CHAPTER 7
UNDERSTANDING THE ISSUES
1. Equity prior to sale of new shares ……………………………………………………………………… $200,000
Equity gained by sale ………………………………………………………………………………………. 650,000
2. Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary …………………… $600,000 $480,000 $120,000
3. Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary ………………… $1,000,000 $800,000 $200,000
2015:
Cost of investment ……………………………………………. $ 800,000
Equity increase:
Equity at July 1, 2019, with 1/2 year income ……… $1,300,000
Equity at January 1, 2015 ……………………………….. 900,000
7–3
3. (Continued)
Sale of 2,000 shares
a. Increase in paid-in equity on sale of investment:
Sale price ($150 × 2,000) ……………………………………. $ 300,000
Adjusted cost (1/4 × $1,084,000) …………………………. (271,000)
Internally generated ……………………………………………. $150,000
Subsidiary:
(60% × 1 × $190,000) …………………………………….. 114,000
(20% × 1/2 × $190,000) ………………………………….. 19,000
Total controlling interest ……………………………………… $283,000
c. Not applicable
Sale of 6,000 shares
a. Gain on sale of investment (would not be discontinued operation):
Sale price ($150 × 6,000) ………………………… $ 900,000
4. Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary ………………… $1,750,000 $1,400,000 $ 350,000
Adjustment of identifiable accounts:
Amortization Worksheet
Adjustment Life per Year Key
Goodwill …………………………………….. $262,000 debit D
Parent income ………………………………………………….. $120,000
Subsidiary income …………………………………………….. 80,000
Consolidated net income …………………………………… $200,000
NCI (20% × $68,000) ………………………………………… $13,600
NCI preferred (6% × $200,000) ………………………….. 12,000 $ 25,600
7–5 Ch. 7—Exercises
EXERCISES
EXERCISE 7-1
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (60%) (40%)
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Building ……………………………………… $200,000 debit D1 20 10,000
Goodwill …………………………………….. 140,000 debit D2
Total assets ………………………………………………………………………….. $3,700,000
Liabilities and Stockholders’ Equity
Current liabilities …………………………………………………………………… $ 350,000
Bonds payable ……………………………………………………………………… 1,350,000
Stockholders’ equity:
EXERCISE 7-2
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (60%) (40%)
Fair value of subsidiary …………………… $225,000 $135,000 $ 90,000
Less book value of interest acquired:
Common stock ($10 par) …………….. $100,000
Retained earnings ……………………… 20,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Equipment ………………………………….. $105,000 debit D 10 $10,500
Analysis of 20% Interest, January 1, 2017
Price paid for additional investment in Hardee ………………………….. $ 40,000
Less interest acquired:
Common stock ($10 par) …………………………………………………… $100,000
Exercise 7-2, Concluded
Baker Corporation and Subsidiary Hardee Company
Consolidated Balance Sheet
December 31, 2019
Assets
Paid-in capital in excess of par from stock retirement ……………. 6,800
Retained earningsc …………………………………………………………… 336,200 843,000
Total liabilities and stockholders’ equity ……………………………………. $1,397,500
b20% × $220,000 ………………………………………… $ 44,000
Remaining share of excess, 5 X 20% X $10,500 10,500
Total ………………………………………………………….. 54,500
cConversion:
EXERCISE 7-3
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (60%) (40%)
Fair value of subsidiary …………………… $465,000 $418,500 $ 46,500
Less book value of interest acquired:
Common stock ($10 par) …………….. $100,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Equipment ………………………………….. $115,000 debit D 20 $5,570
Entries
Investment in Venus Company ……………………………………………….. 195,300
Retained Earnings* ………………………………………………………….. 137,475
7–9 Ch. 7—Exercises
EXERCISE 7-4
Entries on Carpenter’s books, January 1, 2016:
Investment in Hinckley Company …………………………………………….. 2,960
Retained Earnings—Carpenter ………………………………………….. 2,960
To adjust investment to equity for shares sold.
Remaining shares may remain at cost, because
they will be consolidated.
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (60%) (40%)
Fair value of subsidiary …………………… $200,000 $160,000 $ 40,000
Less book value of interest acquired:
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Machine …………………………………….. $ 20,000 debit D1 5 $4,000
Equity adjustment:
Income …………………………………………………………………………… $110,000
Amortization of excess (4 years × $4,000) …………………………… (16,000)
Dividends ……………………………………………………………………….. (20,000)
EXERCISE 7-5
(1) Retained Earnings (3 × 80% × $5,000) ……………………………….. 12,000
Investment in Bruce Corporation ……………………………………. 12,000
To adjust for building depreciation to December 31, 2017.
