CHAPTER 3

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Answers to Questions
1

A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a
controlling financial interest (generally over 50 percent) of its outstanding voting stock.

Amounts assigned to identifiable assets and liabilities in excess of recorded amounts on the books of the
subsidiary are not recorded separately by the parent. Instead, the parent records the fair value/purchase
price of the interest acquired in an investment account. The assignment to identifiable asset and liability
accounts is made through working paper entries when the parent and subsidiary financial statements are
consolidated.

The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the
purchase price of the subsidiary is greater than the book value of the subsidiarys net assets. If the parent
had acquired an 80 percent interest and the implied fair value of the subsidiary was greater than the book
value of the subsidiarys net assets, the land would still appear in the consolidated balance sheet at
$100,000. Under GAAP, the noncontrolling interest is also reported based on fair values at the acquisition
date.

Parent and subsidiaries should maintain separate accounting record because legally they are separate
entities. However, in parent-subsidiary relationship, the parent has a control over the subsidiary. Thus
there is only one economic entity because all resources are under control of a single management, which is
the management of parent. Therefore, the separate accounting record should be consolidated for reporting
purposes.

A noncontrolling interest is the equity interest in a subsidiary that is owned by stockholders outside of the
affiliation structure. In other words, it is the equity interest in a subsidiary (recorded at fair value) that is
not held by the parent or subsidiaries of the parent.

Under GAAP, a subsidiary will not be consolidated if control does not rest with the majority owner, such
as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under severe
foreign exchange restrictions or other governmentally imposed uncertainties. Other conditions for not
consolidating a subsidiary are: (1) formation of joint ventures, (2) the acquisition of an asset or group of
assets that does not constitute a business, (3) combination between entities under common control and (4)
combination between not-for-profit entities or the acquisition of a for-profit business by a not-for-profit
entity.

Cash is not the only permissible options to finance the acquisition. Investor may also sell shares of
authorized but previously unissued common stock, issue preferred shares, sell debt securities (bonds), or
combine these possible options.

The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of
the outstanding capital stock of the parent.

All elimination entries are not recorded in a ledger because the purpose of the entries is to help the
process of consolidating the parent and subsidiary financial statement. These entries are fictitious and do
not need to be journalized or posted in either parent accounting records or subsidiary accounting records.

10

The parents investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is
consolidated. It would appear in the parents separate balance sheet under the heading investments or
other assets. Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as
investments or other assets. They are accounted for under the equity method if the parent can exercise
significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost method.
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3-2

An Introduction to Consolidated Financial Statements

11

Parents books:
Investment in subsidiary
Sales
Accounts receivable
Interest income
Dividends receivable
Advance to subsidiary

Reciprocal accounts on subsidiarys books:

Capital stock and retained earnings
Cost of Goods Sold
Accounts payable
Interest expense
Dividends payable
Advance from parent

12

Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order
to show the financial position and results of operations of the total economic entity that is under the
control of a single management team. Sales by a parent to a subsidiary are internal transactions from the
viewpoint of the economic entity and the same is true of interest income and interest expense and rent
income and rent expense arising from intercompany transactions. Similarly, receivables from and payables
to affiliates do not represent assets and liabilities of the economic entity for which consolidated financial
statements are prepared.

13

The stockholders equity of a parent under the equity method is the same as the consolidated stockholders
equity of a parent and its subsidiaries except for the noncontrolling interest.

14

No. The amounts that appear in the parents statement of retained earnings under the equity method and
the amounts that appear in the consolidated statement of retained earnings are identical, assuming that the
noncontrolling interest is included as a separate component of stockholders equity.

15

Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total
income to the consolidated entity between controlling and noncontrolling stockholders. From the
viewpoint of the controlling interest (the stockholders of the parent), income attributable to noncontrolling
interest has the same effect on consolidated net income as an expense. This is because consolidated net
income is income to all stockholders. Alternatively, you can view total consolidated net income as being
allocated to the controlling and noncontrolling interests.

