Chapter 5

Questions
1. Distinguish among the following concepts:
(a) Difference between cost and book value.
(b) Excess of cost over fair value.
(c) Excess of fair value over cost.
(d) Deferred excess of fair value over cost.
2. n what account is !the difference between cost and book value" recorded on the books of the
investor# n what account is the !excess of cost over fair value" recorded#
$. %ow do &ou determine the amount of !the difference between cost and book value" to be
allocated to a specific asset of a less than wholl& owned subsidiar&#
'. (he parent compan&)s share of the fair value of the net assets of a subsidiar& ma& exceed
ac*uisition cost. %ow must this excess be treated in the preparation of consolidated financial
statements#
+. ,h& are marketable securities excluded from the noncurrent assets to which an& excess of
fair value over cost is to be allocated#
-. . /ompan& ac*uired a 1001 interest in 2 /ompan&. 3n the date of ac*uisition the fair value
of the assets and liabilities of 2 /ompan& was e*ual to their book value except for land that
had a fair value of 415+005000 and a book value of 4$005000. 6t what amount should the
land of 2 /ompan& be included in the consolidated balance sheet# 6t what amount should
the land of 2 /ompan& be included in the consolidated balance sheet if . /ompan& ac*uired
an 701 interest in 2 /ompan& rather than a 1001 interest#
8. /orporation 6 purchased the net assets of /orporation 9 for 4705000. 3n the date of 6)s
purchase5 /orporation 9 had no long:term investments in marketable securities and 4105000
(book and fair value) of liabilities. (he fair values of /orporation 9)s assets5 when ac*uired5
were
/urrent assets 4 '05000
;oncurrent assets -05000
(otal 4 1005000
%ow should the 4105000 difference between the fair value of the net assets ac*uired
(4<05000) and the cost (4705000) be accounted for b& /orporation 6#
(a) (he 4105000 difference should be credited to retained earnings.
(b) (he noncurrent assets should be recorded at 4+05000.
(c) (he current assets should be recorded at 4$-50005 and the noncurrent assets should be
recorded at 4+'5000.
(d) 6 current gain of 4105000 should be recogni=ed.
7. >eredith /ompan& and ?&le /ompan& were combined in a purchase transaction. >eredith
was able to ac*uire ?&le at a bargain price. (he sum of the market or appraised values of
identifiable assets ac*uired less the fair value of liabilities assumed exceeded the cost to
>eredith. 6fter reducing noncurrent assets to =ero5 there was still some !negative goodwill."
.roper accounting treatment b& >eredith is to report the amount as
(a) 6n extraordinar& item.
(b) .art of current income in the &ear of combination.
(c) 6 deferred credit.
(d) .aid in capital.
<. %ow does the recording in the consolidated statements workpaper of the increase in
depreciation that results from the allocation of a portion of the difference between cost and
book value to depreciable propert& affect the calculation of noncontrolling interest in
combined income#
Exercises
Exercise 5-1 Allocation of Cost
3n @anuar& 15 200$5 .am /ompan& purchased an 7+1 interest in 2haw /ompan& for 4+'05000.
3n this date5 2haw /ompan& had common stock of 4'005000 and retained earnings of 41'05000.
6n examination of 2haw /ompan&As assets and liabilities revealed that their book value was
e*ual to their fair value except for marketable securities and e*uipment:
9ook Balue Cair Balue
>arketable securities 4 205000 4 '+5000
E*uipment (net) 1205000 1'05000
Required:
6. .repare a /omputation and 6llocation 2chedule for the difference between cost and book
value of e*uit& ac*uired.
9. Determine the amounts at which the above assets (plus goodwill5 if an&) will appear on the
consolidated balance sheet on @anuar& 15 200$.
Exercise 5-2 End of the Year of Acquisition Workpaper Entries
3n @anuar& 15 200+5 .a&ne /orporation purchased a 8+1 interest in 2almon /ompan& for
4+7+5000. 6 summar& of 2almon /ompan&As balance sheet on that date revealed the following:
9ook Balue Cair Balue
E*uipment 4 +2+5000 4 80+5000
3ther assets 1+05000 1+05000
4 -8+5000 4 7++5000
Diabilities 4 8+5000 4 8+5000
/ommon stock 22+5000
Eetained earnings $8+5000
4 -8+5000
(he e*uipment had an original life of 1+ &ears and has a remaining useful life of 10 &ears.
Required:
Cor the December $15 200+5 consolidated financial statements workpaper5 prepare the workpaper
entr& to allocate and depreciate the difference between cost and book value assuming:
6. E*uipment is presented net of accumulated depreciation.
9. 6ccumulated depreciation is presented on a separate row in the workpaper and in the
consolidated statement of financial position.
Exercise 5- Allocation of Cost
.ace /ompan& purchased 205000 of the 2+5000 shares of 2addler /orporation for 4+2+5000. 3n
@anuar& $5 200'5 the ac*uisition date5 2addler /orporationAs capital stock and retained earnings
account balances were 4+005000 and 410050005 respectivel&.
(he following values were determined for 2addler /orporation on the date of purchase:
9ook Balue Cair Balue
nventor& 4 +05000 4 805000
3ther current assets 2005000 2005000
>arketable securities 1005000 12+5000
.lant and e*uipment $005000 $$05000
Required:
6. .repare the entr& on the books of .ace /ompan& to record its investment in 2addler
/orporation.
9. .repare a /omputation and 6llocation 2chedule for the difference between the cost and book
value in the consolidated statements workpaper.
Exercise 5-! Allocation of Cost and Workpaper Entries at "ate of Acquisition
3n @anuar& 15 200+5 .orter /ompan& purchased an 701 interest in 2alem /ompan& for
42-05000. 3n this date5 2alem /ompan& had common stock of 42085000 and retained earnings
of 41$05+00.
6n examination of 2alem /ompan&As balance sheet revealed the following comparisons between
book and fair values:
9ook Balue Cair Balue
nventor& 4 $05000 4 $+5000
3ther current assets +05000 ++5000
E*uipment $005000 $+05000
Dand 2005000 2005000
Required:
6. Determine the amounts that should be allocated to 2alem /ompan&As assets on the
consolidated financial statements workpaper on @anuar& 15 200+.
9. .repare the @anuar& 15 200+5 consolidated financial statements workpaper entries to eliminate
the investment account and to allocate the difference between cost and book value.
Exercise 5-5 #-Account Calculation of Controllin$ %nterest in Co&'ined (et %nco&e
3n @anuar& 15 200'5 . /ompan& purchased an 701 interest in 2 /ompan& for 4-0050005 at
which time 2 /ompan& had retained earnings of 4$005000 and capital stock of 4$+05000. 6n&
difference between cost and book value was entirel& attributable to a patent with a remaining
useful life of 10 &ears.
6ssume that . and 2 /ompanies reported net incomes from their independent operations of
42005000 and 410050005 respectivel&.
Required:
.repare a t:account calculation of the controlling interest in combined net income for the &ear
ended December $15 200'.
Exercise 5-) Workpaper Entries
.ark /ompan& ac*uires an 7+1 interest in 2unland /ompan& on @anuar& 25 200+. (he resulting
difference between cost and book value in the amount of 41205000 is entirel& attributable to
e*uipment with an original life of 1+ &ears and a remaining useful life5 on @anuar& 25 200+5 of 10
&ears.
Required:
.repare the December $1 consolidated financial statements workpaper entries for 200+ and 200-
to allocate and depreciate the difference between cost and book value5 recording accumulated
depreciation as a separate balance.
Exercise 5-* Workpaper Entries
3n @anuar& 15 200'5 .ackard /ompan& purchased an 701 interest in 2age /ompan& for
4-005000. 3n this date 2age /ompan& had common stock of 41+05000 and retained earnings of
4'005000.
2age /ompan&As e*uipment on the date of .ackard /ompan&As purchase had a book value of
4'005000 and a fair value of 4-005000. 6ll e*uipment had an estimated useful life of 10 &ears on
@anuar& 25 1<<<.
Required:
.repare the December $1 consolidated financial statements workpaper entries for 200' and 200+
to allocate and depreciate the difference between cost and book value5 recording accumulated
depreciation as a separate balance.
