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chapter 2

Understanding the Issues

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Full file at http://testbankwizard.eu/Solution-Manual-for-Advanced-Accounting-10th-Edition-by-Fischer

1. (a) Johnson has a passive level of ownership and in future periods will record dividend income of only 10% of Bickler’s declared dividends. Johnson will also have to adjust the investment to market value at the end of each period.

(b) Johnson has an influential level of ownership and in future periods will record investment income of 30% of Bickler’s net income. Any dividends declared by Bickler will reduce the investment account, but will not affect the investment income amount.

(c) Johnson has a controlling level of ownership and in future periods will add 100% of Bickler’s net income to its own net income. Bickler’s nominal account balances will be added to Johnson’s nominal accounts. Any dividends declared by Bickler will not affect Johnson’s income.

(d) Johnson has a controlling level of ownership and in future periods will add 100% of Bickler’s net income to its own net income. All (100%) of Bickler’s nominal account balances will be added to Johnson’s nominal account balances. This will result in consolidated net income, followed by a distribution to the noncontrolling interest equal to 20% of Bickler’s income. Any dividends declared by Bickler will not affect Johnson’s income.

2. The elimination process serves to make the consolidated financial statements appear as though the parent had purchased the net assets of the subsidiary. The investment account and the subsidiary equity accounts are eliminated and replaced by the subsidiary’s net assets.

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3. (a) Company Parent NCI

Implied Price Value

Value Analysis Schedule Fair Value (100%) (0%)

Company fair value $900,000 $900,000 N/A

Fair value of net assets excluding goodwill 600,000 600,000

Goodwill $300,000 $300,000

Net Assets—marked up $200,000 ($600,000 fair value – $400,000 book value)

Goodwill—$300,000 ($900,000 – $600,000)

(b) Company Parent NCI

Implied Price Value

Value Analysis Schedule Fair Value (80%) (20%)

Company fair value $900,000 $720,000 $180,000

Fair value of net assets excluding goodwill 600,000 480,000 120,000

Goodwill $300,000 $240,000 $ 60,000

Net Assets—marked up $200,000 ($600,000 fair value – $400,000 book value)

Goodwill—$300,000 ($900,000 – $600,000)

The NCI would be valued at $180,000 (20% of the implied company value) to allow the full recognition of fair values.


4. (a) Company Parent NCI

Implied Price Value

Value Analysis Schedule Fair Value (100%) (0%)

Company fair value $1,000,000 $1,000,000 N/A

Fair value of net assets excluding goodwill 850,000 850,000

Goodwill $ 150,000 $ 150,000

The determination and distribution of excess schedule would make the following adjustments:

$1,000,000 price – $350,000 net book value = $650,000 excess to be allocated as follows:

Current assets $ 50,000

Fixed assets 450,000

Goodwill 150,000

$650,000

(b) 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 850,000 850,000

Gain on acquisition $ (350,000) $ (350,000)

The determination and distribution of excess schedule would make the following adjustments:

$500,000 price – $350,000 net book value = $150,000 excess to be allocated as follows:

Current assets $ 50,000

Fixed assets 450,000

Gain on acquisition (350,000)

$ 150,000

5. (a) Company Parent NCI

Implied Price Value

Value Analysis Schedule Fair Value (80%) (20%)

Company fair value $1,000,000* $800,000 $200,000

Fair value of net assets excluding goodwill 850,000 680,000 170,000

Goodwill $ 150,000 $120,000 $ 30,000

*$800,000/80% = $1,000,000

The determination and distribution of excess schedule would make the following adjustments:

$800,000 parent’s price – (80% × $350,000 net book value) = $520,000

NCI adjustment, $200,000 – (20% × $350,000 net book value) = 130,000

Total adjustment to be allocated = $650,000 as follows:

Current assets $ 50,000

Fixed assets 450,000

Goodwill 150,000

$650,000


(b) Company Parent NCI

Implied Price Value

Value Analysis Schedule Fair Value (80%) (20%)

Company fair value $770,000** $600,000 $170,000*

Fair value of net assets excluding goodwill 850,000 680,000 170,000

Gain on acquisition $ (80,000) $ (80,000) N/A

*Cannot be less than the NCI share of the fair value of net assets excluding goodwill.

