Chapter 3 Mod

CHAPTER 3
CONSOLIDATIONSSUBSEQUENT TO THE DATE OF ACQUISITION

Answers to Problems
1. A
2. B
3. A
4. A Paars equipment book value12/31/14 ............................
$294,000
Kimmels equipment book value12/31/14 .......................
190,400
Original acquisition-date allocation to Kimmel's equipment
($400,000 $272,000) ...........................................................
128,000
Amortization of allocation
($128,000 10 years for 3 years) ...................................
(38,400)
Consolidated equipment .....................................................
$574,000
5. A
6. B
7. D
8. B
9. B Phoenix revenues
Phoenix expenses
Net income before Sedona effect
Equity income from Sedona
Consolidated net income
-orConsolidated revenues
Consolidated expenses (includes $35K amortization)
Consolidated net income
$498,000
350,000
148,000
55,000
$203,000
$783,000
580,000
$203,000
10. A (same as Phoenix because of equity method use).

11. C Consideration transferred at fair value
Book value acquired
Excess fair over book value
to equipment
to customer list (4-year remaining life)
$600,000
420,000
180,000
80,000
$100,000
Three years since acquisition, of acquisition-date value remains.

12. B
13. C
14. D The $105,000 excess acquisition-date fair value allocation to equipment is
"pushed-down" to the subsidiary and increases its balance to $441,500. The
consolidated balance is $871,500 ($430,000 book value for Crawford plus fair value for
Nashville $441,500).
3-1
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18. (20 minutes) (Goodwill impairment testing.)

a. Goodwill Impairment
Step 1
Fair value of reporting unit =
Carrying value of reporting unit =
$1,028
1,094
Because fair value < carrying value, there is a potential goodwill impairment loss.
Step 2
Fair value of reporting unit
$1,028
Fair value of net assets excluding goodwill
Tangible assets
$137
Recognized intangibles
326
Unrecognized intangibles
255 718
Implied value of goodwill
310
Carrying value of goodwill
755
Goodwill impairment loss
$445
b.
Tangible assets, net
Goodwill
Patent
Customer list
24.
$84
310
-0-0-
(15 Minutes) (Consolidated accounts one year after acquisition)

Stanza acquisition fair value ($10,000 in
stock issue costs reduce
additional paid-in capital) ................... $680,000
Book value of subsidiary
(1/1/15 stockholders' equity balances)..... (480,000)
Fair value in excess of book value .......... $200,000
Remaining
Excess fair value allocated to copyrights

life
Amortization
based on fair value .............................. 120,000 6 yrs.
$20,000
Goodwill ..................................................... $ 80,000 indefinite
-0Total ......................................................
$20,000
a. Consolidated copyrights
Penske (book value) ....................................... $900,000
Stanza (book value) ........................................
400,000
Allocation (above) ..........................................
120,000
Excess amortization, 2015 .............................
(20,000)
Total ........................................................... $1,400,000
3-2
b. Consolidated net income, 2015

Revenues (add book values) .........................
Expenses:
Add book values .......................................
Excess amortizations ...............................
Consolidated net income ................................
c. Consolidated retained earnings, 12/31/15
Retained earnings 1/1/15 (Penske) ................
Net income 2015 (above) ................................
Dividends declared 2015 (Penske) ................
Total ...........................................................
$1,100,000
$700,000
20,000
720,000
$380,000
$600,000
380,000
(80,000)
$900,000
Stanza's retained earnings balance as of January 1, 2015, is not included because

these operations occurred prior to the acquisition. Stanza's dividends were
attributable to Penske and therefore are excluded because they are intra-entity in
nature.
d. Consolidated goodwill, 12/31/15
Allocation (above) ..........................................
26.
$80,000
(50 Minutes) (Consolidated totals for an acquisition where parent employs

the equity method. Worksheet is produced as a separate requirement.)
a. Sea Cliff acquisition-date fair value ...................
Sea Cliff book value .............................................
Fair value in excess of book value .....................
Excess assigned to specific
accounts based on fair value
Computer software ................ $1,200,000
Patented technology ............. 2,100,000
Goodwill .................................
200,000
Total ....................................... $3,500,000
$6,000,000
(2,500,000)
$3,500,000
Annual
Remaining
excess
life
amortization
12 yrs. $100,000
7 yrs. 300,000
indefinite
-0$400,000
b. Equity earnings in Sea Cliff:

Because Persoff uses the equity method, the $575,000 "Equity earnings in Sea Cliff"
reflects a $975,000 equity accrual (100% of Sea Cliffs reported earnings) less
$400,000 in excess amortization expense computed above.
c. Investment in Sea Cliff:
Fair value at 1/1/13 ................................................................. $6,000,000
Persoff's equity in Sea Cliff earnings (net of amortization):
2013 .................................................................. $500,000
2014 .................................................................. 540,000
2015 .................................................................. 575,000
Post-acquisition earnings net of amortization .................... 1,615,000
Sea Cliff dividends since acquisition ...................................
(450,000)
Investment balance at 12/31/15............................................. $7,165,000
3-3
26. continued (part d.)

