Chapter 5 - Solution Manual

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value
CHAPTER 5
CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES ACQUIRED AT MORE
THAN BOOK VALUE
ANSWERS TO QUESTIONS
Q5-1 The noncontrolling interest is reported as a separate item in the stockholders equity
section of the balance sheet. Past practice often presented the noncontrolling interest between
long-term liabilities and stockholders equity.
Q5-2 The consolidated balance sheet always includes 100 percent of the subsidiarys assets
and liabilities. When the parent holds less than 100 percent ownership of the subsidiary, the
noncontrolling interests claim on those net assets must be reported.
Q5-3 The income statement portion of the consolidation worksheet is expanded to include a
line for income assigned to the noncontrolling interest. This amount is deducted from
consolidated net income in computing income to the controlling interest. The balance sheet
portion of the worksheet also is expanded to include the claim of the noncontrolling
shareholders on the net assets of the subsidiary.
Q5-4 The balance assigned to the noncontrolling interest is based on the fair value of the
noncontrolling interest at the date of acquisition.
Q5-5 Consolidated retained earnings includes only amounts attributable to the shareholders of
the parent company. Thus, none of the retained earnings is assigned to the noncontrolling
interest.
Q5-6 One hundred percent of the fair value of the subsidiarys assets is included.
Q5-7 The amount of goodwill at the date of acquisition is determined by deducting the fair
value of the net assets of the acquired company from the sum of the fair value of the
consideration given by the acquiring company and the fair value of the noncontrolling interest.
The resulting goodwill must be apportioned between the controlling and noncontrolling interest.
Under normal circumstances, goodwill apportioned to the noncontrolling interest will equal the
excess of the fair value of the noncontrolling interest over its proportionate share of the fair
value of the net assets of the acquired company.
Q5-8 Income assigned to the noncontrolling interest normally is a proportionate share of the
net income of the subsidiary.
Q5-9 Income assigned to noncontrolling shareholders is reported as a deduction from
consolidated net income in arriving at income assigned to the parent company shareholders.
Q5-10 Dividends paid to noncontrolling shareholders are eliminated in preparing the
consolidated statement of retained earnings. Only dividends paid to the parent company
shareholders are reported as dividends distributed to shareholders.
5-1
Q5-11 When the parent owns all the shares of a subsidiary (and the subsidiary has no other
publicly traded securities outstanding), it is free to decide whether it wishes to publish separate
statements for the subsidiary. In some cases creditors, regulatory boards, or other interested
parties may insist that such statements be produced. If the parent does not own all the shares of
the subsidiary, the subsidiary normally would be expected to publish separate financial
statements for distribution to the noncontrolling shareholders. In general, the consolidated
statements are published for use by parent company shareholders and are likely to be of little
use to shareholders of the subsidiary.
Q5-12 Other comprehensive income elements reported by the subsidiary must be included in
other comprehensive income in the consolidated financial statement. If the subsidiary is not
wholly owned, income assigned to the noncontrolling interest will include a proportionate share
of the subsidiarys other comprehensive income.
Q5-13 The parents portion of the subsidiarys other comprehensive income is included in
comprehensive income attributable to the controlling interest.
Q5-14 Prior to FASB 141R (ASC 805), the differential was computed as the difference between
the fair value of the consideration given in acquiring ownership of the subsidiary and the
parents portion of the book value of the subsidiarys net assets.
Q5-15 Prior to FASB 141R (ASC 805), goodwill was reported as the difference between the
fair value of the consideration given in acquiring ownership of the subsidiary and the parents
portion of the fair value of the subsidiarys net assets.
Q5-16 Prior to FASB 141R (ASC 805), consolidated net income was computed by deducting
income to noncontrolling interest from consolidated revenues less expenses.
Q5-17* The only effect of a negative balance in retained earnings is the need for a credit to
subsidiary retained earnings, rather than a debit to retained earnings, when the stockholders
equity accounts of the subsidiary and the investment account of the parent are eliminated.
Q5-18* In the period in which the land is sold, the gain or loss recorded by the subsidiary must
be adjusted by the amount of the differential assigned to the land. When the differential is
assigned in the worksheet eliminating entries at the end of the period, a debit will be made to
the gain or loss on sale of land that came to the worksheet from the subsidiarys books.
5-2
SOLUTIONS TO CASES
C5-1 Consolidation Worksheet Preparation
a. If the parent company is using the equity method, the elimination of the income recognized by
the parent from the subsidiary generally should not be equal to a proportionate share of the
subsidiarys dividends. If the parent has recognized only dividend income from the subsidiary, it
is using the cost method.
b. It should be possible to tell if the preparer has included the parent's share of the subsidiary's
reported income in computing consolidated net income. It is not possible to tell from looking at
the worksheet alone whether or not all the adjustments that should have been made for
amortization of the differential or to eliminate unrealized profits have been properly treated in
computing the consolidated net income.
c. If the parent paid more than its proportionate share of the fair value of the subsidiarys net
assets, the eliminating entries relating to that subsidiary should show amounts assigned to
individual asset accounts for fair value adjustments and to goodwill when the investment
account balance is eliminated and any noncontrolling interest is established in the worksheet. It
should be relatively easy to determine if this has occurred by examining the consolidation
worksheet.
d. If the preparer has made a separate entry in the worksheet to eliminate the change in the
parents investment account during the period, the easiest way to ascertain the parents
subsidiary ownership percentage is to determine the percentage share of the subsidiarys
dividends eliminated in that entry. Another approach might be to divide the total amount of the
parents subsidiary investment account eliminated in the worksheet by the sum of the total
parents investment account eliminated and the total amount of the noncontrolling interest
established in the worksheet through eliminating entries. However, this approach assumes that
the fair value of the consideration given by the parent when acquiring its subsidiary interest and
the fair value of the noncontrolling interest on that date were proportional, which is usually, by
not always, the case.
5-3
C5-2 Consolidated Income Presentation

MEMO
TO:
Treasurer
Standard Company
FROM:
RE:
, Accounting Staff
Allocation of Consolidated Income to Parent and Noncontrolling
Shareholders
FASB 160 (ASC 810) specifies that consolidated net income reflects the income of the entire
consolidated entity and that consolidated net income must be allocated between the controlling
and noncontrolling interests. Earnings per share reported in the consolidated income statement
is based on the income allocated to the controlling interest only.
Consolidated net income increased by $34,000 from 20X4 to 20X5, an increase of 52 percent.
However, consolidated net income allocated to the controlling interest increased by $24,100
from 20X4 to 20X5, an increase of only 38 percent. The increase in the controlling interests
share of consolidated net income did not keep pace with the increase in sales because nearly
all of the sales increase was experienced by Jewel, which has a very low profit margin. In
addition the parent receives only 55 percent of the increased profits of the subsidiary.
Consolidated net income for the two years is computed and allocated as follows:
20X4
$160,000 (a)
(94,000)(c)
$ 66,000
(2,700)(e)
$ 63,300
Consolidated revenues
Operating costs
Consolidated net income
Income to noncontrolling shareholders
Income to controlling shareholders
(a)
(b)
(c)
(d)
(e)
(f)
$100,000 + $60,000
$120,000 + $280,000
($100,000 x .40) + ($60,000 x .90)
($120,000 x .40) + ($280,000 x .90)
($60,000 x .10 x .45)
($280,000 x .10 x .45)
Primary citations:
FASB 160 (ASC 810)
Secondary source:
ARB 51 (ASC 810)
5-4
20X5
$400,000 (b)
(300,000)(d)
$100,000
(12,600) (f)
$ 87,400
C5-3 Pro Rata Consolidation

MEMO
To:
Financial Vice-President
Rose Corporation
From:
Re:
, Senior Accountant
Pro Rata Consolidation of Joint Venture
This memo is in response to your request for additional information on the desirability of using
pro rata consolidation rather than equity method reporting for Rose Corporations investment in
its joint venture with Krome Company. The equity method is used by most companies in
reporting their investments in corporate joint ventures. [APB Opinion, Par. 16; ASC 323]
While APB 18 provides guidance for joint ventures that have issued common stock, it does not
provide guidance for ownership of noncorporate entities. Interpretation No. 2 to APB 18 (ASC
323) suggests that the equity method would be appropriate for unincorporated entities as well.
[APB 18, Int. #2]
Assuming the joint venture with Krome Company is unincorporated, Rose owns an undivided
interest in each asset held by the joint venture and is liable for its share of each of its liabilities
and, under certain circumstances, the entire amount. In this case, it can be argued pro rata
consolidation provides a more accurate picture of Roses assets and liabilities, although not all
agree with this assertion. Pro rata consolidation is generally considered not acceptable in this
country, although it is a widely used industry practice in a few industries such as oil and gas
exploration and production. If the joint venture is incorporated, Rose does not have a direct
claim on the assets of the joint venture and Roses liability is sheltered by the joint ventures
corporate structure. In this case, continued use of the equity method appears to be appropriate.
Primary citations:
APB 18; ASC 323
APB 18, INT #2
5-5
C5-4 Elimination Procedures

a. The eliminating entries are recorded only in the consolidation worksheet and therefore do not
change the balances recorded on the company's books. Each time consolidated statements are
prepared the balances reported on the company's books serve as the starting point. Thus, all
the necessary eliminating entries must be entered in the consolidation worksheet each time
consolidated statements are prepared.
b. For acquisitions after the effective date of FASB 141R (ASC 805), the noncontrolling interest
at a point in time is equal to its fair value on the date of combination, adjusted to date for a
proportionate share of the undistributed earnings of the subsidiary and the noncontrolling
interests share of any write-off of differential. Another approach to determining the
noncontrolling interest at a point in time is to add the remaining differential at that time to the
subsidiarys common stockholders equity and multiply the result by the noncontrolling interests
proportionate ownership interest in the subsidiary.
c. In the consolidation worksheet the ending balance assigned to noncontrolling interest is
derived by crediting noncontrolling interest for the starting balance, as indicated in the preceding
question, and then adding income assigned to the noncontrolling interest in the consolidated
income statement and deducting a pro rata portion of subsidiary dividends declared during the
period.
d. All the stockholders' equity account balances of the subsidiary must be eliminated each time
consolidated financial statements are prepared. Intercompany receivables and payables, if any,
must also be eliminated.
e. The "investment in subsidiary" and "income from subsidiary" accounts must be eliminated
each time consolidated financial statements are prepared. Intercompany receivables and
payables, if any, must also be eliminated.
5-6
C5-5 Changing Accounting Standards: Monsanto Company

a. Monsanto reported the income to noncontrolling (minority) shareholders of consolidated
subsidiaries as an expense in the continuing operations portion of its 2007 income statement.
b. Monsanto reported the noncontrolling interest in consolidated subsidiaries in other liabilities in
its consolidated balance sheet.
c. In 2007, Monsantos treatment of its noncontrolling interest in its consolidated financial
statements, although theoretically objectionable, was considered acceptable. The noncontrolling
(minority) interest did not fit the definition of a liability, and its share of income did not fit the
definition of an expense. Nevertheless, prior to 2008 no authoritative pronouncement prohibited
the treatment exhibited by Monsanto. With the issuance of FASB 160 (ASC 810), however,
Monsantos 2007 treatment became unacceptable. The noncontrolling interest is now required
to be treated as an equity item, with the income attributed to the noncontrolling interest treated
as an allocation of consolidated net income.
d. Monsanto provided customer financing through a lender that was a special purpose entity.
Monsanto had no ownership interest in the special purpose entity but did consolidate it because
Monsanto effectively originated, guaranteed, and serviced the loans. Monsanto had a 9 percent
ownership interest in one variable interest entity and a 49 percent ownership interest in another.
Neither entity was consolidated because Monsanto was not the primary beneficiary of either
entity.
5-7
SOLUTIONS TO EXERCISES
E5-1 Multiple-Choice Questions on Consolidation Process
1. d
2. d
3. b
4. d [AICPA Adapted]
E5-2 Multiple-Choice Questions on Consolidation [AICPA Adapted]
1. b
2. c
3. a
$650,000 = $500,000 + $200,000 - $50,000
4. c
$95,000 = ($956,000 / 0.80) - $1,000,000 - $100,000
5. c
$251,000 = .20[($956,000 + $239,000) + ($190,000 - $5,000 - $125,000)]
5-8
E5-3 Eliminating Entries with Differential

a.
Equity Method Entries on Game Corp.'s Books:
49,20
Investment in Amber Corp.
Cash
Record the initial investment in Amber Corp.
0
49,200
Book Value Calculations:

NCI
40%
Ending book value
Game Corp.
60%
22,800
34,200
Common
Stock
20,000
Retained
Earnings
37,000
6/10/X8
Goodwill = 0
Identifiable excess
= 15,000
60%
Book value =
34,200
$49,200
Initial
investment in
Amber Corp.
Basic elimination entry

Common stock
Retained earnings
NCI in NA of Amber Corp.
Excess Value (Differential) Calculations:
NCI
40%
+
Beginning balances
10,000
20,000
37,000
34,200
22,800
Game Corp.
60%
15,000
5-9
Inventory
5,000
Buildings &
Equipment
20,000
Excess value (differential) reclassification entry:

Inventory
5,000
Buildings & Equipment
20,000
NCI in NA of Amber Corp.
15,000
10,000
E5-3 (continued)
Investment in
Amber Corp.
Acquisition
Price
49,200
34,200
15,000
Basic
Excess Reclass.
b.
Journal entries used to record transactions, adjust account balances, and close income
and revenue accounts at the end of the period are recorded in the company's books and
change the reported balances. On the other hand, eliminating entries are entered only in
the consolidation worksheet to facilitate the preparation of consolidated financial
statements. As a result, they do not change the balances recorded in the company's
accounts and must be reentered each time a consolidation worksheet is prepared.
E5-4 Computation of Consolidated Balances

a. Inventory
$140,000
b. Land
$ 60,000
c.
$550,000
Buildings and Equipment
d. Fair value of consideration given by Ford

Fair value of noncontrolling interest
Total fair value
Book value of Slims net assets
Fair value increment for:
Inventory
Land
Buildings and equipment (net)
Fair value of identifiable net assets
Goodwill
$450,000
20,000
(10,000)
70,000
$470,000
117,500
$587,500
(530,000)
$ 57,500
e. Investment in Slim Corporation: None would be reported;

the balance in the investment account is eliminated.
f.
Noncontrolling Interest ($587,500 x .20)
$117,500
5-10
E5-5 Balance Sheet Worksheet

Cash and Receivables
Retained Earnings
Accrued interest earned by Power Co.
900
900
Equity Method Entries on Power Co.'s Books:

Investment in Pleasantdale Dairy
270,000
Cash
Record the initial investment in Pleasantdale Dairy
270,000

NCI
10%
Ending book value
Power Co.
90%
28,000
Common
Stock
252,000
60,000
Goodwill = 0
Identifiable excess
= 18,000
90%
Book value =
252,000
$270,000
Initial
investment in
Pleasantdale
Dairy

Common stock
Retained earnings
NCI in NA of Pleasantdale Dairy
60,000
220,000
252,000
28,000
5-11
Retained
Earnings
220,000
E5-5 (continued)
NCI
Power Co.
10%
+
90%
Beginning balances
2,000
18,000
Land
20,000

Land
20,000
Eliminate intercompany accounts:
Current Payables
18,000
2,000
8,900
8,900
Investment in
Pleasantdale Dairy
Acquisition
Price
270,000
252,000
18,000
Basic
Excess Reclass.
0
Power
Co.
Pleasantdale
Dairy
130,900
70,000
Inventory
210,000
90,000
70,000
40,000
Buildings & Equipment (net)
390,000
220,000
270,000
Elimination Entries
DR
CR
Consolidated
Balance Sheet
Land
8,900
192,000
300,000
20,000
130,000
610,000
252,000
18,000
Total Assets
1,070,900
420,000
20,000
80,000
40,000
8,900
Long-Term Liabilities
200,000
100,000
Common Stock
400,000
60,000
60,000
400,000
Retained Earnings
390,900
220,000
220,000
390,900
Current Payables
260,900
1,232,000
111,100
300,000
28,000
30,000
2,000
Total Liabilities & Equity
1,070,900
420,000
5-12
288,900
28,000
1,232,000
E5-6 Majority-Owned Subsidiary Acquired at Greater than Book Value

a.
Equity Method Entries on Zenith Corp.'s Books:
Investment in Down Corp.
Cash
Record the initial investment in Down Corp.
102,200
102,200

NCI
30%
Ending book value
37,500
Zenith
Corp.
70%
Common
Stock
87,500
40,000
Retained
Earnings
85,000
12/31/X4
Goodwill = 0
Identifiable excess
= 14,700
70%
Book value =
87,500

Common stock
Retained earnings
NCI in NA of Down Corp.
$102,200
Initial
investment in
Down Corp.
40,000
85,000
87,500
37,500

NCI
Zenith Corp.
30%
+
70%
Beginning balances
6,300
14,700
5-13
Inventory
6,000
Buildings &
Equipment
15,000

E5-6 (continued)
Inventory
6,000
15,000
14,700
6,300

Accounts Payable
Accounts Receivable
12,500
12,500
Optional accumulated depreciation elimination entry

Accumulated depreciation
80,000
Building & equipment
80,000
Investment in
Down Corp.
Acquisition
Price
102,200
87,50
0
14,700
Basic
Excess Reclass.
0
b.
Elimination Entries
DR
CR
Zenith
Corp.
Down
Corp.
50,300
90,000
130,000
60,000
410,000
(150,000)
102,200
21,000
44,000
75,000
30,000
250,000
(80,000)
Total Assets
692,500
340,000
101,000
Accounts Payable
Mortgage Payable
Common Stock
Retained Earnings
152,500
250,000
80,000
210,000
35,000
180,000
40,000
85,000
12,500
692,500
Balance Sheet
Cash
Accounts Receivable
Inventory
Land
Less: Accumulated Depreciation
340,000
5-14
12,500
6,000
15,000
80,000
80,000
87,500
14,700
180,000
40,000
85,000
137,500
37,500
6,300
37,500
Consolidated
71,300
121,500
211,000
90,000
595,000
(150,000)
0
938,800
175,000
430,000
80,000
210,000
43,800
938,800
E5-6 (continued)
c.
Zenith Corporation and Subsidiary

Consolidated Balance Sheet
December 31, 20X4
Cash
Accounts Receivable
Inventory
Land
Total Assets
$595,000
(150,000)
Accounts Payable
Mortgage Payable
Stockholders Equity:
Controlling Interest:
Common Stock
Retained Earnings
Total Controlling Interest
Noncontrolling Interest
Total Stockholders Equity
Total Liabilities and Stockholders' Equity
5-15
$ 71,300
121,500
211,000
90,000
445,000
$938,800
$175,000
430,000
$ 80,000
210,000
$290,000
43,800
333,800
$938,800
E5-7 Consolidation with Minority Interest

Equity Method Entries on Temple Corp.'s Books:
Investment in Dynamic Corp.
Cash
Record the initial investment in Dynamic Corp.
390,000
390,000

NCI
25%
Ending book value
90,000
Temple
Corp.
75%
Common
Stock
270,000
Retained
Earnings
120,000
240,000
12/31/X4
Goodwill = 33,000
Identifiable excess
= 87,000
75%
Book value =
270,000

Common stock
Retained earnings
NCI in NA of Dynamic Corp.
$390,000
Initial
investment in
Dynamic
Corp.
120,000
240,000
270,000
90,000

NCI
Temple Corp.
25%
+
75%
Beginning balances 40,000
120,000
Buildings
80,000

Buildings
80,000
Inventories
36,000
Goodwill
44,000
120,000
NCI in NA of Dynamic Corp.
40,000
5-16
Inventories
36,000
Goodwill
44,000
E5-8 Worksheet for Majority-Owned Subsidiary

a.
Equity Method Entries on Glitter Enterprises's Books:
Investment in Lowtide Builders
90,000
Cash
90,000
Record the initial investment in Lowtide Builders
NCI
40%
Ending book value
Glitter
Enterprises
60%
60,000
90,000
Common
Stock
140,000
1/1/X5
Goodwill = 0
Identifiable excess
=0
$90,000
Initial
investment in
Lowtide
Builders
60%
Book value =
90,000

Common stock
Retained earnings
NCI in NA of Lowtide Builders
140,000
10,000
90,000
60,000
Investment in
Lowtide Builders
Acquisition Price
90,000
90,000
Basic
5-17
Retained
Earnings
10,000
E5-8 (continued)
b.
Elimination Entries
Glitter
Enterprises
Lowtide
Builders
80,000
30,000
110,000
Inventory
150,000
350,000
500,000
Buildings & Equipment (net)
430,000
80,000
510,000
DR
CR
Consolidated
Balance Sheet
90,000
90,000
1,120,000
750,000
460,000
Current Liabilities
100,000
110,000
Long-Term Debt
400,000
200,000
Common Stock
200,000
140,000
140,000
200,000
50,000
10,000
10,000
50,000
210,000
600,000
NCI in NA of Lowtide Builders

c.
Total Assets
Retained Earnings
90,000
750,000
460,000
150,000
60,000
60,000
60,000
1,120,000
Glitter Enterprises and Subsidiary

January 1, 20X5
Inventory
Buildings and Equipment (net)
Total Assets
$ 110,000
500,000
510,000
$1,120,000
Current Liabilities
Long-Term Debt
Common Stock
Retained Earnings
$ 210,000
600,000
5-18
$200,000
50,000
$250,000
60,000
310,000
$1,120,000
E5-9 Multiple-Choice Questions on Balance Sheet Consolidation

1.
$215,000
$130,000 + $70,000 + ($85,000 - $70,000)
2.
$40,000
($150,500 + $64,500) - ($405,000 - $28,000 - $37,000

- $200,000) - $15,000 - $20,000
3.
$1,121,000
Total Assets of Power Corp.

Less: Investment in Silk Corp.
Book value of assets of Silk Corp.
Book value reported by Power and
Silk
Increase in inventory ($85,000 - $70,000)
Increase in land ($45,000 - $25,000)
Goodwill
Total assets reported
4.
$701,500
5.
$64,500
6.
7.
$ 791,500
(150,500)
$ 641,000
405,000
$1,046,000
15,000
20,000
40,000
$1,121,000
($61,500 + $95,000 + $280,000) + ($28,000 + $37,000

+ $200,000)
$205,000
The amount reported by Power Corporation
$419,500
($150,000 + $205,000) + $64,500
5-19
E5-10 Basic Consolidation Entries for Majority-Owned Subsidiary

a.
Equity Method Entries on Horrigan Corp.'s Books:
Investment in Farmstead Co.
210,000
Cash
Record the initial investment in Farmstead Co.
210,000

14,000
Income from Farmstead Co.
14,000
Record Horrigan Corp.'s 70% share of Farmstead Co.'s 20X9 income
Cash
3,500
3,500
Record Horrigan Corp.'s 70% share of Farmstead Co.'s 20X9 dividend
b.
Original book value

+ Net Income
- Dividends
NCI
30%
90,000
6,000
(1,500)
Ending book value
94,500
Horrigan
Corp.
70%
210,000
14,000
(3,500)
220,500
Common
Stock
200,000
200,000
1/1/X9
12/31/X9
Goodwill = 0
Goodwill = 0
Identifiable excess
=0
70%
Book value =
210,000
$210,000
Initial
investment in
Farmstead
Co.
5-20
Excess = 0
70%
Book value =
220,500
Retained
Earnings
100,000
20,000
(5,000)
115,000
$220,500
Net
investment
in
Farmstead
Co.
E5-10 (continued)
Common stock
Retained earnings
Income from Farmstead Co.
NCI in NI of Farmstead Co.
Dividends declared
NCI in NA of Farmstead Co.
Acquisition Price
70% Net Income
Ending Balance
Investment in
Farmstead Co.
210,000
14,000
3,500
220,500
220,500
200,000
100,000
14,000
6,000
5,000
220,500
94,500
Income from
Farmstead Co.
14,000
70% Net Income
14,000
Ending Balance
70% Dividends
Basic
14,000
0
5-21
E5-11 Majority-Owned Subsidiary with Differential

a.
Equity Method Entries on West Corp.'s Books:
Investment in Canton Corp.
Cash
Record the initial investment in Canton Corp.
133,500
133,500

