Advanced Accounting, 11e (Beams/Anthony/Bettinghaus/Smith)

Chapter 11 Consolidation Theories, Push-Down Accounting, and Corporate Joint

Ventures
Multiple Choice Questions
Use the following information to answer the question(s) below.
Pasfield Corporation acquired a 90% interest in Santini Corporation for $90,000 cash on January 1, 2011.
The following information is available for Santini at that time.

Current assets
Plant assets
Liabilities
Net assets

Book Value
$40,000
60,000
(50,000)
$50,000

Fair Value
$50,000
75,000
(50,000)
$75,000

Difference
$10,000
15,000
0

1) Under the entity theory, a consolidated balance sheet prepared immediately after the business
combination will show goodwill of
A) $15,000.
B) $22,500.
C) $25,000.
D) $32,500.
Answer: C
Explanation: C)
Imputed value of Santini ($90,000/90%)
$100,000
Less: Fair value of net assets acquired
(75,000)
Goodwill
$25,000
Objective: LO1
Difficulty: Moderate

2) Under the entity theory, a consolidated balance sheet prepared immediately after the business
combination will show noncontrolling interest of
A) $5,000.
B) $7,500.
C) $9,000.
D) $10,000.
Answer: D
Explanation: D)
Imputed value of Santini ($90,000/90%)
$100,000
Noncontrolling interest percentage
10%
Noncontrolling interest
$10,000
Objective: LO1
Difficulty: Moderate

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3) Paroz Corporation acquired a 70% interest in Sandberg Corporation for $900,000 when Sandberg's
stockholders' equity consisted of $600,000 of Capital Stock and $600,000 of Retained Earnings. The fair
values of Sandberg's net assets were equal to their recorded book values. At the time of acquisition, on
Paroz's books, Paroz will record
A) goodwill for $60,000 under the parent company theory.
B) goodwill for $85,714 under the entity theory.
C) investment in Sandberg for $1,285,714 under the entity theory.
D) investment in Sandberg for $900,000 under the entity and parent company theories.
Answer: D
Explanation: D) (The investment is recorded at cost.)
Objective: LO1
Difficulty: Moderate

Use the following information to answer the question(s) below.

Pascoe Corporation paid $450,000 for a 90% interest in Sarabet Corporation on January 1, 2011, when
Sarabet's stockholders' equity consisted of $250,000 Common Stock and $50,000 Retained Earnings. The
book values and fair values of Sarabet's assets and liabilities were equal when Pascoe acquired its interest.
The separate net incomes (excluding investment income) of Pascoe and Sarabet for 2011 were $600,000
and $100,000, respectively. Dividends declared and paid during 2011 were $250,000 for Pascoe and
$50,000 for Sarabet. Pascoe uses the entity theory in consolidating its financial statements with those of
Sarabet.
4) Goodwill was reported in the December 31, 2011 consolidated balance sheet at
A) $170,000.
B) $180,000.
C) $200,000.
D) $210,000.
Answer: C
Explanation: C)
Imputed fair value of Sarabet ($450,000/90%)
$500,000
Less: Total underlying book value
(300,000)
Total amount of implied goodwill
$200,000
Objective: LO1
Difficulty: Moderate

5) Noncontrolling interest share was reported in the 2011 consolidated income statement at
A) $5,000.
B) $6,000.
C) $8,000.
D) $10,000.
Answer: D
Explanation: D)
Sarabet's separate income
$100,000
Parent ownership percentage
10%
Noncontrolling interest share
$10,000
Objective: LO1

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Difficulty: Moderate

6) Pascoe's income from Sarabet under the equity method for 2011 was
A) $72,000.
B) $87,500.
C) $90,000.
D) $100,000.
Answer: C
Explanation: C)
Sarabet's separate income
$100,000
Parent ownership percentage
90%
Income from Sarabet to Pascoe
$90,000
Objective: LO1
Difficulty: Moderate

Use the following information to answer the question(s) below.

