Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
P4–31 Intercorporate Receivables and Payables
a. Consolidation entries:
Equity Method Entries on Kim Corp.’s Books:
Investment in Normal Co.
305,000
Cash
305,000
Record the initial investment in Normal Co.
Book Value Calculations:
Total Book
Value
=
Common
Stock
+
Additional
PIC
+
Retained
Earnings
Book value at
acquisition
285,000
150,000
140,000
(5,000)
1/1/X7
Goodwill = 20,000
Identifiable
Excess = 0
$305,000
Initial
investment
in Normal
Co.
100%
Book value =
285,000
Basic Consolidation Entry
Common stock
150,000
Paid-in capital in excess of par
140,000
Retained earnings
5,000
Investment in Normal Co.
285,000
Excess Value (Differential) Calculations:
Total
=
Goodwill
Balances
20,000
20,000
Excess Value (Differential) Reclassification Entry:
Goodwill
20,000
Investment in Normal Co.
20,000
Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
4-52
P4-31 (continued)
Eliminate Intercompany Accounts:
Bonds Payable
50,000
Investment in Normal Co. Bonds
50,000
Accounts Payable
10,000
Accounts Receivable
10,000
Optional Accumulated Depreciation Consolidation Entry
Accumulated depreciation
75,000
Building & equipment
75,000
Investment in
Normal Co.
Acquisition Price
305,000
285,000
Basic
20,000
Excess Reclass.
0
Kim
Corp.
Normal
Co.
Consolidation
Entries
DR
CR
Consolidated
Balance Sheet
Cash
70,000
35,000
105,000
Accounts Receivable
90,000
65,000
10,000
145,000
Inventory
84,000
80,000
164,000
Buildings & Equipment
400,000
300,000
75,000
625,000
Less: Accumulated Depreciation
(160,000)
(75,000)
75,000
(160,000)
Investment in Normal Company Stock
305,000
285,000
0
20,000
Investment in Normal Company Bonds
50,000
50,000
0
Goodwill
20,000
20,000
Total Assets
839,000
405,000
95,000
440,000
899,000
Accounts Payable
50,000
20,000
10,000
60,000
Bonds Payable
200,000
100,000
50,000
250,000
Common Stock
300,000
150,000
150,000
300,000
Capital in Excess of Par
140,000
140,000
Retained Earnings
289,000
(5,000)
5,000
289,000
Total Liabilities & Equity
839,000
405,000
350,000
5,000
899,000
Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
4-53
P4–31 (continued)
c.
Kim Corporation and Subsidiary
Consolidated Balance Sheet
January 1, 20X7
Cash
$105,000
Accounts Receivable
145,000
Inventory
164,000
Buildings and Equipment
$625,000
Less: Accumulated Depreciation
(160,000)
465,000
Goodwill
20,000
Total Assets
$899,000
Accounts Payable
$ 60,000
Bonds Payable
250,000
Common Stock
$300,000
Retained Earnings
289,000
589,000
Total Liabilities and Stockholders’ Equity
$899,000
Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
P4–32 Balance Sheet Consolidation
a.
Equity Method Entries on Primary Corp.’s Books:
Investment in Street Co.
650,000
Bonds Payable
650,000
Record the initial investment in Street Co.
b.
Book Value Calculations:
Total Book
Value
=
Common
Stock
+
Add’l Paid-
In-Capital
+
Retained
Earnings
Book value at
acquisition
478,000
200,000
130,000
148,000
Basic Consolidation Entry
Common Stock
200,000
Additional Paid-in capital
Retained Earnings
148,000
Investment in Street Co.
Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
4-55
P4–32 (continued)
Total
=
Inventory
+
Land
+
Buildings
&
Equipment
+
Patent
+
Disc. on
Bonds
Payable
+
Goodwill
Balances
172,000
4,000
20,000
50,000
40,000
10,000
48,000
Excess Value (Differential) Reclassification Entry:
Inventory
4,000
Land
20,000
Buildings & Equipment
50,000
Patent
40,000
Discount on Bonds Payable
10,000
Goodwill
48,000
Investment in Street
Co.
172,000
Eliminate Intercompany Accounts:
Current Payables
6,500
Receivables
6,500
FYI, the FASB now requires that no allowance accounts be carried forward from the
acquiree in a business combination. However, because of immateriality and the short-
lived nature of the carry forward subsequent to the date of combination, the allowance in
this problem has not been offset against the receivable. If such an offset is desired, the
following consolidation entry would be made:
Allowance for Bad Debts
1,000
Receivables
1,000
However, since receivables are reported net of the allowance, the entry is not shown in the
worksheet included here.
Optional Accumulated Depreciation Consolidation Entry
Accumulated depreciation
220,000
Building & equipment
220,000
Investment in
Street Co.
Acquisition Price
650,000
478,000
Basic
172,000
Excess Reclass.
0
Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
4-56
P4–32 (continued)
c.
Primary
Corp.
Street
Co.
Consolidation
Entries
DR
CR
Consolidated
Balance Sheet
Cash
12,000
9,000
21,000
Receivables (net)
39,000
30,000
6,500
62,500
Inventory
86,000
68,000
4,000
158,000
Land
55,000
50,000
20,000
125,000
Buildings & Equipment
960,000
670,000
50,000
220,000
1,460,000
Less: Accumulated
Depreciation
(411,000)
(220,000)
220,000
(411,000)
Investment in Street Co.