16

The computation of noncontrolling interest is comparable to the computation of retained earnings. It is

computed:
Noncontrolling interest beginning of the period
Add: Income attributable to noncontrolling
interest
Deduct: Noncontrolling interest dividends
Deduct: Noncontrolling interest of amortization of
excess of fair value over book value
Add: Noncontrolling interest of amortization of
excess of book value over fair value
Noncontrolling interest end of the period

XX
XX
(XX)
(XX)
XX
XX

17

It is acceptable to consolidate the annual financial statements of a parent and a subsidiary with different
fiscal periods, provided that the dates of closing are not more than three months apart. Any significant
developments that occur in the intervening three-month period should be disclosed in notes to the
financial statements. In the situation described, it is acceptable to consolidate the financial statements of
the subsidiary with an October 31 closing date with the financial statements of the parent with a
December 31 closing date.

18

The acquisition of shares from noncontrolling stockholders is not a business combination. It must be
accounted for as a treasury stock transaction if the acquirer is the controlling interest. It is not possible, by
definition, to acquire a controlling interest from noncontrolling stockholders.

SOLUTIONS TO EXERCISES
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Chapter 3

3-3

Solution E3-1

Solution E3-2

1
2
3
4
5

1
2
3
4
5
6
7

b
c
d
d
a

d
b
d
d
a
b
c

Solution E3-3 [AICPA adapted]

1

Advance to Hill $75,000 + receivable from Ward $200,000 = $275,000

Zero, goodwill has an indeterminate life and is not amortized.

a
Pow accounts for Sap using the equity method, therefore,
consolidated retained earnings is equal to Pows retained earnings, or
$2,480,000.

d
On the consolidated balance sheet, intercompany receivables should
be zero.

Solution E3-4 (in thousands)

1

Implied fair value of San ($3,600 / 90%)

Less: Book value of San
Excess fair value over book value
Equipment undervalued
Goodwill at January 1, 2011
Goodwill at December 31, 2011 = Goodwill from consolidation
Since goodwill is not amortized

Consolidated net income

Pins reported net income
Less: Correction to income from San for
depreciation on excess allocated
to equipment [($120,000/3 years)x 90%]
Controlling share of consolidated net income
Noncontrolling share of consolidated net income:
($400,000 - $40,000 depreciation) x 10%
Controlling share of consolidated net income
Consolidated net income

$4,000
(3,600)
$ 400
120
$ 280
$ 280

$1,960
(36)
$1,924
$36
1,924
$1,960

Solution E3-5 (in thousands)

1.

Implied fair value of Matt Inc.

($1,400,000 / 70%)
Less: book value of Matt Inc.
Goodwill
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$2,000,000
$1,500,000
$500,000

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An Introduction to Consolidated Financial Statements

2. Noncontrolling interest at January 1

($2,000,000 x 30%)
Add: noncontrolling interest share ($600,000 x 30%)
Less: Dividends declared ($300,000 x 30%)
Noncontrolling interest at December 31
Check:
Investment in Matt Inc. at January 1
Add: controlling interest share ($600,000 x 70%)
Less: dividends declared ($300,000 x 70%)
Investment in Matt Inc. at December 31

$600,000
$180,000
$90,000
$690,000
$1,400,000
$420,000
$210,000
$1,610,000

Noncontrolling interest at December 31

($1,610,000 x 30% / 70%)

$690,000

Solution E3-6 (in thousands)

1.Cost of acquiring Patricia NVs stocks [$45 x 10,000]
Implied fair value [$40,000 + $20,000 + $80,000 +
$280,000 -$40,000]
Goodwill
2.Journal entries to record push-down value:
Inventories (+A)
Plant assets (+A)
Accounts payable (-L)
Goodwill (+A)
Retained earnings (-SE)
Accounts receivable (-A)
Push-down capital (+SE)

$450,000
$380,000
$

70,000

30
50
10
70
200
10
350

Push-down capital in the balance sheet of Patricia NV is $350,000

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Chapter 3

3-5

Solution E3-7
1. Sooseck Co Ltd net income
Percentage of ownership
Income allocated to controlling interest

$240,000
80%
$192,000

2. Controlling share of net income is equal to parents net income.

Yum Co Ltd separate net income
Income from Sooseck Co Ltd
Controlling share of net income

$350,000
$192,000
$542,000

Solution E3-8 (in thousands)

1

Capital stock
The capital stock appearing in the consolidated balance sheet at
December 31, 2011 is $7,200, the capital stock of Pob,the parent
company.

Goodwill at December 31, 2011

Investment cost at January 2, 2011 (80% interest)
Implied total fair value of Sof ($2,800 / 80%)
Book value of Sof(100%)
Excess is considered goodwill since no other fair value
information is given.

