SOLUTIONS TO EXERCISES AND PROBLEMS CHAPTER 4

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SOLUTIONS TO EXERCISES AND PROBLEMS CHAPTER 4 Powered By Docstoc
					                             Accounting 401
      Solutions to Exercises and Problems at the Ends of Chapters
                                Chapter 4
                               Spring 2006

SOLUTIONS TO EXERCISES

E4.1 ACQUISITION AND EQUITY METHOD ACCOUNTING

Requirement 1:

1/1/X3
 Investment in Williams                                   450,000
                         Various stockholder equity
                         accounts                                   450,000
To record investment in Williams.

12/31/X3
 Cash                                                      24,000
                              Investment in Williams                 24,000
To record dividends received from Williams.

12/31/X3
 Investment in Williams                                    78,000
                           Equity in Income of Williams              78,000
To record equity method income accrual - James= share
of the net income of Williams (100% x $80,000) less
$2,000 depreciation of purchase premium (plant assets,
$50,000/25).

Requirement 2:

1/1/X3
 Investment in Williams                                   450,000
                         Various stockholder equity
                         accounts                                   450,000
To record investment in Williams.

12/31/X3
Cash                                                         19,200
                              Investment in Williams                    19,200
To record dividends received from Williams (80% x $24,000).
E4.1 (cont=d.)

12/31/X3
 Investment in Williams                                      62,400
                          Equity in Income of Williams                  62,400
To record equity method income accrual - James' share of
the net income of Williams ($64,000 = 80% x $80,000)
less $1,600 amortization of purchase premium (plant assets
are $40,000 = (.8 x $50,000), depreciated over 25 years).

E4.2 CONSOLIDATION AT END OF FIRST YEAR


Equity in Income of M                                        30,000
                             Dividends - S                               9,000
                             Investment in S                            21,000
Note: $30,000 = (.9 x $100,000) - $50,000 (COGS) -
$10,000 (Depr = $150,000/15).

Common Stock                                           400,000
Retained Earnings                                      600,000
Purchase Premium                                       500,000
                              Investment in S                         1,400,000
                              Minority Interest in S                    100,000

Current Assets                                            50,000
Property, Plant & Equipment                              150,000
Goodwill                                                 300,000
                                 Purchase Premium                      500,000
E4.2 (cont=d.)


Cost of Goods Sold                                            50,000
Depreciation Expense                                          10,000
                         Current Assets                                  50,000
                         Plant, Property & Equipment                     10,000

Minority Interest in Net Income                                10,000
                                    Dividends - S                         1,000
                                    Minority Interest in S                9,000

E4.3 ELIMINATION ENTRIES AFTER FIRST AND SECOND
     YEARS

Requirement 1:

Cash (or Dividends Receivable)                               420,000
                                        Investment in S                 420,000
To record P's share of S's dividends; $420,000 = .7 x $600,000.

Investment in S                                              890,000
                              Income from S                             890,000
To record the equity method income accrual for 20X2,
per the following schedule.

P's share of S's net income (.7 x $1,600,000)                      $1,120,000
Less amortization of purchase premium:
   Sale of revalued inventory (.4 x $200,000)          $ 80,000
   Additional depreciation ($500,000/5)                100,000
   Impairment of goodwill                                50,000
Total amortization                                                  (230,000)
Net equity method income accrual for 20X2                          $ 890,000
E4.3 (cont=d.)
               Consolidated Financial Statement Working Paper
 Income from S                                             890,000
                              Investment in S                      470,000
                              Dividend - S                         420,000
To eliminate the equity method entries made by P in 20X2
thereby adjusting the investment account to its balance on
1/2/X2.

 Purchase Premium                                         1,000,000
 Stockholders' Equity:
 S (($5,200,000 -
 $1,000,000)/.7)                                          6,000,000
                            Investment in S                            5,200,000
                            Minority Interest in S
                            (.3 x $6,000,000)                          1,800,000
To reclassify the purchase premium, eliminate the
Investment in S against 70 percent of the stockholders'
equity of S and reclassify the remaining stockholders'
equity as minority interest, all as of 1/2/X2.

 Inventory                                                 200,000
 Equipment                                                 500,000
 Goodwill                                                  300,000
                              Purchase Premium                         1,000,000
To allocate the purchase premium to the assets of S
Company and goodwill as of 1/2/X2.

 Cost of Goods Sold (or
 Inventory, 1/1, I/S)                                         80,000
 Depreciation Expense                                        100,000
 Impairment Loss                                              50,000
                              Inventory                                  80,000
                              Equipment                                 100,000
                              Goodwill                                   50,000
To recognize current year amortization of the purchase
premium in the consolidated income statement for 20X2.

                                     4-4
E4.3 (cont=d.)

 Minority Interest in Net
 Income (.3 x $1,600,000)                                   480,000
                                Dividends - S (.3 x
                                $600,000)                             180,000
                                Minority Interest in S                300,000
To record the change in the minority interest during 20X2
consisting of the minority's interest in net income decreased
by S Company's dividends paid to minority shareholders.

Requirement 2:

               Consolidated Financial Statement Working Paper
 Purchase Premium                                       770,000
                              Investment in S                   770,000
To reclassify the unamortized purchase premium at 1/1/X3;
$770,000 = $1,000,000 - $230,000.

 Inventory                                                  120,000
 Equipment                                                  400,000
 Goodwill                                                   250,000
                              Purchase Premium                        770,000
To allocate the unamortized purchase premium at 1/1/X3
among the assets of S Company and goodwill.

 Cost of Goods Sold (or
 Inventory, 1/1 I/S)                                        120,000
 Depreciation Expense                                       100,000
                              Inventory                               120,000
                              Equipment                               100,000
To recognize current year amortization of the purchase
premium in the consolidated income statement for 20X3.




                                      4-5
E4.4 EQUITY METHOD AND MINORITY INTEREST

Requirement 1:

Investment - January 1, 20X8                                $2,600,000
Equity method income accrual for 20X8:
Brussels' net income ($400,000 x 80%)                         320,000
 Amortization of purchase premium:
   Equipment (($300,000)/10)                                    30,000
   Buildings ($400,000/20)                                    (20,000)
   Long-term debt ($250,000/10)                               (25,000)
Less 80% of Brussels= dividends                               (72,000)
Investment - December 31, 20X8                              $2,833,000

Requirement 2:

Brussels' stockholders equity - January 1, 20X8             $2,400,000
Net income for 20X8                                            400,000
Dividends                                                     (90,000)
Brussels' stockholders' equity - December 31, 20X8          $2,710,000

Minority interest: $2,710,000 x 20% = $542,000

Requirement 3:

Minority interest in net income: $400,000 x 20% = $80,000




                                   4-6
E4.5 CONSOLIDATION AFTER SEVERAL YEARSBPOOLING

Equity in Income of S                                    190,000
                           Dividends - S                             38,000
                           Investment in S                          152,000

Stockholders' Equity - S                              5,900,000
                           Investment in S                         5,605,000
                           Minority Interest in S                    295,000

Minority Interest in NI                                   10,000
                                Dividends - S                         2,000
                                Minority Interest                     8,000

E4.6 CONSOLIDATION AFTER SEVERAL YEARS

Equity in Income of S                                    430,000
                             Dividends - S                           80,000
                             Investment in S                        350,000

Stockholders' Equity - S                              3,500,000
Purchase Premium                                        550,000
                         Investment in S                           3,350,000
                         Minority Interest in S                      700,000
NOTE: $550,000 = $1,000,000 - $200,000 - (5 x $50,000)

Land                                                     300,000
Equipment                                                250,000
                             Purchase Premium                       550,000

Depreciation Expense                                      50,000
                           Accumulated Depreciation                  50,000

Minority Interest in NI                                  120,000
                             Dividends - S                           20,000
                             Minority Interest in S                 100,000


                                   4-7
E4.7 PROJECTING CONSOLIDATION ENTRIES

Requirement 1:

Land                                                     80,000
Equipment                                                18,000
                           Purchase Premium                        98,000

 Depreciation Expense                                     6,000
                           Equipment                                6,000

Requirement 2:

Land                                                     80,000
                           Purchase Premium                        80,000

Requirement 3:

No entry required.

E4.8 ALLOCATION OF PURCHASE PREMIUM AFTER SEVERAL
     YEARS

The allocation of purchase premium as of January 1, 20X7 would be:
                           Original                               1/1/X7
      Component            Amount         Prior Amortization     Amount
 Accounts Receivable         $(3,000) Fully amortized              $     0
 Inventory                     12,000 Fully amortized                    0
 Equipment                     75,000 6 years at $7,500            30,000
 Patents                       30,000 Fully amortized                    0
 Goodwill                     100,000 $15,000 impairment loss      85,000
                            $214,000                             $115,000




                                   4-8
E4.9 INTERPRETING ELIMINATION ENTRIES

Requirement 1:

The acquisition was recorded as a purchase, because a purchase premium is
shown in the consolidation elimination entries.

Requirement 2:

The parent owns 85 percent of the stock of S. Minority interest is
$135,000/($600,000 + $300,000) = 15%.

Requirement 3:

Observe that 4 years' depreciation had been recorded prior to 20X6; thus the
acquisition occurred at the beginning of 20X2.

