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6THE PURCHASE METHOD:

POSTACQUISITION PERIODS & PARTIAL OWNERSHIPS

LEVEL OF TIMEDIFFICULTY (MINUTES)

REVIEW QUESTIONS

EXERCISES FOR 100%-OWNED SUBSIDIARIES6-1 Recording parents entries under the equity and cost methods............. Simple 106-2 Calculating consolidated and parent company amounts....................... Simple 106-3 Applying the equity method; consolidation entries.............................. Moderate 206-4 Applying the equity method; consolidation entries.............................. Moderate 206-5 Calculating a goodwill impairment loss................................................ Moderate 20

EXERCISES FOR PARTIALLY OWNED SUBSIDIARIES6-6 Calculating consolidated net income.................................................... Simple 5

6-7 Calculating consolidated net income.................................................... Simple 156-8 Calculating consolidated net income.................................................... Simple 106-9 Calculating consolidated and parent company amounts....................... Simple 106-10 Separating parents cost into components............................................. Simple 10

6-11 Separating parents cost into components............................................. Simple 10 6-12 Determining subsidiarys equity from consolidated data... ... .. ... .. .. ... .. . Simple 10

PROBLEMS FOR 100%-OWNED SUBSIDIARIES6-1 Consolidation worksheet (continuation of Problem 5-4)........................ Moderate 406-2 Consolidation worksheet (continuation of Problem 5-5)........................ Moderate 406-3 COMPREHENSIVE: Recording the acquisition; analyzing the Investment

account; applying the equity method; consolidation worksheet......... Moderate 606-4 COMPREHENSIVE CHALLENGER: Converting to the equity method

from the cost method two years after the acquisition date;consolidation worksheet..................................................................... Complex 70

6-5 COMPREHENSIVE: Recording the acquisition and selectingrelevant data; consolidation worksheet............................................... Moderate 50

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6-2 ADVANCED ACCOUNTING: Concepts and Practice

PROBLEMS FOR PARTIALLY OWNED SUBSIDIARIES6-6 Consolidation worksheet as of the acquisition date.............................. Simple 206-7 Consolidation worksheet subsequent to the acquisition date

(continuation of Problem 6-6)............................................................. Moderate 406-8 Consolidation worksheet as of the acquisition date.............................. Simple 206-9 Consolidation worksheet subsequent to the acquisition date

(continuation of Problem 6-8)............................................................. Moderate 40 6-10 COMPREHENSIVE: Analyzing the investment account;

applying the equity method; consolidation worksheet....................... Complex 60 6-11 REVIEW (Chapters 5 and 6): Analyzing the investment account;

applying the equity method; computing noncontrolling interest andconsolidated retained earnings............................................................ Moderate 30

6-12 COMPREHENSIVE: Recording the acquisition; selecting relevant data;consolidation worksheet..................................................................... Moderate 50

6-13 Step acquisition: Significant influence; 90% ownership obtained....... . Moderate 35 6-14 Step acquisition: Significant influence; 70% ownership obtained;

mid-year acquisitionPost acquisition period.................................. Moderate 50

THINKING CRITICALLYCASE

6-1 Actual practice case: Subsequently found unrecorded liability............ Simple 10

FINANCIAL ANALYSIS PROBLEMS6-1 Calculating parents annual return on investment: 100% ownership. . . Simple 106-2 Calculating parents annual return on investment: 75% ownership.. .. . Simple 106-3 Evaluating profitability of the parents investment............................... Moderate 70

CHAPTER ETHICS QUESTION Would you fudge the numbers? (page 195).......................................... Simple 10

EXERCISES FOR APPENDIX 6AECONOMIC UNIT CONCEPT PROCEDURES6A-1

..Comparison of the parent company concept and the economic unit concept Tangible assets................................................................... Simple 5

6A-2..Comparison of the parent company concept and the economic unit concept Tangible assets................................................................... Simple 5

6A-3..Comparison of the parent company concept and the economic unit concept Tangible assets and goodwill............................................. Simple 5

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The Purchase Method: Postacquisition Periods and Partial Ownerships 6-3

ASSIGNMENT MATERIALReview Questions

1. An acquired businesss preacquisition earnings are never combined with the preacquisition earnings of theacquiring entity. Thus they are eliminated in consolidation.

2. In a parent-subsidiary relationship, a liquidating dividend can occur only if the subsidiary was acquired (as

opposed to being created by the parent). In such situations, a liquidating dividend occurs when thesubsidiarys postacquisition dividends exceed the subsidiarys postacquisition earnings.3. Under the equity method , liquidating dividends are recorded as a liquidation of the parents investmentthe

same treatment accorded nonliquidating dividends. Under the cost method , liquidating dividends arerecorded as a liquidation of the parents investmentnot as dividend income.

4. Under the equity method , amortization of a parents cost in excess of book value is recorded in its generalledger. Under the cost method , amortization of a parents cost in excess of book value is not recorded in itsgeneral ledger but on the consolidation worksheet during the consolidation process.

5. An acquired subsidiarys financial statements are relevant amounts only if the subsidiary has applied push-down accounting to bring all accounts to their current values.

6. Goodwill must be tested for impairment annually (or more often if certain triggering events occur). 7. A reporting unit is either an operating segment (as defined by FAS 131 ) or a component of an operating

segment. 8. A reporting units fair value is determined using estimation techniques (such as calculating the present value

probability-weighted estimated future cash flows). Both the reporting units recognized intangible assets(other than goodwill) and unrecognized intangible assets (other than goodwill) are included in determiningthe reporting units fair value.

9. Goodwill is tested for impairment at the reporting unit level. (At the acquisition date, goodwill is assignedto the appropriate reporting unit(s).)

10. Goodwills implied fair value is determined in a residual manner (in Step 2 of the impairment test) as if thereporting unit had been acquired in a business combination on that testing date (a pro forma exercise ).

11. Goodwill impairment writedowns are reported currently in the income statement as a separate line itembefore the subtotal Income from Continuing Operations.

12. Under the parent company concept , an acquired subsidiarys assets and liabilities are revalued to theircurrent values only to the extent that the parent bought and paid for such undervaluation.

Under the economic unit concept , an acquired subsidiarys assets and liabilities are revalued to 100% of theircurrent values.13. Under the parent company concept , goodwill is limited to the amount of goodwill actually paid for.

Under the economic unit concept , goodwill can be either (1) the goodwill implicit in the transactions (whichimputes an amount that accrues to the noncontrolling interest) or (2) the amount actually paid for by theparent (same amount as determined under the parent company concept).

14. The FASBs latest proposal on consolidation procedures (May 1996) requires goodwill to be reported at theamount that was bought and paid for by the parentno amounts are imputed to the noncontrolling interest.(This proposal is currently on hold.)

15. In a step acquisition in which a noncontrolling interest exists, the subsidiarys assets and liabilities arerevalued (1) to 100% of their current values in consolidation under the economic unit concept and (2) only tothe extent of the parents ownership percentage under the parent company concept .

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EXERCISES

E 6-1 (Estimated time: 10 minutes)Requirements 1 and 2:

Equity Method Cost Method(not required)

Investment in Subsidiary................................................................ 90,000 Equity in Net Income (of subsidiary)................................... 90,000

Dividends Receivable/Cash............................................................ 40,000 40,000 Investment in Subsidiary...................................................... 40,000 Dividend Income.................................................................. 40,000Equity in Net Income (of subsidiary)............................................. 12,000 Investment in Subsidiary....................................................... 12,000

E 6-2 (Estimated time: 10 minutes)

Requirement 1:Consolidated net income for 2006............................................................................................. $1,012,000 aa$900,000 + $120,000 $8,000 = $1,012,000.

Requirement 2:

Consolidated dividends declared for 2006................................................................................. $ 200,000

Requirement 3:

Parents 2006 investment income under the equity method ...................................................... $ 112,000 aa$120,000 $8,000 = $112,000.

