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Answers to Chapter 3 Homework and Selected Problems
9. B Phoenix revenues $498,000
Phoenix expenses 350 ,000
Net income before Sedona effect 148,000
Equity income from Sedona 55 ,000
Consolidated net income $203 ,000
-or-
Consolidated revenues $783,000
Consolidated expenses (includes $35K amortization) 580 ,000
Consolidated net income $203 ,000
10. A (same as Phoenix because of equity method use).
11. C Consideration transferred at fair value $600,000
Book value acquired 420 ,000
Excess fair over book value 180,000
to equipment 80 ,000
to customer list (4-year remaining life) $100,000
Three years since acquisition, ¼ 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).
15. (Determine consolidated retained earnings when parent uses various
accounting methods. Determine Entry *C for each of these methods)
a. CONSOLIDATED RETAINED EARNINGS–EQUITY METHOD
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Herbert (parent) balance—1/1/14 ……………………………. $400,000
Herbert income—2014 …………………………………………… 40,000
Herbert dividends—2014 (subsidiary dividends are
intra-entity and, thus, eliminated) ………………………. (10,000)
Rambis income—2014 (not included in parent’s income) 20,000
Amortization—2014 ……………………………………………….. (12,000)
Herbert income—2015 …………………………………………… 50,000
Herbert dividends—2015………………………………………… (10,000)
Rambis income—2015 …………………………………………… 30,000
Amortization—2015 ………………………………………………. (12 ,000)
Consolidated retained earnings, 12/31/15………………… $496 ,000
PARTIAL EQUITY METHOD AND INITIAL VALUE METHOD
Consolidated RE are the same regardless of the method in use: the
beginning balance plus the income less the dividends of the parent plus
the income of the subsidiary less amortization expense. Thus,
December 31, 2015 consolidated RE are $496,000 as computed above.
b. Investment in Rambis—equity method
Rambis fair value 1/1/14…………………………………………………… $574,000
Rambis income 2014……………………………………………………….. 20,000
Rambis dividends 2014……………………………………………………. (5,000)
Herbert’s 2014 excess fair over book value amortization …… (12 ,000)
Investment account balance 1/1/15…………………………………… $577 ,000
Investment in Rambis—partial equity method
Rambis fair value 1/1/14…………………………………………………… $574,000
Rambis income 2014……………………………………………………….. 20,000
Rambis dividends 2014……………………………………………………. (5 ,000)
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Investment account balance 1/1/14…………………………………… $589 ,000
Investment in Rambis—Initial value method
Rambis fair value 1/1/14…………………………………………………… $574 ,000
Investment account balance 1/1/15…………………………………… $574 ,000
c. ENTRY *C
EQUITY METHOD
No entry is needed to convert the past figures to the equity method
since that method has already been applied.
PARTIAL EQUITY METHOD
Amortization for the prior years (only 2014 in this case) has not been
recorded and must be brought into the consolidation through worksheet