Exercise 5-+ Workpaper Entries and ,ain on -ale of .and
.adilla /ompan& purchased 701 of the common stock of 2anoma /ompan& in the open market
on @anuar& 15 200$5 pa&ing 4$15000 more than the book value of the interest ac*uired. (he
difference between cost and book value is attributable to land.
Required:
6. ,hat workpaper entr& is re*uired each &ear until the land is disposed of#
9. 6ssume that the land is sold on 1F1F0- and that 2anoma /ompan& recogni=es a 4+05000 gain
on its books. ,hat amount of gain will be reflected in combined income on the 200-
consolidated income statement#
/. n all &ears subse*uent to the disposal of the land5 what workpaper entr& will be necessar&#
Exercise 5-/ Allocation of Cost and Workpaper Entries
3n @anuar& 15 200$5 .oint /orporation ac*uired an 701 interest in 2harp /ompan& for
4250005000. 6t that time 2harp /ompan& had capital stock of 415+005000 and retained earnings
of 48005000. (he book values of 2harp /ompan&As assets and liabilities were e*ual to their fair
values except for land and bonds pa&able. (he land had a fair value of 41005000 and a book
value of 4705000. (he outstanding bonds were issued at par value on @anuar& 15 1<<75 pa& 101
annuall&5 and mature on @anuar& 15 2007. (he bond principal is 4+005000 and the current &ield
rate on similar bonds is 71.
Required:
6. .repare a /omputation and 6llocation 2chedule for the difference between cost and book
value in the consolidated statements workpaper on the ac*uisition date.
9. .repare the workpaper entries necessar& on December $15 200$5 to allocate and depreciate
the difference between cost and book value.
Exercise 5-10 Allocation of Cost and Workpaper Entries
3n @anuar& 25 200$5 .age /orporation ac*uired a <01 interest in 2alcedo /ompan& for
4$5+005000. 6t that time 2alcedo /ompan& had capital stock of 4252+05000 and retained
earnings of 4152+05000. (he book values of 2alcedo /ompan&As assets and liabilities were e*ual
to their fair values except for land and bonds pa&able. (he land had a fair value of 42005000 and
a book value of 41205000. (he outstanding bonds were issued on @anuar& 15 1<<75 at <1 and
mature on @anuar& 15 2007. (he bondsA principal is 4+005000 and the current &ield rate on similar
bonds is -1.
Required:
6. 6ssuming interest is paid annuall&5 prepare a /omputation and 6llocation 2chedule for the
difference between cost and book value in the consolidated statements workpaper on the
ac*uisition date.
9. .repare the workpaper entries necessar& on December $15 200$5 to allocate and depreciate
the difference between cost and book value.
Exercise 5-11 Workpaper Entries for #hree Years
3n @anuar& 15 200$5 .iper /ompan& ac*uired an 701 interest in 2and /ompan& for 42528-5000.
6t that time the capital stock and retained earnings of 2and /ompan& were 4157005000 and
480050005 respectivel&. Differences between the fair value and the book value of the identifiable
assets of 2and /ompan& were as follows:
Cair Balue
n Excess of
9ook Balue
nventor& 4 '+5000
E*uipment (net) +05000
(he book values of all other assets and liabilities of 2and /ompan& were e*ual to their fair
values on @anuar& 15 200$. (he e*uipment had a remaining useful life of eight &ears. nventor&
is accounted for on a CC3 basis. 2and /ompan&As reported net income and declared dividends
for 200$ through 200+ are shown here:
200$ 200' 200+
;et ncome 4 1005000 4 1+05000 4 705000
Dividends 205000 $05000 1+5000
Required:
.repare the eliminatingFadGusting entries needed on the consolidated worksheet for the &ears
ended 200$5 200' and 200+. (t is not necessar& to prepare the worksheet.)
1) 6ssume the use of the cost method.
2) 6ssume the use of the partial e*uit& method.
$) 6ssume the use of the complete e*uit& method.
Exercise 5-12 Workpaper Entries and Consolidated Retained Earnin$s1 Cost 2ethod
6 <01 interest in 2axton /orporation was purchased b& .alm ncorporated on @anuar& 25 200'.
(he capital stock balance of 2axton /orporation was 4$50005000 on this date5 and the balance in
retained earnings was 4150005000. (he cost of the investment to .alm ncorporated was
4$58+05000.
(he balance sheet information available for 2axton /orporation on the ac*uisition date revealed
these values:
9ook Balue Cair Balue
nventor& (CC3) 4 8005000 4 7005000
E*uipment (net) 250005000 250005000
Dand 15-005000 250005000
(he e*uipment was determined to have a 1+:&ear useful life when purchased at the beginning of
1<<<. 2axton /orporation reported net income in 200' of 42+05000 and 4$005000 in 200+. ;o
dividends were declared in either of those &ears.
Required:
6. .repare the workpaper entries5 assuming that the cost method is used to account for the
investment5 to establish reciprocit&5 to eliminate the investment account5 and to allocate and
depreciate the difference between cost and book value in the 200+ consolidated statements
workpaper.
9. /alculate the consolidated retained earnings for the &ear ended December $15 200+5
assuming that the balance in .alm ncorporatedAs ending retained earnings on that date was
4250005000.
Exercise 5-1 3ush "o4n Accountin$
.ascal /orporation purchased <01 of the stock of 2al=er /ompan& for 4250805000 on @anuar& 15
200+. 3n this date5 the fair value of the assets and liabilities of 2al=er /ompan& was e*ual to
their book value except for the inventor& and e*uipment accounts. (he inventor& had a fair
value of 482+5000 and a book value of 4-005000. (he e*uipment had a book value of 4<005000
and a fair value of 41508+5000.
(he balances in 2al=er /ompan&As capital stock and retained earnings accounts on the date of
ac*uisition were 4152005000 and 4-0050005 respectivel&.
Required:
n general Gournal form5 prepare the entries on 2al=er /ompan&As books to record the effect of the
pushed down values implied b& the purchase of its stock b& .ascal /ompan& assuming that:
6. Balues are allocated on the basis of the fair value of 2al=er /ompan& as a whole imputed
from the transaction.
9. Balues are allocated on the basis of the proportional interest ac*uired b& .ascal /ompan&.
Exercise 5-1! Workpaper Entries and Consolidated Retained Earnin$s1 3artial Equit5
6 <01 interest in 2axton /orporation was purchased b& .alm ncorporated on @anuar& 25 200'.
(he capital stock balance of 2axton /orporation was 4$50005000 on this date5 and the balance in
retained earnings was 4150005000. (he cost of the investment to .alm ncorporated was
4$58+05000.
(he balance sheet information available for 2axton /orporation on the ac*uisition date revealed
these values:
9ook Balue Cair Balue
nventor& (CC3) 4 8005000 4 7005000
E*uipment (net) 250005000 250005000
Dand 15-005000 250005000
(he e*uipment was determined to have a 1+:&ear useful life when purchased at the beginning of
1<<<. 2axton /orporation reported net income in 200' of 42+05000 and 4$005000 in 200+. ;o
dividends were declared in either of those &ears.
Required:
6. .repare the worksheet entries5 assuming that the partial e*uit& method is used to account for
the investment5 to eliminate the investment account5 and to allocate and depreciate the
difference between cost and book value in the 200+ consolidated statements workpaper.
9. /alculate the consolidated retained earnings for the &ear ended December $15 200+5 assuming
that the balance in .alm ncorporatedAs ending retained earnings on that date was 425'<+5000.
Exercise 5-15 Workpaper Entries and Consolidated Retained Earnin$s1 Co&plete Equit5
6 <01 interest in 2axton /orporation was purchased b& .alm ncorporated on @anuar& 25 200'.
(he capital stock balance of 2axton /orporation was 4$50005000 on this date5 and the balance in
retained earnings was 4150005000. (he cost of the investment to .alm ncorporated was
4$58+05000.
(he balance sheet information available for 2axton /orporation on the ac*uisition date revealed
these values:
9ook Balue Cair Balue
nventor& (CC3) 4 8005000 4 7005000
E*uipment (net) 250005000 250005000
Dand 15-005000 250005000
(he e*uipment was determined to have a 1+:&ear useful life when purchased at the beginning of
1<<<. 2axton /orporation reported net income in 200' of 42+05000 and 4$005000 in 200+. ;o
dividends were declared in either of those &ears.
