Professional Documents
Culture Documents
Investment on January 1
dr. Investment.....................................................................................................................................................................
600,000
cr. Cash...........................................................................................................................................................................
600,000
dr. Cash..............................................................................................................................................................................
40,000*
cr. Investment..................................................................................................................................................................
40,000
* ($100,000 x .4)
On December 31, the investment in Company P would be reported as $680,000 ($600,000 + $120,000 $40,000).
1
Anthony/Hawkins/Merchant
Problem 12-2
Company P should use the cost method to account for its investment in Company S. Company P own less
than 20 percent of Company S.
Original Investment
dr. Investment..................................................................................................................................................................................
1,000,000
cr. Cash........................................................................................................................................................................................
1,000,000
Problem 12-3
Year 1
(1) dr. Investment.......................................................................................................................................................................
700,000
cr. Cash.............................................................................................................................................................................
700,000
(2)
dr. Investment.......................................................................................................................................................................
24,500*
cr. Equity Income..............................................................................................................................................................
24,500
* ($70,000 x .35)
(3)
dr. Cash.................................................................................................................................................................................
21,000*
cr. Investment...................................................................................................................................................................
21,000
*($60,000 x .35)
Year 2
(1) dr. Investment.......................................................................................................................................................................
75,000
cr. Cash.............................................................................................................................................................................
75,000
(2)
No entry.
(3)
dr. Investment.......................................................................................................................................................................
60,000
cr. Equity Income............................................................................................................................................................
60,000
(150,000 x .4)
(4)
dr. Cash.................................................................................................................................................................................
40,000
cr. Investment...................................................................................................................................................................
40,000
Problem 12-4
Goodwill Calculation
Ba Be
Current assets..................................................................................................................................................................................
$150,000 (Appraised value)
Net fixed assets...............................................................................................................................................................................
555,600 (Appraised value)
Other assets.....................................................................................................................................................................................
134,400 (Appraised value)
Total Assets...............................................................................................................................................................................
840,000
Liabilities........................................................................................................................................................................................
192,000
Net Assets.................................................................................................................................................................................
648,000
Purchase price.................................................................................................................................................................................
870,000
Goodwill.........................................................................................................................................................................................
$222,000
2
2007 McGraw-Hill/Irwin
Chapter 12
Current liabilities................................................................................................................................................................
$ 3,600,000
$ 42,000
$ 3,642,000
Long-term debt...................................................................................................................................................................
15,582,000
150,000
15,732,000
Common stock...................................................................................................................................................................
24,000,000
--24,000,000
Paid-in capital....................................................................................................................................................................
5,418,000
--5,418,000
Retained earnings...............................................................................................................................................................
600,000
--600,000
Total liabilities and equity............................................................................................................................................
$49,392,000
Problem 12-5
(1)
(2)
(3)
(4) An entry to eliminate Pebbles investment in Sandvel is necessary, although the problem does not
provide the equity amounts for Sandvel. The entry would be structured as follows:
Pooling of Interests
Company
Company
Pooling of
A
B
Interests
Current assets..........................................................................................................................................................
$ 500,000
$150,000
$ 650,000
Fixed assets.............................................................................................................................................................
700,000
250,000
950,000
Totals.................................................................................................................................................................
$1,200,000
$400,000
$1,600,000
Current liabilities....................................................................................................................................................
$ 250,000
$ 75,000
$ 325,000
Long-term liabilities...............................................................................................................................................
175,000
50,000
225,000
Capital stock, $20 per.............................................................................................................................................
400,000
--660,000*
Capital stock, $10, per............................................................................................................................................
--170,000
--Additional paid-in capital.......................................................................................................................................
175,000
60,000
145,000+
Retained earnings....................................................................................................................................................
200,000
45,000
245,000
Totals.................................................................................................................................................................
$1,200,000
$400,000
$1,600,000
* $400,000 + ($650,000 / $50) x $20)
+ Plug figure (= $175,000 + $60,000 + $170,000 - $260,000)
3
Anthony/Hawkins/Merchant
Purchase Accounting
Company B
(Market
Company A
Value)
Purchase
Current assets.......................................................................................................................................................................
$ 500,000
$175,000
$ 575,000*
Fixed assets..........................................................................................................................................................................
