Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
CHAPTER 4
Q4-1 The carrying value of the investment is reduced under equity method reporting when (a)
Q4-2 A differential occurs when an investor pays more than or less than underlying book value
in acquiring ownership of an investee.
Q4-3 Amortization of a differential is the most common reason for investment income to be
lower than a proportionate share of reported income of the investee. If Turner Company has
paid more than book value for the shares of Straight Lace Company, the differential must be
assigned to identifiable assets and liabilities of the investee, or to goodwill. Those amounts
Q4-4 The differential represents the difference between the acquisition-date fair value of the
Q4-5 A company must acquire a subsidiary at a price equal to the subsidiary’s fair value, and
Q4-6 Current consolidation standards require recognition of the fair value of the subsidiary’s
Q4-7 One hundred percent of the fair value of the subsidiary’s assets and liabilities at the date
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C4-1 Reporting Significant Investments in Common Stock
Answers to this case can be found in the annual reports to stockholders of the companies
mentioned and in their 10-K filings with the SEC (available at www.sec.gov).
a. Before 1998, Harley-Davidson reported its investment in the common stock of Buell
Motorcycle Company using the equity method. The 49 percent investment that Harley held
affiliate’s equity resulting from issuance of additional stock by the affiliate.
Chevron analyses any difference between the carrying value of an equity-method investment
and its underlying book value and, to the extent that it can, assigns that differential to specific
assets and liabilities. The company adjusts quarterly its equity-method income recognized from
affiliates for any write-off or amortization of the differential.
C4-2 Assigning an Acquisition Differential
It may be difficult to determine the amount of the differential to be assigned to the manufacturing
facilities of Ball Corporation. The equipment is relatively old and may be in varying states of
repair or operating condition. Some units may be technologically obsolete or of little value
because production needs have changed. The $600,000 estimated fair value of net assets
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for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
C4-3 Negative Retained Earnings
Net assets of the subsidiary increase when positive earnings results occur and decrease when
negative results occur. A negative retained earnings balance indicates that the other
stockholders’ equity balances of the subsidiary exceed the reported net assets of the subsidiary
assuming the company is solvent.
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
E4-1 Cost versus Equity Reporting
a. Cost-method journal entries recorded by Roller Corporation:
20X5
Investment in Steam Company Stock
270,000
Cash
270,000
Record purchase of Steam Company stock.
Cash
5,000
Dividend Income
5,000
Record dividend income from Steam Company
20X6
Cash
15,000
Dividend Income
15,000
Record dividend income from Steam Company
20X7
Cash
35,000
Dividend Income
35,000
Record dividend income from Steam Company
Note: Cumulative dividends do not exceed cumulative earnings to date.
b. Equity-method journal entries recorded by Roller Corporation:
20X5
Investment in Steam Company Stock
270,000
Cash
270,000
Record purchase of Steam Company stock.
Cash
5,000
Investment in Steam Company Stock
5,000
Record dividend from Steam Company.
Investment in Steam Company Stock
20,000
Income from Steam Company
20,000
Record equity-method income.
Income from Steam Company
7,000
Investment in Steam Company Stock
7,000
Amortize differential: ($270,000 – $200,000) / 10 years
20X6
Cash
15,000
Investment in Steam Company Stock
15,000
Record dividend from Steam Company.
Investment in Steam Company Stock
40,000
Income from Steam Company
40,000
Record equity-method income.
Income from Steam Company
7,000
Investment in Steam Company Stock
7,000
Amortize differential.
Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
20X7
Cash
35,000
Investment in Steam Company Stock
35,000
Record dividend from Steam Company.
Investment in Steam Company Stock
20,000
Income from Steam Company
20,000
Record equity-method income.
Income from Steam Company
7,000
Investment in Steam Company Stock
7,000
Amortize differential.
E4-2 Differential Assigned to Patents
Journal entries recorded by Power Corporation:
20X2
Investment in Snow Corporation Stock
1,080,000
Common Stock
270,000
Additional Paid-In Capital
810,000
Record purchase of Snow Corporation stock
Cash
20,000
Investment in Snow Corporation Stock
20,000
Record dividend from Snow Corporation
Investment in Snow Corporation Stock
56,000
Income from Snow Corporation
56,000
Record equity-method income
Income from Snow Corporation
12,500
Investment in Snow Corporation Stock
12,500
Amortize differential: ($1,080,000 – $980,000) / 8 years
20X3
Cash
10,000
Investment in Snow Corporation Stock
10,000
Record dividend from Snow Corporation
Income from Snow Corporation
44,000
Investment in Snow Corporation Stock
44,000
Record equity-method loss
Income from Snow Corporation
12,500
Investment in Snow Corporation Stock
12,500
Amortize differential
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
E4-4 Differential Attributable to Depreciable Assets
a. Journal entries recorded by Capital Corporation using the equity method:
20X4
Investment in Cook Company Stock
340,000
Cash
340,000
Record purchase of Cook Company Stock.
Cash
6,000
Investment in Cook Company Stock
6,000
Record dividend from Cook Company
Investment in Cook Company Stock
10,000
Income from Cook Company
10,000
Record equity-method income
Income from Cook Company
4,000
Investment in Cook Company Stock
4,000
Amortize differential: (340,000 – 300,000) / 10 years
20X5
Cash
9,000
Investment in Cook Company Stock
9,000
Record dividend from Cook Company
Investment in Cook Company Stock
20,000
Income from Cook Company
20,000
Record equity-method income
Income from Cook Company
4,000
Investment in Cook Company Stock
4,000
Amortize differential
20X4
Investment in Cook Company Stock
340,000
Cash
340,000
Record purchase of Cook Company Stock.
Cash
6,000
Dividend Income
6,000
Record dividend income from Cook Company.
20X5
Cash
9,000
Dividend Income
9,000
Record dividend income from Cook Company.