Requirement 4:

Patents balance 1/1/X6                        $60,000
Prior amortization: $3,750 x 4                 15,000
Original balance                              $75,000

Requirement 5:

The patents are being amortized over 20 years ($75,000/20 = $3,750).




                                     4-9
E4.10              CONSOLIDATED INCOME STATEMENT

                       Parson Company and Subsidiary
                       Consolidated Income Statement
                      For the Year Ended June 30, 20X7
 Sales                                                      $7,000,000
 Cost of Goods Sold ($3,000,000+$800,000+.8($160,000))      $3,928,000
 Depreciation Expense ($500,000+$140,000-.8($200,000)/10)      624,000
 Interest Expense ($100,000+$60,000+.8($l00,000)/5)            176,000
 Other Expenses                                              1,300,000
 Operating Expenses                                         $6,028,000
 Minority Interest in Net Income (.2 x $300,000)                60,000
 Total Expenses                                             $6,088,000
 Consolidated Net Income                                    $ 912,000


E4.11            CONSOLIDATED CASH FLOW FROM
             OPERATIONS

Computation of Cash Provided by Operations
 Consolidated net income                                    $1,000,000
 Addition (subtraction) of items affecting cash:
  Depreciation expense                                         180,000
  Amortization expense                                          25,000
  Impairment loss (goodwill)                                    30,000
  Minority interest in net income                               40,000
  Undistributed equity method income                          (18,000)
 Cash provided by operations                                $1,257,000




                                     4-10
E4.12               COST AND EQUITY METHODS (APPENDIX)

Requirement 1:

The balance in the Investment in Sue account at January 1, 20X4 under the
cost method used by Peggy is $500,000, the original purchase price.

Requirement 2:
 Conversion to equity method:
 Peggy's equity in undistributed earnings of Sue since
 acquisition: 80% x ($135,000 Total net income minus $46,000
 dividends)                                                        $ 71,200
 Amortization of purchase premium:
 Equipment ($60,000/10) x 4 years                                   (24,000)
 Increase in Investment in Sue account                              $ 47,200
 Balance per books                                                  500,000
 Corrected balance                                                 $547,200

Requirement 3:

Investment in Sue                                         47,200
                              Retained Earnings                      47,200
To adjust Peggy's accounts from cost method to complete
equity method.

Adjustment needed:
 Equity in undistributed earnings of Sue of 20X0 - 20X4:
 [.8 X ($135,000 - $46,000)]                                       $71,200
 Less four years purchase premium amortization (4 X $6,000)        (24,000)
                                                                   $47,200




                                   4-11
E4.13           ELIMINATION ENTRIES: COST AND EQUITY
             METHODS (APPENDIX)

Requirement 1: (Equity Method)

Books of P Company
                                           20X4               20X5
                                       Dr.        Cr.      Dr.       Cr.
Cash                                 135,000             162,000
                 Investment in S               135,000             162,000
To record dividends received from S.

Investment in S                      215,000             260,000
                    Income from S              215,000             260,000
To record P's equity accrual (90 percent
of S's reported net income less $10,000
(= $100,000/10) of amortization of
identifiable intangibles.

Consolidated Financial Statement Working Paper
                                             20X4              20X5
                                         Dr.       Cr.     Dr.      Cr.
 Income from S                         215,000           260,000
                   Dividends - S                 135,000          162,000
                   Investment in S                80,000           98,000
 To reverse the current year's equity method entries.

Intangible
Assets                               100,000              90,000
                   Investment in S             100,000              90,000
To reclassify the unamortized purchase
premium as of the beginning of the year.




                                   4-12
E4.13 (cont=d.)

                                     20X4                          20X5
                               Dr.           Cr.             Dr.           Cr.
Stock-
holders'
Equity - S                  2,000,000                      2,100,000
             Investment
             in S                         1,800,000                     1,890,000
             Min. Int.
             in S                           200,000                       210,000
To eliminate the investment
account against the stockholders'
equity of S and establish the
minority interest, all as of the
beginning of the year [($2,000,000 =
($1,900,000 - $100,000)/.9]
Min. Int.
in NI                            25,000                      30,000
             DivsBS                          15,000                        18,000
             Min. Int.
             in S                            10,000                        12,000
To record the change in the
minority interest during the year.

Requirement 2: (Cost method)

Books of P Company
                                             20X4                      20X5
                                        Dr.          Cr.        Dr.           Cr.
Cash                                  135,000                 162,000
                Dividend Income                    135,000                162,000
To record dividends received from S.




                                     4-13
E4.13 (cont=d.)

Consolidated Financial Statement Working Paper
                                          20X4             20X5
                                      Dr.      Cr.     Dr.      Cr.
 Dividend Income                    135,000          162,000
                     Dividends - S           135,000          162,000
 To eliminate intercompany dividends.

Investment in S                             No entry        80,000
                     Retained
                     Earnings - P                                      80,000
To adjust the investment account to
the equity basis as of January 1, 20X5
[$80,000 = .9($250,000 - $150,000)
- $100,000/10].

NOTE: The remaining entries, beginning with the reclassification of the
identifiable intangibles, are the same under both the cost and equity methods.




                                     4-14
                     SOLUTIONS TO PROBLEMS

P4.1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     ONE YEAR AFTER ACQUISITION

Requirement 1:

         Schedule to Compute the Equity Method Income Accrual
Ponon=s share of Santo=s net income (.8 X $5,000,000)      $4,000,000
Purchase premium amortization:
   Sale of revalued inventory (.75 X $2,000,000)           -1,500,000
   Depreciation of revalued plant assets ($8,500,000/8.5)  -1,000,000
   Amortization of premium on revalued long-term debt
($1,000,000/10)                                            + 100,000
   Amortization of patents ($500,000/4)                    - 125,000
Equity method income accrual                               $1,475,000

Requirement 2:

              Consolidated Financial Statement Working Paper
 Equity in Income of Santo                           1,475,000
                             Investment in Santo                  1,475,000
To reverse equity method entry and adjust the investment account to
beginning-of-year balance.

Purchase Premium                                   12,000,000
                             Investment in Santo                12,000,000
To reclassify unamortized purchase premium.

Inventory                                           2,000,000
Plant Assets, Net                                   8,500,000
Patents                                               500,000
Goodwill                                            2,000,000
                            Long-Term Debt                       1,000,000
                            Purchase Premium                    12,000,000
To allocate purchase premium.


                                   4-15
P4.1 (cont=d.)

 Capital Stock - Santo                                 6,000,000
 Retained Earnings -
 Santo                                                 4,000,000
                          Investment in Santo
                          ($21,475,000 -$1,475,000
                          - $12,000,000)                           8,000,000
                          Minority Interest in Santo
                          [.2 X ($6,000,000 +
                          $4,000,000)]                             2,000,000
To eliminate the investment account against the
stockholders= equity of Santo and establish the
minority interest as of January 2, 20X3.

 Cost of Goods Sold                                    1,500,000
 Depreciation Expense                                  1,000,000
 Amortization Expense                                    125,000
 Long-Term Debt                                          100,000
                        Interest and Other
                        Expenses                                     100,000
                        Inventory                                  1,500,000
                        Plant Assets, Net (or
                        Accumulated
                        Depreciation)                              1,000,000
                        Patents                                      125,000
To recognize purchase premium amortization.

 Minority Interest in Net
 Income (.2 X $5,000,000)                              1,000,000
                               Minority Interest in
                               Santo                               1,000,000
To recognize the minority interest in net income and
update the minority interest in Santo to its December 31,
20X3 balance.



                                     4-16
P4.1 (cont=d.)

Requirement 3:
                 Ponon Corporation and Santo Corporation
                       Consolidated Income Statement
                  for the Year Ended December 31, 20X3
Sales                                                         $43,200,000
Cost of Goods Sold ($18,000,000 + $4,000,000 +
$1,500,000)                                                   $23,500,000
Depr. Expense ($2,000,000 + $3,200,000 + $1,000,000)            6,200,000
Amortization Expense                                              125,000
Interest and Other Expenses
($5,400,000 + $1,000,000 - $100,000)                            6,300,000
Minority Interest in Net Income                                 1,000,000
Total Expenses                                                $37,125,000
Net Income                                                    $ 6,075,000

                 Ponon Corporation and Santo Corporation
                       Consolidated Balance Sheet
                          December 31, 20X3
ASSETS
Cash and Receivables                                          $ 7,600,000
Inventory [$5,000,000 + $5,200,000 +($2,000,000 -
$1,500,000)]                                                   10,700,000
Plant Assets, Net [$8,000,000 + $12,000,000 +($8,500,000 -
$1,000,000)]                                                   27,500,000
Patents ($500,000 - $125,000)                                     375,000
Goodwill                                                        2,000,000
Total Assets                                                  $48,175,000
LIABILITIES AND STOCKHOLDERS= EQUITY
Current Liabilities                                           $ 7,100,000
Long-Term Debt [$15,000,000 +$3,300,000 + ($1,000,000 -
$100,000)]                                                     19,200,000
Capital Stock                                                   8,000,000
Retained Earnings                                              10,875,000
Minority Interest in Santo [.2 X ($6,000,000 + $9,000,000)]     3,000,000
Total Liabilities and Stockholders= Equity                    $48,175,000

                                  4-17
P4.2 EQUITY METHOD AND ELIMINATING ENTRIES THREE
     YEARS AFTER ACQUISITION

Requirement 1:

           Schedule to Compute the Equity method Income Accrual
                    for the year Ended December 31, 20X8.
 P=s share of S=s net income (.9 X $130,000)                       $117,000
 Purchase premium amortization: (1)
     Reduced depreciation on plant assets (.9 X $100,000)/10        + 9,000
     Amortization of intangibles ($330,000)/20) (2)                 - 16,500
 Net equity income accrual                                         $109,500
(1) Because S=s inventory is carried at LIFO, and the inventory increased
since acquisition, none of the undervalued LIFO inventory would have been
sold; hence, no amortization of this amount.
(2) Intangibles = $330,000 [= $600,000 - (.9 X $400,000) + (.9 X 100,000)].

