978-1285190907 Chapter 8 Part 2

Chapter 8

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in whole or in part.

they are claims against assets; again, they are credits in the traditional debit/

credit framework.

b. Consolidation Worksheet for Ormond Company and Daytona Company 2014

(amounts in millions)

Ormond Daytona Elimina- Consoli-

Consolidated Worksheet Company Company tions dated

Income Statement (2014)

Sales …………………………………………………. $(600) $ (450) $ (1,050)

Equity in earnings of Daytona Company .. (30) $ 30 0

Operating expense ………………………………. 550 395 13 958

Interest expense ………………………………….. 10 5 15

Loss (Gain) on lawsuit ………………………… 0 20 (25) (5)

Income tax expense …………………………….. 28 12 40

Net income ………………………………………… $ (42) $ (18) $ 18 $ (42)

Balance Sheet (12/31/14)

Cash………………………………………………….. $ 45 $ 25 $ 70

Accounts receivable ……………………………. 80 50 130

Investment in Daytona Company ………….. 339 $(339) 0

Fixed assets ……………………………………….. 280 195 40 515

Patent ……………………………………………….. 0 36 36

Deferred tax asset ……………………………….. 15 15

Goodwill …………………………………………… 0 142 142

Total assets ……………………………………… $759 $270 $(121) $908

Accounts payable and accruals …………….. $(90) $(55) $ 0 $(145)

Long-term debt…………………………………… (140) (75) (215)

Deferred tax liability …………………………… (50) (50)

Other noncurrent liabilities ………………….. (40) (19) (59)

Common stock …………………………………… (392) (50) 50 (392)

Retained earnings ……………………………….. (47) (90) 90 (47)

Total liabilities and shareholders’

equity ………………………………………….. $(759) $(270) $121 $(908)

Equity in Daytona Company earnings = $18 million Daytona Company earnings

+ $12 million amortizations (see schedule below) = $30 million.

Investment in Daytona Company = $312 million original investment + $30 mil-

lion equity in Daytona Company earnings – $3 million dividends received =

$339 million.

The Eliminations column is further supported by the schedule below, which

shows amortizations of the excess amounts and remaining excess amounts at the

end of 2014.

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in whole or in part.

Revenues, gains, and net income are in parentheses to indicate that their signs are

opposite those of expenses and losses; that is, they are credits for those interpret-

ing the worksheet from the accountant’s traditional debit/credit approach. Lia-

bilities and shareholders’ equity accounts are in parentheses to indicate that they

are claims against assets; again, they are credits in the traditional debit/credit

framework.

Date of Acquisition

Differences

Charged (Credited) to Expense or Loss

Balance One Year Later

Fixed assets: $50 million $50 million/5 years = $10 million increase

in operating expense

$40 million

Patent: $40 million $40 million/10 years = $4 million increase

in operating expense

$36 million

Accounts payable and

accruals: $25 million

($25 million) to reduce loss on lawsuit

$0

Post-employment benefits:

$20 million

$20 million/20 years = ($1 million)

decrease in operating expense

$19 million

Goodwill: $142 Million $0 (not impaired) $142 million

Net effects: $50 + $40 +

($25) + ($20) + $142 = $187

million

Increase income by ($10) + ($4) + $25 +

$1 million = $12 million

Increase net assets by $40 +

$36 + ($19) + $142 = $199

million

The balance of adjustments to net assets (that is, assets minus liabilities) is greater one

year later because the liabilities have been satisfied faster than the assets have been

amortized.

8.21 Variable-Interest Entities.

a. RMBC is a joint venture with Owens-Brockway Glass Container, Inc. in which

Molson Coors holds a 50% interest. RMBC produces glass bottles at a glass

manufacturing facility for use at the Golden, Colorado brewery. Under this

agreement, RMBC supplies the firm’s bottle requirements and Owens-

Brockway has a contract to supply the majority of bottle requirements not met

by RMBC. RMMC is a joint venture with Ball Corporation in which Molson

Coors holds a 50% interest.

