Chapter 05 – Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value
E5-17A Consolidation of Subsidiary with Negative Retained Earnings
Equity Method Entries on General Corp.’s Books:
Investment in Strap Co.
138,000
Cash
138,000
Record the initial investment in Strap Co.
Book Value Calculations:
NCI
20%
+
General
Corp.
80%
=
Common
Stock
+
Add. Paid-
in Capital
+
Retained
Earnings
Book value at
acquisition
29,000
116,000
100,000
75,000
(30,000)
Basic Consolidation Entry
Common Stock
100,000
Additional Paid-in Capital
75,000
Retained Earnings
30,000
Investment in Strap Co.
NCI in NA of Strap Co.
Chapter 05 – Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value
5-42
E5-17A (continued)
Excess Value (Differential) Calculations:
NCI
20%
+
General Corp.
80%
=
Goodwill
Beginning balances
5,500
22,000
27,500
Excess Value (Differential) Reclassification Entry:
Goodwill
27,500
Investment in Strap Co.
22,000
NCI in NA of Strap Co.
5,500
Investment in
Strap Co.
Acquisition
Price
138,000
116,000
Basic
22,000
Excess Reclass.
0
E5–18A Complex Assignment of Differential
a.
Equity Method Entries on Worth Corp.’s Books:
Investment in Brinker Inc.
864,000
Cash
864,000
Record the initial investment in Brinker Inc.
Investment in Brinker Inc.
135,000
Income from Brinker Inc.
135,000
Record Worth Corp.’s 90% share of Brinker Inc.’s 20X5 income
Income from Brinker Inc.
82,350
Investment in Brinker Inc.
82,350
Record amortization of excess acquisition price
Book Value Calculations:
NCI
10%
+
Worth
Corp.
90%
=
Common
Stock
+
Premium
on Com.
Stock
+
Retained
Earnings
Beginning book
value
72,000
648,000
500,000
100,000
120,000
+ Net Income
15,000
135,000
150,000
– Dividends
0
0
0
Ending book value
87,000
783,000
500,000
100,000
270,000
Chapter 05 – Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value
E5–18A (continued)
12/1/X5
Goodwill = 45,000
Identifiable
Excess = 171,000
$864,000
Initial
investment in
Brinker Inc.
90%
Book value =
648,000
12/31/X5
Goodwill = 45,000
Identifiable
Excess = 88,650
$916,650
Net
investment in
Brinker Inc.
90%
Book value =
783,000
Chapter 05 – Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value
5-44
E5–18A (continued)
Excess Value (Differential) Reclassification
entry:
Equipment
60,000
Discount on Notes Payable
42,500
Goodwill
50,000
Accumulated Depreciation
4,000
Investment in Brinker Inc.
133,650
NCI in NA of Brinker Inc.
14,850
SOLUTIONS TO PROBLEMS
P5-19 Reported Balances
a.
The investment balance reported by Roof will be $192,000.
b.
The amount of goodwill for the entity as a whole will be $25,000
[($192,000 + $48,000) – ($310,000 – $95,000)].
c.
Noncontrolling interest will be reported at $48,000 ($240,000 x 0.20).
P5-20 Acquisition Price
a.
$57,000 = ($120,000 – $25,000) x 0.60
b.
$81,000 = ($120,000 – $25,000) + $40,000 – $54,000
c.
$48,800 = ($120,000 – $25,000) + $27,000 – $73,200
P5–21 Multiple-Choice Questions on Applying the Equity Method [AICPA Adapted]
1. a – $20,000 = 100,000 x 20%. Because significant influence is not obtained, the cost method
2. a – Net increase to investment during 20X3: $18,000 (0.25 x $120,000 – 0.25 x $48,000)
3. c – $230,000 = ($600,000 x 0.4) – (($1,800,000 – $1,740,000) / 6)
4. d – $808,000 = $800,000 – (0.2 x $40,000) + (0.2 x $180,000) – (($800,000 – $600,000) / 10)
Chapter 05 – Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value
5-45
P5-22 Amortization of Differential
Journal entries recorded by Ball Corporation:
Equity Method Entries on Ball Corp.’s Books:
Investment in Krown Corp.
120,000
Preferred Stock
50,000
Additional Paid-in Capital
70,000
Record the initial investment in Krown Corp.
Investment in Krown Corp.
