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CHAPTER 3
UNDERSTANDING THE ISSUES
1. (a) Subsidiary Income = $40,000.
Investment in Subsidiary ($500,000 +
Investment in Subsidiary ($500,000 +
$33,000 – $5,000) = $528,000.
(c) Subsidiary Income = $0.
2. Date alignment means adjusting the in-
vestment account to reflect the same date
as the subsidiary equity accounts so that
their balances reflect the same point in
time.
(a) Simple equity method—The subsidi-
ary’s equity accounts reflect beginning-
of-year balances, yet the investment
account reflects an end-of-year bal-
ance. During the consolidation process,
(b) Sophisticated equity method—The
subsidiary’s equity accounts reflect
beginning-of-year balances, yet the in-
vestment account reflects an end-of-
year balance. During the consolidation
(c) Cost method—The subsidiary’s equity
accounts reflect beginning-of-year
balances, yet the investment account
reflects the balance on the date of
3. The noncontrolling share of consolidated
net income is the outside ownership share
of the subsidiary’s internally generated in-
come as adjusted for amortizations created
by fair value adjustments on the acquisition
date. The NCI share of consolidated net in-
4. The $80,000 excess attributed to the con-
trolling interest means that the patent is ad-
(a) Parent net income for 2015 . $140,000
Subsidiary net income in
2015 ($60,000 × ½ year) .. 30,000
Amortization of excess for
2015 ($100,000 ÷ 10 ×
½ year) .............................. (5,000)
Consolidated net income ..... $165,000
(b) NCI share of net income = 1/2 ×
($60,000 – $10,000) × 20% = $5,000.
5. In 2015, consolidated net income would be
by $12,000 [($160,000 – $100,000) ÷ 5
years]. In 2016, consolidated net income
would be reduced by $12,000 as a result of
the equipment. The equipment would in-
crease depreciation expense by $12,000
[($160,000 – $100,000) ÷ 5 years].
generated income. The NCI is shown, in
total, as a subdivision of equity on the con-
solidated balance sheet.
7. Consolidated net income could exceed the
The amortization of this markdown would
decrease expense; therefore, consolidated
net income is increased.
Ch. 3—Exercises 3–2
EXERCISES
EXERCISE 3-1
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary ..................... $525,000* $420,000 $105,000
Less book value of interest acquired:
Common stock ($5 par) ............... $ 50,000
Paid-in capital in excess of par ... 100,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Equipment ......................................... $ 40,000 debit D1 5 $8,000
(a) Event Simple Equity Method
2015
Subsidiary income of Investment in Huron Company .......... 40,000
$50,000 reported to parent Subsidiary Income ....................... 40,000
Dividends of $10,000 paid Cash .................................................. 8,000
3-3 Ch. 3—Exercises
Exercise 3-1, Concluded
(b) Event Sophisticated Equity Method
2015
Subsidiary income of Investment in Huron Company .......... 33,600
($50,000 – $8,000 Subsidiary Income ....................... 33,600
amortization) × 80%
reported to parent
(c)
Event Cost Method
2015
Subsidiary income of No entry
$50,000 reported to parent
Dividends of $10,000 paid Cash .................................................. 8,000
by Huron Dividend Income ......................... 8,000
EXERCISE 3-2
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (75%) (25%)
Fair value of subsidiary ..................... $616,667* $462,500 $154,167
Less book value of interest acquired:
Common stock ($5 par) ............... $ 50,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Inventory ($50,000 fair – $40,000
book value).................................. $ 10,000 debit D1
Buildings and equipment
(a) Simple equity ........................................................................................ $462,500
+ (75% × Increase in Retained Earnings of $78,000*) ......................... 58,500**
Balance ................................................................................................. $521,000
(b) Sophisticated equity.............................................................................. $462,500
+ (75% × Increase in Retained Earnings of $78,000*) ......................... 58,500**
– 2014 Amortization of Excess
75% × ($10,000 Inventory + $5,000 Buildings and Equipment +
EXERCISE 3-3
(1) Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary .............. $375,000* $300,000 $ 75,000
Less book value of interest acquired:
Common stock ($10 par) ........ $100,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Fixed assets............................... $ 50,000 debit D1 10 $5,000
(2) (CY1) Subsidiary Income ................................................................... 20,000
Investment in Sargent Company ....................................... 20,000
To eliminate parent’s share of subsidiary earnings
for the current year.
(CY2) Investment in Sargent Company ($5,000 × 80%) ................... 4,000
Dividends Declared ........................................................... 4,000
To eliminate parent’s share of dividends for the
current year.