700,000
325,000
1,025,000
Goodwill..............................................................................................................................................................................
----275,000+
Totals..............................................................................................................................................................................
$1,200,000
$500,000
$1,875,000
Current liabilities.................................................................................................................................................................
$ 250,000
$ 75,000
$ 325,000
Long-term liabilities............................................................................................................................................................
175,000
50,000
775,000^
Capital stock, $20 per..........................................................................................................................................................
400,000
--400,000
Capital stock, $10 per..........................................................................................................................................................
------Additional paid-in capital....................................................................................................................................................
175,000
--175,000
Retained earnings................................................................................................................................................................
200,000
--200,000
Totals..............................................................................................................................................................................
$1,200,000
$125,000
$1,875,000
* ($500,000 - $100,000) + $175,000
+ Plug ($650,000 ($500,000 - $125,000)
^ ($175,000 + $550,000) + $50,000
Cases
Case 12-1: Hardin Tool Company
This teaching note was prepared by James S. Reece. Copyright James S. Reece.
2007 McGraw-Hill/Irwin
Chapter 12
Retained earnings...............................................................................................................................................................
653
346
Total liabilities and equity.............................................................................................................................................
$1,680
$2,039
1
Difference between Hardins appraisal value ($600,000) and book value ($441,000) is attributable to fixed assets; hence Pratts
fixed assets are shown at $312,000 + $159,000 = $471,000 with purchase accounting, giving consolidated fixed assets of
$690,000 (Hardin) + $471,000 (Pratt) = $1,161,000.
2
Excess of purchase price (100,000 * $8 = $800,000) over fair value of net assets of Hardin ($600,000).
3
Plug figure. Students should note that with pooling treatment, owners equity equals $1,105,000, which is the sum of the
preacquisition owners equities of the two firms ($100,000 + $218,000 + $346,000 for Hardin + $40,000 + $94,000 + $307,000
for Pratt = $1,105,000). With purchase treatment consolidated owners equity reflects both the $159,000 write-up of Pratts fixed
assets and the $200,000 goodwill (excess of purchase pace over fair value of acquired net assets). With purchase accounting, the
substance of the transaction is that Hardin issued 100,000 shares for cash (cr. Cash, $800,000; cr. Stock at par, $100,000; cr.
Additional paid-in capital, $700,000); then the $800,000 cash was used to acquire $917,000 of assets ($558,000 book value +
$159,000 write-up + $200,000 goodwill) and Hardin assumed $117,000 of liabilities. The $918,000 consolidated additional
paid-in capital is thus this new $700,000 plus the $218,000 already on Hardins balance sheet.
In addition, the instructor may wish to discuss determination of Pratts purchase price and the appraisal
value of its net (particularly fixed) assets. Is the investment banker the best judge of the worth of 100,000
new shares of Hardins stock? Why not use a market price? If a market price is used, should it be the price
as of the date of the handshake agreement, the signing of a formal agreement, or the effective date of
the agreement; or should it be some sort of average market price? How can an appraiser judge fair
value of Pratts fixed assets? If an appraiser is not the best judge, then who is? Should several
independent appraisals be made? (Anyone who has had a house appraised knows the appraisals will
differ.) Of course, there are no clear answers to these questions, and the student should recognize these
gray matters that underlie the straightforward application of accounting techniques.
Question 2
Pooling Treatment
Sales.......................................................................................................................................................................
$3,600
Expenses................................................................................................................................................................
2,740
Income...................................................................................................................................................................
860
Income tax expense................................................................................................................................................
301
Net income.............................................................................................................................................................
$ 559
Anthony/Hawkins/Merchant
Question 3
This question turns the case into an introductory finance case, with the opportunity to discuss financial
leverage. Both of these new alternatives would have to be accounted for as a purchase. Assuming the
common stock is still valued at $8 per share, the income statements would be as follows:
Preferred
Stock
Debentures
Unadjusted income..........................................................................................................................................................................
$860
$860
Additional depreciation...................................................................................................................................................................
16
16
Additional interest...........................................................................................................................................................................
--40
Taxable income...............................................................................................................................................................................
844
804
Income tax expense.........................................................................................................................................................................
