CH 5 LS

1. Which of the following is a difference between a wholly-owned subsidiary and a less-than wholly-owned
subsidiary?

ANSWER: The existence of noncontrolling interest. In the acquisition of a wholly-owned subsidiary, the
acquiring company purchases a 100% stake in the acquired company and no possibility of a noncontrolling
interest.

2. On January 1, 20X2, Diamond Inc. acquired 80% of Silver Corp’s common stock for $500,000. The fair value
of the noncontrolling interest was $125,000. The book value of Silver Corp.’s net assets was $490,000.
Calculate the difference between the fair value and the book value of Silver Corp.’s net assets.

ANSWER: $135,000 = ($500,000 + $125,000) - $490,000 = Difference between the fair value and the
book value

3. Which of the following amounts is recorded as goodwill?

ANSWER: The excess of the consideration given and the noncontrolling interest over the fair value of
the subsidiary company’s net identifiable assets.

4. Peridot Corp. acquired 85% of Amber Foods’ outstanding common stock. At the time of acquisition, Amber
Foods’ Common Stock and Retained Earnings balances were $250,000 and $100,000, respectively.
Calculate Peridot’s share of the book value of Amber Food’s net assets.

ANSWER: $297,500 = 85% x ($250,000 + $100,000) = Peridot’s share of Amber Foods’ net assets

5. Crystal Quartz Corp. acquired 80% of Amethyst Inc.’s outstanding common stock. On that date, Amethyst’s
Common Stock was $450,000 and Retained Earnings was $150,000. Calculate the portion of the net
assets’ book value attributable to Amethyst’s noncontrolling interest.

ANSWER: $120,000 = 20% x ($450,000 + $150,000) = NCI in NA of Amethyst

6. Which of the following accounts is credited in the basic consolidation journal entry at the point of the
acquisition?

ANSWER: Investment in Subsidiary; NCI in Net Assets of Subsidiary

7. Buildhat Inc. purchased a 95% stake in Rayzone Corp.’s common stock for $600,000 on January 1, 20X1. On
that date, the fair value of the noncontrolling interest was $31,580. Rayzone’s Common Stock and
Retained Earnings were $250,000 and $300,000, respectively. Rayzone appraised the land and buildings
and determined they were undervalued on the balance sheet by $100,000. Calculate Buildhat’s share of
the book value of Rayzone’s net assets.

ANSWER: $522,200 = 95% x $550,000 = Buildhat’s share

8. Assuming assets are undervalued, Depreciation Expense should be debited when recording the amortized
excess value reclassification consolidation entry.

9. Phyton Inc., a subsidiary of Xylon Corp., purchased investments for $60,000 on January 1, 20X9. If, by the
end of 20X9, the fair value of the investment securities had increased by 15% from the original acquisition
price, the amount of unrealized gains recorded by Phyton would be $____.

ANSWER: $9,000 = $60,000 x 15%

10. Which of the following best describes the consolidation entry relating to other comprehensive income
(OCI)?

ANSWER: Debit OCI from Subsidiary; Debit OCI to the NCI; Credit Investment in Subsidiary; Credit NCI in
NA of the Subsidiary

11. When a subsidiary records unrealized gains on available-for-sale securities, which accounts would be
affected during a consolidation in the second year following the combination?

ANSWER: Investment in Subsidiary; OCI from Subsidiary- Unrealized Gains on Investments

12. Which of the following journal entries would a parent company record when it acquires a subsidiary’s
stock for cash?

ANSWER: Debt Investment in Subsidiary; Credit Cash

13. Agrobuild Inc. purchased an 80% stake in Centagrone Holdings for $430,000 on January 1, 20X3. On that
date, the fair value of the 20% noncontrolling interest was $107,500. Centagrone’s Common Stock and
Retained Earnings had a total book value of $400,000. Centagrone had several assets which were
undervalued by a total of $50,000. Calculate the total amount of goodwill that would be recorded on the
consolidated worksheet.

ANSWER: $87,500

Differential = Total fair value of the consideration – Book value of Centagrone’s net assets
= (430,000 + $107,500) - $400,000 = $137,500

Goodwill = Differential – Fair value adjustment

= $137,500 - $50,000 = $87,500

14. Asterios Inc., purchased a 75% stake in Ceraliac Corp. for $600,000 on January 1, 20X9. The NCI had a fair
value of $200,000 on the acquisition date. The book value of Cerliac Corp.’s net assets was $450,000.
Various assets were undervalued on Ceraliac’s books by a total of $75,000. Calculate the noncontrolling
interest share of goodwill.

