CHAPTER 3 AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Answers to Questions 1 2 A corporation becomes a subsidiary w en anot er corporation eit er direct!y or indirect!y ac"uires a contro!!in# $inancia! interest %#enera!!y o&er '( percent) o$ its outstandin# &otin# stoc*+ Amounts assi#ned to identi$iab!e assets and !iabi!ities in e,cess o$ recorded amounts on t e boo*s o$ t e subsidiary are not recorded separate!y by t e parent+ Instead- t e parent records t e $air &a!ue.purc ase price o$ t e interest ac"uired in an in&estment account+ T e assi#nment to identi$iab!e asset and !iabi!ity accounts is made t rou# wor*in# paper entries w en t e parent and subsidiary $inancia! statements are conso!idated+ T e !and wou!d be s own in t e conso!idated ba!ance s eet at /0((-(((- its $air &a!ue- assumin# t at t e purc ase price o$ t e subsidiary is #reater t an t e boo* &a!ue o$ t e subsidiary1s net assets+ I$ t e parent ad ac"uired an 2( percent interest and t e imp!ied $air &a!ue o$ t e subsidiary was #reater t an t e boo* &a!ue o$ t e subsidiary1s net assets- t e !and wou!d sti!! appear in t e conso!idated ba!ance s eet at /0((-(((+ Under 3AA4- t e noncontro!!in# interest is a!so reported based on $air &a!ues at t e ac"uisition date+ Parent company 5a corporation t at owns a contro!!in# interest in t e outstandin# &otin# stoc* o$ anot er corporation %its subsidiary)+ Subsidiary company5a corporation t at is contro!!ed by a parent t at owns a contro!!in# interest in its outstandin# &otin# stoc*- eit er direct!y or indirect!y+ Affiliates 5companies t at are contro!!ed by a sin#!e mana#ement team t rou# parent6subsidiary re!ations ips+ %A!t ou# t e term a$$i!iate is a synonym $or subsidiary- t e parent is inc!uded in t e tota! a$$i!iation structure+) In many annua! reports- t e term inc!udes a!! in&estments accounted $or by t e e"uity met od+ Associates5companies t at are contro!!ed t rou# parent6subsidiary re!ations ips or w ose operations can be si#ni$icant!y in$!uenced t rou# e"uity in&estments o$ 7( percent to '( percent+ A noncontro!!in# interest is t e e"uity interest in a subsidiary t at is owned by stoc* o!ders outside o$ t e a$$i!iation structure+ In ot er words- it is t e e"uity interest in a subsidiary %recorded at $air &a!ue) t at is not e!d by t e parent or subsidiaries o$ t e parent+ Under 3AA4- a subsidiary wi!! not be conso!idated i$ contro! does not rest wit t e ma8ority owner- suc as in t e case o$ a subsidiary in reor#ani9ation or ban*ruptcy- or w en t e subsidiary operates under se&ere $orei#n e,c an#e restrictions or ot er #o&ernmenta!!y imposed uncertainties+ Conso!idated $inancia! statements are intended primari!y $or t e stoc* o!ders and creditors o$ t e parentaccordin# to 3AA4+ T e amount o$ capita! stoc* t at appears in a conso!idated ba!ance s eet is t e tota! par or stated &a!ue o$ t e outstandin# capita! stoc* o$ t e parent+ 3oodwi!! $rom conso!idation may appear in t e #enera! !ed#er o$ t e sur&i&in# entity in a mer#er or conso!idation accounted $or as an ac"uisition+ :ut #oodwi!! $rom conso!idation wou!d not appear in t e #enera! !ed#er o$ a parent or its subsidiary+ 3oodwi!! is entered in conso!idation wor*in# papers w en t e reciproca! in&estment and e"uity amounts are e!iminated+ ;or*in# paper entries a$$ect conso!idated $inancia! statements- but t ey are not entered in any #enera! !ed#er+

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An Introduction to Consolidat e d Financial Stat e m e n t s

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T e parent1s in&estment in subsidiary does not appear in a conso!idated ba!ance s eet i$ t e subsidiary is conso!idated+ It wou!d appear in t e parent1s separate ba!ance s eet under t e eadin# ?in&estments@ or ?ot er assets+@ In&estments in unconso!idated subsidiaries are s own in conso!idated ba!ance s eets as in&estments or ot er assets+ T ey are accounted $or under t e e"uity met od i$ t e parent can e,ercise si#ni$icant in$!uence o&er t e subsidiaryA ot erwise- t ey are accounted $or by t e $air &a!ue . cost met od+ Parents books In&estment in subsidiary Sa!es Accounts recei&ab!e Interest income Di&idends recei&ab!e Ad&ance to subsidiary Reciprocal accounts on subsidiarys books Capita! stoc* and retained earnin#s 4urc ases Accounts payab!e Interest e,pense Di&idends payab!e Ad&ance $rom parent

