112 Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

Chapter 11

CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND

CORPORATE JOINT VENTURES

Answers to Questions

1 Parent company theory views consolidated financial statements from the

viewpoint of the parent company and entity theory views consolidated
financial statements from the viewpoint of the business entity under which all
resources are controlled by a single management team. By contrast,
contemporary theory sometimes reflects the parent company viewpoint and
at other times it reflects the viewpoint of the business entity. A detailed
comparison of these theories is presented in Exhibit 11-1 of the text.

2 Only contemporary theory is changed by current pronouncements of the

Financial Accounting Standards Board. While such pronouncements can and
do change the current accounting and reporting practices, they do not change
the logic or the consistency of either parent company or entity theory.

3 The valuation of subsidiary assets on the basis of the price paid for the
majority interest seems justified conceptually when substantially all of the
subsidiary stock is acquired by the parent. But the conceptual support for this
approach disappears when only a slim majority of subsidiary stock is acquired.
In addition, the valuation of the minority interest based on the price paid by
the parent company has practical limitations because minority interest does
not represent equity ownership in the usual sense. The ability of minority
stockholders to participate in management is limited and minority shares do
not possess the usual marketability of equity securities.

4 Consolidated assets are equal to their fair values under entity theory only
when the book values of parent company assets are equal to their fair values.
Otherwise, consolidated assets are not equal to their fair values under either
parent company or entity theories.

5 The valuation of the minority interest at book value might overstate the
equity of minority shareholders because of the limited marketability of shares
held by minority stockholders and because of the limited ability of minority
stockholders to share in management through their voting rights. Valuation of
113 Consolidation Theories, Push-down Accounting, and
Corporate Joint Ventures
the minority interest at book value also overstates or understates the minority
interest unless the subsidiary assets are recorded at their fair values.

6 Consolidated net income under parent company theory and income to the
majority stockholders under entity theory should be the same. This is
illustrated in Exhibit 11-5, which shows different income statement amounts
for cost of sales, operating expenses, and income allocated to minority
stockholders, but the same income to majority stockholders. Note that
consolidated net income under parent company and contemporary theories
reflects income to majority stockholders.

7 Income to the parent company stockholders under the equity method of

accounting is the same as income to the controlling stockholders under entity
theory. But income to controlling stockholders is not identified as consolidated
net income as it would be under parent company or contemporary theories.

8 Consolidated income statement amounts under entity theory are the same
as under contemporary theory when subsidiary investments are made at book
value because contemporary theory follows entity theory in eliminating the
effects of intercompany transactions from consolidated financial statements.
But contemporary theory differs from entity theory in accounting for
differences between investment cost and book value acquired.

9 Contemporary theory corresponds to entity theory in matters relating to

unrealized and constructive gains and losses from intercompany transactions.
In other words, unrealized and constructive gains and losses are allocated
between majority and minority interests in the same manner under these two
theories.

10 Push-down accounting simplifies the consolidation process. The push-

down adjustments are recorded in the subsidiary's separate books at the time
of the business combination; thus, it is not necessary to allocate the
unamortized cost-book value differentials in the consolidation working papers.

11 A joint venture is an entity that is owned, operated, and jointly controlled

by a small group of investor-venturers to operate a business for the mutual
benefit of the venturers. Some joint ventures are organized as corporations,
while others are organized as partnerships or undivided interests. Each
venturer typically participates in important decisions of a joint venture
irrespective of ownership percentage.

12 Investors in corporate joint ventures use the equity method of accounting

and reporting for their investment earnings and investment balances as
required by APB Opinion No. 18. The cost method would be used only if the
Chapter 11 114
investor could not exercise significant influence over the corporate joint
venture.
Alternatively, investors in unincorporated joint ventures use the equity
method of accounting and reporting as explained in Interpretation No. 2 of
APB Opinion No. 18 or proportional consolidation for undivided interests
specified as a special industry practice.
115 Consolidation Theories, Push-down Accounting, and
Corporate Joint Ventures

SOLUTIONS TO EXERCISES

Solution E11-1

1 a 5 b
2 a 6 c
3 c 7 d
4 a

Solution E11-2

1 b 4 d
2 b 5 c
3 d

Solution E11-3

1 c

Total value of Smith implied by purchase price ($720,000/.8) $900,000

Minority interest percentage 20%
Minority interest $180,000

2 a Only the parent's percentage of unrealized profits from

upstream sales is eliminated under parent company theory.