Required:
6. .repare the worksheet entries5 assuming that the complete e*uit& method is used to account
for the investment5 to eliminate the investment account5 and to allocate and depreciate the
difference between cost and book value in the 200+ consolidated statements workpaper.
9. /alculate the consolidated retained earnings for the &ear ended December $15 200+5 assuming
that the balance in .alm ncorporatedAs ending retained earnings on that date was 425'$+5000.
Exercise 5-1) ,ood4ill %&pair&ent
3n @anuar& 15 200$5 .orsche /ompan& ac*uired 100 percent of 2aab /ompan&)s stock for
4'+05000 cash. (he fair value of 2aab)s identifiable net assets was 4$8+5000 on this date. .orsche
/ompan& decided to measure goodwill impairment using comparable prices of similar
businesses to estimate the fair value of the reporting unit (2aab). (he information for these
subse*uent &ears is as follows:
/arr&ing Balue of Cair Balue
.resent value 2aab)s dentifiable 2aab)s dentifiable
Hear of Cuture /ash Clows
;et 6ssets
200' 4'005000 4$$05000 4$'05000
200+ 4'005000 4$205000 $'+5000
200- 4$+05000 4$005000 $2+5000
I dentifiable net assets do not include goodwill.
Required:
Part A: Cor each &ear determine the amount of goodwill impairment5 if an&. %int: Hou ma&
wish to refer back to the section entitled Joodwill mpairment (est in /hapter 2.
Part B: .repare the workpaper entries needed each year (200' through 200-) on the
consolidating worksheet to record an& goodwill impairment assuming:
1. (he cost or partial e*uit& method is used.
2. (he complete e*uit& method is used.
Exercise 5-1* Accountin$ for the #ransition in ,ood4ill #reat&ent
.orch /ompan& ac*uired 1001 of the stock of 2tairs /ompan& on @anuar& 15 2000 for 4-005000.
(he management of .orch recentl& adopted a vertical merger strateg&. 3n the date of the
combination (immediatel& before the ac*uisition)5 the assets5 liabilities5 and stockholders) e*uit&
of each compan& were as follows:
.orch 2tairs
/urrent assets 4 '005000 412+5000
.lant assets (net) 7705000 $705000
(otal 4 152705000 4 +0+5000
(otal Diabilities 4 $005000 41005000
/ommon stock5 420 par value '005000 2005000
3ther contributed capital 2+05000 8+5000
Eetained earnings $$05000 1$05000
(otal 4152705000 4+0+5000
3n the date of ac*uisition5 the onl& item on 2tairs) balance sheet not recorded at fair value was
plant assets5 which had a fair value of 4'005000. .lant assets had a 10 &ear remaining life and
goodwill was to be amorti=ed over 20 &ears.
n 20015 the C629 issued 2C62 ;o. 1'1 and 1'2 and the .orch /ompan& adopted the new
statements as of @anuar& 2002. 3n @anuar& 15 20025 the fair value of 2tairs) identifiable net assets
was 4'+05000. 2tairs is considered to be a reporting unit for purposes of goodwill impairment
testing. ts fair value was estimated to be 4++05000 on @anuar& 15 20025 and its carr&ing value
(including goodwill) on that date was 4-005000.
Required:
1. .repare the Gournal entr& as of @anuar& 15 20005 to record the ac*uisition of 2tairs b& .orch.
.repare the eliminatingFadGusting workpaper entries needed to eliminate the investment account
and to allocate the difference between cost and book value immediatel& after the ac*uisition.
2. Eecall that although goodwill is no longer amorti=ed under current J66.5 it was amorti=ed
for most companies in the &ears 2000 and 2001. .repare the eliminatingFadGusting workpaper
entries needed to amorti=e goodwill for the &ears 2000 and 2001.
a. 6ssume the use of the cost or partial e*uit& method on the books of the parent.
b. 6ssume the use of the complete e*uit& method on the books of the parent.
,hat is the carr&ing value of goodwill (unamorti=ed balance) resulting from the ac*uisition of
2tairs as of @anuar& 15 20025 on the consolidated balance sheet#
$. 6 transitional goodwill impairment test is re*uired on the date of adoption of the new C629
standards (to be carried out within the first six months after adoption) for preexisting goodwill.
9ased on the facts listed above5 perform the impairment test and calculate the loss from
impairment5 if an&. %int: Hou ma& wish to refer back to the section entitled Joodwill
mpairment (est in /hapter 2.
'. f there is an impairment of goodwill5 how should it be shown in the consolidated financial
statements for the &ear 2002# .repare the eliminatingFadGusting workpaper entr& needed to
record the loss from impairment5 if an&5 in the workpapers for the &ear ending December $15
2002.
+. ,hat transitional disclosures are re*uired in the &ear of initial adoption of 2C62 ;o. 1'1 and
1'2# (Hou ma& also wish to refer to /hapter 2 to answer this *uestion.)
3ro'le&s
3ro'le& 5-1 Workpaper Entries and Consolidated (et %nco&e for #4o Years1 Cost
2ethod
3n @anuar& 15 200'5 .almero /ompan& purchased an 701 interest in 2antos /ompan& for
42570050005 at which time 2antos /ompan& had retained earnings of 4150005000 and capital
stock of 4+005000. 3n the date of ac*uisition5 the fair value of the assets and liabilities of 2antos
/ompan& was e*ual to their book value5 except for propert& and e*uipment (net)5 which had a
fair value of 415+005000 and a book value of 4-005000. (he propert& and e*uipment had an
estimated remaining life of 10 &ears. .almero /ompan& reported net income from independent
operations of 4'005000 in 200' and 4'2+5000 in 200+. 2antos /ompan& reported net income of
4$005000 in 200' and 4'005000 in 200+. ;either compan& declared dividends in 200' or 200+.
.almero uses the cost method to account for its investment in 2antos.
Required:
6. .repare in general Gournal form the entries necessar& in the consolidated statements
workpapers for the &ears ended December $15 200' and 200+.
9. .repare a schedule or t:account showing the calculation of the controlling interest in
combined net income for the &ears ended December $15 200' and December $15 200+.
3ro'le& 5-2 Workpaper Entries and Consolidated (et %nco&e for #4o Years1 3artial
Equit5 2ethod
3n @anuar& 15 200'5 .axton /ompan& purchased a 801 interest in 2agon /ompan& for
415$0050005 at which time 2agon /ompan& had retained earnings of 4+005000 and capital stock
of 4150005000. 3n @anuar& 15 200'5 the fair value of the assets and liabilities of 2agon /ompan&
was e*ual to their book value except for bonds pa&able. 2agon /ompan& had outstanding a
4150005000 issue of -1 bonds that were issued at par and that mature on @anuar& 15 200<.
nterest on the bonds is pa&able annuall&5 and the &ield rate on similar bonds on @anuar& 15 200'5
is 101. .axton /ompan& reported net income from independent operations of 4$005000 in 200'
and 42+05000 in 200+. 2agon /ompan& reported net income of 41005000 in 200' and 41205000
in 200+. ;either compan& paid or declared dividends in 200' or 200+. .almero uses the partial
e*uit& method to account for its investment in 2antos.
Required:
6. .repare in general Gournal form the entries necessar& in the consolidated statements
workpapers for the &ears ended December $15 200'5 and December $15 200+.
9. .repare in good form a schedule or t:account showing the calculation of the controlling
interest in combined net income for the &ears ended December $15 200'5 and December $15
200+.
3ro'le& 5- Workpaper Entries and Consolidated (et %nco&e1 Co&plete Equit5 2ethod
.erke /orporation purchased 701 of the stock of 2uperstition /ompan& for 415<805000 on
@anuar& 15 200+. 3n this date5 the fair value of the assets and liabilities of 2uperstition /ompan&
was e*ual to their book value except for the inventor& and e*uipment accounts. (he inventor&
had a fair value of 482+5000 and a book value of 4-005000. 2ixt& percent of 2uperstition
/ompan&As inventor& was sold in 200+K the remainder was sold in 200-. (he e*uipment had a
book value of 4<005000 and a fair value of 41508+5000. (he remaining useful life of the
e*uipment is seven &ears.