Requirement 2:

          Schedule to Compute the Balance in the Investment in S
                           at December 31, 20X8
Investment cost, December 31, 20X5                             $2,000,000
Plus P=s share of S=s cumulative net income since
acquisition (.9 X $400,000)                                       360,000
Less P=s share of S=s cumulative dividends since
acquisition (.9 X .6 X $400,000)                               - 216,000
Plus reduced depreciation on overvalued plant assets [3 X
(.9 X 100,000)/10]                                                 27,000
Less amortization of intangibles [3 X ($330,000/20)]            - 49,500
Balance in Investment in S, December 31, 20X8                  $2,121,500




                                   4-18
P4.2 (cont=d.)

Requirement 3:

Equity in Income of S
(from Requirement 1)                                   109,500
                        Dividends-S
                        (.9 X .6 X $130,000)                         70,200
                        Investment in S                              39,300
To reverse 20X8 equity method entries.

Purchase Premium ($600,000 + [2
X (.9 X $100,000)/10]- [(2 X
$330,000)/20]                                            585,000
                                     Investment in S             585,000
To establish unamortized purchase premium as of January 1, 20X8.

Inventory                                              360,000
Identifiable Intangibles                               297,000
                             Plant Assets, Net                       72,000
                             Purchase Premium                       585,000
To allocate unamortized purchase premium as of January 1, 20X8.

Stockholders= Equity - S
{[($2,000,000 -
$600,000)/.9]+ [(1 - .6) X
($400,000 - $130,000)]                                1,663,556
                                 Investment in S
                                 ($2,121,500 -
                                 $39,300 - $585,000)               1,497,200
                                 Minority Interest in S              166,356
To eliminate the stockholders= equity of S against the Investment in S and
establish the Minority Interest in S as of January 1, 20X8.




                                   4-19
P4.2 (cont=d.)

NOTE: At this point the Investment in S is fully eliminated ($2,121,500 -
$39,300 - $585,000 - $1,497,200 = 0).

Plant Assets, Net (or
Accumulated Depreciation)                                     9,000
Amortization Expense                                         16,500
                               Identifiable Intangibles               16,500
                               Depreciation Expense                    9,000
To recognize 20X8 purchase premium amortization.

Minority Interest in NI                                      13,000
                                   Dividends - S                       7,800
                                   Minority Interest in S              5,200
to recognize the Minority Interest in Net Income in 20X8 and update the
Minority Interest in S at December 31, 20X8.

Requirement 4:

The Minority Interest in S at December 31, 20X8 of $171,556 is 10% of S=s
stockholders= equity on that date, $1,715,556, explained next. Ninety percent
of S=s stockholders= equity at the December 31, 20X5 acquisition date is
$1,400,000 (= $2,000,000 purchase price - $600,000 purchase premium).
Therefore, 100% is $1,555,556 (= $1,400,000/.9). In the three years since
acquisition, S=s stockholders= equity grew by $160,000 [= total income of
$400,000 - $240,000 (60%) paid out in dividends]. Thus at December 31,
20X8, S=s stockholders= equity is $1,715,556 (= $1,555,556 + $160,000).
The Minority Interest in S is 10% of that amount, or $171, 556. This is also
the sum of the amounts in the fourth and sixth eliminating entries; $171,556 =
$166,356 + $5,200.




                                    4-20
P4.3 EQUITY METHOD ENTRIES, ELIMINATIONS, AND
     CONSOLIDATION COMPUTATIONS

Requirement 1:
 Total purchase premium at 12/31/X0                                 $30,000
 P's share of amount attributable to equipment (.6 x $50,000)       $30,000

                Computation of Equity Method Income Accrual
P' s share of S's net income (.6 x $20,000)                         $12,000
Less amortization of purchase premium:
    Additional depreciation ($30,000/10)                              3,000
Net equity method income accrual for 20X3                           $ 9,000


                            Books of P Company
Investment in S                                             9,000
                               Income from S                          9,000
To record P's share of S's net income for 20X3, reduced
by purchase premium amortization.

Cash                                                        4,800
                              Investment in S                         4,800
To record P's share of dividends paid by S Company;
6 x $8,000.

Requirement 2:

              Consolidated Financial Statement Working Paper

Income from S                                               9,000
                             Dividends - S                            4,800
                             Investment in S                          4,200
To eliminate the equity method entries recorded by P,
thereby adjusting the investment account to its balance
on 1/1/X3.




                                    4-21
P4.3 (cont=d.)

 Capital Stock - S                                           100,000
 Retained Earnings - S,
 1/1/X3                                                      130,000
 Purchase Premium                                             24,000
                              Investment in S                          162,000
                              Minority Interest in S                    92,000
To eliminate the Investment in S against the stockholders'
equity of S Company and establish the unamortized
purchase premium and minority interest in S, all as of
1/1/X3.

Notes:

(1)   P paid $150,000 for a 60% interest having a book value of $120,000.
      therefore, 100% of S's net assets had a book value of $200,000
      (=$120,000/.6). Since the capital stock of S is $100,000, S's retained
      earnings must also have been $100,000 at 12/31/X0. At 1/1/X3,
      however, S Company's retained earnings had grown to $130,000
      (=$100,000+$70,000-$40,000).

(2)   The original purchase premium of $30,000 has, at 1/1/X3, been reduced
      by two years' amortization amounting to $6,000 (=2x$3,000). Its
      unamortized balance at 1/1/X3 is $24,000 (=$30,000-$6,000).

(3)   The investment account balance at 1/1/X3 consists of original cost of
      $150,000 plus 60% of the growth in S Company's retained earnings in
      20X1 and 20X2, $18,000 (=.6($70,000- $40,000) less two years of
      purchase premium amortization, $6,000; $162,000 = $150,000 +
      $18,000 - $6,000.

(4)   Minority interest in S at 1/1/X3 is 40% of $230,000
      (=$100,000+$130,000).




                                    4-22
P4.3 (cont=d.)

Equipment                                                    30,000
                               Accumulated Depreciation                  6,000
                               Purchase Premium                         24,000
To allocate the unamortized purchase premium at 1/1/X3 to
the assets of S Company. The accumulated depreciation
is the amount allocated since acquisition on 12/31/X0.

Depreciation Expense                                          3,000
                           Accumulated Depreciation                      3,000
To recognize current year amortization of the purchase
premium in the consolidated income statement.

Minority Interest in Net
Income                                                        8,000
                                Dividends - S                            3,200
                                Minority Interest in S                   4,800
To record the change in the minority interest during 20X3.

Requirement 3:

                Consolidated Retained Earnings at 12/31/X3
P Company's retained earnings from its own operations                 $220,000
Plus 60% of S Company's net income in 20X1,20X2 and
20X3; .6($70,000 + $20,000)                                             54,000
Less three years of purchase premium amortization                       (9,000)
Consolidated retained earnings at 12/31/X3                            $265,000

                      Minority Interest in S at 12/31/X3
Minority interest in S at 1/1/X3; .4 x $230,000                       $ 92,000
Change in minority interest during 20X3                                  4,800
Minority interest in S at 12/31/X3                                     $96,800




                                    4-23
P4.3 (cont=d.)

Requirement 4:

                    Consolidated Net Income for 20X3
P's net income from its own operations                             $36,000
Plus P's equity method income accrual                                9,000
Consolidated net income for 20X3                                   $45,000

P4.4 ANALYSIS OF INVESTMENT ACCOUNT AND ELIMINATION
     ENTRIES

Requirement 1:

Initial cost, January 1, 20X1                                   $5,000,000
Share of Sunny's income, 20X1-X5 $800,000 x .9                     720,000
Amortization of purchase premium:
   Inventory                                                     (100,000)
   Equipment ($200,000 x (5/10))                                 (100,000)
   Goodwill impairment                                            (25,000)
Balance, December 31, 20X5                                      $5,495,000

NOTE: Original purchase premium was $500,000 ( = $5,000,000 -
.9 x $5,000,000), allocated $100,000 to inventory, $200,000 to equipment, and
$200,000 to goodwill.

Requirement 2:

Balance, January 1, 20X1                                        $5,000,000
Net income, 20X1-X5                                                800,000




Balance, December 31, 20X5                                      $5,800,000

Requirement 3:


                                   4-24
Equity in Income of S                     61,000
                        Investment in S            61,000




                           4-25
P4.4 (cont=d.)

