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Chapter 04 - Consolidated Financial Statements and Outside Ownership
CHAPTER 4
CONSOLIDATED FINANCIAL STATEMENTS
AND OUTSIDE OWNERSHIP
Chapter Outline
I. Outside ownership may be present within any business combination
A. Complete ownership of a subsidiary is not a prerequisite for consolidation—only
enough voting shares need be owned so that the acquiring company has the ability
to control the decision-making process of the acquired company
B. Any ownership retained in a subsidiary corporation by a party unrelated to the
acquiring company is termed a noncontrolling interest
II. Valuation of subsidiary assets and liabilities poses a problem when a noncontrolling
interest is present follows the acquisition method
1. The accounting emphasis is placed on the entire entity that results from the
business combination as measured by the sum of the acquisition-date fair
values of the controlling and noncontrolling interests.
2. Valuation of subsidiary accounts is based on the acquisition-date fair value of
the company (frequently determined by the consideration transferred and the
fair value of the noncontrolling interest); specific subsidiary assets and liabilities
are consolidated at their fair values
3. The noncontrolling interest balance is reported as a component of stockholders'
equity
III. Consolidations involving a noncontrolling interest—subsequent to the date of

acquisition
A. According to the parent company concept, all noncontrolling interest amounts are
calculated in reference to the book value of the subsidiary company
B. Only four noncontrolling interest figures are determined for reporting purposes
1. Beginning of year balance
2. Interest in subsidiary’s current income
3. Dividends paid during the period
4. End of year balance
C. Noncontrolling interest balances are accumulated in a separate column in the
consolidation worksheet
1. The beginning of year figure is recorded on the worksheet as a component of
Entries S and A
2. The noncontrolling interest's share of the subsidiary's income is established by a
columnar entry that simultaneously reports the balance in both the consolidated
income statement and the noncontrolling interest column
3. Dividends paid to these outside owners are reflected by extending the
subsidiary's Dividends Paid balance (after eliminating intra-entity transfers) into
the noncontrolling interest column as a reduction
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4. The end of year noncontrolling interest total is the summation of the three items
above and is reported in stockholders' equity.
IV. Step acquisitions

A. An acquiring company may make several different purchases of a subsidiary's stock
in order to gain control
B. Upon attaining control, all of the parent’s previous investments in the subsidiary are
adjusted to fair value and a gain or loss recognized as appropriate
C. Upon attaining control, the valuation basis for the subsidiary is established at its
total fair value (the sum of the fair values of the controlling and noncontrolling
interests)
Vl. Sales of subsidiary stock

A. The proper book value must be established within the parent's Investment account
so that the sales transaction can be correctly recorded
B. The investment balance is adjusted as if the equity method had been applied during
the entire period of ownership
C. If only a portion of the shares are being sold, the book value of the investment
account is reduced using either a FIFO or a weighted-average cost flow assumption
D. If the parent maintains control, any difference between the proceeds of the sale and
the equity-adjusted book value of the share sold is recognized as an adjustment to
additional paid-in capital.
E. If the parent loses control with the sale of the subsidiary shares, the difference
between the proceeds of the sale and the equity-adjusted book value of the share
sold is recognized as a gain or loss.
F. Any interest retained by the parent company should be accounted for by either
consolidation, the equity method, or the fair value method depending on the
influence remaining after the sale.
Answers to Questions
1. "Noncontrolling interest" refers to an equity interest that is held in a member of a
business combination by an unrelated (outside) party.
2. a. Acquisition method = $220,000 (fair value)

b. Purchase method = $208,000 (all of the book value plus 80 percent of the $60,000
difference between fair value and book value)
3. A control premium is the portion of an acquisition price (above currently traded market
values) paid by a parent company to induce shareholders to sell a sufficient number of
shares to obtain control. The extra payment typically becomes part of the goodwill
acquired in the acquisition attributable to the parent company.
4. Current accounting standards require the noncontrolling interest to appear in various
locations within consolidated financial statements. The end of year balance can be
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found in the stockholders' equity section. The noncontrolling interest's share of net income is
shown as an allocated component of consolidated net income.
5. The ending noncontrolling interest can be determined on a consolidation worksheet by
adding the four components found in the noncontrolling interest column: (1) the
beginning balance of the subsidiary’s book value, (2) the noncontrolling interest share
of the adusted acquisition-date excess fair over book value allocation, (3) its share of
current year subsidiary income, (4) less dividends paid to these outside owners.
6. Allsports should remove the pre-acquisition revenues and expenses from the
consolidated totals. These amounts were earned (incurred) prior to ownership by
Allsports and therefore should are not earnings for the current parent company owners.
7. Following the second acquisition, consolidation is appropriate. Once Tree gains control,
the 10% previous ownership is included at fair value as part of the total consideration
transferred by Tree in the acquisition.
8. When a company sells a portion of an investment, it must remove the carrying value of
that portion from its investment account. The carrying value is based upon application
of the equity method. Thus, if either the initial value method or the partial equity method
has been used, Duke must first restate the account to the equity method before
recording the sales transaction. This same method is also applied to the operations of
the current period occurring prior to the time of sale.
9. Unless control is surrendered, the acquisition method views the sale of subsidiary's
stock as a transaction with its owners. Thus, no gain or loss is recognized. The
difference between the sale proceeds and the carrying value of the shares sold (equity
method) is accounted for as an adjustment to the parent’s additional paid in capital.
10. The accounting method choice for the remaining shares depends upon the current
relationship between the two firms. If Duke retains control, consolidation is still required.
However, if the parent now can only significantly influence the decision-making
process, the equity method is applied. A third possibility is Duke may have lost the
power to exercise even significant influence. The fair value method then is appropriate.
Answers to Problems
1. C
2. D At the date control is obtained, the parent consolidates subsidiary assets

at fair value ($500,000 in this case) regardless of the parent’s percentage
ownership.
3. D In consolidating the subsidiary's figures, all intra-entity balances must be

eliminated in their entirety for external reporting purposes. Even though
the subsidiary is less than fully owned, the parent nonetheless controls it.
4. C An asset acquired in a business combination is initially valued at 100%

acquisition-date fair value and subsequently amortized its useful life.
Patent fair value at January 1, 2011................................................ $45,000
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Amortization for 2 years (10 year life)............................................ (9,000)

Patent reported amount December 31, 2012................................. $36,000
5. C
6. B Combined revenues......................................................................... $1,100,000

Combined expenses......................................................................... (700,000)
Excess acquisition-date fair value amortization........................... (15,000)
Consolidated net income................................................................. $385,000
Less: noncontrolling interest ($85,000 × 40%).............................. (34,000)
Consolidated net income to controlling interest.......................... $351,000
7. B
8. A Amie, Inc. fair value at July 1, 2012:

30% previously owned fair value (30,000 shares × $5) ................ $150,000
60% new shares acquired (60,000 shares × $6)............................ 360,000
10% NCI fair value (10,000 shares × $5)........................................ 50,000
Acquisition-date fair value............................................................... $560,000
Net assets' fair value........................................................................ 500,000
Goodwill ............................................................................................ $60,000
9. C
10. B Fair value of 30% noncontrolling interest on April 1.................... $165,000

30% of net income for remainder of year ($240,000 × 30%)......... 72,000
Noncontrolling interest December 31............................................. $237,000
11. C Proceeds of $80,000 less $64,000 (⅓ × $192,000) book value = $16,000

Control is maintained so excess proceeds go to APIC.
12. B Combined revenues.......................................................................... $1,300,000
Combined expenses......................................................................... (800,000)
Trademark amortization................................................................... (6,000)
Patented technology amortization.................................................. (8,000)
Consolidated net income ................................................................ $486,000
13. C Subsidiary income ($100,000 – $14,000 excess amortizations). . $86,000

Noncontrolling interest percentage................................................ 40%
Noncontrolling interest in subsidiary income............................... $34,400
Fair value of noncontrolling interest at acquisition date............. $200,000
40% change in Solar book value since acquisition...................... 52,000
Excess fair value amortization ($14,000 × 40% × 2 years)............ (11,200)
Noncontrolling interest at end of year........................................... $240,800
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14. A West trademark balance................................................................... $260,000

Solar trademark balance.................................................................. 200,000
Acquisition-date fair value allocation............................................. 60,000
Excess fair value amortization for two years................................ (12,000)
Consolidated trademarks................................................................. $508,000
15. A Acquisition-date fair value ($60,000 ÷ 80%)................................... $75,000

Strand's book value ......................................................................... (50,000)
Fair value in excess of book value ................................................ $25,000
Excess assigned to inventory (60%) ................................$15,000
Excess assigned to goodwill (40%) ..................................$10,000
Park current assets........................................................................... $70,000
Strand current assets....................................................................... 20,000
Excess inventory fair value............................................................. 15,000
Consolidated current assets........................................................... $105,000
16. D Park noncurrent assets.................................................................... $90,000

Strand noncurrent assets................................................................ 40,000
Excess fair value to goodwill.......................................................... 10,000
Consolidated noncurrent assets..................................................... $140,000
17. B Add the two book values and include 10% (the $6,000 current portion) of
the loan taken out by Park to acquire Strand.
18. B Add the two book values and include 90% (the $54,000 noncurrent portion)
of the loan taken out by Park to acquire Strand.
19. C Park stockholders' equity................................................................ $80,000

