Ch. 3—Problems
PROBLEMS
PROBLEM 3-1
(1)
GroupOwnershipCumulative
Zone AnalysisTotalPortionTotal
Priority accounts...... $ (80,000)$ (64,000)$ (64,000)
Nonpriority accounts...... 800,000 640,000 576,000
Price Analysis
Price...... $740,000
Assign to priority accounts...... (64,000)full value
Assign to nonpriority accounts...... 640,000full value
Goodwill...... 164,000
Determination and Distribution of Excess Schedule
Price paid for investment...... $740,000
Less book value interest acquired:
Common stock...... $100,000
Paid-in capital in excess of par..... 200,000
Retained earnings...... 250,000
Total equity...... $550,000
Interest acquired...... 80%440,000
Excess of cost over book value (debit)..$300,000
Adjustments:Amortization
Land...... $56,000—debit D1
Buildings...... 80,00020debit D2$4,000
Goodwill...... 164,000debit D3
Extraordinary gain...... —
Total adjustments...... $300,000
Problem 3-1, Continued
(2)Investment Entries:
EventSimple Equity Method
20X1
Subsidiary income of Investment in Saul Company ...... 48,000
$60,000 reported to parentSubsidiary Income...... 48,000
Dividends of $10,000 paid Cash...... 8,000
by SaulInvestment in Saul Company...... 8,000
20X2
Subsidiary income of Investment in Saul Company...... 36,000
$45,000 reported to parentSubsidiary Income...... 36,000
Dividends of $10,000 paid Cash...... 8,000
by SaulInvestment in Saul Company...... 8,000
EventSophisticated Equity Method
20X1
Subsidiary income of Investment in Saul Company*...... 44,000
$60,000 reported to parentSubsidiary Income...... 44,000
Dividends of $10,000 Cash...... 8,000
paid by SaulInvestment in Saul Company...... 8,000
20X2
Subsidiary income of Investment in Saul Company*...... 32,000
$45,000 reported to parentSubsidiary Income...... 32,000
Dividends of $10,000 Cash...... 8,000
paid by SaulInvestment in Saul Company...... 8,000
*Amortization of building excess deducted ($4,000).
EventCost Method
20X1
Subsidiary income of No entry
$60,000 reported to parent
Dividends of $10,000 Cash...... 8,000
paid by Saul Dividend Income...... 8,000
20X2
Subsidiary income of No entry
$45,000 reported to parent
Dividends of $10,000 Cash...... 8,000
paid by SaulDividend Income...... 8,000
Problem 3-1, Continued
(3)Elimination Entries:
EventSimple Equity Method
20X1
Eliminate current-year CY1Subsidiary Income...... 48,000
entriesInvestment in Saul...... 48,000
CY2Investment in Saul...... 8,000
Dividends Declared...... 8,000
Eliminate investment ELCommon Stock...... 80,000
as of Jan. 1Paid-In Capital in Excess of Par.....160,000
Retained Earnings...... 200,000
Investment in Saul...... 440,000
Distribute excessD1Land...... 56,000
D2Building...... 80,000
D3Goodwill...... 164,000
DInvestment in Saul...... 300,000
Amortize excessA2Depreciation Expense...... 4,000
A2Accumulated Depreciation...... 4,000
20X2
Eliminate current-year CY1Subsidiary Income...... 36,000
entriesInvestment in Saul...... 36,000
CY2Investment in Saul...... 8,000
Dividends Declared...... 8,000
Eliminate investment ELCommon Stock...... 80,000
as of Jan. 1Paid-In Capital in Excess of Par.....160,000
Retained Earnings...... 240,000
Investment in Saul...... 480,000
Distribute excessD1Land...... 56,000
D2Building...... 80,000
D3Goodwill...... 164,000
DInvestment in Saul...... 300,000
Amortize excessA2-3Retained Earnings—Peter...... 4,000
A2Depreciation Expense...... 4,000
A2Accumulated Depreciation...... 8,000
Problem 3-1, Continued
EventSophisticated Equity Method
20X1
Eliminate current-year CY1Subsidiary Income...... 44,000
entriesInvestment in Saul...... 44,000
CY2Investment in Saul...... 8,000
Dividends Declared...... 8,000
Eliminate investment ELCommon Stock...... 80,000
as of Jan. 1Paid-In Capital in Excess of Par.....160,000
Retained Earnings...... 200,000
Investment in Saul...... 440,000
Distribute excessD1Land...... 56,000
D2Building...... 80,000
D3Goodwill...... 164,000
DInvestment in Saul...... 300,000
Amortize excessA2Depreciation Expense...... 4,000
A2Accumulated Depreciation...... 4,000
20X2
Eliminate current-year CY1Subsidiary Income...... 32,000
entriesInvestment in Saul...... 32,000
CY2Investment in Saul...... 8,000
Dividends Declared...... 8,000
Eliminate investment ELCommon Stock...... 80,000
as of Jan. 1Paid-In Capital in Excess of Par.....160,000
Retained Earnings...... 240,000
Investment in Saul...... 480,000
Distribute excessD1Land...... 56,000
D2Building (net)*...... 76,000
D3Goodwill...... 164,000
DInvestment in Saul...... 296,000
Amortize excessA2Depreciation Expense...... 4,000
A2Accumulated Depreciation...... 4,000
Problem 3-1, Concluded
EventCost Method
20X1
Eliminate current-year CY2Dividend Income...... 8,000
entriesDividends Declared...... 8,000
Eliminate investment ELCommon Stock...... 80,000
as of Jan. 1Paid-In Capital in Excess of Par.....160,000
Retained Earnings...... 200,000
Investment in Saul...... 440,000
Distribute excessD1Land...... 56,000
D2Building...... 80,000
D3Goodwill...... 164,000
DInvestment in Saul...... 300,000
Amortize excessA2Depreciation Expense...... 4,000
A2Accumulated Depreciation...... 4,000
20X2
Equity conversionCVInvestment in Saul...... 40,000
Retained Earnings—Peter...... 40,000
Eliminate current-year CY2Dividend Income...... 8,000
entriesDividends Declared...... 8,000
Eliminate investment ELCommon Stock...... 80,000
as of Jan. 1Paid-In Capital in Excess of Par.....160,000
Retained Earnings...... 240,000
Investment in Saul...... 480,000
Distribute excessD1Land...... 56,000
D2Building...... 80,000
D3Goodwill...... 164,000
DInvestment in Saul...... 300,000
Amortize excessA2-3Retained Earnings—Peter...... 4,000
A2Depreciation Expense...... 4,000
A2Accumulated Depreciation...... 8,000
PROBLEM 3-2
(1)
Determination and Distribution of Excess Schedule
Price paid for investment...... $308,000
Less book value interest acquired:
Common stock...... $ 50,000
Other paid-in capital...... 100,000
Retained earnings...... 150,000
Total equity...... $300,000
Interest acquired...... 80%240,000
Excess of cost over book value (debit)..$68,000
Adjustments:Amortization
Inventory...... $8,0001debit D1
Buildings...... 20,00010debit D2$2,000
Goodwill...... 40,000debit D3
Extraordinary gain......