Investment in Bruce Corporation ………………………………………… 26,000
Investment Income ………………………………………………………. 26,000
To adjust current year’s share of income and investment
account for one-half of the year’s building depreciation
(2) Retained Earnings (3 × 80% × $5,000) ……………………………….. 12,000
Investment in Bruce Corporation ……………………………………. 12,000
To adjust for building depreciation to December 31, 2017.
Investment in Bruce Corporation ………………………………………… 13,000
Investment Income ………………………………………………………. 13,000
To adjust one-half of current year’s share of income for
the first half of the year and one-half of the year’s building
7–11 Ch. 7—Exercises
Exercise 7-5, Concluded
(3) Only the 20% portion sold (25% of the investment) needs adjustment; the remaining 60% of
the investment will be adjusted at year-end when consolidated statements are prepared.
Retained Earnings [(3 × 80% × $5,000)* × 1/4] ……………………. 3,000
Investment in Bruce Corporation ……………………………………. 3,000
EXERCISE 7-6
(1)
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary …………………… $350,000 $280,000 $ 70,000
Less book value of interest acquired:
Common stock ($10 par) …………….. $200,000
Retained earnings ……………………… 90,000
(2)
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary …………………… $350,000 $280,000 $ 70,000
Less book value of interest acquired:
Common stock ($10 par) …………….. $200,000
Retained earnings ……………………… 90,000
Preferred dividend share of retained
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Goodwill …………………………………….. $ 90,000 debit D
(3)
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary …………………… $350,000 $280,000 $ 70,000
Less book value of interest acquired:
Common stock ($10 par) …………….. $200,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Goodwill …………………………………….. $ 82,000 debit D
7–13 Ch. 7—Exercises
EXERCISE 7-7
(1)
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary …………………… $900,000 $720,000 $180,000
Less book value of interest acquired:
Common stock ($10 par) …………….. $800,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Goodwill …………………………………….. $ 30,000 debit D
(2) Investment in Brian ………………………………………………………….. 40,000
Retained Earnings ……………………………………………………….. 40,000
To adjust for 80% of subsidiary income for 2015 and 2016
EXERCISE 7-8
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 ($10 stated value) … $300,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Goodwill …………………………………….. $ 97,000 debit D
(1) Equity claim on Kim Company retained earnings:
(2) Cost-to-simple-equity conversion for preferred stock:
Preferred stockholders’ claim on retained earnings;
January 1, 2015, through January 1, 2017
(2 years × $16,000) ……………………………………………………… $32,000
Ownership interest …………………………………………………………… × 50%
Cost-to-simple-equity conversion ……………………………………….. $16,000
Investment in Kim Company Preferred Stock ………………………. 16,000
7–15 Ch. 7—Exercises
Exercise 7-8, Concluded
(3) Cost-to-simple-equity conversion for common stock:
Retained earnings, January 1, 2017 …………………………………… $210,000
Less preferred claim—4 years × 8% × $200,000 ………………….. 64,000 $146,000
Retained earnings, December 31, 2014 ………………………….. $160,000
Less preferred claim—2 years × 8% × $200,000 ……………… 32,000 128,000
Entries:
Investment in Kim Company Common Stock ……………………….. 14,400
Retained Earnings—Zigler …………………………………………….. 14,400
To adjust investment to equity.
Ch. 7—Problems 7–16
PROBLEMS
PROBLEM 7-1
(1)
Price paid ……………………………………………………………………….. $70,000
Less interest acquired:
Common stock ($10 par) ……………………………………………… $100,000
Retained earnings ………………………………………………………. 85,000
(2) See worksheet on page 389.
Eliminations and Adjustments:
(CY1) Eliminate intercompany income.
(CY2) Eliminate intercompany dividends.
(EL) Eliminate the controlling interest in the subsidiary equity.
