1

Chapter 4: Consolidated Financial Statements and Outside Ownership

Consolidated financial statements are required whenever one company controls another (ownership of more than 50% of its voting shares) and more than one company continues to exist. Chapters 2 and 3 examined the accounting for combinations, both at the date of acquisition and after the date of acquisition, in which one company acquired 100% of the voting shares of another. Chapter 4 examines the accounting for combinations in which one company (the parent) owns more than 50% but less than 100% of the voting shares of the other (subsidiary). Since pooling of interests combinations require more than 90% ownership, Chapter 4 examines purchase combinations only.

I.Noncontrolling interest defined:

noncontrolling interest is the remaining outside ownership of a company involved in a business combination.

II.Consolidation process - in general: if noncontrolling interests exist in the combination, both the acquiring company (parent) and the acquired company (subsidiary) continue to exist after the acquisition.

The financial records of both companies are not combined and the consolidation process is done through the use of worksheets.

III.Internal reporting:

the acquiring company (parent) may use the equity method, partial equity method, or the cost method.

In addition, the parent may account for the noncontrolling interest according to:

A.Economic unit concept:

this approach to consolidations emphasizes the business being formed by the combination, rather than emphasizing the parent's investment in the combination.

This approach assumes that the purpose of consolidated financial statements is to report on the new business formed.

B.Proportionate consolidation concept:

this approach assumes that the purpose of consolidated financial statements is to report to owners of the acquiring (parent) company.

Emphasis is placed on accounting for the parent company's resources.

C.Parent company concept:

this approach is a mixture of the economic unit concept and the proportionate consolidation concept.

This approach is the most often used.

IV. The consolidation process illustrated: assumptions - combination occurs at the beginning of the year and the acquiring company (parent) uses the equity method and the economic unit concept.

Assume that the Lowell Corporation acquired 60% of the Nashua Corporation on January 1, 2007 by paying $42,000 cash. The following information is available.

Accounts / Nashua
Book Value
1/1/07 / Nashua
Fair Value
1/1/07
Cash / $7,000 / $7,000
Accounts Receivable / 10,000 / 10,000
Land / 15,000 / 17,000
Buildings / 28,000 / 31,000
Equipment / 40,000 / 43,000
Total assets / 100,000 / 108,000
Accounts Payable / 6,000 / 6,000
Bonds Payable / 38,000 / 38,000
Total liabilities / 44,000 / 44,000

The Lowell Corporation would record the investment in Nashua Corporation through the following journal entry.

Date / Item / Posting
Ref. / Debits / Credits
Jan. 1
Investment in Nashua Corp.
Date / Item / Posting
Ref. / Debits / Credits
Jan. 1 / Investment in Nashua Corporation / 42,000
Cash / 42,000
Investment in Nashua Corp.

Based on its $42,000 cash payment for 60% ownership of the Nashua Corporation, the Lowell Corporation believes that the total value of the Nashua Corporation is . This implied value of could be viewed as follows.

Value of firm based on cash paid in acquisition ($42,000 / .60) / $70,000
Less: Book value of net assets acquired
($100,000 assets other than goodwill - $44,000 liabilities) / $56,000
Excess acquisition costs / $14,000
Land adjustment to fair value ($17,000 - $15,000) / $2,000
Buildings adjustment to fair value ($31,000 - $28,000) / $3,000
Equipment adjustment to fair value ($43,000 - $40,000) / $3,000
Goodwill ($14,000 - $2,000 - $3,000 - $3,000) / $6,000

The Lowell Corporation's use of the economic unit concept of accounting for acquisition of 60% of the Nashua Corporation may be viewed as follows.

Lowell Corporation (60%) / Noncontrolling Interest (40%) / Total
Book value of net assets acquired ($100,000 - $44,000)
Excess of net assets' fair value over
Book value ($70,000 - $56,000 = $14,000)
Totals
Lowell Corporation (60%) / Noncontrolling Interest (40%) / Total
Book value of net assets acquired ($100,000 - $44,000) / $33,600 / $22,400 / $56,000
Excess of net assets' fair value over
Book value ($70,000 - $56,000 = $14,000) / $8,400 / $5,600 / $14,000
Totals / $42,000 / $28,000 / $70,000

Based on the estimated remaining lives of the Nashua Corporation's net assets acquired, the Lowell Corporation would recognize additional amortization each year as follows.

