Aa2e Hal Sm Ch03

Solution Manual(Updated through November 11, 2013)

Chapter 3 - Consolidated Financial Statements Subsequent to the Date of Acquisition

1. If the parent uses the equity method of accounting, it recognizes the Equity Income of the subsidiary, less the depreciation and amortization of the [A] AAP net assets, in the Equity Income account on its income statement. In the consolidation process, this Equity Income account is eliminated and replaced with the revenues and expenses to which it relates. Net income is unaffected because we are replacing the subsidiarys net income (reported in Equity Income) with its revenues and expenses.

2. The parent and the subsidiary it controls are viewed as one entity under GAAP. Therefore, only payments of dividends outside of the controlled group affect consolidated Retained Earnings. Another way of looking at it is this: consolidated Retained Earnings represent the cumulative earnings that are available for dividends to the parents stockholders. The payment of cash from the subsidiary to its parent only transfers cash from one company to another. That cash is still available to pay dividends up to the remaining balance in consolidated Retained Earnings.

3. The Equity Investment account appears on the balance sheet of the parent and represents the proportion of the Stockholders Equity of the subsidiary that it owns. In the consolidation process, we eliminate the Equity Investment account and replace it with the assets and liabilities of the subsidiary to which it relates. Since assets = liabilities + equity (equity = assets liabilities), the dollar amount of the Equity Investment account must equal the subsidiarys assets less its liabilities (i.e., net assets). Although total assets and total liabilities change, consolidated Stockholders Equity remains unchanged in the consolidation process.

4. The Equity Investment account on the parents balance sheet includes all of the assets it purchased less the liabilities it assumed in the acquisition (less any subsequent depreciation and amortization of the AAP). In the consolidation process, those unrecorded net assets and liabilities, that were previously included in the Equity Investment account, are broken out separately on the consolidated balance sheet.

5. The consolidated statement of cash flows reports the cash inflows and outflows between the consolidated entity and outside parties. Intercompany transfers of cash do not generate or use cash on a consolidated basis. The consolidation process eliminates intercompany transactions. As a result, the consolidated statement of cash flows should be prepared from the consolidated income statement and comparative consolidated balance sheets.

6. Goodwill is a residual asset, which means that it is the amount left over after we have first allocated the purchase price to all other assets (tangible and intangible) purchased and liabilities assumed. The FASB ASC Glossary defines goodwill as an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is not valued directly as are all other assets and liabilities that are acquired in an acquisition. Instead, the value of Goodwill is inferred from the total consideration given to the acquiree less the fair value of the net tangible and intangible assets (other than Goodwill) that are acquired.

7. In the absence of a market price for the subsidiarys shares, the parent can use any reasonable basis for determining the value of the subsidiary, including discounted cash flows (DCF) and a multiple of earnings (ASC 350-20-35-22 through 35-24).

8. There are a number of situations that would require impairment testing in between annual reviews (FASB ASC 350-20-35-30):

a. A significant adverse change in legal factors or an adverse action or assessment by a regulator,b. A significant adverse change in the business climate or unanticipated competition,c. A loss of key personnel,d. An expectation that the investee company will be sold, ande. Recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

9. FASB ASC 805-10-50-1 requires the following general disclosures in the footnotes in the year of acquisition and for each year in which comparative information is provided (the subsequent two years):

a. The name and a description of the acquiree.b. The acquisition date.c. The percentage of voting equity interests acquired.d. The primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree.e. A qualitative description of the factors that make up the goodwill.f. The acquisition-date fair value of the total consideration transferred.g. A description of the contingent consideration arrangements, if any.

10. Following are some of the limitations of consolidated financial statements:

a. Consolidated income does not imply that the parent company has received any or all of the subsidiaries net income as cash. b. Unguaranteed debts of a subsidiary are not obligations of the consolidated group. c. Consolidated balance sheets and income statements are a mix of the various subsidiaries, often from different industries. d. Segment disclosures on individual subsidiaries are affected by intercorporate transfer pricing policies. e. Segment disclosures are often too summarized for effective analysis.

11. The following guidance is provided in the FASB ASC 350-30-55-2 through 55-20:

a. The customer list would be amortized over 18 months, managements best estimate of its useful life, following the pattern in which the expected benefits will be consumed or otherwise used up.

b. The patent would be amortized over its five-year useful life to the reporting entity following the pattern in which the expected benefits will be consumed or otherwise used up. The amount to be amortized is 40 percent of the patents fair value at the acquisition date (residual value is 60 percent).

c. The copyright would be amortized over its 30-year estimated useful life following the pattern in which the expected benefits will be consumed or otherwise used.

d. The broadcast license would be deemed to have an indefinite useful life because cash flows are expected to continue indefinitely. Therefore, the license would not be amortized until its useful life is deemed to be no longer indefinite. The license would be tested for impairment annually.

e. The trademark would be deemed to have an indefinite useful life because it is expected to contribute to cash flows indefinitely. Therefore, the trademark would not be amortized until its useful life is no longer indefinite. The trademark would be tested for impairment at least annually.

12. The following guidance is provided in FASB ASC 350-30-35-1 through 35-20: as a result of the projected decrease in future cash flows, since the company determines that the estimated fair value of the trademark ($10 million) is less than its carrying amount ($30 million), an impairment loss of $20 million should recognized. The amount not written off ($10 million) will continue to not be amortized because it is still deemed to have an indefinite useful life. The remaining balance of the trademark will, however, continue to be tested for impairment.

13. Following are provisions of FASB ASC 805-20-25-2 and FASB Concept Statement #6 relating to restructuring activities.

a. Typical restructuring activities include the costs of a plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquirees employees.

b. A liability is defined in FASB Concepts Statement No. 6, Elements of Financial Statements as, probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. FASB ASC 805-20-25-2 provides the following guidance with respect to the accounting for restructuring costs: costs the acquirer expects but is not obligated to incur in the future to affect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquirees employees are not liabilities at the acquisition date. Therefore, the acquirer does not recognize those costs as part of applying the acquisition method. Instead, the acquirer recognizes those costs in its post-combination financial statements in accordance with other applicable generally accepted accounting principles (GAAP). (emphasis added) Bottom line, unless the subsidiary has already adopted a plan and is obligated for its completion (in which case the expense would have already been recognized in its financial statements), the restructuring liability and related expense should not be recognized at acquisition. Instead, those costs should be recognized in the future when the restructuring plan is adopted.

