add: Consolidated net income Add: Net income to controlling stockholders Less: Dividends to controlling stockholders Retained earnings December 31, 2012

Pit Corporation and Subsidiary Comparative Consolidated Balance Sheets at December 31, 2012 Traditional Theory Assets Cash Accounts receivable Inventory Land Buildings net Goodwill Total assets Liabilities Accounts payable Noncontrolling interest Total liabilities Stockholders equity Capital stock Retained earnings Noncontrolling interest Total stockholders equity Total equities 110,800 120,000 196,000 280,000 840,000 32,000 $1,578,800 $ 275,800 275,800 800,000 451,800 51,200 1,303,000 $1,578,800 $ $ Parent Company Theory 110,800 120,000 196,800 280,000 840,000 32,000 $1,579,600 $ 275,800 52,000 327,800 800,000 451,800 1,251,800 $1,579,600 $ Entity Theory 110,800 120,000 196,000 280,000 840,000 40,000 $1,586,800 $ 275,800 275,800 800,000 451,800 59,200 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 Theory Assets Cash Receivables net Inventories Plant assets net Goodwill Total assets Liabilities Accounts payable Other liabilities Total liabilities Stockholders equity Capital stock Retained earnings Noncontrolling interest ($150,000 - $20,000) 20% ($150,000 + $50,000 - $20,000) 20% Total stockholders equity Total equities Supporting computations Cost or imputed value Book value of 80% Book value of 100% Goodwill Investment cost Add: 80% of retained earnings increase ($50,000 - $10,000) 80% Less: 80% of $20,000 unrealized profits Investment balance $ 70,000 110,000 120,000 300,000 40,000 $640,000 $ 95,000 25,000 120,000 300,000 194,000 26,000 520,000 $640,000 Traditional Theory $128,000 88,000 $ 40,000 $128,000 32,000 (16,000) $144,000 36,000 530,000 $650,000 Entity Theory $160,000 110,000 $ 50,000 Entity Theory $ 70,000 110,000 120,000 300,000 50,000 $650,000 $ 95,000 25,000 120,000 300,000 194,000

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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 Companys income statement and by the absence of income from subsidiary. P holds 1,400 shares of S. P Companys percentage ownership is 70%, as determined by the relationship of P Companys dividend revenues and S Companys 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. S Companys retained earnings at acquisition were $100,000. Imputed value of S ($245,000 cost/70%) Less: Patents (applicable to 100%) Book value and fair value of Ss identifiable net assets Less: Capital stock Retained earnings 4 $ 350,000 (50,000) 300,000 (200,000) $ 100,000

The nonrecurring loss is a constructive loss on the purchase of P bonds by S Company. Working paper entry: 100,000 Mortgage bonds payable (5%) Loss on retirement of P bonds 3,000 103,000 P bonds owned To eliminate intercompany bond investment and bonds payable and to recognize a loss on the constructive retirement of P bonds.

Intercompany sales P to S are $240,000 computed as follows: Combined sales ($600,000 + $400,000) Less: Consolidated sales Intercompany sales $1,000,000 760,000 $ 240,000 Intercompany Balances $ 45,600 40,000 5,600

Yes, there are other intercompany debts: Cash and receivables Current payables Dividends payable Combined $143,000 93,000 18,000 Consolidated $97,400 53,000 12,400

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 To balance 403,000 $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 Less: Patent amortization ($50,000/10 years) Adjusted income of S Noncontrolling interest percentage Noncontrolling interest share $ 34,000 5,000 29,000 30% $ 8,700

9 Noncontrolling interest of $117,000 at the balance sheet date is computed: Stockholders equity of S Company Add: Unamortized patents Equity of S plus unamortized patents Noncontrolling interest percentage Noncontrolling interest on balance sheet date 10 Consolidated retained earnings Retained earnings of P at end of year Add: Ps share of increase in Ss retained earnings since acquisition ($160,000 - $100,000) 70% Less: Unrealized profit in Ss ending inventory Less: Ps patent amortization since acquisition $20,000 70% Less: Loss on constructive retirement of Ps bonds Consolidated retained earnings end of year $200,000 42,000 (8,000) (14,000) (3,000) $217,000 $360,000 30,000 390,000 30% $117,000