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Reciproca! accounts are e!iminated in t e process o$ preparin# conso!idated $inancia! statements in order to s ow t e $inancia! position and resu!ts o$ operations o$ t e tota! economic entity t at is under t e contro! o$ a sin#!e mana#ement team+ Sa!es by a parent to a subsidiary are interna! transactions $rom t e &iewpoint o$ t e economic entity and t e same is true o$ interest income and interest e,pense and rent income and rent e,pense arisin# $rom intercompany transactions+ Simi!ar!y- recei&ab!es $rom and payab!es to a$$i!iates do not represent assets and !iabi!ities o$ t e economic entity $or w ic conso!idated $inancia! statements are prepared+ T e stoc* o!ders1 e"uity o$ a parent under t e e"uity met od is t e same as t e conso!idated stoc* o!ders1 e"uity o$ a parent and its subsidiaries pro&ided t at t e noncontro!!in# interest- i$ any- is reported outside o$ t e conso!idated stoc* o!ders1 e"uity+ I$ noncontro!!in# interest is inc!uded in conso!idated stoc* o!ders1 e"uity- it represents t e so!e di$$erence between t e parent1s stoc* o!ders1 e"uity under t e e"uity met od and conso!idated stoc* o!ders1 e"uity+ No+ T e amounts t at appear in t e parent1s statement o$ retained earnin#s under t e e"uity met od and t e amounts t at appear in t e conso!idated statement o$ retained earnin#s are identica!- assumin# t at t e noncontro!!in# interest is inc!uded as a separate component o$ stoc* o!ders1 e"uity+ Income attributab!e to noncontro!!in# interest is not an e,pense- but rat er it is an a!!ocation o$ t e tota! income to t e conso!idated entity between contro!!in# and noncontro!!in# stoc* o!ders+ From t e &iewpoint o$ t e contro!!in# interest %t e stoc* o!ders o$ t e parent)- income attributab!e to noncontro!!in# interest as t e same e$$ect on conso!idated net income as an e,pense+ T is is because conso!idated net income is income to a!! stoc* o!ders+ A!ternati&e!y- you can &iew tota! conso!idated net income as bein# a!!ocated to t e contro!!in# and noncontro!!in# interests+ T e computation o$ noncontro!!in# interest is comparab!e to t e computation o$ retained earnin#s+ It is computedB Noncontro!!in# interest be#innin# o$ t e period AddB Income attributab!e to noncontro!!in# interest DeductB Noncontro!!in# interest di&idends DeductB Noncontro!!in# interest o$ amorti9ation o$ e,cess o$ $air &a!ue o&er boo* &a!ue AddB Noncontro!!in# interest o$ amorti9ation o$ e,cess o$ boo* &a!ue o&er $air &a!ue Noncontro!!in# interest end o$ t e period CC CC DCC

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It is acceptab!e to conso!idate t e annua! $inancia! statements o$ a parent and a subsidiary wit di$$erent $isca! periods- pro&ided t at t e dates o$ c!osin# are not more t an t ree mont s apart+ Any si#ni$icant de&e!opments t at occur in t e inter&enin# t ree6mont period s ou!d be disc!osed in notes to t e $inancia! statements+ In t e situation described- it is acceptab!e to conso!idate t e $inancia! statements o$ t e subsidiary wit an October >0 c!osin# date wit t e $inancia! statements o$ t e parent wit a December >0 c!osin# date+ 2011 Pearson Education, Inc. publishing as Prentice Hall

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T e ac"uisition o$ s ares $rom noncontro!!in# stoc* o!ders is not a business combination+ It must be accounted $or as a treasury stoc* transaction i$ t e ac"uirer is t e contro!!in# interest+ It is not possib!e- by de$inition- to ac"uire a contro!!in# interest $rom noncontro!!in# stoc* o!ders+

SOLUTIONS TO EXERCISES Solution E3-1 1 2 3 4 5 b c d d a Solution E3-2 1 2 3 4 5 6 7 d b d d a b c

Solution E3-3 [AICPA adapted] 1 2 3 c a Ad ance to Hill !"#,000 $ recei able %ro& 'ard !200,000 ( !2"#,000 )ero, good*ill has an indeter&inate li%e and is not a&orti+ed.

a Po* accounts %or ,ap using the e-uit. &ethod, there%ore, consolidated retained earnings is e-ual to Po*/s retained earnings, or !2,010,000. d )ero, all interco&pan. recei ables and pa.ables are eli&inated.

