CHAPTER 3

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Answers to Questions
1

A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a
controlling financial interest (generally over 50 percent) of its outstanding voting stock.

Amounts assigned to identifiable assets and liabilities in excess of recorded amounts on the books of the
subsidiary are not recorded separately by the parent. Instead, the parent records the fair value/purchase
price of the interest acquired in an investment account. The assignment to identifiable asset and liability
accounts is made through working paper entries when the parent and subsidiary financial statements are
consolidated.

The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the
purchase price of the subsidiary is greater than the book value of the subsidiarys net assets. If the parent
had acquired an 80 percent interest and the implied fair value of the subsidiary was greater than the book
value of the subsidiarys net assets, the land would still appear in the consolidated balance sheet at
$100,000. Under GAAP, the noncontrolling interest is also reported based on fair values at the acquisition
date.

Parent companya corporation that owns a controlling interest in the outstanding voting stock of another
corporation (its subsidiary).
Subsidiary companya corporation that is controlled by a parent that owns a controlling interest in its
outstanding voting stock, either directly or indirectly.
Affiliatescompanies that are controlled by a single management team through parent-subsidiary
relationships. (Although the term affiliate is a synonym for subsidiary, the parent is included in the total
affiliation structure.) In many annual reports, the term includes all investments accounted for by the equity
method.
Associatescompanies that are controlled through parent-subsidiary relationships or whose operations can
be significantly influenced through equity investments of 20 percent to 50 percent.

A noncontrolling interest is the equity interest in a subsidiary that is owned by stockholders outside of the
affiliation structure. In other words, it is the equity interest in a subsidiary (recorded at fair value) that is
not held by the parent or subsidiaries of the parent.

Under GAAP, a subsidiary will not be consolidated if control does not rest with the majority owner, such
as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under severe
foreign exchange restrictions or other governmentally imposed uncertainties.

Consolidated financial statements are intended primarily for the stockholders and creditors of the parent,
according to GAAP.

The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of
the outstanding capital stock of the parent.

Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or
consolidation accounted for as an acquisition. But goodwill from consolidation would not appear in the
general ledger of a parent or its subsidiary. Goodwill is entered in consolidation working papers when the
reciprocal investment and equity amounts are eliminated. Working paper entries affect consolidated
financial statements, but they are not entered in any general ledger.
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An Introduction to Consolidated Financial Statements

10

The parents investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is
consolidated. It would appear in the parents separate balance sheet under the heading investments or
other assets. Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as
investments or other assets. They are accounted for under the equity method if the parent can exercise
significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost method.

11

Parents books:
Investment in subsidiary
Sales
Accounts receivable
Interest income
Dividends receivable
Advance to subsidiary

12

Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order to
show the financial position and results of operations of the total economic entity that is under the control of
a single management team. Sales by a parent to a subsidiary are internal transactions from the viewpoint of
the economic entity and the same is true of interest income and interest expense and rent income and rent
expense arising from intercompany transactions. Similarly, receivables from and payables to affiliates do
not represent assets and liabilities of the economic entity for which consolidated financial statements are
prepared.

13

The stockholders equity of a parent under the equity method is the same as the consolidated stockholders
equity of a parent and its subsidiaries provided that the noncontrolling interest, if any, is reported outside of
the consolidated stockholders equity. If noncontrolling interest is included in consolidated stockholders
equity, it represents the sole difference between the parents stockholders equity under the equity method
and consolidated stockholders equity.

14

No. The amounts that appear in the parents statement of retained earnings under the equity method and the
amounts that appear in the consolidated statement of retained earnings are identical, assuming that the
noncontrolling interest is included as a separate component of stockholders equity.

15

Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total
income to the consolidated entity between controlling and noncontrolling stockholders. From the viewpoint
of the controlling interest (the stockholders of the parent), income attributable to noncontrolling interest
has the same effect on consolidated net income as an expense. This is because consolidated net income is
income to all stockholders. Alternatively, you can view total consolidated net income as being allocated to
the controlling and noncontrolling interests.