Paris Corporation purchased 80% of the outstanding voting common stock of Sanders Corporation on
January 1, 2011, at a cost of $400,000. The stockholders' equity of Sanders Corporation on this date
consisted of $200,000 of Capital Stock and $100,000 of Retained Earnings. Book values were equal to fair
values except for land and inventory. The book value of Sanders' land was $10,000, and fair value was
$22,000. The book value of Sanders' inventory was $30,000, and fair value was $25,000.
7) Under the parent company theory, what amount of goodwill was reported on the consolidated balance
sheet at December 31, 2011?
A) $148,000
B) $153,000
C) $154,400
D) $160,000
Answer: C
Explanation: C)
Purchase price of 80% interest
$400,000
Less: Book value acquired ($300,000 80%)
240,000
Excess of cost over book value
$160,000
Less: Excess allocated to land ($12,000 80%)
(9,600)
Plus: Excess allocated to inventory ($5,000 80%)
4,000
Remainder allocated to goodwill
$154,400
Objective: LO1
Difficulty: Moderate

8) Under the entity theory, what amount of goodwill was reported on the consolidated balance sheet at
December 31, 2011?
A) $185,000
B) $191,250
C) $193,000
D) $200,000
Answer: C
Explanation: C) ($154,400/80% = $193,000)
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Objective: LO1
Difficulty: Moderate

9) Assume Paris's land account had a book value of $50,000 and a fair value of $70,000 on January 1, 2011.
Using the parent company and entity theories, what amounts would be reported on the consolidated
balance sheet at January 1, 2011 for the land account?
Parent Company Theory
A)
Parent Company Theory
$69,600

Entity Theory
Entity Theory
$72,000

B)
Parent Company Theory
$72,000

Entity Theory
$72,000

C)
Parent Company Theory
$72,000

Entity Theory
$92,000

D)
Parent Company Theory
$92,000

Entity Theory
$72,000

Answer: A
Explanation: A) Under the parent company theory, the Land account on the consolidated balance sheet
would be the sum of the book value of the parent's Land account balance of $50,000 plus the book value
of the Land account on the subsidiary's books of $10,000 plus 80% of the $12,000 excess of the fair value in
excess of book value of $9,600, for a total of $69,600. Under the entity theory, the land would be valued at
the book value of the parent of $50,000 plus the full fair value of the subsidiary's land which is $22,000 for
a total of $72,000.
Objective: LO1
Difficulty: Moderate

10) Assume Paris's inventory account had a book value of $40,000 and a fair value of $44,000 on January 1,
2011. Using the parent company theory, what was the amount reported on the consolidated balance sheet
for inventories on January 1, 2011?
A) $65,000
B) $66,000
C) $69,000
D) $70,000
Answer: B
Explanation: B) Under the parent company theory, the Inventory account on the consolidated balance
sheet would be the sum of the book value of the parent's Inventory account balance of $40,000 plus the
book value of the Inventory account on the subsidiary's books of $30,000 less 80% of the $5,000 excess of
the book value in excess of fair value, or ($4,000), for a total of $66,000.
Objective: LO1

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Difficulty: Moderate

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11) The SEC requires push-down accounting for SEC filings of subsidiaries when the subsidiary has no
substantial publicly-held debt or preferred stock outstanding and
A) the parent has substantial ownership (5% or greater).
B) the parent has substantial ownership (20% or greater).
C) the parent has substantial ownership (50% or greater).
D) the parent has substantial ownership (90% or greater).
Answer: D
Objective: LO2
Difficulty: Moderate

12) Under parent company theory, noncontrolling interest is classified on the consolidated balance sheet
as ________. Under entity theory, noncontrolling interest is classified on the consolidated balance sheet as
________.
A) stockholders' equity; stockholders' equity
B) stockholders' equity; liability
C) liability; a liability
D) liability; stockholders' equity
Answer: D
Objective: LO1
Difficulty: Moderate

13) Under parent company theory, the amount of consolidated net income is equal to the amount of
________ under entity theory.
A) noncontrolling interest share
B) noncontrolling interest income
C) income attributable to controlling stockholders
D) income attributable to noncontrolling stockholders
Answer: C
Objective: LO1
Difficulty: Moderate

