Chapter 2Consolidated Statements: Date of Acquisition

MULTIPLE CHOICE
1.
Account
Sales
Cost of Goods Sold
Gross Profit
Selling & Admin. Expenses
Net Income
Dividends paid

Investor
$500,000
230,000
$270,000
120,000
$150,000

Investee
$300,000
170,000
$130,000
100,000
$ 30,000

50,000

10,000

Assuming Investor owns 70% of Investee. What is the amount that will be recorded as Net Income
for the Controlling Interest?
a.
$164,000
b.
$171,000
c.
$178,000
d.
$180,000
ANS: B
a.
b.
c.
d.

DIF: M

OBJ: 2-1

2.
Consolidated financial statements are designed to provide:
informative information to all shareholders.
the results of operations, cash flow, and the balance sheet in an understandable and
informative manner for creditors.
the results of operations, cash flow, and the balance sheet as if the parent and subsidiary
were a single entity.
subsidiary information for the subsidiary shareholders.

ANS: C

DIF: M

OBJ: 2-2

3.
Consolidated financial statements are appropriate even without a majority
ownership if which of the following exists:
a.
the subsidiary has the right to appoint members of the parent company's board of
directors.
b.
the parent company has the right to appoint a majority of the members of the subsidiary's board of directors through a large minority voting interest.
c.
the subsidiary owns a large minority voting interest in the parent company.
d.
the parent company has an ability to assume the role of general partner in a limited
partnership with the approval of the subsidiary's board of directors.
ANS: B

DIF: M

OBJ: 2-3

4.
The SEC and FASB has recommended that a parent corporation should consolidate the financial statements of the subsidiary into its financial statements when it exercises control
over the subsidiary, even without majority ownership. In which of the following situations would
control NOT be evident?
a.
Access to subsidiary assets is available to all shareholders.
b.
Dividend policy is set by the parent.
c.
The subsidiary does not determine compensation for its main employees.
d.
Substantially all cash flows of the subsidiary flow to the controlling shareholders.
ANS: A

DIF: E

OBJ: 2-3

a.
b.
c.
d.

5.
The goal of the consolidation process is for:
asset acquisitions and 100% stock acquisitions to result in the same balance sheet.
goodwill to appear on the balance sheet of the consolidated entity.
the assets of the noncontrolling interest to be predominately displayed on the balance
sheet.
the investment in the subsidiary to be properly valued on the consolidated balance
sheet.

ANS: A

DIF: E

OBJ: 2-4

6.
A subsidiary was acquired for cash in a business combination on December 31,
20X1. The purchase price exceeded the fair value of identifiable net assets. The acquired
company owned equipment with a fair value in excess of the book value as of the date of the
combination. A consolidated balance sheet prepared on December 31, 20X1, would
a.
report the excess of the fair value over the book value of the equipment as part of
goodwill.
b.
report the excess of the fair value over the book value of the equipment as part of the
plant and equipment account.
c.
reduce retained earnings for the excess of the fair value of the equipment over its book
value.
d.
make no adjustment for the excess of the fair value of the equipment over book value.
Instead, it is an adjustment to expense over the life of the equipment.
ANS: B

DIF: D

OBJ: 2-5

7.
Parr Company purchased 100% of the voting common stock of Super Company
for $2,000,000. There are no liabilities. The following book and fair values are available:
Book Value
Fair Value
Current assets
$300,000
$600,000
Land and building
600,000
900,000
Machinery
500,000
600,000
Goodwill
100,000
?
The machinery will appear on the consolidated balance sheet at ____.
a.
$560,000
b.
$860,000
c.
$600,000
d.
$900,000
ANS: C

DIF: M

OBJ: 2-5

8.
Pagach Company purchased 100% of the voting common stock of Rage Company
for $1,800,000. The following book and fair values are available:
Book Value
Fair Value
Current assets
$150,000
$300,000
Land and building
280,000
280,000
Machinery
400,000
700,000
Bonds payable
(300,000)
(250,000)
Goodwill
150,000
?
The bonds payable will appear on the consolidated balance sheet
a.
at $300,000 (with no premium or discount shown).
b.
at $300,000 less a discount of $50,000.
c.
at $0; assets are recorded net of liabilities.

d.
at an amount less than $250,000 since it is a bargain purchase.
ANS: B
DIF: M
OBJ: 2-5
a.
b.
c.
d.

9.
The investment in a subsidiary should be recorded on the parent's books at the
underlying book value of the subsidiary's net assets.
fair value of the subsidiary's net identifiable assets.
fair value of the consideration given.
fair value of the consideration given plus an estimated value for goodwill.