ANSWER: $68,750
 Differential = Total fair value - Total book value of Cereliac’s net assets
= ($600,000 + $200,000) - $450,000 = $350,000

Goodwill = Differential – Fair value adjustment

= $350,000 - $75,000 = $275,000

NCI share of good will = 25% of $275,000 = $68,750

15. Adding the parent’s share of the subsidiary’s net income to its share of the subsidiary’s beginning net book
value and subtracting the parent’s share of dividends, if any, equals the parent’s share of the ending book
value.

16. Dardwell Corp. acquired 70% of Flamell Company’s common stock for $350,000. The fair value of the
noncontrolling interest on the acquisition date was $150,000. Also on the acquisition date, Flamell had to
total of $50,000 in declared dividends. In recording the basic consolidation entry, which of the following
accounts would be credited?

ANSWER: Investment in Flamell; Dividends Declared; NCI in NA of Flamell

17. Radoville Inc. acquired 75% of Detrenet Inc.’s common stock for $450,000. On the date of acquisition, the
fair value of the noncontrolling interest was $150,000. Also on that date, the book value of Detrenet’s net
assets was $400,000 which included the building that was overvalued by $10,000. The goodwill balance
immediately after the acquisition is $__________.

ANSWER: $210,000

18. In the period in which inventory units are sold, any inventory-related differential is assigned to _____.

ANSWER: Cost of Goods Sold

19. Blakefield Corp. acquired 70% of Cropden Inc.’s common stock for $420,000. On the acquisition date,
Cropden had machinery with a fair value of $600,000, a book value of $500,000, and a remaining useful
life of 10 years. The amount of the excess machinery value that would be amortized in the differential
reclassification entry would be $________.

ANSWER: $10,000 per yr = Excess value ($600,000 - $500,000) / Remaining useful life (10 yrs)

20. Perenation Inc. purchased 70% of Tyretree Inc.’s common stock for $500,000 on January 1, 20X2.
Perenation’s share of Tyretree’s income for 20X3 was $10,000. Prepare the 20X3 equity method journal
entry to record Perenation’s share of Tyretree’s income.

ANSWER: Debit Investment in Tyretree Inc. for $10,000; Credit Income from Tyretree Inc. for $10,000.
PRACTICE

1. If A Company acquires 80 percent of the stock of B Company on January 1, 20X2, immediately after the
acquisition, which of the following is correct?

ANSWER: Consolidated retained earnings and A Company retained earnings will be the same.

Explanation
Under the equity method, consolidated retained earnings will always equal the retained earning balance of the
acquiring company (A company) at the date of acquisition regardless of the percentage owned. The retained
earnings balance of the acquired company (B Company) is eliminated in consolidation. This will continue to be
true if the parent uses the fully-adjusted equity method to account for its investment.

 (Consolidated retained earnings will be equal to the combined retained earnings of the two
companies.) Incorrect. The retained earnings of B Company is eliminated during consolidation.
 (Goodwill will always be reported in the consolidated balance sheet.) Incorrect. Goodwill does not arise in
every consolidation. If goodwill were to arise in this acquisition, it would appear on the consolidated balance
sheet. However, there is insufficient data to determine the existence of goodwill.
 (A Company’s additional paid-in capital may be reduced to permit the carryforward of B Company retained
earnings.) Incorrect. B Company’s retained earnings are never carried forward, rather they are eliminated
during consolidation.

2. Which of the following is correct?

ANSWER: Total assets reported by the parent generally will be less than total assets reported on the
consolidated balance sheet.

Explanation
Because the consolidated balance sheet contains the assets of the parent company as well as the assets of the
subsidiary, total assets of the parent company will always be less than total assets reported on the consolidated
balance sheet.