(he balances in 2uperstition /ompan&As capital stock and retained earnings accounts on the date
of ac*uisition were 4152005000 and 4-0050005 respectivel&. .erke uses the complete e*uit&
method to account for its investment in 2uperstition. (he following financial data are from
2uperstition /ompan&As records.
200+ 200-
;et income 4 8+05000 4 <005000
Dividends declared 1+05000 22+5000
Required:
6. n general Gournal form5 prepare the entries on .erke /ompan&As books to account for its
investment in 2uperstition /ompan& for 200+ and 200-.
9. .repare the eliminating entries necessar& for the consolidated statements workpapers in 200+
and 200-.
/. 6ssuming .erke /orporationAs net income for 200+ was 41500050005 calculate the controlling
interest in combined net income for 200+.

3ro'le& 5-! Eli&inatin$ Entries and Worksheets for 6arious Years
3n @anuar& 15 200$5 .orter /ompan& purchased an 701 interest in the capital stock of 2alem
/ompan& for 47+05000. 6t that time5 2alem /ompan& had capital stock of 4++05000 and retained
earnings of 4705000.
Differences between the fair value and the book value of the identifiable assets of 2alem
/ompan& were as follows:
Cair Balue
n Excess 3f
9ook Balue
E*uipment 41$05000
Dand -+5000
nventor& '05000
(he book values of all other assets and liabilities of 2alem /ompan& were e*ual to their fair
values on @anuar& 15 200$. (he e*uipment had a remaining life of five &ears on @anuar& 15 200$5
the inventor& was sold in 200$.
2alem /ompan&)s net income and dividends declared in 200$ and 200' were as follows:
Hear 200$ ;et ncome of 41005000K Dividends Declared of 42+5000
Hear 200' ;et ncome of 41105000K Dividends Declared of 4$+5000
Required:
6. .repare a /omputation and 6llocation 2chedule for the difference between cost and book
value of e*uit& ac*uired.
9. .resent the eliminatingFadGusting entries needed on the consolidated worksheet for the &ear
ended December $15 200$. (t is not necessar& to prepare the worksheet.)
') 6ssume the use of the cost method.
+) 6ssume the use of the partial e*uit& method.
-) 6ssume the use of the complete e*uit& method.
/. .resent the eliminatingFadGusting entries needed on the consolidated worksheet for the &ear
ended December $15 200'. (t is not necessar& to prepare the worksheet.)
1) 6ssume the use of the cost method.
2) 6ssume the use of the partial e*uit& method.
$) 6ssume the use of the complete e*uit& method.
Lse the following financial data for 200+ for re*uirements D through J.
.orter
/ompan&
2alem
/ompan&
2ales 4151005000 4'+05000
Dividend income '75000 :::::::
(otal revenue 151'75000 '+05000
/ost of goods sold <005000 2005000
Depreciation expense '05000 $05000
3ther expenses -05000 +05000
(otal cost and expense 150005000 2705000
;et income 4 1'75000 41805000
1F1 Eetained earnings 4 +005000 42$05000
;et income 1'75000 1805000
Dividends declared (<05000) (-05000)
12F$1 Eetained earnings 4 ++75000 4$'05000
/ash 4 805000 4 -+5000
6ccounts receivable 2-05000 1<05000
nventor& 2'05000 18+5000
nvestment in 2alem /ompan& 7+05000
Dand ::0:: $205000
.lant and e*uipment $-05000 2705000
(otal assets 4158705000 4 150$05000
6ccounts pa&able 4 1$25000 41105000
;otes pa&able <05000 $05000
/apital stock 150005000 ++05000
Eetained earnings ++75000 $'05000
(otal liabilities and e*uit& 4 158705000 4 150$05000
Required:
D. .repare a consolidated financial statements workpaper for the &ear ended December $15 200+.
(%int: Hou can infer the method being used b& the parent from the information in its trial
balance.)
E. .repare a consolidated statement of financial position and a consolidated income statement for
the &ear ended December $15 200+.
C. Describe the effect on the consolidated balances if 2alem /ompan& uses the DC3 cost flow
assumption in pricing its inventor& and there has been no decrease in ending inventor&
*uantities since 200$.
J. .repare an anal&tical calculation of consolidated retained earnings for the &ear ended
December $15 200+.
3ro'le& 5-5 Workpaper Entries and Consolidated 7inancial -tate&ents
3n @anuar& 15 200'5 .almer /ompan& ac*uired a <01 interest in 2tevens /ompan& at a cost of
4150005000. 6t the purchase date5 2tevens /ompan&As stockholdersA e*uit& consisted of the
following:
/ommon stock 4+005000
Eetained earnings 1<05000
6n examination of 2tevens /ompan&As assets and liabilities revealed the following at the date of
ac*uisition:
9ook Balue Cair Balue
/ash 4 <0582- 4 <0582-
6ccounts receivable 2005000 2005000
nventories 1-05000 2105000
E*uipment $005000 $<05000
6ccumulated depreciation : e*uipment (1005000) (1$05000)
Dand 1<05000 2<05000
9onds pa&able (20+5++-) (1+05000)
3ther +'57$0 +'57$0
(otal 4 -<05000 4 <++5++-
Additional %nfor&ation - "ate of Acquisition
2tevens /ompan&As e*uipment had an original life of 1+ &ears and a remaining useful life of 10
&ears. 6ll the inventor& was sold in 200'. 2tevens /ompan& purchased its bonds pa&able on the
open market on @anuar& 105 200'5 for 41+05000 and recogni=ed a gain of 4++5++-.
Cinancial statement data for 200- are presented here:
.almer 2tevens
/ompan& /ompan&
2ales 4 -205000 4 $'05000
/ost of sales '$05000 2'05000
Jross margin 1<05000 1005000
Depreciation expense $05000 205000
3ther expenses -05000 $+5000
ncome from operations 1005000 '+5000
Dividend income $15+00 0
;et income 4 1$15+00 4 '+5000
1F1 Eetained earnings 4 2<85-00 4 2105000
;et income 1$15+00 '+5000
'2<5100 2++5000
Dividends (1205000) ($+5000)
12F$1 Eetained earnings 4 $0<5100 4 2205000
/ash 4 2015200 4 1+15000
6ccounts receivable 2215000 18$5000
nventories 1005'00 715000
nvestment in 2tevens /ompan& 150005000
E*uipment '+05000 $005000
6ccumulated depreciation : e*uipment ($005000) (1'05000)
Dand $-05000 2<05000
(otal assets 4250$25-00 4 7++5000
.almer 2tevens
/ompan& /ompan&
6ccounts pa&able 4 $2$5+00 4 1$+5000
9onds pa&able '005000
/ommon stock 150005000 +005000
Eetained earnings $0<5100 2205000
(otal liabilities and e*uit& 4250$25-00 4 7++5000
Required:
6. ,hat method is .almer using to account for its investment in 2tevens# %ow can &ou tell#
9. .repare in general Gournal form the workpaper entr& to allocateand depreciate the difference
between cost and book value in the December $15 200'5 consolidated statements workpaper.
/. .repare a consolidated financial statements workpaper for the &ear ended December $15
200-.
D. .repare in good form a schedule or t:account showing the calculation of the controlling
interest in combined net income for the &ear ended December $15 200-.
3ro'le& 5-) Workpaper Entries for #4o Years and -ale of Equip&ent in Year #4o
3n @anuar& 15 200'5 .erini /ompan& purchased an 7+1 interest in 2ilvas /ompan& for
4'005000. 3n this date5 2ilvas /ompan& had common stock of 4<05000 and retained earnings of
42105000. 6n examination of 2ilvas /ompan&As assets and liabilities revealed that their book
value was e*ual to their fair value except for the e*uipment.
9ook Balue Cair Balue
E*uipment 4 $-05000
6ccumulated depreciation (1205000)
4 2'05000 4 $005000
(he e*uipment had an expected remaining life of six &ears and no salvage value. 2traight:line
depreciation is used.
During 200' and 200+5 .erini /ompan& reported net income from its own operations of
4705000 and paid dividends of 4+05000 in each &ear. 2ilvas /ompan& had income of 4'05000
each &ear and paid dividends of 4$05000 on each December $1.