3 b

Subsidiary's income of $200,000 x 10% minority interest $ 20,000

Less: Patent amortization ($70,000/10 years x 10%) (700)
Minority interest expense $ 19,300

4 a

Implied fair value - $840,000 = patents at acquisition

Book value of 100% of identifiable net assets $840,000

Add: Patents at acquisition ($54,000/90%) 60,000
Total implied value 900,000
Percent acquired 80%
Purchase price under entity theory $720,000

5 b

Purchase price - ($840,000 x 80%) = patents at acquisition

Book value $840,000 x 80% = underlying equity $672,000

Add: Patents at acquisition ($54,000/90%) 60,000
Purchase price (contemporary theory) $732,000
Chapter 11 116

Solution E11-4

1 Goodwill

Parent company theory

Cost of investment in Staff $500,000
Fair value acquired ($400,000 x 80%) 320,000
Goodwill $180,000
Entity theory
Implied value based on purchase price ($500,000/.8) $625,000
Fair value of Staff's net assets 400,000
Goodwill $225,000

2 Minority interest

Parent company theory

Book value of Staff's net assets $260,000
Minority interest percentage 20%
Minority interest $ 52,000
Entity theory
Total valuation of Staff $625,000
Minority interest percentage 20%
Minority interest $125,000

3 Total assets

Parent company theory

Pond Staff Adjustment Total
Current assets $20,000 $ 50,000 $ 40,000 x 80% $ 102,000
Plant assets-net 480,000 250,000 110,000 x 80% 818,000
Goodwill 180,000
$500,000 $300,000 $1,100,000

Entity theory
Current assets $20,000 $ 50,000 $ 40,000 x 100% $ 110,000
Plant assets-net 480,000 250,000 110,000 x 100% 840,000
Goodwill 225,000
$500,000 $300,000 $1,175,000
117 Consolidation Theories, Push-down Accounting, and
Corporate Joint Ventures

Solution E11-5

Preliminary computations

Parent company theory

Cost of 80% interest $300,000
Fair value acquired ($350,000 x 80%) 280,000
Goodwill $ 20,000

Entity theory
Implied total value ($300,000 cost  80%) $375,000
Fair value of Shelly 350,000
Goodwill $ 25,000

1 Consolidated net income and minority interest expense for 2005:

Parent
Company Theory Entity Theory

Combined separate incomes $550,000 $550,000

Depreciation on excess allocated to equipment:

$75,000 excess x 80% acquired  5 years (12,000)
$75,000 excess  5 years (15,000)

Total consolidated income 538,000 535,000

Less: Minority interest expense

$50,000 x 20% (10,000)
($50,000 -15,000) x 20% (7,000)

Consolidated net income $528,000 $528,000

2 Goodwill at December 31, 2005:

$ 20,000 $ 25,000
Chapter 11 118

Solution E11-6

Preliminary computation

Interest acquired in Stahl: 72,000 shares  80,000 shares = 90%

1 Stahl's net assets under entity theory

Implied value from purchase price: $1,800,000/90% interest $2,000,000

2 Goodwill

a Entity theory

Implied value $2,000,000

Less: Fair value and book value of net assets 1,710,000
Goodwill $ 290,000

b Parent company theory

Cost of 90% interest $1,800,000

Fair values of net assets acquired ($1,710,000 x 90%) 1,539,000
Goodwill $ 261,000

c Contemporary theory (same as parent company theory) $ 261,000

3 Investment income from Stahl

Income from Stahl ($80,000 x 1/2 year x 90% interest) $ 36,000

4 Minority interest under entity theory

Imputed value of Stahl at July 1, 2003 $2,000,000

Add: Income for 1/2 year 40,000
2,040,000
Minority percentage 10%
Minority interest $ 204,000

Alternatively, $200,000 minority interest at July 1, plus $4,000 share of

reported income = $204,000
119 Consolidation Theories, Push-down Accounting, and
Corporate Joint Ventures

Solution E11-7

1 Parent company theory

Combined separate incomes of Palumbo and Seal $800,000

Less: Palumbo's share of unrealized profits from upstream
inventory sales ($30,000 x 80%) (24,000)
Less: Minority interest expense ($300,000 x 20%) (60,000)
Consolidated net income $716,000