14. Answer: d

Each statement is true, except for d. For passive noncontrolling marketable equity investments, the investor can account for the securities as trading or available for sale (AFS). Changes in the fair value of AFS securities are recorded in other comprehensive income. Changes in the fair value of trading securities are reported as part of net income. This question reviews a wide variety of concepts that should have been covered in previous courses and that integrate with topics in this textbook.

15. Answer: a

Each statement is true, except for a. The fair value option is available for all equity investments, except for controlling investments in subsidiaries.

16. Answer: c

Under the equity method, when there are no intercompany profits between affiliated companies, the pre-consolidation investment at any point in time can be determined via the following equation:

Investment in Subsidiary = p% x stockholders equity of S + unamortized p% AAP

Given that this is a 100% investment and there is no AAP or fair value-book value differences for the net assets of the subsidiary on the acquisition date, then, on any date, the pre-consolidation investment account will equal the stockholders equity of the Subsidiary on that date. SE(S) on 12/31/13 = $600,000

17. Answer: d

Under the equity method, when there are no intercompany profits between affiliated companies, the pre-consolidation income from investee for any given year can be determined via the following equation:

Income from Subsidiary = p% x NI(S) - p% AAP for the period

Given that this is a 100% investment and there is no AAP or fair value-book value differences for the net assets of the subsidiary, then, for any period after the acquisition, the Income from Subsidiary account will equal the net income of the Subsidiary for that period. NI(S) for the year ended 12/31/13 = $94,000

18. A Answer: a

Under the cost method, the pre-consolidation investment at any point in time will equal the investment on the acquisition date. Given that there is no AAP or fair value-book value differences, the investment account equals p% x the stockholders equity on the acquisition date. In this problem, we are given the stockholder equity at 12/31/11. We need to back out the changes in stockholders equity during 2011 to back into the stockholders equity on 1/1/11 (i.e., SE(S)12/31/11 NI(S)2011 + Div(S)2011 = SE(S)1/1/11). Thus, the pre-consolidation investment account on 1/1/11 equals $450,000 (i.e., $500,000 - $75,000 + $25,000), which is also the balance under the cost method on December 31, 2013.

19. A Answer: a

Under the cost method, the pre-consolidation income from investee is equal to the dividends received from the investee (i.e.,$39,000 for the year ended 12/31/13).

20. Answer: b

Under the equity method, when there are no intercompany profits between affiliated companies, the pre-consolidation investment at any point in time can be determined via the following equation:

Investment in Subsidiary = p% x stockholders equity of S + unamortized p% AAP

In this case, the acquisition-date AAP was equal to $300,000 (i.e., $100,000 + $200,000). The $100,000 is amortized over 10 years, which means it is amortized at a rate of $10,000/year. After three years, it has an unamortized balance of $70,000. The $200,000 represents goodwill, which is not amortized. Thus, the pre-consolidation balance in the investment account can be calculated as follows:

Investment in Subsidiary12/31/13= (100% x 600,000) of S + ($70,000 + $200,000) = $870,000

21. Answer: c

Under the equity method, when there are no intercompany profits between affiliated companies, the pre-consolidation income from investee for any given year can be determined via the following equation:

Income from Subsidiary = p% x NI(S) - p% AAP for the period

In this case, the acquisition-date AAP was equal to $300,000 (i.e., $100,000 + $200,000). The $100,000 is amortized over 10 years, which means it is amortized at a rate of $10,000/year. After three years, it has an unamortized balance of $70,000. The $200,000 represents goodwill, which is not amortized.

Thus, the pre-consolidation amount in the income from investee account can be calculated as follows:

Income from Subsidiary2013= p% x NI(S) - p% AAP for the period= (100% x $94,000) - $10,000= $84,000

22. Answer: a

Goodwill = FV entire subsidiary FV Identifiable net assets of the subsidiary

When an investor purchases 100% of a subsidiary in a single transaction, the purchase price is presumed to represent the FV of the entire subsidiary (i.e., $6,000,000 in this case). We can determine the FV of the identifiable net assets (FVINA) by taking the reported book value of the net assets (BVNA) of the subsidiary and adding any fair-value book value differences. In this case, the FVINA(S) equals $5,600,000 (i.e., $4,400,000 + $1,200,000). Thus the goodwill equals $400,000 (i.e., $6,000,000 - $5,600,000).

Note: For questions 23-26, the following is the implied consolidation spreadsheet based on the facts in the problem. Note that this competed spreadsheet was not required. However, this worksheet could be used as an effective took in discussing the various subparts of the multiple choice problems.

InvestorInvesteeDrCrConsolidated

Income Statement

Revenues2,400,000320,0002,720,000

Income from Investee150,0000[C]150,000-

Expenses(1,600,000)(160,000)[D]10,000(1,770,000)

Net Income950,000160,000950,000

Retained Earnings Statement

Retained Earnings, January 1752,00040,000[E]40,000752,000

Net Income950,000160,000950,000

Dividends declared(64,000)(40,000)[C]40,000(64,000)

Retained Earnings, December 311,638,000160,0001,638,000

Balance Sheet

Investment in Investee290,000-[C]110,000-

[E]120,000

[A]60,000

All Other Assets4,788,000400,000[A]60,000[D]10,0005,238,000

Total Assets5,078,000400,0005,238,000

Liabilities2,640,000160,0002,800,000

Common Stock & APIC800,00080,000[E]80,000800,000

Retained Earnings1,638,000160,0001,638,000

Total Liabilities and Equity5,078,000400,000340,000340,0005,238,000

23. Answer: c

Given that there are no intercompany transactions between the investor and the investee, the amount of consolidated expenses will equal the parents expenses plus the subsidiary expenses, adjusted of any acquisition accounting premium (AAP) amortization. Although we are not given the AAP amortization, we can infer the amount by comparing the Income from Investee account to the Net income of the investee. Because p% = 100%, any difference is equal to the AAP amortization. In this case, AAP amortization during the year ended December 31, 2013 equals $10,000 (i.e., $160,000 - $150,000). Thus, consolidated expenses can be determined as follows:

Consolidated expenses= Expenses (P) + Expenses (S) + AAP Amortization= $1,600,000 + $160,000 + $10,000= $1,770,000

24. Answer: c

Given that there are no intercompany transactions between the investor and the investee (or related intercompany profits) and the parent uses the equity method, then the reported pre-consolidation net income of the parent company equals consolidated net income (i.e., $950,000).