RMMC supplies the firm with substantially all of the cans for its Golden,

Colorado brewery. RMMC manufactures the can at the Molson Coors’ manu-

facturing facilities, which RMMC operates under a use and license agreement.

Grolsch is a joint venture between CBL and Royal Grolsch N.V. in which

Molson Coors holds a 49% interest. The Grolsch joint venture markets Grolsch

branded beer in the United Kingdom and the Republic of Ireland. The majority

of the Grolsch branded beer is produced by CBL under a contract brewing ar-

rangement with the joint venture. CBL and Royal Grolsch N.V. sell beer to the

joint venture, which sells the beer back to CBL (for onward sale to customers)

for a price equal to what it paid plus a marketing and overhead charge and a

profit margin.

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in whole or in part.

b. An investing firm consolidates the VIE when it absorbs the majority of the enti-

ty’s expected losses if they occur, receives a majority of the entity’s expected

residual returns if they occur, or both. The consolidating firm is labeled the pri-

mary beneficiary. The firm considers the rights and obligations conveyed by its

variable interests and the relationship of its variable interests to variable interest

held by other firms to determine whether it will absorb a majority of expected

losses, receive a majority of expected residual returns, or both. If one firm

absorbs a majority of the expected losses and another firm receives a majority

of the expected residual returns, the firm absorbing a majority of the losses con-

solidates the variable-interest entity.

c. Cost of goods sold for Molson Coors includes all costs that the firm incurred for

producing, bottling, and canning its beers. Although the firm performs most of

these services in-house, it does outsource some to the three consolidated VIEs.

However, the accounting that Molson Coors followed is not precise because the

amount credited to cost of goods sold for the VIEs is net of revenues and costs,

whereas the cost of goods sold incurred in-house only includes the costs of pro-

duction, bottling, and canning.

d. The parent does not always own 100% of the voting stock of a consolidated sub-

sidiary. Accountants refer to the owners of the remaining shares of voting stock

as the minority interest. These shareholders have a proportionate interest in the

net assets (total assets – total liabilities) of the subsidiary as shown in the subsid-

iary’s separate corporate records. The shareholders also have a proportionate in-

terest in the earnings of the subsidiary. The amount of the minority interest in the

subsidiary’s income results from multiplying the subsidiary’s net income by the

minority’s percentage of ownership. The consolidated income statement shows

the proportion of consolidated income applicable to the parent company (net in-

come before minority interest) and the proportion of the subsidiary’s income ap-

plicable to the minority interest (minority interest in earnings). Typically, the

minority interest in the subsidiary’s income appears as a subtraction in calculat-

ing consolidated net income.

e. If RMBC, RMMC, and Grolsch did not qualify as VIEs, GAAP would require

them to account for minority, active investments (generally those in which own-

ership is between 20% and 50%) using the equity method. Under the equity me-

thod, the firm owning shares in another firm recognizes as revenue (expense)

each period its share of the net income (loss) of the other firm. The line “Equity

Income from Affiliates” would include Molson Coors’ share of the earnings in

50%-owned affiliates. The firm would treat dividends received from the inves-

tee as a return of investment, not as income. The statement of cash flows would

report Equity Income from Affiliates as a deduction from operating cash flows,

net of any cash dividends received from the affiliates.

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in whole or in part.

f. Molson Coors consolidated the financial statements of RMBC, RMMC, and

Grolsch with the financial statements of the parent. Thus, the depreciation re-

ported by the VIEs increased the parent’s depreciation by $13.1 million for 2004.

8.22 Accounting for a Merger under the Acquisition Method (Noncontrolling

Interests).