2 Entity theory

Combined separate incomes $800,000

Less: Unrealized profits from upstream sales (30,000)
Total consolidated income $770,000

Income allocated to majority stockholders ($500,000 +

[$270,000 x 80%]) $716,000

Income allocated to minority stockholders

($300,000 - $30,000) x 20% $ 54,000

Solution E11-8
Parent
Contemporary Company Entity
Theory Theory Theory
Combined separate incomes $180,000 $180,000 $180,000
Less: Unrealized inventory profits
from downstream sales
($60,000 - $30,000) x 50% (15,000) (15,000) (15,000)
Less: Unrealized profit on upstream
sale of land
($96,000 - $70,000) x 100% (26,000) (26,000)
($96,000 - $70,000) x 80% (20,800)
Less: Minority interest expense
($60,000 - $26,000) x 20% (6,800)
$60,000 x 20% (12,000)
Consolidated net income $132,200 $132,200

Total consolidated income $139,000

Allocated to majority stockholders $132,200
Allocated to minority stockholders
($60,000 - $26,000) x 20% $ 6,800
Chapter 11 120

Solution E11-9 [Push-down accounting]

1 Push down under parent company theory

Retained earnings $ 800,000
Inventories 90,000
Land 450,000
Buildings-net 270,000
Goodwill 360,000
Equipment $ 180,000
Other liabilities 90,000
Push down equity 1,700,000
To record revaluation of 90% of the net assets and elimination of
retained earnings as a result of a business combination with
Pioneer Corporation. Push down equity = ($600,000 fair value-book
value differential x 90%) + $360,000 goodwill + $800,000 retained
earnings.

2 Push down under entity theory

Retained earnings $ 800,000

Inventories 100,000
Land 500,000
Buildings-net 300,000
Goodwill 400,000
Equipment-net $ 200,000
Other liabilities 100,000
Push down equity 1,800,000
To record revaluation of 100% of the net assets and elimination of
retained earnings as a result of a business combination with
Pioneer. Push down equity = $600,000 fair value-book value
differential + $400,000 goodwill + $800,000 retained earnings.

Solution E11-10

Each of the investments should be accounted for by the equity method as

a one-line consolidation because the joint venture agreement requires consent
of each venturer for important decisions. Thus, each venturer is able to
exercise significant influence over its joint venture investment irrespective
of ownership interest.

The 40 percent venturer:

Income from Sun-Belt ($500,000 x 40%) $ 200,000

Investment in Sun-Belt ($8,500,000 x 40%) $3,400,000

The 15 percent venturer

Income from Sun-Belt ($500,000 x 15%) $ 75,000

Investment in Sun-Belt ($8,500,000 x 15%) $1,275,000
121 Consolidation Theories, Push-down Accounting, and
Corporate Joint Ventures

SOLUTION TO PROBLEMS

Solution P11-1

Picody Corporation and Subsidiary

Comparative Consolidated Balance Sheets
at December 31, 2005

Parent
Company Theory Entity Theory
Assets
Cash $ 52,000 $ 52,000
Receivables-net 300,000 300,000
Inventories 450,000 450,000
Plant assets-neta 1,998,000 2,010,000
Patentsb 64,000 80,000
Total assets $2,864,000 $2,892,000

Liabilities
Accounts payable $ 304,000 $ 304,000
Other liabilities 500,000 500,000
Minority interestc 160,000 _
Total liabilities 964,000 804,000
Capital stock 1,000,000 1,000,000
Retained earnings 900,000 900,000
Minority interestd 188,000
Total stockholders' equity 1,900,000 2,088,000
Total liabilities and
stockholders' equity $2,864,000 $2,892,000
a
Parent company theory: Combined plant assets of $1,950,000 + ($80,000 x
3/5 undepreciated excess)
Entity theory: Combined plant assets of $1,950,000 + ($100,000 x 3/5
undepreciated excess)
b
Parent company theory: $80,000 patents - $16,000 amortization
Entity theory: $100,000 patents - $20,000 amortization
c
Parent company theory: Minority interest equals Scone's equity of
$800,000 x 20%
d
Entity theory: [Scone's equity of $800,000 + ($60,000 undepreciated
plant assets + $80,000 unamortized patents)] x 20%
Chapter 11 122

Solution P11-2

Preliminary computation
Implied value of Pisces based on purchase price ($160,000/.8) $200,000
Book value 170,000
Excess to undervalued equipment $ 30,000