12,000
Income from Krown Corp.
12,000
Record Ball Corp.’s 30% share of Krown Corp.’s 20X5 income
Cash
3,000
Investment in Krown Corp.
3,000
Record Ball Corp.’s 30% share of Krown Corp.’s 20X5 dividend
Income from Krown Corp.
4,575
Investment in Krown Corp.
4,575
Record amortization of excess acquisition price
Amortization of differential assigned to buildings and equipment:
Fair value of buildings and equipment
$360,000
Book value of buildings and equipment
300,000
Differential
$60,000
Portion of stock held by Ball
x
0.30
Differential assigned to buildings and equipment
$18,000
Remaining life
÷
15
Yearly amortization
$1,200
Amortization of differential assigned to copyrights:
Purchase price
$120,000
Fair value of Krown‘s:
Total assets
$560,000
Total liabilities
(250,000)
$310,000
Proportion of stock held by Ball
x .30
(93,000)
Amount assigned to copyrights
$27,000
Remaining life
÷
8
Yearly amortization
$3,375
Chapter 05 – Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value
5-46
P5–23 Computation of Account Balances
a. Easy Chair Company 20X1 equity-method income:
Proportionate share of reported income ($30,000 x .40)
$ 12,000
Amortization of differential assigned to:
Buildings and equipment [($35,000 x .40) / 5 years]
(2,800)
Goodwill ($8,000: not impaired)
-0-
Investment Income
$
9,200
Assignment of differential
Purchase price
$150,000
Proportionate share of book value of
net assets ($320,000 x .40)
(128,000)
Proportionate share of fair value increase in
buildings and equipment ($35,000 x .40)
(14,000)
Goodwill
$ 8,000
b.
Dividend income, 20X1 ($9,000 x .40)
$ 3,600
c.
Cost-method account balance (unchanged):
$150,000
Equity-method account balance:
Balance, January 1, 20X1
$150,000
Investment income
9,200
Dividends received
(3,600)
Balance, December 31, 20X1
$155,600
P5–24 Complex Differential
a. Essex Company 20X2 equity-method income:
Proportionate share of reported net income
($80,000 x .30)
$24,000
Deduct increase in cost of goods sold for purchase
differential assigned to inventory ($30,000 x .30)
(9,000)
Deduct amortization of differential assigned to:
Buildings and equipment
[($320,000 – $260,000) x .30] / 12 years]
(1,500)
Patent [($25,000 x .30) / 10 years]
(750)
Equity-method income for 20X2
$12,750
Purchase Price
$165,000
Investment income for 20X2
$12,750
Dividends received in 20X2 ($9,000 x .30)
(2,700)
10,050
Investment account balance on December 31, 20X2
$175,050
Chapter 05 – Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value
5-47
P5–25 Equity Entries with Differential
a. Journal entry recorded by Hunter Corporation:
Investment in Arrow Manufacturing
210,000
Common Stock
60,000
Additional Paid-In Capital
150,000
Record acquisition of Arrow Manufacturing stock.
(1)
Investment in Arrow Manufacturing Stock
210,000
Common Stock
60,000
Additional Paid-In Capital
150,000
Record acquisition of Arrow Manufacturing stock.
(2)
Cash
9,000
Investment in Arrow Manufacturing Stock
9,000
Record dividends from Arrow Manufacturing: $20,000 x 0.45
(3)
Investment in Arrow Manufacturing Stock
36,000
Income from Arrow Manufacturing
36,000
Record equity-method income: $80,000 x 0.45
(4)
Income from Arrow Manufacturing
1,350
Investment in Arrow Manufacturing Stock
1,350
Amortize differential assigned to buildings and equipment:
($30,000 x .45) / 10 years
(1)
Cash
18,000
Investment in Arrow Manufacturing Stock
18,000
Record dividends from Arrow Manufacturing: $40,000 x 0.45
(2)
Investment in Arrow Manufacturing Stock
22,500
Income from Arrow Manufacturing
22,500
Record equity-method income for period: $50,000 x 0.45
(3)
Income from Arrow Manufacturing
1,350
Investment in Arrow Manufacturing Stock
1,350
Amortize differential assigned to buildings and equipment.