ANS: C

DIF: E

OBJ: 2-6

10.
Which of the following costs of a business combination can be included in the
value charged to paid-in-capital in excess of par?
a.
direct and indirect acquisition costs
b.
direct acquisition costs
c.
direct acquisition costs and stock issue costs if stock is issued as consideration
d.
stock issue costs if stock is issued as consideration
ANS: D

DIF: M

OBJ: 2-6

11.
When it purchased Sutton, Inc. on January 1, 20X1, Pavin Corporation issued
500,000 shares of its $5 par voting common stock. On that date the fair value of those shares
totaled $4,200,000. Related to the acquisition, Pavin had payments to the attorneys and accountants of $200,000, and stock issuance fees of $100,000. Immediately prior to the purchase, the
equity sections of the two firms appeared as follows:
Pavin
$ 4,000,000
7,500,000
5,500,000
$17,000,000

Common stock
Paid-in capital in excess of par
Retained earnings
Total

Sutton
$ 700,000
900,000
500,000
$2,100,000

Immediately after the purchase, the consolidated balance sheet should report paid-in capital in
excess of par of
a.
$8,900,000
b.
$9,100,000
c.
$9,200,000
d.
$9,300,000
ANS: C

DIF: M

OBJ: 2-6

12.
Judd Company issued nonvoting preferred stock with a fair value of $1,500,000
in exchange for all the outstanding common stock of the Bath Corporation. On the date of the
exchange, Bath had tangible net assets with a book value of $900,000 and a fair value of
$1,400,000. In addition, Judd issued preferred stock valued at $100,000 to an individual as a
finder's fee for arranging the transaction. As a result of these transactions, Judd should report an
increase in net assets of ____.
a.
$900,000
b.
$1,400,000
c.
$1,500,000
d.
$1,600,000
ANS: C

DIF: M

OBJ: 2-6

13.
In an 80% purchase accounted for as a tax-free exchange, the excess of cost over
book value is $200,000. The equipment's book value for tax purposes is $100,000 and its fair

value is $150,000. All other identifiable assets and liabilities have fair values equal to their book
values. The tax rate is 30%. What is the total deferred tax liability that should be recognized on
the consolidated balance sheet on the date of purchase?
a.
$12,000
b.
$60,000
c.
$72,857
d.
$85,714
ANS: D

DIF: D

OBJ: 2-6

14.
On June 30, 20X1, Naeder Corporation purchased for cash at $10 per share all
100,000 shares of the outstanding common stock of the Tedd Company. The total fair value of all
identifiable net assets of Tedd was $1,400,000. The only noncurrent asset is property with a fair
value of $350,000. The consolidated balance sheet of Naeder and its wholly owned subsidiary on
June 30, 20X1, should report
a.
a retained earnings balance that is inclusive of a gain of $400,000.
b.
goodwill of $400,000.
c.
a retained earnings balance that is inclusive of a gain of $350,000.
d.
a gain of $400,000
ANS: A

DIF: M

OBJ: 2-6 | 2-7

Scenario 2-1
Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of its $1
par value stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in
direct acquisition costs. Prior to the transaction, the companies have the following balance sheets:
Assets
Cash
Accounts receivable
Inventory
Property, plant, and equipment (net)
Total assets

Pinehollow
$ 150,000
500,000
900,000
1,850,000
$3,400,000

Liabilities and Stockholders' Equity

Current liabilities
Bonds payable
Common stock ($1 par)
Paid-in capital in excess of par
Retained earnings
Total liabilities and equity

$ 300,000
1,000,000
300,000
800,000
1,000,000
$3,400,000

Stonebriar
50,000
350,000
600,000
900,000
$1,900,000
$

$ 100,000
600,000
100,000
900,000
200,000
$1,900,000

The fair values of Stonebriar's inventory and plant, property and equipment are $700,000 and
$1,000,000, respectively.
15.
Refer to Scenario 2-1. The journal entry to record the purchase of Stonebriar
would include a
a.
credit to common stock for $1,500,000.
b.
credit to additional paid-in capital for $1,100,000.
c.
debit to investment for $1,500,000.
d.
debit to investment for $1,525,000.
ANS: C
____.

16.

DIF: M

OBJ: 2-6 | 2-7

Refer to Scenario 2-1. Goodwill associated with the purchase of Stonebriar is

a.
b.
c.
d.

$100,000
$125,000
$300,000
$325,000

ANS: A

DIF: M

OBJ: 2-6 | 2-7

17.
On April 1, 20X1, Paape Company paid $950,000 for all the issued and outstanding stock of Simon Corporation. The recorded assets and liabilities of the Simon Corporation on
April 1, 20X1, follow:
Cash
Inventory
Property and equipment (net of accumulated depreciation of $320,000)
Liabilities

$ 80,000
240,000
480,000
(180,000)

On April 1, 20X1, it was determined that the inventory of Simon had a fair value of $190,000,
and the property and equipment (net) had a fair value of $560,000. What is the amount of
goodwill resulting from the business combination?
a.
$0
b.
$120,000
c.
$300,000
d.
$230,000
ANS: C

DIF: D

OBJ: 2-7

18.
Paro Company purchased 80% of the voting common stock of Sabon Company
for $900,000. There are no liabilities. The following book and fair values are available for Sabon:
Book Value
$100,000
200,000
300,000
100,000

Current assets
Land and building
Machinery
Goodwill

Fair Value
$200,000
200,000
600,000
?

