Chapter 11 Test Bank

CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND

CORPORATE JOINT VENTURES

Multiple Choice Questions

Use the following information in answering Questions 1 and 2.

Pasfield Corporation acquired a 90% interest in Santini Corporation

for $90,000 cash on January 1, 2005. The following information is
available for Santini at that time.

Book Fair
Value Value Difference
Current assets $ 40,000 $ 50,000 $ 10,000
Plant assets 60,000 75,000 15,000
Liabilities ( 50,000 ) ( 50,000 ) 0
Net assets $ 50,000 $ 75,000

LO1
1. Under the entity theory, a consolidated balance sheet prepared
immediately after the business combination will show goodwill
of

a. $15,000.
b. $22,500.
c. $25,000.
d. $32,500.

LO1
2. Under the entity theory, a consolidated balance sheet prepared
immediately after the business combination will show minority
interest of

a. $ 5,000.
b. $ 7,500.
c. $ 9,000.
d. $10,000.

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LO1
3. Paroz Corporation acquired a 70% interest in Sandberg
Corporation for $900,000 when Sandberg’s stockholders’ equity
consisted of $600,000 of Capital Stock and $600,000 of Retained
Earnings. The fair values of Sandberg’s net assets were equal
to their recorded book values. At the time of acquisition,
Pratt will record

a. goodwill for $60,000 under the parent company theory.

b. goodwill for $85,714 under the entity theory.
c. investment in Sandberg for $1,285,714 under the entity
theory.
d. investment in Sandberg for $900,000 under the entity and
parent company theories.

Use the following information for Questions 4, 5, and 6.

Pascoe Corporation paid $450,000 for a 90% interest in Sarabet

Corporation on January 1, 2005, when Sarabet’s stockholders’ equity
consisted of $250,000 Common Stock and $50,000 Retained Earnings. The
book values and fair values of Shelby’s assets and liabilities were
equal when Pascoe acquired its interest.

The separate incomes of Pascoe and Sarabet for 2005 were $600,000 and
$100,000, respectively. Dividends declared and paid during 2005 were
$250,000 for Pascoe and $50,000 for Sarabet. Pascoe uses the entity
theory in consolidating its financial statements with those of
Sarabet.
LO1
4. Goodwill was reported in the December 31, 2005 consolidated
balance sheet at

a. $170,000.
b. $180,000.
c. $200,000.
d. $210,000.

LO1
5. Minority interest income was reported in the 2005 consolidated
income statement at

a. $ 5,000.
b. $ 6,000.
c. $ 8,000.
d. $10,000.

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LO1
6. Pascoe’s income from Sarabet under the equity method for 2005
was

a. $ 72,000.
b. $ 87,500.
c. $ 90,000.
d. $100,000.

Use the following information for Questions 7, 8, 9, and 10.

Paris Corporation purchased 80% of the outstanding voting common

stock of Sanders Corporation on January 1, 2005, at a cost of
$400,000. The stockholders’ equity of Sanders Corporation on this
date consisted of $200,000 of Capital Stock and $100,000 of Retained
Earnings. Book values were equal to fair values except for land and
inventory. The book value of Sanders’ land was $10,000, and fair
value was $22,000. The book value of Sanders’ inventory was $30,000,
and fair value was $25,000.

LO1
7. What amount of goodwill was reported under the parent company
theory?

a. $148,000.
b. $153,000.
c. $154,400.
d. $160,000.

LO1
8. What amount of goodwill was reported under the entity theory?

a. $185,000.
b. $191,250.
c. $193,000.
d. $200,000.

LO1
9. At what amount was consolidated Land account stated under the
parent company and entity theories, respectively, if Paris’s
land account had a book value of $50,000 and a fair value of
$70,000?

a. $69,600 and $72,000.

b. $72,000 and $72,000.
c. $72,000 and $92,000.
d. $92,000 and $72,000.

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LO1
10. If Paris’s inventory account had a book value of $40,000 and a
fair value of $44,000, what was the amount stated on the
consolidated balance sheet for inventories under the parent
theory of consolidation?

a. $65,000.
b. $66,000.
c. $69,000.
d. $70,000.

LO2
11. The SEC requires push-down accounting for SEC filings of
subsidiaries when the subsidiary has no substantial publicly-
held debt or preferred stock outstanding and

a. the parent has substantial ownership (5% or greater).

b. the parent has substantial ownership (20% or greater).
c. the parent has substantial ownership (50% or greater).
d. the parent has substantial ownership (97% or greater).