1 Pisces Corporation and Subsidiary

Consolidated Income Statement
for the year ended December 31, 2003
Sales $600,000
Less: Cost of sales 380,000
Gross profit 220,000
Other expenses $ 80,000
Depreciationa 79,500 159,500

Total consolidated net income $ 60,500

Allocation of income to:

Minority interestb $ 4,100
Majority interest $ 56,400
a
$75,000 depreciation - $500 piecemeal recognition of gain on equipment
through depreciation + ($30,000 excess  6 years) excess depreciation
b
($30,000 reported income - $5,000 unrealized gain on equipment + $500
piecemeal recognition of gain on equipment - $5,000 excess depreciation)
x 20% interest

2 Pisces Corporation and Subsidiary

Consolidated Balance Sheet
at December 31, 2003
Assets
Current assets $241,600
Plant and equipment-net ($595,000 - $199,500 + 25,000) 420,500
Total assets $662,100
Liabilities and equity
Liabilities $150,000
Capital stock 300,000
Retained earningsa 170,000
Minority interestb 42,100
Total liabilities and stockholders' equity $662,100
a
Pisces beginning retained earnings $163,600 + Pisces net income $56,400 -
Pisces dividends of $50,000
b
($190,000 stockholders' equity + $25,000 excess - $4,500 unrealized gain on
equipment) x 20%
Check: $40,000 beginning minority interest + $4,100 minority interest expense
- $2,000 minority interest dividends = $42,100
123 Consolidation Theories, Push-down Accounting, and
Corporate Joint Ventures

Solution P11-3

Parent company theory

1a Income from Sign for 2003 ($90,000 x 70%) $ 63,000

1b Goodwill at December 31, 2003 $ 70,000

($595,000 cost- $525,000 fair value)

1c Consolidated net income for 2003

Palace's separate income $300,000

Add: Income from Sign 63,000 $363,000

1d Minority interest income for 2003

Net income of Sign of $90,000 x 30% $ 27,000

1e Minority interest December 31, 2003

Sign's stockholders' equity $790,000 x 30% $237,000

Entity theory

2a Income from Sign for 2003 ($90,000 x 70%) $ 63,000

2b Goodwill at December 31, 2003

Imputed value ($595,000/70%) $850,000

Fair value of Sign's net assets 750,000
Goodwill $100,000

2c Total consolidated income for 2003

Income to majority stockholders ($300,000 + $63,000) $363,000

Add: Minority interest income ($90,000 x 30%) 27,000
Total consolidated income $390,000

2d Minority interest income (computed in 2c above) $ 27,000

2e Minority interest at December 31, 2003

(Book equity $790,000 + $100,000 goodwill) x 30% $267,000

Chapter 11 124
Solution P11-4

Preliminary computations
Parent company theory
Investment in Smedley $224,000
Fair value of 80% interest acquired ($240,000 x 80%) 192,000
Goodwill $ 32,000

Entity Theory
Implied value of Smedley ($224,000/.8) $280,000
Fair value of net assets 240,000
Goodwill $ 40,000

Pierre used an incomplete equity method in accounting for its investment in

Smedley. It ignored the intercompany upstream sales of inventory. Income
from Smedley on an equity basis would be:
Share of Smedley’s income ($50,000 x .8) $ 40,000
Less: Unrealized profits in ending inventory from
upstream sale ($8,000 x 50% x 80%) (3,200)
Income from Smedley $ 36,800

Pierre Corporation and Subsidiary

Comparative Consolidated Income Statements
for the year ended December 31, 2004
Contem- Parent
porary Company Entity
Theory Theory Theory
Sales $1,000,000 $1,000,000 $1,000,000
Less: Cost of sales (575,000) (575,000) (575,000)
Gross profit 425,000 425,000 425,000

Expenses (200,000) (200,000) (200,000)

Less: Unrealized profit on

upstream sale of inventory
($23,000 - $15,000) x 50% x 100% (4,000) (4,000)
($23,000 - $15,000) x 50% x 80% (3,200)
Minority interest expense
($50,000 - $4,000) x 20% (9,200)
$50,000 x 20% (10,000)
Consolidated net income $211,800 $211,800
Total consolidated income $221,000
Allocated to majority stockholders $211,800
Allocated to minority stockholders
($50,000 - $4,000) x 20% $ 9,200
125 Consolidation Theories, Push-down Accounting, and
Corporate Joint Ventures