25. Answer: a

Given that the parent uses the equity method, then the reported pre-consolidation retained earnings of the parent company equals consolidated retained earnings (i.e., $1,638,000).

26. Answer: c

Given that there are no intercompany transactions or related balances, then the amount of consolidated totals assets will equal the Parents total assets after deducting the investment account plus the subsidiarys total assets plus the unamortized AAP implicit in the investment account at the end of the year. We will compute each of these items separately:

Parents total assets after deducting the investment account = $5,078,000 - $290,000 = $4,788,000 Subsidiarys total assets = $400,000 Unamortized AAP at December 31, 2013 = Investment12/31/2013 SE(S)12/31/2013 = $290,000 ($80,000 + $160,000) = $50,000

Adding these components together yields consolidated total assets equal to $5,238,000 (i.e., $4,788,000 + $400,000 + $50,000).

27. Total value of the consideration given$1,500,000

-Fair value of the tangible and intangible assets1,410,000

=Goodwill90,000

The Goodwill asset is not amortized since it is deemed to have an indefinite life. Instead, it is tested at least annually for impairment and written down if found to be impaired.

28. a.The amount of goodwill in this acquisition is computed as follows:

Total value of the consideration given$5,000,000


=Goodwill$1,500,000

The Goodwill asset is not amortized since it is deemed to have an indefinite life. Instead, it is tested at least annually for impairment and written down if found to be impaired.

b. The total value of the consideration increases by $500,000. Since the fair value of the net tangible and intangible assets is unchanged, the amount assigned to the Goodwill asset increases by $500,000.

c. The goodwill computation is as follows:

Total value of the consideration given$5,000,000


=Goodwill$(1,000,000)

This is a bargain purchase. Assuming a cash purchase for all of the outstanding voting shares of the acquiree, the acquisition would be recorded as follows:

Equity investment6,000,000

Cash5,000,000

Gain on bargain purchase1,000,000

(to record the acquisition and bargain purchase)

29. a.Since the value of the Equity Investment ($4.5 million) is below its carrying amount ($5 million), Goodwill is potentially impaired and you should proceed to the second part of the test for impairment.

b.The implied value of goodwill is computed as follows:

Fair value of the subsidiary$4,500,000

Fair value of the net assets exclusive of goodwill4,300,000

Implied fair value of goodwill$200,000

Book value of goodwill500,000

Goodwill impairment$(300,000)

The goodwill asset is found to be impaired.

c. Goodwill must be written down to its implied value of $200,000 with the following journal entry:

Equity income from S300,000

Equity investment300,000

(to write down the book value of goodwill)

Goodwill will now be reported on the consolidated balance sheet at $200,000, and a loss on the write-down of goodwill will be reported in the consolidated income statement. The goodwill asset cannot be subsequently written up should the fair value of the subsidiary improve.

30. a.The allocation of the purchase price to the restructuring liability reduced the dollar amount of net identifiable assets recognized and, as a result, increased the dollar amount of goodwill recognized by $10.86 million.

b. The restructuring liability was accrued by Omniture (the target company) prior to the acquisition. As a result, the associated expense was reflected in Omnitures income statement before the acquisition.

c. As Adobe makes payments under the restructuring plan, the debit will be to the restructuring liability that it recognized in the acquisition, not to an expense account. As a result, Adobes post-acquisition pretax profit will be $10.86 million higher.

31. Working capital normal accounting for collection of receivables, payment of payables, etc. Inventories normal accounting for removal of inventories and recognition of cost of goods sold.Identifiable intangible assets amortization over useful life.In-process research & development write off if abandoned, amortize over useful life when completed if not abandoned.Other noncurrent assets depreciate/amortize over useful life and test for impairment annually.Long-term debt amortize (increase) the carrying amount with the offsetting debit to expense. Benefit obligations amortize (increase) the carrying amount with the offsetting debit to expense.Net tax accounts record reduction of the liability as taxes are paid as is customary for deferred tax liabilities. Other noncurrent liabilities reduce when paid. Goodwill no amortization. Test annually for impairment.

32. a.The 6.742 billion balance in the PPE account is the book value on Anheuser-Buschs balance sheet on the date of the acquisition. The addition of 1.783 billion reflects the AAP and the 8.525 billion is the fair value of the PPE assets on the date of acquisition.

b. The Goodwill account represents the Goodwill asset on Anheuser-Buschs balance sheet on the date of the acquisition. InBev does not recognize the previously, existing goodwill asset. Instead, it only recognizes goodwill that is implicit in the assignment of the purchase price in the acquisition of Anheuser-Busch.

c. The adjustment to the Investment in Associates account represents the difference between fair value and the recorded equity-method values for noncontrolling investments by Anheuser Busch.

d. The reduction of the interest-bearing loans and borrowings account represents a reduction in the reported amount to the liabilities which may reflect an increase in the general levels of interest rates subsequent to the issuance of the debt (or possibly a worsening of the credit rating on the debt).

e. The increase in Deferred Tax Liabilities reflects the expected taxes that will be paid on the higher value of the net assets acquired.