6ccumulated depreciation is presented on a separate row in the workpaper and in the
consolidated financial statements.
Required:
6. .repare eliminating entries for consolidated financial statements workpaper for the &ear
ended December $15 200'5 assuming:
1) (he cost method is used to account for the investment.
2) (he partial e*uit& method is used to account for the investment.
9. 3n @anuar& 15 200+5 2ilvas /ompan& sold all its e*uipment for 42205000. .repare the
eliminating entries for the consolidated financial statements workpaper for the &ear ended
December $15 200+5 assuming:
1) (he cost method is used to account for the investment.
2) (he partial e*uit& method is used to account for the investment.
3ro'le& 5-* Workpaper Entries and -ale of Equip&ent in Year #hree1 Co&plete Equit5
3n @anuar& 15 200'5 .ueblo /orporation purchased a 8+1 interest in 2anche= /ompan& for
4<005000. 6 summar& of 2anche= /ompan&As balance sheet at date of purchase follows:
9ook Balue Cair Balue
E*uipment 4 8205000
6ccumulated depreciation (2'05000)
E*uipment (net) '705000 4 --05000
3ther assets '+05000 '+05000
4 <$05000
Diabilities 4 2++5000 4 2++5000
/ommon stock $005000
Eetained earnings $8+5000
4 <$05000
(he e*uipment had an original life of 1+ &ears and remaining useful life of 10 &ears.
During 200' .ueblo /orporation reported income of 42$85000 and paid dividends of 41+05000.
2anche= /ompan& reported net income of 412$5000 and paid dividends of 41205000. .ueblo
uses the complete e*uit& method to account for its investment in 2anche=.
Required:
6. .repare the elimination entries for the consolidated financial statements workpaper on
December $15 200'. 6ccumulated depreciation is presented on a separate row in the
workpaper and in the consolidated financial statements.
9. 6ssume that 2anche= /ompan& disposed of all its e*uipment on @anuar& 15 200-5 for
4'+05000.
(1) ,hat amount of gain (loss) will 2anche= /ompan& report#
(2) ,hat is the consolidated gain (loss)#
($) .repare the workpaper entr& necessar& to allocate the amount of the difference between
cost and book value that was originall& allocated to the e*uipment that has now been sold
to outsiders.
(') ,hat workpaper entr& will be necessar& to allocate this difference between cost and book
value in future &ears#
3ro'le& 5-+ Eli&inatin$ Entries and Consolidated (et %nco&e
.atten /orporation ac*uired an 7+1 interest in 2avage /ompan& for 4$51005000 on @anuar& 15
200'. 3n this date5 the balances in 2avage /ompan&As capital stock and retained earnings
accounts were 4250005000 and 480050005 respectivel&.
6n examination of 2avage /ompan&As books on this date revealed the following:
9ook Balue Cair Balue
/urrent assets 4 -+05000 4 -+05000
nventor& +-05000 -105000
>arketable securities '$05000 '$05000
.lant and e*uipment 152005000 15-005000
Dand '005000 <005000
Diabilities +'05000 +'05000
(he remaining useful life of the plant and e*uipment is 10 &ears5 and all the inventor& was sold
in 200'. (he net income from .atten /orporationAs own operations was 4<+05000 in 200' and
4-8+5000 in 200+. 2avage /ompan&As net income for the respective &ears was 41105000 and
41705000. ;o dividends were declared.
Required:
6. .repare a /omputation and 6llocation 2chedule for the difference between purchase price and
book value of e*uit&.
9. .repare the consolidated statements workpaper eliminating entries for 200' and 200+ in
general Gournal form5 under each of the following assumptions:
1) (he cost method is used to account for the investment.
2) (he partial e*uit& method is used to account for the investment.
$) (he complete e*uit& method is used to account for the investment.
/. /alculate the controlling interest in combined net income for 200' and 200+.
3ro'le& 5-/ Workpaper Entries and Consolidated (et %nco&e for Year of Acquisition
3n @anuar& 15 200'5 .ump /ompan& ac*uired all the outstanding common stock of 2ound
/ompan& for 4++-5000 in cash. Cinancial data relating to 2ound /ompan& on @anuar& 15 200'5
are presented here:
9alance 2heet
9ook Balue Cair Balue
/ash 4 10'5++0 4 10'5++0
Eeceivables 12$5000 1125$10
nventories 2205000 2-75000
9uildings $$15000 $8+5000
6ccumulated depreciation : buildings (2-'5700) ($005000)
E*uipment 1'+5000 1$05000
6ccumulated depreciation : e*uipment (10758+0) (<85+00)
Dand 1+05000 '205000
(otal assets 4 8005000 4150125$-0
9ook Balue Cair Balue
/urrent liabilities 4 10-5000 4 10-5000
9onds pa&able5 71 due 1F1F2022
nterest pa&able on -F$0 and 12F$1 $005000
/ommon stock 2005000
.remium on common stock 705000
Eetained earnings 1'5000
(otal liabilities and e*uities 4 8005000
2ound /ompan& would expect to pa& 101 interest to borrow long:term funds on the date of
ac*uisition. During 200'5 2ound /ompan& wrote its receivables down b& 4105-<0 and recorded
a corresponding loss. 2ound /ompan& accounts for its inventories at lower of CC3 cost or
market. ts buildings and e*uipment had a remaining estimated useful life on @anuar& 15 200'5 of
10 &ears and 2M &ears5 respectivel&. 2ound /ompan& reported net income of 4705000 and
declared no dividends in 200'.
Required:
6. .repare in general Gournal form the December $15 200'5 workpaper entries necessar& to
eliminate the investment account and to allocate and depreciate the difference between cost
and book value.
9. 6ssume that .ump /ompan&As net income from independent operations in 200' amounts to
4+005000. /alculate the controlling interest in combined net income for 200'.
3ro'le& 5-10 Workpaper Entries for Year of Acquisition
.earson /ompan& purchased a 1001 interest in 2anders /ompan& and a <01 interest in (a&lor
/ompan& on @anuar& 25 200'5 for 47005000 and 415$0050005 respectivel&. (he account balances
and fair values of the ac*uired companies on the ac*uisition date were as follows:
2anders (a&lor
9ook Balue Cair Balue 9ook Balue Cair Balue
/urrent assets 4 2005000 4 2005000 4 $+05000 4 $+05000
nventor& '005000 '005000 +005000 +8+5000
.lant and e*uipment (net) $005000 $+05000 -005000 -005000
Dand -005000 -005000 ++05000 -2+5000
(otal 415+005000 4250005000
/urrent liabilities 4 +005000 4 +005000 4 $005000 4 $005000
9onds pa&able $005000 $005000 -005000 -005000
/apital stock +005000 7005000
Eetained earnings 2005000 $005000
(otal 415+005000 4250005000
2anders /ompan&As e*uipment has a remaining useful life of 10 &ears. (wo:thirds of (a&lor
/ompan&As inventor& was sold in 200' and the rest was sold in the following &ear. n 200'5
2anders /ompan& reported net income of 4+005000 and declared dividends of 41005000. (a&lor
/ompan&As net income and declared dividends for 200' were 47005000 and 420050005
respectivel&.
Required:
6. .repare in general Gournal form the entries on the books of .earson /orporation to account
for its investments in 200'.
9. .repare the elimination entries necessar& in the consolidated statements workpaper for the
&ear ended December $15 200'.
3ro'le& 5-11 Eli&inatin$ Entries and Worksheets for 6arious Years
(;ote that this is the same problem as .roblem +:'5 but assuming the use of the partial e*uit&
method.)
3n @anuar& 15 200$5 .orter /ompan& purchased an 701 interest in the capital stock of 2alem
/ompan& for 47+05000. 6t that time5 2alem /ompan& had capital stock of 4++05000 and retained
earnings of 4705000. .orter /ompan& uses the partial e*uit& method to record its investment in
2alem /ompan&. Differences between the fair value and the book value of the identifiable assets
of 2alem /ompan& were as follows:
Cair Balue
n Excess 3f
9ook Balue
E*uipment 41$05000
Dand -+5000
nventor& '05000
(he book values of all other assets and liabilities of 2alem /ompan& were e*ual to their fair
values on @anuar& 15 200$. (he e*uipment had a remaining life of five &ears on @anuar& 15 200$5
the inventor& was sold in 200$.