**$600,000 parent price + $170,000 minimum allowable for NCI = $770,000.

$600,000 parent’s price – (80% ´ $350,000 book value) = $320,000

NCI adjustment, $170,000 – (20% × $350,000 net book value) = 100,000

Total adjustment to be allocated = $420,000 as follows:

Current assets $ 50,000

Fixed assets 450,000

Gain on acquisition (80,000)

$420,000

6. Company Parent NCI

Implied Price Value

Value Analysis Schedule Fair Value (80%) (20%)

Company fair value $1,000,000* $800,000 $200,000

Fair value of net assets excluding goodwill 800,000 680,000 120,000

Goodwill $ 200,000 $120,000 $ 80,000

*$800,000/80% = $1,000,000

The NCI will be valued at $200,000, which is 20% of the implied company value. The NCI account will be displayed on the consolidated balance sheet as a subdivision of equity. It is shown as a total, not broken down into par, paid-in capital in excess of par, and retained earnings.

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Ch. 2—Exercises

EXERCISES

EXERCISE 2-1

Solara Corporation

Pro Forma Income Statement

Ownership Levels

10% 20% 70%

Sales $640,000 $640,000 $1,010,000

Cost of goods sold 300,000 300,000 530,000

Gross profit $340,000 $340,000 $ 480,000

Selling and administrative expenses 120,000 120,000 195,000

Operating income $220,000 $220,000 $ 285,000

Dividend income (10% × $15,000 dividends) 1,500

Investment income (20% × $65,000 reported

income) 13,000

Net income $221,500 $233,000 $ 285,000

Noncontrolling interest (30% × $65,000 reported

income) 19,500

Controlling interest $ 265,500

EXERCISE 2-2

Company Parent NCI

Implied Price Value

Value Analysis Schedule Fair Value (100%) (0%)

Company fair value $530,000 $530,000 N/A

Fair value of net assets excluding goodwill

($280,000 book value + $20,000) 300,000 300,000

Goodwill $230,000 $230,000

1. (a) Cash 20,000*

Accounts Receivable 70,000

Inventory 100,000

Property, Plant, and Equipment ($270,000 + $20,000) 290,000

Goodwill 230,000

Current Liabilities 80,000

Bonds Payable 100,000

Cash 530,000*

*Cash may be shown as a net credit of $510,000.


Exercise 2-2, Concluded

(b) Glass Company

Balance Sheet

Assets

Current assets:

Cash $ 30,000

Accounts receivable 120,000

Inventory 150,000 $ 300,000

Property, plant, and equipment (net) 520,000

Goodwill 230,000

Total assets $1,050,000

Liabilities and Stockholders’ Equity

Liabilities:

Current liabilities $220,000

Bonds payable 350,000 $ 570,000

Stockholders’ equity:

Common stock ($100 par) $200,000

Retained earnings 280,000 480,000

Total liabilities and stockholders’ equity $1,050,000

2. (a) Investment in Plastic 530,000

Cash 530,000

(b) Investment in Plastic appears as a long-term investment on Glass’s unconsolidated balance sheet.

(c) The balance sheet would be identical to that which resulted from the asset acquisition of part (1).

EXERCISE 2-3

Company Parent NCI

Implied Price Value

Value Analysis Schedule Fair Value (100%) (0%)

Company fair value To be determined N/A

Fair value of net assets excluding goodwill $560,000* $560,000

Goodwill

Gain on acquisition

*$370,000 net asset book value + $40,000 inventory increase + $50,000 land increase + $100,000 building increase = $560,000 fair value

(1) Goodwill will be recorded if the price is above $560,000.

(2) A gain will be recorded if the price is below $560,000.