 (The noncontrolling shareholders’ claim on the subsidiary’s net assets is based on the book value of the
subsidiary’s net assets.) Incorrect. The noncontrolling shareholders’ claim on the subsidiary’s net assets is
based on the fair value of the net assets, not the book value.
 (Only the parent’s portion of the difference between book value and fair value of the subsidiary’s assets is
assigned to those assets.) Incorrect. The entire differential is assigned and proportionately allocated to both
the parent and the noncontrolling interest’s respective share.
 (Goodwill represents the difference between the book value of the subsidiary’s net assets and the amount paid
by the parent to buy ownership.) Incorrect. Goodwill represents the difference between the fair value of the
subsidiary’s net assets and the amount paid by the parent to buy ownership.

3. Which of the following statements is correct?

ANSWER: Consolidated retained earnings do not include the noncontrolling interest’s claim on the
subsidiary’s retained earnings.
 Explanation

The only amount included in the consolidated retained earnings balance is the retained earnings balance
from the parent’s books.

 (Foreign subsidiaries do not need to be consolidated if they are reported as a separate operating group under
segment reporting.) Incorrect. Foreign subsidiaries are still required to be consolidated even if they are reported
as a separate operating segment. However, if laws of the foreign country prevented the parent from exercising
control, the foreign subsidiary would not be consolidated.
 (The noncontrolling shareholders’ claim should be adjusted for changes in the fair value of the subsidiary assets but
should not include goodwill.) Incorrect. The noncontrolling shareholders’ claim on the net assets does include
their proportionate share of goodwill that results in the acquisition.
 (Consolidation is expected any time the investor holds significant influence over the
investee.) Incorrect. Consolidation is only required when control is held over the subsidiary, not just significant
influence.

4. [AICPA Adapted] At December 31, 20X9, Grey Inc. owned 90 percent of Winn Corporation, a consolidated
subsidiary, and 20 percent of Carr Corporation, an investee in which Grey cannot exercise significant
influence. On the same date, Grey had receivables of $300,000 from Winn and $200,000 from Carr. In its
December 31, 20X9, consolidated balance sheet, Grey should report accounts receivable from its affiliates
of

ANSWER: $200,000
Explanation

The only accounts receivable from affiliates that will be eliminated from the consolidated balance sheet are
receivables from consolidated entities (Winn Corporation). Thus, the receivable from any unconsolidated
investees (Carr Corporation) would be reported on the consolidated balance sheet. [AICPA Adapted]

 ($500,000) Incorrect. Receivables from consolidated entities (Winn Corporation) would be eliminated in
consolidated, while any receivables from an unconsolidated investee would still be reported.
 ($340,000) Incorrect. Receivables from the consolidated entity (Winn Corporation) would be eliminated in their
entirety, while receivables from investees under significant influence (Carr Corporation) would be reported in their
entirety, not proportionately eliminated.
 ($230,000) Incorrect. The only amounts that should be recorded on the consolidated balance sheet are the
receivables from the investee under significant influence (Carr Corporation), while receivable from the consolidated
entity (Winn Corporation) would be eliminated in consolidation.

5. A 70 percent owned subsidiary company declares and pays a cash dividend. What effect does the
dividend have on the retained earnings and noncontrolling interest balances in the parent
company’s consolidated balance sheet?

ANSWER: No effect on retained earnings and a decrease in noncontrolling interest.

Explanation
 Subsidiary dividends declared have no effect on consolidated retained earnings (because the parent’s
retained earnings appear as the consolidated retained earnings, but they do decrease the noncontrolling
interest just as they decrease the controlling interest.

 (No effect on either retained earnings or noncontrolling interest.) Incorrect. The noncontrolling interest is
decreased by dividends declared by the subsidiary.
 (Decreases in both retained earnings and noncontrolling interest.) Incorrect. The retained earnings balance is not
decreased by subsidiary dividends declared.
 (A decrease in retained earnings and no effect on noncontrolling interest.) Incorrect. Retained earnings is
unaffected, while the noncontrolling interest is decreased.

6. How is the portion of consolidated earnings to be assigned to the noncontrolling interest in consolidated
financial statements determined?

ANSWER: The amount of the subsidiary’s earnings recognized for consolidation purposes is multiplied
by the noncontrolling interest’s percentage of ownership.

Explanation

The noncontrolling interest’s proportionate share of the subsidiary’s income is allocated based on the
percentage of ownership in the subsidiary held by the noncontrolling shareholders.