Asset / Extra Cost (100%) / Life / Amortization
Land / unlimited
Buildings / 20 years
Equipment / 10 years
Goodwill / indefinite
Totals
Asset / Extra Cost (100%) / Life / Amortization
Land / $2,000 / unlimited / $0
Buildings / $3,000 / 20 years / $150
Equipment / $3,000 / 10 years / $300
Goodwill / $6,000 / indefinite / $0
Totals / $14,000 / $450

Assume that at the end of the 2007 fiscal year, the following information was available.

Accounts / Lowell
12/31/07 / Nashua
12/31/07
Cash / $11,000 / $22,000
Accounts Receivable / 35,000 / 15,000
Investment in Nashua Corp. / 47,730 / 0
Land / 25,000 / 15,000
Buildings / 50,000 / 27,000
Equipment / 200,000 / 38,000
Total assets / 368,730 / 117,000
Accounts Payable / 15,000 / 13,000
Bonds Payable / 220,000 / 38,000
Common Stock / 5,000 / 6,000
Additional Paid-in Capital / 14,000 / 15,000
Retained Earnings, 1/1/07 / 88,000 / 35,000
Dividends (2007) / 22,000 / 5,000
Revenues (2007) / 200,000 / 55,000
Expenses (2007) / 160,000 / 40,000
Equity in Subsidiary Earnings / 8,730 / 0

For 2007, the Nashua Corporation's results could be viewed as follows.

Lowell Corporation
(60%) / Noncontrolling
Interest (40%) / Total
Revenues - expenses
Less: Additional amortization
Net Income
Dividends
Lowell Corporation
(60%) / Noncontrolling
Interest (40%) / Total
Revenues - expenses / $9,000 / $6,000 / $15,000
Less: Additional amortization / $270 / $180 / $450
Net Income / $8,730 / $5,820 / $14,550
Dividends / $3,000 / $2,000 / $5,000

Using the equity method of accounting for its Investment in Nashua Corporation, the Lowell Corporation would have arrived at the following balances on 12/31/07.

Investment In
Nashua Corp. / Equity in
Subsidiary Earnings
$42,000
Investment In
Nashua Corp. / Equity in
Subsidiary Earnings
$42,000
60% of Nashua' net income / $9,000 / $9,000
60% of Nashua' dividends / $3,000
Amortization / $270 / $270
$47,730 / $8,730

Using the economic unit concept to account for the consolidation of the financial data of the Lowell Corporation and the Nashua Corporation, the Lowell Corporation could make use of a worksheet, as shown below. Note that the consolidation is as of December 31, 2007.

Business combination accounted for as a purchase,

with the equity method and economic unit concept being used

Accounts / Lowell
12/31/07 / Nashua
12/31/07 / Debits / Credits / Noncon-
trolling
Interest / Consoli-dated
Totals
12/31/07
Income Statement
Revenues / $200,000 / $55,000 / $255,000
Expenses / 160,000 / 40,000 / 200,450
Equity in Subsidiary Earnings / 8,730 / 0
Net Income / $48,730 / $15,000
St. of Retained Earn.
R/E, 1/1/07 / $88,000 / $35,000 / $88,000
Plus: Net Income / 48,730 / 15,000
Less: Dividends / 22,000 / 5,000
R/E, 12/31/07 / $114,730 / $45,000
Balance Sheet
Cash / $11,000 / $22,000 / $33,000
Accounts Receivable / 35,000 / 15,000 / 50,000
Investment in Nashua / 47,730 / 0
Land / 25,000 / 15,000 / 42,000
Buildings / 50,000 / 27,000 / 79,850
Equipment / 200,000 / 38,000 / 240,700
Total assets / $368,730 / $117,000 / $451,550
Accounts Payable / 15,000 / 13,000 / 28,000
Bonds Payable / 220,000 / 38,000 / 258,000
Common Stock / 5,000 / 6,000 / 5,000
Add. Paid-in Capital / 14,000 / 15,000 / 14,000
R/E, 12/31/07 / 114,730 / 45,000
Total Liab. & St. Eq. / $368,730 / $117,000 / $451,550