16

The computation of noncontrolling interest is comparable to the computation of retained earnings. It is

computed:

Reciprocal accounts on subsidiarys books:

Capital stock and retained earnings
Purchases
Accounts payable
Interest expense
Dividends payable
Advance from parent

Noncontrolling interest beginning of the period

Add: Income attributable to noncontrolling interest
Deduct: Noncontrolling interest dividends
Deduct: Noncontrolling interest of amortization of
excess of fair value over book value
Add: Noncontrolling interest of amortization of
excess of book value over fair value
Noncontrolling interest end of the period
17

XX
XX
XX

It is acceptable to consolidate the annual financial statements of a parent and a subsidiary with different
fiscal periods, provided that the dates of closing are not more than three months apart. Any significant
developments that occur in the intervening three-month period should be disclosed in notes to the financial
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statements. In the situation described, it is acceptable to consolidate the financial statements of the
subsidiary with an October 31 closing date with the financial statements of the parent with a December 31
closing date.
18

The acquisition of shares from noncontrolling stockholders is not a business combination. It must be
accounted for as a treasury stock transaction if the acquirer is the controlling interest. It is not possible, by
definition, to acquire a controlling interest from noncontrolling stockholders.

SOLUTIONS TO EXERCISES
Solution E3-1
1
2
3
4
5

b
c
d
d
a

Solution E3-2
1
2
3
4
5
6
7

d
b
d
d
a
b
c

Solution E3-3 [AICPA adapted]

1

Advance to Hill $75,000 + receivable from Ward $200,000 = $275,000

Zero, goodwill has an indeterminate life and is not amortized.

a
Pow accounts for Sap using the equity method, therefore,
consolidated retained earnings is equal to Pows retained earnings, or
$2,480,000.

Zero, all intercompany receivables and payables are eliminated.

Solution E3-4 (in thousands)

1

Implied fair value of San ($1,800 / 90%)

Less: Book value of San
Excess fair value over book value
Equipment undervalued
Goodwill at January 1, 2011
Goodwill at December 31, 2011 = Goodwill from consolidation
Since goodwill is not amortized

Consolidated net income

$2,000
(1,800)
$ 200
60
$ 140
$ 140

Pins reported net income

Less: Correction to income from San for
depreciation on excess allocated
to equipment [($60,000/3 years)x 90%]
Controlling share of consolidated net income

$980
(18)
$962

Noncontrolling share of consolidated net income

[$200,000 - $20,000 depreciation] x 10%
Controlling share of consolidated net income
Consolidated net income

$ 18
962
$980

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Solution E3-5 (in thousands)

1

$1,200, the dividends of Pan

$660, equal to $600 dividends payable of Pan plus $60 (30% of $200)
dividends payable to noncontrolling interests of Sad.

Solution E3-6 (in thousands)

Preliminary computation
Cost of Sli stock (Fair value)
Fair value of Slis identifiable net assets
Goodwill
1

$2,500
2,000
$ 500

Journal entry to record push down values

Inventories
Land
Buildings net
Equipment net
Goodwill
Retained earnings
Note payable
Push-down capital

40
100
300
160
500
420
20
1,500
Sli Corporation
Balance Sheet
January 1, 2011
(in thousands)

Assets
Cash
Accounts receivable
Inventories
Land
Buildings net
Equipment net
Goodwill
Total assets
Liabilities
Accounts payable
Note payable
Total liabilities
Stockholders equity
Capital stock
Push-down capital
Total stockholders equity
Total liabilities and stockholders equity

140
160
200
400
1,000
600
500
$3,000
$

200
300
500

$1,000
1,500
2,500
$3,000

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An Introduction to Consolidated Financial Statements

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Solution E3-7
1

Pas Corporation and Subsidiary

Consolidated Income Statement
for the year 2012
(in thousands)
Sales ($2,000 + $800)
Less: Cost of sales ($1,200 + $400)

$2,800
(1,600)