Parents 2006 investment income under the cost method ( not required)................................. $ 25,000

E 6-3 (Estimated time: 20 minutes)Requirement 1:

2006Investment in Subsidiary................................................................................................. 35,000 Equity in Net Income (of subsidiary).................................................................... 35,000Dividends Receivable/Cash............................................................................................ 5,000 Investment in Subsidiary....................................................................................... 5,000Equity in Net Income (of subsidiary).............................................................................. 11,000 Investment in Subsidiary....................................................................................... 11,000

2007Equity in Net Loss (of subsidiary).................................................................................. 10,000 Investment in Subsidiary....................................................................................... 10,000Dividends Receivable/Cash............................................................................................ 5,000 Investment in Subsidiary....................................................................................... 5,000Equity in Net Loss (of subsidiary).................................................................................. 6,000 Investment in Subsidiary....................................................................................... 6,000

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E 6-3 (continued)Requirement 2:

I. A NALYSIS OF THE INVESTMENT ACCOUNT BOOK VALUE ELEMENT

Parents BOOK VALUE ELEMENTInvestment Subsidiarys Equity AccountsAccount Common RetainedBook Value = Stock + Earnings

Balances, 1/1/06................................................................ $160,000 $100,000 $60,000+ Equity in net income...................................................... 35,000 35,000

Dividends................................................................... (5,000 ) (5,000 )Balances, 12/31/06............................................................ $190,000 $100,000 $90,000+ Equity in net loss............................................................ (10,000) (10,000)

Dividends................................................................... (5,000 ) (5,000 )Balances, 12/31/07............................................................ $175,000 $100,000 $75,000

II. A NALYSIS OF THE INVESTMENT ACCOUNT E XCESS COST ELEMENTS

Parents UNDER- OR (OVER)VALUATIONInvestment OF NET ASSETS ELEMENTAccount Building

Excess Accum. GOODWILLCost = Inventory + Land + Cost + Depr. + ELEMENT

Life: 3 mo. Indefinite 15 yrs. IndefiniteBalances, 1/1/06........... $240,000 $ 5,000 $105,000 $90,000 $40,000 Amortization..... ......... (11,000 ) (5,000 ) (6,000 )Balances, 12/31/06.......$229,000 $ -0- $105,000 $90,000 $ (6,000) $40,000 Amortization.............. (6,000 ) (6,000 )Balances, 12/31/07.. .. .. .$223,000 $ -0 - $105,000 $90,000 $(12,000 ) $40,000

Requirement 3: Consolidation Date12/31/06 12/31/07

Dr. Cr. Dr. Cr.(a) The basic elimination entry:

Common Stock.............................................................................. 100,000 100,000Retained Earnings, 1/1/06 and 1/1/07.... .. .. ... .. ... .. ... .. ... .. .. ... .. ... .. ... 60,000 90,000Equity in Net Income (of subsidiary)............................................ 35,000 Dividends Declared............................................................. 5,000 5,000 Equity in Net Loss (of subsidiary)...................................... 10,000 Investment in Subsidiary..................................................... 190,000 175,000

(b) The unamortized excess cost reclassification entry (for BS):Land............................................................................................... 105,000 105,000Building......................................................................................... 90,000 90,000Goodwill........................................................................................ 40,000 40,000 Accumulated Depreciation (building)................................. 6,000 12,000 Investment in Subsidiary..................................................... 229,000 223,000

(c) The amortized excess cost reclassification entry (for IS):Cost of Sales (all depreciation is assumed to be on mfg. plant). . . 11,000 6,000 Equity in Net Income (of subsidiary).................................. 11,000 6,000

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2006:Equity in Net Loss (of subsidiary).................................................................................. 15,000 Investment in Subsidiary...................................................................................... 15,000

Dividends Receivable (when declared )/Cash (when collected )..................................... 1,000 Investment in Subsidiary...................................................................................... 1,000Equity in Net Loss (of subsidiary).................................................................................. 2,000 Investment in Subsidiary...................................................................................... 2,000

2007:Investment in Subsidiary................................................................................................. 30,000 Equity in Net Income (of subsidiary)........................................................................ 30,000Dividends Receivable (when declared )/Cash (when collected )..................................... 5,000 Investment in Subsidiary........................................................................................... 5,000Investment in Subsidiary................................................................................................. 3,000 Equity in Net Income (of subsidiary)........................................................................ 3,000

Requirement 2: I. ANALYSIS OF THE INVESTMENT ACCOUNT BOOK VALUE ELEMENT


Balances, 1/1/06............................................................ $350,000 $250,000 $100,000+ Equity in net loss ........................................................ (15,000) (15,000) Dividends................................................................... (1,000 ) (1,000 )Balances, 12/31/06........................................................ $334,000 $250,000 $ 84,000+ Equity in net income.................................................. 30,000 30,000 Dividends................................................................... (5,000 ) (5,000 )

Balances, 12/31/07........................................................ $359,000 $250,000 $109,000II. A NALYSIS OF THE INVESTMENT ACCOUNT E XCESS COST ELEMENTS


Excess Accum.Cost = Inventory + Land + Cost + Depr.

Balances, 1/1/06.................................. $(40,000) $ 5,000 $30,000 $(75,000) Amortization................ .......... .......... (2,000 ) (5,000 ) $3,000Balances, 12/31/06.............................. $(42,000) $ -0- $30,000 $(75,000) $3,000 Amortization................ .......... .......... 3,000 3,000Balances, 12/31/07.............................. $(39,000 ) $ -0 - $30,000 $(75,000 ) $6,000

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E 6-4 (continued )Requirement 3 (continued) :

Consolidation Date12/31/06 12/31/07

Dr. Cr. Dr. Cr.

(a) The basic elimination entry:Common Stock........................................................................ 250,000 250,000Retained Earnings, 1/1/06 and 1/1/07..................................... 100,000 84,000Equity in Net Income (of subsidiary)..................................... 30,000 Dividends Declared....................................................... 1,000 5,000 Equity in Net Loss (of subsidiary)................................ 15,000 Investment in Subsidiary.............................................. 334,000 359,000

(b) The unamortized excess cost reclassification entry (for BS):Land........................................................................................ 30,000 30,000Accumulated Depreciation (building).................................... 3,000 6,000Investment in Subsidiary........................................................ 42,000 39,000

Building......................................................................... 75,000 75,000(c) The amortized excess cost reclassification entry (for P/L ):

Cost of Sales........................................................................... 2,000 Equity in Net Income (of subsidiary)........................... 2,000Equity in Net Income (of subsidiary)..................................... 3,000 Cost of Sales................................................................. 3,000


Estimated fair value of the reporting unit............................................................................. $900,000LessAmounts assigned to:

Tangible net assets................................................................................................................. (520,000)Recognized intangible assets................................................................................................. (250,000)Unrecognized intangible assets.............................................................................................. (100,000 )

Implied Fair Value of Goodwill.............................................................................................. $ 30,000

Requirement 2:Book Value of Goodwill............................................................................................................ $290,000Implied Fair Value of Goodwill (per requirement 1)................................................................. 30,000

Goodwill Impairment Loss.................................................................................................... $260,000

Requirement 3Parents adjusting entry

(assuming common stock was acquired and nonpush-down accounting is used)

Equity in Net Income of Subsidiary........................................................................... 260,000Invesestment in Subsidiary......................................................................................... 260,000

(assuming asset s were acquired instead of common stock)Goodwill Impairment Loss......................................................................................... 260,000 Goodwill............................................................................................................. 260,000

Requirement 4No entry would be made one year later if the goodwill recovered in value.

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E 6-5 (continued)Requirement 5

Estimated fair value of the reporting unit............................................................................. $1,000,000LessAmounts assigned to:

Tangible net assets................................................................................................................. (520,000)Recognized intangible assets................................................................................................. (250,000)Unrecognized intangible assets............................................................................................. (100,000 )

Implied Fair Value of Goodwill ($160,000 below its book value of $290,000).................... $ 130,000

If the reporting units fair value were $1,000,000, step one of the impairment test would show that no goodwillimpairment had occurred (reporting units carrying value of $990,000 is below its fair value of $1,000,000).Accordingly, step 2 is not required and no impairment loss would be recognized even though the goodwillsimplied fair value is $160,000 below its book value.