Solution E3-4 (in thousands 1 I&plied %air alue o% ,an 2!1,100 3 4056 7ess8 9oo: alue o% ,an E;cess %air alue o er boo: alue E-uip&ent under alued =ood*ill at >anuar. 1, 2011 =ood*ill at ?ece&ber @1, 2011 ( =ood*ill %ro& consolidation ,ince good*ill is not a&orti+ed Consolidated net income Pin/s reported net inco&e 7ess8 Correction to inco&e %ro& ,an %or depreciation on e;cess allocated to e-uip&ent [2!<0,0003@ .ears6; 405] Controlling share o% consolidated net inco&e Aoncontrolling share o% consolidated net inco&e [!200,000 B !20,000 depreciation] ; 105 Controlling share o% consolidated net inco&e Consolidated net inco&e !410 2116 !4<2 ! 11 4<2 !410 !2,000 21,1006 ! 200 <0 ! 100 ! 100

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An Introduction to Consolidat e d Financial Stat e m e n t s

Solution E3-5 (in thousands 1 2 !1,200, the di idends o% Pan !<<0, e-ual to !<00 di idends pa.able o% Pan plus !<0 2@05 o% !2006 di idends pa.able to noncontrolling interests o% ,ad.

Solution E3-6 (in thousands Preliminary computation Cost o% ,li stoc: 2Cair alue6 Cair alue o% ,li/s identi%iable net assets =ood*ill 1 Journal entry to record push down values In entories 7and 9uildings 5 net E-uip&ent 5 net =ood*ill Detained earnings Aote pa.able PushBdo*n capital 2 Sli Co!"o!ation 9alance ,heet >anuar. 1, 2011 2in thousands6 Assets Cash Accounts recei able In entories 7and 9uildings 5 net E-uip&ent 5 net =ood*ill Eotal assets Liabilities Accounts pa.able Aote pa.able Eotal liabilities Stockholders equity Capital stoc: PushBdo*n capital Eotal stoc:holders/ e-uit. Eotal liabilities and stoc:holders/ e-uit. ! 100 1<0 200 000 1,000 <00 #00 !@,000 ! 200 @00 #00 00 100 @00 1<0 #00 020 20 1,#00 !2,#00 2,000 ! #00

!1,000 1,#00 2,#00 !@,000

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Solution E3-7 1 #as Co!"o!ation and Su$sidia!% Consolidated Inco&e ,tate&ent %or the .ear 2012 2in thousands6 ,ales 2!2,000 $ !1006 7ess8 Cost o% sales 2!1,200 $ !0006 =ross pro%it 7ess8 ?epreciation e;pense 2!100 $ !106 Fther e;penses 2!@41 $ !1106 Consolidated net inco&e 7ess8 Aoncontrolling interest share 2!100 @056 Controlling interest share o% cnsolidated net inco&e 2 #as Co!"o!ation and Su$sidia!% Consolidated Inco&e ,tate&ent %or the .ear 2012 2in thousands6 ,ales 2!2,000 $ !1006 7ess8 Cost o% sales 2!1,200 $ !0006 =ross pro%it 7ess8 ?epreciation e;pense 2!100 $ !10 B !126 Fther e;penses 2!@41 $ !1106 Consolidated net inco&e 7ess8 Aoncontrolling interest share [2!100 @056$ 2!12 depreciation ; @056] Controlling interest share o% consolidated net inco&e Supporting computations ?epreciation o% e;cess allocated to overvalued e-uip&ent8 !<03# .ears ( !12 !2,100 21,<006 1,200 21<16 2#"16 0#0 ! 20#.<6 001.0 !2,100 21,<006 1,200 21106 2#"16 002 2026 000

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An Introduction to Consolidat e d Financial Stat e m e n t s

Solution E3-& (in thousands 1 Capital stock Ehe capital stoc: appearing in the consolidated balance sheet at ?ece&ber @1, 2011 is !@,<00, the capital stoc: o% Pob,the parent co&pan.. 2 Goodwill at ecember !"# $%"" !1,000 !1,"#0 21,2006 alue ! ##0

In est&ent cost at >anuar. 2, 2011 2105 interest6 I&plied total %air alue o% ,o% 2!1,000 3 1056 9oo: alue o% ,o%210056 E;cess is considered good*ill since no other %air in%or&ation is gi en. 3 Consolidated retained earnings at ecember !"# $%""

Pob/s retained earnings >anuar. 2 2e-ual to beginning consolidated retained earnings Add8 Aet inco&e o% Pob 2e-ual to controlling share o% consolidated net inco&e6 7ess8 ?i idends declared b. Pob Consolidated retained earnings ?ece&ber @1 4 &oncontrolling interest at ecember !"# $%""