Pierre Corporation and Subsidiary

Comparative Statements of Retained Earnings
for the year ended December 31, 2004
Contem- Parent
porary Company Entity
Theory Theory Theory
Retained earnings December 31, 2003 $360,000 $360,000 $360,000
Add: Consolidated net income 211,800 211,800
Add: Net income to majority stockholders 211,800
571,800 571,800 571,800
Less: Dividends to majority stockholders (120,000) (120,000) (120,000)
Retained earnings December 31, 2004 $451,800 $451,800 $451,800

Solution P11-4 (continued)

Pierre Corporation and Subsidiary

Comparative Consolidated Balance Sheets
at December 31, 2004

Contem- Parent
porary Company Entity
Theory Theory Theory
Assets
Cash $ 110,800 $ 110,800 $ 110,800
Accounts receivable 120,000 120,000 120,000
Inventory 196,000 196,800 196,000
Land 280,000 280,000 280,000
Buildings-net 840,000 840,000 840,000
Goodwill 32,000 32,000 40,000
Total assets $1,578,800 $1,579,600 $1,586,800
Liabilities
Accounts payable $ 275,800 $ 275,800 $ 275,800
Minority interest 52,000
Total liabilities 275,800 327,800 275,800
Stockholders' equity
Capital stock 800,000 800,000 800,000
Retained earnings 451,800 451,800 451,800
Minority interest 51,200 59,200
Total stockholders' equity 1,303,000 1,251,800 1,311,000
Total equities $1,578,800 $1,579,600 $1,586,800
Chapter 11 126
127 Consolidation Theories, Push-down Accounting, and
Corporate Joint Ventures

Solution P11-5

Packard Corporation and Subsidiary

Comparative Balance Sheets
at December 31, 2004
Contemporary Entity
Theory Theory
Assets
Cash $ 70,000 $ 70,000
Receivables-net 110,000 110,000
Inventories 120,000 120,000
Plant assets-net 300,000 300,000
Goodwill 40,000 50,000
Total assets $640,000 $650,000

Liabilities
Accounts payable $ 95,000 $ 95,000
Other liabilities 25,000 25,000
Total liabilities 120,000 120,000

Stockholders' equity
Capital stock 300,000 300,000
Retained earnings 194,000 194,000
Minority interest
($150,000 - $20,000) x 20% 26,000
($150,000 + $50,000 - $20,000) x 20% 36,000
Total stockholders' equity 520,000 530,000
Total equities $640,000 $650,000

Supporting computations Contemporary Entity

Theory Theory
Cost or imputed value $128,000 $160,000
Book value of 80% 88,000
Book value of 100% 110,000
Goodwill $ 40,000 $ 50,000

Investment cost $128,000

Add: 80% of retained earnings increase
($50,000 - $10,000) x 80% 32,000
Less: 80% of $20,000 unrealized profits (16,000)
Investment balance $144,000
Chapter 11 128

Solution P11-6 [AICPA adapted]

1 X carries its investment in Y on a cost basis. This is evidenced by the

appearance of dividend revenue in X Company's income statement and by the
absence of income from subsidiary.

2 X holds 1,400 shares of Y. X Company's percentage ownership is 70%, as

determined by the relationship of X Company's dividend revenues and Y
Company's dividends paid ($11,200/$16,000). Y has 2,000 outstanding
shares ($200,000/$100) and X holds 70% of these, or 1,400 shares.

3 Y Company's retained earnings at acquisition were $100,000.

Imputed value of Y ($245,000 cost/70%) $350,000

Less: Patents (applicable to 100%) (50,000)
Book value and fair value of Y's identifiable net assets 300,000
Less: Capital stock (200,000)
Retained earnings $100,000

4 The nonrecurring loss is a constructive loss on the purchase of X bonds by

Y Company.

Working paper entry:

Mortgage bonds payable (5%) $100,000
Loss on retirement of X bonds 3,000
X bonds owned $103,000
To eliminate intercompany bond investment and bonds payable and to
recognize a loss on the constructive retirement of X bonds.