Noncontrolling interest at fair value (20% × $75,000)................... 15,000
Total stockholders' equity............................................................... $95,000
20. (15 minutes) (Compute consolidated income and noncontrolling interests)

2011 2012
Harrison income.............................................................. $220,000 $260,000
Starr income..................................................................... 70,000 90,000
Acquisition-date excess fair value amortization......... (8,000) (8,000)
Consolidated net income............................................... $282,000 $342,000
Starr fair value.............................................................................. $1,200,000
Fair value of consideration transferred.......................................... 1,125,000
Noncontrolling interest fair value................................................... $75,000
Noncontrolling interest fair value January 1, 2011 (above).......... $75,000
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2011 income to NCI ([$70,000 – $8,000] × 10%)................................ 6,200

2011 dividends to NCI ..................................................................... (3,000)
Noncontrolling interest reported value December 31, 2011.... 78,200
2012 income to NCI ([$90,000 – $8,000] × 10%)................................ 8,200
2012 dividends to NCI ..................................................................... (3,000)
Noncontrolling interest reported value December 31, 2012 $83,400
21. (40 minutes) (Several valuation and income determination questions for a
business combination involving a noncontrolling interest.)
a. Business combinations are recorded generally at the fair value of the

consideration transferred by the acquiring firm plus the acquisition-date fair
value of the noncontrolling interest.
Patterson’s consideration transferred ($31.25 × 80,000 shares)......... $2,500,000

Noncontrolling interest fair value ($30.00 × 20,000 shares)................. 600,000
Soriano’s total fair value January 1..................................................... $3,100,000
b. Each identifiable asset acquired and liability assumed in a business

combination is initially reported at its acquisition-date fair value.
c. In periods subsequent to acquisition, the subsidiary’s assets and liabilities

are reported at their acquisition-date fair values adjusted for amortization and
depreciation. Except for certain financial items, they are not continually
adjusted for changing fair values.
d. Soriano’s total fair value January 1..................................................... $3,100,000

Soriano’s net assets book value.......................................................... 1,290,000
Excess acquisition-date fair value over book value.......................... $1,810,000
Adjustments from book to fair values.................................................
Buildings and equipment.......................................... (250,000)

Trademarks................................................................. 200,000
Patented technology................................................. 1,060,000
Unpatented technology............................................. 600,000 1,610,000
Goodwill ............................................................................................ $ 200,000
e. Combined revenues............................................................................... $4,400,000

Combined expenses.............................................................................. (2,350,000)
Building and equipment excess depreciation.................................... 50,000
Trademark excess amortization........................................................... (20,000)
Patented technology amortization....................................................... (265,000)
Unpatented technology amortization.................................................. (200,000)
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Consolidated net income...................................................................... $1,615,000
To noncontrolling interest:
Soriano’s revenues........................................................................... $1,400,000
Soriano’s expenses.......................................................................... (600,000)
Total excess amortization expenses (above)................................ (435,000)
Soriano’s adjusted net income....................................................... $ 365,000
Noncontrolling interest percentage ownership............................ 20%
Noncontrolling interest share of consolidated net income......... $ 73,000
To controlling interest:
Consolidated net income................................................................. $1,615,000
Noncontrolling interest share of consolidated net income......... (73,000)
Controlling interest share of consolidated net income............... $1,542,000
-OR-
Patterson’s revenues........................................................................ $3,000,000

Patterson’s expenses....................................................................... 1,750,000
Patterson’s separate net income.................................................... $1,250,000
Patterson’s share of Soriano’s adjusted net income
(80% × $365,000)..................................................................... 292,000
Controlling interest share of consolidated net income............... $1,542,000
f. Fair value of noncontrolling interest January 1................................. $600,000

Current year income allocation............................................................ 73,000
Dividends (20% × $30,000).................................................................... (6,000)
Noncontrolling interest December 31.................................................. $667,000
g. If Soriano’s acquisition-date total fair value was $2,250,000, then a bargain

purchase has occurred.
Collective fair values of Soriano’s net assets.................................... $2,900,000

Soriano’s total fair value January 1..................................................... $2,250,000
Bargain purchase................................................................................... $ 650,000
The acquisition method requires that the subsidiary assets acquired and
liabilities assumed be recognized at their acquisition date fair values
regardless of the assessed fair value. Therefore, none of Soriano’s identifiable
assets and liabilities would change as a result of the assessed fair value.
When a bargain purchase occurs, however, no goodwill is recognized.
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22. (20 Minutes) (Determine consolidated income balances, includes a mid-year

acquisition)
a. Acquisition-date total fair value .......................... $594,000

Book value of net assets...................................... (400,000)
Fair value in excess of book value ..................... $194,000 Annual Excess
Excess fair value assigned to Life Amortizations
Patent ............................................................ 140,000 5 years $28,000
Land ............................................................ 10,000
Buildings......................................................... 30,000 10 years 3,000
Goodwill........................................................... 14,000
Total ............................................................ -0- $31,000
Consolidated figures following January 1 acquisition date:

Combined revenues .............................................................................. $1,500,000
Combined expenses.............................................................................. (1,031,000)
Consolidated net income...................................................................... 469,000
NCI in Sawyer’s income ([200,000 – 31,000] × 30%)......................... (50,700)
Controlling interest in consolidated net income ............................... $418,300
b. Consolidated figures following April 1 acquisition date:

Combined revenues (1).......................................................................... $1,350,000
Combined expenses (2)......................................................................... (923,250)
Consolidated net income ..................................................................... $426,750
Noncontrolling interest in subsidiary income (3)............................... (38,025)
Controlling interest in consolidated net income ............................... $388,725
(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues

(2) $600,000 Parker expenses plus $300,000 of post-acquisition Sawyer expenses
plus $23,250 amortization expenses for 9 months
(3) ($200,000 – 31,000) adjusted subsidiary income × 30% × ¾ year
23. (15 minutes) Consolidated figures with noncontrolling interest
Fair value of company (given) $60,000

Book value (10,000)
Fair value in excess of book value 50,000
to machine ($50,000 – $10,000) 40,000 ÷ 10 = $4,000 per year
to process trade secret $10,000 ÷ 4 = 2,500 per year
$6,500 per year
Consolidated figures:
• Noncontrolling interest in subsidiary income
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= 40% × ($50,000 revenues less $26,500 expenses) = $9,400

• End-of-year noncontrolling interest:
Beginning balance (40% × $60,000) $24,000
Income allocation 9,400
Dividend reduction (40% × $5,000) (2,000)
End-of-year noncontrolling interest $31,400
• Machine (net) = $45,000 ($9,000 book value plus $40,000 excess
allocation less $4,000 excess depreciation for one year).
• Process trade secret (net) = $10,000 – $2,500 = $7,500
24. (20 Minutes) (Determine consolidated balances for a step acquisition).
a. Amsterdam fair value implied by price paid by Morey

$560,000 ÷ 70% = $800,000
b. Revaluation gain:
1/1 equity investment in Amsterdam (book value) $178,000
25% income for 1st 6 months 8,750
Investment book value at 6/30 186,750
Fair value of investment at 6/30 (25% × $800,000) 200,000
Gain on revaluation to fair value $ 13,250
c. Goodwill at 12/31:
Fair value of Amsterdam at 6/30 $800,000
Book value at 6/30 (700,000 + [70,000 ÷ 2]) 735,000
Excess fair value $ 65,000
Allocation to goodwill (no impairment) $ 65,000
d. Noncontrolling interest:
5% fair value balance at 6/30 $40,000
5% Income from 6/30 to 12/31 1,750
5% dividends (1,000)
Noncontrolling interest 12/31 $40,750
25. (30 Minutes) (Reporting the sale of a portion of an investment in a

subsidiary.)
a. Posada records an accrual of $7,950 (see computation below) as
"Equity Income from Sold Shares of Sabathia" for the January 1, 2012
to October 1, 2012 period which will appear in the 2012 consolidated
income statement. The consolidation will continue to include all of
Sabathia's accounts but now recognizing a 40% noncontrolling
interest.
Sabathia fair value 1/1/10 .......................................... $1,200,000
Sabathia book value .................................................. (1,130,000)
Patent ........................................................................... $70,000
Life of patent ............................................................... 5 years
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Annual amortization ................................................... $14,000

Posada’s share of Sabathia’s income accruing to shares sold:
Sabathia's net income................................................ $120,000
Excess patent fair value amortization...................... (14,000)
Sabathia's adjusted net income................................ 106,000
Fraction of year held................................................... 9/12
Sabathia’s adjusted income for 9 months............... 79,500
Percentage owned by Posada................................... 70%
Posada’s share of Sabathia’s 9 month income ...... 55,650
Shares sold—1,000 out of 7,000 ............................... 1/7
Posada’s income shares sold .................................. $7,950
b. As long as control is maintained, the acquisition method considers

transactions in the stock of a subsidiary, whether purchases or sales,
as transactions in the equity of the consolidated entity.
Posada’s investment book value 10/1/12

