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Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
E4-7 Correction of Error
Required correcting entry:
Investment in Case Products Stock
44,000
Dividend Income
8,000
Income from Case Products
30,000
Retained Earnings
22,000
Addition to account for investment income:
20X6: $16,000
$16,000
20X7: $24,000
24,000
20X8: $32,000
32,000
$72,000
Deduction for dividends received:
20X6: $6,000
$ 6,000
20X7: $8,000
8,000
20X8: $8,000
8,000
(22,000)
Amortization of differential:
Purchase price
$56,000
Proportionate share of book value of net assets
($10,000 + $30,000)
(40,000)
Amount of differential
$16,000
Amortization for 3 years [($16,000 / 8) x 3]
(6,000)
Required correction of investment account
$44,000
Computation of correction of retained earnings of Grand Corporation
Dividend income recorded in 20X6: $6,000
$ 6,000
20X7: $8,000
8,000
($14,000)
Equity-method income in 20X6: ($16,000 - $2,000)
$14,000
20X7: ($24,000 - $2,000)
22,000
36,000
Required correction of retained earnings
$22,000
E4-8 Differential Assigned to Land and Equipment
(1)
Investment in Stafford Corporation Stock
65,000
Cash
65,000
Record purchase of Stafford Stock.
(2)
Cash
4,500
Investment in Stafford Corporation Stock
4,500
Record dividend from Stafford
(3)
Investment in Stafford Corporation Stock
12,000
Income from Stafford
12,000
Record equity-method income
(4)
Income from Stafford
1,000
Investment in Stafford Corporation Stock
1,000
Amortize differential assigned to equipment.
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4. b - $550,000 = $1,500,000 – [(100,000 + 200,000 + 450,000 +1,000,000) – (300,000 +
5. a – The consolidated balance sheet should only show the retained earnings balance of the
parent company.
E4-11 Multiple-Choice Questions on Consolidation [AICPA Adapted]
1. c – Goodwill is not amortized, but instead is tested for impairment at least annually.
(a) Incorrect. Goodwill is not amortized.
2. a – Goodwill is not amortized, thus no amortization expense is recorded. Because goodwill
was found to be unimpaired, the entire amount of the existing goodwill would be reported.
3. d – All intercompany loans and profits must be eliminated in a consolidation, thus the entire
balances should be eliminated.
4. c – $400,000 = $1,700,000 - $1,300,000
E4-12 Consolidation entries with Differential
a.
Equity Method Entries on Tower Corp.'s Books:
Investment in Brown Co.
100,000
Cash
100,000
Record the initial investment in Brown Co.
Book Value Calculations:
Total Book
Value
=
Common
Stock
+
Retained
Earnings
Book value at
acquisition
57,000
20,000
37,000
Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
E4-12 (continued)
Investment in
Brown Co.
Acquisition Price
100,000
57,000
Basic
43,000
Excess Reclass.
0
b. Journal entries used to record transactions, adjust account balances, and close income
and revenue accounts at the end of the period are recorded in the company's books and
change the recorded balances. On the other hand, consolidation entries are entered only
in the consolidation worksheet to facilitate the preparation of consolidated financial
statements. As a result, they do not change the balances recorded in the company's
accounts and must be reentered each time a consolidation worksheet is prepared.
E4-13 Balance Sheet Consolidation
Equity Method Entries on Reed Corp.'s Books:
Investment in Thorne Corp.
395,000
Cash
395,000
Book Value Calculations:
Total Book
Value
=
Common
Stock
+
Retained
Earnings
Book value at
acquisition
360,000
120,000
240,000
1/1/X4
Goodwill = 19,000
Identifiable
Excess = 16,000
$395,000
Initial
investment
in Thorne
Corp.
100%
Book value =
360,000
Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
4-16
Basic Consolidation Entry
Common Stock
120,000
Retained Earnings
240,000
Investment in Thorne Corp.
360,000
Excess Value (Differential) Calculations:
Total
=
Buildings
+
Inventory
+
Goodwill
Balances
35,000
(20,000)
36,000
19,000
Excess Value (Differential) Reclassification Entry:
Inventory
36,000
Goodwill
19,000
Buildings
20,000
Investment in Thorne Corp.
35,000
Investment in
Thorne Corp.
Acquisition Price
395,000
360,000
Basic
35,000
Excess Reclass.
0
E4-14 Acquisition with Differential
a. Goodwill is $60,000, computed as follows:
Book value of Conger's net assets:
Common stock outstanding
$ 80,000
Retained earnings
130,000
$210,000
Fair value increment:
Land ($100,000 - $80,000)
$ 20,000
Buildings ($400,000 - $220,000)
180,000
200,000
Fair value of net assets
$410,000
Fair value of consideration given
(470,000)
Goodwill
$ 60,000
b.
Equity Method Entries on Road Corp.'s Books:
Investment in Conger Corp.
470,000
Cash
470,000
Record the initial investment in Conger Corp.
Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
Book Value Calculations:
Total Book
Value
=
Common
Stock
+
Retained
Earnings
Book value at
acquisition
210,000
80,000
130,000
1/1/X2
Goodwill = 60,000
Identifiable
Excess = 200,000
$470,000
Initial
investment
in Conger
Corp.
100%
Book value =
210,000
Basic Consolidation Entry
Common stock
80,000
Retained earnings
130,000
Investment in Conger Corp.
210,000
Excess Value (Differential) Calculations:
Total
=
Land
+
Buildings
+
Goodwill
Balances
260,000
20,000
180,000
60,000
Excess Value (Differential) Reclassification Entry:
Land
20,000
Buildings
180,000
Goodwill
60,000
Investment in Conger Corp.
260,000
Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
E4-15 Balance Sheet Worksheet with Differential
a.
Equity Method Entries on Blank Corp.'s Books:
Investment in Faith Corp.
189,000
Cash
189,000
Record the initial investment in Faith Corp.
Book Value Calculations:
Total Book
Value
=
Common
Stock
+
Retained
Earnings
Book value at
acquisition
150,000
60,000
90,000
Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
4-19
E4-15 (continued)
Investment in
Faith Corp.
Acquisition Price
189,000
150,000
Basic
39,000
Excess Reclass.
0
Blank
Corp.
Faith
Corp.
Consolidation
Entries
DR
CR
Consolidated
Balance Sheet
Cash
26,000
18,000
44,000
Accounts Receivable
87,000
37,000
124,000
Inventory
110,000
60,000
24,000
194,000
Buildings & Equipment (net)
220,000
150,000
15,000
385,000
Investment in Faith Corp.
189,000
150,000
0
39,000
Goodwill
0
Total Assets
632,000
265,000
39,000
189,000
747,000
Accounts Payable
92,000
35,000
127,000
Notes Payable
150,000
80,000
230,000
Common Stock
100,000
60,000
60,000
100,000
Retained Earnings
290,000
90,000
90,000
290,000
Total Liabilities & Equity
632,000
265,000
150,000
0
747,000
Chapter 04 - Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
E4-16 Worksheet for Wholly Owned Subsidiary
a.
Equity Method Entries on Gold Enterprises’ Books:
Investment in Premium Builders
167,000
Cash
167,000
Record the initial investment in Premium Builders
Book Value Calculations:
Total Book
Value
=
Common
Stock
+
Retained
Earnings
Book value at
acquisition
150,000
140,000
10,000