Stockholders' Equity - S                               5,800,000
Purchase Premium                                         275,000
                            Investment in S                             5,495,000
                            Minority Interest in S                        580,000

Equipment                                                    100,000
Goodwill                                                     175,000

                                Purchase Premium                         275,000

Depreciation Expense                                          20,000
                                Equipment                                 20,000

Minority Interest in Net Income                                 9,000
                                    Minority Interest in S                 9,000


P4.5 CONSOLIDATION CALCULATIONS AND RATIO
     ANALYSISBINCOMPLETE EQUITY METHOD

Requirement 1:

Because the incomplete equity method is used, purchase premium
amortization is not reflected in the investment account. Thus we can compute
the original purchase premium as follows:
Purchase premium:      $208,000 = $664,000 - .8 X ($100,000 + $470,000)
Original allocation:   $160,000 (= .8 X $200,000) to long-term liabilities
                                (debit balance)
                           48,000 (= $208,000 - $160,000) to identifiable
                                  intangibles
                       $208,000




                                    4-26
P4.5 (cont=d.)

Of this amount, total amortization in the three years since acquisition is:

Interest expense (amortization of discount on long-term liabilities) =
$48,000 [= 3 X ($160,000/10)]

Amortization expense (identifiable intangibles) =
$6,000 [= 3 X ($48,000/24)]

Consolidated total assets at December 31, 20X6 is $7,022,000:
$7,022,000 = $5,414,000 + $2,230,000 - $664,000 + ($48,000 - $6,000)
identifiable intangibles

NOTE: Amortization of discount on long-term liabilities does not affect total
assets.

NOTE: Consolidated total liabilities and stockholders= equity also is
$7,022,000 [= $5,414,000 + $2,230,000 - ($100,000 + $470,000) - ($160,000
- $48,000 amortization) - $6,000 intangibles amortization expense - $48,000
interest expense + $114,000 minority interest].

Consolidated net income for the year ended December 31, 20X6 is $782,000:
 $782,000 = $800,000 - ($16,000 + $2,000) purchase premium amortization
           = $600,000 + (.8 X $250,000) - ($16,000 + $2,000)

Consolidated retained earnings at December 31, 20X6 is $2,160,000:
     $2,160,000 = $2,214,000 - 3 X ($16,000 + $2,000) total purchase
     premium amortization

Requirement 2:
                                (000 eliminated)
              ROA                       ROS                     TATO
 a.   1,000*/5,414 = .185       1,000*/6,000 = .167     6,000/5,414 = 1.11
 b.   1,046**/7,000 = .150      1,046**/(6,000 +        (6,000 + 2,000)/7,000
                                2,000) = .131           = 1.14
 c.   1,096***/7,000 = .157     1,096***/(6,000 +       (6,000 + 2,000)/7,000

                                      4-27
                                 2,000) = .137            = 1.14

P4.5 (cont=d.)

*1,000 = 800 + 200 interest
** 1,046 = 780 + (200 + 50 + 16) interest
*** 1,096 = 1,046 + 50 minority interest in net income

Both b. and c. report lower profitability than a. because the equity method
ratios do not include the total assets or sales of Satellite and do not add back
Satellite=s interest expense, increased by the applicable purchase premium
amortization. The total assets turnover ratios are similar in this problem
whether consolidated or not.

When the equity method is used in a., the asset base in the ROA includes the
investment account balance (80% of Satellite=s net assets + some purchase
premium), not the total assets of Satellite deployed to generate the reported
income. In general, the consolidated totals in b. and c. provide a more
complete and credible assessment of profitability than do equity method
amounts in a.

Comparing b. and c., we note that in consolidation, 100% of the assets and
sales of Satellite are included in the consolidated totals whereas consolidated
net income includes 80% of Satellite=s net income. To correct this mismatch,
and place income and assets or sales on the same basis, we should add back
the minority interest in net income (or not subtract it in the first place), as in c.
This gives us group income (total for P and S) in the numerator and group
assets and sales in the denominator (total for P and S), a better comparison.




                                       4-28
P4.6 CONSOLIDATED FINANCIAL STATEMENT WORKING
     PAPER--PURCHASE PREMIUM

Requirement 1:

Slim's reported net income                                  $610,000
Less purchase premium amortization:
  Sale of undervalued inventory                             $100,000
  Additional depreciation on plant assets ($200,000/10)       20,000
  Amortization of discount on long-term debt ($100,000/5)     20,000
Total purchase premium amortization                         $140,000
Net equity method income accrual                            $470,000




                                  4-29
P4.6 (cont=d.)

Requirement 2:
                               Paltry Company and Subsidiary Slim Company
                              Consolidated Financial Statement Working Paper
                                  For the Year Ended December 31, 20X7
                                        S Company      Adjustments & Eliminations
Income Statement         P Company        (100%)          Dr.               Cr.      Consolidated

Sales                    12,780,000      5,400,000                                   18,180,000
Income from Slim            470,000          --       (1)     470,000        --
Inventory, 12/31/X7       3,200,000      1,350,000                                    4,550,000
    Total Credits        16,450,000      6,750,000           470,000                 22,730,000
Inventory, 1/2/X7         3,000,000      1,400,000    (4)    100,000                  4,500,000
Purchases                 8,000,000      3,000,000                                   11,000,000
Operating Expenses        2,100,000      1,700,000    (4)      20,000                 3,820,000
Interest Expense            160,000         40,000    (4)      20,000                   220,000
  Total Debits           13,260,000      6,140,000            140,000                19,540,000
Net Income-to Ret.
  Earn. Stmt.             3,190,000        610,000            610,000                  3,190,000

Retained Earnings Statement
Ret. Earnings,
 1/2/X7-P                4,200,000           --                                        4,200,000
Ret. Earnings,
 1/2/X7-S                    --          1,000,000    (2)1,000,000                         --
Net Income-from
 Inc Stmt                3,190,000         610,000           610,000                  3,190,000
Dividends - P             (300,000)          --                                        (300,000)
Dividends - S               --             (80,000)                     (1) 80,000        --____
Ret. Earn, 12/31/X7-
 to Bal Sht              7,090,000       1,530,000          1,610,000       80,000     7,090,000




                                  4-30
P4.6 (cont'd.)
                           Paltry Company and Subsidiary Slim Company
                          Consolidated Financial Statement Working Paper
                                For the Year Ended December 31, 20X7
                                      S Company          Adjustments & Eliminations
Balance Sheet         P Company          (100%)              Dr.               Cr.        Consolidated

Cash and
 Receivables          2,800,000         880,000                                           3,680,000
Inventory             3,200,000       1,350,000   (3)     100,000     (4) 100,000         4,550,000
Investment in Slim    2,390,000           --                          (1) 390,000             --
                                                                      (2)2,000,000
Plant Assets          5,000,000       2,300,000   (3)     200,000                          7,500,000
Accumulated
 Depreciation        (1,200,000)          --                          (4)     20,000      (1,220,000)
Purchase Premium                                  (2)     800,000     (3)    800,000           --
Goodwill                                          (3)     400,000                            400,000
     Total           12,190,000       4,530,000         1,500,000           3,310,000     14,910,000

Current
 Liabilities          2,600,000       2,300,000                                           4,900,000
Long-Term Debt        1,700,000         500,000   (3)     100,000     (4)     20,000      2,120,000
Capital Stock - P       800,000           --                                                800,000
Capital Stock - S         --            200,000   (2)     200,000                             --
Ret Earn-from
 Earn Stmt            7,090,000       1,530,000         1,610,000             80,000      7,090,000
Minority Interest
 in S
   Total             12,190,000       4,530,000          1,910,000              100,000    14,910,000
                                                         3,410,000            3,410,000




                                   4-31
P4.6 (cont'd.)

(1)   To eliminate the equity method entries made by Paltry during 20X7.
(2)   To eliminate the investment account against the stockholders' equity of
      Slim and reclassify the purchase premium, all as of 1/2/X7.
(3)   To allocate the purchase premium among the assets and liabilities of
      Slim and to Goodwill. Goodwill of $400,000 = $2,000,000 - $200,000
      - $1,000,000 - $100,000 - $200,000 - $100,000 (decrease in long term
      debt).
(4)   To record current year amortization of the purchase premium;
      alternatively, this amount could be credited directly to Plant Assets as
      S's accumulated depreciation recorded during 20X7 is not separately
      disclosed.

                  Formal Adjusting and Eliminating Entries
                              (Not Required)
(1)
 Income from Slim                                       470,000
                          Dividends - Slim                            80,000
                          Investment in Slim                         390,000
To eliminate the equity method entries made by
Paltry during 20X7.

(2)
 Capital Stock - Slim                                   200,000
 Retained Earnings - Slim                             1,000,000
 Purchase Premium                                       800,000
                            Investment in Slim                      2,000,000
To eliminate the investment account and establish
the purchase premium, as of 1/2/X7.




                                    4-32
P4.6 (cont'd.)

(3)
 Inventory                                              100,000
 Plant Assets                                           200,000
 Goodwill                                               400,000
 Long-Term Debt                                         100,000
                            Purchase Premium                      800,000
To allocate the purchase premium among the assets
and liabilities of Slim and to goodwill.

(4)
 Inventory, 1/2,
 Income Statement                                       100,000
 Operating Expenses                                      20,000
 Interest Expense                                        20,000
                       Inventory                                  100,000
                       Accumulated Depreciation                    20,000
                       Long-Term Debt                              20,000
To record current year purchase premium amortization.