1/1/12 balance (given—equity method) ................... $1,085,000
Recognition of 1/1/12–10/1/12 period:
Income accrual ($120,000 × 70% × ¾) ................ 63,000
Dividends ($40,000 × 70% × ¾) ........................... (21,000)
Amortization ($14,000 × 70% × ¾) ....................... (7,350)
Pre-sale investment book value—10/1/12................ $1,119,650
Computation of income effect—sale transaction
10/1/12 book value (above) ....................................... $1,119,650
Portion of investment sold (1,000/7,000 shares) .... 1/7
Book value of investment sold ................................. $159,950
Proceeds ..................................................................... 191,000
Credit to Posada’s additional paid-in capital ......... $ 31,050
c. Because Posada continues to hold 6,000 shares of Sabathia, control is

still maintained and consolidated financial statements would be
appropriate with a noncontrolling interest of 40 percent.
26. (35 Minutes) (Consolidation entries and the effect of different investment
methods)
a. From the original fair value allocation, $30,000 is assigned based on the
fair value of the patent. With a 5-year life, excess amortization will be
$6,000 per year.
Because the equity method is in use, no Entry *C is required.
Entry S
Common Stock (Bandmor) ............................. 300,000
Retained Earnings, 1/1/11(Bandmor) ............ 268,000
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Investment in Bandmor (70%) .................. 397,600

Noncontrolling Interest in Bandmor, 1/1/11 170,400
(To eliminate stockholders' equity accounts of subsidiary and
recognize outside ownership. Retained earnings figure includes
2009 and 2010 income and dividends.)
Entry A
Patent ................................................................ 18,000
Goodwill ........................................................... 190,000
Investment in Bandmor ............................. 145,600
Noncontrolling Interest in Bandmor (30%) 62,400
(To recognize unamortized portions of acquisition-date fair value
allocations. No control premium, so goodwill is allocated
proportionately. Patent has undergone two years amortization)
Entry I
Equity in Subsidiary Earnings ....................... 72,800
(To eliminate intra-entity income balance. Equity accrual of $72,800
[70% × ($110,000 – 6,000 amortization)] has been recorded)
Entry D
Investment in Bandmor .................................. 42,000
Dividends Paid ........................................... 42,000
(To eliminate current intra-entity dividend transfers—70% of $60,000)
Entry E
Amortization Expense..................................... 6,000
Patent........................................................... 6,000
(To recognize amortization for current year)
Entry P
Accounts Payable ........................................... 22,000
Accounts Receivable ................................. 22,000
(To eliminate intra-entity payable/receivable balance)
26. (continued)
b. If the initial value method had been applied, the parent would have
recorded only the dividends received as income rather than an equity
accrual. Therefore, Entry *C is needed to adjust the parent's beginning
retained earnings for 2011 to the equity method. During 2009 and 2010,
the subsidiary earned a total net income of $171,000 but paid dividends
of only $83,000. The parent's share of the difference is $61,600 (70% of
$88,000 [$171,000 - $83,000]). In addition, the parent’s 70% share of
excess amortization expense for two years must also be included
($8,400 = 2 years × $6,000 per year × 70%). The net amount to be
recognized is $53,200 ($61,600 - $8,400).
ENTRY *C
Investment in Bandmor .................................. 53,200
Retained Earnings, 1/1/11 ......................... 53,200
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c. If the partial equity method had been applied, only the excess
amortization expenses for the previous two years would have been
omitted from the parent's retained earnings. As shown above, that
figure is $8,400 (2 years × $6,000 per year × 70%).
ENTRY *C
Retained Earnings, 1/1/11 .............................. 8,400
d. Noncontrolling interest in Bandmor's income—2011
[($110,000 – 6,000) × 30%] .............................. $31,200
Noncontrolling interest fair value January 1, 2009 $210,000

Adjustments to original basis:
2009 Net Income to NCI....................................... $20,700
Dividends paid ........................................... (11,700) 9,000
2010 Net income to noncontrolling interest .... $27,000

Dividends to noncontrolling interest ...... (13,200) 13,800
2011 Net income to noncontrolling interest .... $31,200

Dividends to noncontrolling interest ...... (18,000) 13,200
Noncontrolling interest in Bandmor 12/31/11.... $246,000
–OR–
Worksheet adjustment S...................................................... $170,400

Worksheet adjustment A..................................................... $62,400
2011 income to noncontrolling interest ............................ 31,200
2011 dividends to noncontrolling interest ....................... (18,000)
Noncontrolling interest in Bandmor 12/31/11.............. $246,000
27. (45 Minutes) (Asks about several consolidated balances and consolidation
process. Includes the different accounting methods to record investment.)
a. Schedule 1—Fair Value Allocation and Excess Amortizations
Consideration transferred by Miller ......... $664,000
Noncontrolling interest fair value............. 166,000
Taylor’s fair value....................................... $830,000
Taylor’s book value.................................... (600,000)
Fair value in excess of book value ......... 230,000 Annual Excess
Life Amortizations
Excess fair value assigned to buildings 80,000
20 years
$4,000
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Goodwill ...................................................... $150,000 indefinite -0-

Total....................................................... $4,000
b. $150,000 (see schedule 1 above)
c. Entry (S)
Common stock (Taylor) ....................................... 300,000
Additional paid-in capital (Taylor) ...................... 90,000
Retained earnings (Taylor) .................................. 210,000
Investment in Taylor Company (80%) ........... 480,000
Noncontrolling interest in Taylor (20%) ....... 120,000
Entry (A)—no control premium

Buildings ................................................................ 80,000
Goodwill ................................................................. 150,000
Investment in Taylor Company (80%) ........... 184,000
Noncontrolling interest in Taylor (20%) ....... 46,000
d. (1) Equity method

Income accrual (80%) ..................................... $56,000
Excess amortization expense ........................ (3,200)
Investment income .................................... $52,800
(2) Partial equity method
Income accrual (80%) ..................................... $56,000
(3) Initial value method
Dividends received (80%) ............................... $8,000
e. Equity method
Initial fair value paid.............................................. $664,000
Income accrual 2009–2011 ($260,000 × 80%) .... 208,000
Dividends 2009–2011 ($45,000 × 80%) ............... (36,000)
Excess Amortizations 2009–2011 ($3,200 × 3) . . (9,600)

Investment in Taylor—12/31/11 ..................... $826,400
27. (continued)
Partial Equity Method

Investment in Taylor—12/31/11 = $836,000 (initial value paid plus
income accrual of $208,000 less dividends of $36,000 [no excess
amortizations])
Initial Value Method
Investment in Taylor—12/31/11 = $664,000 (original value paid)
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f. Using the acquisition method, the allocation will be the total difference
($80,000) between the buildings' book value and fair value. Based on a
20 year life, annual excess amortization is $4,000.
Miller book value—buildings ............................... $800,000
Taylor book value—buildings ............................. 300,000
Allocation ............................................................... 80,000
Excess amortizations for 2009–2010 ($4,000 × 2) (8,000)
Consolidated buildings account ............. $1,172,000
g. Acquisition-date fair value allocated to goodwill
(see schedule 1 above) ................................... $150,000
h. If the parent has been applying the equity method, the stockholders'
equity accounts on its books will already represent consolidated totals.
The common stock and additional paid-in capital figures to be reported
are the parent balances only. As to retained earnings, the equity
method will properly record all subsidiary income and amortization so
that the parent balance is also a reflection of the consolidated total.
28. (20 Minutes) (A variety of consolidated balances-midyear acquisition)

Consideration transferred by Karson
(cash and contingent consideration)........ $1,360,000
Noncontrolling interest fair value ................. 340,000
Reilly’ fair value (given)................................... $1,700,000
Book value of Reilly........................................ (1,450,000)*
Fair value in excess of book value................. $250,000 Annual Excess
Excess fair value assigned Life Amortizations
Trademarks ................................................... 150,000 5 years $30,000
Goodwill ........................................................ $100,000 indefinite -0-
Total ............................................................ $30,000
*Reilly book value, January 1
(Common stock + APIC + RE) ....................... $1,400,000

Increase in book value:
Net income (revenues less cost of
goods sold and expenses) ................... $120,000
Dividends ............................................... (20,000)
Change during year .................................. $100,000
Change during first 6 months of year..... 50,000
Reilly book value, July 1 (acquisition date)..... $1,450,000
CONSOLIDATION TOTALS:
 Sales (1) $1,050,000
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Cost of goods sold (2) 540,000

 Operating expenses (3) 265,000
 Consolidated net Income $245,000
 Noncontrolling Interest in sub. Income (4) $9,000
(1) $800,000 Karson revenues plus $250,000 (post-acquisition subsidiary
revenue)
(2) $400,000 Karson COGS plus $140,000 (post-acquisition subsidiary
COGS)
(3) $200,000 Karson operating expenses plus $50,000 (post-acquisition
subsidiary operating expenses) plus ½ year excess amortization of
$15,000
(4) 20% of post-acquisition subsidiary income less excess fair value
amortization [20% × ½ year × (120,000 – 30,000)] = $9,000
 Retained earnings, 1/1 = $1,400,000 (the parent’s balance because the
subsidiary was acquired during the current year)
 Trademarks = $935,000 (add the two book values and the excess fair
value allocation after taking one-half year excess amortization)
 Goodwill = $100,000 (the original allocation)
29. (25 Minutes) (A variety of consolidated questions and balances)

a. Nascent applies the initial value method because the original price of
$414,000 is still in the Investment in Sea-Breeze account. In addition,
the Investment Income account is equal to 60 percent of the dividends
paid by the subsidiary during the year.
b. Consideration transferred in acquisition. $414,000
Noncontrolling interest fair value............. 276,000
Sea-Breeze fair value 1/1/09 ..................... $690,000
Sea-Breeze book value 1/1/09 550,000
Excess fair value over book value $140,000
Excess fair assignments: Annual Excess