$1,100

Consolidated retained earnings at December 31, 2011

Pobs retained earnings January 2 (equal to
beginning consolidated retained earnings
Add: Net income of Pob (equal to controlling share of
consolidated net income)
Less: Dividends declared by Pob
Consolidated retained earnings December 31

$2,800
$3,500
(2,400)

$3,200
1,200
(720)
$3,680

Noncontrolling interest at December 31, 2011

Capital stock and retained earnings of Sof on
January 2
Add: Sofs net income
Less: Dividends declared by Sof
Sofs stockholders equity December 31
Noncontrolling interest percentage
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$2,400
360
(200)
2,560
20%

3-6

An Introduction to Consolidated Financial Statements

Noncontrolling interest at book value

Add: 20% Goodwill
Noncontrolling interest December 31
5

$ 512
220
$ 732

Dividends payable at December 31, 2011

Dividends payable to stockholders of Pob
Dividends payable to noncontrolling stockholders ($100
20%)
Dividends payable to stockholders outside the
Consolidated entity

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$ 360
20
$ 380

Chapter 3

3-7

Solution E3-9 (in thousands)

Pas Corporation and Subsidiary
Partial Balance Sheet
at December 31, 2011
Stockholders equity:
Capital stock, $10 par
Additional paid-in capital
Retained earnings
Equity of controlling stockholders
Noncontrolling interest
Total stockholders equity

$1,200
200
260
1,660
164
$1,824

Supporting computations
Computation of consolidated retained earnings:
Pass December 31, 2010 retained earnings
Add: Pass reported income for 2011
Less: Pass dividends
Consolidated retained earnings December 31, 2011

$ 140
220
(100)
$ 260

Computation of noncontrolling interest at December 31, 2011

Sals December 31, 2010 stockholders equity
Income less dividends for 2011 ($80 - $60)
Sals December 31, 2011 stockholders equity
Noncontrolling interest percentage
Noncontrolling interest December 31, 2011

$800
20
820
20%
$164

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3-8

An Introduction to Consolidated Financial Statements

Solution E3-10
Pek Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2013
(in thousands)
Sales
Cost of goods sold
Gross profit
Deduct: Operating expenses
Consolidated net income
Deduct: Noncontrolling interest share
Controlling interest share

$8,400
4,400
4,000
2,220
1,780
58
$1,722

Supporting computations
Investment cost January 1, 2011 (90% interest)
Implied total fair value of Slo ($3,240 / 90%)
Slos Book value acquired (100%)
Excess of fair value over book value
Excess allocated to:
Inventories (sold in 2011)
Equipment (4 years remaining useful life)
Goodwill
Excess of fair value over book value
Operating expenses:
Combined operating expenses of Pek and Slo
Add: Depreciation on excess allocated to equipment
($80/4 years)
Consolidated operating expenses

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$ 3,240
$ 3,600
(2,800)
$
800
$
$

120
80
600
800

$2,200
20
$2,220

Chapter 3

3-9

SOLUTIONS TO PROBLEMS
Solution P3-1
1

Pen Corporation and Subsidiary

Consolidated Balance Sheet
at December 31, 2011
(in thousands)
Assets
Cash ($128 + $72)
Accounts receivable ($180 + $136 - $20)
Inventories ($572 + $224)
Equipment net ($1,520 + $700)
Total assets
Liabilities and Stockholders Equity
Liabilities:
Accounts payable ($160 + $132 - $20)
Stockholders equity:
Common stock, $10 par
Retained earnings
Noncontrolling interest ($600 + $400) 20%
Total liabilities and stockholders equity

200
296
796
2,220
$3,512

272

1,840
1,200
200
$3,512

Consolidated net income for 2012

Pens separate income
Add: Income from Sut (80% x $360,000)
Controlling interest share
Add: Noncontrolling interest share (20% x $360,000)
Consolidated net income

Pens separate income

Add: Suts net income
Consolidated net income
Less: Noncontrolling interest share (20% x $360,000)
Controlling share of consolidated net income

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680
288
968
72
$1,040
680
360
1,040
72
$ 968

3-10

An Introduction to Consolidated Financial Statements

Solution P3-2 (in thousands)

