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CHAPTER 3

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Answers to Questions

1 A corporation becomes a subsidiary w en anot er corporation eit er direct!y or indirect!y ac"uires acontro!!in# $inancia! interest %#enera!!y o&er '( percent) o$ its outstandin# &otin# stoc*+

2 Amounts a!!ocated to identi$iab!e assets and !iabi!ities in e,cess o$ recorded amounts on t e boo*s o$ t esubsidiary are not recorded separate!y by t e parent+ Instead- t e parent records t e $air &a!ue.purc ase

price o$ t e interest ac"uired in an in&estment account+ T e a!!ocation to identi$iab!e asset and !iabi!ityaccounts is made t rou# wor*in# paper entries w en t e parent and subsidiary $inancia! statements areconso!idated+

3 T e !and wou!d be s own in t e conso!idated ba!ance s eet at /0((-(((- its $air &a!ue- assumin# t at t e purc ase price is e"ua! to or #reater t an t e tota! $air &a!ue o$ t e subsidiary+ I$ t e parent ad ac"uiredan 1( percent interest and t e purc ase price was e"ua! to or #reater t an t e $air &a!ue o$ t e interest

ac"uired- t e !and wou!d sti!! appear in t e conso!idated ba!ance s eet at /0((-(((+ Under SFAS No+020R- t e noncontro!!in# interest is a!so reported based on $air &a!ues at t e ac"uisition date+

4 Parent company 3a corporation t at owns a contro!!in# interest in t e outstandin# &otin# stoc* o$ anot ercorporation %its subsidiary)+

Subsidiary company 3a corporation t at is contro!!ed by a parent company t at owns acontro!!in# interest in its outstandin# &otin# stoc*- eit er direct!y or indirect!y+

Affiliated companies 3companies t at are contro!!ed by a sin#!e mana#ement team t rou# parent4subsidiary re!ations ips+ %A!t ou# t e term a$$i!iate is a synonym $or subsidiary- t e parentcompany is inc!uded in t e tota! a$$i!iation structure+)

Associated companies 3companies t at are contro!!ed t rou# parent4subsidiary re!ations ips orw ose operations can be si#ni$icant!y in$!uenced t rou# e"uity in&estments o$ 5( percent to '( percent+

5 A noncontro!!in# interest is t e e"uity interest in a subsidiary company t at is owned by stoc* o!ders

outside o$ t e a$$i!iation structure+ In ot er words- it is t e e"uity interest in a subsidiary %recorded at $air&a!ue) t at is not e!d by t e parent company or subsidiaries o$ t e parent company+

6 Under t e pro&isions o$ FASB Statement No. !" 6Conso!idation o$ A!! Ma7ority4owned Subsidiaries-8 asubsidiary wi!! not be conso!idated i$ contro! is temporary or i$ contro! does not rest wit t e ma7orityowner- suc as in t e case o$ a subsidiary in reor#ani9ation or ban*ruptcy- or w en t e subsidiary operatesunder se&ere $orei#n e,c an#e restrictions or ot er #o&ernmenta!!y imposed restrictions+

7 Conso!idated $inancia! statements are intended primari!y $or t e stoc* o!ders and creditors o$ t e parentcompany- accordin# to SFAS No. #$% &and ARB No. '#( +

8 T e amount o$ capita! stoc* t at appears in a conso!idated ba!ance s eet is t e tota! par or stated &a!ue o$t e outstandin# capita! stoc* o$ t e parent company+

9 :oodwi!! $rom conso!idation may appear in t e #enera! !ed#er o$ t e sur&i&in# entity in a mer#er orconso!idation accounted $or as an ac"uisition+ ;ut #oodwi!! $rom conso!idation wou!d not appear in t e#enera! !ed#er o$ a parent company or its subsidiary+ :oodwi!! is entered in conso!idation wor*in# papersw en t e reciproca! in&estment and e"uity amounts are e!iminated+ ?earson Education- Inc+ pub!is in# as ?rentice @a!!40