Gross profit
Less: Depreciation expense ($100 + $80)
Other expenses ($398 + $180)
Consolidated net income
Less: Noncontrolling interest share ($140 30%)
Controlling interest share of cnsolidated net income
2

1,200
(180)
(578)
442
(42)
400

Pas Corporation and Subsidiary

Consolidated Income Statement
for the year 2012
(in thousands)
Sales ($2,000 + $800)
Less: Cost of sales ($1,200 + $400)

$2,800
(1,600)

Gross profit
Less: Depreciation expense ($100 + $80 - $12)
Other expenses ($398 + $180)
Consolidated net income
Less: Noncontrolling interest share
[($140 30%)+ ($12 depreciation x 30%)]
Controlling interest share of consolidated net income

1,200
(168)
(578)
454

Supporting computations
Depreciation of excess allocated to overvalued equipment:
$60/5 years = $12

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Solution E3-8 (in thousands)

1

Capital stock
The capital stock appearing in the consolidated balance sheet at
December 31, 2011 is $3,600, the capital stock of Pob,the parent
company.

Goodwill at December 31, 2011

Investment cost at January 2, 2011 (80% interest)
Implied total fair value of Sof ($1,400 / 80%)
Book value of Sof(100%)
Excess is considered goodwill since no other fair value
information is given.

550

$1,600
600
(360)
$1,840

Noncontrolling interest at December 31, 2011

Capital stock and retained earnings of Sof on
January 2
Add: Sofs net income
Less: Dividends declared by Sof
Sofs stockholders equity December 31
Noncontrolling interest percentage
Noncontrolling interest at book value
Add: 20% Goodwill
Noncontrolling interest December 31

Consolidated retained earnings at December 31, 2011

Pobs retained earnings January 2 (equal to
beginning consolidated retained earnings
Add: Net income of Pob (equal to controlling share of
consolidated net income)
Less: Dividends declared by Pob
Consolidated retained earnings December 31

$1,400
$1,750
(1,200)

$1,200
180
(100)
1,280
20%
$ 256
110
$ 366

Dividends payable at December 31, 2011

Dividends payable to stockholders of Pob
$ 180
Dividends payable to noncontrolling stockholders ($50 20%)
10
Dividends payable to stockholders outside the
Consolidated entity
$ 190

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3-8

Solution E3-9 (in thousands)

Pas Corporation and Subsidiary
Partial Balance Sheet
at December 31, 2011
Stockholders equity:
Capital stock, $10 par
Additional paid-in capital
Retained earnings
Equity of controlling stockholders
Noncontrolling interest
Total stockholders equity

$600
100
130
830
82
$912

Supporting computations
Computation of consolidated retained earnings:
Pass December 31, 2010 retained earnings
Add: Pass reported income for 2011
Less: Pass dividends
Consolidated retained earnings December 31, 2011

$ 70
110
(50)
$130

Computation of noncontrolling interest at December 31, 2011

Sals December 31, 2010 stockholders equity
Income less dividends for 2011 ($40 - $30)
Sals December 31, 2011 stockholders equity
Noncontrolling interest percentage
Noncontrolling interest December 31, 2011

$400
10
410
20%
$ 82

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Solution E3-10
Pek Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2013
(in thousands)
Sales
Cost of goods sold
Gross profit
Deduct: Operating expenses
Consolidated net income
Deduct: Noncontrolling interest share
Controlling interest share

$4,200
2,200
2,000
1,110
890
29
$ 861

Supporting computations
Investment cost January 1, 2011 (90% interest)
Implied total fair value of Slo ($1,620 / 90%)
Slos Book value acquired (100%)
Excess of fair value over book value
Excess allocated to:
Inventories (sold in 2011)
Equipment (4 years remaining useful life)
Goodwill
Excess of fair value over book value
Operating expenses:
Combined operating expenses of Pek and Slo
Add: Depreciation on excess allocated to equipment
($40/4 years)
Consolidated operating expenses

$ 1,620
$ 1,800
(1,400)
$ 400
$
$

60
40
300
400

$1,100
10
$1,110

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SOLUTIONS TO PROBLEMS
Solution P3-1
1

