www.freebookslides.

com
108 CHAPTER 3

E3-3
[Based on AICPA] General problems
1. Cobb Company’s current receivables from affiliated companies at December 31, 2016, are (1) a $75,000 cash
advance to Hill Corporation (Cobb owns 30 percent of the voting stock of Hill and accounts for the investment by
the equity method), (2) a receivable of $260,000 from Vick Corporation for administrative and selling services (Vick
is 100 percent owned by Cobb and is included in Cobb’s consolidated financial statements), and (3) a receivable of
$200,000 from Ward Corporation for merchandise sales on credit (Ward is a 90 percent–owned, unconsolidated
subsidiary of Cobb accounted for by the equity method). In the current assets section of its December 31, 2016,
consolidated balance sheet, Cobb should report accounts receivable from investees in the amount of:
a $180,000
b $255,000
c $275,000
d $535,000
Use the following information in answering questions 2 and 3.
On January 1, 2016, Pop Corporation purchased all of Son Corporation’s common stock for $2,400,000. On that
date, the fair values of Son’s assets and liabilities equaled their carrying amounts of $2,640,000 and $640,000, respec-
tively. Pop’s policy is to amortize intangibles other than goodwill over 10 years. During 2016, Son paid cash dividends
of $40,000.
Selected information from the separate balance sheets and income statements of Pop and Son as of December 31,
2016, and for the year then ended follows (in thousands):
Pop Son
Balance Sheet Accounts
Investment in subsidiary $2,640 —
Retained earnings 2,480 $ 1,120
Total stockholders’ equity 5,240 2,240
Income Statement Accounts
Operating income $ 840 $ 400
Equity in earnings of Son 280 —
Net income 800 280

2. In Pop’s 2016 consolidated income statement, what amount should be reported for amortization of goodwill?
a $0
b $24,000
c $36,000
d $40,000
3. In Pop’s December 31, 2016, consolidated balance sheet, what amount should be reported as total retained
earnings?
a $2,480,000
b $2,720,000
c $2,760,000
d $3,600,000

E3-4
Correction of consolidated net income
Liong Corporation paid $2,500,000 in cash for an 80 percent interest in Taro Corporation on January 1, 2016, when the
book value of Taro’s net assets was $2,250,000. Some additional information is given below:
a Land was overvalued by $100,000.
b Equipment with a five-year remaining useful life was undervalued by $150,000.
c Taro’s net income was $300,000.
d Liong’s net income was $1,440,000, including an income of $240,000 from Taro.

REQuIRED
1. Calculate the goodwill that should appear in the consolidated balance sheet of Liong and Subsidiary at
December 31, 2016.
2. Calculate consolidated net income for 2016.
 www.freebookslides.com
An Introduction to Consolidated Financial Statements 109

E3-5
Consolidated Balance Sheet after Acquisition
On January 1, 2014, Wins Inc. acquired a 70 percent interest in Matt Inc. at a cost of $1,400,000. Matt Inc.’s net assets
on this date were $1,500,000. During 2014, Matt Inc. reported net income of $600,000 and declared dividend of
$300,000. The fair values of Matt Inc.’s net assets were equal to the book value on January 1, 2014.

REQuIRED
1. Calculate the goodwill that should be reported in the consolidated balance sheet on December 31, 2014.
2. Calculate the noncontrolling interest that should be reported in the consolidated balance sheet at December
31, 2014.

E3-6
Push-down accounting
Lizzy NV acquired 100 percent of the outstanding common stock of Patricia NV by issuing 10,000 shares of $10 par
common stock with a market value of $45 per share on December 31, 2014. The acquisition is recorded using pushdown
accounting. The balance sheet of Patricia NV on December 31, 2014 is as follows (in thousands):
Book Value Fair Value
Cash $40,000 $40,000
Accounts Receivable 30,000 20,000
Inventories 50,000 80,000
Plant Assets 230,000 280,000
Accounts Payable 50,000 40,000
Capital Stock, $10 par 100,000
Retained Earnings 200,000

REQuIRED
1. What is the amount of goodwill that will be shown in the balance sheet of Patricia NV?
2. What is the amount of push-down capital that will be shown in the balance sheet of Patricia NV?