(EL) Common Stock—Sargent ($100,000 × 80%) .......................... 80,000
Retained Earnings—Sargent ($150,000 × 80%) ..................... 120,000
Exercise 3–3, Continued
(3) Parker Company and Sargent Company
Consolidated Income Statement
For Year Ended December 31, 2015
Sales ................................................................................................................ $250,000
Subsidiary Sargent Company Income Distribution
Depreciation adjustment ....... $5,000 Internally generated net
income ................................. $25,000
Adjusted income ........................ $20,000
NCI share ................................... × 20%
NCI ............................................. $ 4,000
(4) Parker Company and Subsidiary Sargent Company
Consolidated Statement of Retained Earnings
For the Year Ended December 31, 2015
Noncontrolling Controlling
Interest
Retained Earnings
Retained earnings, January 1, 2015 ................. $30,000 $200,000
3-7 Ch. 3—Exercises
Exercise 3–3, Concluded
(5) Parker Company and Sargent Company
Consolidated Balance Sheet
December 31, 2015
Assets
Current assets .......................................................................... $140,000
Depreciable fixed assets ........................................................... $650,000a
Less accumulated depreciation ................................................ 131,000b 519,000
Liabilities and Stockholders’ Equity
Current liabilities ....................................................................... $100,000
Stockholders’ equity:
Controlling interest:
EXERCISE 3-4
(1) (CY1) Subsidiary Income ................................................................... 12,000
Investment in Sargent Company ....................................... 12,000
To eliminate parent’s share of subsidiary earnings
for the current year.
(CY2) Investment in Sargent Company ............................................. 8,000
Exercise 3–4, Concluded
(A) Depreciation Expense ............................................................. 5,000
Retained Earnings—Parker (80% × $5,000) ........................... 4,000
(2) Parker Company and Sargent Company
Consolidated Income Statement
For Year Ended December 31, 2016
Sales ................................................................................................................ $300,000
Less expenses (add $5,000 adjustment) ......................................................... 250,000
Subsidiary Sargent Company Income Distribution
Depreciation adjustment ...... (A) 5,000 Internally generated net
income ..................................... $15,000
Adjusted income ............................ $10,000
Parent Parker Company Income Distribution
Internally generated net
income ..................................... $40,000
EXERCISE 3-5
(1) Same as Exercise 3, part (1).
(2) (CY1) Subsidiary Income $20,000 – $4,000 amortization) ................ 16,000
Investment in Sargent Company ....................................... 16,000
(CY2) Investment in Sargent Company ............................................. 4,000
(3) Same as Exercise 3, part (3).
(5) Same as Exercise 3, part (5).
EXERCISE 3-6
(1) (CY1) Subsidiary Income ................................................................... 8,000
Investment in Sargent Company ....................................... 8,000
(CY2) Investment in Sargent Company ............................................. 8,000
Dividends Declared ........................................................... 8,000
(A) Depreciation Expense ............................................................. 5,000
Accumulated Depreciation ................................................. 5,000
Ch. 3—Exercises 3–10
EXERCISE 3-7
(1) Same as Exercise 3, part (1).
(2) (CY2) Dividend Income ...................................................................... 4,000
Dividends Declared ........................................................... 4,000
To eliminate parent’s share of subsidiary dividends
for the current year.
(EL) Common Stock—Sargent ........................................................ 80,000
Retained Earnings—Sargent ................................................... 120,000
year Sargent equity balances.
(D) Depreciable Fixed Assets ........................................................ 50,000
Goodwill ................................................................................... 75,000
Investment in Sargent Company ....................................... 100,000
(A) Depreciation Expense ............................................................. 5,000
Accumulated Depreciation ................................................. 5,000
To amortize excess for the current year.
(4) Same as Exercise 3, part (4).
3-11 Ch. 3—Exercises
EXERCISE 3-8
(1) (CV) Investment in Sargent Company ............................................. 16,000
Retained Earnings—Parker ............................................... 16,000
Convert from cost to equity method by adding to
investment account parent’s share of subsidiary
equity increase. [80% × ($170,000 – $150,000)]
(CY2) Dividend Income ...................................................................... 8,000
Dividends Declared ........................................................... 8,000
To eliminate parent’s share of subsidiary dividends
for the current year.
(EL) Common Stock—Sargent ........................................................ 80,000
Retained Earnings—Sargent ................................................... 136,000
(D) Depreciable Fixed Assets ........................................................ 50,000
Goodwill ................................................................................... 75,000
Investment in Sargent Company ....................................... 100,000
(A) Depreciation Expense ............................................................. 5,000
Retained Earnings—Parker (80% × $5,000) ........................... 4,000
(2) Same as Exercise 4, part (2).
EXERCISE 3-9
Amortization Schedule
Annual
Account Adjustments Life Amount 2015 2016 2017 2018
Inventory ........................................ 1 $ 6,250 $ 6,250
Amortization:
Investments .............................. 3 5,000 5,000 $ 5,000 $ 5,000 $ 0
Buildings (net) .......................... 20 12,500 12,500 12,500 12,500 12,500
Equipment (net) ........................ 5 34,500 34,500 34,500 34,500 34,500
EXERCISE 3-10
(1) Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary .............. $387,500 $310,000 $ 77,500
Less book value of interest acquired:
Common stock ...................... $100,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Fixed assets ................................ $(12,500) credit D 5 $(2,500)
Total ...................................... $(12,500)
(2) (EL) Common Stock—Kraus ........................................................... 80,000
Retained Earnings—Kraus ...................................................... 240,000
Investment in Kraus Company .......................................... 320,000
To eliminate pro rata share of the beginning-of-
year Kraus equity balances and purchased income.