!1,<00 <00 2@<06 !1,100

Capital stoc: and retained earnings o% ,o% on >anuar. 2 Add8 ,o%/s net inco&e 7ess8 ?i idends declared b. ,o% ,o%/s stoc:holders/ e-uit. ?ece&ber @1 Aoncontrolling interest percentage Aoncontrolling interest at boo: alue Add8 205 =ood*ill Aoncontrolling interest ?ece&ber @1 5 ividends payable at ecember !"# $%""

!1,200 110 21006 1,210 205 ! 2#< 110 ! @<<

?i idends pa.able to stoc:holders o% Pob ! 110 ?i idends pa.able to noncontrolling stoc:holders 2!#0 2056 10 ?i idends pa.able to stoc:holders outside the Consolidated entit. ! 140

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Solution E3-' (in thousands #as Co!"o!ation and Su$sidia!% Partial 9alance ,heet at ?ece&ber @1, 2011 Stockholders equity' Capital stoc:, !10 par Additional paidBin capital Detained earnings E-uit. o% controlling stoc:holders Aoncontrolling interest Eotal stoc:holders/ e-uit. Supporting computations Co&putation o% consolidated retained earnings8 Pas/s ?ece&ber @1, 2010 retained earnings Add8 Pas/s reported inco&e %or 2011 7ess8 Pas/s di idends Consolidated retained earnings ?ece&ber @1, 2011 Computation o( ,al/s ?ece&ber Inco&e less di ,al/s ?ece&ber Aoncontrolling Aoncontrolling noncontrolling interest at ecember !"# $%"" @1, 2010 stoc:holders/ e-uit. idends %or 2011 2!00 B !@06 @1, 2011 stoc:holders/ e-uit. interest percentage interest ?ece&ber @1, 2011 !<00 100 1@0 1@0 12 !412

! "0 110 2#06 !1@0 !000 10 010 205 ! 12

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An Introduction to Consolidat e d Financial Stat e m e n t s

Solution E3-1( #)* Co!"o!ation and Su$sidia!% Consolidated Inco&e ,tate&ent %or the .ear ended ?ece&ber @1, 201@ 2in thousands6 ,ales Cost o% goods sold =ross pro%it ?educt8 Fperating e;penses Consolidated net inco&e ?educt8 Aoncontrolling interest share Controlling interest share Supporting computations In est&ent cost >anuar. 1, 2011 2405 interest6 I&plied total %air alue o% ,lo 2!1,<20 3 4056 ,lo/s 9oo: alue ac-uired 210056 E;cess o% %air alue o er boo: alue )*cess allocated to' In entories 2sold in 20116 E-uip&ent 20 .ears re&aining use%ul li%e6 =ood*ill E;cess o% %air alue o er boo: alue +perating e*penses' Co&bined operating e;penses o% Pe: and ,lo Add8 ?epreciation on e;cess allocated to e-uip&ent 2!0030 .ears6 Consolidated operating e;penses ! 1,<20 ! 1,100 21,0006 ! 000 ! ! <0 00 @00 000 !0,200 2,200 2,000 1,110 140 24 ! 1<1

!1,100 10 !1,110

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SOLUTIONS TO #RO+LE,S Solution #3-1 1 #)n Co!"o!ation and Su$sidia!% Consolidated 9alance ,heet at ?ece&ber @1, 2011 2in thousands6 Assets Cash 2!<0 $ !@<6 Accounts recei able 2!40 $ !<1 B !106 In entories 2!21< $ !1126 E-uip&ent 5 net 2!"<0 $ !@#06 Eotal assets Liabilities and Stockholders )quity Liabilities' Accounts pa.able 2!10 $ !<< B !106 Stockholders equity' Co&&on stoc:, !10 par Detained earnings Aoncontrolling interest 2!@00 $ !2006 205 Eotal liabilities and stoc:holders/ e-uit. 2 Consolidated net income (or $%"$ Pen/s separate inco&e Add8 Inco&e %ro& ,ut Consolidated net inco&e Aoncontrolling interest share 2205 ; !110,0006 Controlling interest share 21056 !@00 110 !#20 ! @< !010 ! 100 101 @41 1,110 !1,"#<

1@<

420 <00 100 !1,"#<

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An Introduction to Consolidat e d Financial Stat e m e n t s