The machinery will appear on the consolidated balance sheet at ____.

a.
$600,000
b.
$540,000
c.
$480,000
d.
$300,000
ANS: A

DIF: M

OBJ: 2-8

19.
When a company purchases another company that has existing goodwill and the
transaction is accounted for as a stock acquisition, the goodwill should be treated in the following
manner.
a.
Goodwill on the books of an acquired company should be disregarded.
b.
Goodwill is recorded prior to recording fixed assets.
c.
Goodwill is not recorded until all assets are stated at full fair value.
d.
Goodwill is treated consistent with other tangible assets.
ANS: C

DIF: M

OBJ: 2-9

20.
The SEC requires the use of push-down accounting in some specific situations.
Push-down accounting results in:
a.
goodwill be recorded in the parent company separate accounts.

b.
c.
d.

eliminating subsidiary retained earnings and paid-in capital in excess of par.

reflecting fair values on the subsidiary's separate accounts.
changing the consolidation worksheet procedure because no adjustment is necessary to
eliminate the investment in subsidiary account.

ANS: C

DIF: M

OBJ: 2-10

PROBLEM
1.
31, 20X1:

Supernova Company had the following summarized balance sheet on December

Assets

Accounts receivable
Inventory
Property and plant (net)
Goodwill
Total

$ 200,000
450,000
600,000
150,000
$1,400,000
Liabilities and Equity

Notes payable
Common stock, $5 par
Paid-in capital in excess of par
Retained earnings
Total

$ 600,000
300,000
400,000
100,000
$1,400,000

The fair value of the inventory and property and plant is $600,000 and $850,000, respectively.
Assume that Redstar Corporation exchanges 75,000 of its $3 par value shares of common stock,
when the fair price is $20/share, for 100% of the common stock of Supernova Company. Redstar
incurred acquisition costs of $5,000 and stock issuance costs of $5,000.
Required:
a.

What journal entry will Redstar Corporation record for the investment in Supernova?

b.

Prepare a supporting value analysis and determination and distribution of excess

schedule

c.

Prepare Redstar's elimination and adjustment entry for the acquisition of Supernova.

ANS:
a.

Investment in Supernova (75,000 $20)

Common Stock $3 par value
Paid-in-capital excess of par
Acquisition expense*
Cash

1,500,000
225,000
1,275,000
10,000

*alternative treatment: debit Paid-in capital in excess of par for issue costs
b)
Value Analysis

10,000

Company ImCompany fair value

Fair value identifiable net assets
Goodwill

$1,500,000
plied1,050,000
Fair Value
$ 450,000

Determination & Distribution Schedule

Company
Implied
Fair Value
Fair value of subsidiary
$1,500,000
Less book value:
C Stk
$ 300,000
APIC
400,000
R/E
100,000
Total S/E
$ 800,000
Interest Acquired
Book value
Excess of fair over book
$ 700,000
Adjustment of identifiable accounts:
Adjustment
Inventory
$ 150,000
Property and equip
250,000
Goodwill (increase over
300,000
$150,000)
Total
$ 700,000
c.

NCI Value
(0%)
(100%)
$1,500,000
Parent
Price
1,050,000
$ 450,000

(100%)
Parent Price
$1,500,000

N/A

0%
NCI Value

$ 800,000
100%
$ 800,000
$ 700,000

Elimination entries
EL Common Stock $5 Par Sub
Paid-in capital in excess of par sub
Retained Earnings sub
Investment in Supernova
D

DIF: M

Inventory
Property and Plant
Goodwill
Investment in Supernova

300,000
400,000
100,000
800,000
150,000
250,000
300,000
700,000

OBJ: 2-2 | 2-3 | 2-4 | 2-5 | 2-6

2.
On December 31, 20X1, Priority Company purchased 80% of the common stock
of Subsidiary Company for $1,550,000. On this date, Subsidiary had total owners' equity of
$650,000 (common stock $100,000; other paid-in capital, $200,000; and retained earnings,
$350,000). Any excess of cost over book value is due to the under or overvaluation of certain
assets and liabilities. Assets and liabilities with differences in book and fair values are provided in
the following table:

Current Assets
Accounts Receivable
Inventory

Book
Value
$500,000
200,000
800,000

Fair
Value
$800,000
150,000
800,000

Land
Buildings (net)
Current Liabilities
Long-Term Debt

100,000
700,000
800,000
850,000

600,000
900,000
875,000
930,000

Remaining excess, if any, is due to goodwill.

Required:
a.

Using the information above and on the separate worksheet, prepare a schedule to
determine and distribute the excess of cost over book value.

b.

Complete the Figure 2-1 worksheet for a consolidated balance sheet as of December 31,
20X1.