Life Amortizations
Buildings................................................ 60,000 6 years $10,000
Equipment.............................................. (20,000) 4 years (5,000)
Patent...................................................... 100,000 10 years 10,000
Total ...................................................... -0- $15,000
c. If the equity method had been applied, the Investment Income account
would show the basic equity accrual less amortization: 60% of (the
subsidiary's income of $90,000 less $15,000 excess fair value
amortization) = $45,000.
d. The initial value method recognizes neither the increase in the
subsidiary's book value nor the excess amortization expenses for prior
4-15
years. At the acquisition date, the subsidiary’s book value was $550,000
as indicated by the assets less liabilities. At the beginning of the
current year, the book value of the subsidiary is $780,000 as indicated
by beginning stockholders' equity balances.
Increase in book value during prior years
($780,000 – $550,000)............................................................ $230,000
Less excess amortization .......................................................... (45,000)
Net increase in book value......................................................... $185,000
Ownership ................................................................................... 60%
Increase required in parent's retained earnings, 1/1/12 ........ $111,000
Parent's retained earnings, 1/1/12 as reported ....................... 700,000
Parent’s share of consolidated retained earnings, 1/1/12...... $811,000
e. Consolidated net income and allocation
 Revenues (add book values) $900,000
 Expenses (add book values and excess amortization) (635,000)
 Consolidated net Income $265,000
 Noncontrolling interest in consolidated net income
($90,000 – 15,000) × 40% 30,000
 Controlling interest in consolidated net income $235,000
29. (continued)
f. Consolidated buildings, 1/1/09 (subsidiary):

Book value.............................................................................. $300,000
Acquisition-date fair-value allocation ................................ 60,000
Consolidation figure ............................................................. $360,000
g. Consolidated buildings, 12/31/12:
Parent's book value .............................................................. $700,000
Subsidiary's book value ....................................................... 200,000

Original allocation ................................................................. 60,000
Amortization ($10,000 × 4 years) ......................................... (40,000)
Consolidated balance ........................................................... $920,000
30. Acquisition Method Consolidated Balances
Adjustments
December 31, 2011 Pierson Steele & Eliminations NCI Consolidated
Revenues (1,843,000) (675,000) (2,518,000)
Cost of goods sold 1,100,000 322,000 1,422,000
Depreciation expense 125,000 120,000 245,000
Amortization expense 275,000 11,000 (E) 80,000 366,000
Interest expense 27,500 7,000 34,500
Equity in Steele Income (121,500) (I)121,500 -0-
4-16
Separate company
net income (437,000) (215,000)
Consolidated net income (450,500)
NCI in Steele Income (13,500) (13,500)
Controlling interest in CNI (437,000)
Retained Earnings 1/1 (2,625,000) (395,000) (S)395,000 (2,625,000)

Net Income (437,000) (215,000) (437,000)
Dividends paid 350,000 25,000 (D) 22,500 2,500 350,000
Retained Earnings 12/31 (2,712,000) (585,000) (2,712,000)
Current Assets 1,204,000 430,000 1,634,000

Investment in Steele 1,854,000 (D) 22,500 (S)769,500
(A)985,500 -0-
(I) 121,500
Customer base -0- -0- (A)720,000 (E) 80,000 640,000
Buildings and Equipment 931,000 863,000 1,794,000
Copyrights 950,000 107,000 1,057,000
Goodwill (A)375,000 375,000
Total Assets 4,939,000 1,400,000 5,500,000
Accounts Payable (485,000) (200,000) (685,000)

Notes Payable (542,000) (155,000) (697,000)
NCI in Steele (S) 85,500
(A)109,500 (195,000)
(206,000) (206,000)
Common Stock (900,000) (400,000) (S)400,000 (900,000)
Additional Paid-In Capital (300,000) (60,000) (S) 60,000 (300,000)
Retained Earnings 12/31 (2,712,000) (585,000) (2,712,000)
Total Liab. and SE (4,939,000) (1,400,000) (5,500,000)
Fair value of Steele Company (1,710,000 ÷ 90%) $1,900,000

Carrying amount acquired 725,000
Excess fair value 1,175,000
to customer base 800,000

to goodwill $375,000
30. (Continued)
Controlling
Noncontrolling
Interest Interest
Fair value at acquisition date $1,710,000 $190,000
Relative fair values of identifiable net assets
90% and 10% of $1,525,000 (acquisition date
recorded fair value plus customer base) 1,372,500 152,500
Goodwill $337,500 $37,500
4-17
b. If the fair value of the noncontrolling interest was $152,500, both goodwill and
the noncontrolling interest balance would be reduced equally by $37,500 as
follows:
Fair value of Steele Company (1,710,000 + 152,500) $1,862,500

Carrying amount acquired 725,000
Excess fair value 1,137,500
to customer base 800,000
to goodwill $337,500
Noncontrolling interest balance beginning of year $(157,500)

Noncontrolling interest in consolidated net income (13,500)
Dividends paid to noncontrolling interest 2,500
Noncontrolling interest end of year $168,500
Controlling
Noncontrolling
Interest Interest
Fair value at acquisition date $1,710,000 $152,500
90% and 10% of $1,525,000 (acquisition date
recorded fair value plus customer base) 1,372,500 152,500
Goodwill $337,500 -0-
31. (60 Minutes) (Consolidation worksheet and income statement with parent
using initial value method. Also consolidated balances with a control
premium paid by parent.)
a. Fair Value Allocation and Amortization

Consideration transferred by Krause............ $504,000
Noncontrolling interest fair value.................. 126,000
Leahy total fair value 1/1/11............................ $630,000
Leahy book value 1/1/11................................. (380,000)

Fair value in excess of book value ................ $250,000 Annual Excess
Life Amortizations
Excess price allocated to undervalued
Building........................................................ 45,000 5 years $9,000
Trademark .................................................. 60,000 10 years 6,000
Goodwill....................................................... $145,000 indefinite -0-
$15,000
Explanation of Consolidation Entries Found on Worksheet
Entry *C: Convert the parent’s 1/1/12 retained earnings balance from the
cash basis to the accrual basis.
4-18
Entry S: Eliminates stockholders' equity accounts of subsidiary while

recognizing noncontrolling interest balance (20%) as of the beginning
of the current year.
Entry A: Recognizes acquisition-date fair value allocations less 1 year
amortization for building and trademark and increases beginning
balance of the noncontrolling interest for its share.
Entry I: Eliminates Intra-entity dividend payments recorded as income by
parent.
Entry E: Recognizes amortization expense for current year.
Columnar entry—Recognizes noncontrolling interest's share of
subsidiary's net income ($90,000 – 15,000) × 20%).
4-19
31. a. (continued) KRAUSE CORPORATION AND LEAHY, INC.

Consolidation Worksheet
For Year Ending December 31, 2012
Krause Leahy Consolidation Entries Noncontrolling Consolidated
Accounts Corporation Inc. Debit Credit Interest Totals
Sales (584,000) (250,000) (834,000)
Cost of goods sold 194,000 95,000 289,000
Operating expenses 246,000 65,000 (E) 15,000 326,000
Dividend income (16,000) ______ (I) 16,000 -0-
Separate company net income (160,000) (90,000)
Consolidated net income 219,000
NCI in Leahy's income (15,000) 15,000
Krause’s interest in consolidated income (204,000)
Retained earnings, 1/1 (700,000) (350,000) (S)350,000 (*C) 44,000 (744,000)

Net income (above) (160,000) (90,000) (204,000)
Dividends paid 70,000 20,000 (I) 16,000 4,000 70,000
Retained earnings, 12/31 (790,000) (420,000) (878,000)
Current assets 296,000 191,000 487,000

Investment in Leahy 504,000 (*C) 44,000 (S)360,000 -0-
(A)188,000
Buildings and equipment (net) 680,000 390,000 (A) 36,000 (E) 9,000 1,097,000
Trademarks 100,000 144,000 (A) 54,000 (E) 6,000 292,000
Goodwill 0 0 (A)145,000 145,000
Total assets 1,580,000 725,000 2,021,000
Liabilities (470,000) (205,000) (675,000)

Common stock (320,000) (100,000) (S)100,000 (320,000)
Retained earnings, 12/31 (above) (790,000) (420,000) (878,000)
NCI in Leahy, 1/1 (S) 90,000
(A) 47,000 (137,000)
NCI in Leahy, 12/31 148,000 (148,000)
Total liabilities and equities (1,580,000) (725,000) (2,021,000)
4-20
31. (continued)
b. KRAUSE CORPORATION AND LEAHY, INC.
Consolidated Income Statement
Sales $834,000
Cost of goods sold $289,000
Operating expenses 326,000
Total expenses 615,000
Consolidated net income $219,000
To 20% noncontrolling interest $15,000
To controlling interest $204,000
c. Consideration transferred by Krause for 80% of Leahy $504,000

Noncontrolling interest fair value ($4.85 × 20,000 shares) 97,000
Leahy fair value $601,000
Fair value of Leahy’s underlying net assets 485,000
Goodwill $116,000
If the noncontrolling interest fair value was $4.85 per share at the acquisition
date, then goodwill declines to $116,000 and the noncontrolling interest total
would also decline from $148,000 to $119,000.
Worksheet entries (S), (A1) and (A2) assuming a $4.85 noncontrolling interest
acquisition-date fair value:
(S) Common stock-Leahy 100,000

