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Requirement 3:
(a) Acquisition Method
Plate
Salad
Eliminations
Consolidated
Dr
Cr
Balance Sheet
Assets
Cash
$ 320,000
$ 100,000
$ 420,000
Accounts receivable
50,000
20,000
70,000
Inventory
100,000
30,000
130,000
Land
50,000
10,000
8,000(B)
70,000
2,000(C)
Bldg. & equip., net
200,000
100,000
8,000(B)
310,000
2,000(C)
Investment in Salad
180,000
144,000(A)
–
36,000(B)
Goodwill
20,000(B)
25,000
5,000(C)
Total
$ 900,000
$ 260,000
$ 1,025,000
Liabilities & Equity
Accounts payable
40,000
80,000
120,000
Bonds payable
200,000
–
200,000
Common stock & PIC
300,000
100,000
100,000(A)
300,000
Retained earnings
360,000
80,000
80,000(A)
360,000
Noncontrolling interest in Salad
36,000(A)
9,000(C)
45,000
Total
$ 900,000
$ 260,000
$ 1,025,000
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 3:
(b) Purchase Method
Salad
Eliminations
Consolidated
Dr
Cr
Balance Sheet
Assets
Cash
$ 100,000
$ 420,000
Accounts receivable
20,000
70,000
Inventory
30,000
130,000
Land
10,000
8,000(B)
68,000
Bldg. & equip., net
100,000
8,000(B)
308,000
Investment in Salad
144,000(A)
–
36,000(B)
Goodwill-controlling interest
20,000(B)
20,000
Total
$ 260,000
$ 1,016,000
Liabilities & Equity
Accounts payable
80,000
120,000
Bonds payable
–
200,000
Noncontrolling interest in Salad
36,000(A)
36,000
Common stock & PIC
100,000
100,000(A)
300,000
Retained earnings
80,000
80,000(A)
360,000
Total
$ 260,000
$ 1,016,000
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P16–11. Eliminating entries and accounting for goodwill
Requirement 1:
DR Investment in Saturn $1,000,000
CR Cash $1,000,000
life.
P16–12. Comparing translation effect on ratios
(CFA Exam)
Remeasurement is the process under which local currency results are
16–48
more rapidly than cost of goods sold. Thus, the gross profit margin
percentage will generally increase after remeasurement.
(2) Operating profit margin (operating profit/sales) is higher after
remeasurement for two reasons. First, the gross profit margin
P16-13. Financial asset impairment and recovery
Requirement 1: U.S. GAAP
1/01/14
DR AFS Investment in MBSs $10,000
CR Cash $10,000
12/31/14
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CR AFS Investment in MBSs $ 3,000
12/31/15
DR AFS Investment in MBSs $2,000
CR Impairment reversal – income $ 2,000
2014 2015
CR Unrealized Gain – OCI 1,000
P16–14. Variable interest entities
Requirement 1:
16–50
Requirement 2:
Waste Management owns 0% of the Surety Bonding Company stock. This can be
seen by the fact that the value of the net assets ($60 million + $6 million – $33
million – $22 million) equals $11 million and the firm claims this entire amount as a
16–51
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Financial Reporting and Analysis (6th Ed.)
Chapter 16 Solutions
Intercorporate Equity Investments
Cases
Cases
C16-1. Shopko: Business acquisitions and analysis of sales growth
Requirement 1:
The financial statement user should recognize that a significant part of the
31.8% increase in consolidated revenue for Year 1is attributable to the
Pamida acquisition. The revenue amount for Year 1 includes approximately
six months of Pamida’s results after the acquisition, while the revenue
amount for Year 0 excludes the Pamida results entirely. Failure to adjust for
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C16-2. City Holding Company: Fair value accounting for available-for-sale
securities
Requirement 1:
Before-tax unrealized holding gain on available-for-sale securities in Year 2:
12/31/Year 2
$383,552,000 – $377,013,000 = $6,539,000 DR
Unrealized holding gain in Year 2 (required
adjustment to fair value adjustment account) $2,775,000 DR
Requirement 2:
Deferred tax liability related to this unrealized gain in Year 2 ($ in thousands):
securities:
DR Fair value adjustment–available-for-sale $2,775,000
CR Deferred tax liability on
available-for-sale securities $ 971,300
CR OCI – Unrealized holding gain on
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Requirement 5:
Explain the year-to-year change from 12/31/Year 1 to 12/31/Year 2 in the
cost basis of the available-for-sale securities.