                                   4-33
P4.7 CONSOLIDATED FINANCIAL STATEMENT WORKING
     PAPER--PURCHASE DISCOUNT

Requirement 1:

P's share of S's reported net income                             $320,000 (1)
Less purchase discount amortization:
Amortization of premium on note receivable                        $ 3,200
((.8x$20,000)/5)
Reduction in depreciation on buildings and equipment
((.8x$100,000)/20)                                                  (4,000)
Amortization of premium on long-term
debt((.8x$80,000)/10)                                              (6,400)
Total purchase discount amortization                              $(7,200)(2)
Net equity method income accrual                                 $327,200

(1)   $320,000 = .8($3,200,000-($440,000+$2,440,000-$500,000)+
                  $8,000-$410,000-$18,000).

(2)   Note that S Company uses the LIFO cost flow assumption to account
      for its inventories. Since the beginning inventory is undervalued,
      application of LIFO implies that the beginning inventory is still on hand
      and the portion of the purchase discount allocated to it has not been
      amortized.

Note: The purchase discount at 1/2/X1 amounted to ($80,000) (=$1,470,000
      +$50,000-.8($100,000+$1,900,000)). The initial allocation is $48,000
      (=.8($500,000-$440,000)) to Inventory, ($80,000)
      (=.8($400,000-$500,000) to Buildings and Equipment,
      $16,000(=.8($130,000-$110,000)) to Notes Receivable, Noncurrent,
      and ($64,000)(=.8($300,000)-($220,000)) to Long-Term Debt.




                                    4-34
P4.7 (cont'd.)

Requirement 2:

                            P Company and Subsidiary S Company
                        Consolidated Financial Statement Working Paper
                           For the Year Ended December 31, 20X1
                                    S Company      Adjustments & Eliminations
Income Statement     P Company        (80%)           Dr.               Cr.       Consolidated
Sales                7,000,000      3,200,000                                       10,200,000
Income from S          327,200                    (1)   327,200
Interest Income          --               8,000   (4)     3,200                         4,800
Inventory,
 12/31/X1            1,800,000        500,000                      (4)   48,000      2,348,000
Total Credits        9,127,200      3,708,000           330,400          48,000     12,552,800
Inventory, 1/2/X1    1,700,000        440,000     (4)    48,000                      2,188,000
Purchases            4,800,000      2,440,000                                        7,240,000
Operating Expenses     750,000        410,000                      (4)    4,000      1,156,000
Interest Expense        60,000         18,000                      (4)    6,400         71,600
  Total Debits       7,310,000      3,308,000            48,000          10,400     10,655,600
Minority Int. in
 Net Income              --              --       (5)    80,000                         80,000
Net Income-to Ret
  Earn Stmt          1,817,200          400,000         458,400          58,400      1,817,200




                                 4-35
P4.7 (cont'd.)
Retained Earnings                     S Company             Adjustments & Eliminations
Statement             P Company         (80%)                  Dr.               Cr.        Consolidated

Ret Earnings,
 1/2/X1-P             2,810,000              --                                               2,810,000
Ret Earnings,
 1/2/X1-S                 --          1,900,000        (2) 1,900,000                             --
Net Income-from
 Inc Stmt             1,817,200            400,000             458,400            58,400      1,817,200
Dividends - P          (120,000)             --                                                (120,000)
Dividends - S             --               (50,000)                       (1)     40,000         --
                                                                          (5)     10,000
Ret Earn, 12/31/X1-
  to Bal Sht          4,507,200       2,250,000              2,358,400            108,400     4,507,200


Balance Sheet
Cash and
 Receivables          1,000,000      1,580,000                                               2,580,000
Inventory             1,800,000        500,000        (3)      48,000                        2,348,000
Investment in S       1,807,200          --                               (1) 287,200           --
                                                                          (2)1,520,000
Notes Receivable,
 Noncurrent               --              108,000     (3)      16,000     (4)      3,200       120,800
Land                    600,000           330,000                                              930,000
Buildings and
 Equipment            2,200,000           600,000                         (3)     80,000     2,720,000
Accumulated
 Depreciation          (700,000)          (50,000)    (4)       4,000                          (746,000)
Purchase Discount                                     (3)      80,000     (2)      80,000         --
Total                 6,707,200      3,068,000                148,000           1,970,400     7,952,800




                                   4-36
P4.7 (cont'd.)
                                   S Company           Adjustments & Eliminations
Balance Sheet       P Company        (80%)                Dr.               Cr.      Consolidated

Current
 Liabilities        1,400,000          500,000                                         1,900,000
Long-term Debt        600,000          218,000   (4)      6,400    (3)     64,000        875,600
Capital Stock - P     200,000             --                                             200,000
Capital Stock - S        --            100,000   (2)    100,000                             --
Ret Earn-from
 Ret Earn Stmt      4,507,200      2,250,000       2,358,400              108,400      4,507,200
Minority Interest
 in S                    --               --                       (2)     400,000
                                                                   (5)      70,000        470,000
   Total            6,707,200      3,068,000           2,464,800           642,400      7,952,800
                                                       2,612,800         2,612,800




                                4-37
P4.7 (cont'd.)

(1)   To eliminate the equity method entries made by P during 20X1.
(2)   To eliminate the investment account against 80 percent of the
      stockholders' equity of S, reclassify the remaining stockholders' equity
      as minority interest and establish the purchase discount.
(3)   To allocate the purchase discount as of 1/2/X1 among the assets and
      liabilities of S Company to the extent of P's 80 percent interest.
(4)   To record current year amortization of the purchase discount.
(5)   To record the change in the minority interest during 20X1.

                  Formal Adjusting and Eliminating Entries
                              (Not Required)
(1)
 Income from S                                            327,200
                              Dividends - S                            40,000
                              Investment in S                         287,200

(2)
 Retained Earnings-S,1/1                               1,900,000
 Capital Stock - S                                       100,000
                             Purchase Discount                         80,000
                             Investment in S                        1,520,000
                             Minority Interest in S                   400,000

(3)
 Inventory                                                 48,000
 Notes Receivable, Noncurrent                              16,000
 Purchase Discount                                         80,000
                                   Buildings and
                                   Equipment                           80,000
                                   Long-Term Debt                      64,000




                                     4-38
P4.7 (cont'd.)

(4)
 Interest Income                                              3,200
 Accumulated Depreciation                                     4,000
 Long-Term Debt                                               6,400
                                   Operating Expenses                   4,000
                                   Interest Expense                     6,400
                                   Notes Receivable,
                                   Noncurrent                           3,200

(5)
 Minority Interest in Net Income                              80,000
                                     Dividends - S                     10,000
                                     Minority Interest in S            70,000




                                     4-39
P4.8 ACCOUNTING FOR ACQUISITION, INVESTMENT, AND
     CONSOLIDATION

Requirement 1:

A stock acquisition has occurred. Plumbing Professionals, Inc., acquired 80%
of the outstanding shares of common stock of Sewer Specialists, Inc., for
cash. Both companies remain separate legal entities.

Requirement 2:

 Net income of Sewer Specialists for 20X6:
    Sales                                                      $400,000
    Cost of goods sold                                          180,000
    Gross profit                                                220,000
    Selling, general and administrative expenses                 70,000
 Net income                                                    $150,000
 Plumbing Professionals' interest                               x 80%
 Plumbing Professionals= share                                 $120,000[E]

Equity in income of Sewer Specialists = $96,000 ( = .8 x $120,000)

Since $120,000 does not equal $96,000, Plumbing Professionals is using the
complete equity method. Plumbing Professionals has recorded more than
merely its share of Sewer Specialists 20X6 net income.




                                    4-40
P4.8 (cont=d.)

Requirement 3:
                      Investment in Sewer Specialists
 01/01/X4                             20X4 and 20X5
 Original investment                  Excess depreciation on equipment
 $820,000 [A]                         $48,000 [C]
 20X4 and 20X5                        20X4
 Share of net income and cash         Excess inventory sold
 dividends                            30,000 [D]
 80,000 [B]

 12/31/X5 Balance                    20X6
 $822,000                            Share of cash dividends
 20X6                                40,000 [F]
 Share of net income                 Excess depreciation on equipment
 120,000 [E]                         24,000 [G]
 12/31/X6 Balance
 $878,000

            Computations:
              Original investment:
                 80,000                  shares of common stock
                x $10 per share
              $800,000                   common stock purchase price
               + 20,000                  legal fees
              $820,000 [A]               cost of investment




                                  4-41
P4.8 (cont'd.)

         Share of net income and cash dividends for 20X4 and 20X5:
       $200,000              retained earnings--Sewer, 01/01/X6
       -100,000              retained earnings--Sewer, 01/01/X4
       $100,000              earnings less cash dividends since acquisition
        x 80%                Plumbing Professionals' interest
        $ 80,000 [B]         Plumbing Professionals' share

      Share of cash dividends for 20X6:
        $50,000              cash dividends declared--Sewer
        x 80%                Plumbing Professionals' interest
        $40,000 [F]          Plumbing Professionals' share

      Adjustments under complete equity method:

      Equipment:
 $120,000/5 years = $24,000/yr     for 20X4 - 20X8 extra depreciation
                                   expense
 $24,000 x 2 = $48,000 [C]         for 20X4 and 20X5
 $24,000 [G]                       for 20X6

      Land:       No adjustment to net income since not sold.

      Inventory: $30,000 [D] extra cost of goods sold in 20X4 since sold
                 under FIFO method in 20X4




                                    4-42
P4.8 (cont'd.)