Retained earnings- Leahy 1/1 350,000
Investment in Leahy 360,000
Noncontrolling interest 90,000
(A1) Buildings and equipment (net) 36,000

Trademarks 54,000
Noncontrolling interest 18,000
(A2) Goodwill 116,000
Controlling
Noncontrolling
Interest Interest
Fair value at acquisition date $504,000 $97,000
80% and 20% of $485,000 (acquisition date
fair value of net identifiable assets) 388,000 97,000
4-21
Goodwill $116,000 -0-
32. (40 Minutes) (Determine consolidated balances.)
Acquisition-date subsidiary fair value (given)... $850,000

Book value of subsidiary (given) ........................ (600,000)
Fair value in excess of book value ..................... $250,000
Allocations to specific accounts based on difference
between fair value and book value
Land .................................................................. $165,000
Buildings and equipment ............................... (25,000)
Copyright .......................................................... 100,000
Notes payable .................................................. 10,000 250,000
Total........................................................ -0-
Annual excess amortizations:

Buildings and equipment [$(25,000) ÷ 10 years] $(2,500)
Copyright ($100,000 ÷ 20 years) 5,000
Notes payable ($10,000 ÷ 8 years) 1,250
Total $3,750
Consolidated Totals:
 Revenues = $1,900,000 (add the two book values)
 Cost of goods sold = $1,085,000 (add the two book values)
 Depreciation expense = $267,500 (add the two book values less $2,500
excess adjustment)
 Amortization expense = $10,000 (add the two book values plus $5,000
excess adjustment)
 Interest expense = $50,250 (add the two book values plus $1,250 excess
adjustment)
 Equity in income of Sam = -0- (eliminated so that the individual revenues
and expenses of the subsidiary can be included in the consolidated
figures)
 Net income = $487,250 (revenues less expenses)
 Retained earnings, 1/1 = $1,265,000 (parent company balance; subsidiary's
operations prior to acquisition do not affect consolidated figures)
 Noncontrolling interest in income of subsidiary = $26,250 ($135,000
reported income of the subsidiary less $3,750 amortization expense
multiplied by 20 percent outside ownership)
4-22
 Dividends paid = $260,000 (parent company balance; subsidiary's

payments to parent are intra-entity, payments to outside owners decrease
noncontrolling interest balance)
32. (continued)
 Retained earnings, 12/31 = $1,466,000 (consolidated balance on 1/1/11 plus
consolidated net income less noncontrolling interest in subsidiary's
income less consolidated dividends)
 Current assets = $1,493,000 (add the two book values)
 Investment in Sam = -0- (eliminated so that the individual assets and
liabilities of the subsidiary can be included in the consolidated figures)
 Land = $517,000 (add the book values plus the $165,000 excess allocation)
 Buildings and equipment (net) = $1,119,500 (add the book values less the
$25,000 allocation [asset was overvalued] plus the excess amortization)
 Copyright = $190,000 (book value + $100,000 excess allocation less
amortization for the year)
 Total assets = $3,319,500
 Accounts payable = $339,000 (add book values)
 Notes payable = $581,250 (add the book values less $10,000 excess
allocation plus amortization)
 Noncontrolling interest in subsidiary = $183,250 (20% of fair value as of
1/1/11 [$170,000] plus noncontrolling interest in income of subsidiary
[$26,250] less dividends paid to outside owners [$13,000])
 Common stock = $300,000 (parent company balance)
 Additional paid-in capital = 450,000 (parent company balance)
 Retained earnings, 12/31 = $1,466,000 (computed above)
 Total liabilities and equities = $3,319,500
4-23
32. (continued) Acquisition Method

Consolidation Entries Noncontrolling Consolidated
Accounts Father Sam Debit Credit Interest Totals
Revenues......................................... (1,360,000) (540,000) (1,900,000)
Cost of goods sold......................... 700,000 385,000 1,085,000
Depreciation expense.................... 260,000 10,000 (E) 2,500 267,500
Amortization expense.................... -0- 5,000 (E) 5,000 10,000
Interest expense............................. 44,000 5,000 (E) 1,250 50,250
Equity in income of Sam ............. (105,000) -0- (I) 105,000 -0-
Separate company net income...... (461,000) (135,000)
Consolidated net income............... (487,250)
Noncontrolling interest in Sam's income (26,250) 26,250
Controlling interest in CNI ............ (461,000)
Retained earnings 1/1 ................... (1,265,000) (440,000) (S) 440,000 (1,265,000)
Net income (above) ........................ (461,000) (135,000) (461,000)
Dividends paid .......................... 260,000 65,000 (D) 52,000 13,000 260,000
Retained earnings 12/31 .......... (1,466,000) (510,000) (1,466,000)
Current assets ............................... 965,000 528,000 1,493,000
Investment in Sam ......................... 733,000 (D) 52,000 (S) 480,000
(I) 105,000
(A) 200,000 -0-
Land ................................................ 292,000 60,000 (A) 165,000 517,000
Buildings and equipment (net)..... 877,000 265,000 (E) 2,500 (A) 25,000 1,119,500
Copyright ............................ -0- 95,000 (A) 100,000 (E) 5,000 190,000
Total assets .............................. 2,867,000 948,000 3,319,500
Accounts payable .......................... (191,000) (148,000) (339,000)
Notes payable ................................ (460,000) (130,000) (A) 10,000 (E) 1,250 (581,250)
NCI in Sam 1/1................................. (S) 120,000
NCI in Sam 12/31 (A) 50,000 (170,000)
.................................................... (183,250) (183,250)
Common stock ............................... (300,000) (100,000) (S) 100,000 (300,000)
Additional paid-in capital.............. (450,000) (60,000) (S) 60,000 (450,000)
Retained earnings 12/31… (above) (1,466,000) (510,000) (1,466,000)
Total liab. and stockholders' equity (2,867,000) (948,000) (3,319,500)
4-24
33. (55 Minutes) (Consolidated worksheet)

a. Consideration transferred by Adams $603,000
Noncontrolling interest fair value 67,000
Acquisition-date total fair value $670,000
Book value of Barstow (CS + RE 12/31/09) (460,000)
Excess fair value over book value $210,000
Annual Excess
Life Amortizations
Land $30,000 — —
Buildings (20,000) 10 years ($2,000)
Equipment 40,000 5 years 8,000
Patents 50,000 10 years 5,000
Notes payable 20,000 5 years 4,000
120,000
Goodwill $90,000 indefinite -0-
Total $15,000
b. Because investment income is exactly 90 percent of Barstow's reported
earnings, Adams apparently is applying the partial equity method.
Explanation of Consolidation Entries Found on Worksheet
Entry *C—Converts Adams's financial records from the partial equity
method to the equity method by recognizing amortization for 2010. Total
expense was $15,000 but only 90 percent (or $13,500) applied to the
parent.
Entry S—Eliminates subsidiary's stockholders' equity while recording
noncontrolling interest balance as of January 1, 2011.
Entry A—Records unamortized allocation balances as of January 1, 2011.
The acquisition method attributes 10 percent of these amounts to the non-
controlling interest.
Entry I—Eliminates intra-entity income accrual for 2011.
Entry D—Eliminates intra-entity dividend transfers.
Entry E—Records amortization expense for current year.
Columnar Entry—Recognizes noncontrolling interest's share of Barstow's
net income as follows:
Noncontrolling Interest in Barstow's Income (Columnar Entry)
Barstow reported income ................................................................ $120,000
Excess amortization expenses 2011.............................................. (15,000)
Adjusted income of Barstow ..................................................... $105,000
Noncontrolling interest ownership ................................................ 10%
Noncontrolling interest in Barstow's income ......................... $10,500
4-25
33. b. (continued) ADAMS CORPORATION AND BARSTOW, INC.

Consolidation Worksheet-Acquisition Method
For Year Ending December 31, 2011 Noncontrolling Consolidated
Adams Corp. Barstow Inc. Debit Credit Interest Totals
Revenues (940,000) (280,000) (1,220,000)
Cost of goods sold 480,000 90,000 570,000
Depreciation expense 100,000 55,000 (E) 6,000 161,000
Amortization expense (E) 5,000 5,000
Interest expense 40,000 15,000 (E) 4,000 59,000
Investment income (108,000) (I) 108,000 -0-
Income to noncontrolling interest (10,500) 10,500
Income to controlling interest (414,500)
Retained earnings, 1/1 (1,367,000) (340,000) (C*) 13,500 (1,353,500)
(S) 340,000
Net income (428,000) (120,000) (414,500)
Dividends paid 110,000 70,000 (D) 63,000 7,000 110,000
Retained earnings, 12/31 (1,685,000) (390,000) (1,658,000)
Current assets 610,000 250,000 860,000
Investment in Barstow 702,000 (D) 63,000 (*C) 13,500 -0-
(S) 468,000
(A) 175,500
(I) 108,000
Land 380,000 150,000 (A) 30,000 560,000
Buildings 490,000 250,000 (E) 2,000 (A) 18,000 724,000
Equipment 873,000 150,000 (A) 32,000 (E) 8,000 1,047,000
Patents (A) 45,000 (E) 5,000 40,000
Goodwill (A) 90,000 90,000
Total assets 3,055,000 800,000 3,321,000
Notes payable (860,000) (230,000) (A) 16,000 (E) 4,000 (1,078,000)
Common stock (510,000) (180,000) (S) 180,000 (510,000)
(S) 52,000
Noncontrolling interest (A) 19,500 (71,500)
(75,000) (75,000)
Total liabilities and stockholders' equity (3,055,000) (800,000) (3,321,000)
4-26
34. (25 minutes) (Consolidated balances after a mid-year acquisition)