Business combination accounted for as a purchase,

with the equity method and economic unit concept being used

Accounts / Lowell
12/31/07 / Nashua
12/31/07 / Debits / Credits / Noncon-
trolling
Interest / Consoli-dated
Totals
12/31/07
Income Statement
Revenues / $200,000 / $55,000 / $255,000
Expenses / 160,000 / 40,000 / (E) 450 / 200,450
Equity in Subsidiary Earnings / 8,730 / 0 / (I) 8,730 / 0
Noncontrolling Interest / (1) 5,820 / 5,820
Net Income / $48,730 / $15,000 / $48,730
St. of Retained Earn.
R/E, 1/1/07 / $88,000 / $35,000 / (S) 35,000 / $88,000
Plus: Net Income / 48,730 / 15,000 / 48,730
Less: Dividends / 22,000 / 5,000 / (D) 3,000 / (2) (2,000) / 22,000
R/E, 12/31/07 / $114,730 / $45,000 / $114,730
Balance Sheet
Cash / $11,000 / $22,000 / $33,000
Accounts Receivable / 35,000 / 15,000 / 50,000
Investment in Nashua / 47,730 / 0 / (D) 3,000 / (S) 33,600 / 0
(A) 8,400
(I) 8,730
Land / 25,000 / 15,000 / (A) 2,000 / 42,000
Buildings / 50,000 / 27,000 / (A) 3,000 / (E) 150 / 79,850
Equipment / 200,000 / 38,000 / (A) 3,000 / (E) 300 / 240,700
Goodwill / (A) 6,000 / 6,000
Total assets / $368,730 / $117,000 / $451,550
Accounts Payable / 15,000 / 13,000 / 28,000
Bonds Payable / 220,000 / 38,000 / 258,000
Noncontrolling Interest / (S) 22,400 / (1) (5,820) / 31,820
(A) 5,600 / (2) 2,000
Common Stock / 5,000 / 6,000 / (S) 6,000 / 5,000
Add. Paid-in Capital / 14,000 / 15,000 / (S) 15,000 / 14,000
R/E, 12/31/07 / 114,730 / 45,000 / 114,730
Total Liab. & St. Eq. / $368,730 / $117,000 / $82,180 / $82,180 / $0 / $451,550

V.The consolidation process illustrated: assumptions - combination occurs at the beginning of the year and the acquiring company (parent) uses the equity method and the parent company concept.

The Lowell Corporation's use of the parent company concept of accounting for acquisition of 60% of the Nashua Corporation may be viewed as follows.

Lowell Corporation (60%) / Noncontrolling Interest (40%) / Total
Book value of net assets acquired ($100,000 - $44,000) / $33,600
Excess of net assets' fair value over
Book value ($70,000 - $56,000 = $14,000) / $8,400
Totals / $42,000
Lowell Corporation (60%) / Noncontrolling Interest (40%) / Total
Book value of net assets acquired ($100,000 - $44,000) / $33,600 / $22,400 / $56,000
Excess of net assets' fair value over
Book value ($70,000 - $56,000 = $14,000) / $8,400 / $8,400
Totals / $42,000 / $22,400 / $64,400

Based on the estimated remaining lives of the Nashua Corporation's net assets acquired, the Lowell Corporation would recognize additional amortization each year as follows.

Asset / Extra Cost (60%) / Life / Amortization
Land ($2,000) / unlimited
Buildings ($3,000) / 20 years
Equipment ($3,000) / 10 years
Goodwill ($6,000) / indefinite
Totals
Asset / Extra Cost (60%) / Life / Amortization
Land ($2,000) / $1,200 / unlimited / $0
Buildings ($3,000) / $1,800 / 20 years / $90
Equipment ($3,000) / $1,800 / 10 years / $180
Goodwill ($6,000) / $3,600 / indefinite / $0
Totals / $8,400 / $270

For 2007, the Nashua Corporation's results could be viewed as follows.

