# Problem 4 by Abbydoc

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```									Problem 4.1                              Name ___________Solution______________

The Christopher Corporation paid \$140,000 cash to acquire 70% of the Lowell
Corporation on January 1, 2006. On January 1, 2006 the Lowell Corporation's assets had
the following remaining useful lives: land = unlimited, buildings = 20 years, equipment =
10 years, and goodwill = indefinite. Immediately before the acquisition, the following
information was available.

Christopher      Lowell          Lowell
Corporation    Corporation     Corporation
Accounts               Book Value     Book Value      Market Value
Cash                             \$152,000         \$24,000          \$24,000
Accounts Receivable                 80,000         35,000            35,000
Land                                45,000         18,000            27,000
Buildings                           98,000         32,000            50,000
Equipment                          200,000         54,000            74,000
Accounts Payable                    60,000         48,000            48,000
Common Stock, \$1 par                70,000         19,000
Retained Earnings, 1/1/06          175,000         33,000

For the year ended December 31, 2006 the Christopher Corporation reported net
income of \$50,000 (not including equity in investee earnings) and paid cash dividends of
\$20,000. For the year ended December 31, 2006 the Lowell Corporation reported net
income of \$20,000 and paid cash dividends of \$6,000. For the year ended December 31,
2007 the Lowell Corporation reported net income of \$24,000 and paid cash dividends of
\$7,000.

On December 31, 2008 the following information was available. Note: This is
not the complete financial statement data for either company.

Christopher       Lowell
Accounts             Corporation     Corporation
Land                               45,000          18,000
Buildings                          88,000          29,000
Equipment                          80,000          22,000
Accounts Payable                   75,000          61,000
Common Stock, \$1 par               70,000          19,000
Dividends                          21,000           8,000
Revenues                       * 320,000          115,000
Expenses                       * 260,000           85,000

* Christopher Corporation's revenues and expenses do not include any amounts related to
its investment in Lowell Corporation.
2

1. Assuming the Christopher Corporation uses the equity method and the parent
company concept to account for its investment in the Lowell Corporation, determine
the following.

December 31, 2008 balance in the Investment in Lowell Corporation account in the
Christopher Corporation's general ledger. \$171,010

Lowell acquisition         Total  Amortization   70%    Amortization
Implied value (\$140,000 / .70) \$200,000              \$140,000
Less: Lowell book value        \$115,000               \$80,500
Excess                          \$85,000               \$59,500

Land                              \$9,000              \$0     \$6,300                \$0
Buildings (20-year life)         \$18,000            \$900    \$12,600              \$630
Equipment (10-year life)         \$20,000          \$2,000    \$14,000            \$1,400
Goodwill (indefinite life)       \$38,000              \$0    \$26,600                \$0
Totals                           \$85,000          \$2,900    \$59,500            \$2,030

Investment in Lowell Corp.                    Eq. in Investee Earn.
1/1/06                140,000
NI 20,000 x. .7         14,000                                                  14,000
4,200 D 6,000 x .7
2,030 Amortization              2,030
12/31/06              147,770                                                   11,970

NI 24,000 x .7         16,800                                                   16,800
4,900 D 7,000 x .7
2,030 Amortization              2,030
12/31/07              157,640                                                   14,770

NI 30,000 x .7         21,000                                                   21,000
5,600 D 8,000 x .7
2,030 Amortization              2,030
12/31/08              171,010                                                   18,970

Equity in Investee Earnings reported on the Christopher Corporation's parent
company income statement for the year ended December 31, 2008. \$18,970

Net income reported on the Christopher Corporation's consolidated income statement
for the year ended December 31, 2008. \$78,970

Christopher Corp. revenues - expenses \$60,000
Equity in investee earnings           \$18,970
Consolidated net income               \$78,970
3

Noncontrolling interest reported on the Christopher Corporation's December 31, 2008
consolidated balance sheet. \$50,400

Lowell Corp. book value, 1/1/06          \$115,000
Lowell Corp. 2006 net income - dividends \$14,000
Lowell Corp. 2007 net income - dividends \$17,000
Lowell Corp. 2008 net income - dividends \$22,000
Lowell Corp. book value, 12/31/08        \$168,000

Noncontrolling interest (30%)                 \$50,400

Land reported on the Christopher Corporation's December 31, 2008 consolidated
balance sheet. \$69,300

Christopher     Lowell                        PC 70%     2006-2008    12/31/08
Corporation   Corporation       Total        Allocation Amortization Consolidated
\$45,000      \$18,000        \$63,000          \$6,300           \$0     \$69,300

Buildings reported on the Christopher Corporation's December 31, 2008 consolidated
balance sheet. \$127,710

Christopher     Lowell                        PC 70%     2006-2008    12/31/08
Corporation   Corporation        Total       Allocation Amortization Consolidated
\$88,000       \$29,000        \$117,000        \$12,600     (\$1,890)    \$127,710