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C-ap te r 3 3- 3

18 T e ac"uisition o$ s ares e!d by noncontro!!in# stoc* o!ders does not constitute a business combination+Rat er- it must be accounted $or as a treasury stoc* transaction+ It is not possib!e- by de$inition- to ac"uirea contro!!in# interest $rom noncontro!!in# stoc* o!ders+

SOLUTIONS TO EXERCISES

Solution E3-1 Solution E3-2

1 b 1 d2 c 2 b3 d 3 d4 d 4 d5 b 5 a6 a 6 d

7 c

Solution E3-3 [AICPA adapted]

1 c Ad ance to Hill !"#,000 $ recei able %ro& 'ard !200,000 ( !2"#,000

2 a )ood*ill has an indeter&inate li%e and is not a&orti+ed.

3 a *en accounts %or -harp using the e uit/ &ethod, there%ore,consolidated retained earnings is e ual to *en s retained earnings, or!1,2 0,000.

4 d All interco&pan/ recei ables and pa/ables are eli&inated.

Solution E3-4

1 I&plied %air alue o% -anta 3aria 4!900,000 5 9067 !1,000,0008ess :oo; alue o% -anta 3aria 4900,000 7Eanuar/ 1, 2009 ! "0,000)ood*ill at ?ece&ber =1, 2009 ( )ood*ill %ro& consolidation ! "0,000-ince good*ill is not a&orti+ed

2 Consolidated net income

Pinto s reported net inco&e ! 90,0008ess Correction %or depreciation on e

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C-ap te r 3 3- 5

Solution E3-6

Preliminary computationCost o% -lider stoc; 4Bair alue7 !1,2#0,000:oo; alue o% -lider 1,000,000

)ood*ill ! 2#0,000

1 Journal entry to record push down values

In entories 20,0008and #0,000:uildings 3 net 1#0,000E uip&ent 3 net @0,000)ood*ill 2#0,000etained earnings 210,000

Dote pa/able 10,000Push do*n capital "#0,000

2 Slider Corporation

:alance -heet>anuar/ 1, 20104in thousands7

AssetsCash ! "0Accounts recei able @0In entories 1008and 200:uildings 3 net #00E uip&ent 3 net =00)ood*ill 2#0

Fotal assets !1,#00

LiabilitiesAccounts pa/able ! 100Dote pa/able 1#0

Fotal liabilities 2#0

Stockholders equity Capital stoc; ! #00Push do*n capital "#0

Fotal stoc;holders e uit/ 1,2#0 Fotal liabilities and stoc;holders e uit/ !1,#00

2009 Pearson Education, Inc. publishing as Prentice Hall

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C-ap te r 3 3- 7

Solution E3-$

1 Capital stock

Fhe capital stoc; appearing in the consolidated balance sheet at?ece&ber =1, 2009 is !1,@00,000, the capital stoc; o% Poball,

the parent co&pan/.

2 Goodwill at ecember !"# $%%&

In est&ent cost at >anuar/ 2, 2009 4@06 interest7 !"00,000I&plied total %air alue o% -o%tcan 4!"00,000 5 @067 !@"#,000:oo; alue o% -o%tcan410067 4 00,0007Eanuar/ 2 4e ual to

beginning consolidated retained earnings !@00,000Add Det inco&e o% Poball 4e ual to controlling share o%consolidated net inco&e7 =00,0008ess ?i idends declared b/ Poball 41@0,0007

Consolidated retained earnings ?ece&ber =1 !920,000

4 'oncontrolling interest at ecember !"# $%%&

Capital stoc; and retained earnings o% -o%tcan on >anuar/ 2 ! 00,000Add -o%tcan s net inco&e 90,0008ess ?i idends declared b/ -o%tcan 4#0,000 7

-o%tcan s stoc;holders e uit/ ?ece&ber =1 0,000Doncontrolling interest percentage 20 6