14) A parent company acquired 100% of the outstanding common stock of another corporation. The
parent is going to use push-down accounting. The fair market value of each of the acquired corporation's
assets is lower than its respective book value. The fair market value of each of the acquired corporation's
liabilities is higher than its respective book value. The acquired corporation has a deficit in the Retained
Earnings account. Which one of the following statements is correct?
A) The push-down capital account will have a credit balance after this transaction is posted.
B) The push-down capital account will have a debit balance after this transaction is posted.
C) The push-down capital account will have either a debit or a credit balance depending upon whether
the asset adjustments exceed the liability adjustments, or vice versa.
D) Subsidiary Retained Earnings will have a deficit balance after this transaction is posted.
Answer: B
Objective: LO2
Difficulty: Moderate

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15) Earth Company, Fire Incorporated, and Wind Incorporated created a joint venture to market their
products on the internet. Earth owns 40% of the stock, Fire owns 45% of the stock and Wind owns the
remaining 15%. Which firms should report their joint venture investments using the equity method?
A) Earth
B) Fire
C) Earth and Fire
D) Earth, Fire and Wind
Answer: D
Objective: LO3
Difficulty: Easy

16) Anthony and Cleopatra create a joint venture to distribute artifacts. Anthony contributes 70% and
Cleopatra 30% of the cash for assets purchased from Tomb Company. How would Anthony report
information about Cleopatra on Anthony's financial statements?
A) Not at all
B) In a footnote
C) As a liability
D) As a noncontrolling interest
Answer: D
Objective: LO3
Difficulty: Moderate

17) Noncontrolling interest share is viewed as an expense under ________ theory.

A) parent company
B) entity
C) contemporary
D) joint venture
Answer: A
Objective: LO1
Difficulty: Easy

18) Under parent company theory, noncontrolling interest is valued at ________ on the consolidated
balance sheet. Under entity theory, noncontrolling interest is valued at ________ on the consolidated
balance sheet.
A) fair value; present value
B) present value; fair value
C) book value; fair value
D) fair value; book value
Answer: C
Objective: LO1
Difficulty: Moderate

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19) Under GAAP, the ________ will include the variable interest entity in consolidated financial
statements.
A) special purpose entity
B) limited liability company
C) trust
D) primary beneficiary
Answer: D
Objective: LO5
Difficulty: Moderate

20) Entities other than the primary beneficiary account for their investment in a variable interest entity
using the
A) cost method.
B) equity method.
C) cost or equity methods.
D) consolidated method.
Answer: C
Objective: LO4
Difficulty: Easy

21) With regard to a variable interest entity (VIE), Ann Company may meet the following two conditions:
Condition I
Ann Company has the power to direct VIE activities that significantly impact VIE's economic
performance.
Condition II
Ann Company has an obligation to absorb losses and/or a right to receive significant benefits from the
VIE.
Ann Company must consolidate a VIE if
A) Condition I is met only.
B) Condition II is met only.
C) either Condition I or Condition II is met.
D) both Condition I and Condition II are met.
Answer: D
Objective: LO4
Difficulty: Moderate

22) Which of the following statements about variable interest entities (VIE) is false?
A) Under GAAP, a VIE may be a corporation, partnership, limited liability company or trust.
B) Under GAAP, pension plans are excluded from VIE accounting.
C) A potential VIE must be a separate entity, not a subset, branch or division of another entity.
D) VIEs do not require the identification of a primary beneficiary.
Answer: D
Objective: LO4
Difficulty: Moderate

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23) Under push-down accounting, the ________ of the acquired subsidiary's assets and liabilities are
reported on the financial statements of the ________.
A) book value; subsidiary
B) book value; parent
C) fair value; subsidiary
D) present value; parent
Answer: C
Objective: LO2
Difficulty: Easy

Use the following information to answer the question(s) below.

On January 1, 2011, Penelope Company acquired a 90% interest in Leah Company for $180,000 cash. On
January 1, 2011, Leah Company had the following assets and liabilities:

Cash
Accounts Receivable
Inventory
Plant Assets
Total Assets
Liabilities
Capital Stock
Retained Earnings
Total Liabilities &
Stockholders' Equity

Book Value
$10,000
30,000
40,000
60,000
$140,000

Fair Value
$10,000
35,000
50,000
80,000
$175,000

$25,000
100,000
15,000

$25,000

$140,000

Push-down accounting is used for the acquisition.