      Goodwill:

Book value of net assets of Sewer Specialists on 01/01/X4:
 common stock                                $100,000
 additional paid-in-capital                   400,000
 retained earnings                            100,000
 net assets                                  $600,000
 Plumbing Professionals' interest             x 80%
 Plumbing Professionals' share               $480,000

Positive goodwill computation:

 original investment                    $820,000
 Plumbing Professionals' share of       -480,000
 Sewer Specialists' net assets
 purchase premium                       $340,000 [J]
 allocated to equipment                 -120,000
 allocated to land                      - 50,000
 allocated to inventory                 - 30,000
 goodwill                               $140,000

Requirement 5:

Entries to consolidate on 12/31/X6:

a)
 Equity in Income of Sewer
 Specialists                                           120,000 [E]
                              Investment in Sewer
                              Specialists                            120,000
To reverse share of 20X6 net income.




                                      4-43
P4.8 (cont'd.)

b)
 Investment in Sewer
 Specialists                                              24,000
                              Equity in Income of
                              Sewer Specialists                       24,000
To reverse excess depreciation expense on equipment
for 20X6 (24,000 [G]).

c)
 Investment in Sewer
 Specialists                                          40,000 [F]
                             Dividends--Sewer
                             Specialists                              40,000
To reverse shares of 20X6 cash dividends.

d)    Adjusted to complete equity--already there

e)
 Common Stock--                                       400,000
 Sewer Specialists
 Additional Paid-In
 Capital--Sewer
 Specialists                                          100,000
 Retained Earnings--
 Sewer Specialists                                    200,000
 Purchase Premium                                  262,000 [H]
                          Investment in Sewer
                          Specialists                                822,000
                          Minority Interest in
                          Sewer Specialists                        140,000[I]
To eliminate investment account balance as of 12/31/X5.




                                   4-44
P4.8 (cont'd.)

 purchase premium, 01/01/X4                                     $340,000 [J]
 extra depreciation expense 20X4 and 20X5                        - 48,000 [C]
 extra cost of goods sold 20X4                                   - 30,000 [D]
 purchase premium, 12/31/X5                                     $262,000 [H]
 common stock--Sewer, 12/31/X6                                  $100,000
 additional paid-in-capital--Sewer, 12/31/X6                     400,000
 retained earnings--Sewer, 12/31/X6                              200,000
 net assets--Sewer, 12/31/X6                                    $700,000
 minority interest percentage                                   x 20%
 minority interest in Sewer Specialists, 12/31/X6               $140,000 [I]

f)
 Goodwill                                                  140,000
 Equipment (120,000 - 48,000)                               72,000
 Land                                                       50,000
                                Purchase Premium
                                [H]                                   262,000
To allocate purchase premium for 20X4 and 20X5.

g)
 Depreciation                                            24,000 [G]
 Expense
                        Accumulated
                        Depreciation--Equipment                        24,000
To depreciate excess equipment for 20X6.

h)
 Minority interest in net
 income (150,000 x 20%)                                     30,000
 Dividends--Sewer Specialists
 (50,000 x 20%)                                                        10,000
                                  Minority interest in
                                  Sewer Specialists                    20,000
To update the minority interest for 20X6.


                                     4-45
P4.9 INTERPRETING CONSOLIDATED FINANCIAL
     STATEMENTS

Requirement 1:

The total value of the Wallace stock issued in the acquisition was
$14,000,000, as determined from the information in the consolidated
statement of stockholders' equity:
 Common stock--par value                                          $ 608,000
 Additional capital                                                13,392,000
                                                                  $14,000,000
On a per-share basis, Wallace stock was worth approximately
$23($14,000,000/608,034).

Requirement 2:

 Investment in
 Colorforms                                         27,000,000
                   Cash                                           13,000,000
                   Common stock                                      608,034
                   Additional (paid-in) capital                   13,391,966

Requirement 3:

Since the acquisition price was $27,000,000 and resulting goodwill was
$15,564,000, the fair value of net assets acquired was $11,436,000
($27,000,000 - $15,564,000). Colorforms' total liabilities were $17,500,000,
making the fair value of total identifiable assets $28,936,000. Thus,
consolidated total assets would be:
 Wallace's total assets at 7/31/91                               $399,093,000
 Fair value of Colorforms' total identifiable assets at
 acquisition                                                        28,936,000
 Goodwill                                                           15,564,000
 Less: cash paid in acquisition                                   (13,000,000)
 Consolidated total assets 8/1/91                                $430,593,000




                                     4-46
P4.9 (cont=d.)

Requirement 4:

Goodwill amortization for the year was $389,000, determined as follows:
 Balance 7/31/91                                                $ 1,382,000
 Amount added from Colorforms acquisition                       15,564,000
                                                               $16,946,000
 Balance 7/31/92                                                16,557,000
 Amount amortized                                               $ 389,000

It appears that a 40-year life is being used ($15,564,000/40 approximately
equals $389,000).

Requirement 5:

The price per share paid for the 23,000 shares repurchased during the year was
$24 (=(23,000 + 529,000)/23,000).

The Wallace shares were valued at $23 in the acquisition and then bought
back at $24. Had the buyback cash been included in the original transaction,
in lieu of the 23,000 shares, goodwill would have been affected only slightly,
increasing by $23,000 (=($24 - $23) x 23,000 shares) from $15,564,000 to
$15,587,000, a change of about one-tenth of one percent.




                                     4-47
P4.10            DEVELOPING AN AUTOMATED SPREADSHEET
             FOR CONSOLIDATION

Note to instructor: This assignment asks the student to develop a
computerized spreadsheet that will automate the standard consolidation
entries, such as those shown in Exhibit 4.3 in the chapter. To be correct, the
spreadsheet needs to work under various conditions, including cases where
one or more components of the purchase premium is fully amortized.

To grade this assignment, enter a set of test data in the student's program, and
see if the proper results are achieved. If not, I return the program (with the
test data results) to the student for revision. Typical students may need two or
three iterations to get their program working.

This has proven to be a very good assignment to get students to generalize the
consolidation elimination process.

Following are two sets of test data for use in evaluating students' programs.




                                     4-48
P4.10 (cont=d.)

Data set A:

1.    Current trial balances for P and S:
                                                    Parent          Sub
 Cash and receivables                                 80,000         30,000
 Inventory                                           275,000        140,000
 Equipment                                           800,000        710,000
 Accumulated depreciation                          (355,000)      (210,000)
 Investment in S                                     504,600
 Liabilities                                       (230,000)      (130,000)
 Common stock                                      (400,000)      (200,000)
 APIC                                              (100,000)       (50,000)




 Retained earnings                                 (390,000)      (250,000)
 Dividends                                            70,000         20,000
 Revenue                                           (920,000)      (300,000)
 Cost of goods sold                                  485,000        210,000
 Depreciation                                        110,000         20,000
 Other expenses                                      110,600         10,000
 Income from S                                      (40,200)

2.    Percentage of P owned by S: 80%

3.    Original cost of acquisition: $400,000

4.    Retained earnings of S at acquisition: $100,000

5.    Allocation and amortization of original purchase premium:
 Inventory                20%          1 year
 Equipment                50%          10 years
 Identifiable intangibles 30%          20 years


                                     4-49
6.   Year: 3




               4-50
P4.10 (cont=d.)

The consolidated trial balance that results from these data is as follows:
 Cash and receivables                                                    110,000
 Inventory                                                               415,000
 Equipment                                                             1,570,000
 Accumulated depreciation                                              (583,000)
 Identifiable intangibles                                                 30,600
 Liabilities                                                           (360,000)
 Common stock                                                          (400,000)
 APIC                                                                  (100,000)




Retained earnings                                                      (390,000)



Minority interest                                                    (108,000)
Dividends                                                               70,000
Revenue                                                            (1,220,000)
Cost of goods sold                                                     695,000
Depreciation                                                           136,000
Amortization expense                                                     1,800
Other expenses                                                         120,600
Minority interest in net income                                         12,000

The consolidation elimination entries are:

(1)
 Income from S                                                40,200
                               Dividends - S                             16,000
                               Investment in S                           24,200

(2)
 Common Stock                                               200,000

                                     4-51
APIC                                     50,000
Retained Earnings                       250,000
Purchase Premium                         80,400
                    Investment in S               480,400
                    Minority Interest             100,000




                          4-52
P4.10 (cont=d.)

(3)
 Equipment                                                 60,000
 Identifiable Intangibles                                  32,400
                            Accumulated Depreciation                  12,000
                            Purchase Premium                          80,400
(4)
 Depreciation Expense                                       6,000
 Amortization Expense                                       1,800
                            Accumulated Depreciation                   6,000
                            Identifiable Intangibles                   1,800
(5)
 Minority Interest in Net Income                            12,000
                                     Dividends - S                     4,000
                                     Minority Interest                 8,000

Data set B:

1.    Current trial balances for P and S:
                                                      Parent          Sub
 Cash and receivables                                  100,850         40,000
 Inventory                                             210,000        160,000
 Equipment                                             700,000        600,000
 Accumulated depreciation                            (410,000)      (200,000)
 Investment in S                                       549,150
 Liabilities                                         (100,000)       (70,000)
 Common stock                                        (350,000)      (100,000)
 APIC                                                 (60,000)       (70,000)




 Retained earnings                                   (480,000)      (280,000)
 Dividends                                              40,000         10,000
 Revenue                                             (800,000)      (700,000)
 Cost of goods sold                                    450,000        460,000

                                     4-53
 Depreciation                                           120,000         70,000
 Other expenses                                         105,450         80,000
 Income from S                                          (75,450)

P4.10 (cont=d.)