22,500
Income from Canton Corp.
Record West Corp.'s 75% share of Canton Corp.'s 20X3 income
22,500
Cash
9,000
Record West Corp.'s 75% share of Canton Corp.'s 20X3 dividend
9,000

Record amortization of excess acquisition price
3,000
3,000
b.
Original book value

+ Net Income
- Dividends
NCI
25%
37,500
7,500
(3,000)
Ending book value
42,000
West
Corp.
75%
112,500
22,500
(9,000)
126,000
Common
Stock
60,000
Retained
Earnings
90,000
30,000
(12,000)
60,000
1/1/X3
12/31/X3
Goodwill = 0
Goodwill = 0
Identifiable excess
= 21,000
Excess = 18,000
75%
Book value =
112,500
$133,500
Initial
investment in
Canton Corp.
5-22
75%
Book value =
126,000
108,000
$144,000
Net
investment in
Canton
Corp.
E5-11 (continued)
Common stock
Retained earnings
NCI in NI of Canton Corp.
Dividends declared
NCI in NA of Canton Corp.
60,000
90,000
22,500
7,500
12,000
126,000
42,000

NCI
West Corp.
25%
+
75%
Beginning balance
7,000
21,000
Changes
(1,000)
(3,000)
Ending balance
6,000
18,000
Amortized excess value reclassification entry:

Depreciation expense
NCI in NI of Canton Corp.
Equipment
28,000
28,000
Acc. Depr.
0
(4,000)
(4,000)
4,000
3,000
1,000

Equipment
28,000
Acc. Depr.
4,000
18,000
NCI in NA of Canton Corp.
6,000
Acquisition Price
75% Net Income
Ending Balance
Investment in
Canton Corp.
133,500
22,500
9,000
3,000
144,000
Income from
Canton Corp.
75% Dividends
Excess Val. Amort.
126,000
Basic
18,000
Excess Reclass.
5-23
22,500
75% Net Income
19,500
Ending Balance
3,000
22,500
3,000
0
E5-12 Differential Assigned to Amortizable Asset

a.
Lancaster Companys common stock, January 1, 20X1

Lancaster Companys retained earnings, January 1, 20X1
Book value of Lancasters net assets
Proportion of stock acquired
Book value of Lancaster's shares purchased
by Major Corporation
Excess of acquisition price over book value
Fair value of consideration given
Add: Share of Lancaster's net income ($60,000 x .90)
Less: Amortization of patents ($40,000 / 5) x .90
Dividends paid by Lancaster ($20,000 x .90)
Balance in investment account, December 31, 20X1
$120,000
380,000
$500,000
x
.90
$450,000
36,000
$486,000
54,000
(7,200)
(18,000)
$514,800
b.
Equity Method Entries on Major Corp.'s Books:
Investment in Lancaster Co.
Cash
Record the initial investment in Lancaster Co.
486,000
486,000

54,000
Income from Lancaster Co.
54,000
Record Major Corp.'s 90% share of Lancaster Co.'s 20X1 income
Cash
18,000
18,000
Record Major Corp.'s 90% share of Lancaster Co.'s 20X1 dividend
7,200
7,200
Original book value

+ Net Income
- Dividends
NCI
10%
50,000
6,000
(2,000)
Ending book value
54,000
Major
Corp.
90%
450,000
54,000
(18,000)
486,000
Common
Stock
120,000
120,000
5-24
Retained
Earnings
380,000
60,000
(20,000)
420,000
E5-12 (continued)
1/1/X1
12/31/X1
Goodwill = 0
Goodwill = 0
Identifiable excess
= 36,000
Excess = 28,800
90%
Book value =
450,000

Common stock
Retained earnings
NCI in NI of Lancaster Co.
Dividends declared
NCI in NA of Lancaster Co.
$486,000
Initial
investment in
Lancaster
Co.
90%
Book value =
486,000
120,000
380,000
54,000
6,000

NCI
Major Corp.
10%
+
90%
Beginning
balance
4,000
36,000
Changes
(800)
(7,200)
Ending balance
3,200
28,800
20,000
486,000
54,000
Patents
40,000
(8,000)
32,000

Patents
8,000
NCI in NI of Lancaster Co.
5-25
7,200
800
$514,800
Net
investment in
Lancaster
Co.
E5-12 (continued)
Patents
32,000
NCI in NA of Lancaster Co.
28,800
3,200
Investment in
Lancaster Co.
Acquisition
Price
90% Net Income
486,000
54,000
18,000
7,200
Ending Balance
Income from
Lancaster Co.
90% Dividends
Excess Val. Amort.
Basic
28,800
Excess Reclass.
5-26
90% Net Income
46,800
Ending Balance
7,200
514,800
486,000
54,000
54,000
7,200
0
E5-13 Consolidation after One Year of Ownership

a.
Equity Method Entries on Pioneer Corp.'s Books:
Investment in Lowe Corp.
190,000
Cash
Record the initial investment in Lowe Corp.
190,000

NCI
20%
Ending book value
40,000
Pioneer Corp.
80%
160,000
Common
Stock
120,000
Retained
Earnings
80,000
1/1/X2
Goodwill = 4,400
Identifiable excess
= 25,600
80%
Book value =
160,000

Common stock
Retained earnings
NCI in NA of Lowe Corp.
$190,000
Initial
investment in
Lowe Corp.
120,000
80,000
160,000
40,000

NCI
Pioneer Corp.
20%
+
80%
Beginning balances
7,500
30,000
5-27
Buildings
32,000
Goodwill
5,500
E5-13 (continued)
Buildings
32,000
Goodwill
5,500
Acquisition Price
Investment in
Lowe Corp.
190,000
160,000
30,000
0
30,000
7,500
Basic
Excess Reclass.
b.
Equity Method Entries on Pioneer Corp.'s Books:
190,000
Cash
Record the initial investment in Lowe Corp.
190,000

32,000
Income from Lowe Corp.
32,000
Record Pioneer Corp.'s 80% share of Lowe Corp.'s 20X2 income
3,20
0
3,200
Original book value

+ Net Income
- Dividends
NCI
20%
40,000
8,000
0
Ending book value
48,000
Pioneer
Corp.
80%
160,000
32,000
0
192,000
Common
Stock
120,000
120,000
5-28
Retained
Earnings
80,000
40,000
0
120,000
E5-13 (continued)
1/1/X2
12/31/X2
Goodwill = 4,400
Goodwill = 4,400
Identifiable excess
= 25,600
Excess = 22,400
80%
Book value =
160,000

Common stock
Retained earnings
NCI in NI of Lowe Corp.
$190,000
Initial
investment in
Lowe Corp.
80%
Book value =
192,000
120,000
80,000
32,000
8,000
192,000
48,000

NCI
Pioneer
20%
+
Corp. 80%
Beginning balance
7,500
30,000
Changes
(800)
(3,200)
Ending balance
6,700
26,800
Buildings
32,000
32,000

4,000
NCI in NI of Lowe Corp.
Excess value (differential)
reclassification entry:
Buildings
Goodwill
Acc. Depr.
$218,800
Net
investment in
Lowe Corp.
3,200
800
32,000
5,500
4,000
26,800
6,700
5-29
Acc. Depr.
0
(4,000)
(4,000)
Goodwill
5,500
0
5,500

E5-13 (continued)
Acquisition Price
80% Net Income
Ending Balance
Investment in
Lowe Corp.
190,000
32,000
3,200
218,800
Income from
Lowe Corp.
Excess Val. Amort.
192,000
Basic
26,800
Excess Reclass.
32,000
80% Net Income
28,800
Ending Balance
3,200
32,000
3,200
0
E5-14 Consolidation Following Three Years of Ownership

a.
Computation of increase in value of patents:

Fair value of consideration given by Knox
Fair value of noncontrolling interest
Total fair value
Book value of Conway stock
Excess of fair value over book value
Increase in value of land ($30,000 - $22,500)
Increase in value of equipment ($360,000 - $320,000)
Increase In value of patents
$277,500
185,000
$462,500
(400,000)
$ 62,500
(7,500)
(40,000)
$ 15,000
b.
Equity Method Entries on Knox Corp.'s Books:
Investment in Conway Corp.
Cash
Record the initial investment in Conway Corp.
277,500
277,500

NCI
40%
Ending book value
160,000
Knox
Corp.
60%
240,000
Common
Stock
50,000
5-30
Retained
Earnings
150,000
1/1/X7
Goodwill = 0
Identifiable excess
= 37,500
$277,500
Net
investment in
Conway
Corp.
60%
Book value =
240,000

Common stock
Retained earnings
NCI in NA of Conway Corp.
250,000
150,000
240,000
160,000

NCI
Knox Corp.
40%
+
60%
Beginning
balances
25,000
37,500
Excess value (differential) reclassification
entry:
Land
Equipment
Patent
Land
7,500
7,500
40,000
15,000
37,500
25,000
Investment in
Conway Corp.
Acquisition
Price
277,500
240,000
37,500
Basic
Excess Reclass.
5-31
Equipment
40,000
Patent
15,000
E5-14 (continued)
c.
Computation of investment account balance at January 1, 20X9:
Fair value of consideration given
Undistributed income since acquisition
($100,000 - $60,000) x .60
Amortization of differential assigned to:
Equipment ($40,000 / 8) x .60 x 2 years
Patents ($15,000 / 10) x .60 x 2 years
Account balance at January 1, 20X9
$277,500
24,000
(6,000)
(1,800)
$293,700
d.
Equity Method Entries on Knox Corp.'s Books:
18,000
Income from Conway Corp.
18,000
Record Knox Corp.'s 60% share of Conway Corp.'s 20X7 income
Cash
6,000
6,000
Record Knox Corp.'s 60% share of Conway Corp.'s 20X7 dividend
3,900
3,900
e.
Original book value

+ Net Income
- Dividends
NCI
40%
176,000
12,000
(4,000)
Ending book value
184,000
Knox
Corp.
60%
264,000
18,000
(6,000)
276,000
5-32
Common
Stock
250,000
250,000
Retained
Earnings
190,000
30,000
(10,000)
210,000
E5-14 (continued)
1/1/X7
12/31/X7
Goodwill = 0
Goodwill = 0
Identifiable excess
= 29,700
Excess = 25,800
60%
Book value =
264,000
$293,700
Initial
investment in
Conway
Corp.