E3-7
Consolidated net income
Sooseck Co. Ltd. is an 80 percent owned subsidiary of Yum Co. Ltd., acquired on January 1, 2014. The fair values of
Sooseck Co. Ltd.’s net assets were equal to the book value on January 1, 2014. Yum Co. Ltd.’s separate net income
before recognizing income from Sooseck Co. Ltd. for 2014 was $350,000, while Sooseck Co. Ltd.’s net income for the
year was $240,000.

REQuIRED
1. Calculate income from Sooseck Co. Ltd. that should appear in the consolidated income statement for 2014.
2. Calculate the controlling share of net income for 2014.
 www.freebookslides.com
110 CHAPTER 3

E3-8
Calculate consolidated balance sheet amounts with goodwill and noncontrolling interest
Pop Corporation acquired an 80 percent interest in Son Corporation on January 2, 2016, for $1,400,000. On this date
the capital stock and retained earnings of the two companies were as follows (in thousands):

Pop Son
Capital stock $3,600 $1,000
Retained earnings 1,600 200

The assets and liabilities of Son were stated at fair values equal to book values when Pop acquired its 80 percent
interest. Pop uses the equity method to account for its investment in Son.
Net income and dividends for 2016 for the affiliated companies were as follows (in thousands):

Pop Son
Net income $600 $180
Dividends declared 360 100
Dividends payable December 31, 2016 180 50

R E Q u I R E D : Calculate the amounts at which the following items should appear in the consolidated balance
sheet on December 31, 2016.
1. Capital stock
2. Goodwill
3. Consolidated retained earnings
4. Noncontrolling interest
5. Dividends payable

E3-9
Calculate consolidated net income one year after acquisition
Patta and Qira Corporations’ income statements for 2016 are summarized as follows (in thousands):

Patta Qira
Sales $7,500 $2,500
Cost of Sales (3,200) (1,000)
Depreciation expense (500) (200)
Other expense (1,280) (500)
Net Income $2,520 $800

Patta Corporation paid $2,000,000 in cash for a 90 percent interest in Qira Corporation on December 31, 2015, and
subsequently discovered undervalued equipment, with a three-year remaining useful life, of $120,000.

R E Q u I R E D : Calculate the consolidated net income of Patta Corporation and Subsidiary for 2016.

E3-10
Prepare consolidated income statement three years after acquisition
Comparative income statements of Pop Corporation and Son Corporation for the year ended December 31, 2018, are as
follows (in thousands):
 www.freebookslides.com
An Introduction to Consolidated Financial Statements 111

Pop Son
Sales $3,200 $1,000
Income from Son 261 —
Total revenue 3,461 1,000
Less: Cost of goods sold 1,800 400
Operating expenses 800 300
Total expenses 2,600 700
Net income $ 861 $ 300

A D D I T I O N A L I N F O R M AT I O N
1. Son is a 90 percent–owned subsidiary of Pop, acquired by Pop for $1,620,000 on January 1, 2016, when
Son’s stockholders’ equity at book value was $1,400,000.
2. The excess of the cost of Pop’s investment in Son over book value acquired was allocated $60,000 to
undervalued inventories that were sold in 2016, $40,000 to undervalued equipment with a four-year remain-
ing useful life, and the remainder to goodwill.

R E Q u I R E D : Prepare a consolidated income statement for Pop Corporation and Subsidiary for the year ended
December 31, 2018.

pROBLEMS

P3-1
Prepare a consolidated balance sheet at acquisition date
On December 31, 2016, Ali Corporation acquired 90 percent of interest in Baba Corporation at book value
in cash. Separate balance sheets before acquisition are summarized as follows (in thousands):
Ali Baba
Assets
Cash $550 $100
Accounts receivable 200 120
Inventories 440 80
Land 600 100
Buildings–net 750 60
Equipment–net 800 160
$3,340 $620
Liabilities and Stockholder’s Equity
Accounts payable $180 $120
Common stock, $10 par 2,500 300
Retained earnings 660 200
$3,340 $620

R E Q u I R E D : Prepare a consolidated balance sheet for Ali Corporation and Subsidiary at December 31, 2016.

