CHAPTER 4 HOMEWORK SOLUTIONS

SOLUTIONS TO REVIEW QUESTIONS

1. Noncontrolling interest represents the equity interest of the noncontrolling shareholders in

the fair value of the subsidiary. IFRS 10 requires that it be shown in shareholders' equity in
the consolidated balance sheet under both the identifiable net assets and fair value
enterprise methods.
2. The consolidated balance sheet typically includes 100 percent of the subsidiary’s assets and
liabilities. When the parent holds less than 100 percent ownership of the subsidiary, the
noncontrolling interest’s claim on those net assets must be reported. The balance sheet will
not balance without this additional amount.
3. Consolidated retained earnings includes only amounts attributable to the shareholders of the
parent company. Thus, none of the retained earnings is assigned to the noncontrolling
interest.
4. If 80% of a subsidiary cost $80,000, it is inferred that 100% would have cost $100,000. The
fair value of 100% of the subsidiary's net assets is subtracted from this implied acquisition
cost and the difference is goodwill. The amount of the noncontrolling interest is determined
based on the subsidiary's fair values and goodwill arising from the purchase. With a small
ownership percentage (e.g., 52%), or when majority ownership is reached through a series
of small step acquisitions, this inference as to what 100% would cost is significantly less
reliable than at higher ownership percentages.
5. Deferred charges do not meet the definition of an asset. Therefore, the deferred charge
should not be reported on the consolidation balance sheet. In other words, the deferred
charge should be measured at zero and would appear as a fair value deficiency on the
schedule of acquisition differential.
6. The proportionate consolidation method requires consolidation of the parent's share of the
subsidiary's net assets, therefore giving no recognition to the noncontrolling interest at all.
Fair value enterprise method views the consolidated entity as being owned by two groups of
shareholders, the parent and the noncontrolling interest, and views the purchase transaction
to have revalued both parties' ownership. Thus, the fair value enterprise method requires the
noncontrolling interest to be recorded at its percentage share of the fair value of the
subsidiary's net assets (including goodwill) at the date that the parent acquired its controlling
interest. Identifiable net assets method also gives attention to NCI as one of the
shareholders groups; Under this method, noncontrolling interest is to be recorded at its
percentage share of the fair value of the subsidiary's identifiable net assets (excluding
goodwill).
7. Goodwill and noncontrolling interest differ under the two consolidation methods. Under the
identifiable net assets method, only the parent’s share of the subsidiary’s goodwill is
reported because it is too difficult or subjective to measure the total goodwill of the
subsidiary. Since the noncontrolling interest’s share of the subsidiary’s goodwill is not
included on the consolidated balance sheet, the value for noncontrolling does not include a
share of the subsidiary’s goodwill. Therefore, both goodwill and noncontrolling interest are
smaller amounts under the identifiable net assets method in comparison to the fair value
enterprise method.
8. Negative goodwill exists if the implied acquisition cost for a 100% investment is less than the
fair value of the subsidiary's identifiable net assets. Negative goodwill is reported on the
consolidated income statement as a gain on purchase.
9. No, it is not the same. A negative acquisition differential exists if the implied value for a
100% acquisition is less than the carrying amount of the subsidiary's net assets. Negative
goodwill exists if the implied acquisition cost is less than the fair value of the subsidiary's
identifiable net assets. It is possible to have a negative acquisition differential and end up
with positive goodwill.
10. No, the historical cost principle is not applied when accounting for negative goodwill. In fact,
it is violated. The subsidiary’s identifiable net assets are reported at fair value on the
consolidated balance sheet at the date of acquisition regardless of the amount paid by the
parent. The negative goodwill is reported as a gain on purchase, which is not consistent with
the historical cost principle.
11. Goodwill of this nature is treated as if it does not exist at the date of acquisition. A new
goodwill figure is calculated based on the acquisition cost at the date of acquisition. When
preparing the schedule to allocate the acquisition differential, we assume that the goodwill
had been written off by the subsidiary just before the parent acquired its controlling interest
in the subsidiary. When calculating goodwill and goodwill impairment in subsequent years,
we must adjust on consolidation based on the goodwill calculated at the date of acquisition.
12. Contingent consideration is the additional consideration that may be payable for the
acquisition of a business. The additional consideration is dependent upon whether certain
future events occur (or do not occur). For example, a further payment may be required if
future net income reaches (or fails to reach) a certain level. The contingent consideration
should be measured at fair value at the date of acquisition. To do so, the parent should
assess the amount expected to be paid in the future under different scenarios, assign
probabilities as to the likelihood of the scenarios occurring, derive an expected value of the
likely amount to be paid, and use a discount rate to derive the value of the expected
payment in today’s dollars.
13. Changes in the fair value of contingent consideration that will be payable in cash should be
recognized in net income at each reporting date with a corresponding adjustment to the
contingent liability.
14. A private company may choose not to consolidate its subsidiaries and instead can report its
investment in subsidiaries using the equity method or the cost method. All subsidiaries
should be reported using the same method. However, if the entity would otherwise choose
to use the cost method and the security is traded in an active market, it must report the
investment at fair value.
15. The fair value enterprise method would typically report the lowest and proportionate
consolidation the highest debt-to equity ratio because of the value reported for
noncontrolling interest, which is reported as a part of shareholders’ equity. Under
proportionate consolidation, no value is included for NCI. Under the fair value enterprise
method, NCI reports the highest amount because it includes the NCI’s share of the
subsidiary’s goodwill. The higher the shareholders’ equity, the lower the debt-to-equity ratio
and vice versa.
16. The consolidation elimination entries are not recorded in the accounting records of either the
parent or subsidiary unless the subsidiary applies push down accounting. The elimination
entries are recorded on a consolidated working paper or consolidated worksheet, which is
used to facilitate the consolidation process.
 Problem 4-2