Pen Corporation and Subsidiary

Consolidated Balance Sheet
at December 31, 2011
(in thousands)
Assets
Cash ($64 + $36)
Accounts receivable ($90 + $68 - $10)
Inventories ($286 + $112)
Equipment net ($760 + $350)
Total assets
Liabilities and Stockholders Equity
Liabilities:
Accounts payable ($80 + $66 - $10)
Stockholders equity:
Common stock, $10 par
Retained earnings
Noncontrolling interest ($300 + $200) 20%
Total liabilities and stockholders equity

100
148
398
1,110
$1,756

136

920
600
100
$1,756

Consolidated net income for 2012

Pens separate income
Add: Income from Sut
Consolidated net income
Noncontrolling interest share (20% x $180,000)
Controlling interest share (80%)

$340
180
$520
$ 36
$484

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Solution P3-2 (in thousands)

1

Schedule to allocate fair value/book value differential

Cost of investment in Set
Implied fair value of Set ($350 / 70%)
Book value of Set
Excess fair value over book value
Excess allocated:
Book Value
Fair Value
Inventories
($100
$60)
Land
($120
$100)
($180
$140)
Buildings net
($60
$80)
Equipment net
Other liabilities
($80
$100)
Allocated to identifiable net assets
Goodwill for the remainder
Excess fair value over book value

$350
$500
(220)
$280
Allocation
$ 40
20
40
(20)
20
100
180
$280

Par Corporation and Subsidiary

Consolidated Balance Sheet
at January 1, 2011
Assets
Current assets:
Cash ($70 + $40)
Receivables net ($160 + $60)
Inventories ($140 + $60 + $40)
Property, plant and equipment:
Land ($200 + $100 + $20)
Buildings net ($220 + $140 + $40)
Equipment net ($160 + $80 - $20)
Goodwill (from consolidation)
Total assets
Liabilities and Stockholders Equity
Liabilities:
Accounts payable ($180 + $160)
Other liabilities ($20 + $100 - $20)
Stockholders equity:
Capital stock
Retained earnings
Equity of controlling stockholders
Noncontrolling interest *
Total liabilities and stockholders equity

$110
220
240
$320
400
220

340
100

$1,000
100
1,100
150

570

940
180
$1,690

440

1,250
$1,690

* 70% of implied fair value of $500 = $150.

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3-12

Solution P3-3 (in thousands)

Cost of investment in Sof January 1, 2011
Implied fair value of Sof ($5,400 / 80%)
Book value of Sof
Excess of fair value over book value

$5,400
$6,750
5,000
$1,750

Schedule to Allocate Fair Value Book Value Differential

Current assets
Equipment

Fair Value
- Book Value
$1,000
2,000

Allocation
$1,000
2,000

Bargain purchase *
Excess fair value over book value

(1,250)
$1,750

* After recognizing acquired assets and liabilities at fair values, we are

left with a negative excess of $1,250. Under GAAP, this difference is recorded
as a gain in the consolidated income statement in the year of acquisition. The
gain is attributable entirely to the controlling interest, and is recorded on
the parents books by a debit to the Investment account and a credit to a Gain
from bargain Purchase account. An alternative calculation of this amount takes
the difference between the fair values of the net assets ($8,000) and their
fair value implied by the acquisition price ($6,750), which equals $1,250.
Solution P3-4 (in thousands)
Noncontrolling interest of $130 (fair value) plus $520 (fair value of Pams
investment) equals total fair value of $650. Therefore, Pams interest is 80%
($520 / $650), and noncontrolling interest is 20% ($130 / $650).
Total fair value
Book value of Sap
Excess fair value over book value