33. a.Sales = $5,500,000 + $1,200,000 = $6,700,000b.Equity income = $0c.Operating expenses = $825,000 + $312,000 + $15,000 = $1,152,000d.Accounts receivable = $1,408,000 + $278,400 = $1,686,400e.Equity investment = $0 f.PPE, net = $11,365,200 + $661,600 + $285,000 - $15,000 = $12,296,800g.Goodwill = $300,000h.Common stock = $512,450i.Retained earnings = $4,406,200

34. a.Cost of goods sold = $1,800,000 + $450,000 = $2,250,000b.Equity income = $0c.Operating expenses = $375,000 + $195,000 + $50,000 = $620,000d.Cash = $513,750 + $193,250 = $707,000 e.Equity investment = $0 f.PPE, net = $5,166,000 + $413,500 = $5,579,500g.Goodwill = $300,000h.Common stock = $444,000 i.Retained earnings = $3,520,000

35. a.Sales = $6,000,000 + $1,350,000 = $7,350,000b.Equity income = $0c.Operating expenses = $900,000 + $351,000 + $65,000 = $1,316,000d.Inventories = $2,328,000 + $402,300 = $2,730,300 e.Equity Investment = $0 f.PPE, net = $12,398,400 + $744,300 + $425,000 - $25,000 = $13,542,700 g.Patent = $280,000 - $40,000 = $240,000h.Common Stock = $704,850 i.Retained Earnings = $5,828,600

36. a.Equity investment1,400,000

Common stock35,000

APIC1,365,000

(to record the acquisition)

b.Beginning Equity Investment$1,400,000

Equity income294,000

Dividends(44,100)

Ending Equity Investment$1,649,900

c.[C]Equity income (P)294,000

Dividends (S)44,100

Equity investment (P)249,900

(to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account)

[E]Common stock (S) @ BOY140,000

APIC (S) @ BOY175,000

Retained earnings (S) @ BOY1,085,000

Equity Investment (P) @ BOY1,400,000

(to eliminate the portion of the investment account related to the book value of the subsidiary's Stockholders' Equity @ BOY)

[A]No Accounting Acquisition Premium

[D](AAP) in problem

[I]No intercompany items in problem

d.

Consolidation Entries

Parent SubsidiaryDrCrConsolidated

Income statement:

Sales$3,700,000 $2,100,000 $ 5,800,000

Cost of goods sold(2,590,000)(1,260,000)(3,850,000)

Gross profit1,110,000 840,000 1,950,000

Equity income294,000 [C]294,0000

Operating expenses(703,000)(546,000)(1,249,000)

Net income$ 701,000 $ 294,000 $ 701,000

Statement of retained earnings:

BOY retained earnings$2,352,000 $1,085,000 [E]1,085,000$2,352,000

Net income701,000 294,000 701,000

Dividends(140,200)(44,100)[C]44,100(140,200)

Ending retained earnings$2,912,800 $1,334,900 $2,912,800

Balance sheet:

Assets

Cash$ 877,400 $ 541,100 $1,418,500

Accounts receivable473,600 487,200 960,800

Inventory 717,800 625,800 1,343,600

Equity investment1,649,900 [E]1,400,000 0

[C]249,900

PPE, net2,712,840 1,157,800 3,870,640

$6,431,540 $2,811,900 $7,593,540

Liabilities and Stockholders Equity

Accounts payable$ 270,840 $ 200,200 $ 471,040

Accrued liabilities321,900 261,800 583,700

Long-term liabilities 0 700,000 700,000

Common stock518,000 140,000 [E]140,000518,000

APIC2,408,000 175,000 [E]175,0002,408,000

Retained earnings2,912,800 1,334,900 2,912,800

$6,431,540 $2,811,900 $7,593,540


Common stock42,500

APIC1,657,500


b.Subsidiary net income$231,000

Depreciation / amortization(35,000 )

Equity income$196,000

c.Beginning Equity Investment$1,700,000

Equity Income196,000

Dividends(34,650)


d.[C]Equity income (P)196,000

Dividends (S)34,650

Equity Investment (P)161,350



APIC (S) @ BOY137,500

Retained earnings (S) @ BOY852,500

Equity investment (P) @ BOY1,100,000


[A]PPE, net (S) @ BOY100,000

Patent (S) @ BOY300,000

Goodwill (S) @ BOY200,000

Equity investment (P) @ BOY600,000

(to assign the remaining Equity Investment account (i.e., unamortized BOY AAP) to appropriate asset & liability accounts)

[D]Operating expenses (S)35,000

PPE, net (S)5,000

Patent (S) 30,000

(depreciates/amortizes AAP so that income statement includes the activity and the balance sheet accounts include ending balances in appropriate accounts)

[I]No intercompany items in problem

37. continued e.



Income statement:

Sales$5,500,000 $1,650,000 $7,150,000

Cost of goods sold(3,850,000)(990,000)(4,840,000)

Gross profit1,650,000 660,000 2,310,000


Operating expenses(1,045,000)(429,000)[D]35,000(1,509,000)

Net income$ 801,000 $ 231,000 $ 801,000


BOY retained earnings$2,856,000 $ 852,500 [E]852,500$2,856,000

Net income801,000 231,000 801,000

Dividends(160,200)(34,650)[C]34,650(160,200)


Balance sheet:

Assets

Cash$ 265,950 $ 425,150 $ 691,100

Accounts receivable704,000 382,800 1,086,800

Inventory 1,067,000 491,700 1,558,700


[A]600,000

[C]161,350

PPE, net4,032,600 909,700 [A]100,000[D]5,000 5,037,300

Patent[A]300,000[D]30,000 270,000

Goodwill[A]200,000200,000

$7,930,900 $2,209,350 $8,843,900

Liabilities and stockholders equity




Common stock629,000 110,000 [E]110,000629,000

APIC2,924,000 137,500 [E]137,5002,924,000


$7,930,900 $2,209,350 $8,843,900

37. continued

f. We have recognized the additional PPE assets, the Patent asset, and the Goodwill asset in the consolidation process. These assets were included in the Equity Investment account on the parents balance sheet and are now reported explicitly on the consolidated balance sheet.