Solution #3-2 (in thousands 1 Schedule to allocate (air value,book value di((erential Cost o% in est&ent in ,et I&plied %air alue o% ,et 2!@#0 3 "056 9oo: alue o% ,et E;cess %air alue o er boo: alue E;cess allocated8 Cair Galue 9oo: Galue In entories 2!100 B !<06 7and 2!120 B !1006 2!110 B !1006 9uildings 5 net 2!<0 B !106 E-uip&ent 5 net Fther liabilities 2!10 B !1006 Allocated to identi%iable net assets =ood*ill %or the re&ainder E;cess %air alue o er boo: alue 2 #a! Co!"o!ation and Su$sidia!% Consolidated 9alance ,heet at >anuar. 1, 2011 Assets Current assets' Cash 2!"0 $ !006 Decei ables 5 net 2!1<0 $ !<06 In entories 2!100 $ !<0 $ !006 Property# plant and equipment' 7and 2!200 $ !100 $ !206 9uildings 5 net 2!220 $ !100 $ !006 E-uip&ent 5 net 2!1<0 $ !10 B !206 Goodwill -(rom consolidation. Eotal assets Liabilities and Stockholders )quity Liabilities' Accounts pa.able 2!110 $ !1<06 Fther liabilities 2!20 $ !100 B !206 Stockholders equity' Capital stoc: Detained earnings E-uit. o% controlling stoc:holders Aoncontrolling interest H Eotal liabilities and stoc:holders/ e-uit. H "05 o% i&plied %air alue o% !#00 ( !1#0. !@#0 !#00 22206 !210 Allocation ! 00 20 00 2206 20 100 110 !210

!110 220 200 !@20 000 220

#"0

400 110 !1,<40

@00 100

000

!1,000 100 1,100 1#0

1,2#0 !1,<40

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Solution #3-3 (in thousands Cost o% in est&ent in ,o% >anuar. 1, 2011 I&plied %air alue o% ,o% 2!#,000 3 1056 9oo: alue o% ,o% E;cess o% %air alue o er boo: alue Schedule to Allocate /air 0alue " 1ook 0alue Cair Galue B 9oo: Galue !1,000 2,000 alue i((erential !#,000 !<,"#0 #,000 !1,"#0

Current assets E-uip&ent

Allocation !1,000 2,000 21,2#06 !1,"#0

9argain purchase H E;cess %air alue o er boo:

H A%ter recogni+ing ac-uired assets and liabilities at %air alues, *e are le%t *ith a negati e e;cess o% !1,2#0. Inder =AAP, this di%%erence is recorded as a gain in the consolidated inco&e state&ent in the .ear o% ac-uisition. Ehe gain is attributable entirel. to the controlling interest, and is recorded on the parent/s boo:s b. a debit to the In est&ent account and a credit to a =ain %ro& bargain Purchase account. An alternati e calculation o% this a&ount ta:es the di%%erence bet*een the %air alues o% the net assets 2!1,0006 and their %air alue i&plied b. the ac-uisition price 2!<,"#06, *hich e-uals !1,2#0. Solution #3-4 (in thousands Aoncontrolling interest o% !1@0 2%air alue6 plus !#20 2%air alue o% Pa&/s in est&ent6 e-uals total %air alue o% !<#0. Ehere%ore, Pa&/s interest is 105 2!#20 3 !<#06, and noncontrolling interest is 205 2!1@0 3 !<#06. Eotal %air alue 9oo: alue o% ,ap E;cess %air alue o er boo: )*cess allocated to Plant assets 5 net =ood*ill Eotal Cair Galue !020 B B 9oo: Galue !000 ! ! 20 110 1@0 ! alue <#0 2#206 ! 1@0

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An Introduction to Consolidat e d Financial Stat e m e n t s

Solution #3-5 #al Co!"o!ation and Su$sidia!% Consolidated 9alance ,heet at ?ece&ber @1, 2011 -in thousands. Assets Current assets Plant assets =ood*ill )quities 7iabilities Capital stoc: Detained earnings Supporting computations ,or/s net inco&e 2!100 B !<00 B !1006 7ess8 E;cess allocated to in entories that *ere sold in 2011 7ess8 ?epreciation on e;cess allocated to plant assets 2!10 30 .ears6 Inco&e %ro& ,or Plant assets 2!1,000 $ !<00 $ !10 B !206 Pal/s retained earnings8 9eginning retained earnings Add8 Fperating inco&e Add8 Inco&e %ro& ,or ?educt8 ?i idends Detained earnings ?ece&ber @1, 2011 ! <10 1,<<0 000 !2,"00 !1,@20 <00 120 !2,"00 ! 100 2006 2206 00