(3) Neiman Company and Subsidiary Kraus Company
Consolidated Income Statement
For Year Ended December 31, 2016
Sales ..................................................................................................... $400,000
Less cost of goods sold ........................................................................ 225,000
3-13 Ch. 3—Exercises
Exercise 3-10, Concluded
Subsidiary Kraus Company Income Distribution
Internally generated net
income .................................... $30,000
Adjustment of depreciation ........... 1,250
Parent Neiman Company Income Distribution
Internally generated net
income .................................... $60,000
EXERCISE 3-11
Calculation of book value of Subsidiary:
Fair value at purchase ....................................................................................... $1,062,500
Add $200,000 increase in Barker retained earnings ......................................... 200,000
Deduct amortization of excess (5 years × $10,000 per year) ............................ (50,000)
Book value balance ............................................................................................ $1,212,500
Ch. 3—Exercises 3–14
APPENDIX EXERCISES
EXERCISE 3B-1
(1) Investment in Largo Company ........................................................ 500,000
(2) Company Parent NCI
Implied Price Value
Value Analysis Schedule Fair Value (100%) (0%)
Company fair value ........................................... $500,000 $500,000 N/A
Fair value of net assets excluding goodwill ...... 386,000 386,000*
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (100%) (0%)
Fair value of subsidiary .............. $500,000 $500,000 N/A
Less book value of interest acquired:
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Inventory ($120,000 fair –
$100,000 book value) ............ $ 20,000 debit D1 1
Deferred tax liability (30% tax
rate × $20,000) ...................... (6,000) credit D1t 1
Depreciable fixed assets
3-15 Ch. 3—Exercises
Exercise 3B-1, Concluded
(3) Elimination Entries:
Common Stock ............................................................................... 100,000
Retained Earnings .......................................................................... 230,000
Investment in Largo Company ................................................... 330,000
EXERCISE 3B-2
(1) Company Parent NCI
Implied Price Value
Value Analysis Schedule Fair Value (90%) (10%)
Company fair value ........................................... $520,000 $468,000 $52,000
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (90%) (10%)
Fair value of subsidiary .............. $520,000 $468,000 $ 52,000
Less book value of interest acquired:
Common stock ($5 par) .......... $100,000
Exercise 3B-2, Continued
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Inventory .................................... $ 20,000 debit D1 1
Deferred tax liability (30% tax
rate × $20,000) ...................... (6,000) credit D1t 1
(2) Lucy Company and Subsidiary Diamond Company
Consolidated Income Statement
For Year Ended December 31, 2015
Sales ......................................................................................... $550,000
Less cost of goods sold (add $20,000 adjustment) .................. 310,000
Gross profit ............................................................................... $240,000
Less expenses:
Exercise 3B-2, Concluded
Subsidiary Diamond Company Income Distribution
Inventory consumption............. $20,000 Internally generated
Building depreciation ............... 5,000 income before tax ............... $20,000
Adjusted income before tax ...... $ (5,000)
Parent Lucy Company Income Distribution
Internally generated
income before tax .................... $ 90,000
Adjusted income ............................ $ 90,000
EXERCISE 3B-3
Company Parent NCI
Implied Price Value
Value Analysis Schedule Fair Value (100%) (0%)
Company fair value .................................................. $700,000 $700,000 N/A
Fair value of net assets excluding goodwill .............. 445,000* 455,000
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (100%) (0%)
Fair value of subsidiary ..................... $700,000 $700,000 N/A
Less book value of interest acquired:
Common stock ($5 par) ............... $250,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Buildings and equipment ................... $ 50,000 debit D1 10 $5,000
Deferred tax liability (30% tax
rate × $50,000) ............................ (15,000) credit D1t 10 (1,500)
3-19 Ch. 3—Problems
PROBLEMS
PROBLEM 3-1
(1) Company Parent NCI
Implied Price Value
Value Analysis Schedule Fair Value (80%) (20%)
Company fair value ........................................... $950,000 $800,000 $150,000*
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary .............. $9500,000 $800,000 $150,000
Less book value of interest acquired:
Common stock ($10 par) ........ $100,000
Paid-in capital in excess of par 200,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Land ($180,000 book –
$120,000 fair value) .............. $ 60,000 debit D1
Building ($450,000 book –
Ch. 3—Problems 3-20
Problem 3-1, Continued
(2) Investment Entries:
Simple Equity Method
Sophisticated Equity Method Cost Method
Investment Entries
2015
Subsidiary reports Investment in Investment in No entry
income of $60,000. Solvo Company ......... 48,000 Solvo Company ............. 44,000
Subsidiary Income Subsidiary Income
(80% × reported) .... 48,000 [80% × (reported –