 (The parent’s net income is subtracted from the subsidiary’s net income to determine the noncontrolling
interest.) Incorrect. The parent’s net income would never be subtracted from the subsidiary’s net income.
 (The subsidiary’s net income is extended to the noncontrolling interest.) Incorrect. The entire portion of the
subsidiary’s income is not extended to the noncontrolling interest, but rather is proportionately allocated between
the controlling and noncontrolling interest based on ownership percentage.
 (The amount of consolidated earnings on the consolidated worksheets is multiplied by the noncontrolling interest
percentage on the balance sheet date.) Incorrect. The noncontrolling interest’s ownership percentage is not
multiplied by the consolidated earnings because it would then be allocating a portion of the parent’s own earnings
as well. The noncontrolling interest is not entitled to any of the parent’s income, only their share of the subsidiary’s
income.

7. On January 1, 20X5, Post Company acquired an 80 percent investment in Stake Company. The
acquisition cost was equal to Post’s equity in Stake’s net assets at that date. On January 1, 20X5, Post
and Stake had retained earnings of $500,000 and $100,000, respectively. During 20X5, Post had net
income of $200,000, which included its equity in Stake’s earnings, and declared dividends of $50,000;
Stake had net income of $40,000 and declared dividends of $20,000. There were no other intercompany
transactions between the parent and subsidiary. On December 31, 20X5, what should the consolidated
retained earnings be?

ANSWER: $650,000 = $500,000 + $200,000 - $50,000

8. On January 1, 20X8, Ritt Corporation acquired 80 percent of Shaw Corporation’s $10 par common stock
for $956,000. On this date, the fair value of the noncontrolling interest was $239,000, and the carrying
 amount of Shaw’s net assets was $1,000,000. The fair values of Shaw’s identifiable assets and liabilities
were the same as their carrying amounts except for plant assets (net) with a remaining life of 20 years,
which were $100,000 in excess of the carrying amount. For the year ended December 31, 20X8, Shaw
had net income of $190,000 and paid cash dividends totaling $125,000. In the January 1, 20X8,
consolidated balance sheet, the amount of goodwill reported should be

ANSWER: $95,000 = $(956,000 + $239,000) - $1,000,000 - $100,000

9. On January 1, 20X8, Ritt Corporation acquired 80 percent of Shaw Corporation’s $10 par common stock
for $956,000. On this date, the fair value of the noncontrolling interest was $239,000, and the carrying
amount of Shaw’s net assets was $1,000,000. The fair values of Shaw’s identifiable assets and liabilities
were the same as their carrying amounts except for plant assets (net) with a remaining life of 20 years,
which were $100,000 in excess of the carrying amount. For the year ended December 31, 20X8, Shaw
had net income of $190,000 and paid cash dividends totaling $125,000. In the December 31, 20X8,
consolidated balance sheet, the amount of noncontrolling interest reported should be

ANSWER: $251,000 = 0.20 [($956,000 + $239,000) + ($190,000 - $5,000 - $125,000)]

10. Server Corporation is a majority-owned subsidiary of Proxy Corporation. Proxy acquired 75 percent
ownership on January 1, 20X3, for $133,500. At that date, Server reported common stock outstanding of
$60,000 and retained earnings of $90,000, and the fair value of the noncontrolling interest was $44,500.
The differential is assigned to equipment, which had a fair value $28,000 more than book value and a
remaining economic life of seven years at the date of the business combination. Server reported net
income of $30,000 and paid dividends of $12,000 in 20X3.

Required:
a. Prepare the journal entries recorded by Proxy during 20X3 on its books if it accounts for its investment
in Server using the equity method. (If no entry is required for a transaction/event, select "No journal
entry required" in the first account field.)

A. Record the initial investment in Server Corp.

B. Record Proxy Corp.'s 75% share of Server Corp.'s 20X3 income.
C. Record Proxy Corp.'s 75% share of Server Corp.'s 20X3 dividend.
D. Record Proxy Corp's 75% share of the amortization of the excess acquisition price.
 b. Prepare the consolidation entries needed at December 31, 20X3, to prepare consolidated financial
statements. (If no entry is required for a transaction/event, select "No journal entry required" in the
first account field.)

A. Record the basic consolidation entry.

B. Record the amortized excess value reclassification entry.
C. Record the excess value (differential) reclassification entry.