Account Titles
Assets:
Current Assets
Accounts Receivable
Inventory
Investment in Sub Co.
Land
Buildings and Equipment
Accumulated DepreciaTotal
Liabilities and Equity:
Current Liabilities
Bonds Payable
Common Stock P Co.
Addnl paid-in capt P
Co
Retained Earnings P Co.

Figure 2-1
Trial Balance
Priority
Sub.
Company
Company
425,000
530,000
1,600,000
1,550,000

500,000
200,000
800,000

225,000
1,200,000

100,000
1,100,000

4,730,000

2,300,000

2,100,000
1,000,000

800,000
850,000

900,000
670,000
60,000

Common Stock S Co.

Addnl paid-in capt S
Co
Retained Earnings S Co.
NCI
Total

Eliminations and
Adjustments
Debit
Credit

100,000
200,000
350,000
4,730,000

2,300,000
(continued)
Consolidated

Account Titles
Assets:
Current Assets
Accounts Receivable
Inventory
Investment in Sub Co.

NCI

Balance Sheet
Debit
Credit

Land
Buildings and Equipment
Accumulated Depreciation
Total
Liabilities and Equity:
Current Liabilities
Bonds Payable
Common Stock P Co.
Addnl paid-in capt P Co
Retained Earnings P Co.
Common Stock S Co.
Addnl paid-in capt S Co
Retained Earnings S Co.
NCI
Total
ANS:
a.

Determination and Distribution Schedule:

Fair value of subsidiary

Less book value:
C Stk
APIC
R/E
Total S/E

Company
Implied
Fair Value
$ 1,937,500
$
$

100,000
200,000
350,000
650,000

Interest Acquired
Book value
Excess of fair over book
Adjust identifiable accounts:
Current assets
Accounts Receivable
Land
Buildings (net)
Current liabilities
Long-term debt

$ 1,287,500
$

300,000
(50,000)
500,000
200,000
(75,000)
(80,000)

Parent Price
$ 1,550,000

650,000
80%
$ 520,000
$ 1,030,000

NCI Value
$387,500

$650,000
20%
$130,000
$257,500

Goodwill
Total

b.

492,500
$ 1,287,500

For the worksheet solution, please refer to Answer 2-1.

Answer 2-1
Trial Balance

Account Titles
Assets:
Current Assets
Accounts Receivable
Inventory
Investment in Sub. Co.
Land
Buildings and Equipment
Accumulated Depreciation
Goodwill
Total
Liabilities and Equity:
Current Liabilities
Bonds Payable
Premium on Bonds Pay
Common Stock P Co.
Addnl paid-in capt P
Co
Ret. Earnings P Co.

425,000
530,000
1,600,000
1,550,000

500,000
200,000
800,000

225,000
1,200,000
(800,000)

100,000
1,100,000
(400,000)

4,730,000

2,300,000

2,100,000
1,000,000

800,000
850,000

Account Titles
Assets:
Current Assets
Accounts Receivable
Inventory
Investment in Sub. Co.
Land
Buildings and Equipment
Accumulated Depreciation

(D)

Debit

Credit

300,000

(D)
(D)

500,000
200,000

(D)

492,500

(D)

50,000

(EL)
(D)

520,000
1,030,000

(D)

75,000

(D)

80,000

900,000
670,000
60,000

Common Stock S Co.

Addnl paid-in capt S
Co
Ret. Earnings S Co.
NCI
Total

Eliminations and Adjustments

Priority
Sub.
Company
Company

4,730,000

100,000

(EL)

80,000

200,000
350,000

(EL)
(EL)

160,000
280,000

2,300,000

NCI

(D)

2,012,500
Consolidated
Balance Sheet
Debit
Credit
1,225,000
680,000
2,400,000
-825,000
2,500,000
1,200,000

257,500
2,012,500
(continued)

Goodwill

492,500

Liabilities and Equity:

Current Liabilities
Bonds Payable
Premium on Bonds Pay

2,975,000
1,850,000
80,000

Common Stock P Co.

Addnl paid-in capt P Co
Ret. Earnings P Co.

900,000
670,000
60,000

Common Stock S Co.

Addnl paid-in capt S Co
Ret. Earnings S Co.

20,000
40,000
237,500

NCI
Total

387,500
8,122,500

387,500
8,122,500

Eliminations and Adjustments:

(EL)

Eliminate 80% of the subsidiary's equity accounts against the investment in

subsidiary account.

(D)

Allocate the excess of cost over book value to net assets as required by the
determination and distribution of excess schedule.

DIF: M

OBJ: 2-4 | 2-5 | 2-6 | 2-7 | 2-8

3.
On December 31, 20X1, Parent Company purchased 80% of the common stock of
Subsidiary Company for $280,000. On this date, Subsidiary had total owners' equity of $250,000
(common stock $20,000; other paid-in capital, $80,000; and retained earnings, $150,000). Any
excess of cost over book value is due to the under or overvaluation of certain assets and liabilities.
Inventory is undervalued $5,000. Land is undervalued $20,000. Buildings and equipment have a
fair value which exceeds book value by $30,000. Bonds payable are overvalued $5,000. The
remaining excess, if any, is due to goodwill.
Required:
a.