Common stock
Retained earnings
NCI in NI of Conway Corp.
Dividends declared
Knox
NCI
Corp.
40%
+
60%
Beginning
balance
19,800
29,700
Changes
(2,600)
(3,900)
Ending balance
17,200
25,800
$301,800
Net
investment in
Conway
Corp.
60%
Book value =
276,000
250,000
190,000
18,000
12,000
10,000
276,000
184,000
Land
7,500
0
7,500

Amortization Expense
NCI in NI of Conway Corp.
Equipment
40,000
40,000
1,500
5,000
3,900
2,600
5-33
Patent
12,000
(1,500)
10,500
Acc.
Depr.
(10,000)
(5,000)
(15,000)

Land
Equipment
Patent
Acc. Depr.
7,500
40,000
10,500
15,000
25,800
17,200
E5-15 Consolidation Worksheet for Majority-Owned Subsidiary

a.
Equity Method Entries on Proud Corp.'s Books:
Investment in Stergis Co.
Cash
Record the initial investment in Stergis Co.
120,000
120,000

24,000
Income from Stergis Co.
Record Proud Corp.'s 80% share of Stergis Co.'s 20X3 income
24,000
Cash
8,000
Record Proud Corp.'s 80% share of Stergis Co.'s 20X3 dividend
8,000
Original book value

+ Net Income
- Dividends
NCI
20%
30,000
6,000
(2,000)
Ending book value
34,000
Proud Corp.
80%
120,000
24,000
(8,000)
136,000
5-34
Common
Stock
100,000
100,000
Retained
Earnings
50,000
30,000
(10,000)
70,000
E5-15 (continued)
1/1/X3
12/31/X3
Goodwill = 0
Goodwill = 0
Identifiable excess
=0
Excess = 0
$120,000
Initial
investment in
Stergis Co.
80%
Book value =
120,000

Common stock
Retained earnings
NCI in NI of Stergis Co.
Dividends declared
NCI in NA of Stergis Co.
Acquisition Price
80% Net Income
Ending Balance
$136,000
Net
investment in
Stergis Co.
80%
Book value =
136,000
100,000
50,000
24,000
6,000
10,000
136,000
34,000
Investment in
Stergis Co.
120,000
24,000
8,000
136,000
136,000
Income from
Stergis Co.
24,000
80% Net Income
24,000
Ending Balance
80% Dividends
Basic
24,000
0

60,000
Depreciable Assets
60,000
5-35
E5-15 (continued)
b.
Elimination Entries
Proud
Corp.
Stergis
Co.
Sales
200,000
120,000
320,000
Less: Depreciation Expense
(25,000)
(15,000)
(40,000)
(105,000)
(75,000)
DR
CR
Consolidated
Income Statement
Less: Other Expenses

24,000
Consolidated Net Income
94,000
NCI in Net Income

Controlling Interest in Net
Income
30,000
(180,000)
24,000
24,000
100,000
6,000
(6,000)
94,000
30,000
30,000
230,000
50,000
50,000
94,000
30,000
30,000
Less: Dividends Declared
(40,000)
(10,000)
Ending Balance
284,000
70,000
Current Assets
173,000
105,000
Depreciable Assets
500,000
300,000
(175,000)
(75,000)
94,000
Statement of Retained Earnings

Beginning Balance
Net Income
80,000
230,000
0
94,000
10,000
(40,000)
10,000
284,000
Balance Sheet
278,000
60,000
60,000
740,000
(190,000)
136,000
Total Assets
634,000
330,000
Current Liabilities
50,000
40,000
90,000
Long-Term Debt
100,000
120,000
220,000
Common Stock
200,000
100,000
100,000
Retained Earnings
284,000
70,000
80,000
60,000

634,000
330,000
180,000
136,000
60,000
828,000
200,000
10,000
284,000
34,000
34,000
44,000
828,000
E5-15 (continued)
c.
Proud Corporation and Subsidiary

December 31, 20X3
Current Assets
Depreciable Assets
Total Assets
Current Liabilities
Long-Term Debt
Common Stock
Retained Earnings
$740,000
(190,000)
$278,000
550,000
$828,000
$ 90,000
220,000
$200,000
284,000
$484,000
34,000
518,000
$828,000

Consolidated Income Statement
Year Ended December 31, 20X3
Sales
Depreciation
Other Expenses
Total Expenses
Income to Noncontrolling Interest
Income to Controlling Interest
$ 40,000
180,000
$320,000
(220,000)
$100,000
(6,000)
$ 94,000

Consolidated Retained Earnings Statement
Retained Earnings, January 1, 20X3
Income to Controlling Interest, 20X3
Dividends Declared, 20X3
Retained Earnings, December 31, 20X3
$230,000
94,000
$324,000
(40,000)
$284,000
E5-16 Consolidation Worksheet for Majority-Owned Subsidiary for Second Year

a.
Equity Method Entries on Proud Corp.'s Books:
28,000
28,000
Record Proud Corp.'s 80% share of Stergis Co.'s 20X4 income
Cash
12,000
12,000
Record Proud Corp.'s 80% share of Stergis Co.'s 20X4 dividend
Original book value

+ Net Income
- Dividends
NCI
20%
34,000
7,000
(3,000)
Ending book value
38,000
Proud Corp.
80%
136,000
28,000
(12,000)
152,000
Common
Stock
100,000
100,000
1/1/X4
12/31/X4
Goodwill = 0
Goodwill = 0
Identifiable excess
=0
Excess = 0
80%
Book value =
136,000
$136,000
Net
investment in
Stergis Co.
80%
Book value =
152,000
Retained
Earnings
70,000
35,000
(15,000)
90,000
$152,000
Net
investment in
Stergis Co.
E5-16 (continued)
Common stock
Retained earnings
NCI in NI of Stergis Co.
Dividends declared
Beginning Balance
80% Net Income
Ending Balance
Investment in
Stergis Co.
136,000
28,000
12,000
152,000
152,000
0
100,000
70,000
28,000
7,000
15,000
152,000
38,000
Income from
Stergis Co.
28,000
80% Net Income
28,000
Ending Balance
80% Dividends
Basic

60,000
Depreciable Assets
60,000
28,000
0
E5-16 (continued)
b.
Elimination Entries
Proud
Corp.
Stergis
Co.
230,000
140,000
(25,000)
(15,000)
(40,000)
(150,000)
(90,000)
(240,000)
DR
CR
Consolidated
Income Statement
Sales
28,000
83,000
35,000
NCI in Net Income

Controlling Interest in Net Income
370,000
28,000
28,000
90,000
7,000
(7,000)
83,000
35,000
35,000
284,000
70,000
70,000
35,000
83,000

Beginning Balance
Net Income
83,000
35,000
(50,000)
(15,000)
Ending Balance
317,000
90,000
Current Assets
235,000
150,000
Depreciable Assets
500,000
300,000
(200,000)
(90,000)
105,000
284,000
0
83,000
15,000
(50,000)
15,000
317,000
Balance Sheet

152,000
Total Assets
687,000
360,000
385,000
60,000
60,000
60,000
740,000
(230,000)
152,000
60,000
895,000
Current Liabilities
70,000
50,000
120,000
Long-Term Debt
100,000
120,000
220,000
Common Stock
200,000
100,000
100,000
Retained Earnings
317,000
90,000
105,000

687,000
360,000
205,000
200,000
15,000
317,000
38,000
38,000
53,000
895,000
E5-17 Preparation of Stockholders' Equity Section with Other Comprehensive Income

a.
Consolidated net income:

Operating income of Broadmore
Net income of Stem
Amortization of differential ($580,000 - $500,000) / 10
Years
Consolidated net income
Comprehensive gain reported by Stem
Consolidated comprehensive income
b.
Comprehensive income attributable to controlling interest:

Consolidated comprehensive income
Comprehensive income attributable to
Noncontrolling interest
($50,000 - $8,000) x .25
($65,000 - $8,000) x .25
Comprehensive income attributable to controlling interest
c.
Consolidated stockholders' equity:

Common Stock
Retained Earnings
Accumulated Other Comprehensive Income
20X8
20X9
$120,000 $ 140,000
40,000
60,000
(8,000)
(8,000)
$152,000 $ 192,000
10,000
5,000
$162,000 $ 197,000
20X8
20X9
$162,000 $ 197,000
(10,500)
(14,250)
$151,500 $ 182,750
20X8
20X9
$320,000 $ 320,000
504,000
613,000
7,500
11,250
831,500
944,250
151,750
158,500
$983,250 $1,102,750
E5-18 Eliminating Entries for Subsidiary with Other Comprehensive Income

a.
Equity Method Entries on Palmer Corp.'s Books:
Investment in Krown Corp.
Cash
Record the initial investment in Krown Corp.
140,000
140,000

21,000
Income from Krown Corp.
21,000
Record Palmer Corp.'s 70% share of Krown Corp.'s 20X8 income
Cash
17,500
17,500
Record Palmer Corp.'s 70% share of Krown Corp.'s 20X8 dividend
4,200
Other Comprehensive Income from Krown Corp.
4,200
Record Palmer Corp.'s proportionate share of OCI from Krown Corp.
Original book value

+ Net Income
- Dividends
NCI
30%
60,000
9,000
(7,500)
Ending book value
61,500
Palmer Corp.
70%
140,000
21,000
(17,500)
143,500
Common
Stock
120,000
120,000
1/1/X8
12/31/X8
Goodwill = 0
Goodwill = 0
Identifiable excess
=0
Excess = 0
70%
Book value =
140,000
$140,000
Initial
investment in
Krown Corp.
70%
Book value =
147,700
Retained
Earnings
80,000
30,000
(25,000)
85,000
$147,700
Net
investment in
Krown Corp.
E5-18 (continued)
Common stock
Retained earnings
NCI in NI of Krown Corp.
Dividends declared
NCI in NA of Krown Corp.
Other Comprehensive Income Entry:
OCI from Krown Corp.
OCI to the NCI
NCI in NA of Krown Corp.
Acquisition Price
70% Net Income
Ending Balance
Investment in
Krown Corp.
140,000
21,000
17,500
4,200
147,700
143,500
4,200
0
120,000
80,000
21,000
9,000
25,000
143,500
61,500
4,200
1,800
4,200
1,800
Income from
Krown Corp.
21,000
70% Dividends
70% OCI
21,000
Basic
OCI Entry
21,000
0
E5-19* Consolidation of Subsidiary with Negative Retained Earnings

Equity Method Entries on General Corp.'s Books:
Investment in Strap Co.
138,000
Cash
Record the initial investment in Strap Co.
138,000

NCI
20%
Ending book value
29,000
General
Corp.
80%
Retained
=
116,000
Common
Stock
100,000
1/1/X4
Goodwill = 22,000
Identifiable excess
=0
80%
Book value =
116,000

Common stock
Additional Paid-in Capital
Retained earnings
NCI in NA of Strap Co.
$138,000
Initial
investment in
Strap Co.
100,000
75,000
30,000
116,000
29,000
Add. Paidin Capital

75,000
+
Earnings
(30,000)
E5-19* (continued)
NCI
General Corp.
20%
+
80%
Beginning balances
5,500
22,000
Goodwill
27,500

Goodwill
27,500
NCI in NA of Strap Co.
22,000
5,500
Investment in
Strap Co.
Acquisition
Price
138,000
116,000
22,000
Basic
Excess Reclass.
E5-20* Complex Assignment of Differential

a.
Equity Method Entries on Worth Corp.'s Books:
Investment in Brinker Inc.
Cash
Record the initial investment in Brinker Inc.
864,000
864,000

135,000
Income from Brinker Inc.
Record Worth Corp.'s 90% share of Brinker Inc.'s 20X5 income
135,000
82,350
82,350
b.
Original book value

+ Net Income
- Dividends
NCI
10%
72,000
15,000
0
Ending book value
87,000
Worth
Corp.
90%
648,000
135,000
0
783,000
Common
Stock
500,000
Premium
on Com.
Stock
100,000
500,000
100,000
Retained
+
Earnings
120,000
150,000
0
270,000
E5-20* (continued)
12/1/X5
12/31/X5
Goodwill = 45,000
Goodwill = 45,000
Identifiable excess
= 171,000
Excess = 88,650
90%
Book value =
648,000

Common stock
Premium on common stock
Retained earnings
NCI in NI of Brinker Inc.
NCI in NA of Brinker Inc.
$864,000
Initial
investment in
Brinker Inc.
90%
Book value =
783,000
500,000
100,000
120,000
135,000
15,000
783,000
87,000
$916,650
Net
investment in
Brinker Inc.