PERSOFF COMPANY AND CONSOLIDATED SUBSIDIARY
Consolidation Worksheet
For Year Ending December 31, 2015
Income Statement
Revenues
Cost of goods sold
Depreciation
Amortization
Equity earnings in Sea Cliff
Net income
Persoff
(2,720,000)
1,350,000
275,000
370,000
(575,000)
(1,300,000)
Sea Cliff
(2,250,000)
870,000
380,000
25,000
Statement of Retained Earnings

Retained earnings 1/1
Net income (above)
Dividends declared
(7,470,000)
(1,300,000)
600,000
(8,170,000)
(3,240,000)
(975,000)
150,000
(4,065,000)
490,000
7,165,000
375,000
Balance Sheet
Current assets
Investment in Sea Cliff
Computer software
Patented technology
Goodwill
Equipment
Total assets
Liabilities
Common stock
Total liabilities and equity
Adjustments & Eliminations
E
I
400,000
575,000
(975,000)
S 3,240,000
150,000 D
45,000
80,000
0
4,500,000
5,000,000
(520,000)
(2,000,000)
(8,170,000)
(10,690,000)
(135,000)
(800,000)
(4,065,000)
(5,000,000)
(7,470,000)
(1,300,000)
600,000
(8,170,000)
865,000
D
300,000
800,000
100,000
1,835,000
10,690,000
Consolidated
(4,970,000)
2,220,000
655,000
795,000
0
(1,300,000)
150,000
A 1,000,000
A 1,500,000
A 200,000
575,000 I
4,040,000 S
2,700,000 A
100,000 E
300,000 E
800,000
7,865,000
7,865,000
-01,245,000
2,080,000
300,000
6,335,000
10,825,000
(655,000)
(2,000,000)
(8,170,000)
(10,825,000)
3-4
30.
(65 Minutes) (Consolidated totals and worksheet five years after acquisition. Parent
uses equity method. Includes goodwill impairment.)
a. Acquisition-date fair value allocations (given) Remaining Annual excess
life
Land
Equipment
Goodwill
Total
amortizations
$90,000
50,000
60,000
$200,000
-10 yrs.
indefinite
-$5,000
-0$5,000
Because Giant uses the equity method, the $135,000 "Equity in Income of Small"
reflects a $140,000 equity accrual (100% of Smalls reported earnings) less $5,000 in
amortization expense computed above.
b.
Revenues = $1,535,000 (both balances are added together)
Cost of goods sold = $640,000 (both balances are added)
Depreciation expense = $307,000 (both balances are added along with excess
equipment depreciation)
Equity in income of Small = $0 (the parent's Equity in Income of Small balance is
removed and replaced with Small's individual revenue and expense accounts)
Net income = $588,000 (consolidated expenses are subtracted from consolidated
revenues)
Retained earnings, 1/1/15 = $1,417,000 (the parents balance)
Dividends declared = $310,000 (the parent number alone because the subsidiary's
dividends are intra-entity)
Retained earnings, 12/31/15 = $1,695,000 (the parents balance at beginning of the
year plus consolidated net income less consolidated dividends declared)
Current assets = $706,000 (both book balances are added together while the $10,000
intra-entity receivable is eliminated)
Investment in Small = $0 (the parent's asset is removed so that Small's individual
asset and liability accounts can be brought into the consolidation)
Land = $695,000 (both book balances are added together along with the acquisitiondate fair value allocation of $90,000)
Buildings = $723,000 (both book balances are added together)
Equipment = $959,000 (both book balances are added plus the unamortized portion of
the acquisition-date fair value allocation [$50,000 less $25,000 after 5 years of excess
depreciation])
3-5
30. b. (continued)
Goodwill = $60,000 (represents the original acquisition-date allocation)
Total assets = $3,143,000 (summation of all consolidated assets)
Liabilities = $1,198,000 (both balances are added together while the $10,000 intraentity payable is eliminated)
Common stock = $250,000 (parent balance only)
Retained earnings, 12/31/15 = $1,695,000 (see above)
Total liabilities and equity = $3,143,000 (summation of all consolidated liabilities
and equity)
b. Worksheet is presented on following page.
c. If all goodwill from the Small investment was determined to be impaired, Giant would
make the following journal entry on its books:
Goodwill impairment loss
Investment in Small
60,000
60,000
After this entry, the worksheet process would no longer require an adjustment in Entry
(A) to recognize goodwill. The impairment loss would simply carry over to the
consolidated income column. The impairment loss would be reported as a separate line
item in the operating section of the consolidated income statement.
3-6
30. c. (continued)
GIANT COMPANY AND SMALL COMPANY
Consolidation Worksheet
For Year Ending December 31, 2015
Accounts
Revenues ............................................................
Cost of goods sold .............................................
Depreciation expense.........................................
Equity income of Small ......................................
Net income ....................................................
Giant
(1,175,000)
550,000
172,000
(135,000)
(588,000)
Small
(360,000)
90,000
130,000
-0(140,000)
Retained earnings 1/1.........................................