!1,<<0 ! <10 200 00 21006 ! 120

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Solution #3-6 #)! Co!"o!ation and Su$sidia!% Consolidated 9alance ,heet 'or:ing Papers at ?ece&ber @1, 2011 2in thousands6
Cash Decei ables 5 net In entories 7and E-uip&ent 5 net In est&ent in ,i& =ood*ill Eotal assets Accounts pa.able ?i idends pa.able Capital stoc: Detained earnings Aoncontrolling interest Eotal e-uities a b Per per boo:s ! 10 100 "00 @00 1,200 411 a !@,@02 ! 120 120 2,000 @<2 !1,000 ! 1<0 20 <00 220 b 11 a <00 a 220 a !@,@02 !1,000 102 200 ,i& per boo:s ! 00 2<0 100 000 200 a 411 200 !@,#<< ! 410 122 2,000 @<2 102 !@,#<< AdJust&ents and Eli&inations b 11 Consolidated 9alance ,heet ! 120 @02 100 "00 1,000

Eo eli&inate reciprocal in est&ent and e-uit. accounts, record good*ill 2!2006, and enter noncontrolling interest [2!120 e-uit. $ !200 good*ill6 1056]. Eo eli&inate reciprocal di idends recei able 2included in recei ables 5 net6 and di idends pa.able a&ounts 2!20 di idends 4056.

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An Introduction to Consolidat e d Financial Stat e m e n t s

Solution #3-7 (in thousands Preliminary computations Cost o% 105 in est&ent >anuar. @, 2011 I&plied total %air alue o% ,le 2!#<0 3 1056 9oo: alue o% ,le E;cess %air alue o er boo: alue on >anuar. @ ( =ood*ill 1 2 &oncontrolling interest share o( income' ,le/s net inco&e !100 205 noncontrolling interest Current assets' Co&bined current assets 2!001 $ !1#06 7ess8 ?i idends recei able 2!20 1056 Current assets !#<0 !"00 2#006 !200 ! 20 !##1 21<6 !#02

3 4 5 6 7

Inco&e %ro& ,le8 Aone In est&ent inco&e is eli&inated in consolidation. Capital stoc:8 !1,000 Capital stoc: o% the parent, Por Corporation. In est&ent in ,le8 Aone Ehe in est&ent account is eli&inated. E;cess o% %air alue o er boo: alue !200

Controlling share o% consolidated net inco&e8 E-uals Por/s net inco&e, or8 Consolidated sales 7ess8 Consolidated cost o% goods sold 7ess8 Consolidated e;penses Consolidated net inco&e 7ess8 Aoncontrolling interest share Controlling share

!1,200 2"006 21<06 ! @00 2206 ! 210

& '

Consolidated retained earnings ?ece&ber @1, 20118 !000 E-uals Por/s beginning retained earnings. Consolidated retained earnings ecember !"# $%"$ E-ual to Por/s ending retained earnings8 9eginning retained earnings Add8 Controlling share o% consolidated net inco&e 7ess8 Por/s di idends %or 2012 Ending retained earnings &oncontrolling interest ecember !"# $%"$ ,le/s capital stoc: and retained earnings Add8 Aet inco&e 7ess8 ?i idends ,le/s e-uit. ?ece&ber @1, 2012 at %air alue Aoncontrolling interest percentage Aoncontrolling interest ?ece&ber @1, 2012 using boo: alue Add8 Aoncontrolling interest share o% =ood*ill Aoncontrolling interest ?ece&ber @1, 2012 at %air alue

!000 210 21206 !#<0 !<00 100 2#06 <#0 205 !1@0 00 !1"0

1(

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Solution #3-& [AICPA adapted] Preliminary computations In est&ent cost8 ,a* 21,000 shares 1056 !100 ,un 2@,000 shares "056 !10 I&plied total %air alues8 ,a* 2!112,000 3 1056 ,un 2!1<1,000 3 "056 9oo: alue ,a* ,un E;cess %air alue o er boo: alue at ac-uisition 1 a2 Journal entries to account (or investments January "# $%"" 5 Acquisition o( investments In est&ent in ,a* 21056 112,000 Cash Eo record ac-uisition o% 100 shares o% ,a* co&&on stoc: at !100 per share. In est&ent in ,un 2"056 1<1,000 Cash Eo record ac-uisition o% 2,100 shares o% ,un co&&on stoc: at !10 per share. b2 uring $%"" 5 ividends (rom subsidiaries Cash 2#,<00 In est&ent in ,a* 21056 Eo record di idends recei ed %ro& ,a* 2!@2,000 1056. Cash 12,<00 In est&ent in ,un 2"056 Eo record di idends recei ed %ro& ,un 2!11,000 "056. c2 ecember !"# $%"" 5 Share o( income or loss In est&ent in ,a* 21056 #",<00 Inco&e %ro& ,a* Eo record in est&ent inco&e %ro& ,a* 2!"2,000 1056. 7oss %ro& ,un 1<,100 In est&ent in ,un 2"056 Eo record in est&ent loss %ro& ,un 2!20,000 "056. ,a* 112,000 1<1,000 100,000 200,000 100,000 0 200,000 0 ,un