a. Investment account balance indicates the initial value method.
Consideration transferred by Gibson...... $528,000
Noncontrolling interest fair value ............ 352,000
Davis acquisition-date fair value ............. 880,000
Book value of Davis (below)...................... (765,000)
Fair value in excess of book value .......... $115,000
Excess assigned Annual Excess
based on fair value: Life Amortizations
Equipment (overvalued).................. (30,000) 5 years $(6,000)
Goodwill ........................................... $145,000 indefinite -0-
Total ....................................................... $(6,000)
Amortization for 9 months .................. $(4,500)
Acquisition-date subsidiary book value:
Book value of Davis, 1/1/11 (CS + 1/1 RE) ............... $740,000
Increase in book value-net income (dividends
were paid after acquisition) ................................. $100,000
Time prior to purchase (3 months) .......................... × ¼ year 25,000
Book value of Davis, 4/1/11 (acquisition date) ....... $765,000
Consolidated income statement:
Revenues (1) $825,000
Cost of goods sold (2) $405,000
Operating expenses (3) 214,500 619,500
Consolidated net income 205,500
Noncontrolling interest in CNI (4) 31,800
Controlling interest in CNI $173,700
(1) $900,000 combined revenues less $75,000 (preacquisition subsidiary
revenue)
(2) $440,000 combined COGS less $35,000 (preacquisition subsidiary COGS)
(3) $234,000 combined operating expenses less $15,000 (preacquisition subsidiary
operating expenses) less nine month excess overvalued equipment depreciation
reduction of $4,500
(4) 40% of post-acquisition subsidiary income less excess amortization
b. Goodwill = $145,000 (original allocation)
Equipment = $774,500 (add the two book values less $30,000
reduction to fair value plus $4,500 nine months excess
amortization)
Common Stock = $630,000 (parent company balance only)
Buildings = $1,124,000 (add the two book values)
Dividends Paid = $80,000 (parent company balance only)
35. (40 minutes) Determine consolidated balance for a mid-year acquisition.
4-27
a. Consideration transferred by Truman .......... $720,000

Noncontrolling interest fair value ................. 290,000
Atlanta’s acquisition-date total fair value..... $1,010,000
Book value of Atlanta..................................... (840,000)
Fair value in excess of book value................. $170,000 Annual Excess
Excess fair value assigned Life Amortizations
Patent .......................................................... 100,000 5 years $20,000
Goodwill ........................................................ $70,000 indefinite
-0-
Total ............................................................ $20,000
b. Goodwill allocation with control premium Controlling

Noncontrolling
Interest Interest
Fair values at acquisition date $720,000 $290,000
70% and 30% of $940,000 (acquisition date
book value plus patent = net asset fair value) 658,000 282,000
Goodwill $ 62,000 $ 8,000
c. Initial value at acquisition date $720,000

Truman’s share of Atlanta’s income for half year
([$120,000 – 20,000 amortization × ½ year] × 70%) 35,000
Dividends 2011 ($80,000 × ½ year × 70%) (28,000)
Investment account balance 12/31/11 $727,000
35. (continued)
d. Consolidated Worksheet
TRUMAN COMPANY AND SUBSIDIARY ATLANTA COMPANY

Truman Atlanta Adjustments & Eliminations NCI Cons.

Revenues (670,000) (400,000) (S)200,000 (870,000)
Operating Expenses 402,000 280,000 (E) 10,000 (S)140,000 552,000
Income of subsidiary (35,000) (I) 35,000 0
NCI in Atlanta's income (15,000) 15,000
Controlling interest in CNI (303,000)
Retained earnings, 1/1 (823,000) (500,000) (S) 500,000 (823,000)

Net income (above) (303,000) (120,000) (303,000)
Dividends paid 145,000 80,000 (S) 40,000 12,000
(D) 28,000 145,000
Current assets 481,000 390,000 871,000
4-28
Investment in Atlanta 727,000 (D) 28,000 (S)588,000 0

(I) 35,000
(A1) 70,000
(A2) 62,000
Land 388,000 200,000 588,000
Buildings 701,000 630,000 1,331,000
Patent (A1)100,000 (E) 10,000 90,000
Goodwill (A2) 70,000 70,000
Total assets 2,297,000 1,220,000 2,950,000
Liabilities (816,000) (360,000) (1,176,000)

Common stock (95,000) (300,000) (S) 300,000 (95,000)
Additional paid-in capital (405,000) (20,000) (S) 20,000 (405,000)
Noncontrolling interest, 7/1 (A1) 30,000
(A2) 8,000
(S) 252,000 (290,000)
Noncontrolling interest, 12/31 293,000 (293,000)
Total liabilities and
stockholders' equity (2,297,000) (1,220,000) 1,263,000 1,263,000 (2,950,000)
36. (60 minutes) (Consolidated statements for a step acquisition)
a. Fair value of Sysinger 1/1/12 (given) $1,750,000

Book value of Sysinger 1/1/12 (CS + APIC + RE) 1,300,000
Excess fair value over book value 450,000
To customer contract (4 year life) 400,000
To goodwill $50,000
b. Equity in earnings of Sysinger

2012 income (150,000 × 95%) $142,500
Amortization (100,000 × 95%) (95,000)
Equity in earnings of Sysinger $47,500
Revaluation of 15% block to fair value

Consideration transferred $184,500
2011 Income (100,000 × 15%) 15,000
2011 dividends (30,000 × 15%) (4,500)
Book value at 1/1/12
195,000
Fair value at 1/1/12 262,500
Gain on revaluation $67,500
Investment account balance

Fair value at 1/1/12 (15% block) $262,500
Consideration transferred 1/1/12 (80% block) 1,400,000
Equity earnings 2012
4-29
Income (95% × 150,000) 142,500

Customer contract amortization (95,000) 47,500
Dividends (40,000 × 95%) (38,000)
Investment in Sysinger 12/31/12 $1,672,000
4-30
36. (Continued) c. Allan and Sysinger

Allan Sysinger Consolidation Entries Noncontrolling Consolidated
Accounts Company Company Debit Credit Interest Totals
Revenues (931,000) (380,000) (1,311,000)
Operating expenses 615,000 230,000 (E)100,000 945,000
Equity earnings of Sysinger (47,500) -0- (I) 47,500 -0-
Gain on revaluation (67,500) -0- (67,500)
NCI in Sysinger’s income (2,500) 2,500
Allan’s share of CNI (431,000)
Net income (431,000) (150,000) (431,000)
Dividends paid 140,000 40,000 (D) 38,000 2,000 140,000
Retained earnings 12/31 (1,256,000) (710,000) (1,256,000)
Current assets 288,000 540,000 828,000
Investment in Sysinger 1,672,000 -0- (D) 38,000 (S)1,235,000 -0-
(I) 47,500
(A) 427,500
Property, plant, and equipment 826,000 590,000 1,416,000
Patented technology 850,000 370,000 1,220,000
Customer contract -0- -0- (A) 400,000 (E) 100,000 300,000
Goodwill -0- (A) 50,000 50,000
Total assets 3,636,000 1,500,000 3,814,000
Liabilities (1,300,000) (90,000) (1,390,000)
Common stock (900,000) (500,000) (S) 500,000 (900,000)
Retained earnings 12/31 (1,256,000) (710,000) (1,256,000)
NCI in Sysinger, 1/1 -0- -0- (S) 65,000
(A) 22,500 (87,500)
NCI in Sysinger, 12/31 -0- -0- (88,000) (88,000)
Total liab. and stockholders' equity (3,636,000) (1,500,000) 1,935,500 1,935,500 (3,814,000)
4-31
37. (60 minutes) (Step acquisition—control previously acquired.)
a. According to the acquisition method, the valuation basis for a subsidiary is

established on the date control is obtained, in this case January 1, 2010.
Subsequent acquisitions are valued consistent with this initial value after
adjusting the investment for subsidiary income and other changes.
Because subsequent acquisitions are considered as transactions in the parent’s

own equity, no gains or losses are recorded. Differences in cash paid and the
underlying value are recorded as adjustments to APIC.
Fair value of Keane Company 1/1/10 ($573,000 ÷ 60%) $955,000

Keane income 2010 150,000
Excess fair value amortization for copyright (20,000)*
Keane dividends 2010 (80,000)
Initial fair value adjusted to 1/1/11 $1,005,000
Percent acquired in step acquisition 30%
Value assigned to 30% acquisition 301,500
Cash paid for the 30% acquisition 300,000
Credit to APIC from 30% step acquisition $1,500
*Fair value of Keane Company 1/1/10 ($573,000 ÷ 60%) $955,000

Book value of Keane Company 1/1/10 (given) 810,000
Excess fair value over book value 145,000
To copyright (6 year life) 120,000
To goodwill $25,000
Entry to record 30% additional investment in Keane:
1/1/11 Investment in Keane 301,500

Cash 300,000
APIC from step acquisition 1,500
b. Investment in Keane Company 1/1/10 $573,000