650
(520)
$ 130

Excess allocated to

Plant assets net

Goodwill
Total

Fair Value
$420

Book Value
$400
$
$

20
110
130

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Solution P3-5
Pal Corporation and Subsidiary
Consolidated Balance Sheet
at December 31, 2011
(in thousands)
Assets
Current assets
Plant assets
Goodwill
Equities
Liabilities
Capital stock
Retained earnings
Supporting computations
Sors net income ($800 - $600 - $100)
Less: Excess allocated to inventories that were sold in 2011
Less: Depreciation on excess allocated to plant
assets ($80 /4 years)
Income from Sor
Plant assets ($1,000 + $600 + $80 - $20)
Pals retained earnings:
Beginning retained earnings
Add: Operating income
Add: Income from Sor
Deduct: Dividends
Retained earnings December 31, 2011

$ 680
1,660
400
$2,740
$1,320
600
820
$2,740
$

100
(40)
(20)
40

$1,660
$

680
200
40
(100)
$ 820

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3-14

Solution P3-6
Per Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2011
(in thousands)
Cash
Receivables net
Inventories
Land
Equipment net
Investment in Sim
Goodwill
Total assets
Accounts payable
Dividends payable
Capital stock
Retained earnings
Noncontrolling interest
Total equities
a
b

Per
per books
$
84
100

Sim
per books
$
40
260

700
300
1,200

Adjustments and
Eliminations
b

100
400
200

800
700
1,400

918

a
a

$3,302

$1,000

820
120
2,000
362

160
20
600
220

$1,000

918

200

200
$3,566
$

b
18
a 600
a 220
a

$3,302

18

Consolidated
Balance Sheet
$
124
342

102

980
122
2,000
362
102
$3,566

To eliminate reciprocal investment and equity accounts, record goodwill ($200), and
enter noncontrolling interest [($820 equity + $200 goodwill) 10%)].
To eliminate reciprocal dividends receivable (included in receivables net) and
dividends payable amounts ($20 dividends 90%).

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Solution P3-7 (in thousands)

Preliminary computations
Cost of 80% investment January 3, 2011
Implied total fair value of Sle ($560 / 80%)
Book value of Sle
Excess fair value over book value on January 3 = Goodwill

$560
$700
(500)
$200

Noncontrolling interest share of income:

Sles net income $100 20% noncontrolling interest

$ 20

Current assets:
Combined current assets ($408 + $150)
Less: Dividends receivable ($20 80%)
Current assets

$558
(16)
$542

Income from Sle: None Investment income is eliminated in consolidation.

Capital stock: $1,000 Capital stock of the parent, Por Corporation.

Investment in Sle: None The investment account is eliminated.

Excess of fair value over book value

$200

Controlling share of consolidated net income: Equals Pors

net income, or:
Consolidated sales
Less: Consolidated cost of goods sold
Less: Consolidated expenses
Consolidated net income
Less: Noncontrolling interest share
Controlling share

$1,200
(740)
(160)
$ 300
(20)
$ 280

Consolidated retained earnings December 31, 2011: $404 Equals Pors

beginning retained earnings.

Consolidated retained earnings December 31, 2012

Equal to Pors ending retained earnings:
Beginning retained earnings
Add: Controlling share of consolidated net income
Less: Pors dividends for 2012
Ending retained earnings

$404
280
(120)
$564

Noncontrolling interest December 31, 2012

Sles capital stock and retained earnings
Add: Net income
Less: Dividends
Sles equity December 31, 2012 at fair value
Noncontrolling interest percentage
Noncontrolling interest December 31, 2012 using book value
Add: Noncontrolling interest share of Goodwill
Noncontrolling interest December 31, 2012 at fair value

$600
100
(50)
650
20%
$130
40
$170

10

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Solution P3-8 [AICPA adapted]

Preliminary computations
Investment cost:
Saw (1,000 shares 80%) $140
Sun (3,000 shares 70%) $80
Implied total fair values:
Saw ($112,000 / 80%)
Sun ($168,000 / 70%)
Book value
Saw
Sun
Excess fair value over book value at acquisition
1