Prepare a value analysis schedule for this business combination.

b.

Prepare the determination and distribution schedule for this business combination

c.

Prepare the necessary elimination entries in general journal form.

ANS:
a) Value analysis schedule

Company fair value

Fair value identifiable net assets
Goodwill

Company
Implied
Fair Value
$
350,000
310,000
$
40,000

Parent Price
$ 280,000
248,000
$
32,000

NCI Value
$ 70,000
62,000
$ 8,000

b) Determination and distribution schedule:

Fair value of subsidiary

Less book value:
C Stk
APIC
R/E
Total S/E
Interest Acquired
Book value
Excess of fair over book
Adjust identifiable accounts:
Inventory
Land
Bldgs & Equip
Bond Pay Discount
Goodwill
Total

Company
Implied
Fair Value
$
350,000
$
$

20,000
80,000
150,000
250,000

100,000

$
$

5,000
20,000
30,000
5,000
40,000
100,000

c) Elimination entries:
ELIMINATION ENTRY 'EL'
C Stk-Sub
APIC-Sub
R/E-Sub
Investment in Sub

250,000
80%
200,000
80,000

$250,000
20%
$ 50,000
$ 20,000

200,000
$

200,000

5,000
20,000
30,000
5,000
40,000
80,000
20,000
100,000

DIF: M

NCI Value
$ 70,000

16,000
64,000
120,000
200,000

ELIMINATION ENTRY 'D'

Inventory
Land
Bldgs & Equip
Bond Pay Discount
Goodwill
Investment in Sub
R/E-Sub (NCI)

Parent Price
$ 280,000

100,000

OBJ: 2-4 | 2-5 | 2-6 | 2-7 | 2-8

4.
On January 1, 20X1, Parent Company purchased 100% of the common stock of
Subsidiary Company for $280,000. On this date, Subsidiary had total owners' equity of
$240,000.
On January 1, 20X1, the excess of cost over book value is due to a $15,000 undervaluation of
inventory, to a $5,000 overvaluation of Bonds Payable, and to an undervaluation of land,
building and equipment. The fair value of land is $50,000. The fair value of building and
equipment is $200,000. The book value of the land is $30,000. The book value of the building
and equipment is $180,000.
Required:
a.

Using the information above and on the separate worksheet, complete a value analysis
schedule

b.

Complete schedule for determination and distribution of the excess of cost over book
value.

c.

Complete the Figure 2-5 worksheet for a consolidated balance sheet as of January 1,
20X1.

Account Titles
Assets:
Inventory
Other Current Assets
Investment in SubLand
Buildings
Accumulated DepreciaOther Intangibles
Total
Liabilities and Equity:
Current Liabilities
Bonds Payable
Common Stock P Co.
Addnl Pd-In Capt P
sidiary
Co.
Retained Earnings P
Co.

Figure 2-5
Trial Balance
Trial Balance
Parent
Sub.
Company
Company
50,000
239,000

30,000
165,000

120,000
350,000

30,000
230,000

40,000
979,000

405,000

191,000

65,000
100,000

100,000
280,000
150,000
538,000

Common Stock S Co.

Addnl Pd-In Capt S
Co.
Retained Earnings S
Co.
tion
NCI
Total

Eliminations and
Adjustments
Debit
Credit

50,000
70,000
120,000
(100,000)
(50,000)
979,000

405,000
(continued)

Account Titles
Assets:
Inventory
Other Current Assets

NCI

Consolidated
Consolidated
Balance Sheet
Debit
Credit

Investment in Subsidiary
Land
Buildings
Accumulated Depreciation
Other Intangibles
Total
Liabilities and Equity:
Current Liabilities
Bonds Payable
Common Stock P Co.
Addnl Pd-In Capt P Co.
Retained Earnings P Co.
Common Stock S Co.
Addnl Pd-In Capt S Co.
Retained Earnings S Co.
NCI
Total
ANS:
a. Value analysis schedule:
Company Implied
Company fair value
Fair value identifiable net assets
Gain on acquisition

$
$

280,000
300,000
(20,000)

Parent Price
$ 280,000
300,000
$ (20,000)

Total

c.

40,000

For the worksheet solution, please refer to Answer 2-5.