5 Intercompany sales X to Y are $240,000 computed as follows:

Combined sales ($600,000 + $400,000) $1,000,000

Less: Consolidated sales 760,000
Intercompany sales $ 240,000

6 Yes, there are other intercompany debts:

Intercompany
Combined Consolidated Balances
Cash and receivables $143,000 $97,400 $45,600
Current payables 93,000 53,000 40,000
Dividends payable 18,000 12,400 5,600
Y Company owes X Company $40,000 on intercompany purchases and X Company owes
Y Company $5,600 dividends.
129 Consolidation Theories, Push-down Accounting, and
Corporate Joint Ventures

Solution P11-6 (continued)

7 Adjustment to determine consolidated cost of goods sold:

Consolidated Cost of Goods Sold

|
Combined cost of goods sold $640,000 | $240,000 Intercompany purchases
Unrealized profit in | 5,000 Unrealized profit in beginning
ending inventory 8,000 | inventory
| 403,000 To balance
$648,000 | $648,000
Consolidated cost of |
goods sold $403,000 |

Unrealized profit in ending inventory is equal to the combined less

consolidated inventories ($130,000 - $122,000).
Unrealized profit in beginning inventory is plugged as follows:
($640,000 + $8,000) - ($240,000 + $403,000) = $5,000

8 Minority interest expense of $8,700 is computed as follows:

Net income of Y $34,000

Less: Patent amortization ($50,000/10 years) 5,000
Adjusted income of Y 29,000
Minority interest percentage 30%
Minority interest expense $ 8,700

9 Minority interest of $117,000 at the balance sheet date is computed:

Stockholders' equity of Y Company $360,000

Add: Unamortized patents 30,000
Equity of Y plus unamortized patents 390,000
Minority interest percentage 30%
Minority interest on balance sheet date $117,000

10 Consolidated retained earnings

Retained earnings of X end of year $200,000

Add: X's share of increase in Y's retained earnings since
acquisition ($160,000 - $100,000) x 70% 42,000
Less: Unrealized profit in Y's ending inventory (8,000)
Less: X's patent amortization since acquisition
$20,000 x 70% (14,000)
Less: Loss on constructive retirement of X's bonds (3,000)
Consolidated retained earnings-end of year $217,000
Chapter 11 130

Solution P11-7

1 Entry on Splash's books at acquisition

Inventories $ 20,000
Land 25,000
Buildings-net 50,000
Other liabilities 10,000
Goodwill 20,000
Retained earnings 90,000
Equipment-net $ 15,000
Push-down capital 200,000

To push down fair value-book value differentials.

2 Splash Corporation
Balance Sheet
at January 1, 2004
ASSETS

Cash $ 30,000
Accounts receivable-net 70,000
Inventories 80,000
Total current assets $180,000
Land $ 75,000
Buildings-net 150,000
Equipment-net 75,000
Total plant assets 300,000
Goodwill 20,000
Total assets $500,000
LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable $ 40,000

Other liabilities 60,000
Total liabilities $100,000
Capital stock $200,000
Push-down capital 200,000
Total stockholders' equity 400,000
Total liabilities and stockholders' equity $500,000

3 If Splash reports net income of $90,000 under the new push-down system
for the calendar year 2004, Played's income from Splash will also be
$90,000 under a one-line consolidation.
131 Consolidation Theories, Push-down Accounting, and
Corporate Joint Ventures

Solution P11-8

1 Parent company theory

Preliminary computation:
Cost of 80% interest in Sanue $3,000,000
Book value acquired ($2,000,000 x 80%) 1,600,000
Excess cost over book value acquired $1,400,000
Excess allocated to:
Inventories $1,600,000 x 80% $1,280,000
Equipment-net $(500,000) x 80% (400,000)
Goodwill for the remainder 520,000
Excess cost over book value acquired $1,400,000

Entry on Sanue's books to reflect 80% push down:

Inventories $1,280,000
Goodwill 520,000
Retained earnings 1,200,000
Equipment-net $ 400,000
Push-down capital 2,600,000

2 Entity theory
Preliminary computation:
Implied value of net assets ($3,000,000/.8) $3,750,000
Book value of net assets 2,000,000
Total excess $1,750,000
Excess allocated to:
Inventories $1,600,000
Equipment-net (500,000)
Goodwill for remainder 650,000
Total excess $1,750,000

Entry on Sanue's books to reflect 100% push down:

Inventories $1,600,000
Goodwill 650,000
Retained earnings 1,200,000
Equipment $ 500,000
Push-down capital 2,950,000

3 Minority interest (Parent company theory)

Sanue's stockholders' equity $2,000,000 x 20% $ 400,000

4 Minority interest (Entity theory)

Capital stock $ 800,000

Push-down capital 2,950,000
Stockholders' equity 3,750,000
Minority interest percentage 20%
Minority interest $ 750,000
Chapter 11 132

Solution P11-9

1 Push down under parent company theory

Buildings-net $ 18,000
Equipment-net 27,000
Goodwill 36,000
Retained earnings 20,000
Inventories $ 9,000
Push-down capital 92,000
To record revaluation of 90% of net assets and elimination of
retained earnings as a result of a business combination with Power
Corporation.