24) Assume the entity theory is used. On January 2, 2011, Leah Company will report Goodwill of
________ and Accounts Receivable of ________ on Leah's balance sheet.
A) $27,000; $30,000
B) $27,000; $34,500
C) $30,000; $30,000
D) $50,000; $35,000
Answer: D
Objective: LO1, 2
Difficulty: Moderate

25) Assume the parent company theory is used. On January 2, 2011, Leah Company will report Goodwill
of ________ and Accounts Receivable of ________ on Leah's balance sheet.
A) $27,000; $30,000
B) $27,000; $35,000
C) $30,000; $30,000
D) $45,000; $34,500
Answer: D
Objective: LO1, 2

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Difficulty: Moderate

Exercises
1) On July 1, 2010, Parslow Corporation acquired a 75% interest in Sanderson Corporation for $150,000.
Sanderson's net assets on this date had a book value of $140,000 and a fair value of $160,000. The excess of
fair value over book value at acquisition was due to understated plant assets with a remaining useful life
of five years from July 1, 2010. Separate net incomes (excluding investment income) of Parslow and
Sanderson for 2011 were $400,000 and $20,000, respectively.
Required:
1. Compute goodwill at July 1, 2010 under the parent company theory and the entity theory.
2. Determine consolidated net income and noncontrolling interest share for 2011 under the parent
company theory and the entity theory.
Answer:
Requirement 1
Parent Company Theory:
Cost of 75% interest on July 1, 2010
$150,000
Fair value of net assets acquired ($160,000 75%)
120,000
Goodwill
$30,000
Entity Theory:
Total implied fair value ($150,000/75%)
Fair value of net assets
Goodwill
Requirement 2
Combined separate incomes
Less: Depreciation on excess allocated to
plant assets: $15,000/5 years
$20,000/5 years
Less: Noncontrolling interest share
($20,000 25%)
Consolidated net income
Total consolidated income
Income allocated to controlling
shareholders ($416,000 - $4,000)
Income allocated to noncontrolling
shareholders [($20,000 - $4,000) 25%]

$200,000
160,000
$40,000
Parent Theory
$420,000
(3,000)

(5,000)
$412,000

Entity Theory
$420,000

(4,000)
________
$416,000
$412,000
$4,000

Objective: LO1
Difficulty: Moderate

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2) Partel Corporation purchased 75% of Sandford Corporation on January 1, 2011, for $230,000. Balance
sheets for the two companies on this date, prepared just prior to the purchase, are provided below.

Cash
Inventory
Buildings & equipment-net
Total assets
Common stock
Retained earnings
Total equities

Partel
Book Values
$330,000
270,000
500,000
$1,100,000

Sandford
Book Values
$10,000
70,000
120,000
$200,000

$300,000
800,000
$1,100,000

95,000
105,000
$200,000

Sandford
Fair Values
$10,000
90,000
190,000
$290,000

Required:
1. Prepare a consolidated balance sheet using the entity theory of consolidation.
2. Prepare a consolidated balance sheet using the parent company theory of consolidation.
Answer:
Requirement 1
Partel Corporation and Subsidiary
Consolidated Balance Sheet
January 1, 2011
(Entity Theory)
Assets
Cash [($330,000 - $230,000) + $10,000]
Inventory ($270,000 + $90,000)
Buildings & equipment-net ($500,000 + $190,000)
Goodwill [($230,000/0.75) - $290,000]
Total assets

$110,000
360,000
690,000
16,667
$1,176,667

Stockholders' Equity
Common stock
Retained earnings
Noncontrolling interest ($306,667 25%)
Total stockholders' equity

$300,000
800,000
76,667
$1,176,667

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Requirement 2

Partel Corporation and Subsidiary

Consolidated Balance Sheet
January 1, 2011
(Parent Company Theory)

Assets
Cash (($330,000 - $230,000) + $10,000)
Inventory ($270,000 + $70,000) + (75% 20,000)
Buildings &
Equip.-net ($500,000 + $120,000) + (75% $70,000)
Goodwill ($230,000 paid - ($290,000 75%))
Total assets

$110,000
355,000
672,500
12,500
$1,150,000

Liability and Stockholders' Equity

Liability
Noncontrolling interest ($200,000 25%)
Stockholders' equity
Common stock
Retained earnings
Total liability and stockholders' equity

$50,000
300,000
800,000
$1,150,000

Objective: LO1
Difficulty: Moderate

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3) Pashley Corporation purchased 75% of Sargent Corporation on January 1, 2011, for $115,000. Balance
sheets for the two companies on this date, prepared just prior to the purchase, are provided below.