NCI
10%
Beg.
balance
Changes
End.
balance
Worth
Corp.
90%
Inventory
Land
24,000
216,000
5,000
75,000
(9,150)
(82,350)
(5,000)
(75,000)
14,850
133,650

Cost of goods sold
Gain on sale of land
Interest expense
NCI in NI of Brinker Inc.
Equipment
60,000
60,000
Disc.
on
notes
payable
Acc.
Depr.
0
50,000
(7,500)
(4,000)
42,500
(4,000)
50,000
5,000
75,000
7,500
4,000
82,350
9,150
60,000
42,500
50,000
4,000
133,650
14,850
SOLUTIONS TO PROBLEMS
P5-21 Multiple-Choice Questions on Applying the Equity Method [AICPA Adapted]
1. a
2. a
3. c
4. d
Goodwill
50,000
E5-20* (continued)
Equipment
Discount on notes payable
Goodwill
Acc. Depr.
NCI in NA of Brinker Inc.
P5-22 Amortization of Differential

Journal entries recorded by Ball Corporation:
Equity Method Entries on Ball Corp.'s Books:
Preferred Stock
Record the initial investment in Krown Corp.
120,000
50,000
70,000

12,000
Record Ball Corp.'s 30% share of Krown Corp.'s 20X5 income
Cash
12,000
3,000

Record Ball Corp.'s 30% share of Krown Corp.'s 20X5 dividend
3,000
4,575
4,575
P5-22 (continued)
Amortization of differential assigned to buildings and equipment:
Fair value of buildings and equipment
$360,000
Book value of buildings and equipment
300,000
Differential
$60,000
Portion of stock held by Ball
x
0.30
Differential assigned to buildings and equipment
$18,000
Remaining life
15
Yearly amortization
$1,200
Amortization of differential assigned to copyrights:
Purchase price
Fair value of Krown's:
Total assets
$560,000
Total liabilities
(250,000)
$310,000
Proportion of stock held by Ball
x
.30
Amount assigned to copyrights
Remaining life
Yearly amortization
5-48
$120,000
(93,000)
$27,000
8
$3,375
P5-23 Computation of Account Balances

a.
Easy Chair Company 20X1 equity-method income:

Proportionate share of reported income ($30,000 x .40)
Amortization of differential assigned to:
Buildings and equipment [($35,000 x .40) / 5 years]
Goodwill ($8,000: not impaired)
Investment Income
Assignment of differential
Purchase price
Proportionate share of book value of
net assets ($320,000 x .40)
Proportionate share of fair value increase in
buildings and equipment ($35,000 x .40)
Goodwill
$ 12,000
(2,800)
-0$ 9,200
$150,000
(128,000)
$
(14,000)
8,000
b.
Dividend income, 20X1 ($9,000 x .40)
3,600
c.
Cost-method account balance (unchanged):
$150,000
Equity-method account balance:

Balance, January 1, 20X1
Investment income
Dividends received
Balance, December 31, 20X1
$150,000
9,200
(3,600)
$155,600
P5-24 Multistep Acquisition

Journal entries recorded by Jackson Corp. in 20X9:
(1) Investment in Phillips Corp. Stock
Cash
Record purchase of Phillips stock.
70,000

Retained Earnings
Record pick-up of difference between
cost and equity income.
14,500
Computation of equity pick-up

20X6 .10($70,000 - $20,000)
20X7 .10($70,000 - $20,000)
20X8 .15($70,000 - $20,000)
20X6 amortization of differential
Amount of increase
$ 5,000
5,000
7,500
(1,000)
(1,000)
(1,000)
$14,500
5-49
70,000
14,500
Amortization of differential
20X6 purchase [$25,000 - ($200,000 x .10)]
5 years
20X8 purchase [$15,000 - ($300,000 x .05)]
20X9 purchase [$70,000 - ($350,000 x .20)]
Total annual amortization
(3) Cash
Investment in Phillips Corp. Stock
Record dividend from Phillips Corp:
$20,000 x .35
Income from Phillips Corp.
Record equity-method income:
$70,000 x .35
$1,000
0
0
$1,000
7,000
24,500
(5) Income from Phillips Corp.

Investment in Phillips Corp. Stock
Amortize differential.
5-50
1,000
7,000
24,500
1,000
P5-25 Complex Differential

a. Essex Company 20X2 equity-method income:
Proportionate share of reported net income
($80,000 x .30)
Deduct increase in cost of goods sold for purchase
differential assigned to inventory ($30,000 x .30)
Deduct amortization of differential assigned to:
Buildings and equipment
[($320,000 - $260,000) x .30] / 12 years]
Patent [($25,000 x .30) / 10 years]
Equity-method income for 20X2
$24,000
(9,000)
(1,500)
(750)
$12,750
b. Computation of investment account balance on December 31, 20X2:

Purchase Price
Investment income for 20X2
Dividends received in 20X2 ($9,000 x .30)
Investment account balance on December 31, 20X2
$12,750
(2,700)
$165,000
10,050
$175,050
P5-26 Equity Entries with Differential

a. Journal entry recorded by Hunter Corporation:
Investment in Arrow Manufacturing
Common Stock
Additional Paid-In Capital
Record acquisition of Arrow Manufacturing stock.
b.
210,000
60,000
150,000
Equity-method journal entries recorded by Hunter Corporation in 20X0:

(1) Investment in Arrow Manufacturing Stock
Common Stock
Record acquisition of Arrow Manufacturing stock.
210,000
(2) Cash
9,000
Investment in Arrow Manufacturing Stock
Record dividends from Arrow Manufacturing: $20,000 x 0.45
Income from Arrow Manufacturing
Record equity-method income: $80,000 x 0.45
36,000
(4) Income from Arrow Manufacturing

1,350
Amortize differential assigned to buildings and equipment:
($30,000 x .45) / 10 years
5-51
60,000
150,000
9,000
36,000
1,350
P5-26 (continued)
Equity-method journal entries recorded by Hunter Corporation in 20X1:
(1) Cash
18,000
Record dividends from Arrow Manufacturing: $40,000 x 0.45
18,000

22,500
Income from Arrow Manufacturing
Record equity-method income for period: $50,000 x 0.45
22,500
(3) Income from Arrow Manufacturing

1,350
Amortize differential assigned to buildings and equipment.
1,350
c. Investment account balance, December 31, 20X1:

Purchase price on January 1, 20X0
20X0: Income from Arrow Manufacturing
($36,000 - $1,350)
Dividends received
20X1: Income from Arrow Manufacturing
($22,500 - $1,350)
Dividends received
Investment account balance, December 31, 20X1
5-52
$210,000
$34,650
(9,000)
$21,150
(18,000)
25,650
3,150
$238,800
P5-27 Equity Entries with Differential

a. Equity-method journal entries recorded by Ennis Corporation:
(1) Investment in Jackson Corporation Stock
Common Stock
Record acquisition of Jackson Corporation stock.
200,000
50,000
150,000
(2) Cash
3,500
Investment in Jackson Corporation Stock
Record dividend from Jackson Corporation: $10,000 x 0.35
(3) Investment in Jackson Corporation Stock
Income from Jackson Corporation
3,500
24,500
24,500
(4) Income from Jackson Corporation

7,000
Record expiration of differential assigned to inventory: $20,000 x 0.35
7,000
(5) Income from Jackson Corporation

1,400
1,400
Record amortization of differential assigned to buildings and equipment (net):
($80,000 x .35) / 20 years
b. $212,600 = $200,000 + $24,500 - $3,500 - $7,000 - $1,400
P5-28 Additional Ownership Level
a.
Operating income of Amber for 20X3

Operating income of Blair for 20X3
Add: Equity income from Carmen
[($50,000 - $6,000) x .25)
Blair net income for 20X3
Proportion of stock held by Amber
Amortization of differential:
Equipment [($30,000 x .40) / 8 years]
Patents [($25,000 x .40) / 5 years)
Net income of Amber for 20X3
$100,000
11,000
$111,000
x
0.40
$220,000
44,400
(1,500)
(2,000)
$260,900
5-53
b.
Investment in Blair Corporation Stock

Common Stock
Additional paid-In Capital
Purchase of Blair Corporation Stock.
130,000
Cash
Record dividend from Blair: $30,000 x 0.40
12,000

Income from Blair Corporation
44,400
Income from Blair Corporation

Amortize differential: $3,500 = $1,500 + $2,000
3,500
5-54
40,000
90,000
12,000
44,400
3,500
P5-29 Correction of Error

Required correcting entry:
Retained Earnings
Income from Dale Company
Investment in Dale Company Stock
Adjustments to current books of Hill Company:
Retained
Earnings
1/1/20X4
Item
Adjustment to remove dividends
included in investment income and not
removed from investment account
$(14,000)
Adjustment to annual amortization

of differential:
20X2 and 20X3
20X4
Required adjustment to account balance
(3,000)
$(17,000)
17,000
11,500
28,500
Dale Company
Investment
20X4
Balance
Income
12/31/20X4
$(10,000)
$(24,000)
(1,500)
$(11,500)
(3,000)
(1,500)
$(28,500)
Computation of adjustment to annual amortization of differential

Correct amortization of differential assigned to:
Equipment [($120,000 - $70,000) x 0.40] / 5 years
Patents:
Amount paid
Fair value of identifiable net assets
($300,000 + $50,000) x 0.40
Amount assigned
Number of years to be amortized
Annual amortization
Correct amount to be amortized annually
Amount amortized by Hill
[($164,000 - ($300,000 x 0.40)] / 8 years
Adjustment to annual amortization
5-55
$4,000
$164,000
(140,000)
$ 24,000
3,000
$7,000
(5,500)
$1,500
P5-30 Majority-Owned Subsidiary Acquired at Book Value

a.
Equity Method Entries on Cameron Corp.'s Books:
Investment in Darla Corp.
87,500
Cash
Record the initial investment in Darla Corp.
87,500

NCI
30%
Ending book value
Cameron
Corp.
70%
37,500
87,500
Common
Stock
40,000
12/31/X4
Goodwill = 0
Identifiable excess
=0
$87,500
Initial
investment in
Darla Corp.
70%
Book value =
87,500

Common stock
Retained earnings
NCI in NA of Darla Corp.
Acquisition Price
Investment in
Darla Corp.
87,500
87,500
0
40,000
85,000
87,500
37,500
Basic
5-56
Retained
Earnings
85,000

Accounts payable
Accounts receivable
12,500
12,500
P5-30 (continued)
80,000
80,000
b.
Cameron
Corp.
Darla
Corp.
65,000
21,000
Elimination Entries
DR
CR
Consolidated
Balance Sheet
Cash
Accounts Receivable
Inventory
Land
86,000
90,000
44,000
130,000
75,000
12,500
205,000
60,000
30,000
90,000
410,000
250,000
(150,000)
(80,000)
80,000
80,000
87,500
121,500
580,000
(150,000)
87,500
180,000
932,500
Total Assets
692,500
340,000
80,000
Accounts Payable
152,500
35,000
12,500
Mortage Payable
250,000
180,000
80,000
40,000
40,000
80,000
210,000
85,000
85,000
210,000
Common Stock
Retained Earnings
430,000

692,500
340,000
5-57
175,000
137,500
37,500
37,500
37,500
932,500
c.
Cameron Corporation and Subsidiary

December 31, 20X4
Cash
Accounts Receivable
Inventory
Land
$660,000

Total Assets
(230,000)
Accounts Payable
Mortgage Payable
Common Stock
$ 80,000
Retained Earnings
210,000
$290,000
37,500
Total Stockholders equity
P5-31 Majority-Owned Subsidiary Acquired at Greater than Book Value
a.
Equity Method Entries on Porter Corp.'s Books:
Cash
Record the initial investment in Darla Corp.
102,200
102,200

NCI
30%
Ending book value
37,500
Porter
Corp.
70%
87,500
Common
Stock
40,000
5-58
Retained
Earnings
85,000
$ 86,000
121,500
205,000
90,000
430,000
$932,500
$175,000
430,000
327,500
$932,500
1/1/X4
Goodwill = 0
Identifiable excess
= 14,700
70%
Book value =
87,500

Common stock
Retained earnings
$102,200
Initial
investment in
Darla Corp.
40,000
85,000
87,500
37,500

NCI
Porter Corp.
30%
+
70%
Beginning balances
6,300
14,700
5-59
Inventory
6,000
Buildings &
Equipment
15,000
P5-31 (continued)
Inventory
6,000
15,000
14,700
6,300

Accounts Payable
Accounts Receivable
12,500
12,500

80,000
Acquisition Price
Investment in
Darla Corp.
102,200
87,500
14,700
0
80,000
Basic
Excess Reclass.
5-60
P5-31 (continued)
Elimination Entries
Porter
Corp.
Darla
Corp.
Cash
50,300
21,000
Accounts Receivable
90,000
44,000
130,000
75,000
DR
CR
Consolidate
d
Balance Sheet
Inventory
Land
60,000
30,000