Explanation
b. Book Value Calculations:

NCI Proxy Corp. Common Retained

+ = +
25% 75% Stock Earnings
Beginning book value $37,500 $112,500 $60,000 $ 90,000
+ Net Income 7,500 22,500 30,000
− Dividends (3,000) (9,000) (12,000)
Ending book value $42,000 $126,000 $60,000 $108,000

Excess Value (Differential) Calculations:

NCI Proxy Corp.

+ = +
25% 75% Equipment Acc. Depr.
Beginning balance $ 7,000 $21,000 $28,000 $ 0
Changes (1,000) (3,000) (4,000)
Ending balance $ 6,000 $18,000 $28,000 $(4,000)
 Investment in Server Co.
Acquisition Price 133,500
75% Net Income 22,500
9,000 75% Dividends
3,000 Excess Val. Amort.
Ending Balance 144,000
126,000 Basic
18,000 Excess Reclass.
0

Income from Server Co.

22,500 75% Net Income

Excess Val. Amort. 3,000

19,500 Ending Balance
Basic 22,500
3,000 Amort. Reclass.
0

11. Power Corporation acquired 70 percent of Silk Corporation’s common stock on December 31, 20X2.
Balance sheet data for the two companies immediately following the acquisition follow:

Power Silk
Item Corporation Corporation
Assets
Cash $ 44,000 $ 30,000
Accounts Receivable 110,000 45,000
Inventory 130,000 70,000
Land 80,000 25,000
Buildings & Equipment 500,000 400,000
Less: Accumulated Depreciation (223,000) (165,000)
Investment in Silk Corporation Stock 150,500
Total Assets $ 791,500 $ 405,000
Liabilities and Stockholders’ Equity
Accounts Payable $ 61,500 $ 28,000
Taxes Payable 95,000 37,000
Bonds Payable 280,000 200,000
Common Stock 150,000 50,000
Retained Earnings 205,000 90,000
Total Liabilities and Stockholders’ Equity $ 791,500 $ 405,000

At the date of the business combination, the book values of Silk’s net assets and liabilities approximated
fair value except for inventory, which had a fair value of $85,000, and land, which had a fair value of
$45,000. The fair value of the noncontrolling interest was $64,500 on December 31, 20X2.

Required:
For each question below, indicate the appropriate total that should appear in the consolidated balance
sheet prepared immediately after the business combination.
 What amount of consolidated retained earnings will be reported?

ANSWER: $205,000

HW
1. Paint Corporation acquired 70 percent of the stock of Stain Company by issuing shares of its common
stock with a fair value of $172,900. At that time, the fair value of the noncontrolling interest was
estimated to be $74,100, and the fair values of Stain’s identifiable assets and liabilities were $315,000 and
$88,000, respectively. Stain’s assets and liabilities had book values of $229,000 and $88,000, respectively.

Required:
Compute the following amounts to be reported immediately after the combination.

a. Investment in Stain reported by Paint = $172,900

b. Fair Value of common stock $172,900

Add: Fair value of non-controlling interest $74,100

Less: Fair value of assets – fair value of liabilities ($315,000 - $88,000) $227,000
Goodwill for the combined entity $20,000

c. Non-controlling interest reported in the consolidated balance sheet

= 30% of [70% parent holding plus 30% held on by non-controlling interest]
= 30% x ($172,900 + $74,100) = $74,100

2. Paragraph Corporation acquired controlling ownership of Sentence Corporation on December 31, 20X3,
and a consolidated balance sheet was prepared immediately. Partial balance sheet data for the two
companies and the consolidated entity at that date follow:
PARAGRAPH CORPORATION AND SENTENCE CORPORATION
Balance Sheet Data
December 31, 20X3
Paragraph Sentence Consolidated
Item Corporation Corporation Entity
Assets
Cash $ 80,650 $ 81,000 $ 161,650
Accounts Receivable 115,000 ? 165,000
Inventory 122,000 97,000 246,000
Buildings & Equipment 417,000 357,000 657,000
Less: Accumulated Depreciation (227,000) (152,000) (227,000)
Investment in Sentence Corporation ?
Goodwill 26,000
Total Assets $ 720,170 $ 465,000 $1,028,650

Liabilities & Equities

Accounts Payable $ 132,000 $ 63,000 $ 163,000
Wages Payable ? ? 143,170
Notes Payable 217,000 127,000 344,000
Common Stock 137,000 92,000 ?
Retained Earnings 132,000 142,000 ?
Noncontrolling Interest 109,480

Total Liabilities & Equities $ ? $ 465,000 $1,028,650

During 20X3, Paragraph provided engineering services to Sentence and has not yet been paid for them.
There were no other receivables or payables between Paragraph and Sentence at December 31, 20X3.