Purchase price on January 1, 20X0
$210,000
20X0:
Income from Arrow Manufacturing
($36,000 – $1,350)
$34,650
Dividends received
(9,000)
25,650
20X1:
Income from Arrow Manufacturing
($22,500 – $1,350)
$21,150
Dividends received
(18,000)
3,150
Investment account balance, December 31, 20X1
$238,800
Chapter 05 – Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value
5-48
P5–26 Equity Entries with Differential
(1)
Investment in Jackson Corporation Stock
200,000
Common Stock
50,000
Additional Paid-In Capital
150,000
Record acquisition of Jackson Corporation stock.
(2)
Cash
3,500
Investment in Jackson Corporation Stock
3,500
Record dividend from Jackson Corporation: $10,000 x 0.35
(3)
Investment in Jackson Corporation Stock
24,500
Income from Jackson Corporation
24,500
Record equity-method income: $70,000 x 0.35
(4)
Income from Jackson Corporation
7,000
Investment in Jackson Corporation Stock
7,000
Record expiration of differential assigned to inventory: $20,000 x 0.35
(5)
Income from Jackson Corporation
1,400
Investment in Jackson Corporation Stock
1,400
Record amortization of differential assigned to buildings and equipment (net):
($80,000 x 0.35) / 20 years
b. $212,600 = $200,000 + $24,500 – $3,500 – $7,000 – $1,400
P5–27 Additional Ownership Level
a.
Operating income of Amber for 20X3
$220,000
Operating income of Blair for 20X3
$100,000
Add: Equity income from Carmen
[($50,000 – $6,000) x .25)
11,000
Blair net income for 20X3
$111,000
Proportion of stock held by Amber
x 0.40
44,400
Amortization of differential:
Equipment [($30,000 x .40) / 8 years]
(1,500)
Patents [($25,000 x .40) / 5 years)
(2,000)
Net income of Amber for 20X3
$260,900
b.
Investment in Blair Corporation Stock
130,000
Common Stock
40,000
Additional paid-In Capital
90,000
Purchase of Blair Corporation Stock.
Cash
12,000
Investment in Blair Corporation Stock
12,000
Record dividend from Blair: $30,000 x 0.40
Chapter 05 – Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value
5-49
Investment in Blair Corporation Stock
44,400
Income from Blair Corporation
44,400
Record equity-method income: $111,000 x 0.40
Income from Blair Corporation
3,500
Investment in Blair Corporation Stock
3,500
Amortize differential: $3,500 = $1,500 + $2,000
P5–28 Correction of Error
Required correcting entry:
Retained Earnings
17,000
Income from Dale Company
11,500
Investment in Dale Company Stock
28,500
Dale Company
Item
Retained
Earnings
1/1/20X4
20X4 Income
Investment
Balance
12/31/20X4
Adjustment to remove dividends
included in investment income and not
removed from investment account
$(14,000)
$(10,000)
$(24,000)
Adjustment to annual amortization
of differential:
20X2 and 20X3
(3,000)
(3,000)
20X4
(1,500)
(1,500)
Required adjustment to account balance
$(17,000)
$(11,500)
$(28,500)
Computation of adjustment to annual amortization of differential
Correct amortization of differential assigned to:
Equipment [($120,000 – $70,000) x 0.40] / 5 years
$4,000
Patents:
Amount paid
$164,000
Fair value of identifiable net assets
($300,000 + $50,000) x 0.40
(140,000)
Amount assigned
$ 24,000
Number of years to be amortized
÷ 8
Annual amortization
3,000
Correct amount to be amortized annually
$7,000
Amount amortized by Hill
[($164,000 – ($300,000 x 0.40)] / 8 years
(5,500)
Adjustment to annual amortization
$1,500
Chapter 05 – Consolidation of Less-Than-Wholly Owned Subsidiaries Acquired at More than Book Value
P5-29 Majority-Owned Subsidiary Acquired at Greater than Book Value
a.
Equity Method Entries on Porter Corp.’s Books:
Investment in Darla Corp.
102,200
Cash
102,200
Record the initial investment in Darla Corp.
Book Value Calculations:
NCI
30%
+
Porter
Corp.
70%
=
Common
Stock
+
Retained
Earnings
Book value at
acquisition
37,500
87,500
40,000
85,000
Basic consolidation entry
40,000
85,000
Investment in Darla Corp.
NCI in NA of Darla Corp.
Excess Value (Differential) Calculations:
+
=
Inventory
+
Beginning balances