Chapter 04 – CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES
DESCRIPTIONS OF CASES, EXERCISES, AND PROBLEMS
C4-1
40 min.
LO 4-1
H
Reporting Significant Investments in Common Stock
Students must research aspects of intercorporate investments held by Harley-
Davidson, Chevron, PepsiCo, and Sears, Roebuck.
C4-2
LO 4-2
20 min.
M
Assigning an Acquisition Differential
In this case, the student is required to give explicit consideration to some of the
problems that can arise in determining the amount of the differential and in
assigning it to appropriate balance sheet accounts.
C4-3
LO 4-2,
LO 4-3
15 min.
M
Negative Retained Earnings
Nearly all illustrations dealing with consolidation present a positive retained
earnings balance for each of the consolidating companies. This case is intended
to test the student’s understanding of the consolidation process when there is a
negative balance on the subsidiary’s books.
C4-4
LO 4-1,
LO 4-3
40 min.
M
Balance Sheet Reporting Issues
This critical thinking decision case asks students to assess three different
scenarios for obtaining additional assets. The scenarios are: issue additional debt;
create a wholly owned subsidiary which would borrow the resources needed and
obtain the assets; or create a trust which would guarantee the additional debt and
obtain the assets. Students must discuss the ramifications and legality of each
alternative and make an appropriate recommendation.
C4-5
LO 4-1,
LO 4-2
20 min.
M
Subsidiary Ownership: AMR Corporation and International Lease
Students have to conduct research and answer specific questions concerning
AMR Corporation and International Lease Finance Corporation.
E4-1
LO 4-1
25 min.
E
Cost versus Equity Reporting
Journal entries are required for a three-year period using both cost and equity
method reporting. A differential is included.
E4-2
LO 4-1
15 min.
E
Differential Assigned to Patents
Journal entries are required for all transactions occurring during a two-year
period assuming that the investor utilizes the equity method. The differential is
assigned to patents.
E4-3
LO 4-1
25 min.
M
Differential Assigned to Copyrights
Journal entries are required for all transactions occurring during a two-year
period assuming that the investor utilizes the equity method. The differential is
assigned to copyrights.
Chapter 04 – CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES
8
E4-4
LO 4-1
15 min.
E
Differential Attributable to Depreciable Assets
Equity-method and cost method entries recorded by the investor are needed for
two years. The differential is assigned to depreciable assets.
E4-5
LO 4-1
10 min.
E
Investment Income
Students must compute the income reported by the investor from its equity
investment given a cost – fair market value differential attributable to land,
equipment, and goodwill.
E4-6
LO 4-1
15 min.
M
Determination of Purchase Price
Students must calculate the purchase price of a 30% investment given the ending
balance in the investment account and information regarding income, dividends
and differential.
E4-7
LO 4-1,
LO 4-2
20 min.
M
Correction of Error
A retroactive adjustment from the cost method to the equity method is required at
the end of the third year of ownership. Closing entries at the end of the third year
have not yet been made. A differential assigned to patents is included.
E4-8
LO 4-1
10 min.
E
Differential Assigned to Land and Equipment
Journal entries must be given for the investor under the equity method. The
differential is evenly assigned to land and equipment.
E4-9
LO 4-1,
LO 4-2
15 min.
M
Equity Entries with Goodwill
Journal entries are required for all transactions occurring during the year of
purchase assuming that the investor utilizes the equity method. Goodwill,
inventory write-off, and amortization of differential are included.
E4-10
LO 4-1,
LO 4-2,
LO 4-6
15 min.
E
Multiple-Choice Questions on Consolidation Process
Five multiple-choice questions test the student’s basic comprehension of the
consolidation process.
E4-11
LO 4-3,
LO 4-6
20 min.
M
Multiple-Choice Questions on Consolidation
[AICPA Adapted] Four multiple-choice questions requiring computation of
various consolidated account balances are presented.
E4-12
LO 4-3
10 min.
E
Consolidation Entries with Differential
A basic set of balance sheet consolidation entries must be prepared. Assignment
of differential is required.
Chapter 04 – CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES
9
E4-13
LO 4-5
15 min.
E
Balance Sheet Consolidation
A consolidated balance sheet immediately following a business combination
must be prepared. Consolidation entries are required.
E4-14
LO 4-2,
LO 4-3
20 min.
E
Acquisition with Differential
A basic set of balance sheet consolidation entries must be prepared. Computation
of goodwill is required.
E4-15
LO 4-5
25 min.
E
Balance Sheet Worksheet with Differential
A 100 percent acquisition of a company requires revaluation of assets. Students
must prepare the necessary consolidation entries and prepare a consolidation
balance sheet worksheet.
E4-16
LO 4-5
35 min.
M
Worksheet for Wholly Owned Subsidiary
Consolidation entries needed to prepare a consolidated balance sheet following
100 percent acquisition of a company are required. A consolidated balance sheet
worksheet, and a consolidated balance sheet are also required.
E4-17
LO 4-3,
LO 4-5
20 min.
M
Computation of Consolidated Balances
Given the balance sheet of the acquired company and additional information on
the value of its assets at the date of acquisition, the appropriate consolidated
balances must be computed for five items.
E4-18
LO 4-3
20 min.