Cash
Inventory
Buildings & equipment-net
Total assets
Common stock
Retained earnings
Total equities

Pashley
Book Values
$165,000
135,000
250,000
$550,000

Sargent
Book Values
$5,000
35,000
60,000
$100,000

$150,000
400,000
$550,000

Sargent
Fair Values
$5,000
45,000
95,000
$145,000

$47,500
52,500
$100,000

Required:
Prepare a consolidated balance sheet using the entity theory of consolidation.
Answer:
Pashley Corporation and Subsidiary
Consolidated Balance Sheet
January 1, 2011
(Entity Theory of Consolidation)
Assets
Cash (($165,000 - $115,000) + $5,000)
$55,000
Inventory ($135,000 + $45,000)
180,000
Buildings & equipment-net ($250,000 + $95,000)
345,000
Goodwill ($115,000/75%) - $145,000 fair value
8,333
Total assets
$588,333
Stockholders' Equity
Common stock
Retained earnings
Noncontrolling interest ($153,333 25%)
Total stockholders' equity

150,000
400,000
38,333
$588,333

Objective: LO1
Difficulty: Moderate

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4) Patane Corporation acquired 80% of the outstanding voting common stock of Sanlon Corporation on
January 1, 2011, for $500,000. Sanlon Corporation's stockholders' equity at this date consisted of $250,000
in Capital Stock and $100,000 in Retained Earnings. The fair value of Sanlon's assets was equal to the book
value of the assets except for land with a fair value $40,000 greater than its book value, and marketable
securities with a fair value $50,000 greater than its book value. Sanlon also had a valuable patent with a
fair value of $25,000 and a book value of zero because its development costs were expensed as incurred.
The fair value of Sanlon's liabilities is $10,000 higher than the $40,000 book value.
Required:
Calculate the amount of goodwill under the parent company and entity theories of consolidation.
Answer:
Parent Company Theory:
Difference between Fair Value and Book Value
Land
$40,000
Marketable securities
50,000
Patent
25,000
Liabilities
(10,000)
Net difference between fair value and book value
$105,000
Price paid for investment
Less: Total book value of investment
($350,000 80%)
Less: Net difference between fair value and book value ($105,000 80%)
Goodwill
Entity Theory:
Implied fair value of subsidiary
($500,000/0.80)
Less: Total stockholders' equity
Less: Net difference between fair value and book value
Goodwill
Objective: LO1
Difficulty: Moderate

500,000
(280,000)
(84,000)
$136,000

$625,000
(350,000)
(105,000)
$170,000

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5) On January 1, 2011, Parton Corporation acquired an 80% interest in Sandra Corporation for $184,000.
Sandra's net assets on this date had a book value of $160,000 and a fair value of $210,000. The excess of
fair value over book value at acquisition was attributable to $20,000 of understated plant assets with a
remaining useful life of five years from January 1, 2011, and $30,000 to an understated patent with a
remaining economic life of six years from January 1, 2011. Separate net incomes (excluding investment
income) of Parton and Sandra for 2011 were $300,000 and $50,000, respectively.
Required:
1. Compute goodwill at January 1, 2011 under the parent company theory and the entity theory.
2. Determine consolidated net income and noncontrolling interest share for 2011 under the parent
company theory and the entity theory.
Answer:
Requirement 1
Parent company theory:
Cost of 80% interest on January 1, 2011
Fair value acquired ($210,000 80%)
Goodwill

$184,000
168,000
$16,000

Entity theory:
Total fair value implied by price paid ($184,000/80%)
Fair value
Goodwill

$230,000
210,000
$20,000

Or: ($16,000 goodwill)/80%

$20,000

Requirement 2

Parent Theory
$350,000

Combined separate incomes

Less: Deprec./Amort. on excess to:
Plant assets:
$16,000/5 years
(3,200)
$20,000/5 years
Patent:
$24,000/6 years
(4,000)
$30,000/6 years
Less: Noncontrolling interest share ($50,000 20%)
(10,000)
Consolidated net income
$332,800
Total consolidated income
Income allocated to controlling shareholders ($341,000-$8,200)
Income allocated to noncontrolling shareholders
[($50,000 - $9,000) 20%]
Objective: LO1
Difficulty: Moderate