LO2
12. In practice, push-down accounting

a. must use the cost method to report goodwill.

b. revalues the subsidiary assets on a proportional basis.
c. requires neither a new basis of accounting nor a new
reporting basis.
d. requires a deferred credit for goodwill.

LO2
13. Companies that use push-down accounting

a. must use the parent company theory approach.

b. must use the entity theory approach.
c. may use either the parent company or entity theory
approach.
d. shall use neither the parent company nor entity theory
approach.

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LO2
14. A parent company acquired 100% of the outstanding common stock
of another corporation. The parent is going to use push-down
accounting. The fair market value of each of the acquired
corporation’s assets is lower than its respective book value.
The fair market value of each of the acquired corporation’s
liabilities is higher than its respective book value. The
corporation has a deficit in the Retained Earnings account.
Which one of the following statements is correct?

a. The push-down capital account will have a credit balance

after this transaction is posted.
b. The push-down capital account will have a debit balance
after this transaction is posted.
c. The push-down capital account will have either a debit or a
credit balance depending upon whether the asset adjustments
exceed the liability adjustments, or vice versa.
d. Subsidiary retained Earnings will have a deficit balance
after this transaction is posted.

LO3
15. Earth Company, Fire Incorporated, and Wind Incorporated created
a joint venture to market their products on the internet. Earth
owns 40% of the stock. Fire owns 45% of the stock and Wind owns
the remaining 15%. Which firms should report their joint
venture investments using the equity method?

a. Earth.
b. Fire.
c. Earth and Fire.
d. Earth, Fire and Wind.

LO3
16. Anthony and Cleopatra create a joint venture to distribute
artifacts. Anthony contributes 70% and Cleopatra 30% of the
cash for assets purchased from Tomb Company. How would Anthony
report information about Cleopatra on Anthony’s financial
statements?

a. Not at all.
b. In a footnote.
c. As a liability.
d. As a noncontrolling interest.

LO3
17. If a joint venturer holds a 60% interest in a subsidiary

a. the equity method must be used.

b. either the equity or cost method may be used.
c. the cost method must be used.
d. proportionate consolidation must be used.
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LO4
18. A company’s variable interest entities (VIEs)

a. will have ownership control and financial control.

b. may have no ownership control but financial control.
c. does not require ownership control or financial control.
d. does not have to be an entity.

LO4
19. An enterprise shall consolidate a variable interest entity
(VIE) if

I. that enterprise has a variable interest that will absorb a

majority of the VIE’s expected losses.

II. that enterprise will receive a majority of a VIE’s expected

returns.

a. I. only
b. II. only
c. either I or II
d. neither I or II is necessary

LO5
20. If a company pays more for a variable interest entity (VIE)than
the fair value of the net assets

a. an extraordinary loss is recorded.

b. goodwill is recorded if the VIE is defined as a business.
c. a deferred credit is recorded and amortized over the useful
life.
d. a write-down is taken in all situations.

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LO1
Exercise 1

On July 1, 2004, Parslow Corporation acquired a 75% interest in

Sanderson Corporation for $150,000. Sanderson’s net assets on this
date had a book value of $140,000 and a fair value of $160,000. The
excess of fair value over book value at acquisition was due to
understated plant assets with a remaining useful life of five years
from July 1, 2004. Separate incomes of Parslow and Sanderson for 2005
were $400,000 and $20,000, respectively.

Required:

1. Compute goodwill at July 1, 2004 under the parent company theory

and the entity theory.

2. Determine consolidated net income and minority interest income

for 2005 under the parent company theory and the entity theory.

LO1
Exercise 2

Partel Corporation purchased 75% of Sandford Corporation on January

1, 2005, for $230,000. Balance sheets for the two companies on this
date, prepared just prior to the purchase, are provided below.

Partel Sandford Sandford

Book Book Fair
Values Values Values

Cash $ 330,000 $ 10,000 $ 10,000

Inventory 270,000 70,000 90,000
Buildings & equipment- 500,000 120,000 190,000
net
Total assets $ 1,100,000 $ 200,000 $ 290,000

Common stock $ 300,000 95,000

Retained earnings 800,000 105,000
Total equities $ 1,100,000 $ 200,000

Required:

Prepare one consolidated balance sheet using the proprietary (pro-

rata) theory of consolidation, and, prepare a second consolidated
balance sheet using the parent company theory of consolidation.