Less: Accumulated
Depreciation
410,000
(150,000
)
250,000
(80,000
)
102,200
71,300
12,500
6,000
121,500
211,000
90,000
15,000
80,000
80,000
595,000
(150,000)
87,500
14,700
180,00
0
938,800
Total Assets
692,500
340,000
101,00
0
Accounts Payable
152,500
35,000
12,500
Mortgage Payable
250,000
180,000
80,000
40,000
40,000
80,000
210,000
85,000
85,000
210,000
Common Stock
Retained Earnings
175,000
430,000
37,500
43,800
6,300
692,500
340,000
5-61
137,50
0
37,500
938,800
c.
Porter Corporation and Subsidiary

December 31, 20X4
Cash
Accounts Receivable
Inventory
Land
Total Assets
$595,000
(150,000)
Accounts Payable
Mortgage Payable
Common Stock
Retained Earnings
$ 80,000
210,000
$290,000
43,800
a.
510,000
500,000
10,000
5-62
445,000
$938,800
$175,000
430,000
P5-32 Balance Sheet Consolidation of Majority-Owned Subsidiary
Equity Method Entries on Total Corp.'s Books:

Investment in Ticken Tie Co.
Bonds Payable
Bond Premium
Record the initial investment in Ticken Tie Co.
$ 71,300
121,500
211,000
90,000
333,800
$938,800
b.
NCI
25%
Ending book value
119,500
Total
Corp.
75%
Retained
=
358,500
Common
Stock
200,000
1/1/X8
Goodwill = 66,000
Identifiable excess
= 85,500
75%
Book value =
358,500

Common stock
Retained earnings
NCI in NA of Ticken Tie Co.
$510,000
Initial
investment in
Ticken Tie
Co.
200,000
130,000
148,000
358,500
119,500
5-63
Add. Paidin Capital

130,000
+
Earnings
148,000
P5-32 (continued)
Total
NCI
Corp.
Inven25%
+
75%
=
tory
Beg.
balances 50,500
151,500
4,000
Land
20,000

Inventory
Land
Building & Equipment
Patent
Goodwill
Current payables
Receivables
Acquisition Price
Building &
Equipment
50,000
4,000
20,000
50,000
40,000
88,000
151,500
50,500
6,500
6,500

220,000
Investment in
Ticken Tie Co.
510,000
358,500
151,500
0
220,000
Basic
Excess Reclass.
5-64
Patent
40,000
Goodwill
88,000
P5-32 (continued)
c.
Balance Sheet
Cash
Receivables
Inventory
Land
Patent
Goodwill
Total Assets
d.
Total
Corp.
Ticken
Tie Co.
12,000
39,000
86,000
55,000
960,000
(411,000)
510,000
9,000
30,000
68,000
50,000
670,000
(220,000)
Elimination Entries
DR
CR
6,500
4,000
20,000
50,000
220,000
220,000
358,500
151,500
40,000
88,000
294,000
1,251,000
607,000
Current Payables
Bonds Payable
Bond Premium
Common Stock
Retained Earnings
38,000
700,000
10,000
300,000
100,000
103,000
29,000
100,000
6,500
200,000
130,000
148,000
200,000
130,000
148,000
1,251,000
607,000
484,500
585,000
119,500
50,500
119,500
Consolidated
21,000
62,500
158,000
125,000
1,460,000
(411,000)
0
40,000
88,000
1,543,500
60,500
800,000
10,000
300,000
100,000
103,000
170,000
1,543,500
Total Corporation and Subsidiary

January 2, 20X8
Cash
Receivables
Less: Allowance for Bad Debts
Inventory
Land
Patent
Goodwill
Total Assets
65,500
(3,000)
$1,460,000
(411,000)
Current Payables
Bonds Payable
Premium on Bonds Payable
Common Stock
Retained Earnings
Total Liabilities and
$ 800,000
10,000
$ 300,000
100,000
103,000
$ 503,000
170,000
5-65
21,000
62,500
158,000
125,000
1,049,000
40,000
88,000
$1,543,500
$
60,500
810,000
673,000
Stockholders' Equity
P5-33 Incomplete Data
$1,543,500
a.
$15,000
= ($115,000 + $46,000) - $146,000
b.
$65,000
= ($148,000 - $98,000) + $15,000
c.
Skyler: $24,000
= $380,000 - ($46,000 + $110,000

+ $75,000 + $125,000)
= $94,000 - $24,000
Blue: $70,000
d.
Fair value of Skyler

as a whole:
$200,000
10,000
Book value of Skyler shares

Differential assigned to inventory
($195,000 - $105,000 - $80,000)
Differential assigned to buildings and equipment
($780,000 - $400,000 - $340,000)
Differential assigned to goodwill
Fair value of Skyler
40,000
9,000
$259,000
e.
65 percent
1.00 ($90,650 / $259,000)
f.
Capital Stock
Retained Earnings
=
=
$120,000
$115,000
5-66
P5-34 Income and Retained Earnings

a.
Net income for 20X9:

Operating income
Income from subsidiary
Net income
Quill
$ 90,000
24,500
$114,500
North
$35,000
Quill
$290,000
114,500
(30,000)
$374,500
North
$40,000
35,000
(10,000)
$65,000
$35,000
b. Consolidated net income is $125,000 ($90,000 + $35,000).

c. Retained earnings reported at December 31, 20X9:
Retained earnings, January 1, 20X9
Net income for 20X9
Dividends paid in 20X9
Retained earnings, December 31, 20X9
d. Consolidated retained earnings at December 31, 20X9, is equal to the $374,500 retained
earnings balance reported by Quill.
e. When the cost method is used, the parent's proportionate share of the increase in retained
earnings of the subsidiary subsequent to acquisition is not included in the parent's retained
earnings. Thus, this amount must be added to the total retained earnings reported by the
parent in arriving at consolidated retained earnings.
5-67
P5-35 Consolidation Worksheet at End of First Year of Ownership

a.
Equity Method Entries on Power Corp.'s Books:
Investment in Best Co.
Cash
Record the initial investment in Best Co.
96,000
96,000

18,000
Income from Best Co.
Record Power Corp.'s 75% share of Best Co.'s 20X8 income
18,000
Cash
12,000
Record Power Corp.'s 75% share of Best Co.'s 20X8 dividend
12,000

5,625
5,625
Original book value

+ Net Income
- Dividends
NCI
25%
25,000
6,000
(4,000)
Ending book value
27,000
Power Corp.
75%
75,000
18,000
(12,000)
81,000
Common
Stock
60,000
60,000
1/1/X8
12/31/X8
Goodwill = 6,000
Goodwill = 1,875
Identifiable excess
= 15,000
Excess = 13,500
75%
Book value =
75,000
$96,000
Initial
investment in
Best Co.
5-68
75%
Book value =
81,000
Retained
Earnings
40,000
24,000
(16,000)
48,000
$96,375
Net
investment
in Best Co.
P5-35 (continued)
Common stock
Retained earnings
NCI in NI of Best Co.
Dividends declared
NCI in NA of Best Co.
60,000
40,000
18,000
6,000
16,000
81,000
27,000

NCI
Power Corp.
25%
+
75%
Beginning balance
7,000
21,000
Changes
(1,875)
(5,625)
Ending balance
5,125
15,375
Goodwill impairment loss
Buildings &
Equipment
20,000
20,000
Acc.
Depr.
0
(2,000)
(2,000)
Goodwill
8,000
(5,500)
2,500
2,000
5,500
5,625
1,875

Goodwill
Acc. Depr.
20,000
2,500
2,000
15,375
5,125

30,000
30,000
Acquisition Price
75% Net Income
Ending Balance
Investment in
Best Co.
96,000
18,000
12,000
5,625
96,375
Income from
Best Co.
75% Dividends
Excess Val. Amort.
81,000
Basic
15,375
Excess Reclass.
5-69
18,000
75% Net Income
12,375
Ending Balance
5,625
18,000
5,625
0
P5-35 (continued)
b.
Income Statement
Sales
Less: COGS
Less: Wage Expense
Less: Interest Expense
Less: Impairment Loss
NCI in Net Income
Income
Power
Corp.
Best Co.
260,000
(125,000)
(42,000)
(25,000)
(12,000)
(13,500)
180,000
(110,000)
(27,000)
(10,000)
(4,000)
(5,000)
Elimination Entries
DR
CR
Consolidated
5,500
18,000
25,500
6,000
5,625
5,625
1,875
440,000
(235,000)
(69,000)
(37,000)
(16,000)
(18,500)
(5,500)
0
59,000
(4,125)
24,000
31,500
7,500
54,875
102,000
54,875
(30,000)
126,875
40,000
24,000
(16,000)
48,000
40,000
31,500
7,500
16,000
23,500
102,000
54,875
(30,000)
126,875
47,500
70,000
90,000
30,000
350,000
(145,000)
96,375
21,000
12,000
25,000
15,000
150,000
(40,000)
20,000
30,000
538,875
183,000
2,500
50,000
Accounts Payable
Wages Payable
Notes Payable
Common Stock
Retained Earnings
45,000
17,000
150,000
200,000
126,875
16,000
9,000
50,000
60,000
48,000
60,000
71,500
538,875
183,000
131,500
Statement of Retained
Earnings
Beginning Balance
Net Income
Ending Balance
Balance Sheet
Cash
Accounts Receivable
Inventory
Land
Goodwill
Total Assets
12,375
54,875
24,000
54,875
5-70
2,000
71,500
30,000
2,000
81,000
15,375
128,375
23,500
27,000
5,125
23,500
68,500
82,000
115,000
45,000
490,000
(157,000)
0
2,500
646,000
61,000
26,000
200,000
200,000
126,875
32,125
646,000
P5-36 Consolidation Worksheet at End of Second Year of Ownership

a.
Equity Method Entries on Power Corp.'s Books:
27,000
Record Power Corp.'s 75% share of Best Co.'s 20X9 income
Cash
15,000
Record Power Corp.'s 75% share of Best Co.'s 20X9 dividend
27,000
15,000
1,500
1,500
Original book value

+ Net Income
- Dividends
NCI
25%
27,000
9,000
(5,000)
Ending book value
31,000
Power
Corp.
75%
81,000
27,000
(15,000)
93,000
Common
Stock
60,000
Retained
Earnings
48,000
36,000
(20,000)
60,000
1/1/X9
12/31/X9
Goodwill = 1,875
Goodwill = 1,875
Identifiable excess
= 13,500
Excess = 12,000
75%
Book value =
81,000
$96,375
Net
investment in
Best Co.
5-71
75%
Book value =
93,000
64,000
$106,875
Net
investment
in Best Co.
P5-36 (continued)
Common stock
Retained earnings
Dividends declared
60,000
48,000
27,000
9,000
20,000
93,000
31,000
Beginning balance
Changes
Ending balance
NCI
25%
5,125
(500)
4,625
Power
Corp. 75%
15,375
(1,500)
13,875
Buildings
and
Equipment
20,000
20,000

Ending Balance
Goodwill
2,500
0
2,500
1,500
500
20,000
2,500
4,000
13,875
4,625

40,000
Beginning Balance
75% Net Income
Acc.
Depr.
(2,000)
(2,000)
(4,000)
2,000

Goodwill
Acc. Depr.
Investment in
Best Co.
96,375
27,000
15,000
1,500
106,875
40,000
Income from
Best Co.
75% Dividends
Excess Val. Amort.
93,000
Basic
13,875
Excess Reclass.
5-72
27,000
75% Net Income
25,500
Ending Balance
1,500
27,000
1,500
0
P5-36 (continued)
b.
Power
Corp.
Income Statement
Sales
Less: COGS
Less: Wage Expense
NCI in Net Income
Best Co.
Elimination Entries
DR
CR
290,000
(145,000)
(35,000)
(25,000)
(12,000)
(23,000)
25,500
75,500
200,000
(114,000)
(20,000)
(10,000)
(4,000)
(16,000)
75,500
36,000
126,875
75,500
(30,000)
172,375
48,000
36,000
(20,000)
64,000
68,500
85,000
97,000
50,000
350,000
(170,000)
106,875
32,000
14,000
24,000
25,000
150,000
(50,000)
20,000
40,000
587,375
195,000
2,500
60,000
Accounts Payable
Wages Payable
Notes Payable
Common Stock
Retained Earnings
51,000
14,000
150,000
200,000
172,375
15,000
6,000
50,000
60,000
64,000
60,000
86,000
587,375
195,000
146,000

