P16-8. Elimination entries and consolidated balance sheet under acquisition
method
16-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Requirement 3:
Plate Salad
Eliminations Consolidated
Dr Cr Balance Sheet
Assets
Cash $ 320,000 $ 100,000 $ 420,000
36,000(B)
Goodwill 20,000(B) 25,000
5,000(C)
Total $ 900,000 $ 260,000 $ 1,025,000
Liabilities & Equity
Accounts payable 40,000 80,000 120,000
9,000(C) 45,000
Total $ 900,000 $ 260,000 $ 1,025,000
16-2
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
P16-9. Eliminating entries and accounting for goodwill
Requirement 1:
DR Investment in Saturn $1,000,000
CR Cash $1,000,000
Requirement 2:
Requirement 3:
2017 2018
Pluto’s income $500,000 $350,000
Saturn’s income 200,000 100,000
life.
P16-10. Comparing translation effect on ratios
(CFA Adapted)
Remeasurement is the process under which a subsidiary’s local currency
results are translated into the parent’s currency. ASC 830 requires
inventory accounting results in a lag in recognizing exchange rate changes.
(1) Gross profit margin percentage (gross profit/sales) is higher after
percentage will generally increase after remeasurement.
(2) Operating profit margin (operating profit/sales) is higher after
remeasurement for two reasons. First, the gross profit margin
after remeasurement, increasing the operating margin percentage.
(3) Net profit margin (net income/sales) may be higher or lower after
when those amounts are remeasured.
P16-11. Financial asset impairment and recovery
Requirement 1: U.S. GAAP
1/01/18
DR AFS Investment in MBSs $10,000
CR Impairment reversal – OCI $1,250
2018 2019
Requirement 2: IFRS
1/01/18
DR AFS Investment in MBSs $10,000
CR Cash $10,000
16-4
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
OCI effect No effect No effect
Requirement 3(a): U.S. GAAP
The recovery due to other factors will be recorded as a reversal of the
previously recorded impairment in OCI. The journal entry is:
Requirement 3(b): IFRS
The $3,000 impairment due to credit losses and other factors recorded in 2018
P16-12. Variable interest entities
Requirement 1:
A variable interest entity must be consolidated by the entity deemed to be its
so it is required to consolidate Surety Bonding Company.
Requirement 2:
Waste Management owns 0% of the Surety Bonding Company stock. This can be
Requirement 3:
The reported current ratio is $3,451/$3,257 = 1.06. However, the consolidation of
the Surety Bonding Company increased the numerator by $60 million and the
we ignore the contribution of the Surety Bonding Company, the current ratio would
be ($3,451 – $60)/($3,257 – $33) = 1.05.
P16-13. Accounting for minority-passive equity investments during
accounting transition
Requirement 1:
Requirement 2:
December 31, 2016:
$500,000 = $50,000.)
Requirement 3:
December 31, 2017:
DR Fair value adjustment – AFS securities $60,000
16-6
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Requirement 4:
January 1, 2018:
DR Accumulated OCI* – AFS securities $110,000
*Assumes the amount credited to OCI each year was subsequently closed to AOCI
during the closing process.
Requirement 5:
December 31, 2018:
DR Unrealized loss on equity securities $20,000
Requirement 6:
July 1, 2019:
DR Cash $640,000
To record the sale of Spiegel stock.
Financial Reporting and Analysis (7th Ed.)
Chapter 16 Solutions
Intercorporate Investments
Cases
Cases
C16-1. Shopko: Business acquisitions and analysis of sales growth
Requirement 1:
16-7
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
The financial statement user should recognize that a significant part of the
31.8% increase in consolidated revenue for Year 1 is attributable to the
lead to an incorrect assessment of revenue growth from Year 0 to Year 1.
The pro forma note disclosures report results for Year 0 and Year 1 as if the
15.2%, computed as ($4,181,567 – $3,630,951)/$3,630,951
Requirement 2:
The 15.2% growth rate provides a better estimate of sustainable revenue
The instructor might point out that the minimum GAAP pro forma disclosures
are so limited (i.e., sales, net income and EPS) that reconstruction of
C16-2. Measurement and reporting of noncontrolling interest under
acquisition method
NOTE: $ amounts in thousands
Requirement 1:
ASC 805-20-30, paragraph 7 requires the acquirer (ICG) to measure
market prices of the noncontrolling shares, other valuation techniques must
be applied.
Requirement 2:
ASC 805-20-30, paragraph 8 indicates that the purchase price for the
appropriate to discount the value of the noncontrolling shares for the
16-8
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
absence of control. ICG stated that it discounted the noncontrolling shares
Requirement 3:
(The amounts that follow are in thousands of dollars.) The $19,670
purchase price for 89% of GovDelivery’s equity implies a full fair value of
$1,011 ($2,431-$1,420), or 41.6% ($1,011/$2,431).
Requirement 4:
The acquisition would have no effect on the consolidated income statement
acquisition.
The 12/31/09 consolidated balance sheet would include GovDelivery’s
Consolidation would be achieved with the standard elimination entries
Investment account on ICG’s books (credit), and allocate $1,420 to
noncontrolling interest (credit).
Requirement 5:
Customer lists, trademarks/trade names, and technology will be amortized
each year as follows:
potentially affect consolidated income. Other net assets do not have a
16-9
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
stated useful life so their subsequent consolidated income effect is
unknown.
proportionate, as discussed in requirement 3.
C16-3. Air Products: Joint ventures and off-balance-sheet effects
Requirement 1:
The primary reason that companies enter into joint ventures is because
primary explanation for joint ventures.
It is also true that if ownership of the joint venture is exactly 50:50, then—
debt-to-equity.
Requirement 2:
All of the following computations depend upon estimates and assumptions.
statements is 7.30%. After adjusting for the joint ventures, it is 6.94%.
16-10
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
The adjustments are made because the denominator in the ROA computation
total equity affiliates’ income of $196.3 million, or 45.2%.
As shown in the above analysis, the total assets of the equity affiliates at the
end of fiscal Year 2 and Year 1 were $1,881.2 million and $2,224.9 million,
The result is an additional $432.1 million of average total assets and a lower
ROA – 6.94% rather than 7.30%.
16-11
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.