Account Titles
Assets:
Inventory
Other Current Assets
Investment in SubLand
Buildings
Accumulated DepreciaOther Intangibles
Goodwill
Total
Liabilities and Equity:
Current Liabilities
Bonds Payable
Discount on Bonds
Payable
sidiary
Common Stock P Co.
Addnl Pd-In Capt P
Co.
Retained Earnings P
Co.
Common Stock S Co.
Addnl Pd-In Capt S
Co.
tion
Retained
Earnings S
Co.
NCI
Total

Account Titles
Assets:
Inventory
Other Current Assets
Investment in Subsidiary

Answer 2-5
Trial Balance
Trial Balance
Parent
Sub.
Company
Company
50,000
239,000
240,000
(EL)
120,000
350,000

30,000
165,000

Eliminations and
Adjustments
Debit
Credit
(D)

15,000

(D)
30,000
230,000

(D)
(D)

20,000
20,000

(D)

5,000

40,000

40,000
979,000

405,000

191,000

65,000
100,000

280,000
100,000
150,000
538,000

(100,000)
(50,000)

979,000

NCI

(D)
50,000

(EL)

50,000

70,000

(EL)

70,000

120,000

(EL)

120,000

405,000

300,000

Consolidated
Consolidated
Balance Sheet
Debit
Credit
95,000
404,000
--

20,000

300,000
(continued)

Land
Buildings
Accumulated Depreciation
Other Intangibles
Goodwill
Total

170,000
600,000
150,000
40,000

Liabilities and Equity:

Current Liabilities
Bonds Payable
Discount on Bonds Payable

256,000
100,000
5,000

Common Stock P Co.

Addnl Pd-In Capt P Co.
Retained Earnings P Co.

100,000
150,000
558,000

Common Stock S Co.

Addnl Pd-In Capt S Co.
Retained Earnings S Co.

0
0
0

NCI
Total

0
1,314,000

0
1,314,000

Eliminations and Adjustments:

(EL)

Eliminate 100% of the subsidiary's equity accounts against the investment in

subsidiary account.

(D)

Allocate the excess of cost over book value to net assets as required by the
determination and distribution of excess schedule; gain on acquisition closed
to parents Retained Earnings account

DIF: M

OBJ: 2-4 | 2-5 | 2-6 | 2-7

5.
On January 1, 20X1, Parent Company purchased 90% of the common stock of
Subsidiary Company for $252,000. On this date, Subsidiary had total owners' equity of $240,000
consisting of $50,000 in common stock, $70,000 additional paid-in capital, and $120,000 in
retained earnings.
On January 1, 20X1, the excess of cost over book value is due to a $15,000 undervaluation of
inventory, to a $5,000 overvaluation of Bonds Payable, and to an undervaluation of land,
building and equipment. The fair value of land is $50,000. The fair value of building and
equipment is $200,000. The book value of the land is $30,000. The book value of the building
and equipment is $180,000.
Required:
a.

Complete the valuation analysis schedule for this combination.

b.

Complete the determination and distribution schedule for this combination.

c.

Prepare, in general journal form, the elimination entries required to prepare a consolidated balance sheet for Parent and Subsidiary on January 1, 20X1.

ANS:
a.

Value analysis schedule

Company fair value

Fair value identifiable net assets
Gain on acquisition

Company
Implied
Fair Value
$ 282,000**
30,000
270,000
300,000

Parent Price
$ 252,000

(18,000)

(18,000)

NCI Value
$ 30,000*
$

*Cannot be less than the NCI share of the fair value of net assets
**Sum of parent price + minimum allowable for NCI value
b.

Determination and distribution schedule

Fair value of subsidiary

Less book value:
C Stk
APIC
R/E
Total S/E

Company
Implied
Fair Value
$ 282,000
$ 50,000
70,000
120,000
$ 240,000

Interest Acquired
Book value
Excess of fair over book

$ 42,000

Adjust identifiable accounts:

Inventory
Land
Bldgs & Equip
Bond Pay Discount
Gain on acquisition
Total

$ 15,000
20,000
20,000
5,000
(18,000)
$ 42,000

c.

Parent Price
$ 252,000

NCI Value
$ 30,000

$ 240,000
90%
$ 216,000
$
36,000

$240,000
10%
$ 24,000
$ 6,000

Elimination entries

ELIMINATION ENTRY 'EL'

C Stk-Sub
APIC-Sub
R/E-Sub
Investment in Sub

45,000
63,000
108,000
216,000
216,000

ELIMINATION ENTRY 'D'

Inventory
Land
Bldgs & Equip
Bond Pay Discount
Gain on acquisition
Investment in Sub
R/E-Sub (NCI)

$ 15,000
20,000
20,000
5,000
18,000
36,000
6,000
60,000

DIF: D

216,000

OBJ: 2-4 | 2-5 | 2-6 | 2-7 | 2-8

60,000

6.
Individual Balance Sheets
Pepper Co.
Salt Inc.
$ 26,000
$ 20,000
20,000
30,000
125,000
110,000
30,000
80,000
320,000
160,000
279,000
$800,000
$400,000

Cash
Accounts Receivable, net
Inventory
Land
Building and Equipment
Investment in Subsidiary
Goodwill
Total Assets
Accounts Payable
Other Liabilities
Common Stock
Retained Earnings
Noncontrolling Interest
Total Liabilities & Stockholders' Equity

$ 40,000
70,000
400,000
290,000
$800,000

$ 40,000
60,000
200,000
100,000
$400,000

Consolidated
Financial
Statements
$ 46,000
50,000
270,000
124,000
459,000
41,000
$990,000
$ 80,000
130,000
400,000
290,000
90,000
$990,000

Answer the following based upon the above financial statements:

a.
b.
c.
ANS:
a.
b.

c.