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LO1
Exercise 3

Pashley Corporation purchased 75% of Sargent Corporation on January

1, 2005, for $115,000. Balance sheets for the two companies on this
date, prepared just prior to the purchase, are provided below.

Pashley Sargent Sargent

Book Book Fair
Values Values Values

Cash $ 165,000 $ 5,000 $ 5,000

Inventory 135,000 35,000 45,000
Buildings & equipment- 250,000 60,000 95,000
net
Total assets $ 550,000 $ 100,000 $ 145,000

Common stock $ 150,000 $ 47,500

Retained earnings 400,000 52,500
Total equities $ 550,000 $ 100,000

Required:

Prepare a consolidated balance sheet using the entity theory of

consolidation.

LO1
Exercise 4

Patane Corporation acquired 80% of the outstanding voting common stock

of Sanlon Corporation on January 1, 2005, for $500,000. Sanlon
Corporation’s stockholders’ equity at this date consisted of $250,000
in Capital Stock and $100,000 in Retained Earnings. The fair value of
Sanlon’s assets was equal to the book value of the assets except for
land with a fair value $40,000 greater than its book value, and
marketable securities with a fair value $50,000 greater than its book
value. Sanlon also had a valuable patent with a fair value of $25,000
and a book value of zero because its development costs were expensed
as incurred. The fair value of Sanlon’s liabilities is $10,000 higher
than the $40,000 book value.

Required:

Calculate the amount of goodwill under the parent company and entity
theories of consolidation.

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LO1
Exercise 5

On January 1, 2005, Parton Corporation acquired an 80% interest in

Sandra Corporation for $184,000. Sandra’s net assets on this date had
a book value of $160,000 and a fair value of $210,000. The excess of
fair value over book value at acquisition was attributable to $20,000
of understated plant assets with a remaining useful life of five
years from January 1, 2005, and $30,000 to an understated patent with
a remaining economic life of six years from January 1, 2005. Separate
incomes of Parton and Sandra for 2005 were $300,000 and $50,000,
respectively.

Required:

1. Compute goodwill at January 1, 2005 under the parent company

theory and the entity theory.

2. Determine consolidated net income and minority interest income

for 2005 under the parent company theory and the entity theory.

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LO2
Exercise 6

Partridge Corporation purchased an 80% interest in Sandy Corporation

for $840,000 on January 1, 2005. Sandy's balance sheet book values
and accompanying fair values on this date are shown below.

Parent
Entity Company
Theory Theory
Push- Push-
Down Down
Book Fair Balance Balance
Value Value Sheet Sheet

Cash $ 30,000 $ 30,000

Receivables 200,000 200,000

Inventory 300,000 360,000

Land 50,000 90,000

Plant assets-net 250,000 300,000

Total Assets $ 830,000 $980,000

Current liabilities $ 180,000 $180,000

Other liabilities 120,000 100,000

Common Stock 400,000

Retained Earnings 130,000

Total Liab. & Equity $ 830,000

Required

Complete the push-down columns of Sandy Corporation’s restructured

balance sheet using entity theory and parent company theory.

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LO2
Exercise 7

Party Corporation acquired an 80% interest in Sang Corporation on

January 1, 2005 for $20,000. Balance sheet and fair value information
on this date is summarized as follows:

Party Sang Sang

Book Book Fair
Value Value Value
Current assets $ 15,000 $ 9,000 $ 9,000
Land and Building-net 35,000 7,000 7,000
Equipment 8,000 4,000 6,000
Total assets $ 58,000 $ 20,000 $ 22,000

Liabilities $ 27,000 $ 10,000 10,000

Capital stock 18,000 4,000
Retained earnings 13,000 6,000
Total liab. & equity $ 58,000 $ 20,000

Required:

1. Prepare an entry on the books of Sang Corporation to record the

push-down adjustment under parent company theory.

2. Prepare an entry on the books of Sang Corporation to record a

push-down adjustment under entity theory.