(a)
Khan’s cost for 70% of shares 770,000
Implied value of 100% of shares 1,100,000
NCI’s 30% interest 330,000

(b)
Implied value of 100% of Winnipeg $1,100,000
Carrying amount of Winnipeg’s net assets
Assets $1,426,000
Liabilities 558,000
868,000
Acquisition differential 232,000
Allocated: FV – CA
Plant and equipment $ 149,000
Patents 120,000
Current assets 35,000
Long-term debt (23,000) 281,000
Goodwill ($49,000)

Problem 4-3
(a)
Wang’s cost for 80% of shares $1,560,000
Value of NCI’s 20% (10,000 shares x $33/share) 330,000
Total value of Brandon 1,890,000
Carrying amount of Brandon’s net assets
Assets $1,626,000
Liabilities 276,500
1,349,500
Acquisition differential 540,500
Allocated: FV – CA
Accounts receivable $ 15,500
Inventory (18,800)
PP&E 188,500
Liability for warranties (32,600) 152,600
Goodwill $387,900

(b)
Wang’s cost for 80% of shares $1,560,000
Wang’s share of carrying amount of Brandon’s net assets (1,349,500 x 80%) (1,079,600)
Wang’s share of acquisition differential for identifiable net assets (INA)
(152,600 x 80%) (122,080)
Wang’s share of goodwill = goodwill under INA approach 358,320
Total goodwill from part a) $387,900
Less: Wang’ share of goodwill 358,320
NCI’s share of goodwill in part a), which is not recognized under INA approach 29,580
NCI under fair value enterprise approach in part a) 330,000
NCI under INA approach $300,420

Problem 4-5
(a)
Investment in Robin 1,040,000
Cash 1,040,000
Legal fees expense 25,000
Cash 25,000
(b)
Cost of 80% of Robin $1,040,000
Implied value of 100% of Robin $1,300,000
Carrying amount of Robin’s net assets
Assets $1,260,000
Liabilities 612,000
648,000
Acquisition differential 652,000
Allocated: FV – CA
Current assets $48,000
Plant and equipment 132,000
Research project 100,000
Patents 72,000
Long-term debt (24,000) 328,000
Goodwill $324,000

The research project meets the requirement to be recognized as an identifiable asset. Robin
feels that it is within a year of developing a prototype for a state-of-the-art medical device.
Ravinder attributes a value of $100,000 to this technology and knowledge. This in-process
research is capable of being separated or divided from Robin’s other assets and could be sold,
transferred, licensed, rented, or exchanged (regardless of whether there is intent to do so).
(c)
RAVINDER CORP.
Consolidated Balance Sheet
August 1, Year 3