Lowell Corporation
(60%) / Noncontrolling
Interest (40%) / Total
Revenues - expenses / $9,000
Less: Additional amortization: / $270
Net Income / $8,730
Dividends / $3,000
Lowell Corporation
(60%) / Noncontrolling
Interest (40%) / Total
Revenues - expenses / $9,000 / $6,000 / $15,000
Less: Additional amortization: / $270 / $270
Net Income / $8,730 / $6,000 / $14,730
Dividends / $3,000 / $2,000 / $5,000

Using the equity method of accounting for its Investment in Nashua Corporation, the Lowell Corporation would have arrived at the following balances on 12/31/07.

Investment in
Nashua Corp. / Equity in
Subsidiary Earnings
$42,000
60% of Nashua' net income / $9,000 / $9,000
60% of Nashua' dividends / $3,000
Amortization / $270 / $270
$47,730 / $8,730

To consolidate the financial data of the Lowell Corporation and the Nashua Corporation, the Lowell Corporation could make use of a worksheet, as shown below.

Business combination accounted for as a purchase,

with the equity method and parent company concept being used

Accounts / Lowell
12/31/07 / Nashua
12/31/07 / Debits / Credits / Noncon-
trolling
Interest / Consoli-dated
Totals
12/31/07
Income Statement
Revenues / $200,000 / $55,000 / $255,000
Expenses / 160,000 / 40,000
Equity in Subsidiary Earnings / 8,730
0 / 0
Net Income / $48,730 / $15,000
St. of Retained Earn.
R/E, 1/1/07 / $88,000 / $35,000 / $88,000
Plus: Net Income / 48,730 / 15,000
Less: Dividends / 22,000 / 5,000
R/E, 12/31/07 / $114,730 / $45,000
Balance Sheet
Cash / $11,000 / $22,000 / $33,000
Accounts Receivable / 35,000 / 15,000 / 50,000
Investment in Nashua / 47,730 / 0
Land / 25,000 / 15,000 / 41,200
Buildings / 50,000 / 27,000 / 78,710
Equipment / 200,000 / 38,000 / 239,620
Total assets / $368,730 / $117,000 / $446,130
Accounts Payable / 15,000 / 13,000 / 28,000
Bonds Payable / 220,000 / 38,000 / 258,000
Common Stock / 5,000 / 6,000 / 5,000
Add. Paid-in Capital / 14,000 / 15,000 / 14,000
R/E, 12/31/07 / 114,730 / 45,000
Total Liab. & St. Eq. / $368,730 / $117,000 / $446,130

Business combination accounted for as a purchase,

with the equity method and parent company concept being used

Accounts / Lowell
12/31/07 / Nashua
12/31/07 / Debits / Credits / Noncon-
trolling
Interest / Consoli-dated
Totals
12/31/07
Income Statement
Revenues / $200,000 / $55,000 / $255,000
Expenses / 160,000 / 40,000 / (E) 270 / 200,270
Equity in Subsidiary Earnings / 8,730 / (I) 8,730 / 0
Noncontrolling Interest / 0 / 0 / (1) 6,000 / 6,000
Net Income / $48,730 / $15,000 / $48,730
St. of Retained Earn.
R/E, 1/1/07 / $88,000 / $35,000 / (S) 35,000 / $88,000
Plus: Net Income / 48,730 / 15,000 / 48,730
Less: Dividends / 22,000 / 5,000 / (D) 3,000 / (2) (2,000) / 22,000
R/E, 12/31/07 / $114,730 / $45,000 / $114,730
Balance Sheet
Cash / $11,000 / $22,000 / $33,000
Accounts Receivable / 35,000 / 15,000 / 50,000
Investment in Nashua / 47,730 / 0 / (D) 3,000 / (S) 33,600 / 0
(A) 8,400
(I) 8,730
Land / 25,000 / 15,000 / (A) 1,200 / 41,200
Buildings / 50,000 / 27,000 / (A) 1,800 / (E) 90 / 78,710
Equipment / 200,000 / 38,000 / (A) 1,800 / (E) 180 / 239,620
Goodwill / (A) 3,600 / 3,600
Total assets / $368,730 / $117,000 / $446,130
Accounts Payable / 15,000 / 13,000 / 28,000
Bonds Payable / 220,000 / 38,000 / 258,000
Noncontrolling Interest / (S) 22,400 / (1) (6,000) / 26,400
(2) 2,000
Common Stock / 5,000 / 6,000 / (S) 6,000 / 5,000
Add. Paid-in Capital / 14,000 / 15,000 / (S) 15,000 / 14,000
R/E, 12/31/07 / 114,730 / 45,000 / 114,730
Total Liab. & St. Eq. / $368,730 / $117,000 / $76,400 / $76,400 / $0 / $446,130