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LO2
Exercise 8

Pascal Corporation paid $225,000 for a 70% interest in Sank

Corporation on January 1, 2005. On that date, Sank’s balance sheet
accounts, at book value and fair value, were as follows:

Book Value Fair Value

Assets
Cash $ 25,000 $ 25,000
Accounts receivable-net 45,000 55,000
Inventories 40,000 60,000
Property, plant, and equipment-net 140,000 125,000
Total assets $ 250,000 $ 265,000

Equities
Accounts payable $ 40,000 $ 40,000
Common stock 120,000
Retained earnings 90,000
Total liab. & equity $ 250,000
Required:

Prepare a balance sheet for Sank Corporation immediately after the

acquisition transaction by using push-down accounting under the
parent company theory.

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LO3
Exercise 9

Patch Corporation has a 50% undivided interest in Saric Corporation, a

joint venture. Patch accounts for its interest in Saric by the equity
method and also prepares consolidated financial statements for
external reporting purposes. Patch follows specialized industry
practices and uses proportionate consolidation for its interest in
Saric. Separate financial statements for Patch and Saric are as
follows:

Patch Saric Consolidation

Cash $ 30,000 $ 18,000
Accounts receivable 70,000 42,000
Inventories 80,000 72,000
Land 116,000 140,000
Plant, property, equipment 200,000 248,000
Total assets $ 496,000 $ 520,000

Accounts payable $ 24,000 $ 20,000

Common stock 200,000 220,000
Retained earnings 272,000
Venture capital 280,000
Total liab. & equity $ 496,000 $ 520,000

Required:

Prepare the consolidated balance sheet for Patch Corporation and its
undivided interest in Saric Corporation.

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LO4 & LO5
Exercise 10

On January 1, 2005, Alford Corporation and Bancroft Inc. decided to

set up a syndicate called Showtime to conduct. The partners agreed
to a 50%-50% split of Showtime’s profits, but Alford will absorb all
losses. After the partners contributed $15,000 each on January 1,
2005, no journal entries were made for Alford or Bancroft during the
year to report Showtime activities. During the year, Showtime sold
$110,000 of tickets for five shows at $25 per ticket and performers
were paid $60,000 in advance with one show remaining to be performed
next year. Market value was assumed to be cash present value. On
December 31, 2005 year-end, worksheet financial statements for Alford
and Bancroft were as follows:

Alford Corporation, Bancroft Inc. and Showtime Affiliate

Financial Statement Working Papers
on December 31, 2005
Alford Bancroft Showtime
INCOME STATEMENT
Sales $ 23,680 $15,000 $88,000
Cost of Sales ( 9,200) ( 4,700) 48,000
Other Expenses ( 2,300) ( 4,000)

Net income 12,180 6,300 40,000

Retained
Earnings 1/1 11,000 3,000
Add:
Net income 12,180 6,300 40,000
Less:
Dividends ( 3,000) ( 2,000)
Retained
Earnings 12/31 $ 20,180 $ 7,300 40,000
BALANCE SHEET
Cash 2,000 1,900 80,000
Accounts
Receivable-net 22,000 15,500

Inventories 14,000 8,000

Land 27,000 27,000

Equipment and
Buildings-net 61,080 33,000
Investment in
Showtime 15,000 15,000
TOTAL ASSETS $ 141,080 $100,400 $80,000

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LIAB. & EQUITY
Liabilities 90,900 83,100 10,000
Capital
Stock/Partnership 30,000 10,000 30,000
Retained
Earnings 20,180 7,300 40,000
12/31 Noncontrol.
Interest
Earnings
TOTAL LIAB. & $
EQUITY 141,080 $100,400 $80,000

Required:

1.Prepare a balance sheet for Alford as of December 31, 2005.

2.Prepare a balance sheet for Bancroft as of December 31, 2005.

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SOLUTIONS

Multiple Choice Questions

1. c

Imputed value of Santini ($90,000/90%) $ 100,000

Less: Fair value of net assets acquired 75,000
Goodwill $ 25,000

2. d

Imputed value of Santini ($90,000/90%) $ 100,000

Minority interest percentage 10%
Minority interest $ 10,000

3. d The investment is recorded at cost

4. c

Imputed value of Sarabet ($450,000/90%) $ 500,000

Less: Total underlying book value 300,000
Total amount of implied goodwill $ 200,000
Majority percentage acquired 90%
Goodwill under contemporary theory $ 180,000

Under contemporary theory the amount of goodwill recorded would be

$180,000; however, under pure entity theory, the amount of goodwill
will be $200,000.