Beginning Balance
Net Income
Ending Balance
Balance Sheet
Cash
Accounts Receivable
Inventory
Land
Goodwill
Total Assets
36,000
5-73
1,500
1,500
500
2,000
490,000
(259,000)
(55,000)
(37,000)
(16,000)
(39,000)
0
84,000
(8,500)
75,500
2,000
20,000
22,000
126,875
75,500
(30,000)
172,375
2,000
27,000
29,000
9,000
38,000
48,000
38,000
86,000
Consolidated
40,000
4,000
93,000
13,875
150,875
22,000
31,000
4,625
22,000
100,500
99,000
121,000
75,000
480,000
(184,000)
0
2,500
694,000
66,000
20,000
200,000
200,000
172,375
35,625
694,000
P5-36 (continued)
c.
Power Corporation and Subsidiary

December 31, 20X9
Cash
Accounts Receivable
Inventory
Land
Goodwill
Total Assets
$480,000
(184,000)
Accounts Payable
Wages Payable
Notes Payable
Common Stock
Retained Earnings
$100,500
99,000
121,000
75,000
296,000
2,500
$694,000
$ 66,000
20,000
200,000
$200,000
172,375
$372,375
35,625
408,000
$694,000

Sales
Cost of Goods Sold
Wage Expense
Depreciation Expense
Interest Expense
Other Expenses
Total Expenses
$259,000
55,000
37,000
16,000
39,000
$490,000
(406,000)
$ 84,000
(8,500)
$ 75,500

Consolidated Retained Earnings Statement
Retained Earnings, January 1, 20X9
Income to Controlling Interest, 20X9
$126,875
75,500
$202,375
(30,000)
$172,375
Dividends Declared, 20X9

Retained Earnings, December 31, 20X9
5-74
5-75
P5-37 Comprehensive Problem: Majority-Owned Subsidiary

a.
Equity Method Entries on Master Corp.'s Books:
Investment in Stanley Wood Co.
24,000
Income from Stanley Wood Co.
24,000
Record Master Corp.'s 80% share of Stanley Wood Co.'s 20X5 income
Cash
8,000
8,000
Record Master Corp.'s 80% share of Stanley Wood Co.'s 20X5 dividend
4,000
4,000
b.
Original book value

+ Net Income
- Dividends
NCI
20%
38,000
6,000
(2,000)
Ending book value
42,000
Master Corp.
80%
152,000
24,000
(8,000)
168,000
5-76
Common
Stock
100,000
100,000
Retained
Earnings
90,000
30,000
(10,000)
110,000
1/1/X5
12/31/X5
Goodwill = 0
Goodwill = 0
Identifiable excess
= 24,000
Excess = 20,000
80%
Book value =
152,000
$176,000
Net
investment in
Stanley Wood
Co.
5-77
80%
Book value =
168,000
$188,000
Net
investment in
Stanley
Wood Co.
P5-37 (continued)
Common stock
Retained earnings
NCI in NI of Stanley Wood Co.
Dividends declared
NCI in NA of Stanley Wood Co.
100,000
90,000
24,000
6,000
10,000
168,000
42,000

NCI
Master Corp.
20%
+
80%
Beginning balance
6,000
24,000
Changes
(1,000)
(4,000)
Ending balance
5,000
20,000
NCI in NI of Stanley Wood Co.
50,000
50,000
25,000
20,000
5,000
10,000
10,000
Investment in
Stanley Wood Co.
Ending Balance
Acc. Depr.
(20,000)
(5,000)
(25,000)
4,000
1,000

Accounts payable
Cash and receivables
Income from
Stanley Wood Co.
176,000
24,000
8,000
4,000
5,000

Acc. Depr.
Beginning
Balance
80% Net Income
Buildings &
Equipment
50,000
80% Dividends
Excess Val. Amort.
Basic
20,000
Excess Reclass.
5-78
80% Net Income
20,000
Ending Balance
4,000
188,000
168,000
24,000
24,000
4,000
0
P5-37 (continued)
c.
Master
Corp.
Stanley
Wood
Co.
200,000
100,000
300,000
(120,000)
(50,000)
(170,000)
(25,000)
(15,000)
Less: Inventory Losses
(15,000)
(5,000)
Elimination Entries
DR
CR
Consolidated
Income Statement
Sales
Less: COGS
20,000
60,000
30,000
NCI in Net Income

5,000
(45,000)
(20,000)
24,000
4,000
29,000
4,000
65,000
6,000
1,000
(5,000)
5,000
60,000
60,000
30,000
35,000
314,000
90,000
90,000
60,000
30,000
35,000
(30,000)
(10,000)
Ending Balance
344,000
110,000
81,000
65,000
260,000
90,000

Beginning Balance
Net Income
125,000
314,000
5,000
60,000
10,000
(30,000)
15,000
344,000
10,000
136,000
Balance Sheet
Inventory
Land
80,000
80,000
500,000
150,000
(205,000)
(105,000)
188,000
350,000
160,000
50,000
700,000
25,000
(335,000)
168,000
20,000
Total Assets
904,000
280,000
50,000
60,000
20,000
10,000
Notes Payable
200,000
50,000
Common Stock
300,000
100,000
100,000
Retained Earnings
344,000
110,000
125,000
Accounts Payable
35,000
1,011,000
70,000
250,000
300,000
15,000
344,000
42,000
47,000
5,000
904,000
280,000
5-79
235,000
57,000
1,011,000
P5-38 Comprehensive Problem: Differential Apportionment

a.
Equity Method Entries on Mortar Corp.'s Books:
Investment in Granite Co.
Cash
Record the initial investment in Granite Co.
173,000
173,000

48,000
Income from Granite Co.
Record Mortar Corp.'s 80% share of Granite Co.'s 20X7 income
48,000
Cash
16,000
Record Mortar Corp.'s 80% share of Granite Co.'s 20X7 dividend
16,000

b.
3,000
3,000
Original book value

+ Net Income
- Dividends
NCI
20%
30,000
12,000
(4,000)
Ending book value
38,000
Mortar
Corp.
80%
120,000
48,000
(16,000)
152,000
Common
Stock
50,000
Retained
Earnings
100,000
60,000
(20,000)
50,000
140,000
1/1/X7
12/31/X7
Goodwill = 20,000
Goodwill = 20,000
Identifiable excess
= 33,000
Excess = 30,000
80%
Book value =
120,000
$173,000
Initial
investment in
Granite Co.
5-80
80%
Book value =
152,000
$202,000
Net
investment in
Granite Co.
P5-38 (continued)
Common stock
Retained earnings
NCI in NI of Granite Co.
Dividends declared
NCI in NA of Granite Co.
50,000
100,000
48,000
12,000
20,000
152,000
38,000

NCI
Mortar
20%
+
Corp. 80%
Beginning balance
13,250
53,000
Changes
(750)
(3,000)
Ending balance
12,500
50,000
Buildings &
Equipment
41,250
41,250

Goodwill
25,000
0
25,000
41,250
25,000
3,750
50,000
12,500
16,000
16,000

60,000
Ending Balance
3,000
750

Accounts payable
Accounts receivable
Acquisition Price
80% Net Income
Acc.
Depr.
0
(3,750)
(3,750)
3,750

Goodwill
Acc. Depr.
Investment in
Granite Co.
173,000
48,000
16,000
3,000
202,000
152,000
50,000
0
60,000
Income from
Granite Co.
80% Dividends
Excess Val. Amort.
Basic
Excess Reclass.
5-81
48,000
80% Net Income
45,000
Ending Balance
3,000
48,000
3,000
0
P5-38 (continued)
c.
Elimination Entries
DR
CR
Mortar
Corp.
Granite
Co.
700,000
(500,000)
(25,000)
(75,000)
45,000
145,000
400,000
(250,000)
(15,000)
(75,000)
60,000
48,000
51,750
12,000
3,000
3,000
750
1,100,000
(750,000)
(43,750)
(150,000)
0
156,250
(11,250)
145,000
60,000
63,750
3,750
145,000
290,000
145,000
(50,000)
385,000
100,000
60,000
(20,000)
140,000
100,000
63,750
3,750
20,000
23,750
290,000
145,000
(50,000)
385,000
38,000
50,000
240,000
80,000
500,000
(155,000)
202,000
25,000
55,000
100,000
20,000
150,000
(75,000)
41,250
60,000
955,000
275,000
25,000
101,250
Accounts Payable
Mortgage Payable
Common Stock
Retained Earnings
70,000
200,000
300,000
385,000
35,000
50,000
50,000
140,000
50,000
163,750
955,000
275,000
229,750
Income Statement
Sales
Less: COGS
NCI in Net Income
Income
Beginning Balance
Net Income
Ending Balance
Balance Sheet
Cash
Accounts Receivable
Inventory
Land
Goodwill
Total Assets
5-82
3,750
163,750
16,000
60,000
3,750
152,000
50,000
79,750
16,000
23,750
38,000
12,500
61,750
Consolidated
63,000
89,000
340,000
100,000
631,250
(173,750)
0
25,000
1,074,500
89,000
250,000
300,000
385,000
50,500
1,074,500
P5-39 Comprehensive Problem: Differential Apportionment in Subsequent Period.

a.
Equity Method Entries on Mortar
Corp.'s Books:
36,
000
36,00
0
Record Mortar Corp.'s 80% share of Granite Co.'s 20X8
income
20,
Cash
000
20,00
0
Record Mortar Corp.'s 80% share of Granite Co.'s 20X8
dividend
11,
800

Record amortization of excess acquisition
price
b.
Book Value
Calculations:
NCI
20%
Original book
value
38,00
0
Mortar
Corp.
80%
152,000
11,80
0
Comm
=
on
Stock
50,00
0
Retaine
d
+
Earning
s
140,000
+ Net Income
9,000
36,000
45,000
- Dividends
(5,000
)
(20,000)
(25,000
)
42,00
0
168,000
Ending book
value
5-83
50,00
0
160,000
1/1/X8
12/31/X8
Goodwill =
11,200
Goodwill =
20,000
Identifiable
excess =
30,000
80%
Book value =
152,000
$202,000
Net
investmen
t in
Granite
Co.
5-84
Excess =
27,000
80%
Book value =
168,000
$206,200
Net
investmen
t in
Granite
Co.
P5-39 (continued)
5
Common stock
0,000
14
0,000
3
6,000
Retained earnings
9,000
25,00
0
168,0
00
42,00
0
Dividends declared
Investment in
Granite Co.
NCI in NA of Granite
Co.
Excess Value (Differential)
Calculations:
Beginning
balance
Changes
Ending
balance
NCI
20%
12,5
00
(2,9
50)
9,55
0
Mortar
Corp.
+
80%
Building
s&
Equipm
=
ent
50,000
(11,80
0)
41,250
38,200
41,250
Acc.
Depr.
(3,75
0)
(3,75
0)
(7,50
0)
Amortized excess value

3,75
0
11,0
00
Goodwill impairment loss
11,80
0
2,950

Excess value (differential)
41,2
50
14,0
00

Goodwill
Acc. Depr.
7,500
38,20
0
5-85
Good
will
25,00
0
(11,00
0)
14,00
0

Eliminate intercompany
accounts:
Accounts payable
Accounts receivable
9,550
9,000
9,000
Optional accumulated depreciation

elimination entry
Accumulated
6
depreciation
0,000
Building &
equipment
60,00
0
Investment in
Granite Co.
Income from
Granite Co.
Beginning 202,0
Balance 00
80% Net 36,00
Income 0
20,00
0
80%
Dividends
11,80
0
Excess Val.
Amort.
Basic
Excess
Reclass.
5-86
80% Net
Income
24,20
0
Ending
Balance
11,8
00
Ending 206,2
Balance 00
168,0
00
38,20
0
36,00
0
36,0
00
11,80
0
0
P5-39 (continued)
c.
Elimination
Entries
Mortar
Corp.
Granit
e Co.
650,00
0
(490,00
0)
(25,000
)
(62,000
)
470,00
0
(310,00
0)
(15,000
)
(100,00
0)
DR
CR
Consolida
ted
Income Statement
Sales
Less: COGS
Less: Depreciation
Expense
Less: Goodwill
Impairment
24,200