1

Schedule to allocate fair value/book value differential

Cost of investment in Set
Implied fair value of Set ($700 / 70%)
Book value of Set
Excess fair value over book value
Excess allocated:
Fair Value
Book Value
Inventories
($200
$120)
Land
($240
$200)
($360
$280)
Buildings net
($120
$160)
Equipment net
Other liabilities
($160
$200)
Allocated to identifiable net assets
Goodwill for the remainder
Excess fair value over book value

$ 700
$1,000
(440)
$ 560
Allocation
$ 80
40
80
(40)
40
200
360
$560

Par Corporation and Subsidiary

Consolidated Balance Sheet
at January 1, 2011
Assets
Current assets:
Cash ($140 + $80)
Receivables net ($320 + $120)
Inventories ($280 + $120 + $80)
Property, plant and equipment:
Land ($400 + $200 + $40)
Buildings net ($440 + $280 + $80)
Equipment net ($320 + $160 - $40)
Goodwill (from consolidation)
Total assets
Liabilities and Stockholders Equity
Liabilities:
Accounts payable ($360 + $320)
Other liabilities ($40 + $200 - $40)
Stockholders equity:
Capital stock
Retained earnings
Equity of controlling stockholders
Noncontrolling interest *
Total liabilities and stockholders equity

* 30% of implied fair value of $1,000 = $300.

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$220
440
480
$640
800
440

680
200

$2,000
200
2,200
300

$1,140

1,880
360
$3,380

880

2,500
$3,380

Chapter 3

3-11

Solution P3-3 (in thousands)

Schedule to allocate excess of investment fair value over book value:
TOBIAS AG AND ITS 90%-OWNED SUBSIDIARY
MARK AG (IN THOUSANDS)
Fair value (purchase price) of 90% interest
acquired
Implied fair value of sad ($8,100 /
90%)
Book value of Mark AG net assets
Excess of fair value over book value
acquired

Inventories
Land
Buildings-net
Equipment-net
Notes payable
Bonds payable
Patents

$ 8,100
$ 9,000
$ 7,200
$ 1,800

Fair
Book
Value
Value
$ 2,000
$ 1,600
$ 4,000
$ 3,000
$ 2,500
$ 2,800
$ 4,000
$ 3,900
$ 2,000
$ 1,800
$ 2,000
$ 2,400
$ 100
$ 0
Total assigned to
identifiable net assets

Excess
Allocated
$ 400
$ 1,000
-$ 300
$ 100
-$ 200
$ 400
$ 100
$ 1,500

Remainder assigned to goodwill

Total excess of cost over book value
acquired

$ 300
$ 1,800

Solution P3-4 (in thousands)

Noncontrolling interest of $260 (fair value) plus $1,040 (fair value of Pams
investment) equals total fair value of $1,300. Therefore, Pams interest is
80% ($1,040 / $1,300), and noncontrolling interest is 20% ($260 / $1,300).
Total fair value
Book value of Sap
Excess fair value over book value

$1,300
(1,040)
$ 260

Excess allocated to
Plant assets net
Goodwill
Total

Fair Value
$840

Book Value
$800
$
$

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40
220
260

3-12

An Introduction to Consolidated Financial Statements

Solution P3-5
Pal Corporation and Subsidiary
Consolidated Balance Sheet
at December 31, 2011
(in thousands)
Assets
Current assets
Plant assets
Goodwill

$1,360
3,320
800
$5,480

Equities
Liabilities
Capital stock
Retained earnings

$2,640
1,200
1,640
$5,480

Supporting computations
Sors net income ($1,600 - $1,200 - $200)
Less: Excess allocated to inventories that were sold in 2011
Less: Depreciation on excess allocated to plant
assets ($160 /4 years)
Income from Sor

200
(80)
(40)
80

Plant assets ($2,000 + $1,200 + $160 - $40)

$3,320

Pals retained earnings:

Beginning retained earnings
Add: Operating income
Add: Income from Sor
Deduct: Dividends
Retained earnings December 31, 2011

$1,360
400
80
(200)
$1,640

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Chapter 3

3-13

Solution P3-6
1. Preliminary computations:
Fair value (purchase price) of 80% interest acquired
Implied fair value of David PLC [$2,080,000 / 80%]
David PLC stockholders equity on January 1
[$1,000,000 + $1,800,000 + $200,000 - $500,000]
Excess allocated to goodwill