Net income (above) ............................................
Dividends declared.............................................
Retained earnings 12/31 ...............................
(1,417,000)
(588,000)
310,000
(1,695,000)
(620,000)
(140,000)
110,000
(650,000)
Consolidation Entries
Debit
Credit
(E) 5,000
(I) 135,000
(S) 620,000
(D) 110,000
Current assets ....................................................

Investment in Small ............................................
398,000
995,000
318,000
-0-
Land .................................................................
Buildings (net) ....................................................
Equipment (net) ..................................................
Goodwill ..............................................................
Total assets ...................................................
440,000
304,000
648,000
-02,785,000
165,000
419,000
286,000
-01,188,000
(A) 90,000
Liabilities .............................................................
Common stock....................................................
Retained earnings (above) .................................
Total liabilities and equity ............................
(840,000)
(250,000)
(1,695,000)
(2,785,000)
(368,000)
(170,000)
(650,000)
(1,188,000)
(P) 10,000
(S)170,000
(D) 110,000
(A) 30,000
(A) 60,000
1,230,000
(P) 10,000
(S) 790,000
(A) 180,000
(I) 135,000
(E)
5,000
1,230,000
Consolidated
Totals
(1,535,000)
640,000
307,000
-0(588,000)
(1,417,000)
(588,000)
310,000
(1,695,000)
706,000
-0-
695,000
723,000
959,000
60,000
3,143,000
(1,198,000)
(250,000)
(1,695,000)
(3,143,000)
Parentheses indicate a credit balance.
3-7
31. (45 Minutes) (Consolidated totals and worksheet two years after acquisition. Parent uses
initial value method. Includes question comparing initial value and equity methods).
a. 12/31/2015
Sales
Cost of goods sold
Interest expense
Depreciation expense
Amortization expense
Dividend income
Net Income
Pinnacle
(7,000,000)
4,650,000
255,000
585,000
(50,000)
(1,560,000)
(190,000)
Retained earnings 1/1/15

Net income
Dividends declared
(5,000,000)
(1,560,000)
560,000
(6,000,000)
(1,350,000)
(190,000)
50,000
(1,490,000)
Cash
Accounts receivable
Inventory
Investment in Strata
433,000
1,210,000
1,235,000
3,200,000
165,000
200,000
1,500,000
Buildings (net)
Licensing agreements
Goodwill
Total Assets
5,572,000
2,040,000
1,800,000
Accounts payable
Long-term debt
Common stock - Pinnacle
Common stock - Strata
Total Liabilities and OE
350,000
12,000,000
(300,000)
(2,700,000)
(3,000,000)
(6,000,000)
(12,000,000)
Strata
(3,000,000)
1,700,000
160,000
350,000
600,000
Adjustments and Eliminations
30,000
50,000
S 1,350,000
20,000
*C
240,000
50,000
85,000
*C
240,000
S 2,850,000
A 590,000
A
E
A
270,000
20,000
400,000
E
A
(715,000)
(2,000,000)
85,000
(1,500,000)
(1,490,000)
(5,705,000)
S 1,500,000
30,000
80,000
5,705,000
3,945,000
3,945,000
Consolidated
(10,000,000)
6,350,000
415,000
965,000
580,000
0
(1,690,000)
(5,240,000)
(1,690,000)
560,000
(6,370,000)
598,000
1,325,000
2,735,000
0
7,852,000
1,740,000
750,000
15,000,000
(930,000)
(4,700,000)
(3,000,000)
0
(6,370,000)
(15,000,000)
b. Subsidiary income (190,000 10,000)....................................... $180,000

1/1/15 retained earnings (5,000,000 + 240,000) ..................... $5,240,000
Investment in Strata:
Initial value basis ............................................................. $3,200,000
Conversion to equity as of 1/1/15 .................. 240,000
Net income for 2015 ........................................ 180,000
Dividends for 2015 .......................................... (50,000)
370,000
Equity method balance 12/31/15 ...................................... $3,570,000
c. The internal method choice for investment accounting has no effect on consolidated financial
statements.
3-9
34. (35 minutes) (Contingent performance obligation and worksheet adjustments for equity
and initial value methods.)
a.
Investment in Wolfpack, Inc.