Solution a Solution b

Fair value of Sanders (as evidenced by fair value of

cash given and liability incurred by Pace) ………… $3,150,000 $2,150,000

Fair value of Sanders’ net assets ………………………….. (2,400,000) (2,400,000)

Goodwill ………………………………………………………….. $ 750,000

Gain on bargain acquisition ………………………………… $ 250,000

a. Financial Statement Effects of a Merger

CC AOCI RE

Cash +3,000,000 Accounts Payable +400,000

Cash +400,000 Notes Payable +2,200,000

Receivables +500,000 Contingent Performance

Inventory +1,600,000 Obligation +150,000

PP&E +2,000,000

Unpatented Technology +300,000

In-Process R&D +200,000

Goodwill +750,000

Assets = Liabilities +

Shareholders’ Equity

Journal Entries

Cash……………………………………………………………………. 400,000

Receivables …………………………………………………………. 500,000

Inventory …………………………………………………………….. 1,600,000

PP&E………………………………………………………………….. 2,000,000

Unpatented Technology ………………………………………… 300,000

In-Process R&D …………………………………………………… 200,000

Goodwill …………………………………………………………….. 750,000

Accounts Payable …………………………………………….. 400,000

Notes Payable ………………………………………………….. 2,200,000

Contingent Performance Obligation ……………………. 150,000

Cash ……………………………………………………………….. 3,000,000

To record fair value paid and received.

Legal and Management Costs

CC AOCI RE

Cash –20,000 Operating Expenses –20,000

Shareholders’ Equity

+LiabilitiesAssets =

Operating Expenses ……………………………………………… 20,000

Cash ……………………………………………………………….. 20,000

To record legal fees and management time.

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in whole or in part.

b. If the cash consideration is only $2,000,000, Pace records a gain from a bargain

acquisition of $250,000, and no goodwill is reported.

8.23 Consolidation Subsequent to the Date of Acquisition (Noncontrolling Interests).

a. Exhibit 8.30

Allocations of Fair Value

(in millions)

Charged Balance

Allocation (Credited) on

of Fair Estimated to Expense Dec. 31,

Values Life Each Year 2015

Booking fair value at

acquisition date ……….. $ 1,462.5

Booking book value at

acquisition date ……….. (1,110)

Fair value in excess of

book value …………… 352.5

Land (not depreciated) …… (90) NA $ 0 $ 90

Equipment ……………………. 15 10 (1.5) (12)

Customer lists ………………. (180) 20 9 162

Long-term liabilities

(lower fair value) …….. (60) 8 7.5 45

Goodwill ………………… $ 37.5 Indefinite 0 37.5

$ 15

b. Exhibit 8.31

Investor Interests in Booking, Inc.

(in millions)

Prestige Properties

(80% Controlling Interest)

Noncontrolling

Interest (20%)

Acquisition date fair value (1/1/14) =

$1,462.5 $1,170

$292.5

2014 Net income of Booking = $105 $ 84 $ 21

Annual excess amortizations = $15 (12) (3)

Equity in Booking’s earnings for 2014 72 18

Investment in Booking, Inc. (12/31/14) $1,242 $310.5

2015 Net income of Booking = $135 $108 $ 27

Annual excess amortizations = $15 (12) (3)

Equity in Booking’s earnings for 2015 96 24

Dividends paid by Booking in 2015 = $75 (60) (15)

Investment in Booking, Inc. (12/31/15) $1,278 $319.5

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in whole or in part.

c. Consolidation worksheet at December 31, 2015:

A = elimination of the Investment in Booking account

B = elimination of the Booking’s shareholders’ equity accounts

C = allocation of the fair value excesses at the date of acquisition to expenses

and to the balance sheet from Solution a

D = elimination of the Equity in Booking’s earnings account

E = recognition of a $24 noncontrolling claim on consolidated net income and

recognition of noncontrolling equity of $319.5 that should be reported as a

component of shareholders’ equity.

Consolidation Worksheet at December 31, 2015

(amounts in millions)

Prestige

Resorts

Booking,

Inc.