$2,080,000
$2,600,000
$2,500,000
$

HARRISON PLC AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET WORKPAPERS
DECEMBER 31, 2014 (IN THOUSANDS)
Adjustments
and
Eliminations
Harrison
80 %David
Credit
PLC
PLC
Debits s
Assets
Cash
Accounts receivable
Dividends receivable
Equipment-net
Building-net
Land
Investment in David
PLC
Goodwill

$ 300
$ 400
$ 160
$ 1,000
$ 2,000
$ 1,600

$ 80
$ 200

c 100
b 160

$ 800
$ 1,000
$ 1,400

100,000

Consolidate
d Balance
Sheet
$ 380
$ 500
$ 1,800
$ 3,000
$ 3,000

$ 2,320

a 2320
a 100

Total assets

$ 7,780

$ 3,480

Liabilities and
Equity
Accounts payable
Dividends payable
Notes payable
Capital stock
Retained earnings

$ 500
$ 100
$ 1,000
$ 2,000
$ 4,180

$ 80
$ 200
$ 400
$ 1,000
$ 1,800

$ 100
$ 8,780

c 100
b 160
a 1000
a 1800

$ 480
$ 140
$ 1,400
$ 2,000
$ 4,180

$ 7,780
$ 3,480
Noncontrolling
interest
a 580
$ 580
Total liabilities and
stockholders' equity
$ 8,780
a. To eliminate reciprocal subsidiary investment and equity balances,
establish noncontrolling interest, and enter goodwill
b.To eliminate reciprocal dividends receivable and dividends payable
accounts.
c.To eliminate reciprocal accountss receivable and accountss payable
accounts.
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3-14

An Introduction to Consolidated Financial Statements

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Chapter 3

3-15

Solution P3-7 (in thousands)

Preliminary computations
Cost of 80% investment January 3, 2011
Implied total fair value of Sle ($1,120 / 80%)
Book value of Sle
Excess fair value over book value on January 3 = Goodwill
1
2

$1,120
$1,400
(1,000)
$ 400

Noncontrolling interest share of income:

Sles net income $200 20% noncontrolling interest

$ 40

Current assets:
Combined current assets ($816 + $300)
Less: Dividends receivable ($40 80%)
Current assets

$1,116
(32)
$1,084

Income from Sle: None Investment income is eliminated in consolidation.

Capital stock: $2,000 Capital stock of the parent, Por Corporation.

Investment in Sle: None The investment account is eliminated.

Excess of fair value over book value

$400

Controlling share of consolidated net income: Equals Pors

net income, or:
Consolidated sales
Less: Consolidated cost of goods sold
Less: Consolidated expenses
Consolidated net income
Less: Noncontrolling interest share
Controlling share

$ 2,400
(1,480)
(320)
$
600
(40)
$
560

Consolidated retained earnings December 31, 2011: $808 Equals Pors

beginning retained earnings.

Consolidated retained earnings December 31, 2012

Equal to Pors ending retained earnings:
Beginning retained earnings
Add: Controlling share of consolidated net income
Less: Pors dividends for 2012
Ending retained earnings

10

Noncontrolling interest December 31, 2012

Sles capital stock and retained earnings
Add: Net income
Less: Dividends
Sles equity December 31, 2012 at fair value
Noncontrolling interest percentage
Noncontrolling interest December 31, 2012 using book value
Add: Noncontrolling interest share of Goodwill
Noncontrolling interest December 31, 2012 at fair value

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808
560
(240)
$1,128
$1,200
200
(100)
1,300
20%
$ 260
80
$ 340

3-16

An Introduction to Consolidated Financial Statements

Solution P3-8 [AICPA adapted]

Preliminary computations
Investment cost:
Saw (2,000 shares 80%) $280

Saw

Sun

448,000

Sun (6,000 shares 70%) $160

672,000

Implied total fair values:

Saw ($448,000 / 80%)
560,000
Sun ($672,000/ 70%)

960,000

Book value of stockholders equity

Saw
Sun
Excess fair value over book value at acquisition
(Goodwill)
1

280,000
480,000
280,000

480,000

a. Journal entries to account for investments

January 1, 2011 Acquisition of investments
Investment in Saw (80%)
Cash
To record acquisition of 1,600 shares of
Saw common stock at $280 per share.
Investment in Sun (70%)
Cash

