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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