Eliminations

Consolidated

Revenues $ (1,365) $ (645) $ (2,010)

Cost of goods sold 516 300 816

Depreciation expense 90 30 C (1.5) 118.5

Amortization expense 150 112.5 C 9 271.5

Interest expense 105 67.5 C 7.5 180

Equity in Booking’s earnings (96) 0 D 96 0

Net income $ (600) $ (135)

Consolidated net income $ (624)

Noncontrolling interest in net income E 24 24

Net income to controlling interest $ (600)

Cash $ 780 $ 600 $ 1,380

Short-term investments 309 67.5 376.5

Land 456 442.5 C 90 988.5

Equipment (net) 585 240 C (12) 813

Investment in Booking, Inc. 1,278 0 A (1,278) 0

Customer lists 1,320 810 C 162 2,292

Goodwill C 37.5 37.5

Total assets $ 4,728 $ 2,160 $ 5,887.5

Long-term liabilities $ (1,623) $ (885) 45 $ (2,463)

Common stock (1,305) (345) B 345 (1,305)

Noncontrolling interests 0 0 E (319.5) (319.5)

Retained earnings (1,800) (930) B 930 (1,800)

Total liabilities and shareholders’ equity $ (4,728) $ (2,160) 0 $(5,887.5)

Revenues, gains, and net income are in parentheses to indicate that their signs are

opposite those of expenses and losses; that is, they are credits for those interpreting the

worksheet from the accountant’s traditional debit/credit approach. Liabilities and

shareholders’ equity accounts are in parentheses to indicate that they are claims against

assets; again, they are credits in the traditional debit/credit framework.

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in whole or in part.

8.24 Calculating the Translation Adjustment under the All-Current Method and the

Monetary/Nonmonetary Method.

a. Net assets, January 1 ……………… FC 900 $10:1FC $ 9,000

Common stock issued ……………. 100 $10:1FC 1,000

Net income …………………………… 240 $8:1FC 1,920

Dividends …………………………….. (190) $6:1FC (1,140)

Net assets, Dec. 31 (in dollars) ………………………………………………. $ 10,780

Net assets, Dec. 31 (in FC) …….. FC 1,050 $6:1FC 6,300

Translation adjustment ………………………………………………………….. $ 4,480

The $4,480 translation adjustment decreases shareholders’ equity. The U.S. dol-

lar increased in value during the year. The firm is worse off having had its capi-

tal invested in the foreign currency instead of U.S. dollars.

b. Net Monetary asset (liability)

position, January 1 ……………… FC 50 $10:1FC $ 500

Increase in net monetary assets:

Sales for cash or on account … 4,000 $8:1FC 32,000

Decrease in net monetary

assets:

Issue of long-term debt for

land ………………………………… (100) $10:1FC (1,000)

Purchase of merchandise……… (3,250) $8:1FC (26,000)

S&A expenses ……………………. (400) $8:1FC (3,200)

Income taxes ……………………… (160) $8:1FC (1,280)

Dividends ………………………….. (190) $6:1FC (1,140)

Net monetary asset (liability)

position, Dec. 31 (in dollars) ………………………………………………. $ (120)

Net monetary asset (liability)

position, Dec. 31 (in FC) …….. FC (50) $6:1FC (300)

Foreign exchange loss …………………………………………………………… $ 180

The actual net liability at year-end is $300. If converted into U.S. dollars at the

time of the transaction, the liability would have been only $120. Thus, a foreign

exchange loss arises.

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in whole or in part.

8.25 Translating the Financial Statements of a Foreign Subsidiary; Comparison of

Translation Methods.

a. Translation of the Accounts of Canadian Subsidiary

for Year 1 (All-Current Translation Method)

Canadian Exchange U.S.

Dollars Rate Dollars

Balance Sheet:

Assets

Cash………………………………. C$ 77,555 0.80 US$ 62,044

Rent receivable ………………. 25,000 0.80 20,000

Building (Net) ………………… 475,000 0.80 380,000

C$ 577,555 US$ 462,044

Liabilities and Equity

Accounts payable ……………. 6,000 0.80 4,800

Salaries payable ……………… 4,000 0.80 3,200

Common stock ……………….. 555,555 0.90 500,000

Translation adjustment …….. See below (59,156)

Retained earnings ……………. 12,000 See below 13,200

C$ 577,555 US$ 462,044

Income Statement:

Rent revenue ………………….. C$ 125,000 0.85 US$ 106,250

Operating expenses …………. (28,000) 0.85 (23,800)

Depreciation expense ………. (25,000) 0.85 (21,250)

Net income …………………….. C$ 72,000 US$ 61,200

Retained Earnings Statement:

Balance, January 1, Year 1 . C$ — US$ —

Net income …………………….. 72,000 See above 61,200

Dividends ………………………. (60,000) 0.80 (48,000)

Balance, December 31,

Year 1 ………………………. C$ 12,000 US$ 13,200

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in whole or in part.