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Solution P11-7 1 Entry on Saps books at acquisition Inventories Land Buildings net Other liabilities Goodwill Retained earnings Equipment net Push-down capital 20,000 25,000 90,000 10,000 70,000 80,000 15,000 280,000

To push down fair value book value differentials. 2 Assets Cash Accounts receivable net Inventories Total current assets Land Buildings net Equipment net Total plant assets Goodwill Total assets Liabilities And Stockholders Equity Accounts payable Other liabilities Total liabilities Capital stock Push-down capital Total stockholders equity Total liabilities and stockholders Equity 3 Sap Corporation Balance Sheet at January 1, 2012 $ 30,000 70,000 80,000 $180,000 $ 75,000 190,000 75,000 340,000 70,000 $590,000 $ 50,000 60,000 $110,000 $200,000 280,000 480,000 $590,000

If Sap reports net income of $90,000 under the new push-down system for the calendar year 2012, Pays 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 Book value acquired ($2,000,000 80%) Excess cost over book value acquired Excess allocated to: Inventories $1,600,000 80% Equipment net $(500,000) 80% Goodwill for the remainder Excess fair value over book value acquired Entry on Sons books to reflect 80% push down: Inventories Goodwill Retained earnings Equipment net Push-down capital 2 Entity theory Preliminary computation: Implied value of net assets ($3,000,000/.8) Book value of net assets Total excess Excess allocated to: Inventories Equipment net Goodwill for remainder Total excess Entry on Sons books to reflect 100% push down: Inventories Goodwill Retained earnings Equipment Push-down capital 3 Noncontrolling interest (Parent company theory) Sons stockholders equity $2,000,000 20% 4 Noncontrolling interest (Entity theory) Capital stock Push-down capital Stockholders equity Noncontrolling interest percentage Noncontrolling interest $ 800,000 2,950,000 3,750,000 20% $ 750,000 $ 400,000 1,600,000 650,000 1,200,000 500,000 2,950,000 1,280,000 520,000 1,200,000 400,000 2,600,000

$3,000,000 1,600,000 $1,400,000 $1,280,000 (400,000) 520,000 $1,400,000

$3,750,000 2,000,000 $1,750,000 $1,600,000 (500,000) 650,000 $1,750,000

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Solution P11-9 1 Push down under parent company theory 18,000 Buildings net 27,000 Equipment net 36,000 Goodwill Retained earnings 20,000 9,000 Inventories 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 20,000 Buildings net 30,000 Equipment net Goodwill 40,000 20,000 Retained earnings Inventories 10,000 100,000 Push-down capital 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 Assets Cash Accounts receivable net Inventories Land Buildings net Equipment net Goodwill Total assets Liabilities and stockholders equity Accounts payable Other liabilities Capital stock Push-down capital Retained earnings Total equities $ 20,000 50,000 31,000 15,000 48,000 97,000 36,000 $297,000 $ 45,000 60,000 100,000 92,000 0 $297,000 Entity Theory $ 20,000 50,000 30,000 15,000 50,000 100,000 40,000 $305,000 $ 45,000 60,000 100,000 100,000 0 $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
Power 90% Sun Adjustments and Eliminations Consolidated Statements $ 37,800 173,000* 53,200* 56,000* 138,600 4,000* 134,600 420,800 Income Statement $ 310,800 $ 110,000 Sales Income from Sun 37,800 b Cost of sales 140,000* 33,000* Depreciation expense 29,000* 24,200* Other operating 11,000* expenses 45,000* Consolidated NI Noncontrolling share e Controlling share of NI $ 134,600 $ 41,800 Retained Earnings Retained earnings Paw Retained earnings Sun Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Cash Accounts receivable net Dividends receivable Inventories Land Buildings net Equipment net Investment in Sun Goodwill $ 736,600 Accounts payable Dividends payable Other liabilities Capital stock Push-down capital Retained earnings $ 125,000 15,000 75,000 300,000 $ 147,000 $ 134,600 60,000* 0 41,800 10,000* 134,600 b e 9,000 1,000 $ 60,000* 221,600 $ 147,000