Common stock55,000

APIC2,145,000



Depreciation / amortization(65,000)

$208,000



Dividends(40,950)


d.Total value of the consideration given$2,200,000

-Fair value of the tangible and intangible assets*2,050,000

=Goodwill$150,000

* BOY Book value of subsidiary net assets$1,300,000

PPE asset200,000

License asset250,000

Customer List asset300,000

Fair value of net assets acquired$2,050,000

38. continued

e. The consolidation spreadsheet yields the amounts for the requested balance sheet accounts:



Income statement:

Sales$7,200,000 $1,950,000 $9,150,000


Gross profit2,160,000 780,000 2,940,000



Net income (e.1.)$1,000,000 $ 273,000 $1,000,000


BOY retained earnings$3,696,000 $1,007,500 [E]1,007,500$3,696,000

Net income1,000,000 273,000 1,000,000

Dividends(200,000)(40,950)[C]40,950(200,000)


Balance sheet:

Cash $ 622,950 $ 502,450 $ 1,125,400

Accounts receivable (e.2.)921,600 452,400 1,374,000

Inventory 1,396,800 581,100 1,977,900

Equity investment (e.3.)2,367,050 [E]1,300,000 0

[A]900,000

[C]167,050

PPE, net (e.4.)7,439,040 1,075,100 [A]200,000[D]10,000 8,704,140

License[A]250,000[D]25,000 225,000

Customer list[A]300,000[D]30,000 270,000

Goodwill (e.5.)[A]150,000150,000

$12,747,440 $2,611,050 $13,826,440




Long-term liabilities 2,500,000 650,000 3,150,000

Common stock (e.6.)814,000 130,000 [E]130,000814,000

APIC (e.7.)3,784,000 162,500 [E]162,5003,784,000

Retained earnings (e.8.)4,496,000 1,239,550 4,496,000

$12,747,440 $2,611,050 $13,826,440

38. continued

f. The intangible assets reported on the year-end consolidated balance sheet include the License ($225,000 with one year of amortization), the Customer List ($270,000 with one year of amortization) and Goodwill ($150,000).

39. a.The balance of the Equity Investment at the beginning of the year equals the stockholders equity of the subsidiary plus the undepreciated and unamortized balances of the [A] assets. Since the [A] assets with a useful life have now been depreciated or amortized for two years, the beginning balance of the Equity Investment account is as follows:

BOY Stockholders Equity$1,246,000($965,650+$124,600+$155,750)

PPE, net90,000($100,000 2 x $5,000)

Patent160,000($200,000 2 x $20,000)

License240,000($300,000 2 x $30,000)

Goodwill300,000

$2,036,000



$206,660

c.Beginning Equity investment$2,036,000


Dividends(39,249)


39. continued

d.

[C]Equity income (P)206,660

Dividends (S)39,249




APIC (S) @ BOY155,750




[A]PPE, net (S) @ BOY90,000

Patent (S) @ BOY160,000

License (S) @ BOY240,000




[D]EOY Operating expenses (depreciation and amort.)55,000

PPE, net5,000

Patent20,000

License30,000

(to record depreciation and amortization expense for the [A] assets)

[I]No intercompany transactions

39. continued

e.



Income statement:

Sales$6,860,000 $1,869,000 $8,729,000


Gross profit1,920,800 747,600 2,668,400



Net income$1,098,460 $ 261,660 $1,098,460


BOY retained earnings$5,456,480 $ 965,650 [E]965,650$5,456,480

Net income1,098,460 261,660 1,098,460

Dividends(219,692)(39,249)[C]39,249(219,692)


Balance sheet:

Cash$ 1,027,677 $ 481,579 $ 1,509,256

Accounts receivable1,756,160 433,608 2,189,768

Inventory 2,661,680 556,962 3,218,642


[A]790,000

[C]167,411

PPE, net14,175,504 1,030,442 [A]90,000[D]5,000 15,290,946

Patent[A]160,000[D]20,000 140,000

License[A]240,000[D]30,000 210,000

Goodwill[A]300,000300,000

$21,824,432 $2,502,591 $22,858,612


Accounts payable$ 1,004,304 $ 178,178 $ 1,182,482

Accrued liabilities1,193,640 233,002 1,426,642


Common stock753,320 124,600 [E]124,600753,320

APIC5,537,920 155,750 [E]155,7505,537,920


$21,824,432 $2,502,591 $22,858,612

40.

40. a.Subsidiary net income$26,040


$11,040

b. Beginning Equity Investment$414,000*

Equity Income11,040

Dividends(3,906)

Ending Equity Investment$421,134

*BOY stockholders equity$124,000($96,100 + $12,400 + $15,500)

PPE, net30,000($50,000 4 x $5,000)

Customer list60,000($100,000 4 x $10,000)

Goodwill200,000

$414,000

c. 1.PPE, net= $3,357,900 + $102,548 + $30,000 - $5,000 = $3,485,4482. Customer list= $60,000 - $10,000 = $50,0003. Retained earnings = $1,109,520 + $222,290 - $44,458= $1,287,352 d. The intangible assets reported on the year-end consolidated balance sheet include the Customer List ($50,000 after five years of amortization) and Goodwill ($200,000). e. Consolidated net income will always equal the net income of the parent so long as the parent employs the equity method to account for its Equity Investment. f. The subsidiarys stockholders equity is not held by a party outside of the economic entity represented in the consolidated financial statements and, as a result, should not be included in the consolidated stockholders equity.

41.

41.a.The balance at the beginning of the year of the Equity Investment account equals the Stockholders Equity of the subsidiary plus the undepreciated and unamortized balances of the [A] assets. Since the [A] assets with a useful life have now been depreciated or amortized for three years, the beginning balance of the Equity Investment account is as follows:

BOY Stockholders Equity$1,327,000($1,028,425+$132,700+$165,875)

PPE, net85,000($100,000 3 x $5,000)

Customer List250,000($400,000 3 x $50,000)

Royalty Agreement240,000($300,000 3 x $20,000)

Database140,000($200,000 3 x $20,000)

Goodwill500,000

$2,542,000

b. Subsidiary net income$278,670

Depreciation / amortization(95,000 )

$183,670

c. Beginning Equity Investment$2,542,000


Dividends(41,801)


41. continued

d.

[C]Equity income (P)183,670

Dividends (S)41,801




APIC (S) @ BOY165,875



(to eliminate the portion of the investment account related to the book value of the subsidiary's stockholders' equity @ BOY)

[A]PPE, net (S) @ BOY85,000

Customer List (S) @ BOY250,000

Royalty agreement (S) @ BOY240,000

Database (S) @ BOY140,000




[D]EOY Operating expenses (depreciation and amort)95,000

PPE, net5,000

Customer list50,000

Royalty Agreement20,000

Database20,000



41. continued

e.