Total adjustments...... $68,000
(2)Entries under the simple equity method:20X120X2
DebitCreditDebitCredit
Investment in Soll...... 48,000(1)72,000(2)
Soll Income...... 48,00072,000
Cash...... 16,000(3)24,000(4)
Investment in Soll...... 16,00024,000
(1)80% of $60,000 net income
(2)80% of $90,000 net income
(3)80% of $20,000 dividends
(4)80% of $30,000 dividends
(3)Balance in Investment in Soll Company:
Cost...... $308,000
Equity in 20X1 income...... 48,000
Share of dividends received—20X1...... (16,000)
Equity in 20X2 income...... 72,000
Share of dividends received—20X2...... (24,000)
Total...... $388,000
Ch. 3—Problems
Problem 3-2, Continued
(4)Peres Company and Soll Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X2
EliminationsConsolidatedControllingConsol.
Trial Balanceand AdjustmentsIncomeRetainedBalance
PeresSollDr.Cr.StatementNCIEarningsSheet
Inventory, December 31...... 100,000 50,000 150,000
Other Current Assets...... 148,000 180,000 328,000
Investment in Soll...... 388,000 CY2 24,000 (CY1) 72,000
(EL) 272,000
(D) 68,000
Land...... 50,000 50,000 100,000
Buildings and Equipment...... 350,000 320,000 (D2) 20,000 690,000
Accumulated Depreciation...... (100,000) (60,000) (A) 4,000 (164,000)
Goodwill...... (D3) 40,000 40,000
Other Intangibles...... 20,000 20,000
Current Liabilities...... (120,000) (40,000) (160,000)
Bonds Payable...... (100,000) (100,000)
Other Long-Term Liabilities...... (200,000) (200,000)
Common Stock—Peres...... (200,000) (200,000)
Other Paid-In Capital—Peres...... (100,000) (100,000)
Retained Earnings—Peres...... (214,000) (D1)8,000
(A) 2,000 (204,000)
Common Stock—Soll...... (50,000) (EL) 40,000 (10,000)
Other Paid-In Capital—Soll...... (100,000) (EL) 80,000 (20,000)
Retained Earnings—Soll...... (190,000) (EL) 152,000 (38,000)
Net Sales...... (520,000) (450,000) (970,000)
Cost of Goods Sold...... 300,000 260,000 560,000
Operating Expenses...... 120,000 100,000 (A) 2,000 222,000
Subsidiary Income...... (72,000) (CY1) 72,000
Dividends Declared—Peres...... 50,000 50,000
Dividends Declared—Soll...... 30,000 (CY2) 24,000 6,000
Total...... 0 0 440,000 440,000
Consolidated Net Income...... (188,000)
To Noncontrolling Interest (see distribution schedule)...... 18,000 (18,000)
To Controlling Interest (see distribution schedule)...... 170,000 (170,000)
Total NCI...... (80,000) (80,000)
Retained Earnings—Controlling Interest, December 31, 20X2...... (324,000) (324,000)
0
Ch. 3—Problems
Problem 3-2, Concluded
Eliminations and Adjustments:
(CY)Eliminate the current-year entries made in the investment account and in the subsidiary income account.
(EL)Eliminate the pro rata share of Soll Company equity balances at the beginning of the year against the investment account.
(D)Distribute the $68,000 excess cost as required by the Determination and Distribution of Excess Schedule.
(D1)Because FIFO is used for inventory, allocate the $8,000 write-up to the January 1, 20X2, retained earnings of Peres Company.
(D2)Building, $20,000.
(D3)Goodwill, $40,000.
(A)Cumulatively depreciate the write-up to Building over 10 years. Charge the 20X1 Depreciation against January 1, 20X2, retained earnings of Peres Company. Charge the 20X2 Depreciation to Operating Expenses.
Income Distribution Schedules
Soll Company
Internally generated net
income...... $90,000
Adjusted income...... $90,000
NCI share...... 20%
NCI...... $18,000
Peres Company
Building depreciation...... $2,000Internally generated net
net income...... $100,000
80% Soll adjusted
net income...... 72,000
Controlling interest...... $170,000