($ in thousands)
Beginning balance 12/31/Year 1 (from footnote schedule)
$ 377,013
+ Cost of securities purchased (from cash flow statement)
608,709
– Amortized cost basis of securities reclassified from
available for sale to held-to-maturity in Year 2
(36,030)
– Cost basis of available-for-sale securities sold in Year 2
Proceeds from sales of available-for-sale securities
(from cash flow statement)
(348,052)
Proceeds from maturities and calls of available-
for-sale securities (from cash flow statement)
(165,014)
Gain on sales and calls of securities in Year 2 (from
Note 4—Investments and cash flow statement)
1,459
(511,607)
438,085
Ending balance 12/31/Year 2(from footnote schedule)
436,070
Unaccounted-for difference
$ 2,015
C16-3. Internet Capital Group: Measurement and reporting of noncontrolling
ASC 805-20-30, paragraph 7 requires the acquirer (ICG) to measure
noncontrolling interest in the acquired company (GovDelivery) at its fair
ASC 805-20-30, paragraph 8 indicates that the purchase price for the
controlling shares often contains a “control premium”, which means that the
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Requirement 3:
The $19,670 purchase price for 89% of GovDelivery’s equity implies a full fair
value of $22,101 ($19,670/.89) if the noncontrolling interest is valued
proportionately to the acquired shares. This would result in an allocation of
$2,431 (11% x $22,101) to noncontrolling interest. The actual noncontrolling
the year. Under the acquisition method, income from the acquired company is
only included in consolidated income subsequent to the acquisition.
The 12/31/09 consolidated balance sheet would include GovDelivery’s
acquired net assets at their full fair values shown in the acquisition price
allocation table, with a $1,420 allocation to noncontrolling interest in the equity
asset accounts shown in the schedule (debit), eliminate the $19,670
Investment account on ICG’s books (credit), and allocate $1,420 to
noncontrolling interest (credit).
Requirement 5:
Customer lists, trademarks/trade names, and technology will be amortized
Goodwill is not amortized but will be tested for impairment, which could
potentially affect consolidated income. Other net assets do not have a stated
16–55
allocation will not be proportionate because the initial valuation was not
proportionate, as discussed in requirement 3.
C16-4. Air Products: Joint ventures and off-balance-sheet effects
Requirement 1:
The primary reason that companies enter into joint ventures is because
different companies have expertise in different areas. If a particular project
Net income + interest expense x (1 – tax rate)
$525.4 + $79.5
$8,495.0 =7.12%
[Note: $79.5 = $122.3 (interest expense) times (1 – .35)]
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($ in millions)
Current assets $732.6
Noncurrent assets 1,148.7
$1,881.3
$525.4 + $79.5
$8,495.5 + $362.4 = 6.83%
After adjustment, the ratio declines from .0712 to .0683, or a drop of
approximately 4%. This is clearly an approximation since we are not provided
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$2,041.0
$3,594.0 =.568
[Note: $3,594.0 is $2,041.0 + $827.4 + $725.6]
(Of course, if the affiliates’ businesses are different from Air Products’, the
.568 figure potentially introduces error into the analysis.)
Air Products’ ratio of long-term debt
to total noncurrent liabilities x .568
Estimated equity affiliates’ long-term debt $256.8
Estimated Air Products’ portion x .45
Estimated additional long-term debt $115.6
Total liabilities: ($572.5 + $452.2) 1,024.7
Owners’ equity 856.6
Air Products’ proportionate ownership % x 45%
Air Products’ portion of owners’ equity $ 385.5
Equity affiliates’ cumulative income already in owners’ equity:
16–58