Download Chapter 5 - Solution Manual PDF

TitleChapter 5 - Solution Manual
File Size557.6 KB
Total Pages95
Document Text Contents
Page 1

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

CHAPTER 5

CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES ACQUIRED AT MORE
THAN BOOK VALUE

ANSWERS TO QUESTIONS

Q5-1 The noncontrolling interest is reported as a separate item in the stockholders’ equity
section of the balance sheet. Past practice often presented the noncontrolling interest between
long-term liabilities and stockholders’ equity.

Q5-2 The consolidated balance sheet always includes 100 percent of the subsidiary’s assets
and liabilities. When the parent holds less than 100 percent ownership of the subsidiary, the
noncontrolling interest’s claim on those net assets must be reported.

Q5-3 The income statement portion of the consolidation worksheet is expanded to include a
line for income assigned to the noncontrolling interest. This amount is deducted from
consolidated net income in computing income to the controlling interest. The balance sheet
portion of the worksheet also is expanded to include the claim of the noncontrolling
shareholders on the net assets of the subsidiary.

Q5-4 The balance assigned to the noncontrolling interest is based on the fair value of the
noncontrolling interest at the date of acquisition.

Q5-5 Consolidated retained earnings includes only amounts attributable to the shareholders of
the parent company. Thus, none of the retained earnings is assigned to the noncontrolling
interest.

Q5-6 One hundred percent of the fair value of the subsidiary’s assets is included.

Q5-7 The amount of goodwill at the date of acquisition is determined by deducting the fair
value of the net assets of the acquired company from the sum of the fair value of the
consideration given by the acquiring company and the fair value of the noncontrolling interest.
The resulting goodwill must be apportioned between the controlling and noncontrolling interest.
Under normal circumstances, goodwill apportioned to the noncontrolling interest will equal the
excess of the fair value of the noncontrolling interest over its proportionate share of the fair
value of the net assets of the acquired company.

Q5-8 Income assigned to the noncontrolling interest normally is a proportionate share of the
net income of the subsidiary.

Q5-9 Income assigned to noncontrolling shareholders is reported as a deduction from
consolidated net income in arriving at income assigned to the parent company shareholders.

Q5-10 Dividends paid to noncontrolling shareholders are eliminated in preparing the
consolidated statement of retained earnings. Only dividends paid to the parent company
shareholders are reported as dividends distributed to shareholders.

5-1

Page 2

Chapter 05 - Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

Q5-11 When the parent owns all the shares of a subsidiary (and the subsidiary has no other
publicly traded securities outstanding), it is free to decide whether it wishes to publish separate
statements for the subsidiary. In some cases creditors, regulatory boards, or other interested
parties may insist that such statements be produced. If the parent does not own all the shares of
the subsidiary, the subsidiary normally would be expected to publish separate financial
statements for distribution to the noncontrolling shareholders. In general, the consolidated
statements are published for use by parent company shareholders and are likely to be of little
use to shareholders of the subsidiary.

Q5-12 Other comprehensive income elements reported by the subsidiary must be included in
other comprehensive income in the consolidated financial statement. If the subsidiary is not
wholly owned, income assigned to the noncontrolling interest will include a proportionate share
of the subsidiary’s other comprehensive income.

Q5-13 The parent’s portion of the subsidiary’s other comprehensive income is included in
comprehensive income attributable to the controlling interest.

Q5-14 Prior to FASB 141R (ASC 805), the differential was computed as the difference between
the fair value of the consideration given in acquiring ownership of the subsidiary and the
parent’s portion of the book value of the subsidiary’s net assets.

Q5-15 Prior to FASB 141R (ASC 805), goodwill was reported as the difference between the
fair value of the consideration given in acquiring ownership of the subsidiary and the parent’s
portion of the fair value of the subsidiary’s net assets.

Q5-16 Prior to FASB 141R (ASC 805), consolidated net income was computed by deducting
income to noncontrolling interest from consolidated revenues less expenses.

Q5-17* The only effect of a negative balance in retained earnings is the need for a credit to
subsidiary retained earnings, rather than a debit to retained earnings, when the stockholders’
equity accounts of the subsidiary and the investment account of the parent are eliminated.

Q5-18* In the period in which the land is sold, the gain or loss recorded by the subsidiary must
be adjusted by the amount of the differential assigned to the land. When the differential is
assigned in the worksheet eliminating entries at the end of the period, a debit will be made to
the gain or loss on sale of land that came to the worksheet from the subsidiary’s books.

5-2

Page 48

P5-22 Amortization of Differential

Journal entries recorded by Ball Corporation:

Equity Method Entries on Ball Corp.'s Books:

Investment in Krown Corp. 120,000

Preferred Stock 50,000

Additional Paid-in Capital 70,000

Record the initial investment in Krown Corp.

Investment in Krown Corp. 12,000

Income from Krown Corp. 12,000

Record Ball Corp.'s 30% share of Krown Corp.'s 20X5 income

Cash 3,000

Investment in Krown Corp.

3,000

Record Ball Corp.'s 30% share of Krown Corp.'s 20X5 dividend



Income from Krown Corp. 4,575

Investment in Krown Corp. 4,575

Record amortization of excess acquisition price

P5-22 (continued)

Amortization of differential assigned to buildings and equipment:
Fair value of buildings and equipment $360,000
Book value of buildings and equipment 300,000
Differential $60,000
Portion of stock held by Ball x 0.30
Differential assigned to buildings and equipment $18,000
Remaining life ÷ 15
Yearly amortization $1,200

Amortization of differential assigned to copyrights:
Purchase price $120,000
Fair value of Krown's:
Total assets $560,000
Total liabilities (250,000)

$310,000
Proportion of stock held by Ball x .30 (93,000)
Amount assigned to copyrights $27,000
Remaining life ÷ 8
Yearly amortization $3,375

5-48

Page 94

Basic elimination entry

Common stock 100,000

Retained earnings 70,000

Accumulated OCI 10,000

Income from Sparta Co. 18,000

NCI in NI of Sparta Co. 12,000

Dividends declared 20,000

Investment in Sparta Co. 114,000

NCI in NA of Sparta Co. 76,000

Other Comprehensive Income Entry:

OCI from Sparta Co. 2,400

OCI to the NCI 1,600

Investment in Sparta Co. 2,400

NCI in NA of Sparta Co. 1,600

Investment in Income from

Sparta Co. Sparta Co.

Beginning Balance 108,000

60% Net Income 18,000 18,000 60% Net Income

12,000 60% Dividends

2,400 OCI Entry

Ending Balance 116,400 18,000 Ending Balance

114,000 Basic 18,000

2,400 OCI

0 0

5-94

Similer Documents