Equipment reported on the Christopher Corporation's December 31, 2008
consolidated balance sheet. \$111,800

Christopher     Lowell                        PC 70%     2006-2008    12/31/08
Corporation   Corporation        Total       Allocation Amortization Consolidated
\$80,000       \$22,000        \$102,000        \$14,000     (\$4,200)    \$111,800

Goodwill reported on the Christopher Corporation's December 31, 2008 consolidated
balance sheet. \$26,600

Christopher      Lowell                       PC 70%     2006-2008    12/31/08
Corporation    Corporation      Total        Allocation Amortization Consolidated
\$0             \$0              \$0      \$26,600           \$0     \$26,600

2. Assuming the Christopher Corporation uses the equity method and the economic unit
concept to account for its investment in the Lowell Corporation, determine the
following.

December 31, 2008 balance in the Investment in Lowell Corporation account in the
Christopher Corporation's general ledger. \$171,010
4

Equity in Investee Earnings reported on the Christopher Corporation's parent
company income statement for the year ended December 31, 2008. \$18,970

Net income reported on the Christopher Corporation's consolidated income statement
for the year ended December 31, 2008. \$78,970

Christopher Corp. revenues – expenses               \$60,000
Lowell Corp. revenues – expenses                    \$30,000
Total amortization                                  (\$2,900)
Noncontrolling interests [(\$30,000 - \$2,900) x .30]   \$8,130
Consolidated net income                             \$78,970

Noncontrolling interest reported on the Christopher Corporation's December 31, 2008
consolidated balance sheet. \$73,290

Lowell Corp. book value, 1/1/06                         \$115,000
Lowell Corp. 2006 net income – dividends                 \$14,000
Lowell Corp. 2007 net income – dividends                 \$17,000
Lowell Corp. 2008 net income – dividends                 \$22,000
Lowell Corp. book value, 12/31/08                       \$168,000
Total excess allocation                                  \$85,000
Less: Total amortization (\$2,900 x 3 years)              (\$8,700)
Lowell Corp. "consolidated" book value                  \$244,300

Noncontrolling interest (30%)                            \$73,290

Check:
Economic unit noncontrolling interest                    \$73,290
Parent company noncontrolling interest                   \$50,400
Noncontrolling interest difference                       \$22,890

Total allocation - total 3-year amortization             \$76,300
Parent company allocation - total 3-year amortization    \$53,410
Allocation difference                                    \$22,890
5

Land reported on the Christopher Corporation's December 31, 2008 consolidated
balance sheet. \$72,000

Christopher      Lowell                      EU 100%     2006-2008    12/31/08
Corporation    Corporation      Total        Allocation Amortization Consolidated
\$45,000       \$18,000       \$63,000          \$9,000           \$0     \$72,000

Buildings reported on the Christopher Corporation's December 31, 2008 consolidated
balance sheet. \$132,300

Christopher      Lowell                      EU 100%     2006-2008    12/31/08
Corporation    Corporation      Total        Allocation Amortization Consolidated
\$88,000        \$29,000      \$117,000         \$18,000     (\$2,700)    \$132,300

Equipment reported on the Christopher Corporation's December 31, 2008
consolidated balance sheet. \$116,000

Christopher      Lowell                      EU 100%     2006-2008    12/31/08
Corporation    Corporation      Total        Allocation Amortization Consolidated
\$80,000        \$22,000      \$102,000         \$20,000     (\$6,000)    \$116,000

Goodwill reported on the Christopher Corporation's December 31, 2008 consolidated
balance sheet. \$38,000

Christopher      Lowell                       PC 70%     2006-2008    12/31/08
Corporation    Corporation      Total        Allocation Amortization Consolidated
\$0             \$0              \$0      \$38,000           \$0     \$38,000

3. Using the information on page 1, change the date of acquisition to October 1, 2006
and assume the book values and market values on page 1 are as of October 1, 2006.
The Lowell Corporation generated net income fairly evenly during 2006. Assuming
the Christopher Corporation uses the equity method and the parent company concept
to account for its investment in the Lowell Corporation, determine the following.

Noncontrolling interest reported on the Christopher Corporation's consolidated
income statement for the year ended December 31, 2006. \$6,000

Christopher    NCI
Total       Corp. 70%     30%
Lowell Corp. 2006 net income                  \$20,000.00     \$14,000.00 \$6,000.00
Preacquisition income (9/12)                               (\$10,500.00)
Amortization for 3 months (\$2,130 x 3/12)                     (\$507.50)
Equity in Investee Earnings                                   \$2,992.50
6

Preacquisition income reported on the Christopher Corporation's consolidated income
statement for the year ended December 2006. \$10,500

Net income reported on the Christopher Corporation's consolidated income statement
for the year ended December 31, 2006. \$52,992.50

Christopher Corp. revenues - expenses \$50,000.00
Equity in investee earnings            \$2,992.50
Consolidated net income               \$52,992.50

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