How much did Pepper Co. pay to acquire Salt Inc.?

What was the fair value of Salt's Inventory at the time of acquisition?
Was the book value of Salt's Building and Equipment overvalued or undervalued
relative to the Building and Equipment's fair value at the time of acquisition?
Investment in Subsidiary

$279,000

Consolidated Inventory
Pepper Co. Inventory
Value attributable to Salt

$270,000
125,000
$145,000

The Building and Equipment's book value was overvalued relative to the fair value.
$320,000 + $160,000 = $480,000; consolidated buildings carried at $459,000
Salts B&E overvalued by $21,000

DIF: D
7.
31, 20X1:

OBJ: 2-4 | 2-5 | 2-6

Supernova Company had the following summarized balance sheet on December
Assets

Accounts receivable
Inventory
Property and plant (net)
Goodwill
Total

$ 200,000
450,000
600,000
150,000
$1,400,000
Liabilities and Equity

Notes payable

$ 600,000

Common stock, $5 par

Paid-in capital in excess of par
Retained earnings
Total

300,000
400,000
100,000
$1,400,000

The fair value of the inventory and property and plant is $600,000 and $850,000, respectively.
Required:
a.

Assume that Redstar Corporation purchases 100% of the common stock of Supernova
Company for $1,800,000. What value will be assigned to the following accounts of the
Supernova Company when preparing a consolidated balance sheet on December 31,
20X1?
(1)
(2)
(3)
(4)

Inventory
Property and plant
Goodwill
Noncontrolling interest

_________
_________
_________
_________

b.

Prepare a valuation schedule

c.

Prepare a supporting determination and distribution of excess schedule.

ANS:
a.
(1)
(2)
(3)
(4)

Inventory
Property and plant
Goodwill
Noncontrolling interest

$600,000
$850,000
$750,000
0

($450,000 BV + $150,000)
($600,000 BV + $250,000)
No NCI

b. Valuation schedule
Company fair value
Fair value identifiable net assets
Goodwill

Company Implied
Fair Value
$ 1,800,000
1,050,000
$ 750,000

Parent Price
$ 1,800,000
1,050,000
$ 750,000

c.

Fair value of subsidiary

Less book value:
C Stk
APIC
R/E
Total S/E
Interest Acquired
Book value
Excess of fair over book
Adjust identifiable accounts:
Inventory
Property & plant (net)

Company
Implied
Fair Value
$ 1,800,000
$
$

300,000
400,000
100,000
800,000

$ 1,000,000
$

150,000
250,000

Parent Price
$ 1,800,000

800,000
100%
800,000
$ 1,000,000

Goodwill (increase from $150,000)

Total
DIF: M

600,000
$ 1,000,000

OBJ: 2-6 | 2-7 | 2-9

8.
Fortuna Company issued 70,000 shares of $1 par stock, with a fair value of $20
per share, for 80% of the outstanding shares of Acappella Company. The firms had the following
separate balance sheets prior to the acquisition:
Assets
Current assets
Property, plant, and equipment (net)
Goodwill
Total assets

Fortuna
$2,100,000
4,600,000
$6,700,000

Liabilities and Stockholders' Equity

Liabilities
Common stock ($1 par)
Common stock ($5 par)
Paid-in capital in excess of par
Retained earnings
Total liabilities and equity

$3,000,000
800,000
2,200,000
700,000
$6,700,000

Acappella
$ 960,000
1,300,000
240,000
$2,500,000
$ 800,000
200,000
300,000
1,200,000
$2,500,000

Book values equal fair values for the assets and liabilities of Acappella Company, except for the
property, plant, and equipment, which has a fair value of $1,600,000.
Required:
a.

Prepare a value analysis schedule

b.

Prepare a determination and distribution of excess schedule.

c.

Provide all eliminations on the partial balance sheet worksheet provided in Figure 2-8
and complete the noncontrolling interest column.

Figure 2-8
Fortuna Co. and Subsidiary Acappella Co.
Partial Worksheet for Consolidated Financial Statements
January 2, 20X4

Account Titles
Current Assets
Property, Plant, and
Equipment
Investment in Acappella
Goodwill
Liabilities
Common Stock Fortuna
Paid-in Capital in Excess

Balance Sheet
Fortuna
Acappella
2,100,000
960,000
4,600,000
1,400,000
(3,000,000)
(870,000)

1,300,000
240,000
(800,000)

of Par Fortuna
Ret Earnings Fortuna
Common Stock Acappella
Paid-in Capital in Excess
of Par Acappella
Ret Earn Acappella

(3,530,000)
(700,000)
(200,000)
(300,000)
(1,200,000)

(continued)
Fortuna Co. and Subsidiary Acappella Co.
Partial Worksheet for Consolidated Financial Statements
January 2, 20X4