Saw

Sun

112,000
168,000
140,000
240,000
140,000
240,000
0

a. Journal entries to account for investments

January 1, 2011 Acquisition of investments
Investment in Saw (80%)
112,000
Cash
To record acquisition of 800 shares of
Saw common stock at $140 per share.
Investment in Sun (70%)
168,000
Cash
To record acquisition of 2,100 shares of
Sun common stock at $80 per share.
b. During 2011 Dividends from subsidiaries
Cash
25,600
Investment in Saw (80%)
To record dividends received from Saw ($32,000 80%).
Cash
12,600
Investment in Sun (70%)
To record dividends received from Sun ($18,000 70%).
c. December 31, 2011 Share of income or loss
Investment in Saw (80%)
57,600
Income from Saw
To record investment income from Saw ($72,000 80%).
Loss from Sun
16,800
Investment in Sun (70%)
To record investment loss from Sun ($24,000 70%).

112,000

168,000

25,600

12,600

57,600

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Solution P3-8 (continued)

2

Noncontrolling interest December 31, 2011 *

Common stock
Capital in excess of par
Retained earnings
Equity December 31
Noncontrolling interest percentage
Noncontrolling interest December 31

Saw
$100,000
80,000
180,000
20%
$36,000

Sun
$120,000
40,000
38,000
198,000
30%
$59,400

* Fair value equals book value.

3

Consolidated retained earnings December 31, 2011

Consolidated retained earnings is reported at $609,200, equal to the
retained earnings of Pod Corporation, the parent, at December 31, 2011.

Investment balance December 31, 2011:

Investment cost January 1
Add (deduct): Income (loss)
Deduct: Dividends received
Investment balances December 31

Saw
$112,000
57,600
(25,600)
$144,000

Sun
$168,000
(16,800)
(12,600)
$138,600

Check: Investment balances should be equal to the underlying book value

Saw $180,000 80% = $144,000
Sun $198,000 70% = $138,600
After consolidation, the Investment balances are $0.

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3-18

Solution P3-9
Preliminary computations (in thousands)
Cost of 90% investment January 1, 2011
Implied total fair value of Son ($7,200 / 90%)
Book value of Son
Excess fair value over book value on January 1
Allocation to equipment
Remainder is Goodwill
Additional annual depreciation on equipment ($1,600 / 8 years)

$7,200
$8,000
(5,400)
$2,600
$1,600
$1,000
$ 200

Pan Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2011
(in thousands)

Cash
Receivables net
Dividends receivable
Inventory
Land
Buildings net
Equipment net
Investment in Son
Goodwill
Total assets

Pan
$
600
1,200

90%
Son
400
800

180
1,400
1,200
4,000

1,200
1,400
2,000

3,000

1,600

180

1,400

1,000

b
a
a

180
4,000
2,000

6,000
a 7,560

$7,400

Accounts payable
$
600
Dividends payable
1,000
Capital stock
14,000
Retained earnings
3,540
Noncontrolling interest
Total equities
$19,140

$1,200
200
4,000
2,000

Consolidated
Balance Sheet
$ 1,000
2,000
2,600
2,600
6,000

7,560
$19,140

Adjustments and
Eliminations

1,000
$21,200

a
$7,400

840

$ 1,800
1,020
14,000
3,540
840
$21,200

To eliminate reciprocal investment and equity accounts, enter unamortized excess

allocated to equipment, record goodwill, and enter noncontrolling interest (at fair
value).
To eliminate reciprocal dividends receivable and dividends payable amounts.

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Solution P3-10
1

Purchase price of investment in Sun (in thousands)

Underlying book value of investment in Sun:
Equity of Sun January 1, 2011
Add: Excess investment fair value over book value:
Goodwill at December 31, 2015
Fair value of Sun January 1, 2011

120
$560

Purchase price of 80% investment at fair value($560 x 80%)

$448

$440

Suns stockholders equity on December 31, 2015 (in thousands)

20% noncontrolling interest at fair value
$124
20% goodwill
(24)
20% noncontrolling interests equity at book value
$100
Total equity = Noncontrolling interests equity $100 / 20% = $500

Pans investment in Sun account balance at December 31, 2015

(in thousands)
Underlying book value in Sun December 31, 2015
$400
($500 80%)
Add: 80% of Goodwill December 31, 2015
96
(20% is attributable to the noncontrolling interest)
Investment in Sun December 31, 2015
$496
Alternative solution:
Investment cost January 1, 2011
Add: 80% of Suns increase since acquisition
($500 - $440) 80%
Investment in Sun December 31, 2015

$448
48
$496

Pans capital stock and retained earnings December 31, 2015

(in thousands)
Capital stock
$800
Retained earnings
$ 60
Amounts are equal to capital stock and retained earnings shown in the
consolidated balance sheet.