(D1,D2)/
Subsidiary Sharon Company Income Distribution
Depreciation ……………………….. (A) $5,000 Internally generated net
income …………………………. $35,000
Adjusted net income ……………. $30,000
NCI share ………………………….. × 20%
NCI …………………………………… $ 6,000
Problem 7-1, Concluded
(2) Palmer Company and Subsidiary Sharon Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 2015
Eliminations Consolidated Controlling Consolidated
Trial Balance
and Adjustments Income Retained Balance
Palmer Sharon Dr. Cr. Statement NCI Earnings Sheet
Current Assets ……………………………………….. 160,000 80,000 …………….. …………….. ….…………. …………….. …………….. 240,000
Investment in Share Company ………………….. 301,000 …………….. (CY2) 4,000 (CY1) 28,000 …………….. …………….. …………….. ……………..
…………….. …………….. …………….. (EL) 160,000 …………….. …………….. …………….. ……………..
Common Stock ($10 par)—Palmer ……………. (500,000) …………….. …………….. …………….. …….………. …………….. …………….. (500,000)
Retained Earnings—Palmer ……………………… (198,000) …………….. (A) 10,000 …………….. ……….……. …………….. …………….. ……………..
…………….. …………….. (D3) 7,000 …………….. …………….. …………….. (181,000) ……………..
Common Stock ($10 par)—Sharon ……………. …………….. (100,000) (EL) 80,000 …………….. …………..… (20,000) …………….. ……………..
Retained Earnings—Sharon …………………….. …………….. (100,000) (EL) 80,000 (NCI) 56,000 …………….. (45,000) …………….. ……………..
…………….. …………….. (A) 5,000 …………….. …………….. …………….. …………….. ……………..
…………….. …………….. (D3) 26,000 …………….. …………….. …………….. …………….. ……………..
Sales …………………………………………………….. (400,000) (110,000) …………….. ………….…. (510,000) …………….. …………….. ……………..
Subsidiary Income …………………………………… (28,000) …………….. (CY1) 28,000 …………….. …………….. …………….. …………….. ……………..
PROBLEM 7-2
(1)
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (70%) (30%)
Fair value of subsidiary ………………… $350,000 $245,000 $105,000
Less book value of interest acquired:
Common stock ………………………. $ 50,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Equipment ………………………………….. $ 20,000 debit D1 4 $5,000
Analysis of 20% Interest:
Price paid …………………………………………………………………………….. $92,000
Less interest acquired:
Common stock …………………………………………………………… $ 50,000
Other paid-in capital in excess of par …………………………….. 100,000
7–19 Ch. 7—Problems
Problem 7-2, Continued
(2) Entries under the simple equity method: 2015 2016
Debit Credit Debit Credit
Investment in Craft Company ……………. 42,000 (1) 75,000 (2)
(1) 70% of $60,000 net income
(3) 70% of $20,000 dividends
(3) Balance in Investment in Craft Company:
$245,000 + $42,000 – $14,000 + $92,000 + $75,000 – $27,000 = $413,000
Problem 7-2, Continued
(4) James Company and Subsidiary Craft Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 2016
Eliminations Consolidated Controlling Consol.
Trial Balance
and Adjustments Income Retained Balance
James Craft Dr. Cr. Statement NCI Earnings Sheet
Inventory, December 31 …………………………… 100,000 50,000 …………….. (EI) 3,000 …………….. …………….. …………….. 147,000
Other Current Assets ………………………………. 126,000 180,000 …………….. …………….. …….………. …………….. …………….. 306,000
Accumulated Depreciation ……………………….. (100,000) (60,000) …………….. (A) 10,000 …………….. …………….. …………….. (170,000)
Goodwill ………………………………………………… …………….. …………….. (D1) 30,000 ….…………. …………….. …………….. …………….. 30,000
Other Intangibles ……………………………………. 20,000 …………….. …………….. ………….…. …………….. …………….. …………….. 20,000
Current Liabilities ……………………………………. (120,000) (40,000) …………….. …………….. …………….. …………….. …………….. (160,000)
Bonds Payable ……………………………………….. …………….. (100,000) …………….. ……….……. …………….. …………….. …………….. (100,000)
…………….. …………….. (D2) 2,667 …………….. …………….. …………….. ………….…. ……………..
Net Sales ………………………………………………. (520,000) (450,000) (IS) 50,000 …………….. (920,000) …………….. …………….. ……………..
Cost of Goods Sold …………………………………. 300,000 260,000 (EI) 3,000 (IS) 50,000 513,000 ………….…. …………….. ……………..
Operating Expenses ……………………………….. 120,000 100,000 (A) 5,000 …………….. 225,000 ……..……… …………….. ……………..