112,000

1<1,000

2#,<00 12,<00

#",<00 1<,100

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An Introduction to Consolidat e d Financial Stat e m e n t s

Solution #3-& 2continued6 2 &oncontrolling interest ecember !"# $%"" 3 ,a* !100,000 10,000 110,000 205 !@<,000 ,un !120,000 00,000 @1,000 141,000 @05 !#4,000

Co&&on stoc: Capital in e;cess o% par Detained earnings E-uit. ?ece&ber @1 Aoncontrolling interest percentage Aoncontrolling interest ?ece&ber @1 H Cair 3 alue e-uals boo: alue. ecember !"# $%""

Consolidated retained earnings

Consolidated retained earnings is reported at !<04,200, e-ual to the retained earnings o% Pod Corporation, the parent, at ?ece&ber @1, 2011. 4 4nvestment balance ecember !"# $%""' ,a* !112,000 #",<00 22#,<006 !100,000 ,un !1<1,000 21<,1006 212,<006 !1@1,<00 alue

In est&ent cost >anuar. 1 Add 2deduct68 Inco&e 2loss6 ?educt8 ?i idends recei ed In est&ent balances ?ece&ber @1

Chec:8 In est&ent balances should be e-ual to the underl.ing boo: ,a* !110,000 105 ( !100,000 ,un !141,000 "05 ( !1@1,<00 A%ter consolidation, the In est&ent balances are !0.

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Solution #3-' Preliminary computations -in thousands. Cost o% 405 in est&ent >anuar. 1, 2011 I&plied total %air alue o% ,on 2!",200 3 4056 9oo: alue o% ,on E;cess %air alue o er boo: alue on >anuar. 1 Allocation to e-uip&ent De&ainder is =ood*ill Additional annual depreciation on e-uip&ent 2!1,<00 3 1 .ears6 #an Co!"o!ation and Su$sidia!% Consolidated 9alance ,heet 'or:ing Papers at ?ece&ber @1, 2011 2in thousands6
Pan ! <00 1,200 110 1,000 1,200 0,000 @,000 ",#<0 a !14,100 !",000 !1,200 200 0,000 2,000 !",000 b a a 110 0,000 2,000 a 100 1,000 405 ,on 000 100 1,200 1,000 2,000 1,<00 a 1,000 a ",#<0 1,000 !21,200 ! 1,100 1,020 10,000 @,#00 100 !21,200 AdJust&ents and Eli&inations Consolidated 9alance ,heet ! 1,000 2,000 2,<00 2,<00 <,000 <,000

!",200 !1,000 2#,0006 !2,<00 !1,<00 !1,000 ! 200

Cash Decei ables 5 net ?i idends recei able In entor. 7and 9uildings 5 net E-uip&ent 5 net In est&ent in ,on =ood*ill Eotal assets

110

Accounts pa.able ! <00 ?i idends pa.able 1,000 Capital stoc: 10,000 Detained earnings @,#00 Aoncontrolling interest Eotal e-uities !14,100 a b

Eo eli&inate reciprocal in est&ent and e-uit. accounts, enter una&orti+ed e;cess allocated to e-uip&ent, record good*ill, and enter noncontrolling interest 2at %air alue6. Eo eli&inate reciprocal di idends recei able and di idends pa.able a&ounts.

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An Introduction to Consolidat e d Financial Stat e m e n t s

Solution #3-1( 1 Purchase price o( investment in Sun -in thousands. Inderl.ing boo: alue o% in est&ent in ,un8 E-uit. o% ,un >anuar. 1, 2011 Add8 E;cess in est&ent %air alue o er boo: =ood*ill at ?ece&ber @1, 201# Cair alue o% ,un >anuar. 1, 2011 Purchase price o% 105 in est&ent at %air 2 Suns stockholders equity on !000 alue8 120 !#<0 !001

alue2!#<0 ; 1056

ecember !"# $%"5 -in thousands.

205 noncontrolling interest at %air alue !120 205 good*ill 2206 205 noncontrolling interest/s e-uit. at boo: alue !100 Eotal e-uit. ( Aoncontrolling interest/s e-uit. !100 3 205 ( !#00 3 Pans investment in Sun account balance at ecember !"# $%"5 2in thousands6 Inderl.ing boo: alue in ,un ?ece&ber @1, 201# !000 2!#00 1056 Add8 105 o% =ood*ill ?ece&ber @1, 201# 2205 is attributable to the noncontrolling interest6 4< In est&ent in ,un ?ece&ber @1, 201# !04< Alternati e solution8 In est&ent cost >anuar. 1, 2011 Add8 105 o% ,un/s increase since ac-uisition 2!#00 B !0006 105 In est&ent in ,un ?ece&ber @1, 201# 4 Pans capital stock and retained earnings 2in thousands6 Capital stoc: Detained earnings ecember !"# $%"5 !100 ! <0 !001 01 !04<

A&ounts are e-ual to capital stoc: and retained earnings sho*n in the consolidated balance sheet.