Income statement:

Sales$4,185,000 $1,990,500 $6,175,500


Gross profit1,171,800 796,200 1,968,000

Equity income183,670 [C]183,670 0

Operating expenses(627,750)(517,530)[D]95,000 (1,240,280)

Net income$ 727,720 $ 278,670 $ 727,720


BOY retained earnings$6,812,560 $1,028,425 [E]1,028,425 $6,812,560

Net income727,720 278,670 727,720

Dividends(145,544)(41,801)[C]41,801 (145,544)


Balance sheet:

Cash$ 1,541,497 $ 512,885 $ 2,054,382


Inventory 1,623,780 593,169 2,216,949


[A]1,215,000

[C]141,869

PPE, net13,669,884 1,097,429 [A]85,000 [D]5,000 14,847,313

Customer list[A]250,000 [D]50,000 200,000

Royalty agreement[A]240,000 [D]20,000 220,000

Database[A]140,000 [D]20,000 120,000

Goodwill[A]500,000 500,000

$20,590,390 $2,665,279 $21,691,800





Common stock940,540 132,700 [E]132,700 940,540

APIC6,914,240 165,875 [E]165,875 6,914,240


$20,590,390 $2,665,279 $21,691,800

41. continued

f. The fair value of the subsidiary ($2.5 million) is less than the book value of the Equity Investment account ($2,683,869). Goodwill is, therefore, potentially impaired. The second part of the test computes the implied fair value of goodwill as follows:


Fair value of the net assets exclusive of goodwill2,300,000





Goodwill must be written down to its implied value of $200,000 with the following journal entry:





41. continued

g. Our consolidated income statement and balance sheet, reflecting the entry for goodwill impairment, are as follows:

Consolidated Income Statement:Consolidated Balance Sheet:

Sales$ 6,175,500 Assets

Cost of goods sold4,207,500Cash$ 2,054,382

Gross profit1,968,000 Accounts receivable1,533,156

Less: operating expenses1,240,280Inventory 2,216,949

Loss on impairment of Goodwill300,000PPE, net14,847,313

Net income$ 427,720 Customer list200,000

Royalty Agreement220,000

Consolidated Statement of Retained Earnings:Database120,000

BOY retained earnings$ 6,812,560 Goodwill200,000

Net income427,720 $ 21,391,800

Less: Dividends145,544

Ending retained earnings$ 7,094,736 Accounts payable$ 802,445

Accrued liabilities976,339

Long-term liabilities 4,663,500

Common stock940,540

APIC6,914,240

Retained earnings7,094,736

$ 21,391,800

42. a.The balance at the beginning of the year of the Equity Investment account equals the stockholders equity of the subsidiary plus the undepreciated and unamortized balances of the [A] assets. Since the [A] assets with a useful life have now been depreciated or amortized for four years, the beginning balance of the Equity Investment account is as follows:

BOY Stockholders Equity$2,045,000($1,584,875+$204,500+$255,625)

Patent240,000($400,000 4 x $40,000)

Goodwill500,000

$2,785,000



$389,450



Dividends(64,418)


d.[C]Equity income (P)389,450

Dividends (S)64,418

Equity Investment (P)325,032



APIC (S) @ BOY255,625




[A]Patent (S) @ BOY240,000


Equity Investment (P) @ BOY740,000


[D]EOY Operating expenses (amortization)40,000

Patent40,000



42. continued

e.Consolidation Entries


Income statement:

Sales$6,615,000 $3,067,500 $9,682,500


Gross profit1,852,200 1,227,000 3,079,200

Equity income389,450 [C]389,450 0


Net income$1,249,400 $ 429,450 $1,249,400


BOY retained earnings$7,463,800 $1,584,875 [E]1,584,875 $7,463,800

Net income1,249,400 429,450 1,249,400

Dividends(249,880)(64,418)[C]64,418 (249,880)


Balance sheet:

Assets

Cash$ 1,149,088 $ 790,392 $ 1,939,480


Inventory 2,566,620 914,115 3,480,735


[A]740,000

[C]325,032

PPE, net13,669,236 1,691,215 15,360,451

Patent[A]240,000 [D]40,000 200,000

Goodwill[A]500,000 500,000

$22,188,416 $4,107,382 $23,885,766


Accounts payable$ 968,436 $ 292,435 $ 1,260,871


Long-term liabilities 3,000,000 1,022,500 4,022,500

Common stock1,030,450 204,500 [E]204,500 1,030,450

APIC7,575,200 255,625 [E]255,625 7,575,200


$22,188,416 $4,107,382 $23,885,766

42. continued

f. The fair value of the subsidiary ($3 million) is less than the book value of the Equity Investment account ($3,110,032). Goodwill is, therefore, potentially impaired. The second part of the test computes the implied fair value of Goodwill as follows:


Fair value of the net assets exclusive of Goodwill2,600,000










42. continued

g. Our consolidated income statement and balance sheet, reflecting the entry for Goodwill impairment, are as follows:

Consolidated Income Statement:Consolidated Balance Sheet:

Sales$9,682,500 Assets

Cost of goods sold6,603,300Cash$ 1,939,480


Less: Operating expenses1,829,800Inventory 3,480,735

Less: Loss on impairment of goodwill100,000PPE, net15,360,451

Net income$1,149,400 Patent200,000

Goodwill400,000

Consolidated Statement of Retained Earnings:$23,785,766

BOY retained earnings$7,463,800

Net income1,149,400

Dividends(249,880)Accounts payable$ 1,260,871

Ending retained earnings$8,363,320 Accrued liabilities1,533,425

Long-term liabilities 4,022,500

Common stock1,030,450

APIC7,575,200


$23,785,766

43. a.The balance at the beginning of the year of the Equity Investment account equals the stockholders equity of the subsidiary plus the unamortized balance of the customer list. Since the customer list has been amortized for four years, the beginning balance of the Equity Investment account is as follows:

BOY stockholders equity$ 822,000($637,050+$82,200+$102,750)

Customer list200,000($400,000 4 x $50,000)

Goodwill250,000

$1,272,000

b. Subsidiary net loss(147,960)


(197,960)

c. Beginning Equity investment1,272,000

Equity Income(197,960)

Dividends0

Ending Equity Investment1,074,040

d. [C]Equity investment (P)197,960

Equity income (P)197,960

(to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account. Note: debit and credit are reversed since the subsidiary reports a loss.)