2.    Percentage of P owned by S: 90%

3.    Original cost of acquisition: $500,000

4.    Retained earnings of S at acquisition: $180,000

5.    Allocation and amortization of original purchase premium:
 Inventory                10%          1 year
 Equipment                30%          5 years
 Identifiable intangibles 60%          20 years

6.    Year: 7

The consolidated trial balance that results from these data is as follows:
 Cash and receivables                                                    140,850
 Inventory                                                               370,000
 Equipment                                                             1,355,500
 Accumulated depreciation                                              (665,000)
 Identifiable intangibles                                                 72,150
 Liabilities                                                           (170,000)
 Common stock                                                          (350,000)
 APIC                                                                   (60,000)




 Retained earnings                                                   (480,000)



 Minority interest                                                     (53,000)

                                     4-54
Dividends                                     40,000
Revenue                                  (1,500,000)
Cost of goods sold                           910,000
Depreciation                                 190,000
Amortization expense                           5,500
Other expenses                               185,450
Minority interest in net income                9,000




                                  4-55
P4.10 (cont=d.)

The consolidation elimination entries are:

(1)
 Income from S                                             75,450
                                Dividends - S                          9,000
                                Investment in S                       66,450

(2)
 Common Stock                                             100,000
 APIC                                                      70,000
 Retained Earnings                                        280,000
 Purchase Premium                                          77,700
                                Investment in S                      482,700
                                Minority Interest                     45,000

(3)
 Identifiable Intangibles                                  77,700
                            Purchase Premium                          77,700

(4)
 Amortization Expense                                       5,550
                            Identifiable Intangibles                   5,550

(5)
 Minority Interest in Net Income                             9,000
                                      Dividends - S                    1,000
                                      Minority Interest                8,000




                                      4-56
P4.11                    RATIO ANALYSIS C EQUITY METHOD AND
                         CONSOLIDATION

Requirement 1:

Purchase premium = plant assets = $2,500,000 - .8 X $2,500,000 = $500,000
Annual extra depreciation = $500,000/10 = $50,000
Equity method income accrual = .8 X $400,000 - $50,000 = $270,000
P=s share of S=s dividends = .8 X $200,000 = $160,000
Investment account balance at 12/31/X4 = $2,500,000 + $270,000 - $160,000
      = $2,610,000

ROA = ($1,000,000 + $270,000)/($10,000,000 + $2,610,000) = .101

Requirement 2:

Premium balance at December 31, 20X4 = $500,000 - $50,000 = $450,000
      Consolidated net income = $1,000,000 + .8 X $400,000 - $50,000
= $1,270,000
Minority interest in net income = .2 X $400,000 = $80,000

ROA = ($1,270,000 + $80,000)/($10,000,000 + $6,000,000 + $450,000)
=.082

Because the denominator includes 100% of S=s assets, not 80%, the
numerator should include 100% of S=s income so that the profitability of all
the assets can be assessed. Thus the Minority Interest In Net Income should
be added to the numerator.

NOTE: Consolidated total assets does not include the portion of the
Investment in S balance representing P=s share of the book value of S=s net
assets but does include the unamortized purchase premium (plant assets in this
problem). The elimination process removes the Investment in S and replaces
it in consolidation with the underlying assets (and liabilities, not considered
here) of S plus any unamortized purchase premium.




                                     4-57
P4.11 (cont=d.)

Requirement 3:

Because the consolidated balance sheet includes all assets controlled by P, the
ROA that measures the profitability of all of those assets gives the best
measure of the profitability of that asset portfolio. The ROA under full
consolidation should therefore be used with the numerator reflecting the total
income generated by those assets (= consolidated net income + minority
interest in net income).

The equity method treats P=s interest in S as an investment and the
denominator of the ROA includes P=s share of the net assets of S (plus a
purchase premium in this problem). Thus under the equity method, the ROA
reflects the profitability of P=s total assets, excluding the investment account,
plus the return on P=s share of S=s net assets. The result is to add together
two inconsistent measures--return on P=s total assets + return on P=s share of
S=s net assets--and overstate the profitability of the entire asset portfolio
controlled by P.




                                      4-58
P4.12            CONSOLIDATED STATEMENT OF CASH FLOWS

                      Prep Corporation and Subsidiary
                   Consolidated Statement of Cash Flows
Cash Flows from Operating Activities:
Net Income                                                       $400,000
Add (Subtract) Items Not Affecting Cash:
 Depreciation Expense                               $350,000
 Goodwill Impairment Loss                              30,000
 Minority Interest in Net Income                       24,000
 Loss on Retirement of Plant Assets                    50,000     454,000
Changes in Current Assets and Liabilities:
 Increase in Other Current Assets                  (400,000)
 Decrease in Current Liabilities                   (268,000)     (668,000)
Net Cash Flows from Operating Activities                         $186,000
Cash Flows from Investing Activities:
Acquisition of Plant Assets ($4,000,000 -
($4,200,000 - $500,000))                                         (300,000)
Cash Flows from Financing Activities:
Increase in Noncurrent Liabilities                  $100,000
Dividends Paid to Majority Stockholders              (70,000)
Dividends Paid to Minority Stockholders              (16,000)       14,000
 Net Decrease in Cash                                           $(100,000)




                                  4-59
P4.13            CONSOLIDATED STATEMENT OF CASH FLOWS

                         P Company and S Company
                   Consolidated Statement of Cash Flows
                  For the Year ended December 31, 20X7
Cash Flows from Operating Activities:
Net Income                                                    $ 600,000
Add (Subtract) Items Not Affecting Cash:
 Depreciation Expense                               $250,000
 Goodwill Impairment Loss                             25,000
 Minority Interest in Net Income                      12,000     287,000
Changes in Current Assets and Liabilities:
 Increase in Other Current Assets                 $(100,000)
 Increase in Current Liabilities                     250,000     150,000
Net Cash Flows from Operating Activities                      $1,037,000
Cash Flows from Investing Activities:
Sale of Plant Assets                                $ 25,000
Acquisition of Plant Assets                        (675,000)   (650,000)
Cash Flows from Financing Activities:
Increase in Other Liabilities                      $ 150,000
Issuance of Capital Stock                            200,000
Dividends Paid to Majority Stockholders            (435,000)
Dividends Paid to Minority Stockholders               (2,000)   (87,000)
Net Increase in Cash                                          $ 300,000




                                 4-60
P4.14      CONSOLIDATED STATEMENTS: POTPOURRI

Requirement 1:

   Computation of the Investment in State Balance at December 31, 20X4
Original acquisition cost                                    $25,000,000
Share of State=s 20X1-20X4 net income (.8 X                     7,200,000
$9,000,000)
Purchase premium amortization
[extra depreciation; 4 X ($5,000,000/10)]                     (2,000,000)
Share of State=s 20X1-20X4 dividends (.8 X $3,000,000)        (2,400,000)
Balance, December 31, 20X4                                   $27,800,000

Requirement 2:

   Computation of Consolidated Cash Flow from Operations, 20X1-20X4
Total consolidated net income                               $30,000,000
Addback:
  Consolidated depreciation and amortization from
own operations                                                 8,800,000
  Purchase premium amortization                                2,000,000
  Minority interest in net income (.2 X $9,000,000)            1,800,000
Changes in noncash current operating assets and
liabilities:
  Increase in accounts receivable                          (14,000,000)
  Decrease in inventories                                      5,500,000
  Increase in accounts payable                                 4,800,000
  Decrease in accrued liabilities                            (3,700,000)
Total consolidated cash flow from operations                $35,200,000




                                  4-61
P4.14 (cont=d.)

Requirement 3:

             State=s Stockholders Equity at December 31, 20X4
Capital stock                                                $ 8,000,000
Retained earnings
($10,000,000 + $9,000,000 - $3,000,000)                        16,000,000
Accumulated other comprehensive income                        (2,500,000)
Total stockholders= equity                                   $21,500,000

Requirement 4:

    Schedule to Compute Penn=s 20X5 Equity Method Income Accrual
Penn=s share of State=s net income (.8 X $2,800,000)     $2,240,000
Purchase premium amortization:
 Extra depreciation; $5,000,000/10                         (500,000)
 Goodwill impairment                                     (1,000,000)
Equity method income accrual                             $ 740,000




                                  4-62
P4.15          INVESTOR ACCOUNTING--COST AND EQUITY
            METHODS, PURCHASE PREMIUM (APPENDIX)

Requirement 1:

                         Books of Paint Corporation
Investment in Soil                                      77,500
                                Income from Soil                 77,500
To record Paint's share of Soil's net income, reduced
by purchase premium amortization during 20X4;
$77,500 = .9($200,000)-$75,000-$27,500.

Cash                                                    81,000
                               Investment in Soil                81,000
To record the receipt of $81,000 (=.9x$90,000) of
dividends from Soil Company.

Requirement 2:

Cash                                                    81,000
                              Dividend Revenue                   81,000
To record dividend revenue of $81,000 (=.9 x $90,000)
from Soil under the cost method.