Realistically, the result is as if (1) the goodwill was written down by $160,000 and (2) nongoodwill assets werewritten up in total by $160,000 ($20,000 + $50,000 + $100,000 less $10,000 [$1,000,000 - $990,000]).


Requirements 1 and 2: Consolidated

Income before amortization of cost in excess of book value ($1,000,000 + $600,000)........ .... $1,600,000LessParents amortization of cost in excess of book value (given)....................................... (30,000 ) Consolidated Net Income........................................................................................................ $1,570,000 To Noncontrolling Interest (25% of $600,000 = $150,000;............ .......... .......... ........... ....... (150,000 )b To Controlling Interest........................................................................................................... $1,420,000


Calculation for Stane90% Owned (assumed owned for the entire year)

Stanes reported income for 2006................................................................................................ $300,000LessParents amortization of cost in excess of book value (given)......................................... (27,000) Income for Consolidated Reporting Purposes.......................................................................... $273,000

Accruing to NCI (10% $300,000)........................................................................................ $ 30,000Accruing to CI ($273,000 - $30,000)...................................................................................... $ 243,000

Calculation for Steele80% Owned (assumed owned for the entire year)

Steeles reported income for 2006............................................................................................... $100,000LessParents amortization of cost in excess of book value (given)......................................... (8,000 ) Income for Consolidated Reporting Purposes.......................................................................... $ 92,000

Accruing to NCI (20% $100,000)....................................................................................... $ 20,000 Accruing to CI ($92,000 - $20,000)....................................................................................... $ 72,000

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E 6-7 (continued)Requirement 2:

Calculation for Stane90% Owned (assumed owned for 8 months of 2006)

Stanes reported income for 8 months of 2006 ($300,000 2/3 yr.)........................................... $200,000LessParents amortization of cost in excess of book value ($27,000 2/3 yr.)...................... (18,000 ) Income for Consolidated Reporting Purposes.......................................................................... $182,000

Accruing to NCI (10% $200,000)....................................................................................... $ 20,000 a Accruing to CI ($182,000 - $20,000)..................................................................................... $162,000

aThis amount assumes that the period from 1/1/06 to the acquisition date of 5/1/06 is not consolidated. If thisperiod were consolidated (an acceptable practice), the Preacquisition Earnings of $100,000 for this periodwould be reported as a deduction in the consolidated income statement. Of this amount, $10,000 (10% of the$100,000) may be classified as part of the noncontrolling interest deduction.

Calculation for Steele80% Owned (assumed owned for 6 months of 2006)

Steeles reported income for 6 months of 2006 ($100,000 yr.).............................................. $ 50,000LessParents amortization of cost in excess of book value ($8,000 yr.)............................. (4,000 ) Income for Consolidated Reporting Purposes....................................................................... $ 46,000

Accruing to NCI (20% $50,000)........................................................................................... $ 10,000 a Accruing to CI ($46,000 - $10,000)......................................................................................... $ 36,000aThis amount assumes that the period from 1/1/06 to the acquisition date of 7/1/06 is not consolidated. If this

period were consolidated (an acceptable practice), the Preacquisition Earnings of $50,000 for this periodwould be reported as a deduction in the consolidated income statement. Of this amount, $10,000 (20% ofthe $50,000) may be classified as part of the noncontrolling interest deduction.

E 6-8 (Estimated time: 10 minutes)Requirement 1:Consolidated

Sales........................................................................................................................................... $ 1,000,000Cost of sales............................................................................................................................... (500,000)Expenses..................................................................................................................................... (190,000 ) Consolidated Net Income......................................................................................................... $ 310,000 To noncontrolling interest (25% $60,000 of subsidiarys reported net income).............. (15,000) To controlling interest.......................................................................................................... $ 295,000

Requirement 2:

ConsolidatedSales........................................................................................................................................... $ 1,000,000Cost of sales............................................................................................................................... (500,000)Expenses ($190,000 + $3,000 of amortization of excess cost).................................................. (193,000 ) Consolidated Net Income......................................................................................................... $ 307,000 To noncontrolling interest (25% x $60,000 of subsidiarys reported net income)....... ....... (15,000 )

To controlling interest.......................................................................................................... $ 292,000

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Parents net income for all of 2006............................................................................................ $ 800,000Subsidiarys net income for 8 months of 2006.......................................................................... 200,000

Subtotal.................................................................................................................................... $1,000,000

LessGoodwill amortization: Parents amortization (given).................................................................................................. (24,000) Consolidated Net Income........................................................................................................ $ 976,000 To Noncontrolling Interest (25% of $200,000 = $50,000)................................................. (50,000 )b To Controlling Interest........................................................................................................ $ 926,000

Requirement 2:

Consolidated dividends declared for 2006 (the parents total dividends)................................. $ 420,000

Requirement 3:

Parents equity in the subsidiarys net income for 8 months of 2006 (75% of $200,000)... ..... $ 150,000LessParents recorded goodwill amortization........................................................................ (24,000 ) Parents Investment Income................................................................................................... $ 126,000

E 6-10 (Estimated time: 10 minutes)BREAKDOWN OF PARENT S COST AT DATE OF ACQUISITION

Book value element (60% $400,000)..................................................................................... $ 240,000Excess (negative) cost elements................................................................................................. (21,000) Cost (given)............................................................................................................................ $ 219,000

I. ANALYSIS OF INVESTMENT ACCOUNT BOOK VALUE ELEMENT

ParentsNon- Investment BOOK VALUE ELEMENT

controlling Account Subsidiarys Equity AccountsInterest Book Common Additional Retained

(40%) + Value = Stock + Paid-in-Capital +Earnings

5/1/06.............. ........ $160,000 $240,000 $50,000 $550,000 $(200,000)

II. A NALYSIS OF INVESTMENT ACCOUNT EXCESS COST ELEMENTS

ParentsInvestment UNDER- OR (OVER)VALUATION

Account OF NET ASSETS ELEMENTExcess Lease Deferred Note Bond GOODWILL+ Cost = Impr. + Charges + Rec. + Pay. + ELEMENT

5/1/06....................... $(21,000 ) $(21,000 ) $(24,000 ) $6,000 $(12,000)

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BREAKDOWN OF PARENTS COST AT DATE OF ACQUISITION

Book value element (70% $210,000)........................................................................................ $147,000Excess cost elements.................................................................................................................... 56,000 Cost (given).............................................................................................................................. $203,000

I. A NALYSIS OF INVESTMENT ACCOUNT BOOK VALUE ELEMENT

ParentsNon- Investment

Controlling Account Subsidiarys Equity AccountsInterest Book Common Additional Retained

(30%) + Value = Stock + Paid-in-Capital + Earnings

1/1/06...........$63,000 $147,000 $100,000 $50,000 $60,000

II. A NALYSIS OF INVESTMENT ACCOUNT EXCESS COST ELEMENTS Parents

Investment UNDER- OR (OVER)VALUATIONAccount OF NET ASSETS ELEMENT

Excess Old Bond GOODWILLCost = Land + Goodwill + Payable + ELEMENT

1/1/06......................... $56,000 $49,000 $(35,000 ) $14,000 $28,000

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Requirement 1:

Parents cost (given)..................................................................................................................... $105,000Less: Parents excess cost assigned to undervaluation of Sodas fixed assets (given)................ (21,000)

Less: Parents share of goodwill reported in the consolidated balance sheet(70% of $10,000 [given])............................................................................................................. (7,000 ) Portion of Parents Cost Relating to Sodas Book Value...................................................... $ 77,000 Divide by parents ownership percentage................................................................................ 70% Sodas Book Value at Date of Acquisition.......................................................................... $110,000

Requirement 2:

I. ANALYSIS OF INVESTMENT ACCOUNT BOOK VALUE ELEMENT

Non- Parents BOOK VALUE ELEMENTcontrolling Investment Subsidiarys Equity

Accounts Interest Account CommonRetained

(30%) + Book Value = Stock + Earnings

Acquisition date............ $33,000 $77,000 $50,000 $60,000 a

a$110,000 $50,000 for the common stock [a given amount] = $60,000.