Required:
a. What is the amount of unpaid engineering services at December 31, 20X3, on work done by Paragraph
for Sentence?

Unpaid amount = Accts payable of P Corp. + Accts payable of S Corp. – Cons. Accts payable
= ($132,000 + $63,000) - $163,000 = $32,000
b. What balance in accounts receivable did Sentence report at December 31, 20X3?
Accounts Rec. of S Corp. = (Cons Accts Rec – Accts Rec of P Corp.) + Unpaid amount (above)
= ($165,000 - $115,000) + 32,000 = $82,000
c. What amounts of wages payable did Paragraph and Sentence report at December 31, 20X3?
Wages payable = Total assets of S Corp – (Accts Pay. of S Corp + Notes Pay of S Corp + Common
Stock of S Corp + Retained Earnings of S Corp)
= $465,000 – ($63,000 + $127,000 + $92,000 + $142,000) = $41,000 (S Corp)

Wages payable = (Consolidated Wages payable – Wages payable of S Corp)

= $143,170 – $41,000 = $102,170 (P Corp)
d. What was the fair value of Sentence as a whole at the date of acquisition?

Fair value of Sentence as a whole:

Book value of Sentence shares $234,000
Differential assigned to inventory ($246,000 − $122,000 − $97,000) 27,000
Differential assigned to buildings and equipment ($430,000 − $205,000 −
35,000
$190,000)
Differential assigned to goodwill 26,000
Fair value of Sentence $322,000
 e. What percentage of Sentence’s shares were purchased by Paragraph? (Round your answer to
whole percentage.)
Percentage of shares purchased = 1 – (Noncontrolling interest /Fair value of S shares)
= 1 – ($109,480 / $322,000 )
= 1 – 0.34 = .66 = 66%

f. What amounts of capital stock and retained earnings must be reported in the consolidated balance
sheet?
The amount of capital stock to be reported in the consolidated balance sheet is $137,000.
The amount of retained earnings to be reported in the consolidated balance sheet is $132,000.

3. Pie Corporation acquired 75 percent of Slice Company’s ownership on January 1, 20X8, for $102,000. At that
date, the fair value of the noncontrolling interest was $34,000. The book value of Slice’s net assets at
acquisition was $100,000. The book values and fair values of Slice’s assets and liabilities were equal, except
for Slice’s buildings and equipment, which were worth $20,000 more than book value. Accumulated
depreciation on the buildings and equipment was $30,000 on the acquisition date. Buildings and equipment
are depreciated on a 10-year basis.

Although goodwill is not amortized, the management of Pie concluded at December 31, 20X8, that goodwill
from its purchase of Slice shares had been impaired and the correct carrying amount was $2,500. Goodwill
and goodwill impairment were assigned proportionately to the controlling and noncontrolling shareholders.
No additional impairment occurred in 20X9.

Trial balance data for Pie and Slice on December 31, 20X9, are as follows:

Pie Corporation Slice Company

Item Debit Credit Debit Credit
Cash $ 76,500 $ 39,000
Accounts Receivable 91,000 16,000
Inventory 103,000 26,000
Land 54,000 27,000
Buildings & Equipment 359,000 164,000
Investment in Slice Company 127,125
Cost of Goods Sold 144,000 105,000
Wage Expense 30,000 15,000
Depreciation Expense 20,000 5,000
Interest Expense 7,000 3,000
Other Expenses 18,000 11,000
Dividends Declared 36,000 26,000
Accumulated Depreciation $ 167,000 $ 44,000
Accounts Payable 49,000 8,000
Wages Payable 7,000 6,000
Notes Payable 189,500 63,000
Common Stock 180,000 60,000
Retained Earnings 128,875 48,000
 208,00
Sales 294,000
0
Income from Slice Co. 50,250
437,00
$1,065,625 $1,065,625 $437,000 $ 0

Required:
a. Record all consolidation entries needed to prepare a three-part consolidation worksheet as of
December 31, 20X9. (If no entry is required for a transaction/event, select "No journal entry
required" in the first account field.)

(1) Record the basic consolidation entry.