448,000
448,000
672,000

672,000
To record acquisition of 4,200 shares of
Sun common stock at $160 per share.
b. During 2011 Dividends from subsidiaries
Cash
51,200
Investment in Saw (80%)
51,200
To record dividends received from Saw ($64,000 80%).
Cash
25,200
Investment in Sun (70%)
25,200
To record dividends received from Sun ($36,000 70%).
c. December 31, 2011 Share of income or loss
Investment in Saw (80%)
115,200
Income from Saw
115,200
To record investment income from Saw ($144,000 80%).
Loss from Sun
33,600
Investment in Sun (70%)
33,600
To record investment loss from Sun ($48,000 70%).

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Chapter 3

3-17

Solution P3-8 (continued)

2

Noncontrolling interest December 31, 2011 *

Saw
$200,000

Common stock
Capital in excess of par
Retained earnings
Equity December 31
Noncontrolling interest percentage
Noncontrolling interest December 31
Plus: Goodwill x 20%
$280,000 x 20%
$480,000 x 30%
Noncontrolling interest, December 31

160,000
360,000
20%
$ 72,000

Sun
$240,000
80,000
76,000
396,000
30%
$118,800

56,000
$128,000

144,000
$262,800

* Fair value equals book value.

3

Consolidated retained earnings December 31, 2011

Consolidated retained earnings is reported at $1,218,400, equal to the
retained earnings of Pod Corporation, the parent, at December 31, 2011.

Investment balance December 31, 2011:

Investment cost January 1

Saw
$448,000

Sun
$672,000

Add (deduct): Income (loss)

Deduct: Dividends received
Investment balances December 31

115,200
(51,200)
$512,000

(33,600)
(25,200)
$613,200

Check: Investment balances should be equal to the underlying book value

plus goodwill
Saw ($360,000 80%) + ($280,000 x 80%) = $512,000
Sun ($396,000 70%) + ($480,000 x 70%) = $613,200
After consolidation, the Investment balances are $0.

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3-18

An Introduction to Consolidated Financial Statements

Solution P3-9
Preliminary computations (in thousands)
Cost of 90% investment January 1, 2011
Implied total fair value of Son ($14,400 / 90%)
Book value of Son
Excess fair value over book value on January 1
Allocation to equipment
Remainder is Goodwill
Additional annual depreciation on equipment ($3,200 / 8 years)

$14,400
$16,000
(10,800)
$ 5,200
$ 3,200
$ 2,000
$
400

Pan Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2011
(in thousands)

Cash
Receivables net
Dividends receivable
Inventory
Land
Buildings net
Equipment net
Investment in Son
Goodwill
Total assets

Pan
$ 1,200
2,400
360
2,800
2,400
8,000

2,400
2,800
4,000

6,000

3,200

15,120
_______
$38,280

Accounts payable
$ 1,200
Dividends payable
2,000
Capital stock
28,000
Retained earnings
7,080
Noncontrolling interest _______
Total equities
a
b

90%
Son
800
1,600

$38,280

Adjustments and
Eliminations

Consolidated
Balance Sheet
$ 2,000
4,000

360
5,200
5,200
12,000

2,800

12,000
a 15,120

________
$ 14,800
2,400
400
8,000
4,000
________

2,000

2,000
$42,400

$ 14,800

b
a
a

360
8,000
4,000
_______
17,160

1,680

$ 3,600
2,040
28,000
7,080
1,680

17,160

$42,400

To eliminate reciprocal investment and equity accounts, enter unamortized excess

allocated to equipment, record goodwill, and enter noncontrolling interest (at
fair value).
To eliminate reciprocal dividends receivable and dividends payable amounts.

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Chapter 3

3-19

Solution P3-10
1

Purchase price of investment in Sun (in thousands)

Underlying book value of investment in Sun:
Equity of Sun January 1, 2011
Add: Excess investment fair value over book value:
Goodwill at December 31, 2015
Fair value of Sun January 1, 2011

240
$1,120

Purchase price of 80% investment at fair value($1,120 x 80%)

2

Suns stockholders equity on December 31, 2014 (in thousands)

20% noncontrolling interest at fair value
$248
20% goodwill
(48)
20% noncontrolling interests equity at book value
$200
Total equity = Noncontrolling interests equity $200/20% = $1,000