$ 4,000 $

$ 221,600

31,800

63,800 90,000 9,000 20,000 40,000 140,000 165,000 208,800

27,000 40,000 35,000 15,000 43,200 77,600

8,000 a d 8,000 9,000

98,800 122,000 55,000 55,000 183,200 242,600

b 28,800 c 180,000 36,000 $ 273,800 $ $ $ 36,000 792,600 145,000 16,000 95,000 300,000 221,600

20,000 10,000 d 9,000 20,000 100,000 c 100,000 92,000 c 92,000 221,600 31,800 $ 736,600 $ 273,800 c e 12,000 3,000

Noncontrolling interest January 1 Noncontrolling interest December 31

15,000 792,600

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Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-10 (continued) b Paw Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2012 Push down 100% entity theory
Paw 90% Sun Adjustments and Eliminations Consolidated Statements $ 37,800 172,000* 54,000* 56,000* 138,800 4,200* 134,600 420,800 Income Statement $ 310,800 $ 110,000 Sales Income from Sun 37,800 b Cost of sales 140,000* 32,000* Depreciation expense 29,000* 25,000* Other operating expenses 45,000* 11,000* Consolidated NI Noncontrolling share e Controlling share of NI $ 134,600 $ 42,000 Retained Earnings Retained earnings Paw Retained earnings Sun Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Cash Accounts receivable net Dividends receivable Inventories Land Buildings net Equipment net Investment in Sun Goodwill $ 736,600 Accounts payable Dividends payable Other liabilities Capital stock Push-down capital Retained earnings $ 125,000 15,000 75,000 300,000 $ 147,000 $ 134,600 60,000* 0 42,000 10,000* 134,600 b e 9,000 1,000 $ 60,000* 221,600 $ 147,000

$ 4,200 $

$ 221,600

32,000

63,800 90,000 9,000 20,000 40,000 140,000 165,000 208,800

27,000 40,000 35,000 15,000 45,000 80,000

8,000 a d 8,000 9,000

98,800 122,000 55,000 55,000 185,000 245,000

b 28,800 c 180,000 40,000 $ 282,000 $ $ $ 40,000 800,800 145,000 16,000 95,000 300,000 221,600

20,000 10,000 d 9,000 20,000 100,000 c 100,000 100,000 c 100,000 221,600 32,000 $ 736,600 $ 282,000 c e 20,000 3,200

Noncontrolling interest January 1 Noncontrolling interest December 31

* Deduct

23,200 800,800

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 11

11-23

Solution P11-11 Pep Corporation and Subsidiary Proportionate Consolidation Working Papers for the year ended December 31, 2011
Pep Income Statement Sales Income from Jay Cost of sales Depreciation expense Other expenses Net income Retained Earnings Retained earnings Pep Venture equity Jay Net income Dividends Retained earnings/ Venture equity Balance Sheet Cash Receivables net Inventories Land Buildings net Equipment net Investment in Jay $ 300,000 $ 200,000 100,000* $ 400,000 $ 250,000 50,000 b 250,000 200,000 100,000* $ 400,000 $ 300,000 $ 800,000 $ 20,000 400,000* 100,000* 120,000* 200,000 $ Jay 40% 300,000 150,000* 40,000* 60,000* 50,000 Adjustments and Eliminations b 180,000 a 20,000 b b b 90,000 24,000 36,000 $ $ Consolidated Statements 920,000 460,000* 116,000* 144,000* 200,000

300,000

100,000 130,000 110,000 140,000 200,000 300,000 120,000

50,000 30,000 40,000 60,000 100,000 180,000

b b b b b

30,000 18,000 24,000 36,000 60,000

120,000 142,000 126,000 164,000 240,000 372,000

b 108,000 a 20,000 b 100,000

$1,100,000 Accounts payable Other liabilities Common stock, $10 par Retained earnings Venture equity Jay $1,100,000
* Deduct

460,000 100,000 60,000 b b 60,000 36,000

$1,164,000 $ 160,000 104,000 500,000 400,000

120,000 $ 80,000 500,000 400,000 $

300,000 460,000 $1,164,000

2011 Pearson Education, Inc. publishing as Prentice Hall