2010 Equity earnings [60% × (150,000 – 20,000)] 78,000
2010 Dividends received (60% × $80,000) (48,000)
Additional acquisition of 30% interest 301,500
2011 Equity earnings [90% × (180,000 – 20,000)] 144,000
2011 Dividends received (90% × $60,000) (54,000)
Investment in Keane Company 12/31/11 $994,500
4-32
37. (continued) part c. BRETZ, INC. AND KEANE COMPANY

Year Ending December 31, 2011

Accounts Bretz, Inc. Keane Co. Debit Credit Interest Totals
Revenues (402,000) (300,000) (702,000)
Equity in Keane’s income (144,000) (I) 144,000
NCI in Keane’s income (16,000) 16,000
Bretz’s share of CNI (346,000)
Net income (above) (346,000) (180,000) (346,000)
Dividends paid 143,000 60,000 (D) 54,000 6,000 143,000
Current assets 224,000 190,000 414,000
Investment in Keane Company 994,500 (S) 792,000 0
(D)54,000 (A) 112,500
(I) 144,000
Trademarks 106,000 600,000 706,000

Copyrights 210,000 300,000 (A)100,000 (E) 20,000 590,000
Equipment (net) 380,000 110,000 490,000
Goodwill (A) 25,000 25,000
Total assets 1,914,500 1,200,000 2,225,000
Liabilities (453,000) (200,000) (653,000)
Common stock (400,000) (300,000) (S)300,000 (400,000)
APIC-step acquisition (1,500) (1,500)
Retained earnings,12/31 (1,000,000) (620,000) (1,000,000)
Non-controlling interest 1/1 (A) 12,500
(S) 88,000 (100,500)
Non-controlling interest 12/31 110,500 (110,500)
Total liabilities and equities (1,914,500) (1,200,000) 1,223,000 1,223,000 (2,225,000)
4-33
38. (30 Minutes) (Determine SFAS 141 purchase method consolidated

balances when parent uses equity method.
Purchase Price Allocation and Excess Amortizations
Purchase price ........................................... $250,000
Book value acquired
($230,000 × 70%) ................................... 161,000
Price in excess of book value .................. $89,000 Annual Excess
Allocation based on fair value.................. Life Amortizations
Land ($10,000 × 70%) $7,000
Equipment ($68,000 × 70%) 47,600 14 yrs. $3,400
Liabilities ($20,000 × 70%) 14,000 10 yrs. 1,400
68,600
Total ............................................................ $4,800
The parent uses the equity method: Investment income of $44,200 =
$49,000 (70% × $70,000) less $4,800 amortization expense.
Creedmo Adjustments &

Bon Air or Eliminations NCI Consolidated
Revenues (694,800) (250,000) (944,800)
Investment income (44,200) -0- (I) 44,200 -0-
Noncontrolling interest
in Creedmoor
income (21,000) 21,000
Net income (109,000) (70,000) (109,000)
Retained earnings,
1/1/10 (760,000) (260,000) (S)260,000 (760,000)
Net income (109,000) (70,000) (109,000)
Dividends paid 68,000 10,000 (D) 7,000 3,000 68,000
Retained earnings,
12/31/10 (801,000) (320,000) (801,000)
Current assets 72,000 120,000 192,000

Investment in
Creedmoor 321,800 -0- (D) 7,000 (S)210,000
(I) 44,200 -0-
(A)74,600
Land 241,000 50,000 (A) 7,000 298,000
Buildings (net) 289,000 200,000 489,000
Equipment (net) 165,200 40,000 (A)37,400 (E) 3,400 239,200
Goodwill -0- -0- (A)20,400 20,400
Total assets 1,089,000 410,000 1,238,600
Liabilities (180,000) (50,000) (A) 9,800 (E) 1,400 (221,600)

Common stock (50,000) (40,000) (S) 40,000 (50,000)
Additional paid-in
capital (58,000) -0- (58,000)
Noncontrolling interest
1/1/10 (S)90,000 (90,000)
Noncontrolling interest 108,000 (108,000)
4-34
12/31/10
Retained earnings,
12/31/10 (801,000) (320,000) (801,000)
4-35
Total liabilities and (1,089,00

equities 0) (410,000) 430,600 430,600 (1,238,600)
39. (50 Minutes) (A variety of questions and consolidated balances for a SFAS
141 purchase method combination where parent applies equity method)
a. Equity accrual (60% × $70,000) ................................................ $42,000
Excess amortizations (below) ................................................. (5,600)
Equity income (parent uses equity method) .................... $36,400
Purchase Price Allocation and Excess Amortizations
Purchase price ........................................... $400,000
Book value acquired (60% of
$470,000 [assets minus liabilities]) .... 282,000
Price in excess of book value .................. $118,000
Excess price assigned to specific............ Annual Excess
accounts based on fair value.................... Life Amortizations
Equipment (overvalued)
([$30,000] × 60%) .................................. (18,000) 10 yrs. $(1,800)
Buildings ($155,000 × 60%) ................. 93,000 15 yrs. 6,200

Bonds payable ($20,000 × 60%)........... 12,000 10 yrs. 1,200
Total ....................................................... $5,600
b. No adjustment to the parent's retained earnings is needed because the
company is applying the equity method.
c. $5,600—see a.
d. $28,000—40% of $70,000 reported income figure
e. Watson Corporation
Consolidated Income Statement
For the Year Ended December 31, 2011
Revenues $920,000
Operating expenses 695,600
Combined entity net income 224,400
Noncontrolling interest in Houston income 28,000
Consolidated net income $196,400
Remaining
f. Excess Amortizations Allocations
Allocations (see a) for 4 years 12/31/11
Equipment (18,000) (7,200) (10,800)
Buildings 93,000 24,800 68,200
Bonds payable 12,000 4,800 7,200
4-36
Goodwill 31,000 -0- 31,000
39. (continued)
g. Noncontrolling interest, 1/1/11 (40% of book value of $630,000)$252,000

Noncontrolling interest in subsidiary's income (see e) ........... 28,000
Noncontrolling interest in subsidiary's dividends..................... (16,000)
(40% × $40,000)
Noncontrolling interest in subsidiary, 12/31/11 ......................... $264,000
h. Watson Corporation
Consolidated Balance Sheet
December 31, 2011
Current assets $475,000 Current liabilities $560,000
Bonds Payable 462,800
Equipment (net) 909,200 Noncontrolling interest 264,000
Buildings (net) 1,001,200 Common stock 310,000
Goodwill 31,000 Retained earnings 819,600
Total assets $2,416,400 Total liabilities and equity $2,416,400
40. (40 Minutes) (Determine consolidated balances using the SFAS 141
purchase method, parent has applied the cost method)
Acquisition price ............................................. $1,400,000
Book value acquired (see Schedule 1)
($1,120,000 × 80%) ......................................... 896,000
Cost in excess of book value ........................ $504,000
Annual Excess
Excess cost allocated to buildings based Life Amortizations
on fair value ($80,000 × 80%) ......................... 64,000 10 years $6,400
Unpatented technology ($550,000 × 80%) .... 440,000 10 years 44,000
Total ............................................................ $ -0- $50,400
Schedule 1—Book Value of Morning (January 1, 2008)
Book value, January 1, 2011
(stockholders' equity accounts) .............. $1,500,000
2010 Increase in book value .......................... $200,000
2009 Increase in book value .......................... 100,000
2008 Increase in book value ........................ 80,000 380,000
Book value, January 1, 2008 .......................... $1,120,000
Revenues = $1,384,000 (add the two book values)
Expenses = $550,400 (add the two book values and then include $50,400
excess amortization expenses for the year as computed above)
4-37
Noncontrolling interest in subsidiary's net income = $80,000 (20% of

subsidiary's reported income of $400,000)
40. (continued)
Net Income = $753,600 (consolidated revenues less both consolidated
expenses and the noncontrolling interest's share of net income)
Retained earnings, 1/1/11 = $1,952,800 (the cost method is in use because
the original purchase price is still in the Investment account. Thus, the
$380,000 increase in book value for the three previous years [income of
$680,000 less dividends paid of $300,000] multiplied by the 80 percent
ownership gives an equity accrual of $304,000. Excess amortization for
these same three years totals $151,200 ($50,400× 3). Therefore, the
parent's retained earnings must be increased by the net amount
[$152,800 or $304,000 – $151,200])
Dividends paid = $380,000 (the parent company balance only)
Retained earnings, 12/31/11 = $2,326,400 (beginning balance plus net
income less dividends paid)
Cash = $500,000 (add book values)
Receivables = $1,000,000 (add book values after removing $100,000 intra-
entity balance)
Inventory = $900,000 (add book values)
Investment in Morning = -0- (balance is removed so that subsidiary's
assets and liabilities can be included in the consolidated figures)
Land = $1,300,000 (add book values)
Buildings = $1,038,400 (add book values plus $64,000 allocation less four
years of $6,400 annual excess amortization)
Unpatented technology = $264,000 ($440,000 original allocation less four
years of $44,000 annual amortization)
Total assets = $5,002,400
Liabilities = $720,000 (add book values after removing $100,000 intra-entity
balance)
Noncontrolling Interest in subsidiary, 12/31/11 = $356,000 (20% of
subsidiary's beginning book value [$1,500,000] plus interest in
subsidiary income [$80,000 as computed above] less 20% of
subsidiary's dividends [$120,000])
Common stock = $1,000,000 (parent company balance)
Additional paid-in capital = $600,000 (parent company balance)
4-38
Retained earnings, 12/31/11 = $2,326,400 (computed above)