2011 Pearson Education, Inc. publishing as Prentice Hall

An Introduction to Consolidated Financial Statements

3-20

Solution P3-11
Preliminary computations (in thousands)
Cost of 70% investment in Stu
Implied fair of Stu($1,400 / 70%)
Book value of Stu (100%)
Excess
Excess allocated:
Inventories
Plant assets
Goodwill
Excess

$1,400
$2,000
1,600
$ 400
$
$

Investment balance at January 1, 2011

Share of Stus retained earnings increase ($120 70%)
Less: Amortization
70% of excess allocated to inventories (sold in 2011)
70% of excess allocated to plant assets ($160 /8 years)
Investment balance at December 31, 2011

40
160
200
400

$1,400
84
(28)
(14)
$1,442

Noncontrolling interest at December 31

30% of Stus book value at December 31 ($1,720 x 30%)
30% of Goodwill
30% Unamortized excess for plant assets
30% x ($160 - $20 amortization)
Noncontrolling at December 31 (fair value)

$516
60
42
$618

Pop Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2011
(in thousands)
Cash

Accounts receivable net

Accounts payable
Account payable to Stu
Dividends payable
Long-term debt
Capital stock
Retained earnings
Noncontrolling interest
($2,060,000 30%)
Equities

70%
Stu
40
400

Adjustments and
Eliminations

20

Accounts receivable Pop

Dividends receivable
Inventories
Land
Plant assets net
Investment in Stu
Goodwill
Assets

Pop
120
880

14
1,000
200
1,400

640
300
700

20

14
1,640
500
2,240

a 140

1,442

a 1,442
a 200

$5,056

$2,100

600
20
80
1,200
2,000
1,156

Consolidated
Balance Sheet
$ 160
1,280

200
$6,020

160
20
200
1,000
720

$
b
c

20
14

86
1,400
2,000
1,156

a 1,000
a 720
a 618

$5,056

$2,100

760

618
$6,020

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 3

3-21

Solution P3-12
Preliminary computations (in thousands)
80% Investment in Sam at cost January 1, 2011
Implied total fair value of Sam ($1,520 / 80%)
Sam book value
Excess fair value over book value recorded as goodwill

2011
2012
2013

Sam
Dividends
$ 80
100
120
$300

Sam
Net Income
$160
200
240
$600

$ 1,520
$ 1,900
1,800
$
100

80% of
Net Income
$128
160
192
$480

Sams dividends for 2012 ($80 / 80%)

100

Sams net income for 2012 ($160 / 80%)

200

Goodwill December 31, 2012

100

Noncontrolling interest share of income 2013

Sams income for 2013
($96 dividends received/80%) 2
Noncontrolling interest percentage
Noncontrolling interest share

$
$

240
20%
48

Noncontrolling interest December 31, 2013

Equity of Sam January 1, 2011
Add: Income for 2011, 2012 and 2013
Deduct: Dividends for 2011, 2012 and 2013
Equity book value of Sam December 31, 2013
Goodwill
Equity fair value of Sam December 31, 2013
Noncontrolling interest percentage
Noncontrolling interest December 31, 2013

$1,800
600
(300)
2,100
100
$2,200
20%
$ 440

Controlling share of consolidated net income for 2013

Pens separate income
Add: Income from Sam
Controlling share of consolidated net income

Pens net income

Sams net income
Consolidated net income
Less: Noncontrolling interest share ($240 x 20%)
Controlling interest share

$560
240
$800
48
$752

2011 Pearson Education, Inc. publishing as Prentice Hall

560
192
752