Contingent performance obligation
Cash
500,000
35,000
465,000
b.
12/31/14 Loss from increase in contingent performance obligation
5,000
5,000
12/31/15 Loss from increase in contingent performance obligation 10,000

10,000
12/31/15 Contingent performance obligation
Cash
50,000
50,000
c. Equity Method
Common stock- Wolfpack
Retained earnings-Wolfpack
Investment in Wolfpack
200,000
180,000
380,000
Royalty agreements
Goodwill
90,000
60,000
Equity earnings of Wolfpack

65,000
Dividends declared
35,000
Royalty agreements
10,000
150,000
65,000
35,000
10,000
d. Initial Value Method

Retained earnings-Branson
30,000
30,000
Common stock
Retained earnings-Wolfpack
200,000
180,000
380,000
3-10
34. (continued)
36.
Royalty agreements
Goodwill
90,000
60,000
Dividend income
Dividends declared
35,000
Royalty agreements
10,000
150,000
35,000
10,000
(20 Minutes) (Consolidated balances three years after acquisition. Parent

has applied the equity method.)
a. Schedule 1Acquisition-Date Fair Value Allocation and Amortization
Jasmines acquisition-date fair value $206,000
Book value of Jasmine ..................
(140,000)
Fair value in excess of book value
66,000
Excess fair value assigned to specific
accounts based on individual fair values
Equipment ...............................
Buildings (overvalued) ...........
Goodwill ..................................
Total ...........................................
Remaining
life
$54,400
8 yrs.
(10,000)
20 yrs.
$21,600 indefinite
Annual excess
amortization
$6,800
(500)
-0$6,300
Investment in Jasmine Company12/31/15:

Jasmines acquisition-date fair value ...........................
2013 Increase in book value of subsidiary ..................
2013 Excess amortizations (Schedule 1) .....................
Investment in Jasmine Company 12/31/15 ..............
$206,000
40,000
(6,300)
20,000
(6,300)
10,000
(6,300)
$257,100
3-11
36. (continued)
b. Equity in subsidiary earnings:
Income accrual ................................................................
Excess amortizations (Schedule 1) ..............................
Equity in subsidiary earnings ..................................
$30,000
(6,300)
$23,700
c. Consolidated net income:

Consolidated revenues (add book values) ..................
Consolidated expenses (add book values) .................
Excess amortization expenses (Schedule 1) ...............
Consolidated net income ..............................................
$414,000
(272,000)
(6,300)
$135,700
d. Consolidated equipment:
Book values added together .........................................
Acquisition-date fair value allocation ..........................
Excess depreciation ($6,800 3) ..................................
Consolidated equipment ..........................................
$370,000
54,400
(20,400)
$404,000
e. Consolidated buildings:
Book values added together .........................................
Acquisition-date fair value allocation ...........................
Excess depreciation ($500 3) .....................................
Consolidated buildings .............................................
$288,000
(10,000)
1,500
$279,500
f. Allocation of excess fair value to goodwill ...................
$21,600
g. Consolidated common stock .........................................
$290,000
The parent's $290,000 balance appropriately shows the parent company

stockholders contributed capital (the acquired company's common stock will be
eliminated each year on the consolidation worksheet).
h. Consolidated retained earnings ....................................
$410,000
Tyler's balance of $410,000 is equal to the consolidated total because the equity
method has been applied.
3-12

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CHAPTER 3

CONSOLIDATIONSSUBSEQUENT TO THE DATE OF ACQUISITION

10. A (same as Phoenix because of equity method use).

Three years since acquisition, of acquisition-date value remains.

18. (20 minutes) (Goodwill impairment testing.)

(15 Minutes) (Consolidated accounts one year after acquisition)

Excess fair value allocated to copyrights

b. Consolidated net income, 2015

Stanza's retained earnings balance as of January 1, 2015, is not included because

(50 Minutes) (Consolidated totals for an acquisition where parent employs

b. Equity earnings in Sea Cliff:

26. continued (part d.)

Statement of Retained Earnings

Adjustments & Eliminations

Retained earnings 1/1.........................................

Current assets ....................................................

Parentheses indicate a credit balance.

Retained earnings 1/1/15

Adjustments and Eliminations

b. Subsidiary income (190,000 10,000)....................................... $180,000

Investment in Wolfpack, Inc.

12/31/15 Loss from increase in contingent performance obligation 10,000

Equity earnings of Wolfpack

d. Initial Value Method

(20 Minutes) (Consolidated balances three years after acquisition. Parent

Investment in Jasmine Company12/31/15:

c. Consolidated net income:

f. Allocation of excess fair value to goodwill ...................

g. Consolidated common stock .........................................

The parent's $290,000 balance appropriately shows the parent company

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