II. A NALYSIS OF INVESTMENT ACCOUNT EXCESS COST ELEMENTS

Parents UNDER- OR (OVER)VALUATION Investment OF NET ASSETS ELEMENT

Account Fixed GOODWILLExcess Cost = Assets + ELEMENT

Acquisition date............................ $28,000 $21,000 $7,000

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PROBLEMS

P 6-1 (Estimated time: 40 minutes)Requirement 1:

I. ANALYSIS OF THE INVESTMENT ACCOUNT BOOK VALUE ELEMENT

Parents BOOK VALUE ELEMENTInvestment

Subsidiarys Equity AccountsAccount Common RetainedBook Value = Stock + Earnings

Balances, 1/1/06................................................................ $190,000 $100,000 $ 90,000+ Equity in net income...................................................... 60,000 60,000 Dividends........................................................................ (35,000 ) (35,000 )Balances, 12/31/06........................................................... $215,000 $100,000 $ 115,000


Parents UNDER- OR (OVER)VALUATIONInvestment OF NET ASSETS ELEMENTAccount Equipment

Excess Accum. Cov. GOODWILLCost + Inventory = Land + Cost + Depr. + NTC + ELEMENT

Remaining life: n/a 10 yrs. 4 yrs. n/aBalances, 1/1/06...........$135,000 $(5,000) $30,000 $50,000 $40,000 $20,000- Amortization....... ..... . (10,000 ) 5,000 $ (5,000 ) (10,000)Balances, 12/31/06...... $125,000 $ -0 - $30,000 $50,000 $ (5,000 ) $30,000 $20,000

Requirement 2:

(1) The basic elimination entry: Common Stock.............................................................................................................. 100,000 Retained Earnings, 1/1/06............................................................................................. 90,000 Equity in Net Income.................................................................................................... 60,000 Dividends Declared............................................................................................. 35,000 Investment in Subsidiary..................................................................................... 215,000

(2) The unamortized excess cost reclassification entry (for BS):Land............................................................................................................................... 30,000Equipment..................................................................................................................... 50,000

Covenant Not-to-Compete............................................................................................ 30,000Goodwill........................................................................................................................ 20,000

Accumulated Depreciation (equipment)............................................................. 5,000 Investment in Subsidiary..................................................................................... 125,000

(3) The amortized excess cost reclassification entry (for IS): Cost of Sales (all depreciation expense is assumed to be on a manufacturing plant ). . 10,000 Equity in Net Income.......................................................................................... 10,000

(4) The accumulated depreciation elimination entry: Accumulated Depreciation (the balance at the acquisition date per Problem 5-4) .... 44,000 Buildings and Equipment.................................................................................... 44,000

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P 6-1 (continued)Requirement 3:

Pya Inc. and Sya Inc.Consolidation Worksheet as of December 31, 2006

Pya Sya Consolidation EntriesInc. Inc. Dr. Cr. Consolidated

INCOME STATEMENT: (2006)Sales..................................... 950,000 600,000 1,550,000Cost of sales......................... (520,000) (300,000) 10,000(3) (830,000)Expenses............................... (370,000) (240,000) (610,000)Equity in net inc. (of Sya). ... 50,000 60,000 (1) 10,000 (3) -0 -

Net Income...................... 110,000 60,000 70,000 10,000 110,000

STMT. OF RET. EARNINGS:Balances, 1/1/06.................. 350,000 90,000 90,000(1) 350,000+ Net income........................ 110,000 60,000 70,000 BF 10,000 BF Dividends declared............ (80,000 ) (35,000 ) 35,000 (1) (80,000 )Balances, 12/31/06.............. 380,000 115,000 160,000 45,000 380,000

BALANCE SHEET:Cash...................................... 75,000 25,000 100,000Accounts receivable, net...... 95,000 60,000 155,000Inventory.............................. 115,000 120,000 235,000Investment in subsidiary: Book value element ....... 215,000 215,000(1) -0-

Excess cost elements .... . 125,000 125,000(2) -0-Land..................................... 100,000 70,000 30,000(2) 200,000Buildings and equipment...... 250,000 224,000 50,000(2) 44,000(4) 480,000Accumulated depreciation.... (210,000) (59,000) 44,000(4) 5,000(2) (230,000)Covenant not-to-compete..... 30,000(2) 30,000Goodwill............................... 20,000 (2) 20,000

Total Assets..................... 765,000 440,000 174,000 389,000 990,000

Payables and accruals........... 65,000 75,000 140,000Long-term debt..................... 20,000 150,000 170,000Common stock..................... 300,000 300,000

Retained earnings................. 380,000 380,000Common stock..................... 100,000 100,000(1) -0-Retained earnings................. 115,000 160,000 BF ....................................... -0-

Total Liab. & Equity...... 765,000 440,000 260,000 45,000 990,000

Proof of debit and credit postings............................. 434,000 434,000Explanation of entries: (1) The basic elimination entry. (4) The accumulated depreciation

(2) The unamortized excess cost reclassification entry (for BS). elimination entry. (3) The amortized excess cost reclassification entry (for IS).

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Parents BOOK VALUE ELEMENTInvestment Subsidiarys Equity Accounts

Account Common Addl Paid-in RetainedBook Value = Stock + Capital + Earnings

Balances, 12/31/05................................ $260,000 $5,000 $95,000 $160,000 + Equity in net income........................... 70,000 70,000 - Dividends declared.............................. (45,000 ) (45,000 )Balances, 12/31/06.................................. $285,000 $5,000 $95,000 $185,000



Excess Accum. Long-TermCost = Inventory + Land + Cost + Depr. + Debt Remaining life: 6 mo. Indefinite 20 yrs. 4 yrs.

Balances, 12/31/05....... $(50,000) $(20,000) $30,000 $(100,000) $ 40,000 Amortization..... ... ... ... 15,000 20,000 $ 5,000 (10,000 )Balances, 12/31/06.. .... .$ (35,000 ) $ -0 - $30,000 $(100,000 ) $ 5,000 $30,000

Requirement 2:

(1) The basic elimination entry: Common Stock............................................................................................................... 5,000 Additional Paid-in Capital.............................................................................................. 95,000

Retained Earnings, 1/1/06.............................................................................................. 160,000 Equity in Net Income..................................................................................................... 70,000 Dividends Declared............................................................................................... 45,000 Investment in Subsidiary...................................................................................... 285,000

(2) The unamortized excess cost reclassification entry (for BS):Land................................................................................................................................ 30,000

Accumulated Depreciation (building)............................................................................ 5,000Long-Term Debt............................................................................................................. 30,000

Investment in Subsidiary................................................................................................ 35,000 Building................................................................................................................ 100,000

(3) The amortized excess cost reclassification entry (for IS ): Equity in Net Income..................................................................................................... 15,000Expenses (interest)......................................................................................................... 10,000

Cost of Sales......................................................................................................... 25,000

(4) The accumulated depreciation elimination entry: Accumulated Depreciation (the balance at the acquisition date per Problem 5-5) ..... 55,000 Buildings and Equipment......................................................................................... 55,000

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P 6-2 (continued)Requirement 3: Poz Inc. and Soz Inc.