5. d

Sarabet’s separate income $ 100,000

Minority percentage 10%
Minority interest income $ 10,000

6. c

Sarabet’s separate income $ 100,000

Majority percentage 90%
Income from Sarabet to Pascoe $ 90,000

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7. c

Purchase price of 80% interest $ 400,000

Less: Book value acquired ($300,000 x 80%) 240,000
Excess of cost over book value $ 160,000
Less: Excess allocated to land ($12,000 x 80%) ( 9,600 )
Plus: Excess allocated to inventory ($5,000 x 80%) 4,000
Remainder allocated to goodwill $ 154,400

8. c $154,400/80% = $193,000

9. a

Under the parent company theory, the Land account on the consolidated
balance sheet would be the sum of the book value of the parent’s Land
account balance of $50,000 plus the book value of the Land account on
the subsidiary’s books of $10,000 plus 80% of the $12,000 excess of
the fair value in excess of book value of $9,600, for a total of
$69,600. Under the entity theory, the land would be valued at the
book value of the parent of $50,000 plus the full fair value of the
subsidiary’s land which is $22,000 for a total of $72,000.

10. b

Under the parent company theory, the Inventory account on the consolidated
balance sheet would be the sum of the book value of the parent’s Inventory
account balance of $40,000 plus the book value of the Inventory account on
the subsidiary’s books of $30,000 less 80% of the $5,000 excess of the book
value in excess of fair value, or ($4,000), for a total of $66,000.

11. d

12. b

13. c

14. b

15. d

16. d

17. a

18. b

19. c

20. b
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Exercise 1

Requirement 1:
Parent company theory:
Cost of 75% interest on July 1, 2004 $ 150,000
Book value acquired ($140,000 x 75%) 105,000
Excess cost over book value acquired $ 45,000
Excess:
Allocated to plant assets ($160,000 - $140,000) x 75% ( 15,000 )
Goodwill $ 30,000

Entity theory:
Total value implied by purchase price ($150,000/75%) $ 200,000
Book value 140,000
Excess implied value over book value $ 60,000
Excess:
Allocated to plant assets ($160,000-$140,000) ( 20,000 )
Goodwill $ 40,000

Or: ($30,000 goodwill)/75% $ 40,000

Parent Entity
Requirement 2: Theory Theory
Combined separate incomes $ 420,000 $ 420,000
Less: Depreciation on excess allocated to
plant assets: $15,000/5 years ( 3,000 )
$20,000/5 years ( 4,000 )
Less: Minority interest income ( 5,000 )
Consolidated net income $ 412,000
Total consolidated income $ 416,000
Income allocated to majority shareholders $ 412,000
Income allocated to minority shareholders $ 4,000

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Exercise 2

Requirement 1

Partel Corporation and Subsidiary

Consolidated Balance Sheet
January 1, 2005
(Proprietary Theory)

Assets
Cash ($330,000 - $230,000) + (75% x 10,000) $ 107,500
Inventories $270,000 + (75% x 90,000) 337,500
Buildings & equipment-net $500,000 + (75% x 190,000) 642,500
Goodwill ($230,000 paid – ($290,000 x 75%) 12,500
Total assets $ 1,100,000

Equity
Common stock $ 300,000
Retained earnings 800,000
Total equity $ 1,100,000

Requirement 2

Partel Corporation and Subsidiary

Consolidated Balance Sheet
January 1, 2005
(Parent Company Theory)

Assets
Cash ($330,000 - $230,000) + $10,000) $ 110,000
Inventories ($270,000 + $70,000) + (75% x 20,000) 355,000
Buildings &
Equip.-net ($500,000 + $120,000) + (75% x $70,000) 672,500
Goodwill ($230,000 paid – ($290,000 x 75%) 12,500
Total assets $ 1,150,000

Equity
Minority Interest ($200,000 x 25%) $ 50,000
Common stock 300,000
Retained earnings 800,000
Total equity $ 1,150,000

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Exercise 3

Pashley Corporation and Subsidiary

Consolidated Balance Sheet
January 1, 2005
(Entity Theory of Consolidation)

Assets
Cash ($165,000 - $115,000) + $5,000) $ 55,000
Inventories ($135,000 + $45,000) 180,000
Buildings & equipment-net ($250,000 + $95,000) 345,000
Goodwill ($115,000/75%) - $145,000 fair value 8,333
Total assets $ 588,333