2alem /ompan&)s net income and dividends declared in 200$ and 200' were as follows:
Hear 200$ ;et ncome of 41005000K Dividends Declared of 42+5000
Hear 200' ;et ncome of 41105000K Dividends Declared of 4$+5000
Required:
6. .resent the eliminatingFadGusting entries needed on the consolidated worksheet for the &ear
ended December $15 200$. (t is not necessar& to prepare the worksheet.)
9. .resent the eliminatingFadGusting entries needed on the consolidated worksheet for the &ear
ended December $15 200'. (t is not necessar& to prepare the worksheet.)
Lse the following financial data for 200+ for re*uirements / through J.
.orter
/ompan&
2alem
/ompan&
2ales 4151005000 4'+05000
E*uit& in subsidiar& income 1$-5000 :::::::
(otal revenue 152$-5000 '+05000
/ost of goods sold <005000 2005000
Depreciation expense '05000 $05000
3ther expenses -05000 +05000
(otal cost and expense 150005000 2705000
;et income 4 2$-5000 41805000
1F1 Eetained earnings 4 -205000 42$05000
;et income 2$-5000 1805000
Dividends declared (<05000) (-05000)
12F$1 Eetained earnings 4 8--5000 4$'05000
/ash 4 805000 4 -+5000
6ccounts receivable 2-05000 1<05000
nventor& 2'05000 18+5000
nvestment in 2alem /ompan& 150+75000
Dand ::0:: $205000
.lant and e*uipment $-05000 2705000
(otal assets 4 15<775000 4 150$05000
6ccounts pa&able 4 1$25000 41105000
;otes pa&able <05000 $05000
/apital stock 150005000 ++05000
Eetained earnings 8--5000 $'05000
(otal liabilities and e*uit& 4 15<775000 4 150$05000
Required:
/. .repare a t:account calculation of the controlling and noncontrolling interests in combined
income for the &ear ended December $15 200+.
D. .repare a consolidated financial statements workpaper for the &ear ended December $15
200+.
E. .repare a consolidated statement of financial position and a consolidated income statement
for the &ear ended December $15 200+.
C. Describe the effect on the consolidated balances if 2alem /ompan& uses the DC3 cost flow
assumption in pricing its inventor& and there has been no decrease in ending inventor& *uantities
since 200$.
J. .repare an anal&tical calculation of consolidated retained earnings for the &ear ended
December $15 200+.
;ote: f &ou completed .roblem +:'5 a comparison of the consolidated balances in this problem
with those &ou obtained in .roblem +:' will demonstrate that the method (cost or partial e*uit&)
used b& the parent compan& to record its investment in a consolidated subsidiar& has no effect on
the consolidated balances.
3ro'le& 5-12 Workpaper Entries and Consolidated 7inancial -tate&ents
(;ote that this is the same problem as .roblem +:+5 but assuming the use of the partial e*uit&
method.)
3n @anuar& 15 200'5 .almer /ompan& ac*uired a <01 interest in 2tevens /ompan& at a cost of
4150005000. 6t the purchase date5 2tevens /ompan&As stockholdersA e*uit& consisted of the
following:
/ommon stock 4+005000
Eetained earnings 1<05000
6n examination of 2tevens /ompan&As assets and liabilities revealed the following at the date of
ac*uisition:
9ook Balue Cair Balue
/ash 4 <0582- 4 <0582-
6ccounts receivable 2005000 2005000
nventories 1-05000 2105000
E*uipment $005000 $<05000
6ccumulated depreciation : e*uipment (1005000) (1$05000)
Dand 1<05000 2<05000
9onds pa&able (20+5++-) (1+05000)
3ther +'57$0 +'57$0
(otal 4 -<05000 4 <++5++-
Additional %nfor&ation - "ate of Acquisition
2tevens /ompan&As e*uipment had an original life of 1+ &ears and a remaining useful life of 10
&ears. 6ll the inventor& was sold in 200'. 2tevens /ompan& purchased its bonds pa&able on the
open market on @anuar& 105 200'5 for 41+05000 and recogni=ed a gain of 4++5++-. .almer
/ompan& uses the partial e*uit& method to record its investment in 2tevens /ompan&.
Cinancial statement data for 200- are presented here:
.almer 2tevens
/ompan& /ompan&
2ales 4 -205000 4 $'05000
/ost of sales '$05000 2'05000
Jross margin 1<05000 1005000
Depreciation expense $05000 205000
3ther expenses -05000 $+5000
ncome from operations 1005000 '+5000
E*uit& in subsidiar& income '05+00 0
;et income 4 1'05+00 4 '+5000
1F1 Eetained earnings 4 $1+5-00 4 2105000
;et income 1'05+00 '+5000
'+-5100 2++5000
Dividends (1205000) ($+5000)
12F$1 Eetained earnings 4 $$-5100 4 2205000
/ash 4 2015200 4 1+15000
6ccounts receivable 2215000 18$5000
nventories 1005'00 715000
nvestment in 2tevens /ompan& 150285000
E*uipment '+05000 $005000
6ccumulated depreciation : e*uipment ($005000) (1'05000)
Dand $-05000 2<05000
(otal assets 4250+<5-00 4 7++5000
.almer 2tevens
/ompan& /ompan&
6ccounts pa&able 4 $2$5+00 4 1$+5000
9onds pa&able '005000
/ommon stock 150005000 +005000
Eetained earnings $$-5100 2205000
(otal liabilities and e*uit& 4250+<5-00 4 7++5000
Required:
6. .repare in general Gournal form the workpaper entr& to allocate and depreciate the difference
between cost and book value in the December $15 200'5 consolidated statements workpaper.
9. .repare a consolidated financial statements workpaper for the &ear ended December $15
200-.
/. .repare in good form a schedule or t:account showing the calculation of the controlling
interest in combined net income for the &ear ended December $15 200-.
f &ou completed .roblem +:+5 a comparison of the consolidated balances in this problem with
those &ou obtained in .roblem +:+ will demonstrate that the method (cost or partial e*uit&) used
b& the parent compan& to record its investment in a consolidated subsidiar& has no effect on the
consolidated balances.
3ro'le& 5-1 3ush "o4n Accountin$
3n @anuar& 25 200'5 .ress /ompan& purchased on the open market <01 of the outstanding
common stock of 2ensor /ompan& for 47005000 cash. 9alance sheets for .ress /ompan& and
2ensor /ompan& on @anuar& 15 200'5 Gust before the stock ac*uisition b& .ress /ompan&5 were:
.ress 2ensor
/ompan& /ompan&
/ash 4 150-+5000 4 $75000
Eeceivables '225+00 8-5000
nventor& 21-5+00 12'5000
9uilding (net) '-+5000 $225000
E*uipment (net) 22<5000 17+5000
Dand 1775000 1005000
.atents 1-85+00 775000
(otal assets 4 258+$5+00 4 <$$5000
Diabilities 4 --85000 4 2'<5000
/ommon stock 8005000 $005000
3ther contributed capital 7'-5000 1-'5000
Eetained earnings +'05+00 2205000
(otal e*uities 4258+$5+00 4 <$$5000
(he full implied value of 2ensor /ompan& is to be Npushed downN and recorded in 2ensor
/ompan&As books. (he excess of the implied fair value over the book value of net assets
ac*uired is allocated as follows: (o e*uipment5 $01K to land5 201K to patents5 +01.
Required:
6. .repare the entr& on 2ensor /ompan&As books on @anuar& 25 200'5 to record the values
implied b& the <01 stock purchase b& .ress /ompan&.
9. .repare a consolidated balance sheet workpaper on @anuar& 15 200'.
3ro'le& 5-1! 3ush "o4n Accountin$
3n @anuar& 15 20025 .ush /ompan& purchased an 701 interest in the capital stock of ,a&Down
/ompan& for 47205000. 6t that time5 ,a&Down /ompan& had capital stock of 4+005000 and
retained earnings of 41005000. Differences between the fair value and the book value of
identifiable assets of ,a&Down /ompan& were as follows:
Cair Balue
n Excess of
9ook Balue
E*uipment 4 12+5000
Dand -25+00
nventor& $85+00
(he book values of all other assets and liabilities of ,a&Down /ompan& were e*ual to their fair
values on @anuar& 15 2002. (he e*uipment had a remaining life of five &ears on @anuar& 15 20025
the inventor& was sold in 2002. ,a&Down /ompan& revalued its assets on @anuar& 25 2002.