Consolidation Worksheet as of December 31, 2006Poz Soz Consolidation EntriesInc. Inc. Dr. Cr. Consolidated

INCOME STATEMENT: (2006)Sales......................................... 910,000 820,000 1,730,000Cost of sales............................. (510,000) (505,000) 25,000(3) (990,000)Expenses.................................. (310,000) (245,000) 10,000(3) (565,000)Equity in net income (of Soz)..... 85,000 70,000(1) -0-...................................................... 15,000 (3)

Net Income.......................... 175,000 70,000 95,000 25,000 175,000

STMT. OF RET. EARNINGS:Balances, 1/1/06...................... 200,000 160,000 160,000(1) 200,000+ Net income (loss).................. 175,000 70,000 95,000 BF

175,000 Dividends declared................ (135,000 ) (45,000 ) 45,000 (135,000 )Balances, 12/31/06.................. 240,000 185,000 255,000 70,000 240,000

BALANCE SHEET:Cash.......................................... 40,000 20,000 60,000Accounts receivable, net.......... 115,000 80,000 195,000..................................................Inventory.................................. 90,000 120,000 210,000Investment in subsidiary: Book value element ............ 285,000 285,000(1) -0- Excess cost elements ........... (35,000) 35,000(2) -0-Land......................................... 190,000 100,000 30,000(2) 320,000Buildings and equipment......... 500,000 305,000 100,000(2) 650,000 ................................................. 55,000(4)Accumulated depreciation....... (460,000) (85,000) 5,000(2) (485,000)

................................................. 55,000 (4 )

Total Assets........................ 725,000 540,000 125,000 440,000 950,000Payables and accruals.............. 75,000 25,000 100,000Long-term debt......................... 10,000 230,000 30,000(2) 210,000Common stock......................... 20,000 20,000Additional paid-in capital........ 380,000 380,000Retained earnings..................... 240,000 240,000Common stock......................... 5,000 5,000(1) -0-Additional paid-in capital........ 95,000 95,000(1) -0-Retained earnings..................... 185,000 255,000 BF ........................................... -0-

Total Liab. & Equity......... 725,000 540,000 385,000 70,000 950,000Proof of debit and credit postings....................................510,000 510,000

Explanation of entries: (1) The basic elimination entry. (4) The accumulated depreciation

(2) The unamortized excess cost reclassification entry (for BS). elimination entry.

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(3) The amortized excess cost reclassification entry (for IS).

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P 6-3 (Estimated time: 60 minutes)Requirements 1 and 2: The parents total cost is $190,000 ($120,000 + $70,000). The split-out is $202,000 and $(12,000).

I. A NALYSIS OF THE INVESTMENT ACCOUNT BOOK VALUE ELEMENTParents BOOK VALUE ELEMENT

Investment Subsidiarys Equity AccountsAccount Common RetainedBook Value = Stock + Earnings

Balances, 1/1/06.............................................................. $202,000 $100,000 $102,000+ Equity in net income.................................................... 85,000 85,000

Dividends.................................................................. (35,000 ) (35,000 ).......................................................................

Balances, 12/31/06........................................................ $252,000 $100,000 $152,000

II. A NALYSIS OF THE INVESTMENT ACCOUNT E XCESS COST ELEMENTSParents

Investment UNDER- OR (OVER)VALUATIONAccount OF NET ASSETS ELEMENT BARGAIN

Excess Land Held Deferred Long-Term PURCHASE Cost = for Development

Charges + Debt + ELEMENT

Balances, 1/1/06............... $(12,000) $110,000 $(42,000) $(30,000) $(50,000) aExtinguish bargain

purchase element... ... .. (50,000 ) 50,000 bBal, 1/1/06 (adjusted)...... $(12,000) $ 60,000 $(42,000) $(30,000) $ -0 - Amortization.................. (1,000 ) (20,000 )c 14,000 5,000Balances, 12/31/06........... $(13,000 ) $ 40,000 $(28,000 ) $(25,000 )

a Proof: Book value of $202,000 + $110,000 - $42,000 - $30,000 = $240,000 of current value of the net assets.Current value of net assets of $240,000 - $190,000 of parents cost ($120,000 + $70,000) = $50,000 BPE.

bThe bargain purchase element was allocated to Land Held for Development, because this is the subsidiarys onlynoncurrent asset.

cDuring 2006, the subsidiary sold land costing $200,000, which is one-third of the $600,000 book value in theLand Held for Development account at the acquisition date. Accordingly, one-third of the $60,000 differencebetween current value and book value at the acquisition date must be amortized in 2006.

Adjusting Entries RequiredAdditional Paid-in Capital............................................................................................... 25,000 Investment in Subsidiary....................................................................................... 25,000 To charge direct costs of registration to equity.Investment in Subsidiary................................................................................................. 85,000

Equity in Net Income (of subsidiary).................................................................... 85,000 To record equity in net income of subsidiary.Equity in Net Income (of subsidiary).............................................................................. 1,000 Investment in Subsidiary....................................................................................... 1,000 To amortize excess cost.Dividends Receivable...................................................................................................... 35,000 Investment in Subsidiary....................................................................................... 35,000 To record dividend receivable.

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Pina Inc. and Sina Inc.Consolidation Worksheet as of December 31, 2006

Pina Sina Consolidation EntriesInc. Inc. Dr. Cr. Consolidated

INCOME STATEMENT: (2006)Sales..................................... 950,000 330,000 1,280,000Cost of sales......................... (520,000) (200,000) 20,000(3) (740,000)Expenses............................... (204,000) (45,000) 19,000(3) (230,000)Equity in net inc. (of Sina). .. 84,000 85,000 (1) 1,000 (3) -0 -

Net Income...................... 310,000 85,000 105,000 20,000 310,000STMT. OF RET. EARNINGS:

Balances, 1/1/06.................. 314,000 102,000 102,000(1) 314,000+ Net income........................ 310,000 85,000 105,000 20,000 310,000 Dividends declared............ (100,000 ) (35,000 ) 35,000 (1) (100,000 )Balances, 12/31/06.............. 524,000 152,000 207,000 55,000 524,000

BALANCE SHEET:Cash...................................... 28,000 22,000 50,000Accounts receivable, net...... 70,000 70,000Notes receivable................... 50,000 50,000Dividends receivable............ 35,000 35,000(5) -0-Inventory.............................. 130,000 130,000Investment in subsidiary:

Book value element ... ... .. 252,000 252,000(1) -0- Excess cost elements ....... (13,000) 13,000(2) -0-Land..................................... 88,000 88,000Buildings and equipment...... 700,000 5,000 5,000(4) 700,000Accumulated depreciation.... (600,000) (5,000) 5,000(4) (600,000)Land held for development. . 400,000 40,000(2) 440,000Deferred charges.................. 28,000 28,000 (2) -0 -

Total Assets..................... 690,000 500,000 58,000 320,000 928,000

Payables and accruals........... 26,000 13,000 39,000Dividends payable................ 35,000 35,000(5) -0-

Long-term debt..................... 200,000 25,000(2) 225,000Common stock..................... 10,000 10,000Additional paid-in capital..... 130,000 130,000Retained earnings................. 524,000 524,000

Common stock...................... 100,000 100,000(1) -0- Retained earnings.................. 152,000 207,000 55,000 -0 -

Total Liab. & Equity...... 690,000 500,000 342,000 80,000 928,000Proof of debit and credit postings......................... 400,000 400,000

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P 6-3 (continued)Requirement 4: (continued)

Explanation of entries: (1) The basic elimination entry. (2) The unamortized excess cost reclassification entry (for BS).

(3) The amortized excess cost reclassification entry (for IS). (4) The accumulated depreciation elimination entry. (5) The intercompany dividend receivable/payable elimination entry.