NCI in Net Income
Controlling Interest in
Net Income
97,200
45,000
97,200
45,000
385,00
0
140,00
0
1,120,000
(800,000)
3,750
(43,750)
(162,000)
11,00
0
36,00
0
50,75
0
9,000
59,75
0
(11,000)
11,80
0
11,80
0
2,950
14,75
0
0
103,250
(6,050)
97,200
Statement of Retained
Earnings
Beginning Balance
Net Income
Ending Balance
Balance Sheet
Cash
Accounts Receivable
Inventory
Land
Less: Accumulated
Depreciation
97,200
(45,000
)
437,20
0
45,000
(25,000
)
160,00
0
59,000
83,000
275,00
0
80,000
500,00
0
(180,00
0)
206,20
0
31,000
71,000
118,00
0
30,000
150,00
0
(90,000
)
140,0
00
59,75
0
199,7
50
5-87
437,200
9,000
90,000
145,000
97,200
(45,000)
393,000
110,000
41,25
0
60,00
0
14,00
0
Goodwill
385,000
14,75
0
25,00
0
39,75
0
60,00
0
7,500
168,0
00
38,20
0
631,250
(217,500)
0
14,000
Total Assets
Accounts Payable
Mortgage Payable
Common Stock
Retained Earnings
1,023,
200
310,00
0
101,2
50
86,000
200,00
0
300,00
0
437,20
0
30,000
9,000
50,000
160,00
0
1,023,
200
310,00
0
5-88
1,165,750
107,000
70,000
270,000
50,00
0
199,7
50

Total Liabilities &
Equity
76,50
0
258,7
50
300,000
39,75
0
42,00
0
9,550
81,75
0
437,200
51,550
1,165,750
P5-40 Subsidiary with Other Comprehensive Income in Year of Acquisition

a.
Equity Method Entries on Amber Corp.'s Books:
Investment in Sparta Co.
Cash
Record the initial investment in Sparta Co.
96,000
96,000

15,000
Income from Sparta Co.
Record Amber Corp.'s 60% share of Sparta Co.'s 20X8 income
15,000
Cash
9,000
Record Amber Corp.'s 60% share of Sparta Co.'s 20X8 dividend
9,000

6,000
Other Comprehensive Income from Sparta Co.
Record share of increase in value of securities held by Sparta Co.
6,000
Original book value

+ Net Income
- Dividends
NCI
40%
64,000
10,000
(6,000)
Ending book value
68,000
Amber Corp.
60%
96,000
15,000
(9,000)
102,000
Common
Stock
100,000
100,000
1/1/X8
12/31/X8
Goodwill = 0
Goodwill = 0
Identifiable excess
=0
Excess = 0
60%
Book value =
96,000
$96,000
Initial
investment in
Sparta Co.
5-89
60%
Book value =
108,000
Retained
Earnings
60,000
25,000
(15,000)
70,000
$108,000
Net
investment in
Sparta Co.
P5-40 (continued)
Common stock
Retained earnings
NCI in NI of Sparta Co.
Dividends declared
NCI in NA of Sparta Co.
OCI from Sparta Co.
OCI to the NCI
Acquisition Price
60% Net Income
Ending Balance
Investment in
Sparta Co.
96,000
15,000
9,000
6,000
108,000
102,000
6,000
0
100,000
60,000
15,000
10,000
15,000
102,000
68,000
6,000
4,000
6,000
4,000
Income from
Sparta Co.
15,000
60% Net Income
15,000
Ending Balance
60% Dividends
OCI Entry
Basic
OCI
15,000
0
5-90
P5-40 (continued)
b.
Income Statement
Sales
Less: COGS
NCI in Net Income
Beginning Balance
Net Income
Ending Balance
Balance Sheet
Cash
Accounts Receivable
Inventory
Investment in Row Company
Amber
Corp.
Sparta
Co.
220,000
(150,000)
(30,000)
(8,000)
15,000
47,000
148,000
(110,000)
(10,000)
(3,000)
47,000
25,000
208,000
47,000
(24,000)
231,000
60,000
25,000
(15,000)
70,000
27,000
65,000
40,000
500,000
(140,000)
8,000
22,000
30,000
235,000
(85,000)
40,000
25,000
15,000
15,000
10,000
25,000
60,000
25,000
85,000
600,000
250,000
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Accumulated OCI
63,000
100,000
200,000
231,000
6,000
20,000
50,000
100,000
70,000
10,000
600,000
250,000
0
15,000
15,000
208,000
47,000
(24,000)
231,000
75,000
75,000
100,000
85,000
10,000
185,000
Consolidated
368,000
(260,000)
(40,000)
(11,000)
0
57,000
(10,000)
47,000
75,000
108,000
Total Assets
Other Comprehensive Income

Accumulated Other Comprehensive
Income, 1/1/20X8
Other Comprehensive Income from
Sparta Co.
Unrealized Gain on Investments
Other Comprehensive Income to NCI
Income, 12/31/20X8
Elimination Entries
DR
CR
102,000
6,000
75,000
15,000
68,000
4,000
83,000
35,000
87,000
70,000
660,000
(150,000)
40,000
0
742,000
83,000
150,000
200,000
231,000
6,000
72,000
742,000
0
6,000
6,000
0
10,000
(4,000)
10,000
4,000
6,000
10,000
5-91
10,000
6,000
P5-40 (continued)
c.
Amber Corporation and Subsidiary

December 31, 20X8
Cash
Accounts Receivable
Inventory
Investment in Marketable Securities
Total Assets
$660,000
(150,000)
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Accumulated Other Comprehensive Income
$ 35,000
87,000
70,000
510,000
40,000
$742,000
$ 83,000
150,000
$200,000
231,000
6,000
$437,000
72,000
509,000
$742,000

Sales
Cost of Goods Sold
Depreciation Expense
Interest Expense
Total Expenses
$260,000
40,000
11,000
$368,000
(311,000)
$ 57,000
(10,000)
$ 47,000

Consolidated Statement of Comprehensive Income
Other Comprehensive Income:
Unrealized Gain on Investments Held by Subsidiary
Total Consolidated Comprehensive Income
Less: Comprehensive Income Attributable to
Comprehensive Income Attributable to Controlling
Interest
5-92
$57,000
10,000
$67,000
(14,000)
$53,000
P5-41 Subsidiary with Other Comprehensive Income in Year Following

Acquisition
a.
Equity Method Entries on Amber Corp.'s Books:
Cash
Record the initial investment in Sparta Co.
108,000
108,000

18,000
Record Amber Corp.'s 60% share of Sparta Co.'s 20X9 income
18,000
Cash
12,000
Record Amber Corp.'s 60% share of Sparta Co.'s 20X9 dividend
12,000

2,400
Other Comprehensive Income from Sparta Co.
Record share of increase in value of securities held by Sparta Co.
2,400
Original book value

+ Net Income
- Dividends
NCI
40%
72,000
12,000
(8,000)
Ending book value
76,000
Amber Corp.
60%
108,000
18,000
(12,000)
114,000
Common
Stock
100,000
100,000
1/1/X9
12/31/X9
Goodwill = 0
Goodwill = 0
80,000
OCI
10,000
10,000
Excess = 0
Excess = 0
60%
Book value =
108,000
Retained
Earnings
70,000
30,000
(20,000)
$108,000
Net
investment in
Sparta Co.
P5-41 (continued)
5-93
60%
Book value =
116,400
$116,400
Net
investment in
Sparta Co.

Common stock
Retained earnings
Accumulated OCI
NCI in NI of Sparta Co.
Dividends declared
OCI from Sparta Co.
OCI to the NCI
Beginning Balance
60% Net Income
Ending Balance
Investment in
Sparta Co.
108,000
18,000
12,000
2,400
116,400
114,000
2,400
0
100,000
70,000
10,000
18,000
12,000
20,000
114,000
76,000
2,400
1,600
2,400
1,600
Income from
Sparta Co.
18,000
60% Net Income
18,000
Ending Balance
60% Dividends
OCI Entry
Basic
OCI
18,000
0
5-94
P5-41 (continued)
b.
Income Statement
Sales
Less: COGS
NCI in Net Income
Income
Beginning Balance
Net Income
Ending Balance
Balance Sheet
Cash
Accounts Receivable
Inventory
Investment in Row Company
Elimination Entries
DR
CR
Amber
Corp.
Sparta
Co.
250,000
(170,000)
(30,000)
(8,000)
18,000
60,000
140,000
(97,000)
(10,000)
(3,000)
30,000
18,000
18,000
12,000
60,000
30,000
30,000
231,000
60,000
(40,000)
251,000
70,000
30,000
(20,000)
80,000
70,000
30,000
18,000
45,000
40,000
585,000
(170,000)
11,000
21,000
30,000
257,000
(95,000)
44,000
100,000
390,000
(267,000)
(40,000)
(11,000)
0
72,000
(12,000)
0
60,000
0
20,000
20,000
231,000
60,000
(40,000)
251,000
75,000
75,000
116,400
114,000
2,400
75,000
29,000
66,000
70,000
767,000
(190,000)
44,000
0
Total Assets
634,400
268,000
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Accumulated OCI
75,000
100,000
200,000
251,000
8,400
24,000
50,000
100,000
80,000
14,000
634,400
268,000
200,000
6,000
10,000
10,000
6,000
2,400
0
4,000
(1,600)
Other Comprehensive Income

Income, 1/1/20X9
Other Comprehensive Income from
Sparta Co.
Unrealized Gain on Investments
Other Comprehensive Income to NCI
Income, 12/31/20X9
2,400
75,000
Consolidated
100,000
100,000
14,000
20,000
76,000
1,600
96,000
4,000
1,600
8,400
14,000
5-95
14,000
786,000
99,000
150,000
200,000
251,000
8,400
77,600
786,000
8,400

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Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

C5-2 Consolidated Income Presentation

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

C5-3 Pro Rata Consolidation

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

C5-4 Elimination Procedures

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

C5-5 Changing Accounting Standards: Monsanto Company

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

$650,000 = $500,000 + $200,000 - $50,000

$95,000 = ($956,000 / 0.80) - $1,000,000 - $100,000

$251,000 = .20[($956,000 + $239,000) + ($190,000 - $5,000 - $125,000)]

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

E5-3 Eliminating Entries with Differential

Book Value Calculations:

Basic elimination entry

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

Excess value (differential) reclassification entry:

E5-4 Computation of Consolidated Balances

Buildings and Equipment

d. Fair value of consideration given by Ford

e. Investment in Slim Corporation: None would be reported;

Noncontrolling Interest ($587,500 x .20)

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

E5-5 Balance Sheet Worksheet

Equity Method Entries on Power Co.'s Books:

Book Value Calculations:

Basic elimination entry

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

Excess value (differential) reclassification entry:

Cash and Receivables

Buildings & Equipment (net)

Investment in Pleasantdale Dairy

NCI in NA of Pleasantdale Dairy

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

E5-6 Majority-Owned Subsidiary Acquired at Greater than Book Value

Book Value Calculations:

Basic elimination entry

Excess Value (Differential) Calculations:

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

Eliminate intercompany accounts:

Optional accumulated depreciation elimination entry

Total Liabilities & Equity

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

Zenith Corporation and Subsidiary

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

E5-7 Consolidation with Minority Interest

Book Value Calculations:

Basic elimination entry

Excess Value (Differential) Calculations:

Excess value (differential) reclassification entry:

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

E5-8 Worksheet for Majority-Owned Subsidiary

Basic elimination entry

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

Buildings & Equipment (net)

Investment in Lowtide Builders

NCI in NA of Lowtide Builders

Glitter Enterprises and Subsidiary

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

E5-9 Multiple-Choice Questions on Balance Sheet Consolidation