2 Push down under entity theory

Buildings-net $ 20,000
Equipment-net 30,000
Goodwill 40,000
Retained earnings 20,000
Inventories $ 10,000
Push-down capital 100,000
To record revaluation of net assets imputed from purchase price of
90% interest acquired by Power Corporation.

3 Swing Corporation
Comparative Balance Sheets
at January 1, 2004

Parent Company Theory Entity Theory

Assets
Cash $ 20,000 $ 20,000
Accounts receivable-net 50,000 50,000
Inventories 31,000 30,000
Land 15,000 15,000
Buildings-net 48,000 50,000
Equipment-net 97,000 100,000
Goodwill 36,000 40,000
Total assets $297,000 $305,000

Liabilities and stockholders' equity

Accounts payable $ 45,000 $ 45,000
Other liabilities 60,000 60,000
Capital stock 100,000 100,000
Push-down capital 92,000 100,000
Retained earnings 0 0
Total equities $297,000 $305,000
133 Consolidation Theories, Push-down Accounting, and
Corporate Joint Ventures

Solution P11-10

a Power Corporation and Subsidiary

Consolidation Working Papers
for the year ended December 31, 2004

Push down 90% - parent company theory

| | 90% | Adjustments and |Consolidated

| Power | Swing | Eliminations | Statements
| | | |
Income Statement | | | |
Sales |$310,800 |$110,000 | | $420,800
Income from Swing | 37,800 | |b 37,800 |
Cost of sales | 140,000*| 33,000*| | 173,000*
Depreciation expense | 29,000*| 24,200*| | 53,200*
Other operating | | | |
expenses | 45,000*| 11,000*| | 56,000*
Minority expense | | |e 4,000 | 4,000*
Net income |$134,600 |$ 41,800 | | $134,600
| | | |
Retained Earnings | | | |
Retained earnings -Power|$147,000 | | | $147,000
Retained earnings -Swing| |$ 0 | |
Net income | 134,600 | 41,800 | | 134,600
Dividends | 60,000*| 10,000*| b 9,000|
e 1,000| 60,000*
Retained earnings | | | |
December 31, 2004 |$221,600 |$ 31,800 | | $221,600
| | | |
Balance Sheet | | | |
Cash |$ 63,800 |$ 27,000 |a 8,000 | $ 98,800
Accounts receivable -net| 90,000 | 40,000 | a 8,000| 122,000
Dividends receivable | 9,000 | | d 9,000|
Inventories | 20,000 | 35,000 | | 55,000
Land | 40,000 | 15,000 | | 55,000
Buildings -net | 140,000 | 43,200 | | 183,200
Equipment -net | 165,000 | 77,600 | | 242,600
Investment in Swing | 208,800 | | b 28,800|
| | | c 180,000|
Goodwill | | 36,000 | | 36,000
|$736,600 |$273,800 | | $792,600
| | | |
Accounts payable |$125,000 |$ 20,000 | | $145,000
Dividends payable | 15,000 | 10,000 |d 9,000 | 16,000
Other liabilities | 75,000 | 20,000 | | 95,000
Capital stock | 300,000 | 100,000 |c 100,000 | 300,000
Push-down capital | | 92,000 |c 92,000 |
Retained earnings | 221,600 | 31,800 | | 221,600
|$736,600 |$273,800 | |
| |
Minority interest January 1, 2004 | c 12,000|
Minority interest December 31, 2004 | e 3,000| 15,000
| | $792,600
| |
*Deduct
Chapter 11 134