P3-2
Allocation schedule for fair value/book value differential and consolidated balance
sheet at acquisition
Pop Corporation acquired 70 percent of the outstanding common stock of Son Corporation on January 1,
2016, for $350,000 cash. Immediately after this acquisition the balance sheet information for the two
companies was as follows (in thousands):
 www.freebookslides.com
112 CHAPTER 3

Son
Pop Book Value Book Value Fair Value
Assets
Cash $ 70 $ 40 $ 40
Receivables—net 160 60 60
Inventories 140 60 100
Land 200 100 120
Buildings—net 220 140 180
Equipment—net 160 80 60
Investment in Son 350 — —
Total assets $1,300 $480 $ 560
Liabilities and Stockholders’ Equity
Accounts payable $ 180 $160 $160
Other liabilities 20 100 80
Capital stock, $20 par 1,000 200
Retained earnings 100 20
Total equities $1,300 $480

REQuIRED
1. Prepare a schedule to assign the difference between the fair value of the investment in Son and the book
value of the interest to identifiable and unidentifiable net assets.
2. Prepare a consolidated balance sheet for Pop Corporation and Subsidiary at January 1, 2016.

P3-3
Allocating excess of investment
On March 31, 2014, Tobias AG purchased 90 percent of interest in Mark AG for $8,100,000 cash. Mark
AG had unrecorded patents on this date for $100,000. The balance sheet summary of Mark AG on March
31, 2014, was as follows (in thousands):
Book Value Fair Value
Cash $1,000 $1,000
Inventories 1,600 2,000
Land 3,000 4,000
Buildings—net 2,800 2,500
Equipment—net 3,900 4,000
Current liabilities 900 900
Notes payable 1,800 2,000
Bonds payable 2,400 2,000
Common stock, $10 par 2,000
Retained earnings 5,200

R E Q u I R E D : Prepare a schedule to allocate the excess of investment fair value over book value.

P3-4
Given separate and consolidated balance sheets, reconstruct the schedule to assign the
fair value/book value differential
Pam Corporation purchased a block of Sun Company common stock for $1,040,000 cash on January 1,
2016. Separate-company and consolidated balance sheets prepared immediately after the acquisition are
summarized as follows (in thousands):
 www.freebookslides.com
An Introduction to Consolidated Financial Statements 113

Pam Corporation and Subsidiary Consolidated Balance Sheet at January 1, 2016

Pam Sun Consolidated
Assets
Current assets $ 760 $ 400 $ 1,160
Investment in Sun 1,040 — —
Plant assets—net 2,200 800 3,040
Goodwill — — 220
Total assets $4,000 $1,200 $4,420
Equities
Liabilities $1,600 $ 160 $1,760
Capital stock, $20 par 2,000 800 2,000
Retained earnings 400 240 400
Noncontrolling interest — — 260
Total equities $4,000 $1,200 $4,420

R E Q u I R E D : Reconstruct the schedule to assign the fair value/book value differential from Pam’s investment
in Sun.

P3-5
Prepare a consolidated balance sheet one year after acquisition
On January 1, 2016, Mignonne Corporation paid $2,850,000 in cash for a 100 percent interest in Petite
Corporation when Petite’s common stock was at $2,000,000 and retained earnings were at $500,000.
Equipment with a five-year remaining useful life was undervalued by $350,000.
Comparative balance sheet data for Mignonne and Petite Corporations at December 31, 2016,
are as follows (in thousands):
Mignonne Petite
Assets
Cash $104 $70
Receivables–net 300 250
Inventories 900 850
Land 500 300
Equipment–net 1,500 1,200
Investment in Petite 2,786 —
$6,090 $2,670
Equities
Accounts payable $500 $120
Common stock, $10 par 4,000 2,000
Retained earnings 1,590 550
$6,090 $2,670

R E Q u I R E D : Prepare a consolidated balance sheet for Mignonne Corporation and Subsidiary at December
31, 2016.

P3-6
Consolidation after acquisition
Harrison PLC acquires 80 percent of David PLC for $2,080,000 on January 1, 2014. The book values of
David PLC’s assets and liabilities are equal to the fair values. David PLC reports net income of $500,000
during the year. Dividends of $200,000 are declared by David PLC on December 20. These dividends
are to be paid next year. The balance sheets of Harrison PLC and David PLC at December 31, 2014 are
as follows (in thousands):
 www.freebookslides.com
114 CHAPTER 3

Harrison David
PLC PLC
Cash $300 80
Accounts receivable 400 200
Dividends receivable 160 —
Equipment—net 1,000 800
Building—net 2,000 1,000
Land 1,600 1,400
Investment in David PLC 2,320
Accounts payable 500 80
Dividends payable 100 200
Notes payable 1,000 400
Capital stock 2,000 1,000
Retained earnings 4,180 1,800

Harrison PLC accounts payable includes $100,000 owed to David PLC.