(2) Record the amortized excess value reclassification entry.
(3) Record the excess value (differential) reclassification entry.
(4) Record the optional accumulated depreciation consolidation entry.

Explanation
a.
Equity Method Entries on Pie Corp.'s Books:

General Journal Debit Credit

Investment in Slice Company 51,750
Income from Slice Company 51,750
Record Pie Corporation's 75% share of Slice Company's
 20X9 income.

Cash 19,500
Investment in Slice Company 19,500
Record Pie Corporation's 75% share of Slice Company's
20X9 dividend.

Income from Slice Company 1,500

Investment in Slice Company 1,500
Record amortization of excess acquisition price.

Book Value Calculations:

NCI Pie Corp. Common Retained

25% + 75% = Stock + Earnings
Beginning book value $27,000 $ 81,000 $60,000 $ 48,000
+ Net Income 17,250 51,750 69,000
− Dividends (6,500) (19,500) (26,000)
Ending book value $37,750 $113,250 $60,000 $ 91,000

Excess Value (Differential) Calculations:

NCI Pie Corp. Buildings &

25% + 75% = Equipment +Acc. Depr.+Goodwill
Beginning
$5,125 $15,375 $ 20,000 $(2,000) $2,500
balance
Changes (500) (1,500) (2,000) 0
Ending balance $4,625 $13,875 $ 20,000 $(4,000) $2,500

Investment in Slice Company

Beginning
96,375
Balance
75% Net Income 51,750
19,500 75% Dividends
Excess Val.
1,500
Amort.
Ending Balance 127,125
113,250 Basic
13,875 Excess Reclass.
0

Income from Slice Company

51,750 75% Net Income

Excess Val.
1,500
Amort.
 50,250 Ending Balance
Basic 51,750
1,500 Amort. Reclass
0

Calculation of NCI in NA of Slice Co. :-

= $37,750 (NCI 25% Ending book value) + $4,625 (NCI 25% Ending balance) [found in book value calculations]

= $42,375

b. Prepare a three-part consolidation worksheet for 20X9. (Round your answers to the nearest dollar
amount. Values in the first two columns (the "parent" and "subsidiary" balances) that are to be
deducted should be indicated with a minus sign, while all values in the "Consolidation Entries"
columns should be entered as positive values. For accounts where multiple adjusting entries are
required, combine all debit entries into one amount and enter this amount in the debit column of
the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the
credit column of the worksheet.)
c. Prepare a consolidated balance sheet, income statement, and retained earnings statement for
20X9. (Round your answers to the nearest dollar amount. Amounts to be deducted should be
indicated with a minus sign.)
QUIZ
1. Postage Corporation acquired 75 percent of Stamp Corporation's common stock on
December 31, 20X8, for $300,000. The fair value of the noncontrolling interest at that date was
determined to be $100,000. Stamp's balance sheet immediately before the combination reflected
the following balances:

Cash and Receivables $ 40,000

Inventory 70,000
Land 90,000
Buildings and Equipment (net) 250,000
Total Assets $450,000
Accounts Payable $ 30,000
Income Taxes Payable 40,000
Bonds Payable 100,000
Common Stock 100,000
Retained Earnings 180,000
Total Liabilities and Stockholders' Equity $450,000

A careful review of the fair value of Stamp's assets and liabilities indicated that inventory, land,
and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000
respectively. Goodwill is assigned proportionately to Postage and the noncontrolling
shareholders.

a. Based on the preceding information, what amount of Stamp’s inventory will be included in
the consolidated balance sheet immediately following the acquisition?

ANSWER: $65,000

b. Based on the preceding information, what amount of Stamp’s land will be included in the
consolidated balance sheet immediately following the acquisition?

ANSWER: $100,000

c. Based on the preceding information, what amount of Stamp’s buildings and equipment
(net) will be included in the consolidated balance sheet immediately following the acquisition?

ANSWER: $300,000

d. Based on the preceding information, what amount of goodwill will be reported in the
consolidated balance sheet immediately following the acquisition?

ANSWER: $65,000

e. Based on the preceding information, what amount will be reported as investment in Stamp
Corporation stock in the consolidated balance sheet immediately following the acquisition?
ANSWER: $0

f. Based on the preceding information, what amount will be reported as noncontrolling

interest in the consolidated balance sheet immediately following the acquisition?