VI.The consolidation process when business combinations occur at any time other than the beginning of the fiscal year: how should consolidated income be reported?

A. Preacquisition income reported on the income statement.

1.Income statement accounts should be consolidated as if the combination had occurred at the beginning of the year.

2.Allocations of excess acquisition costs should be based on actual months of the combination.

3.A single-line reduction, called preacquisition income, should appear at the bottom of the consolidated income statement to remove the income related to prior owners.

Illustration of preacquisition income:

Reconsider the Lowell Corporation's acquisition of the Nashua Corporation on January 1, 2007. Instead, assume that the acquisition occurred on July 1, 2007.

The book value and fair value of the Nashua Corporation on July 1, 2007 would have to be determined.

The new amounts allocated to net assets and goodwill would be amortized during 2007 for only 6 months (July through December).

Preacquisition income would be based on the Nashua Corporation net income for

the six months ended June 30, 2007.

For example, if the Nashua Corporation earned $15,000 for 2007, the Nashua Corporation's income may be viewed as follows.

Noncontrolling interest ($15,000 x .40) / $6,000
Preacquisition income ($15,000 x 6/12 x .60) / 4,500
Parent company interest ($15,000 x 6/12 x .60) / 4,500
Total / $15,000

Assume that the Lowell Corporation acquired 60% of the Nashua Corporation on July 1, 2007 by paying $42,000 cash. The following information is available.

Accounts / Nashua
Book Value
7/1/07 / Nashua
Fair Value
7/1/07
Cash (includes $5,000 increase in “retained earnings” from 1/1 - 6/30) / $12,000 / $12,000
Accounts Receivable / 10,000 / 10,000
Land / 15,000 / 17,000
Buildings / 28,000 / 31,000
Equipment / 40,000 / 43,000
Total assets / 105,000 / 113,000
Accounts Payable / 6,000 / 6,000
Bonds Payable / 38,000 / 38,000
Total liabilities / 44,000 / 44,000

The Lowell Corporation would record the investment in Nashua Corporation through the following journal entry.

Date / Item / Posting Ref. / Debits / Credits
July 1
Investment in Nashua Corp.
Date / Item / Posting Ref. / Debits / Credits
July 1 / Investment in Nashua Corporation / 42,000
Cash / 42,000
Investment in Nashua Corp.

Based on its $42,000 cash payment for 60% ownership of the Nashua Corporation, the Lowell Corporation believes that the total value of the Nashua Corporation is . This implied value of could be viewed as follows.

Value of firm based on cash paid in acquisition ($42,000 / .60) / $70,000
Less: Book value of net assets acquired
($105,000 assets other than goodwill - $44,000 liabilities) / $61,000
Excess acquisition costs / $9,000
Land adjustment to fair value ($17,000 - $15,000) / $2,000
Buildings adjustment to fair value ($31,000 - $28,000) / $3,000
Equipment adjustment to fair value ($43,000 - $40,000) / $3,000
Goodwill ($9,000 - $2,000 - $3,000 - $3,000) / $1,000

The Lowell Corporation's use of the parent company concept of accounting for acquisition of 60% of the Nashua Corporation may be viewed as follows.