Total liabilities and equities = $5,002,400
40. (continued)
Consolidated figures can also be determined through a worksheet as follows:
Consolidation Entries
Entry *C
Investment in Morning ......................................... 152,800
Retained Earnings, 1/1/11 Good .................... 152,800
(To recognize Good's share of Morning's increase in book value during the
2008-2010 period as well as the amortization expense for that same period.
Because the original $1,400,000 is still the balance in the investment in
Morning account, the parent is applying the cost method. Thus, 80% of
Morning's $380,000 increase in book value [$304,000] must be accrued.
Excess amortizations of $151,200 [$50,400 per year for these three years] is
also recorded leaving a net adjustment of $152,800.)
Entry S
Common Stock (Morning) .................................... 460,000
Additional Paid-in Capital (Morning) .................. 40,000
Retained Earnings, 1/1/11 (Morning) .................. 1,000,000
Investment in Morning (80%) ......................... 1,200,000
Noncontrolling Interest in Morning (20%) .... 300,000
(To eliminate subsidiary's stockholders' equity accounts while recording the
January 1, 2011 balance of the noncontrolling interest.)
Entry A
Buildings................................................................. 44,800
Unpatented technology ....................................... 308,000
Investment in Morning .................................... 352,800
(To recognize unamortized amounts paid in connection with acquisition of
Morning. Original allocations have undergone three previous years of excess
amortizations.)
Entry I
Dividend Income ................................................... 96,000
Dividends Paid ................................................. 96,000
(To eliminate intra-entity income accounts.)
Entry E
Operating Expenses ............................................. 50,400
Buildings .......................................................... 6,400
Unpatented technology................................... 44,000
(To recognize amortization expenses for current year.)
4-39
Entry P
Liabilities ............................................................... 100,000
Receivables ...................................................... 100,000
(To eliminate intra-entity debt.)
4-40
40. (continued) GOOD AND MORNING

Accounts Good Morning Debit Credit Interest Totals
Revenues (884,000) (500,000) (1,384,000)
Operating Expenses 400,000 100,000 (E) 50,400 550,400
Dividend Income (96,000) -0- (I) 96,000 -0-
NCI in Morning's income (20% × 400,000) -0- -0- (80,000) 80,000
Net Income (580,000) (400,000) (753,600)
Retained earnings, 1/1
Good (1,800,000) (*C) 152,800 (1,952,800)
Morning (1,000,000) (S)1,000,000 -0-
Net income (above) (580,000) (400,000) (753,600)
Dividends paid 380,000 120,000 (I) 96,000 24,000 380,000
Retained earnings, 12/31 (2,000,000) (1,280,000) (2,326,400)
Cash 300,000 200,000 500,000
Receivables 700,000 400,000 (P) 100,000 1,000,000
Inventory 400,000 500,000 900,000
Investment in Morning 1,400,000 -0- (*C) 152,800 (S)1,200,000
(A) 352,800 -0-
Land 700,000 600,000 1,300,000
Buildings 300,000 700,000 (A) 44,800 (E) 6,400 1,038,400
Unpatented Technology -0- -0- (A) 308,000 (E) 44,000 264,000
Total assets 3,800,000 2,400,000 5,002,400
Liabilities (200,000) (620,000) (P) 100,000 (720,000)

Common stock (1,000,000) (460,000) (S) 460,000 (1,000,000)
Retained earnings, 12/31 (above) (2,000,000) (1,280,000) (2,326,400)
NCI in Morning, 1/1 -0- -0- (S) 300,000 (300,000 )
NCI in Morning, 12/31 -0- -0- (356,000) (356,000)
Total liabilities and stockholders' equity (3,800,000) (2,400,000) (5,002,400)
4-41
Accounting Theory Research Case: Noncontrolling Interest
In deliberations prior to the issuance of SFAS 160, “Noncontrolling Interests in

Consolidated Financial Statements,” the FASB considered three alternatives for
displaying the noncontrolling interest in the consolidated balance sheet
What were these three alternatives?

1. As a liability
2. As equity
3. In the “mezzanine” area between liabilities and owners’ equity
What criteria did the FASB use to evaluate the desirability of each alternative?
The FASB evaluated whether the classifications conformed to current definitions
of financial statement elements (assets, liabilities, or equity) as articulated in
FASB Concept Statement No. 6.
In what specific ways did FASB Concept Statement 6 affect the FASB’s evaluation
of these alternatives?
From SFAS 160 paragraphs 32-34
If it required that the noncontrolling interest be reported in the
mezzanine, the Board would have had to create a new element—
noncontrolling interest in subsidiaries—specifically for consolidated
financial statements. The Board concluded that no compelling reason
exists to create a new element specifically for consolidated financial
statements to report the interests in a subsidiary held by owners other
than the parent. The Board believes that using the existing elements of
financial statements along with appropriate labeling and disclosure
provides financial information in the consolidated financial statements
that is representationally faithful, understandable, and relevant to the
entity’s owners, creditors, and other resource providers.
The Board concluded that a noncontrolling interest in a subsidiary does

not meet the definition of a liability in the Board’s conceptual
framework. Paragraph 35 of Concepts Statement 6 defines liabilities 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”
4-42
The Board concluded that a noncontrolling interest represents the

residual interest in the net assets of a subsidiary within the
consolidated group held by owners other than the parent. The
noncontrolling interest, therefore, meets the definition of equity in
Concepts Statement 6. Paragraph 49 of Concepts Statement 6 defines
equity (or net assets) as “the residual interest in the assets of an entity
that remains after deducting its liabilities.”
4-43

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Chapter 04 - Consolidated Financial Statements and Outside Ownership

III. Consolidations involving a noncontrolling interest—subsequent to the date of

IV. Step acquisitions

Vl. Sales of subsidiary stock

2. a. Acquisition method = $220,000 (fair value)

2. D At the date control is obtained, the parent consolidates subsidiary assets

3. D In consolidating the subsidiary's figures, all intra-entity balances must be

4. C An asset acquired in a business combination is initially valued at 100%

Amortization for 2 years (10 year life)............................................ (9,000)

6. B Combined revenues......................................................................... $1,100,000

8. A Amie, Inc. fair value at July 1, 2012:

10. B Fair value of 30% noncontrolling interest on April 1.................... $165,000

11. C Proceeds of $80,000 less $64,000 (⅓ × $192,000) book value = $16,000

13. C Subsidiary income ($100,000 – $14,000 excess amortizations). . $86,000

14. A West trademark balance................................................................... $260,000

15. A Acquisition-date fair value ($60,000 ÷ 80%)................................... $75,000

16. D Park noncurrent assets.................................................................... $90,000

19. C Park stockholders' equity................................................................ $80,000

20. (15 minutes) (Compute consolidated income and noncontrolling interests)

Noncontrolling interest fair value January 1, 2011 (above).......... $75,000

2011 income to NCI ([$70,000 – $8,000] × 10%)................................ 6,200

a. Business combinations are recorded generally at the fair value of the

Patterson’s consideration transferred ($31.25 × 80,000 shares)......... $2,500,000

b. Each identifiable asset acquired and liability assumed in a business

c. In periods subsequent to acquisition, the subsidiary’s assets and liabilities

d. Soriano’s total fair value January 1..................................................... $3,100,000

Buildings and equipment.......................................... (250,000)

e. Combined revenues............................................................................... $4,400,000

Consolidated net income...................................................................... $1,615,000

Patterson’s revenues........................................................................ $3,000,000

f. Fair value of noncontrolling interest January 1................................. $600,000

g. If Soriano’s acquisition-date total fair value was $2,250,000, then a bargain

Collective fair values of Soriano’s net assets.................................... $2,900,000

22. (20 Minutes) (Determine consolidated income balances, includes a mid-year

a. Acquisition-date total fair value .......................... $594,000

Consolidated figures following January 1 acquisition date:

b. Consolidated figures following April 1 acquisition date:

(1) $900,000 Parker revenues plus $450,000 of post-acquisition Sawyer revenues

23. (15 minutes) Consolidated figures with noncontrolling interest

Fair value of company (given) $60,000

• Noncontrolling interest in subsidiary income

= 40% × ($50,000 revenues less $26,500 expenses) = $9,400

24. (20 Minutes) (Determine consolidated balances for a step acquisition).

a. Amsterdam fair value implied by price paid by Morey

25. (30 Minutes) (Reporting the sale of a portion of an investment in a

Annual amortization ................................................... $14,000

b. As long as control is maintained, the acquisition method considers

Posada’s investment book value 10/1/12

c. Because Posada continues to hold 6,000 shares of Sabathia, control is

Investment in Bandmor (70%) .................. 397,600

Noncontrolling interest fair value January 1, 2009 $210,000

2010 Net income to noncontrolling interest .... $27,000

2011 Net income to noncontrolling interest .... $31,200

Worksheet adjustment S...................................................... $170,400

Noncontrolling interest in Bandmor 12/31/11.............. $246,000

Goodwill ...................................................... $150,000 indefinite -0-

Entry (A)—no control premium

d. (1) Equity method

Excess Amortizations 2009–2011 ($3,200 × 3) . . (9,600)

Partial Equity Method

28. (20 Minutes) (A variety of consolidated balances-midyear acquisition)

*Reilly book value, January 1

(Common stock + APIC + RE) ....................... $1,400,000