;ew values were allocated on the basis of the fair value on ,a&Down /ompan& as a whole
imputed from the transaction.
Cinancial data for 200' are presented here:
.ush ,a&Down
/ompan& /ompan&
2ales 4 150+05000 4 '005000
Dividend income '05000 0
(otal revenue 150<05000 '005000
/ost of goods sold 7+05000 1705000
Depreciation expense $+5000 +05000
3ther expenses -+5000 +05000
(otal cost and expense <+05000 2705000
;et income 4 1'05000 4 1205000
1F1 Eetained earnings 4 '705000 4 1025+00
;et income 1'05000 1205000
Dividends declared (1005000) (+05000)
12F$1 Eetained earnings 4 +205000 4 1825+00
/ash 4 705000 4 +05000
6ccounts receivable 2+05000 1805000
nventor& 2$05000 1+05000
nvestment in ,a&Down 7205000
Joodwill :0: 17+5000
Dand :0: $-25+00
.lant and e*uipment $+05000 $005000
(otal assets 4 158$05000 4152185+00
6ccounts pa&able 4 1-05000 4 1005000
;otes pa&able +05000 205000
/apital stock 150005000 +005000
Eevaluation capital '2+5000
Eetained earnings +205000 1825+00
(otal liabilities and e*uit& 4 158$05000 4152185+00
Required:
6. n general Gournal form5 prepare the entr& made b& ,a&Down /ompan& on @anuar& 25 20025
to record the effect of the pushed down values implied b& the purchase of its stock b& .ush
/ompan& assuming that values were allocated on the basis of the fair value of ,a&Down
/ompan& as a whole imputed from the transaction.
9. .repare a consolidated financial statements workpaper for the &ear ended December $15
200'.
/. ,hat effect does the decision to appl& the full push down approach have on the following
items (compared to the case where push down accounting is not used):
(1) /onsolidated net income#
(2) /onsolidated retained earnings#
($) /onsolidated net assets#
(') ;oncontrolling interest in consolidated net assets#
3ro'le& 5-15 3ush "o4n Accountin$
3n @anuar& 15 20025 .ush /ompan& purchased an 701 interest in the capital stock of Down
/ompan& for 47205000. 6t that time5 Down /ompan& had capital stock of 4+005000 and
retained earnings of 41005000. Differences between the fair value and the book value of
identifiable assets of Down /ompan& were as follows:
Cair Balue
n Excess of
9ook Balue
E*uipment 4 12+5000
Dand -25+00
nventor& $85+00
(he book values of all other assets and liabilities of Down /ompan& were e*ual to their fair
values on @anuar& 15 2002. (he e*uipment had a remaining life of five &ears on @anuar& 15 20025
the inventor& was sold in 2002. Down /ompan& revalued its assets on @anuar& 25 2002. ;ew
values were allocated on the basis of the proportional interest ac*uired b& .ush /ompan&.
Cinancial data for 200' are presented here:
.ush Down
/ompan& /ompan&
2ales 4 150+05000 4 '005000
Dividend income '05000 0
(otal revenue 150<05000 '005000
/ost of goods sold 7+05000 1705000
Depreciation expense $+5000 '+5000
3ther expenses -+5000 '<5000
(otal cost and expense <+05000 28'5000
;et income 4 1'05000 4 12-5000
1F1 Eetained earnings 4 '705000 4 1225000
;et income 1'05000 12-5000
Dividends declared (1005000) (+05000)
12F$1 Eetained earnings 4 +205000 4 1<75000
/ash 4 705000 4 +05000
6ccounts receivable 2+05000 1805000
nventor& 2$05000 1+05000
nvestment in Down /ompan& 7205000
Dand :0: $+05000
Joodwill :0: 1'75000
.lant and e*uipment $+05000 2<05000
(otal assets 4 158$05000 4151+75000
6ccounts pa&able 4 1-05000 4 1005000
;otes pa&able +05000 205000
/apital stock 150005000 +005000
Eevaluation capital $'05000
Eetained earnings +205000 1<75000
(otal liabilities and e*uit& 4 158$05000 4151+75000
Required:
6. n general Gournal form5 prepare the entr& made b& Down /ompan& on @anuar& 25 20025 to
record the effect of the pushed down values implied b& the purchase of its stock b& .ush
/ompan& assuming that values were allocated on the basis of the proportional interest
ac*uired b& .ush /ompan&.
9. .repare a consolidated financial statements workpaper for the &ear ended December $15
200'.
/. %ow would the consolidated balances in the workpaper prepared in re*uirement 9 compare
with those prepared in the consolidated statements without proportional pushdown.
3ro'le& 5-1) Eli&inatin$ Entries and Worksheets for 6arious Years
(;ote that this is the same problem as .roblem +:' and .roblem +:115 but assuming the use of
the complete e*uit& method.)
3n @anuar& 15 200$5 .orter /ompan& purchased an 701 interest in the capital stock of 2alem
/ompan& for 47+05000. 6t that time5 2alem /ompan& had capital stock of 4++05000 and retained
earnings of 4705000. .orter /ompan& uses the partial e*uit& method to record its investment in
2alem /ompan&. Differences between the fair value and the book value of the identifiable assets
of 2alem /ompan& were as follows:
Cair Balue
n Excess 3f
9ook Balue
E*uipment 41$05000
Dand -+5000
nventor& '05000
(he book values of all other assets and liabilities of 2alem /ompan& were e*ual to their fair
values on @anuar& 15 200$. (he e*uipment had a remaining life of five &ears on @anuar& 15 200$5
the inventor& was sold in 200$.
2alem /ompan&)s net income and dividends declared in 200$ and 200' were as follows:
Hear 200$ ;et ncome of 41005000K Dividends Declared of 42+5000
Hear 200' ;et ncome of 41105000K Dividends Declared of 4$+5000
Required:
6. .resent the eliminatingFadGusting entries needed on the consolidated worksheet for the &ear
ended December $15 200$. (t is not necessar& to prepare the worksheet.)
9. .resent the eliminatingFadGusting entries needed on the consolidated worksheet for the &ear
ended December $15 200'. (t is not necessar& to prepare the worksheet.)
Lse the following financial data for 200+ for re*uirements / through J.
.orter
/ompan&
2alem
/ompan&
2ales 4151005000 4'+05000
E*uit& in subsidiar& income 11+5200 :::::::
(otal revenue 1521+5200 '+05000
/ost of goods sold <005000 2005000
Depreciation expense '05000 $05000
3ther expenses -05000 +05000
(otal cost and expense 150005000 2705000
;et income 4 21+5200 41805000
1F1 Eetained earnings 4 +'-5'00 42$05000
;et income 21+5200 1805000
Dividends declared (<05000) (-05000)
12F$1 Eetained earnings 4 -815-00 4$'05000
/ash 4 805000 4 -+5000
6ccounts receivable 2-05000 1<05000
nventor& 2'05000 18+5000
nvestment in 2alem /ompan& <-$5-00
Dand ::0:: $205000
.lant and e*uipment $-05000 2705000
(otal assets 4 157<$5-00 4 150$05000
6ccounts pa&able 4 1$25000 41105000
;otes pa&able <05000 $05000
/apital stock 150005000 ++05000
Eetained earnings -815-00 $'05000
(otal liabilities and e*uit& 4 157<$5-00 4 150$05000
Required:
/. .repare a t:account calculation of the controlling and noncontrolling interests in combined
income for the &ear ended December $15 200+.
D. .repare a consolidated financial statements workpaper for the &ear ended December $15
200+.
E. .repare a consolidated statement of financial position and a consolidated income statement
for the &ear ended December $15 200+.
C. Describe the effect on the consolidated balances if 2alem /ompan& uses the DC3 cost flow
assumption in pricing its inventor& and there has been no decrease in ending inventor& *uantities
since 200$.