Doncontrolling interest ?ece&ber =1 !12@,000

5 ividends payable at ecember !"# $%%&

?i idends pa/able to stoc;holders o% Poball ! 90,000?i idends pa/able to noncontrolling stoc;holders 4!2#,000 2067 #,000 ?i idends pa/able to stoc;holders outside the

Consolidated entit/ ! 9#,000


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3- 8 An )nt ro ducti on to Consol id at ed Fina nci al St ate m e n t s

Solution E3-%

a!&e# Corporation and Su"!idiar#Partial :alance -heetat ?ece&ber =1, 2010

Stockholders equity(Capital stoc;, !10 par !=00,000Additional paid in capital #0,000etained earnings #,000

E uit/ o% controlling stoc;holders 1#,000Doncontrolling interest 1,000

Fotal stoc;holders e uit/ ! # ,000

Supporting computationsCo&putation o% consolidated retained earningsPas;e/ s ?ece&ber =1, 2009 retained earnings ! =#,000Add Pas;e/ s reported inco&e %or 2010 ##,000

8ess Pas;e/ s di idends 42#,000 7Consolidated retained earnings ?ece&ber =1, 2010 ! #,000

Computation o) noncontrolling interest at ecember !"# $%"%-ala& s ?ece&ber =1, 2009 stoc;holders e uit/ !200,000Inco&e less di idends %or 2010 4!20,000 !1#,0007 #,000 -ala& s ?ece&ber =1, 2010 stoc;holders e uit/ 20#,000Doncontrolling interest percentage 20 6Doncontrolling interest ?ece&ber =1, 2010 ! 1,000


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C-ap te r 3 3- 9

Solution E3-1'

ee&o! Corporation and Su"!idiar#Consolidated Inco&e -tate&ent

%or the /ear ended ?ece&ber =1, 20114in thousands7

-ales !2,100Cost o% goods sold 1,100

)ross pro%it 1,000?educt perating eanuar/ 2, 2009 4906 interest7 ! @10I&plied total %air alue o% -logger 4!@10,000 5 9067 ! 900-logger s :oo; alue ac uired 410067 4"00 7

E

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C-ap te r 3 3- 11

Solution 3-2

1 Schedule to allocate )air value-book value di))erential

Cost o% in est&ent in -etting !1"#,000I&plied %air alue o% -etting 4!1"#,000 5 "067 !2#0,000

:oo; alue o% -etting 4110,0007Eanuar/ 1, 2009

AssetsCurrent assets(Cash 4!=#,000 $ !20,0007 ! ##,000ecei ables 3 net 4!@0,000 $ !=0,0007 110,000In entories 4!"0,000 $ !=0,000 $ !20,0007 120,000 !2@#,000

Property# plant and equipment(8and 4!100,000 $ !#0,000 $ !10,0007 !1 0,000:uildings 3 net 4!110,000 $ !"0,000 $ !20,0007 200,000E uip&ent 3 net 4!@0,000 $ ! 0,000 !10,0007 110,000 "0,000Goodwill .)rom consolidation/ 90,000

Fotal assets !@ #,000

Liabilities and Stockholders *quity Liabilities(Accounts pa/able 4!90,000 $ !@0,0007 !1"0,000ther liabilities 4!10,000 $ !#0,000 !10,0007 #0,000 !220,000

Stockholders equity(Capital stoc; !#00,000etained earnings #0,000

E uit/ o% controlling stoc;holders ##0,000Doncontrolling interest "#,000 2#,000

Fotal liabilities and stoc;holders e uit/ !@ #,000

"06 o% i&plied %air alue o% !2#0,000 ( !"#,000.