APIC (S) @ BOY102,750




[A]Customer list (S) @ BOY200,000





Customer list50,000



43. continued

e.Consolidation Entries


Income statement:

Sales$3,165,000 $1,233,000 $4,398,000


Gross profit886,200 493,200 1,379,400

Equity income(197,960)[C]197,960 0


Net income$ 213,490 $ (147,960)$ 213,490


BOY retained earnings$3,408,960 $637,050 [E]637,050$3,408,960

Net income213,490 (147,960)213,490

Dividends(42,698)0 (42,698)

Ending retained earnings$3,579,752 $489,090 $3,579,752

Balance sheet:

Assets

Cash$ 770,842 $ 23,016 $ 793,858


Inventory 1,228,020 367,434 1,595,454

Equity investment1,074,040 [C]197,960 [E]822,000 0

[A]450,000

PPE, net4,641,156 679,794 5,320,950

Customer list[A]200,000[D]50,000 150,000

Goodwill[A]250,000250,000

$8,524,298 $1,356,300 $9,206,558





Common stock470,640 82,200 [E]82,200470,640

APIC3,459,840 102,750 [E]102,7503,459,840

Retained earnings3,579,752 489,090 3,579,752

$8,524,298 $1,356,300 $9,206,558

43. continued

f. The entry to write-off the customer list is as follows:



(to write down the book value of customer list)

In preparation of the consolidated financial statements, the company will reclassify the $50,000 amortization of the customer list (taken during the year) to the loss incurred on write-down of the customer list. This means that the total loss on writing down the customer list equals $200,000 for the year ($50,000 + $150,000).

The fair value of the subsidiary ($800,000) is less than the book value of the Equity investment account ($1,074,040). Goodwill is, therefore, potentially impaired. The second part of the test computes the implied fair value of goodwill as follows:

Fair value of the subsidiary$800,000

Fair value of the net assets after write-off of customer list and exclusive of Goodwill750,000

Implied fair value of Goodwill$ 50,000

Book value of Goodwill250,000


The Goodwill asset is found to be impaired.




(to write down the book value of Goodwill)


43. continued

g. Our consolidated income statement, statement of retained earnings, and balance sheet, reflecting the entry for Goodwill impairment, are as follows:Consolidated Income statement:Consolidated Balance sheet:

Sales$4,398,000 Assets

Cost of goods sold3,018,600Cash$ 793,858


Operating expenses1,115,910Inventory 1,595,454

Write off of customer list200,000PPE, net5,320,950

Loss on impairment of goodwill200,000Goodwill50,000

Net loss$ (136,510)$8,856,558

Consolidated Statement of retained earnings:Accounts payable$ 580,902

BOY retained earnings$3,408,960 Accrued liabilities704,424

Net loss(136,510)Long-term liabilities 411,000

Dividends(42,698)Common stock470,640

Ending retained earnings$3,229,752 APIC3,459,840


$8,856,558

44.Aa. The Equity Investment, using the equity method, would be equal to the book value of the subsidiarys stockholders equity at the beginning of the year plus the unamortized balance of the Customer List at 1/1/13 (1 year has passed):

BOY Book value of subsidiarys Stockholders Equity$1,246,000

Unamortized balance of the Customer List135,000

BOY Equity investment (using equity method)$1,381,000

b. The [ADJ] consolidation journal entry increases the Equity Investment from its current balance of $1,000,000 (the original cost of the investment) to the $1,381,000 balance that the parent would have reported for the Equity investment had it used the equity method of accounting:

[ADJ]Equity investment381,000

Retained Earnings (parent)381,000

(to adjust the parents Retained Earnings to its proper balance under equity method)

c. [C]Dividend income (P)39,249

Dividends (S)39,249

(to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account. Note: no equity income since the parent uses the cost method.)


APIC (S) @ BOY155,750




[A]Customer list (S) @ BOY135,000




Customer list15,000



44A. continued

d. Consolidation Entries


Income statement:

Sales$6,860,000 $1,869,000 $8,729,000


Gross profit1,920,800 747,600 2,668,400

Operating expenses(1,029,000)(485,940)[D]15,000 (1,529,940)

Dividend income39,249 [C]39,249 0

Net income$ 931,049 $ 261,660 $1,138,460


BOY retained earnings$2,587,942 $ 965,650 [E]965,650 [ADJ]381,000 $2,968,942

Net income931,049 261,660 1,138,460

Dividends(186,210)(39,249)[C]39,249 (186,210)


Balance sheet:

Assets

Cash$ 949,931 $ 481,579 $ 1,431,510


Inventory 2,661,680 556,962 3,218,642

Equity investment1,000,000 [ADJ]381,000 [E]1,246,000 0

[A]135,000

PPE, net7,315,504 1,030,442 8,345,946

Customer list[A]135,000 [D]15,000 120,000

$13,683,275 $2,502,591 $15,305,866


Accounts payable$ 1,004,304 $ 178,178 $ 1,182,482



Common stock373,800 124,600 [E]124,600 373,800

APIC778,750 155,750 [E]155,750 778,750


$13,683,275 $2,502,591 $15,305,866

44A. continued

e. GAAP requires the use of the equity method for all financial statements that are issued to outside parties. Although the parent can use another method to account for its equity investment for internal reporting purposes, it cannot use that method when reporting to outside parties. Consequently, we must adjust the consolidated financial statements to equal those that would have been reported had the parent used the equity method all along. The [ADJ] consolidation journal entry adjusts the parents Retained Earnings to the balance that the parent would have reported had it used the equity method. The consolidated financial statements, therefore, include the parents Retained Earnings that are appropriately stated to reflect the equity method of accounting.