Equity
Minority Interest ($45,000 excess of fair value over
book value x 25%) + (25% x $100,000 net book
values) + ($8,333 goodwill x 25%) $ 38,333
Common stock 150,000
Retained earnings 400,000
Total equity $ 588,333

Exercise 4

Preliminary calculations:
Sanlon net assets at January 1, 2005:
($250,000 capital stock + $100,000 Retained
Earnings) $ 350,000
Plus: Book value of liabilities 40,000
Equals: Book value of assets $ 390,000

Book value of assets $ 390,000

Plus: Excess of land fair value over book value 40,000
Plus: Excess of securities fair value over book 50,000
value
Plus: Fair value of patent in excess of book value 25,000
Equals: Total fair value of assets $ 505,000
Less: Fair value of liabilities 50,000
Equals: Fair value of net assets $ 455,000
Percentage acquired 80%
Equals: Fair value of net assets acquired $ 364,000

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Required:

Goodwill under the parent company theory:

Purchase price $ 500,000

Less: Fair value of net assets acquired 364,000

Goodwill using the parent company theory $ 136,000

Goodwill under the parent company theory $ 136,000

Divided by: Percentage acquired 80%
Goodwill under the entity theory $ 170,000

Exercise 5

Requirement 1:
Parent company theory:
Cost of 80% interest on January 1, 2005 $ 184,000
Book value acquired ($160,000 x 80%) 128,000
Excess cost over book value acquired $ 56,000
Excess allocation:
Plant assets ($20,000 x 80%) = $16,000
Patent ($30,000 x 80%) = 24,000 ( 40,000 )
Goodwill $ 16,000

Entity theory:
Total value implied by purchase price ($184,000/80%) $ 230,000
Book value 160,000
Excess implied value over book value $ 70,000
Excess allocated:
Plant assets $20,000
Patent 30,000 ( 50,000 )
Goodwill $ 20,000

Or: ($16,000 goodwill)/80% $ 20,000

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Requirement 2:

Parent Entity
Theory Theory
Combined separate incomes $ 350,000 $ 350,000
Less: Deprec./Amort. on excess to:
Plant assets: $16,000/5 years ( 3,200 )
$20,000/5 years ( 4,000 )
Patent: $24,000/6 years ( 4,000 )
$30,000/6 years ( 5,000 )

Less: Minority interest income ( 10,000 )

Consolidated net income $ 332,800
Total consolidated income $ 341,000
Income allocated to majority shareholders $ 332,800
Income allocated to minority shareholders $ 8,200

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Exercise 6
Preliminary computations:
Parent company theory:
Cost of 80% interest $ 840,000
Fair value acquired $700,000 x 80% 560,000
Goodwill $ 280,000

Entity theory:
Implied value $840,000/80% $ 1,050,000
Fair value of net assets 700,000
Goodwill $ 350,000

Parent
Entity Company
Theory Theory
Push- Push-
Down Down
Book Fair Balance Balance
Value Value Sheet Sheet

Cash $ 30,000 $ 30,000 $ 30,000 $ 30,000

Receivables 200,000 200,000 200,000 200,000

Inventory 300,000 360,000 360,000 348,000

Land 50,000 90,000 90,000 82,000

Plant assets-net 250,000 300,000 300,000 290,000

Goodwill 350,000 280,000

Total Assets $ 830,000 $ 980,000 $ 1,330,000 $ 1,230,000

Current liabilities $ 180,000 $ 180,000 $ 180,000 $ 180,000

Other liabilities 120,000 100,000 100,000 104,000

Common Stock 400,000 400,000 400,000

Retained Earnings 130,000 0 0

Push-down capital 650,000 546,000

Tot. Liab & Equity $ 830,000 $ 1,330,000 $ 1,230,000

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Exercise 7

Requirement 1:
Push-down under parent company theory:
Cost of the 80% interest $ 20,000
Book value acquired ($10,000 x 80%) 8,000
Excess of cost over book value $ 12,000

Excess allocated to:

Equipment ($2,000 x 80%) $ 1,600
Goodwill 10,400
Excess of cost over book value $ 12,000

Entry:
Equipment 1,600
Goodwill 10,400
Retained earnings 6,000
Push-down capital 18,000