P 6-4 (Estimated time: 70 minutes)Requirements 1 and 2:



Balances, 1/1/06................................................................ $510,000 $250,000 $260,000+ Equity in net income...................................................... 90,000 90,000 Dividends........................................................................ (40,000 ) (40,000 )Balances, 12/31/06............................................................ $560,000 $250,000 $310,000+ Equity in net income...................................................... 140,000 140,000 Dividends...................................................................... (50,000 ) (50,000 )Balances, 12/31/06............................................................ $650,000 $250,000 $400,000


ParentsInvestment UNDER- OR (OVER)VALUATION OF NET ASSETS ELEMENT

Account Buildings and EquipmentExcess Accum. Old 10% Bonds GOODWILLCost = Inventory + Cost + Depr. + Patent + Goodwill + Payable + ELEMENT

$357,000 $ 7,000 $90,000 $40,000 $(60,000) $200,000 $80,000 (41,000) (7,000 ) $ (6,000 ) (8,000 ) (20,000 )$316,000 $ -0- $90,000 $ (6,000) $32,000 $(60,000) $180,000 $80,000

(34,000) (6,000 ) (8,000 ) (20,000 )$282,000 $ -0 - $90,000 $(12,000 ) $24,000 $(60,000 ) $160,000 $80,000

Requirement 3:

Entry to convert to the equity method as of the beginning of 2006:

Investment in Subsidiary ($90,000 [net inc.] $40,000 [div.] $41,000 [amort.])....... 9,000 Retained Earnings................................................................................................. 9,000

Entry to convert to the equity method for 2006:Dividend income............................................................................................................. 50,000Investment in Subsidiary ($140,000 [net inc.] $50,000 [div.] $34,000 [amort.])...... 56,000 Equity in Net Income ($140,000 $34,000)......................................................... 106,000

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(1) The basic elimination entry:Common Stock............................................................................................................... 250,000Retained Earnings, 1/1/06.............................................................................................. 310,000

Equity in Net Income..................................................................................................... 140,000 Dividends Declared.................................................................................................. 50,000 Investment in Subsidiary.......................................................................................... 650,000

(2) The unamortized excess cost reclassification entry (for BS):Buildings and Equipment............................................................................................... 90,000Patent.............................................................................................................................. 24,000Long-Term Debt............................................................................................................. 160,000Goodwill (new).............................................................................................................. 80,000 Accumulated Depreciation................................................................................... 12,000 Goodwill (old)...................................................................................................... 60,000 Investment in Subsidiary...................................................................................... 282,000

(3) The amortized excess cost reclassification entry (for IS):Cost of Sales................................................................................................................... 14,000Expenses......................................................................................................................... 20,000 a Equity in Net Income........................................................................................... 34,000aTechnically, the amortization of $20,000 relating to the long-term debt should beshown as an addition to interest expense (part of Expenses). For simplicity, weassume that the remaining amortization ($6,000 + $8,000 = $14,000)is properly classifiable with Cost of Sales.

(4) The accumulated depreciation elimination entry:Accumulated Depreciation............................................................................................. 300,000 Buildings and Equipment..................................................................................... 300,000

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Pali Inc. and Sali Inc.Consolidation Worksheet as of December 31, 2006

Pali Sali Consolidation EntriesInc. Inc. Dr. Cr. Consolidated

INCOME STATEMENT (2006):Sales......................................... 8,500,000 980,000 9,480,000Cost of sales............................. (4,500,000) (530,000) 14,000(3) (5,044,000)Expenses.................................. (3,640,000) (310,000) 20,000(3) (3,970,000)Equity in net income (of Sali). . 106,000 140,000 (1)........................................... -0-

Net Income.......................... 466,000 140,000 174,000 34,000 466,000

STMT. OF RET. EARNINGS:

Balances, 1/1/06...................... 649,000 310,000 310,000(1) 649,000+ Net income............................ 466,000 140,000 174,000 BF466,000 Dividends declared................ (100,000) (50,000 ) 50,000 (1) (100,000 )Balances, 12/31/06................. 1,015,000 400,000 484,000 84,000 1,015,000

BALANCE SHEET:Cash.......................................... 458,000 98,000 556,000Accounts receivable, net.......... 750,000 190,000 940,000Inventory.................................. 820,000 380,000 1,200,000Investment in subsidiary:

Book value element ........... 650,000 650,000(1) -0- Excess cost elements ........... 282,000 282,000(2) -0-Land......................................... 760,000 240,000 1,000,000Buildings and equipment... .... .. 6,260,000 1,720,000 90,000(2) 300,000(4) 7,770,000Accumulated depreciation... .. ..(2,465,000) (480,000) 300,000(4) 12,000(2) (2,657,000)Patent........................................ 100,000 12,000 24,000(2) 136,000Goodwill (old).......................... 60,000 60,000(2) -0-Goodwill (new)........................ 80,000 (2) 80,000

Total Assets......................... 7,615,000 2,220,000 494,000 1,304,000 9,025,000

Payables and accruals.............. 1,600,000 370,000 1,970,000Long-term debt......................... 3,000,000 1,200,000 160,000(2) 4,040,000Common stock......................... 2,000,000 2,000,000Retained earnings..................... 1,015,000 1,015,000Common stock......................... 250,000 250,000(1) -0-Retained earnings..................... 400,000 484,000 BF ............................................ -0-

Total Liabilities & Equity. 7,615,000 2,220,000 894,000 84,000 9,025,000Proof of debit and credit postings............................... 1,388,000 1,388,000

Explanation of entries: (1) The basic elimination entry. (4) The accumulated depreciation (2) The unamortized excess cost reclassification entry (for BS). elimination entry. (3) The amortized excess cost reclassification entry (for IS).

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The parents independent auditors would not have to mention this change in accounting principle if they arereporting on the consolidated financial statements because the Investment in Subsidiary account will have beeneliminated in preparing those statements. If, for some unusual reason, the parent company issues parent-

company-only financial statements, an independent auditor reporting on those statements would have to mentionthis change in accounting principles in the audit report.


Investment in Subsidiary (6,000 shares $70 per share)............................................... 420,000 Common Stock (6,000 shares $10)..................................................................... 60,000 Additional Paid-in Capital (residual)..................................................................... 360,000 To record issuance of shares.

Investment in Subsidiary................................................................................................. 50,000Additional Paid-in Capital............................................................................................... 40,000 Cash........................................................................................................................ 90,000 To record direct costs pertaining to the acquisition and registration of shares.

Requirement 2:

See the consolidation worksheet on page 6-25.

Requirement 3:

I. A NALYSIS OF THE INVESTMENT ACCOUNT BOOK VALUE ELEMENT


Balances, 7/1/06................................................................ $338,000 $200,000 $138,000+ Equity in net income...................................................... 60,000 60,000 Dividends........................................................................ (20,000 ) (20,000 )Balances, 12/31/06............................................................ $378,000 $200,000 $178,000


ParentsUNDER- OR (OVER)VALUATION

Investment

OF NET ASSETS ELEMENTAccount Bldg. and EquipmentExcess Accum. Old GOODWILLCost = Inventory + Cost + Depr. + LTD + Goodwill + ELEMENT

Remaining life: 2 mo. 12 yr. 8 yr. Indefinite Indefinite

Bal., 7/1/06....... $132,000 $4,000 $72,000 $16,000 $(20,000) $60,000 Amortization. (8,000 ) (4,000) (3,000 ) (1,000 )Bal., 12/31/06... $124,000 $ -0 - $72,000 $(3,000 ) $15,000 $(20,000 ) $60,000

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(1) The basic elimination entry:Common Stock............................................................................................................... 200,000Retained Earnings, 7/1/06.............................................................................................. 138,000

Equity in Net Income..................................................................................................... 60,000 Dividends Declared.............................................................................................. 20,000 Investment in SOS................................................................................................ 378,000

(2) The unamortized excess cost reclassification entry (for BS):Buildings and Equipment............................................................................................... 72,000Long-Term Debt............................................................................................................. 15,000Goodwill (new).............................................................................................................. 60,000 Goodwill (old)...................................................................................................... 20,000 Accumulated Depreciation................................................................................... 3,000 Investment in Subsidiary...................................................................................... 124,000

(3) The amortized excess cost reclassification entry (for IS ).Cost of Sales ($4,000 + $3,000)..................................................................................... 7,000Expenses ($1,000 pertaining to amortization applicable to the long-term debt)........... 1,000 Equity in Net Income........................................................................................... 8,000

Calculation of amortization amounts:Inventory......................................................................................................... $4,000Buildings and equipment ($72,000 12 years year)............................... 3,000Long-term debt ($16,000 8 years year)................................................ 1,000 Total Amortization.................................................................................... $8,000

(4) The accumulated depreciation elimination entry:Accumulated Depreciation............................................................................................. 140,000 Buildings and Equipment..................................................................................... 140,000