f. Had the parent used a hybrid equity method to accrue its proportionate share of the subsidiarys net income, but not the amortization of the customer list, the Equity investment account would be overstated by the amortization expense for the first year of $15,000. The [ADJ] consolidation entry, therefore, reduces the Equity investment account and Retained Earnings as follows:

[ADJ]Retained earnings (parent)15,000



45.Aa. The Equity Investment, using the equity method, would be equal to the book value of the subsidiarys Stockholders Equity at the beginning of the year plus the unamortized balance of the patent:

BOY Book value of subsidiarys stockholders equity$430,000

Unamortized balance of the patent240,000

Equity investment (using equity method)$670,000

b. The [ADJ] consolidation journal entry increases the Equity Investment from its current balance of $590,000 (the original cost of the investment) to the $670,000 balance that the parent would have reported for the Equity Investment had it used the equity method of accounting:

[ADJ]Equity investment80,000

Retained earnings (parent)80,000


45A. continued

c.

[C]Dividend income (P)13,545

Dividends (S)13,545

(to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account. Note: no Equity Income since the parent uses the cost method.)


APIC (S) @ BOY53,750




[A]Patent (S) @ BOY240,000




Patent30,000



45A. continued

d.Consolidation Entries


Income statement:

Sales$4,290,000 $645,000 $4,935,000


Gross profit1,201,200 258,000 1,459,200

Operating expenses(643,500)(167,700)[D]30,000(841,200)

Dividend income13,545 [C]13,5450

Net income $ 571,245 $ 90,300 $ 618,000


BOY retained earnings$ 893,110 $333,250 [E]333,250[ADJ]80,000$ 973,110

Net income571,245 90,300 618,000

Dividends(114,249)(13,545)[C]13,545(114,249)


Balance sheet:

Assets

Cash$ 694,756 $166,195 $ 860,951


Inventory 1,664,520 192,210 1,856,730

Equity investment590,000 [ADJ]80,000[E]430,000 0

[A]240,000

PPE, net4,574,856 355,610 4,930,466

Patent[A]240,000[D]30,000 210,000

$8,622,372 $863,655 $9,106,027





Common stock129,000 43,000 [E]43,000129,000

APIC268,750 53,750 [E]53,750268,750


$8,622,372 $863,655 $9,106,027

45A. continued

e. GAAP requires the use of the equity method for all financial statements that are issued to outside parties. Although the parent can use another method to account for its Equity Investment for internal reporting purposes, it cannot use that method when reporting to outside parties. Consequently, we must adjust the consolidated financial statements to equal those that would have been reported had the parent used the equity method all along. The [ADJ] consolidation journal entry adjusts the parents Retained Earnings to the balance that the parent would have reported had it used the equity method. The consolidated financial statements, therefore, include the parents Retained Earnings that are appropriately stated to reflect the equity method of accounting.

f. Had the parent used a hybrid equity method to accrue its proportionate share of the subsidiarys net income, but not the amortization of the patent, the Equity Investment account would be overstated by the accumulated amortization expense through the first two years of $60,000 ($30,000 x 2). The [ADJ] consolidation entry, therefore, reduces the Equity Investment account and Retained Earnings as follows:

[ADJ]Retained earnings (parent)60,000



46.Ca.[C]Equity income155,610

Dividends23,342


(to eliminate equity income and intercompany dividends)

[E]Common stock74,100

APIC92,625

Retained earnings574,275


(to eliminate subsidiary stockholders' equity)

46.C continued

b. Consolidation Entries


Income statement:

Sales$8,520,000 $1,111,500 $9,631,500


Gross profit2,556,000 444,600 3,000,600

Equity income155,610 [C]155,610 0

Operating expenses(1,618,800)(288,990)(1,907,790)

Net income$1,092,810 $ 155,610 $1,092,810


BOY retained earnings$4,280,448 $574,275 [E]574,275 $4,280,448

Net income1,092,810 155,610 1,092,810

Dividends(218,562)(23,342)[C]23,342 (218,562)


Balance sheet:

Assets

Cash$ 943,648 $ 281,034 $ 1,224,682


Inventory 1,652,880 331,227 1,984,107

Equity investment873,268 [C]132,268 0

[E]741,000

PPE, net6,246,864 761,007 7,007,871

$10,807,220 $1,631,136 $11,565,088


Current Liabilities$ 1,224,324 $ 257,868 $ 1,482,192


Common stock1,393,020 74,100 [E]74,100 1,393,020

APIC1,035,180 92,625 [E]92,625 1,035,180


$10,807,220 $1,631,136 $11,565,088

47.C a.[C]Equity income261,870

Dividends39,281


(to eliminate equity income and intercompany dividends)

[E]Common stock124,700

APIC155,875

Retained earnings966,425

Equity investment1,247,000

(to eliminate subsidiary Stockholders' Equity)

b. Consolidation Entries


Income statement:

Sales$7,330,000 $1,870,500 $9,200,500


Gross profit2,199,000 748,200 2,947,200

Equity income261,870 [C]261,870 0

Operating expenses(1,392,700)(486,330)(1,879,030)

Net income$1,068,170 $ 261,870 $1,068,170


BOY retained earnings$3,604,030 $ 966,425 [E]966,425 $3,604,030

Net income1,068,170 261,870 1,068,170

Dividends(213,634)(39,281)[C]39,281 (213,634)


Balance sheet:

Assets

Cash$ 396,732 $ 131,511 $ 528,243


Inventory 1,422,020 557,409 1,979,429

Equity investment1,469,589 [C]222,589 0

[E]1,247,000

PPE, net5,374,356 1,280,669 6,655,025

$9,600,937$2,403,545 $10,534,893


Current Liabilities$1,053,321 $ 433,956 $ 1,487,277


Common stock1,198,455 124,700 [E]124,700 1,198,455

APIC890,595 155,875 [E]155,875 890,595


$9,600,937 $2,403,545 $10,534,893

Cambridge Business Publishers, 20143-18Advanced Accounting by Halsey & Hopkins, 2nd EditionCambridge Business Publishers, 2014Solutions Manual, Chapter 33-43

Aa2e Hal Sm Ch03

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