EXERCISE 2-4

(1) Investment in Pail Inc. 950,000

Cash 950,000

Acquisition Costs Expense 10,000

Cash 10,000

(2) Company Parent NCI

Implied Price Value

Value Analysis Schedule Fair Value (100%) (0%)

Company fair value $950,000 $950,000 N/A

Fair value of net assets excluding goodwill 850,000* 850,000

Goodwill $100,000 $100,000

*$700,000 net book value + $50,000 inventory increase + $100,000 depreciable fixed
assets increase = $850,000 fair value

Determination and Distribution of Excess Schedule

Company Parent NCI

Implied Price Value

Fair Value (100%) (0%)

Fair value of subsidiary $950,000 $950,000 N/A

Less book value of interest acquired:

Common stock, ($10 par) $300,000

Paid-in capital in excess of par 380,000

Retained earnings 20,000

Total stockholders’ equity $700,000 $700,000

Interest acquired 100%

Book value $700,000

Excess of fair value over book

value $250,000 $250,000

Adjustment of identifiable accounts:

Worksheet

Adjustment Key

Inventory ($250,000 fair –

$200,000 book value) $ 50,000 debit D1

Depreciable fixed assets

($700,000 fair – $600,000

book value) 100,000 debit D2

Goodwill 100,000 debit D3

Total $250,000


Exercise 2-4 Concluded

(3) Elimination entries:

Common Stock ($10 par)—Pail 300,000

Paid-In Capital in Excess of Par—Pail 380,000

Retained Earnings—Pail 20,000

Investment in Pail Inc. 700,000

Inventory 50,000

Depreciable Fixed Assets 100,000

Goodwill 100,000

Investment in Pail Inc. 250,000

EXERCISE 2-5

(1) 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 885,000 885,000

Goodwill

Gain on acquisition $(185,000) $(185,000)

Determination and Distribution of Excess Schedule

Company Parent NCI

Implied Price Value

Fair Value (100%) (0%)

Price paid for investment $700,000 $700,000 N/A

Less book value of interest acquired:

Common stock ($5 par) $200,000

Paid-in capital in excess of par 300,000

Retained earnings 175,000

Total equity $675,000 $675,000

Interest acquired 100%

Book value $675,000

Excess of fair value over book

value $ 25,000 $ 25,000


Exercise 2-5 Concluded

Adjustment of identifiable accounts:

Worksheet

Adjustment Key

Inventory ($215,000 fair –

$200,000 book value) $ 15,000 debit D1

Property, plant and equipment

($700,000 fair – $500,000

book value) 200,000 debit D2

Computer software ($130,000

fair – $125,000 book value) 5,000 debit D3

Premium on bonds payable

($200,000 fair – $210,000

book value) (10,000) credit D4

Gain on acquisition (185,000) credit D5

Total $ 25,000

(2) Elimination entries:

Common Stock ($5 par)—Genall 200,000

Paid-In Capital in Excess of Par—Genall 300,000

Retained Earnings—Genall 175,000

Investment in Genall Company 675,000

Inventory 15,000

Property, Plant, and Equipment 200,000

Computer Software 5,000

Gain on Acquisition 185,000

Premium on Bonds Payable 10,000

Investment in Genall Company 25,000

EXERCISE 2-6

(1) Company Parent NCI

Implied Price Value

Value Analysis Schedule Fair Value (80%) (20%)

Company fair value $900,000* $720,000 $180,000**

Fair value of net assets excluding goodwill 820,000 656,000 164,000

Goodwill $ 80,000 $ 64,000 $ 16,000

*$720,000/80% = $900,000

**$900,000 × 20% = $180,000


Exercise 2-6 Concluded

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 ($5 par) $100,000

Paid-in capital in excess of par 150,000

Retained earnings 250,000

Total equity $500,000 $500,000 $500,000

Interest acquired 80% 20%

Book value $400,000 $100,000

Excess of fair value over book

value $400,000 $320,000 $ 80,000

Adjustment of identifiable accounts:

Worksheet

Adjustment Key

Inventory ($300,000 fair –

$200,000 book value) $100,000 debit D1

Land ($200,000 fair –

$100,000 book value) 100,000 debit D2

Building ($600,000 fair –

$450,000 book value) 150,000 debit D3

Equipment ($200,000 fair –

$230,000 book value) (30,000) credit D4

Goodwill 80,000 debit D5

Total $400,000

(2) Elimination entries:

Common Stock ($5 par)—Cobalt (80%) 80,000

Paid-In Capital in Excess of Par—Cobalt (80%) 120,000

Retained Earnings—Cobalt (80%) 200,000

Investment in Cobalt Company 400,000

Inventory 100,000

Land 100,000

Building 150,000

Goodwill 80,000

Equipment 30,000

Investment in Cobalt Company (excess remaining) 320,000

Noncontrolling Interest (to adjust to fair value) 80,000


EXERCISE 2-7

(1) Company Parent NCI

Implied Price Value

Value Analysis Schedule Fair Value (80%) (20%)

Company fair value $646,000 $512,000 $134,000*

Fair value of net assets excluding goodwill 670,000 536,000 134,000

Gain on acquisition $ (24,000) $ (24,000) N/A

*must at least equal fair value of assets

Determination and Distribution of Excess Schedule

Company Parent NCI

Implied Price Value

Fair Value (80%) (20%)

Price paid for investment $646,000 $512,000 $134,000

Less book value of interest acquired:

Common stock ($5 par) $ 50,000

Paid-in capital in excess of par 130,000

Retained earnings 370,000

Total equity $550,000 $550,000 $550,000

Interest acquired 80% 20%

Book value $440,000 $110,000

Excess of fair value over book

value $96,000 $ 72,000 $ 24,000

Adjustment of identifiable accounts:

Worksheet

Adjustment Key

Inventory ($400,000 fair –

$280,000 book value) $ 120,000 debit D1

Property, plant and equipment

($500,000 fair – $400,000

book value) 100,000 debit D2

Goodwill ($0 fair – $100,000

book value) $(100,000) credit D3

Gain on acquisition (24,000) credit D4

Total $ 96,000


Exercise 2-7 Concluded

(2) Elimination entries:

Common Stock ($5 par) (80%) 40,000

Paid-In Capital in Excess of Par (80%) 104,000

Retained Earnings (80%) 296,000

Investment in Sundown Company 440,000

Inventory 120,000

Property, Plant, and Equipment 100,000

Goodwill 100,000

Gain on Acquisition (Venus retained earnings) 24,000

Investment in Sundown Company (excess remaining) 72,000

Noncontrolling Interest (to adjust to fair value) 24,000

EXERCISE 2-8

(1) Company Parent NCI

Implied Price Value

Value Analysis Schedule Fair Value (80%) (20%)

Company fair value $450,000 $360,000* $90,000

Fair value of net assets excluding goodwill 390,000 312,000 78,000

Goodwill $ 60,000 $ 48,000 $12,000

*1,000 prior shares included at $45 ($315,000/7,000 shares) per share, the market value on 1/1/X6.

Determination and Distribution of Excess Schedule

Company Parent NCI

Implied Price Value

Fair Value (80%) (20%)

Fair value of subsidiary $450,000 $360,000 $ 90,000

Less book value of interest acquired:

Common stock ($10 par) $100,000

Retained earnings 240,000

Total equity $340,000 $340,000 $340,000

Interest acquired 80% 20%

Book value $272,000 $ 68,000

Excess of fair value over book

value $110,000 $ 88,000 $ 22,000


Exercise 2-8 Concluded

Adjustment of identifiable accounts:

Worksheet

Adjustment Key

Equipment ($150,000 fair –

$100,000 book value) $ 50,000 debit D1

Goodwill 60,000 debit D2

Total $110,000

(2) Investment in Doyle 315,000

Cash 315,000

Investment in Doyle (1,000 × $45) 45,000

Available-for-Sale Investment 40,000