R E Q u I R E D : Prepare consolidated balance sheet workpapers for Harrison PLC and Subsidiary at
December 31, 2014.

P3-7
Calculate items that may appear in consolidated statements two years after acquisition
Pop Corporation acquired 80 percent of the outstanding stock of Son Corporation for $1,120,000 cash
on January 3, 2016, on which date Son’s stockholders’ equity consisted of capital stock of $800,000 and
retained earnings of $200,000.
There were no changes in the outstanding stock of either corporation during 2016 and 2017. At
December 31, 2017, the adjusted trial balances of Pop and Son are as follows (in thousands):
Pop Son
Debits
Current assets $ 816 $ 300
Plant assets—net 1,600 1,200
Investment in Son—80% 1,360 —
Cost of goods sold 1,000 480
Other expenses 200 120
Dividends 240 100
$5,216 $2,200
Credits
Current liabilities $ 648 $ 200
Capital stock 2,000 800
Retained earnings 808 400
Sales 1,600 800
Income from Son 160 —
$5,216 $2,200

A D D I T I O N A L I N F O R M AT I O N
1. All of Son’s assets and liabilities were recorded at fair values equal to book values on January 3, 2016.
2. The current liabilities of Son at December 31, 2017, include dividends payable of $40,000.
 www.freebookslides.com
An Introduction to Consolidated Financial Statements 115

R E Q u I R E D Determine the amounts that should appear in the consolidated statements of Pop Corporation
and Subsidiary at December 31, 2017, for each of the following:
1. Noncontrolling interest share 6. Excess of investment fair value over book value
2. Current assets 7. Consolidated net income for the year ended December 31, 2017
3. Income from Son 8. Consolidated retained earnings, December 31, 2016
4. Capital stock 9. Consolidated retained earnings, December 31, 2017
5. Investment in Son 10. Noncontrolling interest, December 31, 2017

P3-8
[Based on AICPA] Prepare journal entries to account for investments, and compute
noncontrolling interest, consolidated retained earnings, and investment balances
On January 1, 2016, Pop Corporation made the following investments:
1. Acquired for cash, 80 percent of the outstanding common stock of Son Corporation at $280 per share.
The stockholders’ equity of Son on January 1, 2016, consisted of the following:
Common stock, par value $100 $200,000
Retained earnings 80,000

2. Acquired for cash, 70 percent of the outstanding common stock of Sam Corporation at $160 per
share. The stockholders’ equity of Sam on January 1, 2016, consisted of the following:
Common stock, par value $40 $240,000
Capital in excess of par value 80,000
Retained earnings 160,000

3. After these investments were made, Pop was able to exercise control over the operations of both
companies.
An analysis of the retained earnings of each company for 2016 is as follows:

Pop Son Sam

Balance January 1 $ 960,000 $ 80,000 $160,000
Net income (loss) 418,400 144,000 (48,000)
Cash dividends paid (160,000) (64,000) (36,000)
Balance December 31 $1,218,400 $160,000 $ 76,000

REQuIRED
1. What entries should have been made on the books of Pop during 2016 to record the following?
a. Investments in subsidiaries
b. Subsidiary dividends received
c. Parent’s share of subsidiary income or loss
2. Compute the amount of noncontrolling interest in each subsidiary’s stockholders’ equity at December 31,
2016.
3. What amount should be reported as consolidated retained earnings of Pop Corporation and subsidiaries as
of December 31, 2016?
4. Compute the correct balances of Pop’s Investment in Son and Investment in Sam accounts at December
31, 2016, before consolidation.
 www.freebookslides.com
116 CHAPTER 3

P3-9
Consolidated balance sheet workpapers with patent and consolidated net income
Peeves Corporation paid $4,000,000 in cash for an 80 percent interest in Jeeves Corporation on January
1, 2016, when Jeeves’ common stock was at $2,500,000 and retained earnings were at $500,000. Com-
parative balance sheet data for Peeves and Jeeves Corporations at December 31, 2016, are as follows (in
thousands):