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PBM Inc. and SOS Inc.Consolidation Worksheet as of December 31, 2006

PBM SOS Consolidation EntriesInc. Inc. Dr. Cr. Consolidated

INCOME STATEMENT (2006):Sales......................................... 2,600,000 500,000 3,100,000Cost of sales............................. (1,300,000) (260,000) 7,000(3) (1,567,000)Expenses.................................. (800,000) (180,000) 1,000(3) (981,000)Equity in net income (of SOS). 52,000 60,000 (1) 8,000 (3 ) -0 -

Net Income.......................... 552,000 60,000 68,000 8,000 552,000

STMT. OF RET. EARNINGS:Balances, 1/1/06...................... 750,000 138,000 138,000(1) 750,000

+ Net income............................ 552,000 60,000 68,000 BF.....................................552,000 Dividends declared................ (300,000 ) (20,000 ) 20,000 (1)(300,000)Balances, 12/31/06.................. 1,002,000 178,000 206,000 28,000 1,002,000

BALANCE SHEET:Current assets........................... 700,000 398,000 1,098,000Land......................................... 943,000 202,000 1,145,000Buildings and equipment......... 2,200,000 450,000 72,000(1) 140,000 (4) 2,582,000Accumulated depreciation....... (330,000) (170,000) 140,000(4) 3,000(2) (363,000)Investment in subsidiary: Book value element ........ .. 378,000 378,000 (1) -0- Excess cost elements .......... 124,000 124,000 (2) -0-Goodwill (old).......................... 20,000 20,000 (2) -0-Goodwill (new)........................ 60,000 (2) 60,000

Total Assets......................... 4,015,000 900,000 272,000 665,000 4,522,000

Payables and accruals.............. 433,000 122,000 555,000Long-term debt......................... 1,600,000 400,000 15,000(1) 1,985,000Common stock......................... 160,000 160,000Additional paid-in capital........ 820,000 820,000Retained earnings..................... 1,002,000 1,002,000Common stock......................... 200,000 200,000(1) -0-Retained earnings..................... 178,000 206,000 BF ................................................. -0 -

Total Liab. & Equity.......... 4,015,000 900,000 421,000 28,000 4,522,000Proof of debit and credit postings.................................. 693,000 693,000

Explanation of entries: (1) The basic elimination entry. (2) The unamortized excess cost reclassification entry (for BS). (3) The amortized excess cost reclassification entry (for IS). (4) The accumulated depreciation elimination entry.

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P 6-6 (Date Of Acquisition) (Estimated time: 20 minutes)Requirement 1:

SPLITTING OF THE INVESTMENT ACCOUNT AT THE ACQUISITION DATE

Total Cost (given)......................................................................................................................... $260,000LessBook value element (80% $190,000)............................................................................ (152,000 ) Excess Cost Elements................................................................................................................. $108,000

I. ANALYSIS OF THE INVESTMENT ACCOUNT --BOOK VALUE ELEMENT

Non- Parents BOOK VALUE ELEMENTcontrolling Investment Subsidiarys Equity Accounts

Interest Account Common Retained(20%) + Book Value = Stock + Earnings

12/31/05............................ $38,000 $152,000 $100,000 $90,000

II. A NALYSIS OF THE INVESTMENT ACCOUNT --EXCESS COST ELEMENTS

ParentsInvestmentAccount UNDER- OR (OVER)VALUATION OF

Excess NET ASSETS ELEMENT (@ 80%) GOODWILLCost = Inventory + Land + Equip. + Cov. + ELEMENT

Remaining life: 2 mo . Indefinite 10 yr . 4 yr . Indefinite12/31/05............... .......... $108,000 $(4,000 ) $24,000 $40,000 $32,000 $16,000

Requirement 2:

(1) The basic elimination entry (under non-push-down accounting):Common Stock............................................................................................................... 100,000Retained Earnings.......................................................................................................... 90,000 Investment in Subsidiary...................................................................................... 152,000 NCI in Net Assets................................................................................................. 38,000

(2) The unamortized excess cost reclassification entry (for BS):Land................................................................................................................................ 24,000Equipment...................................................................................................................... 40,000Covenant not-to-compete............................................................................................... 32,000Goodwill......................................................................................................................... 16,000

Inventory............................................................................................................ 4,000 Investment in Subsidiary...................................................................................... 108,000

(3) The accumulated depreciation elimination entry:Accumulated Depreciation............................................................................................. 44,000 Equipment............................................................................................................ 44,000

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P 6-6 (Date Of Acquisition) (continued)Requirement 3:


(8 0% owned) Consolidation EntriesPya Sya Dr. Cr. Consolidated

BALANCE SHEET:Cash...................................... 110,000 20,000 130,000Accounts receivable............. 75,000 70,000 145,000Inventory.............................. 105,000 80,000 4,000(2) 181,000Investment in subsidiary: Book value element .... .... 152,000 152,000(1) -0- Excess cost element ........ 108,000 108,000(2) -0-Land..................................... 100,000 70,000 24,000(2) 194,000Buildings and equipment...... 250,000 204,000 40,000(2) 44,000(3) 450,000Accumulated depreciation.... (150,000) (44,000) 44,000(3) (150,000)Covenant not-to-compete..... 32,000(2)................................... 32,000Goodwill............................... 16,000 (2) 16,000

Total Assets..................... 750,000 400,000 156,000 308,000 998,000

Payables and accruals........... 80,000 60,000 140,000Long-term debt..................... 20,000 150,000 170,000NCI in net assets................... 38,000(1) 38,000Common stock..................... 300,000 300,000Retained earnings................. 350,000 350,000Common stock..................... 100,000 100,000(1) -0-Retained earnings................. 90,000 90,000 (1) -0 -


Proof of debit and credit postings........................... 346,000 346,000

Explanation of entries: (1) The basic elimination entry. (2) The unamortized excess cost reclassification entry (for BS). (3) The accumulated depreciation elimination entry.

Note: The income statements cannot be consolidated because no postacquisition earnings exist (the acquisition occurred on 12/31/05).

Requirement 4:

$240,000 (see note to worksheet in requirement 3)

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SPLITTING OF THE INVESTMENT ACCOUNT AT 12/31/06

Total carrying value at 12/31/06 (given)...................................................................................... $272,000LessBook value element (80% $215,000)............................................................................ (172,000 ) Excess Cost Elements............................................................................................................... $100,000

I. A NALYSIS OF THE INVESTMENT ACCOUNT --BOOK VALUE ELEMENT


Interest Account Common Retained(20%) + Book Value = Stock + Earnings

Balances, 1/1/06................ $38,000 $152,000 $100,000 $90,000+ Equity in N.I.: To Parent...................... 48,000 48,000 To NCI.......................... 12,000 12,000 Dividends: To Parent...................... (28,000) (28,000)

To NCI.............. ............ (7,000 ) (7,000 )Balances, 12/31/06.......... ..$43,000 $172,000 $100,000 $115,000

II. A NALYSIS OF THE INVESTMENT ACCOUNT --EXCESS COST ELEMENTS

Parents UNDER- OR (OVER)VALUATION OFInvestment

NET ASSETS ELEMENT (@80%)Account

EquipmentExcess Accum. GOODWILLCost = Inventory + Land + Cost + Depr. + Cov. + ELEMENT

Remaining life: 2 mo. Indefinite 10 yrs. 4 yr. Indefinite

1/1/06............................. $108,000 $(4,000) $24,000 $40,000 $32,000 $16,000 Amortization.............. (8,000 ) 4,000 (4,000 ) (8,000 )12/31/06......................... $100,000 $ -0 - $24,000 $40,000 $(4,000 ) $24,000 $16,000

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(1) The basic elimination entry (under non-push-down accounting):Common Stock............................................................................................................... 100,000Retained Earnings, 1/1/06.............................................................................................. 90,000

Equity in Net Income..................................................................................................... 48,000NCI in Net Income......................................................................................................... 12,000 Dividends Declared.............................................................................................. 35,000 Investment in Subsidiary...................................................................................... 172,000 NCI in Net Assets................................................................................................. 43,000