Account Titles
Current Assets

Eliminations and
Adjustments
Debit
Credit

NCI

Property, Plant, and

Equipment
Investment in Acappella
Goodwill
Liabilities
Common Stock Fortuna
Paid-in Capital in Excess
of Par Fortuna
Ret Earnings Fortuna
Common Stock Acappella
Paid-in Capital in Excess
of Par Acappella
Ret Earn Acappella

ANS:
a. Value analysis schedule:

Company fair value

Fair value identifiable net assets
Gain

Company Implied
Fair Value
$ 1,752,000
1,760,000
$
(8,000)

Parent Price
$1,400,000
1,408,000
(8,000)

NCI Value
$ 352,000*
352,000
$
-

*Cannot be less than NCI share of identifiable net assets; company fair value is sum of parent
price and NCI value.
b. Determination and distribution of excess schedule:

Fair value subsidiary

Less book value:
Comm Stock
APIC
Ret Earn
Total S/E
Interest acquired
Book value
Excess of fair over book
Adjust identifiable accounts:
Plant and equipment
Goodwill
Gain on acquisition
Total
c.

Company Implied Fair

Value
$1,752,000

Parent Price
$1,400,000

NCI Value
$352,000

1,700,000
80%
1,360,000
40,000

1,700,000
20%
340,000
12,000

200,000
300,000
1,200,000
1,700,000
52,000
300,000
(240,000)
(8,000)
52,000

DR
CR
CR

For the worksheet solution, please refer to Answer 2-8.

Figure 2-8
Fortuna Co. and Subsidiary Acappella Co.
Partial Worksheet for Consolidated Financial Statements
January 2, 20X4
Balance Sheet
Fortuna
Acappella
2,100,000
960,000

Account Titles
Current Assets
Property, Plant, and
Equipment
Investment in Acappella
Goodwill
Liabilities
Common Stock Fortuna
Paid-in Capital in Excess
of Par Fortuna
Ret Earnings Fortuna
Common Stock Acappella
Paid-in Capital in Excess
of Par Acappella
Ret Earn Acappella

4,600,000
1,400,000
(3,000,000)
(870,000)

1,300,000
240,000
(800,000)

(3,530,000)
(700,000)
(200,000)
(300,000)
(1,200,000)

(continued)
Fortuna Co. and Subsidiary Acappella Co.
Partial Worksheet for Consolidated Financial Statements
January 2, 20X4

Eliminations and
Adjustments
Debit
Credit

Account Titles
Current Assets
Property, Plant, and
Equipment
Investment in Acappella
Goodwill
Liabilities
Common Stock Fortuna
Paid-in Capital in Excess
of Par Fortuna
Ret. Earnings Fortuna
Common Stock Acappella
Paid-in Capital in Excess
of Par Acappella
Ret. Earnings Acappella

(D)

NCI

300,000
(EL)
(D)
(D)

(D)

1,360,000
40,000
240,000

8,000

(EL)

160,000

(40,000)

(EL)
(EL)

240,000
960,000

(60,000)
(252,000)

(D)

12,000

352,000
Eliminations and Adjustments:
(EL)
(D)
DIF: M

Eliminate 80% of subsidiary equity against the investment account.

Distribute excess according to the determination and distribution of excess
schedule.
OBJ: 2-4 | 2-6 | 2-7 | 2-8 | 2-9

ESSAY
1.
Discuss the conditions under which the FASB would assume a presumption of
control. Additionally, under what circumstances might the FASB require consolidation even
though the parent does not control the subsidiary?
ANS:
The FASB presumes that control exists if one company owns over 50% of the voting interest in
another company or has an unconditional right to appoint a majority of the members of another
company's controlling body. Additionally, in the absence of evidence to the contrary, one or
more of the following conditions would lead to a presumption of control:
1.
2.
3.
4.

Ownership of a large noncontrolling interest where no other party has a significant

interest.
Ownership of securities or unconditional rights in the company that can be converted
into securities that would cause a controlling interest to exist.
The acquiring company has the unconditional right to dissolve the entity whose interest
was acquired and assume control of the assets.
A relationship with another entity that assures control through provisions in a charter,
bylaws, or trust agreement.

5.
6.

A legal obligation created with the controlled entity that requires substantially all cash
flows and other economic benefits to flow to the controlling entity.
A sole general partner in a limited partnership where no other party may dissolve the
partnership or remove the general partner.

DIF: M

OBJ: 2-3

2.
A parent company purchases an 80% interest in a subsidiary at a price high
enough to revalue all assets and allow for goodwill on the interest purchased. If "push down
accounting" were used in conjunction with the "economic entity concept," what unique procedures would be used?
ANS:
All assets including goodwill would be adjusted to full fair value. The method differs in that the
asset adjustments would be made directly on the books of the subsidiary rather than on the
consolidated worksheet.
DIF: D

OBJ: 2-8 | 2-10