Computation of Translation Adjustment for Year 1

Canadian Exchange U.S.

Dollars Rate Dollars

Net asset position,

January 1, Year 1 ………… C$ — US$ —

Plus:

Capital contributed

by P ………………………. 555,555 0.90 500,000

Net income …………………….. 72,000 0.85 61,200

Less:

Dividends …………………… (60,000) 0.80 (48,000)

Subtotal ………………………………………………………………………….. US$ 513,200

Net asset position,

December 31, Year 1 …… C$ 567,555 0.80 454,044

Translation adjustment ……………………………………………………… US$ 59,156

b. Translation of the Accounts of Canadian Subsidiary

for Year 1 (Monetary/Nonmonetary Translation Method)

Canadian Exchange U.S.

Dollars Rate Dollars

Balance Sheet:

Assets

Cash………………………………. C$ 77,555 0.80 US$ 62,044

Rent receivable ………………. 25,000 0.80 20,000

Building (net) …………………. 475,000 0.90 427,500

C$ 577,555 US$ 509,544

Liabilities and Equity

Accounts payable ……………. 6,000 0.80 4,800

Salaries payable ……………… 4,000 0.80 3,200

Common stock ……………….. 555,555 0.90 500,000

Retained earnings ……………. 12,000 See below 1,544

C$ 577,555 US$ 509,544

Income Statement:

Rent revenue ………………….. C$ 125,000 0.85 US$ 106,250

Operating expenses …………. (28,000) 0.85 (23,800)

Depreciation expense ………. (25,000) 0.90 (22,500)

Translation exchange loss … — See below (10,406)

Net income …………………….. C$ 72,000 US$ 49,544

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in whole or in part.

Retained Earnings Statement:

Balance, January 1, Year 1 . CS$ — US$ —

Net income …………………….. 72,000 See above 49,544

Dividends ………………………. (60,000) 0.80 (48,000)

Balance, December 31,

Year 1 ………………………. C$ 12,000 US$ 1,544

Computation of Translation Loss for Year 1

Canadian Exchange U.S.

Dollars Rate Dollars

Net monetary asset

position, January 1,

Year 1 ……………………….. C$ — US$ —

Plus:

Cash invested by P ……… 555,555 0.90 500,000

Cash and receivable

from rents ……………….. 125,000 0.85 106,250

Less:

Cash disbursed for

building …………………… (500,000) 0.90 (450,000)

Cash disbursed and

liabilities incurred for

operating expenses …… (28,000) 0.85 (23,800)

Cash disbursed for

dividends ………………… (60,000) 0.80 (48,000)

Subtotal ………………………………………………………………………….. US$ 84,450

Net monetary position,

December 31, Year 1 … C$ 92,555 0.80 74,044

Translation loss ……………………………………………………………….. US$ 10,406

c. The all-current translation method assumes that the subsidiary’s net asset posi-

tion (assets minus liabilities) is at risk to exchange rate changes. The Canadian

dollar decreased in value relative to the U.S. dollar during Year 1. Maintaining

a net asset position in Canada during a period when the Canadian dollar de-

creased in value gives rise to a negative translation adjustment. The monetary/

nonmonetary translation method assumes that the subsidiary’s net monetary

position (monetary assets minus monetary liabilities) is at risk to exchange rate

changes. The subsidiary has no monetary assets or liabilities at the beginning of

the year but had a net monetary asset position at the end of the year. The net

monetary asset position coupled with a declining Canadian dollar gives rise to a

translation loss. The amounts for the negative translation adjustment and the

translation loss differ because the base for computing the loss differs (net assets

versus net monetary assets).