ANSWER: $100,000

2. On December 31, 20X8, Pancake Company acquired controlling ownership of Syrup

Company. A consolidated balance sheet was prepared immediately. Partial balance sheet data for
the two companies and the consolidated entity at that date follow:

Pancake Syrup Consolidated

Company Company Entity
Cash $ 80,000 $ 30,000 $ 110,000
Accounts Receivable 50,000 ? 78,000
Inventory 60,000 50,000 115,000
Buildings and Equipment 200,000 140,000 365,000
Less: Accumulated Depreciation (50,000) (28,000) (78,000)
Investment in Syrup Stock ?
Goodwill 15,000
Total Assets $ 464,000 $ 230,000 $ 605,000

Accounts Payable $ 60,000 $ 32,000 $ 82,000

Wages Payable ? ? 78,000
Notes Payable 100,000 60,000 160,000
Common Stock 100,000 50,000 ?
Retained Earnings 154,000 60,000 ?
Noncontrolling Interest 31,000
Total Liabilities and Equities ? $ 230,000 $ 605,000

During 20X8, Pancake Company provided consulting services to Syrup Company and has not yet
paid for them. There were no other receivables or payables between the companies at December
31, 20X8.

Based on the information given, what is the amount of unpaid consulting services at December
31, 20X8, on work done by Pancake Company for Syrup Company?

ANSWER: $10,000

3. On January 1, 20X8, Polo Corporation acquired 75 percent of Stallion Company's voting

common stock for $300,000. At the time of the combination, Stallion reported common stock
outstanding of $200,000 and retained earnings of $150,000, and the fair value of the
noncontrolling interest was $100,000. The book value of Stallion's net assets approximated
market value except for patents that had a market value of $50,000 more than their book value.
The patents had a remaining economic life of ten years at the date of the business combination.
Stallion reported net income of $40,000 and paid dividends of $10,000 during 20X8.

Based on the preceding information, what balance will Polo report as its investment in Stallion at
December 31, 20X8, assuming Polo uses the equity method in accounting for its investment?

ANSWER: $318,750

4. On January 1, 20X6, Plus Corporation acquired 90 percent of Side Corporation for

$180,000 cash. Side reported net income of $30,000 and dividends of $ Based on the preceding
information, the increase in the fair value of patents held by Side is:10,000 for 20X6, 20X7, and
20X8. On January 1, 20X6, Side reported common stock outstanding of $100,000 and retained
earnings of $60,000, and the fair value of the noncontrolling interest was $20,000. It held land
with a book value of $30,000 and a market value of $35,000 and equipment with a book value of
$50,000 and a market value of $60,000 at the date of combination. The remainder of the
differential at acquisition was attributable to an increase in the value of patents, which had a
remaining useful life of five years. All depreciable assets held by Side at the date of acquisition
had a remaining economic life of five years. Plus uses the equity method in accounting for its
investment in Side.

a. Based on the preceding information, the increase in the fair value of patents held by Side is:
ANSWER: $25,000

b. Based on the preceding information, what balance would Plus report as its investment in Side
at January 1, 20X8?

ANSWER: $203,400
c. Based on the preceding information, what balance would Plus report as its investment in Side
at January 1, 20X9?

ANSWER: $215,100
5. On January 1, 20X2, Pint Corporation acquired 80 percent of Size Corporation for
$200,000 cash. Size reported net income of $25,000 each year and dividends of $5,000 each
year for 20X2, 20X3, and 20X4. On January 1, 20X2, Size reported common stock outstanding of
$160,000 and retained earnings of $40,000, and the fair value of the noncontrolling interest was
$50,000. It held land with a book value of $90,000 and a market value of $100,000, and
equipment with a book value of $40,000 and a market value of $48,000 at the date of
combination. The remainder of the differential at acquisition was attributable to an increase in the
value of patents, which had a remaining useful life of eight years. All depreciable assets held by
Size at the date of acquisition had a remaining economic life of eight years. Pint uses the equity
method in accounting for its investment in Size.
a. Based on the preceding information, the increase in the fair value of patents held by Size is
ANSWER: $32,000

b. Based on the preceding information, what balance would Pint report as its investment in Size
at January 1, 20X4?

ANSWER: $224,000

c. Based on the preceding information, what balance would Pint report as its investment in Size
at January 1, 20X5?

ANSWER: $236,000