Current assets (1,600,000 – 1,040,000 – 25,000 + 420,000 + 48,000) $1,003,000

Plant and equipment (1,330,000 + 1,340,000 – 500,000 + 132,000) 2,302,000
Accumulated depreciation (250,000 + 500,000 – 500,000) (250,000)
Patents – net (0 + 0 + 72,000) 72,000
Research project (0 + 0 + 100,000) 100,000
Goodwill (0 + 0 + 324,000) 324,000
$3,551,000
Current liabilities (1,360,000 + 252,000) $1,612,000
Long-term debt (480,000 + 360,000 + 24,000) 864,000
Common shares 720,000
Retained earnings (120,000 –25,000) 95,000
Noncontrolling interest (1,300,000 – 1,040,000) 260,000
$3,551,000

Problem 4-6
(a)
Cost of 70% of Barrel $329,000
Implied value of 100% of Barrel 470,000 (a)
Carrying amount of Barrel’s net assets (480,000 - 180,000) 300,000
Acquisition differential 170,000
Allocated:
Plant and equipment (320,000 –270,000) 50,000 (b)
Goodwill $120,000 (c)

Pork Co.
Consolidated Statement of Financial Position
December 31, Year 2

Plant and equipment (400,000 + 270,000 + (b) 50,000) $720,000

Goodwill (c) 120,000
Inventory (120,000 + 102,000) 222,000
Accounts receivable (45,000 + 48,000) 93,000
Cash (22,000+ 60,000) 82,000
$1,237,000

Ordinary shares $260,000

Retained earnings 200,000
Noncontrolling interest (30%  (a) 470,000) 141,000
Long-term debt (240,000 + 108,000) 348,000
Current liabilities (216,000 + 72,000) 288,000
$1,237,000
(b) Goodwill under fair value enterprise method $120,000
Less: NCI’s share (30%) 36,000
Goodwill under identifiable net assets method $84,000

NCI under fair value enterprise method $141,000

Less: NCI’s share of goodwill (30%) 36,000
NCI under identifiable net assets method $105,000

Cost of investment (288,000 + 48,000 for contingent consideration) $336,000

Implied value of 100% investment $420,000
Carrying amount of McGraw Ltd.’s net assets
Assets $728,000
Liabilities 390,000
338,000
Less: goodwill 35,000
303,000
Acquisition differential 117,000
Allocated: FV – CA
Inventory $8,000
Land 35,000
Plant and equipment 13,000 56,000
Goodwill $61,000

Hill Corp.
Consolidated Balance Sheet
December 31, Year 4
Cash (13,000 + 6,500) $19,500
Accounts receivable (181,300 + 45,500) 226,800
Inventory (117,000 + 208,000 + 8,000) 333,000
Land (91,000 + 52,000 + 35,000) 178,000
Plant and equipment (468,000 + 381,000 + 13,000) 862,000
Goodwill (117,000 + 0 + 61,000) 178,000
$1,797,300

Current liabilities (156,000 + 104,000) $260,000

Contingent consideration payable 48,000
Long-term debt (416,000 + 286,000) 702,000
Common shares 520,000
Retained earnings 183,300
Noncontrolling interest (20% x $420,000) 84,000
$1,797,300
Problem 4-14
(a) To determine the fair values of the contingent consideration, Calof computes the present
value of the expected payments as follows:
 Cash contingency = $56,000 x 30% / (1 + .04) = $16,154
 Share contingency = $13,000 x 20% / (1 + .04) = $2,500

Calof then records in its accounting records the acquisition of Xiyu as follows:

Investment in Xiyu Company 733,654

Common shares 715,000
Liability for contingent consideration for earnout 16,154
Liability for contingent consideration for stock price guarantee 2,500

(b)
Interest expense (16,154 x 4%) 646
Loss on contingent consideration for earnout 39,200
Liability for contingent consideration for earnout (56,000 – 16,154) 39,846

Interest expense (2,500 x 4%) 100

Loss on contingent consideration for stock price guarantee 4,420
Liability for contingent consideration for stock price guarantee (7,020 – 2,500) 4,520

(c)
The liability for contingent consideration for earnout will have a balance of $56,000 on
December 31, Year 4 and will be presented as a current liability. The liability for contingent
consideration for stock price guarantee will have a balance of $7,020 on December 31, Year 4
and will also be presented as a current liability.