Pans investment in Sun account balance at December 31, 2014

(in thousands)
Underlying book value in Sun December 31, 2014
$800
($1,000 80%)
Add: 80% of Goodwill December 31, 2014
(20% is attributable to the noncontrolling interest)
192
Investment in Sun December 31, 2014
$992
Alternative solution:
Investment cost January 1, 2011
Add: 80% of Suns increase since acquisition
($1,000 - $880) 80%
Investment in Sun December 31, 2014

$896
96
$992

Pans capital stock and retained earnings December 31, 2015

(in thousands)
Capital stock
$1,600
Retained earnings
$ 120
Amounts are equal to capital stock and retained earnings shown in the
consolidated balance sheet.

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880

896

3-20

An Introduction to Consolidated Financial Statements

Solution P3-11
Preliminary computations (in thousands)
Cost of 70% investment in Stu
Implied fair of Stu($2,800 / 70%)
Book value of Stu (100%)
Excess
Excess allocated:
Inventories
Plant assets
Goodwill
Excess

$2,800
$4,000
3,200
$ 800
$
$

Investment balance at January 1, 2011

Share of Stus retained earnings increase ($240 70%)
Less: Amortization
70% of excess allocated to inventories (sold in 2011)
70% of excess allocated to plant assets ($320 /8 years)
Investment balance at December 31, 2011

80
320
400
800

$2,800
168
(56)
(28)
$2,884

Noncontrolling interest at December 31

30% of Stus book value at December 31 ($3,440 x 30%)
30% of Goodwill
30% Unamortized excess for plant assets
30% x ($320 - $40 amortization)
Noncontrolling at December 31 (fair value)

$1,032
120
84
$1,236

Pop Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2011
(in thousands)
Pop
Cash
$
240
1,760
Accounts receivable net
Accounts receivable Pop
Dividends receivable
Inventories
Land
Plant assets net
Investment in Stu
Goodwill
Assets
Accounts payable
Account payable to Stu
Dividends payable
Long-term debt
Capital stock
Retained earnings
Noncontrolling interest
($4,120,000 30%)

70%
Stu
80
800

Adjustments and
Eliminations

40
28
2,000
400
2,800

1,280
600
1,400

2,884
______
$10,112

______
$ 4,200

280

400

b
c

40
28

40

28

Consolidated
Balance Sheet
$
320
2,560

3,280
1,000
4,480
a 2,884

$ 1,200
40
160
2,400
4,000
2,312

_______

_______

400
$12,040

320
40
400
2,000
1,440

$ 1,520
172
2,800
4,000
2,312

a 2,000
a 1,440
_______

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a 1,236

1,236

Chapter 3
Equities

3-21
$10,112

$ 4,200

4,188

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4,188

$12,040

3-22

An Introduction to Consolidated Financial Statements

Solution P3-12
Preliminary computations (in thousands)
80% Investment in Sam at cost January 1, 2011
Implied total fair value of Sam ($3,040 / 80%)
Sam book value
Excess fair value over book value recorded as goodwill

2011
2012
2013

Sam
Dividends
$160
200
240
$600

Sam
Net Income
$ 320
400
480
$1,200

$ 3,040
$ 3,800
3,600
$
200

80% of
Net Income
$256
320
384
$960

Sams dividends for 2012 ($160 / 80%)

200

Sams net income for 2012 ($320 / 80%)

400

Goodwill December 31, 2012

200

Noncontrolling interest share of income 2013

Sams income for 2013
($192 dividends received/80%) 2
Noncontrolling interest percentage
Noncontrolling interest share

480
20%
96

Noncontrolling interest December 31, 2013

Equity of Sam January 1, 2011
Add: Income for 2011, 2012 and 2013
Deduct: Dividends for 2011, 2012 and 2013
Equity book value of Sam December 31, 2013
Goodwill
Equity fair value of Sam December 31, 2013
Noncontrolling interest percentage
Noncontrolling interest December 31, 2013

$3,600
1,200
(600)
4,200
200
$4,400
20%
$ 880

Controlling share of consolidated net income for 2013

Pens separate income
Add: Income from Sam
Controlling share of consolidated net income

$1,120
384
$1,504

Pens net income

Sams net income
Consolidated net income
Less: Noncontrolling interest share ($480 x 20%)
Controlling interest share

$1,120
480
$1,600
96
$1,504

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