J. .repare an anal&tical calculation of consolidated retained earnings for the &ear ended
December $15 200+.
;ote: f &ou completed .roblem +:' and .roblem +:115 a comparison of the consolidated
balances in this problem with those &ou obtained in .roblem +:' and .roblem +:11 will
demonstrate that the method (cost or partial e*uit&) used b& the parent compan& to record its
investment in a consolidated subsidiar& has no effect on the consolidated balances.
3ro'le& 5-1* Workpaper Entries and Consolidated 7inancial -tate&ents
(;ote that this is the same problem as .roblem +:+ or .roblem +:125 but assuming the use of the
complete e*uit& method.)
3n @anuar& 15 200'5 .almer /ompan& ac*uired a <01 interest in 2tevens /ompan& at a cost of
4150005000. 6t the purchase date5 2tevens /ompan&As stockholdersA e*uit& consisted of the
following:
/ommon stock 4+005000
Eetained earnings 1<05000
6n examination of 2tevens /ompan&As assets and liabilities revealed the following at the date of
ac*uisition:
9ook Balue Cair Balue
/ash 4 <0582- 4 <0582-
6ccounts receivable 2005000 2005000
nventories 1-05000 2105000
E*uipment $005000 $<05000
6ccumulated depreciation : e*uipment (1005000) (1$05000)
Dand 1<05000 2<05000
9onds pa&able (20+5++-) (1+05000)
3ther +'57$0 +'57$0
(otal 4 -<05000 4 <++5++-
Additional %nfor&ation - "ate of Acquisition
2tevens /ompan&As e*uipment had an original life of 1+ &ears and a remaining useful life of 10
&ears. 6ll the inventor& was sold in 200'. 2tevens /ompan& purchased its bonds pa&able on the
open market on @anuar& 105 200'5 for 41+05000 and recogni=ed a gain of 4++5++-. .almer
/ompan& uses the complete e*uit& method to record its investment in 2tevens /ompan&.
Cinancial statement data for 200- are presented here:
.almer 2tevens
/ompan& /ompan&
2ales
4 -205000 4 $'05000
/ost of sales '$05000 2'05000
Jross margin 1<05000 1005000
Depreciation expense $05000 205000
3ther expenses -05000 $+5000
ncome from operations 1005000 '+5000
E*uit& in subsidiar& income $+5100 0
;et income 1$+5100 4 '+5000
1F1 Eetained earnings 4 20<5700 4 2105000
;et income 1$+5100 '+5000
$''5<00 2++5000
Dividends (1205000) ($+5000)
12F$1 Eetained earnings 4 22'5<00 4 2205000
/ash 4 2015200 4 1+15000
6ccounts receivable 2215000 18$5000
nventories 1005'00 715000
nvestment in 2tevens /ompan& <1+5700
E*uipment '+05000 $005000
6ccumulated depreciation : e*uipment ($005000) (1'05000)
Dand $-05000 2<05000
(otal assets 415<'75'00 4 7++5000
.almer 2tevens
/ompan& /ompan&
6ccounts pa&able 4 $2$5+00 4 1$+5000
9onds pa&able '005000
/ommon stock 150005000 +005000
Eetained earnings 22'5<00 2205000
(otal liabilities and e*uit& 415<'75'00 4 7++5000
Required:
6. .repare in general Gournal form the workpaper entr& to allocate and depreciate the difference
between cost and book value in the December $15 200'5 consolidated statements workpaper.
9. .repare a consolidated financial statements workpaper for the &ear ended December $15
200-.
/. .repare in good form a schedule or t:account showing the calculation of the controlling
interest in combined net income for the &ear ended December $15 200-.
f &ou completed .roblem +:+ and .roblem +:125 a comparison of the consolidated balances in
this problem with those &ou obtained in .roblem +:+ and .roblem +:12 will demonstrate that the
method (cost5 partial e*uit&5 or complete e*uit&) used b& the parent compan& to record its
investment in a consolidated subsidiar& has no effect on the consolidated balances.
3ro'le& 5-1+ %&pact on 7uture 3rofits and %n-process R8"
(he >c*uire /ompan& is considering ac*uiring 1001 of the 2osa /ompan&. (he management
of >c*uire fears that the ac*uisition price ma& be too high /ondensed financial statements for
2osa /ompan& for the current &ear are as follows:
%nco&e -tate&ent 200+
Eevenues 41005000
/ost of Joods 2old '05000
Jross >argin -05000
3perating Expenses $+5000
.retax ncome 2+5000
ncome (ax Expense 105000
;et ncome 1+5000
9alance -heet
Year ended
12:1:0*
Year Ended
12:1:0+
/ash 4'5000 4'5000
Eeceivables 105000 1'5000
nventor& $15000 285000
Cixed 6ssets (net) +05000 ++5000
(otal 6ssets 4<+5000 41005000
/urrent Diabilities 41+5000 4185000
Dong:term Diabilities 2+5000 175000
/ommon 2tock 205000 205000
Eetained Earnings $+5000 '+5000
(otal Diabilities and E*uit& 4<+5000 41005000
Hou believe that 2osa might be currentl& ac*uired at a price resulting in a price to earnings (.FE)
ratio of 7 to 12 times. 6lso5 the fair market value of 2osa)s net assets is approximatel& 410+50005
and the difference between fair value and book value is due solel& to depreciable assets with a
remaining useful life of 10 &ears. 2osa /ompan& is heavil& involved in research and
development of new baseball bats that enable the batter to hit the ball further. Hou estimate that
4$05000 of the ac*uisition price might be classified as in:process EOD and thus expensed in the
&ear of ac*uisition. 2osa)s net income is expected to grow an average of 10 percent per &ear for
the next 10 &ears and remain constant thereafter.
Required:
1. f the ac*uisition occurs on @anuar& 15 200<5 determine the amount of income from 2osa
/ompan& that would be included in combined income assuming the following .FE ratios are
used to determine the ac*uisition price5 based on earnings for the &ear 200+.
a. .FE ratio P 10
b. .FE ratio P 12
2. f the C629 changes the current rules and re*uires that in:process EOD be capitali=ed and
amorti=ed over 20 &ears5 how would this change &our answer to part 1#
3ro'le& 5-1/ "eferred #ax Effects

3n @anuar& 15 200+5 .ruitt /ompan& .ruitt /ompan& issued 2+5+00 shares of its common stock
in exchange for 7+1 of the outstanding common stock of 2hah /ompan&. .ruittAs common stock
had a fair value of 427 per share at that time. .ruitt /ompan& uses the cost method to account for
its investment in 2hah /ompan& and files a consolidated income tax return. 6 schedule of the
2hah /ompan& assets ac*uired and liabilities assumed at book values (which are e*ual to their
tax bases) and fair values follows.
9ook BalueF
%te& (ax 9asis Cair Balue Excess
Eeceivables (net) 412+5000 4 12+5000 4::0::
nventor& 1-85000 1<+5000 275000
Dand 7-5+00 1205000 $$5+00
.lant assets (net) '-85000 +-85000 1005000
.atents <+5000 2005000 10+5000
(otal 4<'05+00 4152085000 42--5+00
/urrent liabilities 4 7<5+00 4 7<5+00 4::0::
9onds pa&able $005000 $-05000 -05000
/ommon stock 1205000
3ther contributed capital 1-'5000
Eetained earnings 2-85000
(otal 4<'05000
Additional %nfor&ation:
1. .ruittAs income tax rate is $+1.
2. 2hahAs beginning inventor& was all sold during 200+.
$. Lseful lives for depreciation and amorti=ation purposes are:
.lant assets 10 &ears
.atents 7 &ears
9ond premium 10 &ears
'. .ruitt uses the straight:line method for all depreciation and amorti=ation purposes.
Required:
6. .repare the stock ac*uisition entr& on .ruitt /ompan&As books.
9. 6ssuming 2hah /ompan& earned 421-5000 and declared a 4<05000 dividend during 200+5
prepare the eliminating entries for a consolidated statements workpaper on December $15 200+.
/. 6ssuming 2hah /ompan& earned 42'05000 and declared a 41005000 dividend during 200-5
prepare the eliminating entries for a consolidated statements workpaper on December $15 200-.