Lowell Corporation (60%) / Noncontrolling Interest (40%) / Total
Book value of net assets acquired ($105,000 - $44,000)
Excess of net assets' fair value over
Book value ($70,000 - $61,000 = $9,000)
Totals
Lowell Corporation (60%) / Noncontrolling Interest (40%) / Total
Book value of net assets acquired ($105,000 - $44,000) / $36,600 / $24,400 / $61,000
Excess of net assets' fair value over
Book value ($70,000 - $61,000 = $9,000) / $5,400 / $5,400
Totals / $42,000 / $24,400 / $66,400

Based on the estimated remaining lives of the Nashua Corporation's net assets acquired, the Lowell Corporation would recognize additional amortization each year as follows.

Asset / Extra Cost (60%) / Life / Amortization
Land ($2,000) / unlimited
Buildings ($3,000) / 20 years
Equipment ($3,000) / 10 years
Goodwill ($1,000) / indefinite
Totals
Asset / Extra Cost (60%) / Life / Amortization
Land ($2,000) / $1,200 / unlimited / $0
Buildings ($3,000) / $1,800 / 20 years / $90
Equipment ($3,000) / $1,800 / 10 years / $180
Goodwill ($1,000) / $600 / indefinite / $0
Totals / $5,400 / $270

Assume that at the end of the 2007 fiscal year, the following information was available.

Accounts / Lowell
12/31/07 / Nashua
12/31/07
Cash / $9,500 / $22,000
Accounts Receivable / 35,000 / 15,000
Investment in Nashua Corp. / 44,865 / 0
Land / 25,000 / 15,000
Buildings / 50,000 / 27,000
Equipment / 200,000 / 38,000
Total assets / 364,365 / 117,000
Accounts Payable / 15,000 / 13,000
Bonds Payable / 220,000 / 38,000
Common Stock / 5,000 / 6,000
Additional Paid-in Capital / 14,000 / 15,000
Retained Earnings, 1/1/07 / 88,000 / 35,000
Dividends (2007) / 22,000 / 5,000
Revenues (2007) / 200,000 / 55,000
Expenses (2007) / 160,000 / 40,000
Equity in Subsidiary Earnings / 4,365 / 0
Total liabilities and stockholders' equity / 364,365 / 117,000

For 2007, the Nashua Corporation's results could be viewed as follows.

Lowell Corporation
(60% for 6 months) / Noncontrolling
Interest (40%) / Preacquisition
Income
(60% for 6 months) / Total
Lowell Corporation
(60% for 6 months) / Noncontrolling
Interest (40%) / Preacquisition
Income
(60% for 6 months) / Total
Revenues – expenses / $4,500 / $6,000 / $4,500 / $15,000
Less: Additional amortization: / $135 / $135
Net Income / $4,365 / $6,000 / $4,500 / $14,865
Dividends / $1,500 / $2,000 / $1,500 / $5,000

Using the equity method of accounting for its Investment in Nashua Corporation, the Lowell Corporation would have arrived at the following balances on 12/31/07.

Investment in
Nashua Corp. / Equity in
Subsidiary Earnings
$42,000
Investment in
Nashua Corp. / Equity in
Subsidiary Earnings
$42,000
60% of Nashua' 6-month net income / $4,500 / $4,500
60% of Nashua' 6-month dividends / $1,500
Amortization / $135 / $135
$44,865 / $4,365

To consolidate the financial data of the Lowell Corporation and the Nashua Corporation, the Lowell Corporation could make use of a worksheet, as shown below.