650,000
478,000
0
172,000
Patents
40,000
40,000
Goodwill
48,000
48,000
Total Assets
1,391,000
607,000
382,000
876,500
1,503,500
Current Payables
38,000
29,000
6,500
60,500
Bonds Payable
850,000
100,000
950,000
Discount on Bonds Payable
10,000
(10,000)
Common Stock
300,000
200,000
200,000
300,000
Additional Paid-In Capital
100,000
130,000
130,000
100,000
Retained Earnings
103,000
148,000
148,000
103,000
Total Liabilities & Equity
1,391,000
607,000
494,500
0
1,503,500
Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
4-57
P4–32 (continued)
d.
Primary Corporation and Subsidiary
Consolidated Balance Sheet
January 2, 20X8
Cash
$ 21,000
Receivables
$ 65,500
Less: Allowance for Bad Debts
(3,000)
62,500
Inventory
158,000
Land
125,000
Buildings and Equipment
$1,460,000
Less: Accumulated Depreciation
(411,000)
1,049,000
Patent
40,000
Goodwill
48,000
Total Assets
$1,503,500
Current Payables
$ 60,500
Bonds Payable
$ 950,000
Less: Discount on Bonds Payable
(10,000)
940,000
Stockholders’ Equity
Common Stock
$ 300,000
Additional Paid-In Capital
100,000
Retained Earnings
103,000
503,000
Total Liabilities and
Stockholders’ Equity
$1,503,500
P4-33 Consolidation Worksheet at End of First Year of Ownership
a.
Equity Method Entries on Mill Corp.’s Books:
Investment in Roller Co.
128,000
Cash
128,000
Record the initial investment in Roller Co.
Investment in Roller Co.
24,000
Income from Roller Co.
24,000
Record Mill Corp.’s 100% share of Roller Co.’s 20X8 income
Cash
16,000
Investment in Roller Co.
16,000
Record Mill Corp.’s 100% share of Roller Co.’s 20X8 dividend
Income from Roller Co.
7,500
Investment in Roller Co.
7,500
Record amortization of excess acquisition price
Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
Book Value Calculations:
Total Book
Value
=
Common
Stock
+
Retained
Earnings
Beginning book
value
100,000
60,000
40,000
+ Net Income
24,000
24,000
– Dividends
(16,000)
(16,000)
Ending book value
108,000
60,000
48,000
Basic Consolidation Entry
Common Stock
60,000
Retained Earnings
40,000
Income from Roller Co.
24,000
Dividends Declared
16,000
Investment in Roller Co.
108,000
Excess Value (Differential) Calculations:
=
+
+
Beginning balance
Changes
Ending balance
Amortized Excess Value Reclassification Entry:
2,000
5,500
Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
4-59
P4–33 (continued)
Excess Value (Differential) Reclassification Entry:
Buildings & Equipment
20,000
Goodwill
2,500
Accumulated Depreciation
2,000
Investment in Roller Co.
20,500
Optional Accumulated Depreciation Consolidation Entry
Accumulated Depreciation
30,000
Building & Equipment
30,000
Investment in
Income from
Roller Co.
Roller Co.
Acquisition Price
128,000
100% Net Income
24,000
24,000
100% Net Income
16,000
100% Dividends
7,500
Excess Val. Amort.
7,500
Ending Balance
128,500
16,500
Ending Balance
108,000
Basic
24,000
20,500
Excess Reclass.
7,500
0
0
Chapter 04 – Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
4-60
P4–33 (continued)
b.
Mill
Corp.
Roller
Co.
Consolidation
Entries
DR
CR
Consolidated
Income Statement
Sales
260,000
180,000
440,000
Less: COGS
(125,000)
(110,000)
(235,000)
Less: Wage Expense
(42,000)
(27,000)
(69,000)
Less: Depreciation Expense
(25,000)
(10,000)
2,000
(37,000)
Less: Interest Expense
(12,000)
(4,000)
(16,000)
Less: Other Expenses
(13,500)
(5,000)
(18,500)
Less: Impairment Loss
5,500
(5,500)
Income from Roller Co.
16,500
24,000
7,500
0
Net Income
59,000
24,000
31,500
7,500
59,000
Statement of Retained
Earnings
Beginning Balance
102,000
40,000
40,000
102,000
Net Income
59,000
24,000
31,500
7,500
59,000
Less: Dividends Declared
(30,000)
(16,000)
16,000
(30,000)
Ending Balance
131,000
48,000
71,500
23,500
131,000
Balance Sheet
Cash
19,500
21,000
40,500
Accounts Receivable
70,000
12,000
82,000
Inventory
90,000
25,000
115,000
Land
30,000
15,000
45,000
Buildings & Equipment
350,000
150,000
20,000
30,000
490,000
Less: Accumulated
Depreciation
(145,000)
(40,000)
30,000
2,000
(157,000)
Investment in Roller Co.
128,500
108,000
0
20,500
Goodwill
2,500
2,500
Total Assets
543,000
183,000
52,500
160,500
618,000
Accounts Payable
45,000
16,000
61,000
Wages Payable
17,000
9,000
26,000
Notes Payable
150,000
50,000
200,000
Common Stock
200,000
60,000
60,000
200,000
Retained Earnings
131,000
48,000
71,500
23,500
131,000
Total Liabilities & Equity
543,000
183,000
131,500
23,500
618,000