Requirement 2:
Push-down under entity theory:
Implied value ($20,000/80%) $ 25,000
Fair value (10,000)
Excess of cost over book value $ 15,000

Excess allocated to:

Equipment $ 2,000
Goodwill 13,000
Excess of cost over book value $ 15,000

Entry:
Equipment 2,000
Goodwill 13,000
Retained earnings 6,000
Push-down capital 21,000

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11-24
Exercise 8

Cost of a 70% interest in Sank $ 225,000

Fair value acquired ($225,000 x 70%) 157,500
Goodwill $ 67,500

Cost $ 225,000
Book value acquired ($210,000 x 70%) 147,000
Excess of cost over book value acquired $ 78,000

Excess allocated:
Receivables: $10,000 x 70% $ 7,000
Inventories: $20,000 x 70% 14,000
Property, plant & equipment ($15,000) x 70% ( 10,500 )
Goodwill 67,500
Total excess cost over book value $ 78,000

Entry:
Receivables 7,000
Inventories 14,000
Goodwill 67,500
Retained earnings 90,000
Plant, property, and equipment 10,500
Push-down capital 168,000

Sank Corporation
Balance Sheet
1/1/03 (After Push-Down)

Assets
Cash $ 25,000
Receivables 52,000
Inventories 54,000
Property, plant, and equipment 129,500
Goodwill 67,500
Total assets $ 328,000

Liabilities & Equity

Accounts payable $ 40,000
Common stock 120,000
Push-down capital 168,000
Total liab. & equity $ 328,000

©2009 Pearson Education, Inc. publishing as Prentice Hall

11-25
Exercise 9

Patch Corporation
Balance Sheet

Assets
Cash $ 39,000
Accounts receivable 91,000
Inventories 116,000
Land 186,000
Plant, property & equipment 324,000
Total assets $ 756,000

Liabilities & Equity

Accounts payable $ 34,000
Common stock 200,000
Retained earnings 272,000
Venture capital 250,000
Total liab. & equity $ 756,000

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11-26
Exercise 10

Requirement 1

Alford Corporation
Consolidated Financial Statement Working Papers
at December 31, 2005
Alford Showtime Consolidated
INCOME STATEMENT
Sales $ 23,680 $88,000 $111,680

Cost of Sales ( 9,200) ( 48,000) ( 57,200)

Other Expenses ( 2,300) ( 2,300)
Noncontrolling
Interest ( 24,000)

Net income 12,180 40,000 28,180

Retained
Earnings 1/1 11,000 11,000
Add:
Net income 12,180 40,000 28,180
Less:
Dividends ( 3,000) ( 3,000)
Retained
Earnings 12/31 $ 20,180 40,000 36,180
BALANCE SHEET
Cash 2,000 80,000 82,000
Accounts
Receivable-net 22,000 22,000

Inventories 14,000 14,000

Land 27,000 27,000

Equipment and
Buildings-net 61,080 61,080
Investment in
Showtime 15,000 -
TOTAL ASSETS $ 141,080 $80,000 206,080
LIAB. & EQUITY
Liabilities 90,900 10,000 100,900
Capital
Stock/Partnership 30,000 30,000 30,000
Retained
Earnings 20,180 40,000 36,180
12/31 Noncontrol.
Interest 39,000
Earnings
TOTAL LIAB. & $
EQUITY 141,080 $80,000 206,080

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11-27
Requirement 2

Bancroft Inc.
Financial Statement Working Papers
at December 31, 2005
Bancroft
INCOME STATEMENT
Sales $ $15,000

Cost of Sales ( 4,700)

Other Expenses ( 4,000)

Net income 6,300

Retained
Earnings 1/1 3,000
Add:
Net income 6,300
Less:
Dividends ( 2,000)
Retained
Earnings 12/31 $ $ 7,300
BALANCE SHEET
Cash 1,900
Accounts
Receivable-net 15,500

Inventories 8,000

Land 27,000
Equipment and
Buildings-net 33,000
Investment in
Showtime 40,000
TOTAL ASSETS $ $125,400
LIAB. & EQUITY
Liabilities 83,100
Capital
Stock/Partnership 10,000
Retained
Earnings 7,300
Adjustment in
Long-term 25,000
Security
Investment
TOTAL LIAB. & $
EQUITY $125,400

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11-28