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Solution #3-11 Preliminary computations -in thousands. Cost o% "05 in est&ent in ,tu I&plied %air o% ,tu2!1,000 3 "056 9oo: alue o% ,tu 210056 E;cess E;cess allocated8 In entories Plant assets =ood*ill E;cess In est&ent balance at >anuar. 1, 2011 ,hare o% ,tu/s retained earnings increase 2!120 "056 7ess8 A&orti+ation "05 o% e;cess allocated to in entories 2sold in 20116 "05 o% e;cess allocated to plant assets 2!1<0 31 .ears6 In est&ent balance at ?ece&ber @1, 2011 Aoncontrolling interest at ?ece&ber @1 @05 o% ,tu/s boo: alue at ?ece&ber @1 2!1,"20 ; @056 @05 o% =ood*ill @05 Ina&orti+ed e;cess %or plant assets @05 ; 2!1<0 B !20 a&orti+ation6 Aoncontrolling at ?ece&ber @1 2%air alue6 #o" Co!"o!ation and Su$sidia!% Consolidated 9alance ,heet 'or:ing Papers at ?ece&ber @1, 2011 2in thousands6
Cash Accounts recei able 5 net Accounts recei able 5 Pop ?i idends recei able In entories 7and Plant assets 5 net In est&ent in ,tu =ood*ill Assets Accounts pa.able Account pa.able to ,tu ?i idends pa.able 7ongBter& debt Capital stoc: Detained earnings Aoncontrolling interest 2!2,0<0,000 @056 ! Pop 120 110 10 1,000 200 1,000 1,002 a 200 !#,0#< ! <00 20 10 1,200 2,000 1,1#< !2,100 ! 1<0 20 200 1,000 "20 b c 20 10 ! "05 ,tu 00 000 20 <00 @00 "00 AdJust&ents and Eli&inations Consolidated 9alance ,heet ! 1<0 1,210

!1,000 !2,000 1,<00 ! 000 ! ! 00 1<0 200 000

!1,000 10 2216 2106 !1,002 !#1< <0 02 !<11

b c

20 10 1,<00 #00 2,200

a 100 a 1,002

200 !<,020 ! "<0 1< 1,000 2,000 1,1#< a <11 <11

a 1,000 a "20

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3- 20 E-uities !#,0#<

An Introduction to Consolidat e d Financial Stat e m e n t s !2,100 !<,020

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Solution #3-12 Preliminary computations -in thousands. 105 In est&ent in ,a& at cost >anuar. 1, 2011 I&plied total %air alue o% ,a& 2!1,#20 3 1056 ,a& boo: alue E;cess %air alue o er boo: alue recorded as good*ill ,a& ?i idends ! 10 100 120 !@00 ,a& Aet Inco&e !1<0 200 200 !<00 105 o% Aet Inco&e !121 1<0 142 !010 ! ! ! 100 200 100 ! 1,#20 ! 1,400 1,100 ! 100

2011 2012 201@ 1 2 3 4

,a&/s di idends %or 2012 2!10 3 1056 ,a&/s net inco&e %or 2012 2!1<0 3 1056 =ood*ill 5 ?ece&ber @1, 2012 &oncontrolling interest share o( income " $%"! ,a&/s inco&e %or 201@ 2!4< di idends recei ed31056 2 Aoncontrolling interest percentage Aoncontrolling interest share &oncontrolling interest ecember !"# $%"! E-uit. o% ,a& >anuar. 1, 2011 Add8 Inco&e %or 2011, 2012 and 201@ ?educt8 ?i idends %or 2011, 2012 and 201@ E-uit. boo: alue o% ,a& ?ece&ber @1, 201@ =ood*ill E-uit. %air alue o% ,a& ?ece&ber @1, 201@ Aoncontrolling interest percentage Aoncontrolling interest ?ece&ber @1, 201@ Controlling share o( consolidated net income (or $%"! Pen/s separate inco&e Add8 Inco&e %ro& ,a& Controlling share o% consolidated net inco&e Pen/s net inco&e ,a&/s net inco&e Consolidated net inco&e 7ess8 Aoncontrolling interest share 2!200 ; 2056 Controlling interest share

! !

200 205 01

!1,100 <00 2@006 2,100 100 !2,200 205 ! 000 ! ! #<0 142 "#2

!#<0 200 !100 01 !"#2

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