M
Multiple-Choice Questions on Balance Sheet Consolidation
Given the balance sheets of the parent and subsidiary at the date of acquisition,
six multiple-choice questions cover the computation of various consolidated
balances.
E4-19
LO 4-3
20 min.
M
Wholly Owned Subsidiary with Differential
Students must prepare the equity method journal entries made during the year by
the parent and also the consolidation entries necessary to prepare the consolidated
financial statements of a wholly owned subsidiary given a differential between
cost and book values of the underlying net assets.
E4-20
LO 4-5
20 min.
E
Wp
Basic Consolidation Worksheet
A consolidation worksheet for a wholly owned subsidiary is required at the end
of the first year of ownership. No differential is involved.
E4-21
LO 4-5
35 min.
M
Basic Consolidation Worksheet for Second Year
Consolidation journal entries and a three-part worksheet must be prepared for a
wholly-owned subsidiary for the second year after acquisition.
Chapter 04 – CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES
10
E4-22
LO 4-5
30 min.
E
Consolidation Worksheet with Differential
Consolidation entries needed to complete a consolidation worksheet and a three-
part worksheet must be prepared at the end of the first year of ownership.
Acquisition price includes a differential assigned to depreciable assets.
E4-23
LO 4-5
35 min.
E
Consolidation Worksheet for Subsidiary
A consolidation worksheet for a wholly owned subsidiary is required at the end
of the first year of ownership.
E4-24A
LO 4-7
40 min.
M
Push-Down Accounting
Students must prepare parent company entries to record the acquisition of a
subsidiary, the entries on the books of the subsidiary if push-down accounting is
used, and the consolidation entries required for a consolidated balance sheet
immediately after the combination.
P4-25
LO 4-5
30 min.
M
Assignment of Differential in Worksheet
A consolidation worksheet and consolidated balance sheet must be prepared.
The differential is assigned to buildings and equipment and goodwill.
P4-26
LO 4-3
30 min.
H
Computation of Consolidated Balances
Balance sheets for the parent and the subsidiary are given. A differential is
assigned to inventory, buildings and equipment, and goodwill. The acquired
company reported goodwill on its balance sheet. Six consolidated amounts must
be computed.
P4-27
LO 4-5
40 min.
H
Balance Sheet Consolidation
[AICPA Adapted] A complex assignment of the differential is required in
preparing a consolidated balance sheet worksheet at the end of the second year of
ownership.
P4-28
LO 4-5
30 min.
M
Consolidated Balance Sheet
Consolidation entries and a consolidated balance sheet worksheet are required at
the end of the second year of ownership. The subsidiary is wholly-owned and the
differential is assigned to buildings and equipment.
P4-29
LO 4-5,
LO 4-6
40 min.
M
Comprehensive Problem: Consolidation in Subsequent Period
Students must prepare the equity method journal entries made by the parent for
the third year following an acquisition. A three-part consolidation work paper
and consolidation entries for the end of the year are also required.
Chapter 04 – CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES
11
P4-30
LO 4-3,
LO 4-4
20 min.
H
Acquisition at Other than Fair Value of Net Assets
Consolidation entries are required to prepare a consolidated balance sheet
immediately after the business combination assuming two acquisition prices.
P4-31
LO 4-5,
LO 4-6
30 min.
H
Intercorporate Receivables and Payables
Consolidation entries, a consolidation worksheet, and a consolidated balance
sheet are required. In addition to a differential assigned to goodwill, the parent
holds bonds of the subsidiary and the subsidiary has an account payable to the
parent.
P4-32
LO 4-5
30 min.
H
Balance Sheet Consolidation
This problem requires the acquisition entry, the consolidation entries to prepare a
consolidated balance sheet immediately after the combination, a consolidated
balance sheet worksheet, and the formal consolidated balance sheet immediately
after the combination. Differential is assigned to inventory, land, buildings and
equipment, patent, discount on bonds payable, and goodwill.
P4-33
LO 4-5
30 min.
M
Consolidation Worksheet at End of First Year of Ownership
Consolidation journal entries and a three-part work paper must be prepared for a
wholly-owned subsidiary for the first year after acquisition.
P4-34
LO 4-5
30 min.
M
Consolidation Worksheet at End of Second Year of Ownership
Consolidation journal entries and a three-part work paper must be prepared for a
wholly-owned subsidiary for the second year after acquisition. Preparation of a
consolidated balance sheet, income statement and retained earnings statement is
required.
P4-35
LO 4-5
40 min.
M
Comprehensive Problem: Wholly Owned Subsidiary
This problem requires the parent-company acquisition entry, the consolidation
entries to prepare a consolidated balance sheet immediately after the
combination, and a consolidated balance sheet worksheet.
P4-36
LO 4-5
50 min.
H
Comprehensive Problem: Differential Apportionment
Parent company entries, consolidation entries, and a consolidation worksheet are
required at the end of the first year of ownership for a majority-held subsidiary.
The differential is assigned to buildings and equipment and to goodwill.
P4-37A
LO 4-7
45 min.
M
Push-Down Accounting
Parent-company entries to account for the investment, subsidiary-company
entries to record the push-down values, and consolidation entries to prepare
consolidated statements are required for the first two years of investment
ownership.