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Solution 3-3

Cost o% in est&ent in -o%tbac; :oo;s >anuar/ 1, 2009 !2,"00,000I&plied %air alue o% -o%tbac; 4!2,"00,000 5 @067 !=,="#,000:oo; alue o% -o%tbac; 2,#00,000

E

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C-ap te r 3 3- 13

Solution 3-5

al+er Corporation and Su"!idiar#Consolidated :alance -heet

at ?ece&ber =1, 2009.in thousands/

AssetsCurrent assets ! = 0Plant assets @=0)ood*ill 200

!1,="0*quities8iabilities ! 0Capital stoc; =00etained earnings 10

!1,="0

Supporting computations-orrel s net inco&e 4! 00 !=00 !#07 ! #0

8ess E

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Solution 3-6

err# Corporation and Su"!idiar#Consolidated :alance -heet 'or;ing Papers

at ?ece&ber =1, 20094in thousands7

Perr/per boo;s

-i&per boo;s

AdJust&ents andEli&inations

Consolidated:alance -heet

Cash ! 2 ! 20 ! 2

ecei ables 3 net #0 1=0 b 9 1"1In entories =#0 #0 00

8and 1#0 200 =#0

E uip&ent 3 net 00 100 "00In est&ent in -i& #9 a #9

)ood*ill a 100 100

Fotal assets !1, #1 ! #00 !1,"@=

Accounts pa/able ! 10 ! @0 ! 90

?i idends pa/able 0 10 b 9 1

Capital stoc; 1,000 =00 a =00 1,000

etained earnings 1@1 110 a 110 1@1

Doncontrolling interest a #1 #1

Fotal e uities !1, #1 ! #00 !1,"@=

a Fo eli&inate reciprocal in est&ent and e uit/ accounts, record good*ill 4!1007,and enter noncontrolling interest [4! 10 e uit/ $ !100 good*ill7 1067].

b Fo eli&inate reciprocal di idends recei able 4included in recei ables 3 net7 anddi idends pa/able a&ounts 4!10 di idends 9067.


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C-ap te r 3 3- 15

Solution 3-7

Preliminary computationsCost o% @06 in est&ent >anuar/ =, 2009 !2@0,000I&plied total %air alue o% -lender 4!2@0,000 5 @067 !=#0,000:oo; alue o% -lender 42#0,0007

Eanuar/ = ( )ood*ill !100,000

1 'oncontrolling interest share o) income(-lender s net inco&e !#0,000 206 noncontrolling interest ! 10,000

2 Current assets(Co&bined current assets 4!20 ,000 $ !"#,0007 !2"9,0008ess ?i idends recei able 4!10,000 @067 4@,000 7 Current assets !2"1,000

3 Inco&e %ro& -lender Done In est&ent inco&e is eli&inated inconsolidation.

4 Capital stoc; !#00,000 Capital stoc; o% the parent, Portl/ Corporation.

5 In est&ent in -lender Done Fhe in est&ent account is eli&inated.

6 E

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Solution 3-%

Preliminary computations .in thousands/Cost o% 906 in est&ent >anuar/ 1, 2009 !=, 00 I&plied total %air alue o% -no*drop 4!=, 00 5 9067 ! ,000:oo; alue o% -no*drop 42,"00 7

Eanuar/ 1 !1,=00 Allocation to e uip&ent ! @00 e&ainder is )ood*ill ! #00 Additional annual depreciation on e uip&ent 4!@00 5 @ /ears7 ! 100

an!# Corporation and Su"!idiar#Consolidated :alance -heet 'or;ing Papers

at ?ece&ber =1, 20094in thousands7

Pans/906

-no*dropAdJust&ents and

Eli&inationsConsolidated

:alance -heetCash ! =00 ! 200 ! #00

ecei ables 3 net 00 00 1,000?i idends recei able 90 : 90

In entor/ "00 00 1,=00

8and 00 "00 1,=00

:uildings 3 net 2,000 1,000 =,000

E uip&ent 3 net 1,#00 @00 a "00 =,000In est&ent in -no*drop =,"@0 a =,"@0

)ood*ill a #00 #00

Fotal assets !9,#"0 !=,"00 !10, 00

Accounts pa/able ! =00 ! 00 ! 900

?i idends pa/able #00 100 b 90 #10

Capital stoc; ",000 2,000 a 2,000 ",000

etained earnings 1,""0 1,000 a 1,000 1,""0

Doncontrolling interest a 20 20

Fotal e uities !9,#"0 !=,"00 !10, 00

a Fo eli&inate reciprocal in est&ent and e uit/ accounts, enter una&orti+ed e

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C-ap te r 3 3- 19

Solution 3-1'