(2) The unamortized excess cost reclassification entry (for BS):Land............................................................................................................................. 24,000Equipment.................................................................................................................... 40,000Covenant Not-to-Compete........................................................................................... 24,000Goodwill....................................................................................................................... 16,000 Accumulated Depreciation................................................................................. 4,000 Investment in Subsidiary.................................................................................... 100,000

(3) The amortized excess cost reclassification entry (for IS):Cost of Sales (all charged to this account for simplicity)............................................ 8,000 Equity in Net Income......................................................................................... 8,000

(4) The accumulated depreciation elimination entry:Accumulated Depreciation (the balance at the acquisition date per Problem 6-6) ... 44,000 Equipment.......................................................................................................... 44,000

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(80% owned) Consolidation Entries

Pya Sya Dr. Cr. ConsolidatedINCOME STATEMENT (2006):

Sales..................................... 950,000 600,000 1,550,000Cost of sales......................... (520,000) (300,000) 8,000(3) (828,000)Expenses............................... (370,000) (240,000) (610,000)Equity in net inc. (of Sya).... 40,000 48,000 (1) 8,000 (3)

Net Income........................ 100,000 60,000 56,000 8,000(3) NCI in Net Income......... 12,000 (1) (12,000 ) CI in Net Income.......... 68,000 8,000 100,000

STMT. OF RET. EARNINGS:Balances, 1/1/06.................. 350,000 90,000 90,000(1) 350,000+ Net income........................ 100,000 60,000 68,000 BF100,000 Dividends declared............ (80,000 ) (35,000 ) 35,000 (1) (80,000 )Balances, 12/31/06.............. 370,000 115,000 158,000 43,000 370,000

BALANCE SHEET:Cash...................................... 133,000 25,000 158,000Accounts receivable, net...... 95,000 60,000 155,000Inventory.............................. 115,000 120,000 235,000Investment in subsidiary: Book value element .... .... 172,000 172,000(1) -0-

Excess cost elements ...... 100,000 100,000(2) -0-Land..................................... 100,000 70,000 24,000(2) 194,000Buildings and equipment...... 250,000 224,000 40,000(2) 44,000(4) 470,000Accumulated depreciation.... (210,000) (59,000) 44,000(4) 4,000(2) (229,000)Covenant not-to- compete.... 24,000(2)................................. 24,000Goodwill.............................. 16,000 (2) 16,000

Total Assets..................... 755,000 440,000 148,000 320,000 1,023,000Payables and accruals........... 65,000 75,000 140,000Long-term debt..................... 20,000 150,000 170,000

NCI in net assets................... 43,000(1) 43,000Common stock..................... 300,000 300,000Retained earnings................. 370,000 370,000Common stock..................... 100,000 100,000(1) -0-Retained earnings................. 115,000 158,000 BF ....................................... -0-

Total Liab. & Equity...... 755,000 440,000 258,000 86,000 1,023,000Proof of debit and credit postings......................... 406,000 406,000

Explanation of entries : (1) The basic elimination entry. (4) The accumulated depreciation (2) The unamortized excess cost reclassification entry (for BS). elimination entry.

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(3) The amortized excess cost reclassification entry (for IS).

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P 6-8 (Date Of Acquisition) (Estimated time: 20 minutes)Requirement 1:


Total Carrying value at 12/31/05 (given)..................................................................................... $168,000LessBook value element (80% $260,000)............................................................................ (208,000 ) Excess Cost Elements (cost below book value) ....................................................................... $ (40,000)

I. ANALYIS OF THE INVESTMENT ACCOUNTBOOK VALUE ELEMENT


Interest Account Common Additional Retained(20%) + Book Value = Stock + Paid-in Capital + Earnings

12/31/05...... $52,000 $208,000 $5,000 $95,000 $160,000


ParentsInvestment UNDER- OR (OVER)VALUATION OFAccount NET ASSETS ELEMENT (@ 80%)

Excess Long-TermCost = Inventory + Land + Building + Debt

12/31/05............... ..... $(40,000 ) $(16,000) $24,000 $(80,000) $32,000

Requirement 2:

(1) The basic elimination entry (under non-push-down accounting):Common Stock............................................................................................................... 5,000Additional Paid-in Capital.............................................................................................. 95,000Retained Earnings.......................................................................................................... 160,000 Investment in Subsidiary...................................................................................... 208,000 NCI in Net Assets................................................................................................. 52,000

(2) The unamortized excess cost reclassification entry (for BS):Land................................................................................................................................ 24,000Long-Term Debt............................................................................................................. 32,000Investment in Subsidiary................................................................................................ 40,000 Inventory.............................................................................................................. 16,000 Building................................................................................................................ 80,000

(3) The accumulated depreciation elimination entry:Accumulated Depreciation............................................................................................. 55,000

Equipment................................................................................................................ 55,000

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P 6-8 (Date Of Acquisition) (continued)Requirement 3:

Poz Inc. and Soz Inc.Consolidation Worksheet as of December 31, 2005

(80% owned) Consolidation EntriesPoz Soz Dr. Cr. Consolidated

BALANCE SHEET:Cash...................................... 47,000 10,000 57,000Accounts receivable............. 65,000 40,000 105,000Inventory.............................. 140,000 150,000 16,000(2)274,000Investment in subsidiary: Book value element ... ... .. 208,000 208,000(1) -0- Excess cost element ......... (40,000) 40,000(2)............................................. -0-Land..................................... 190,000 100,000 24,000(2) 314,000Buildings and equipment...... 500,000 305,000 80,000(2) 670,000 ............................................. 55,000(3)Accumulated depreciation.... (440,000 ) (55,000 ) 55,000 (3) (440,000 ) Total Assets..................... 670,000 550,000 119,000 359,000 980,000

Payables and accruals........... 60,000 15,000 75,000Long-term debt..................... 10,000 275,000 32,000(2).............................................. 253,000NCI in net assets................... 52,000(1) 52,000Common stock..................... 20,000 20,000Additional Paid-in Capital.... 380,000 380,000Retained earnings................. 200,000 200,000Common stock..................... 5,000 5,000(1) -0-Additional Paid-in Capital.... 95,000 95,000(1) -0- Retained earnings................ 160,000 160,000 (1) -0 -


Proof of debit and credit postings......................... 411,000 411,000

Explanation of entries: (1) The basic elimination entry.

(2) The unamortized excess cost reclassification entry (for BS): (3) The accumulated depreciation elimination entry.

Note: The income statements cannot be consolidated because no postacquisition earnings exist (the acquisitionoccurred on 12/31/05).

Requirement 4:

$1,200,000 (see note to worksheet in requirement 3)

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Total carrying value at 12/31/06 (given)...................................................................................... $324,000LessBook value element (80% $440,000)............................................................................ (352,000 ) Excess Cost (cost below book value)..................................................................................... $ (28,000)



Interest Account Common Additional Retained(20%) + Book Value = Stock + Paid-in Capital+ Earnings

Balances, 1/1/06........... $52,000 $208,000 $5,000 $95,000 $160,000+ Equity in N.I.: To Parent.................... 56,000 56,000 To NCI....................... 14,000 14,000 Dividends declared..... . (9,000 ) (36,000) (45,000)Balances, 12/31/06. .. .. .. $57,000 $228,000 $5,000 $95,000 $185,000

II. A NALYSIS OF THE INVESTMENT ACCOUNT EXCESS COST ELEMENTS

Parents UNDER- OR (OVER)VALUATION OFInvestment

NET ASSETS ELEMENT (@ 80%)Account Building

Excess Accum. Long-TermCost = Inventory + Land + Cost + Depr. + Debt

Remaining life: 2 mo. 20 yr. 4 yr.Balances, 1/1/06....... $(40,000) $(16,000) $24,000 $(80,000) $32,000 Amortization......... 12,000 16,000 $4,000 (8,000 )Balances, 12/31/06. .. . $(28,000 ) $ -0 - $24,000 $(80,000 )

SM-ch06

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