Business combination accounted for as a purchase,

with the equity method and parent company concept being used

Accounts / Lowell
12/31/07 / Nashua
12/31/07 / Debits / Credits / Noncon-
trolling
Interest / Consoli-dated
Totals
12/31/07
Income Statement
Revenues / $200,000 / $55,000 / $255,000
Expenses / 160,000 / 40,000 / (E) 135 / 200,135
Equity in Subsidiary Earnings / 4,365 / (I) 4,365 / 0
0 / 0
Net Income / $44,365 / $15,000
St. of Retained Earn.
R/E, 1/1/07 / $88,000 / $35,000 / (S) 35,000 / $88,000
Plus: Net Income / 44,365 / 15,000 / 44,365
Less: Dividends prior to acq.
Less: Dividends / 22,000 / 5,000 / (D) 1,500
R/E, 12/31/07 / $110,365 / $45,000 / $110,365
Balance Sheet
Cash / $9,500 / $22,000 / $31,500
Accounts Receivable / 35,000 / 15,000 / 50,000
Investment in Nashua / 44,865 / 0 / (D) 1,500 / (S) 33,600
(A) 5,400
(I) 4,365
Land / 25,000 / 15,000 / (A) 1,200 / 41,200
Buildings / 50,000 / 27,000 / (A) 1,800 / (E) 45 / 78,755
Equipment / 200,000 / 38,000 / (A) 1,800 / (E) 90 / 239,710
Goodwill / (A) 600 / 600
Total assets / $364,365 / $117,000 / $441,765
Accounts Payable / 15,000 / 13,000 / 28,000
Bonds Payable / 220,000 / 38,000 / 258,000
(S) 22,400
Common Stock / 5,000 / 6,000 / (S) 6,000 / 5,000
Add. Paid-in Capital / 14,000 / 15,000 / (S) 15,000 / 14,000
R/E, 12/31/07 / 110,365 / 45,000 / 110,365
Total Liab. & St. Eq. / $364,365 / $117,000 / $71,900 / $71,900 / $0 / $441,765

Business combination accounted for as a purchase,

with the equity method and parent company concept being used

Accounts / Lowell
12/31/07 / Nashua
12/31/07 / Debits / Credits / Noncon-
trolling
Interest / Consoli-dated
Totals
12/31/07
Income Statement
Revenues / $200,000 / $55,000 / $255,000
Expenses / 160,000 / 40,000 / (E) 135 / 200,135
Equity in Subsidiary Earnings / 4,365 / (I) 4,365 / 0
Noncontrolling Interest / 0 / 0 / (1) 6,000 / 6,000
Preacquisition Income / (P) 4,500 / 4,500
Net Income / $44,365 / $15,000 / $44,365
St. of Retained Earn.
R/E, 1/1/07 / $88,000 / $35,000 / (S) 35,000 / $88,000
Plus: Net Income / 44,365 / 15,000 / 44,365
Less: Dividends prior to acq. / (P) 1,500
Less: Dividends / 22,000 / 5,000 / (D) 1,500 / (2) (2,000) / 22,000
R/E, 12/31/07 / $110,365 / $45,000 / $110,365
Balance Sheet
Cash / $9,500 / $22,000 / $31,500
Accounts Receivable / 35,000 / 15,000 / 50,000
Investment in Nashua / 44,865 / 0 / (D) 1,500 / (S) 33,600 / 0
(A) 5,400
(I) 4,365
(P) 3,000
Land / 25,000 / 15,000 / (A) 1,200 / 41,200
Buildings / 50,000 / 27,000 / (A) 1,800 / (E) 45 / 78,755
Equipment / 200,000 / 38,000 / (A) 1,800 / (E) 90 / 239,710
Goodwill / (A) 600 / 600
Total assets / $364,365 / $117,000 / $441,765
Accounts Payable / 15,000 / 13,000 / 28,000
Bonds Payable / 220,000 / 38,000 / 258,000
Noncontrolling Interest / (S) 22,400 / (1) (6,000) / 26,400
(2) 2,000
Common Stock / 5,000 / 6,000 / (S) 6,000 / 5,000
Add. Paid-in Capital / 14,000 / 15,000 / (S) 15,000 / 14,000
R/E, 12/31/07 / 110,365 / 45,000 / 110,365
Total Liab. & St. Eq. / $364,365 / $117,000 / $71,900 / $71,900 / $0 / $441,765

B. Preacquisition income not reported on the income statement.

1.Income statement accounts should be consolidated as if the combination had occurred at the date of acquisition. Revenues and expenses recorded prior to date of combination should be eliminated.

2.Allocations of excess acquisition costs should be based on actual months of the combination.

3.Preacquisition income should not appear on the consolidated income statement.