Requirement 3:

               Consolidated Financial Statement Working Paper
 Investment in Soil                                      3,500
 Income from Soil                                       77,500
                              Dividends - Soil                   81,000
To eliminate the equity method entries, thereby
adjusting the investment account to its beginning of
year balance.




                                     4-63
P4.15 (cont=d.)

Stockholders' Equity - Soil                              3,000,000
Purchase Premium                                           500,000
                                Investment in Soil                    3,200,000
                                Minority Interest in
                                Soil                                   300,000
To eliminate the investment in Soil against 90 % of
Soil's stockholders' equity and establish the purchase
premium and minority interest, all as of 1/1/X4.

Note: the book value of the 90 percent interest acquired by Paint was
$2,700,000 (=$3,200,000-$500,000). Accordingly, the book value of all of
Soil's stockholders' equity at 1/1/X4 was $3,000,000 (=$2,700,000/.9).

Inventory (Balance Sheet)                                   75,000
Depreciable Assets                                         275,000
Goodwill                                                   150,000
                             Purchase Premium                    500,000
To allocate the purchase premium among Soil Company's assets and
goodwill.

Depreciation Expense                                         27,500
Inventory 1/1/X4
(Income Statement)                                           75,000
                          Accumulated Depreciation                      27,500
                          Inventory (Balance Sheet)                     75,000
To record amortization of the purchase premium for 20X4.

Minority Interest in Net Income                              20,000
                                  Dividends - Soil                       9,000
                                  Minority Interest in
                                  Soil                                  11,000
To record the change in the minority interest during 20X4.




                                     4-64
P4.15 (cont=d.)

Requirement 4:

Dividend Revenue                                           81,000
                             Dividends - Soil                          81,000
To eliminate intercompany dividends received from
Soil Company.

Note: The investment account under the cost method is stated at its balance
on 1/1/X4. Reversal of the equity method entries achieves the same result in
this, the first year after acquisition. Therefore, the additional eliminating
entries are the same as those required by the equity method (given in part 3).
In subsequent years, however, use of the cost method creates the need for
another working paper entry to adjust the investment account to the equity
basis at the beginning of the year.

Requirement 5:

Consolidated net income is $577,500, Paint's net income from its own
operations, $500,000, plus the equity method income accrual of $77,500.




                                     4-65
P4.16                CONSOLIDATED TRIAL BALANCE WORKING PAPER--COST METHOD (APPENDIX)
Requirement 1:       Consolidated Trial Balance Working Paper, December 31, 20X6
                                                                                       Consoli-       Consoli-    Consoli-     Consoli-
                                                                                        dated          dated       dated         dated
                              EON           NEO             Adjustments & Eliminations Trial          Income      Retained      Balance
         Account           Dr.(Cr.)       Dr.(Cr.)              Dr.              Cr.   Balance        Statement   Statement      Sheet
Cash and
  Receivables             2,610,000      1,500,000                                      4,110,000                              4,110,000
Inventory,
 Jan. 1, 20X6             1,960,000      1,400,000                                       3,360,000    3,360,000
Inventory,
 Dec. 31, 20X6            2,030,000      1,380,000                                      3,410,000                              3,410,000
Land                        200,000        150,000    (4)      90,000                     440,000                                440,000
Other Plant
 Assets (Net)             3,170,000      1,450,000                                      4,620,000                              4,620,000
Investment in NEO         1,190,000          -        (1)     250,000   (3) 270,000          -
                                                                        (5)1,170,000
Purchase Premium              -               -       (3)     270,000   (4) 270,000           -
Identifiable
  Intangibles                 -               -       (4)     180,000   (6)    10,000      170,000                                170,000
Current
 Liabilities             (2,300,000)    (1,500,000)                                     (3,800,000)                           (3,800,000)
Noncurrent
 Liabilities             (1,800,000)      (700,000)                                      (2,500,000)                          (2,500,000)
Minority Interest
 in NEO                       -               -                         (5)   130,000      (228,000)                             (228,000)
                                                                        (7)    98,000
Capital Stock              (550,000)      (400,000)   (5)    400,000                      (550,000)                             (550,000)
Retained Earnings,
 Jan. 1                  (1,900,000)      (900,000)   (5)    900,000    (1)   250,000    (2,150,000)               (2,150,000)
Dividends                   500,000        200,000                      (2)   180,000       500,000                   500,000
                                                                        (7)    20,000
Sales                   (11,000,000)    (6,500,000)                                     (17,500,000) (17,500,000)
Dividend Income            (180,000)         -        (2)     180,000                         -
Purchases                 6,200,000      4,000,000                                       10,200,000   10,200,000


                                       4-66
P4.16 (cont'd.)
                                                                                 Consoli-      Consoli-   Consoli-  Consoli-
                                                                                  dated         dated      dated      dated
                            EON           NEO         Adjustments & Eliminations Trial         Income    Retained    Balance
     Account              Dr.(Cr.)       Dr.(Cr.)          Dr.            Cr.     Balance       Statement Statement    Sheet

Operating
 Expenses                1,900,000      1,300,000    (6)     10,000                3,210,000    3,210,000
Inventory,
 Dec. 31,20X6           (2,030,000)    (1,380,000)                                 (3,410,000) (3,410,000)
Minority Interest
 in Net Income              --              --       (7)     118,000                  118,000     118,000
                            0               0              2,398,000   2,398,000        0
Consolidated net income                                                            (4,022,000) (4,022,000)
 Consolidated Retained Earnings, Dec. 31, 20X6                                                 (5,672,000) (5,672,000)
                                                                                                        0




                                     4-67
P4.16 (cont'd.)

(1)   To adjust the investment account to the equity basis as of January 1,
      20X6.
(2)   To eliminate the intercompany dividends.
(3)   To reclassify the unamortized purchase premium as of January 1, 20X6.
(4)   To allocate the unamortized purchase premium to Land and Identifiable
      Intangibles.
(5)   To eliminate the investment account against NEO's stockholders' equity
      and establish the minority interest as of January 1, 20X6.
(6)   To recognize amortization of identifiable intangibles for 20X6.
(7)   To record the change in the minority interest during 20X6.

NOTE: Original purchase premium (on 1/2/X4), was $290,000 [=$1,190,000 -
.9($400,000 + $600,000)] and was allocated to Land, $90,000 (=.9 x
$100,000) and Identifiable Intangibles (20-year life), $200,000 (=.9 x
$222,222).


                  Formal Eliminating Entries (Not Required)
                  Consolidated Trial Balance Working Paper

(1)
 Investment in NEO                                       250,000
                          Retained Earnings - EON                  250,000
To adjust the investment account to the equity basis
at the beginning of the year; $250,000 = EON's
share of the growth in NEO's retained earnings during
20X4 and 20X5, $270,000 =.9($900,000 - $600,000)
less amortization of identifiable intangibles for 20X4
and 20X5, $20,000 (= 2($200,000/20)).

(2)
 Dividend Income                                         180,000
                             Dividends - NEO                       180,000
To eliminate the intercompany dividends ($180,000
= .9 x $200,000).

                                    4-68
P4.16 (cont=d.)

(3)
 Purchase Premium                                        270,000
                               Investment in NEO                    270,000
To reclassify the unamortized purchase premium as
of January 1, 20X6; $270,000 = $1,190,000 -
.9($400,000 + $600,000) - $20,000 (identifiable
intangibles amortization for 20X4 and 20X5).

(4)
 Land                                                     90,000
 Identifiable Intangibles                                180,000
                              Purchase Premium                      270,000
To allocate the unamortized purchase premium to
Land ($90,000 = .9 x $100,000) and to Identifiable
Intangibles ($180,000 = $200,000 - $20,000).

(5)
 Capital Stock - NEO                                     400,000
 Retained Earnings - NEO                                 900,000
                              Investment in NEO                    1,170,000
                              Minority Interest in
                              NEO                                   130,000
To eliminate the investment account against the
stockholders' equity of NEO and establish the minority
interest, all as of 1/1/X6.

(6)
 Operating Expenses                                       10,000
                             Identifiable Intangibles                10,000
To recognize identifiable intangibles amortization for 20X6.




                                    4-69
P4.16 (cont=d.)

(7)
Minority Interest in Net
Income                                                    118,000
                             Dividends - NEO                           20,000
                             Minority Interest in
                             NEO                                       98,000
To recognize the change in the minority interest
during 20X6; $118,000 = .1[$6,500,000 - ($1,400,000
+ $4,000,000 - $1,380,000) - $1,300,000].

Requirement 2:

If this combination was accounted for as a pooling, the investment account
would be recorded at $900,000, the book value of 90 percent of NEO's
stockholders' equity. There would be no purchase premium to be concerned
about. Therefore, the following differences would arise:

!     Entry (1), which adjusts the investment account to the equity basis as
      of January 1, 20X6, would be for $270,000 [= .9($900,000 -
      $600,000)]; no prior period amortization would be reflected.

!     Entries (3), (4), and (6) would not be needed.

!     Consolidated net income would be $4,032,000 (= $4,022,000 +
      $10,000, the current year's amortization of identifiable intangibles).

!     Consolidated retained earnings would be $5,702,000 (= $5,672,000 +
      $30,000, the identifiable intangibles amortization for the three years
      since acquisition).

!     Land would be carried at $350,000 (= $440,000 - $90,000) on the
      consolidated balance sheet and identifiable intangibles would not be
      present.




                                     4-70

				
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