295
281
Net income......................................................................................................................................................................................
549
523
Preferred dividend...........................................................................................................................................................................
40
--Income available to common..........................................................................................................................................................
$509
$523
Debt/Equity
ROE (common)
Pooling, stock exchange:.......................................................................................................................................................
$205/$1,105 = 18.6%
$559/$1,105 = 50.6%
Purchase, stock exchange:.....................................................................................................................................................
$205/$1,464 = 14.0%
$549/$1,464 = 37.5%
Purchase, with preferred........................................................................................................................................................
$205/$1,464 = 14.0%
$509/$1,064 = 47.8%
Purchase, with debentures:....................................................................................................................................................
$605/$1,064 = 56.9%
$523/$1,064 = 49.2%
This teaching note was prepared by Robert N. Anthony. Copyright Robert N. Anthony.
2007 McGraw-Hill/Irwin
Chapter 12
At time of acquisition................................................................................................................................
$35,700
25 percent of $17,000 increase to retained earnings..................................................................................
4,250
$39,950
2. The entire $37,400 listed as other income constitutes income to the consolidated entity, so the
$30,600 erroneously subtracted from it should be added back. This increases net income and
retained earnings by $30,600. However, the assumed dividend was also subtracted erroneously
from retained earnings, so this adjustment must be reversed, leaving no net effect on consolidated
retained earnings.
Since Diroff has not paid the dividend, it must appear as one of its current liabilities. The
$22,950(75 percent) owed to Carter must be eliminated as an intercompany transaction, by
decreasing current liabilities and increasing retained earnings.
EXHIBIT A
Consolidation Worksheet
Separate
Statements
Carter
Diroff
Adjustments
Balance Sheets
Dr.
Cr.
Consolidated
Assets
Cash...................................................................................................................................................................................
57,800
20,400
78,200
Accounts receivable...........................................................................................................................................................
110,500
35,700
5,100
141,100
Inventory............................................................................................................................................................................
120,700
54,400
175,100
Investment in subsidiary.....................................................................................................................................................
142,800
--142,800
--Plant (net)...........................................................................................................................................................................
477,700
134,300
612,000
Loans receivable................................................................................................................................................................
--32,300
32,300
--Total..............................................................................................................................................................................
909,500
277,100
1,006,400
Liabilities and Equity
Current liabilities................................................................................................................................................................
88,400
62,900
5,100
146,200
Noncurrent liabilities..........................................................................................................................................................
170,000
54,400
32,300
192,100
Capital stock.......................................................................................................................................................................
255,000
102,000
102,000
255,000
Retained earnings...............................................................................................................................................................
396,100
57,800
40,800
______
413,100
Total..............................................................................................................................................................................
909,500
277,100
180,200
180,800
1,006,400
Income Statement Data
7
Anthony/Hawkins/Merchant
Sales................................................................................................................................................................................................
1,040,400
408,000
34,000
1,414,400
Cost of sales....................................................................................................................................................................................
816,000
299,200
34,000
1,081,200
Expenses.........................................................................................................................................................................................
234,600
61,200
295,800
Other income...................................................................................................................................................................................
37,400
--30,600
6,800
Dividends........................................................................................................................................................................................
--30,600
30,600
0
As Revised
Current Assets:
Cash.............................................................................................................................................................................................
$ 78,200
$ 78,200
Accounts receivable.....................................................................................................................................................................
141,100
141,100
Inventory......................................................................................................................................................................................
175,100
175,100
Total current assets
394,400
394,400
Plant (net)........................................................................................................................................................................................
612,000
612,000
Goodwill.........................................................................................................................................................................................
_________
35,700
Total assets................................................................................................................................................................................
$1,006,400
$1,042,100
2007 McGraw-Hill/Irwin
Chapter 12
Income Statement
For the year ended December 31, 20x1
Sales...................................................................................................................................................................................
$1,414,400
$1,414,400
Cost of sales.......................................................................................................................................................................
1,081,200
1,081,200
Gross margin................................................................................................................................................................
333,200
333,200
Expenses............................................................................................................................................................................
(295,800)
(295,800)
Other income......................................................................................................................................................................
6,800
37,400
Net income...................................................................................................................................................................
$ 44,200
$ 74,800
1