1 Purchase price o) investment in Snaplock .in thousands/

nderl/ing boo; alue o% in est&ent in -naploc;E uit/ o% -naploc; >anuar/ 1, 2009 !220

Add Eanuar/ 1, 2009 !2@0

Purchase price o% @06 in est&ent at %air alue !22

2 Snaplocks stockholders equity on ecember !"# $%"! .in thousands/

206 noncontrolling interest at %air alue ! 2206 good*ill 4127206 noncontrolling interest s e uit/ at boo; alue ! #0Fotal e uit/ ( Doncontrolling interest s e uit/ !#0 5 206 ( !2#0

3 Pandoras investment in Snaplock account balance at ecember !"# $%"!4in thousands7nderl/ing boo; alue in -naploc; ?ece&ber =1, 201=

4!2#0 @067 !200Add @06 o% )ood*ill ?ece&ber =1, 201= 4206 is attributable to the noncontrolling interest7 @

In est&ent in -naploc; ?ece&ber =1, 201= !2 @

Alternati e solutionIn est&ent cost >anuar/ 1, 2009 !22Add @06 o% -naploc; s increase since ac uisition 4!2#0 !2207 @06 2 In est&ent in -naploc; ?ece&ber =1, 201= !2 @

4 Pandoras capital stock and retained earnings ecember !"# $%"!4in thousands7Capital stoc; ! 00etained earnings ! =0

A&ounts are e ual to capital stoc; and retained earnings sho*n in theconsolidated balance sheet.


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Solution 3-11

Preliminary computations .in thousands/Cost o% "06 in est&ent in -tubb ! "0I&plied %air o% -tubb 4!"00 5 "067 !1,000:oo; alue o% -tubb 410067 @00

E

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C-ap te r 3 3- 21

Doncontrolling interest

4!@ 0,000 =067 a =09 =09

E uities !2,#2@ !1,0#0 !=,010


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Solution 3-12

Preliminary computations .in thousands/@06 In est&ent in -hasti at cost >anuar/ 1, 2009 ! " 0I&plied total %air alue o% -hasti 4!" 0 5 @067 ! 9#0-hasti boo; alue 900

E

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C-ap te r 3 3- 23

Solution 3-13

Preliminary computations@06 In est&ent in -idne/ 4cost7 >anuar/ 2, 2010 !=00I&plied total %air alue o% -idne/ 4!=00 5 @067 !="#:oo; alue o% -idne/ 410067 42#07

E

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Solution 3-13 4continued7

art 2

a 5ncome )rom Sidney $%"%-idne/ s reported net inco&e ! 0

8ess ?epreciation on e

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C-ap te r 3 3- 25

Solution 3-14

1 Schedule to allocate the investment )air value book valuedi))erential( .in thousands/@06 In est&ent cost >anuar/ 2, 2009 !2," 0I&plied total %air alue 4!2," 0 5 @067 !=, #0

:oo; alue o% interest ac uired 4!2,=00 @067 42,=007E

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Solution 3-14 4continued7

2 ortland Corporation and Su"!idiar#Consolidated :alance -heet

at >anuar/ 2, 20094in thousands7

AssetsCurrent Assets(Cash 4!2 0 $ ! 07 ! =00ecei ables 3 net 4!@00 $ !2007 1,000In entories 4!1,100 $ ! 00 $ !1007 1, 00ther current assets 4!900 $ !1#0 $ !#07 1,100

Fotal current assets ,000 0i+ed Assets(8and 4!=,100 $ !#00 $ !1007 ! =,"00:uildings 3 net 4! ,000 $ !1,000 $ !@007 ",@00E uip&ent 3 net 4!=,#00 $ !@00 !2007 ,100)ood*ill 2#0

Fotal %i

ch03 beams10e sm

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