Business combination accounted for as a purchase,

with the equity method and parent company concept being used

Accounts / Lowell
12/31/07 / Nashua
12/31/07 / Debits / Credits / Noncon-
trolling
Interest / Consoli-dated
Totals
12/31/07
Income Statement
Revenues / $200,000 / $55,000 / $227,500
Expenses / 160,000 / 40,000 / (E) 135
Equity in Subsidiary Earnings / 4,365 / (I) 4,365
0 / 0
Net Income / $44,365 / $15,000
St. of Retained Earn.
R/E, 1/1/07 / $88,000 / $35,000 / (S) 35,000 / $88,000
Plus: Net Income / 44,365 / 15,000 / 44,365
Less: Dividends prior to acq.
Less: Dividends / 22,000 / 5,000 / (D) 1,500
R/E, 12/31/07 / $110,365 / $45,000 / $110,365
Balance Sheet
Cash / $9,500 / $22,000 / $31,500
Accounts Receivable / 35,000 / 15,000 / 50,000
Investment in Nashua / 44,865 / 0 / (D) 1,500 / (S) 33,600
(A) 5,400
(I) 4,365
Land / 25,000 / 15,000 / (A) 1,200 / 41,200
Buildings / 50,000 / 27,000 / (A) 1,800 / (E) 45 / 78,755
Equipment / 200,000 / 38,000 / (A) 1,800 / (E) 90 / 239,710
Goodwill / (A) 600 / 600
Total assets / $364,365 / $117,000 / $441,765
Accounts Payable / 15,000 / 13,000 / 28,000
Bonds Payable / 220,000 / 38,000 / 258,000
(S) 22,400
Common Stock / 5,000 / 6,000 / (S) 6,000 / 5,000
Add. Paid-in Capital / 14,000 / 15,000 / (S) 15,000 / 14,000
R/E, 12/31/07 / 110,365 / 45,000
Total Liab. & St. Eq. / $364,365 / $117,000 / $94,900 / $94,900 / $0 / $441,765

Business combination accounted for as a purchase,

with the equity method and parent company concept being used

Accounts / Lowell
12/31/07 / Nashua
12/31/07 / Debits / Credits / Noncon-
trolling
Interest / Consoli-dated
Totals
12/31/07
Income Statement
Revenues / $200,000 / $55,000 / (P) 27,500 / $227,500
Expenses / 160,000 / 40,000 / (E) 135 / (P) 20,000 / 180,135
Equity in Subsidiary Earnings / 4,365 / (I) 4,365 / 0
Noncontrolling Interest / 0 / 0 / (1) 3,000 / 3,000
Preacquisition Income / 0
Net Income / $44,365 / $15,000 / $44,365
St. of Retained Earn.
R/E, 1/1/07 / $88,000 / $35,000 / (S) 35,000 / $88,000
Plus: Net Income / 44,365 / 15,000 / 44,365
Less: Dividends prior to acq. / (P) 1,500
Less: Dividends / 22,000 / 5,000 / (D) 1,500 / (2) (2,000) / 22,000
R/E, 12/31/07 / $110,365 / $45,000 / $110,365
Balance Sheet
Cash / $9,500 / $22,000 / $31,500
Accounts Receivable / 35,000 / 15,000 / 50,000
Investment in Nashua / 44,865 / 0 / (D) 1,500 / (S) 33,600 / 0
(A) 5,400
(I) 4,365
(P) 3,000
Land / 25,000 / 15,000 / (A) 1,200 / 41,200
Buildings / 50,000 / 27,000 / (A) 1,800 / (E) 45 / 78,755
Equipment / 200,000 / 38,000 / (A) 1,800 / (E) 90 / 239,710
Goodwill / (A) 600 / 600
Total assets / $364,365 / $117,000 / $441,765
Accounts Payable / 15,000 / 13,000 / 28,000
Bonds Payable / 220,000 / 38,000 / 258,000
Noncontrolling Interest / (S) 22,400 / (1) (3,000) / 26,400
(P) 3,000 / (2) 2,000
Common Stock / 5,000 / 6,000 / (S) 6,000 / 5,000
Add. Paid-in Capital / 14,000 / 15,000 / (S) 15,000 / 14,000
R/E, 12/31/07 / 110,365 / 45,000 / 110,365
Total Liab. & St. Eq. / $364,365 / $117,000 / $94,900 / $94,900 / $0 / $441,765