Solution P11-10 (continued)

b Power Corporation and Subsidiary

Consolidation Working Papers
for the year ended December 31, 2004

Push down 100% - entity theory

| | 90% | Adjustments and |Consolidated

| Power | Swing | Eliminations | Statements
| | | |
Income Statement | | | |
Sales |$310,800 |$110,000 | | $420,800
Income from Swing | 37,800 | |b 37,800 |
Cost of sales | 140,000*| 32,000*| | 172,000*
Depreciation expense | 29,000*| 25,000*| | 54,000*
Other operating | | | |
expenses | 45,000*| 11,000*| | 56,000*
Minority expense | | |e 4,200 | 4,200*
Net income |$134,600 |$ 42,000 | | $134,600
| | | |
Retained Earnings | | | |
Retained earnings -Power|$147,000 | | | $147,000
Retained earnings -Swing| |$ 0 | |
Net income | 134,600 | 42,000 | | 134,600
Dividends | 60,000*| 10,000*| b 9,000|
e 1,000| 60,000*
Retained earnings | | | |
December 31, 2004 |$221,600 |$ 32,000 | | $221,600
| | | |
Balance Sheet | | | |
Cash |$ 63,800 |$ 27,000 |a 8,000 | $ 98,800
Accounts receivable -net| 90,000 | 40,000 | a 8,000| 122,000
Dividends receivable | 9,000 | | d 9,000|
Inventories | 20,000 | 35,000 | | 55,000
Land | 40,000 | 15,000 | | 55,000
Buildings -net | 140,000 | 45,000 | | 185,000
Equipment -net | 165,000 | 80,000 | | 245,000
Investment in Swing | 208,800 | | b 28,800|
| | | c 180,000|
Goodwill | | 40,000 | | 40,000
|$736,600 |$282,000 | | $800,800
| | | |
Accounts payable |$125,000 |$ 20,000 | | $145,000
Dividends payable | 15,000 | 10,000 |d 9,000 | 16,000
Other liabilities | 75,000 | 20,000 | | 95,000
Capital stock | 300,000 | 100,000 |c 100,000 | 300,000
Push-down capital | | 100,000 |c 100,000 |
Retained earnings | 221,600 | 32,000 | | 221,600
|$736,600 |$282,000 | |
| |
Minority interest January 1, 2004 | c 20,000|
Minority interest December 31, 2004 | e 3,200| 23,200
| | $800,800
| |
*Deduct
135 Consolidation Theories, Push-down Accounting, and
Corporate Joint Ventures

Solution P11-11

Pepper Corporation and Subsidiary

Proportionate Consolidation Working Papers
for the year ended December 31, 2003

| | | Adjustments and |Consolidated

| Pepper |Jerry 40%| Eliminations | Statements
| | | |
Income Statement | | | |
Sales |$ 800,000 |$300,000 |b 180,000 | $ 920,000
Income from Jerry | 20,000 | |a 20,000 |
Cost of sales | 400,000*| 150,000*| b 90,000| 460,000*
Depreciation expense | 100,000*| 40,000*| b 24,000| 116,000*
Other expenses | 120,000*| 60,000*| b 36,000| 144,000*
Net income |$ 200,000 |$ 50,000 | | $ 200,000
| | | |
Retained Earnings | | | |
Retained earnings-Pepper|$ 300,000 | | | $ 300,000
Venture equity-Jerry | |$250,000 |b 250,000 |
Net income | 200,000 | 50,000| | 200,000
Dividends | 100,000*| | | 100,000*
Retained earnings/ | | | |
Venture equity |$ 400,000 |$300,000 | | $ 400,000
| | | |
Balance Sheet | | | |
Cash |$ 100,000 |$ 50,000 | b 30,000| $ 120,000
Receivables-net | 130,000 | 30,000 | b 18,000| 142,000
Inventories | 110,000 | 40,000 | b 24,000| 126,000
Land | 140,000 | 60,000 | b 36,000| 164,000
Buildings-net | 200,000 | 100,000 | b 60,000| 240,000
Equipment-net | 300,000 | 180,000 | b 108,000| 372,000
Investment in Jerry | 120,000 | | a 20,000|
| | | b 100,000|
|$1,100,000 |$460,000 | | $1,164,000
| | | |
Accounts payable |$ 120,000 |$100,000 |b 60,000 | $ 160,000
Other liabilities | 80,000 | 60,000 |b 36,000 | 104,000
Common stock, $10 par | 500,000 | | | 500,000
Retained earnings | 400,000 | | | 400,000
Venture equity-Jerry | | 300,000 | |
|$1,100,000 |$460,000 | | $1,164,000
| | | |
*Deduct