Peeves Jeeves
Assets
Cash $90 $70
Receivables—net 250 300
Dividend receivable 40 —
Inventories 2,250 1,100
Land 800 550
Equipment—net 1,500 1,400
Investment in Jeeves 4,032 —
$ 8,962 $ 3,420
Equities
Accounts payable $110 $120
Dividend payable — 50
Common stock, $10 par 5,000 2,500
Retained earnings 3,852 750
$8,962 $ 3,420

In 2016, undervalued inventory of $150,000 was sold, and equipment with a four-year remaining useful
life was undervalued by $240,000. Additionally, Peeves’ separate net income was at $900,000, while that
of Jeeves’ was $250,000. Jeeves declared dividends of $50,000, and $50,000 of Peeves’ accounts receiv-
able is from Jeeves.

REQuIRED
1. Prepare consolidated balance sheet workpapers for Peeves Corporation and Subsidiary at December 31,
2016.
2. Calculate the consolidated net income for 2016.

P3-10
Calculate investment cost and account balances from a consolidated balance sheet five
years after acquisition
The consolidated balance sheet of Pam Corporation and its 80 percent subsidiary, Sun Corporation,
contains the following items on December 31, 2020 (in thousands):
Cash $ 160
Inventories 1,536
Other current assets 560
Plant assets—net 2,160
Goodwill 480
$4,896
Liabilities $ 960
Capital stock 3,200
Retained earnings 240
Noncontrolling interests 496
$4,896

Pam Corporation uses the equity method of accounting for its investment in Sun. Sun Corpora-
tion stock was acquired by Pam on January 1, 2016, when Sun’s capital stock was $1,600,000 and
its retained earnings were $160,000. Fair values of Sun’s net assets were equal to book values
on January 1, 2016, and there have been no changes in outstanding stock of either Pam or Sun since
January 1, 2016.
 www.freebookslides.com
An Introduction to Consolidated Financial Statements 117

REQuIRED
1. The purchase price of Pam’s investment in Sun stock on January 1, 2016.
2. The total of Sun’s stockholders’ equity on December 31, 2020.
3. The balance of Pam’s Investment in Sun account at December 31, 2020.
4. The balances of Pam’s Retained earnings and Capital stock accounts on December 31, 2020.

P3-11
Consolidated balance sheet workpapers (fair value/book value differentials and
noncontrolling interest)
Pop Corporation acquired a 70 percent interest in Son Corporation on January 1, 2016, for $2,800,000,
when Son’s stockholders’ equity consisted of $2,000,000 capital stock and $1,200,000 retained earnings.
On this date, the book value of Son’s assets and liabilities was equal to the fair value, except for inventories
that were undervalued by $80,000 and sold in 2016, and plant assets that were undervalued by $320,000
and had a remaining useful life of eight years from January 1. Son’s net income and dividends for 2016
were $280,000 and $40,000, respectively.
Separate-company balance sheet information for Pop and Son Corporations at December 31,
2016, follows (in thousands):
Pop Son
Cash $ 240 $ 80
Accounts receivable—customers 1,760 800
Accounts receivable from Pop — 40
Dividends receivable 28 —
Inventories 2,000 1,280
Land 400 600
Plant assets—net 2,800 1,400
Investment in Son 2,884 —
$10,112 $4,200
Accounts payable—suppliers $ 1,200 $ 320
Accounts payable to Son 40 —
Dividends payable 160 40
Long-term debt 2,400 400
Capital stock 4,000 2,000
Retained earnings 2,312 1,440
$10,112 $4,200

R E Q u I R E D : Prepare consolidated balance sheet workpapers for Pop Corporation and Subsidiary at December
31, 2016.

P3-12
Calculate separate company and consolidated statement items given investment
account for three years
A summary of changes in Pam Corporation’s Investment in Sun account from January 1, 2016, to Decem-
ber 31, 2018, follows (in thousands):
INVESTMENT IN SUN (80%)
January 1, 2016 6,080
Income—2016 512 Dividends—2016 256
2017 640 2017 320
2018 768 2018 384
to balance 7,040
8,000 8,000
December 31, 2018
Balance forward 7,040