Entity Theory
$350,000

(4,000)
(5,000)
________
$341,000
$332,800
$8,200

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6) Partridge Corporation purchased an 80% interest in Sandy Corporation for $840,000 on January 1, 2011.
Sandy's balance sheet book values and accompanying fair values on this date are shown below.
Parent
Company
Theory
PushDown
Balance
Sheet

Book
Value

Fair
Value

Entity
Theory
PushDown
Balance
Sheet

Cash

$30,000

$30,000

________

________

Receivables

200,000

200,000

________

________

Inventory

300,000

360,000

________

________

50,000

90,000

________

________

250,000

300,000

________

________

Total Assets

$830,000

$980,000

________

________

Current liabilities

$180,000

$180,000

________

________

Other liabilities

120,000

100,000

________

________

Common Stock

400,000

________

________

Retained Earnings

130,000

________

________

________

$830,000

________

________

________

Land
Plant assets-net

Total Liab. & Equity

Required:
Complete the push-down columns of Sandy Corporation's restructured balance sheet using entity theory
and parent company theory.

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Answer:
Preliminary computations:
Parent Company Theory:
Cost of 80% interest
Fair value acquired ($700,000 80%)
Goodwill
Entity Theory:
Implied fair value ($840,000/80%)
Fair value of net assets
Goodwill

$840,000
560,000
$280,000
$1,050,000
700,000
$350,000

Entity
Theory
PushDown
Balance
Sheet

Parent
Company
Theory
PushDown
Balance
Sheet

Book
Value

Fair
Value

Cash

$30,000

$30,000

$30,000

$30,000

Receivables

200,000

200,000

200,000

200,000

Inventory

300,000

360,000

360,000

348,000

50,000

90,000

90,000

82,000

250,000

300,000

300,000

290,000

Goodwill

________

________

350,000

280,000

Total Assets

$830,000

$980,000

$1,330,000

$1,230,000

Current liabilities

$180,000

$180,000

$180,000

$180,000

Other liabilities

120,000

100,000

100,000

104,000

Common Stock

400,000

400,000

400,000

Retained Earnings

130,000

650,000

546,000

$1,330,000

$1,230,000

Land
Plant assets-net

________

Push-down capital
Tot. Liab & Equity

$830,000

Objective: LO1, 2
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Difficulty: Moderate

7) Party Corporation acquired an 80% interest in Sang Corporation on January 1, 2011 for $20,000. Balance
sheet and fair value information on this date is summarized as follows:

Current assets
Land and Building-net
Equipment
Total assets
Liabilities
Capital stock
Retained earnings
Total liab. & equity

Party Book Value

$15,000
35,000
8,000
$58,000

Sang Book Value

$9,000
7,000
4,000
$20,000

$27,000
18,000
13,000
$58,000

$10,000
4,000
6,000
$20,000

Sang Fair Value

$9,000
7,000
6,000
$22,000
10,000

Required:
1. Prepare an entry on the books of Sang Corporation to record the push-down adjustment under parent
company theory.
2. Prepare an entry on the books of Sang Corporation to record a push-down adjustment under entity
theory.
Answer:
Requirement 1
Cost of investment
$20,000
Fair value of investment ($12,000 80%)
(9,600)
Goodwill
$10,400
Entry:
Equipment
Goodwill
Retained earnings
Push-down capital

1,600
10,400
6,000

Requirement 2
Implied fair value of net assets ($20,000/80%)
Fair value of net assets
Goodwill
Entry:
Equipment
Goodwill
Retained earnings
Push-down capital

18,000

$25,000
(12,000)
$13,000

2,000
13,000
6,000

Objective: LO1, 2
Difficulty: Moderate

21,000

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8) Pascal Corporation paid $225,000 for a 70% interest in Sank Corporation on January 1, 2011. On that
date, Sank's balance sheet accounts, at book value and fair value, were as follows:

Assets
Cash
Accounts receivable-net
Inventories
Plant, property and equipment-net
Total assets
Equities
Accounts payable
Common stock
Retained earnings
Total liab. & equity

Book Value

Fair Value

$25,000
45,000
40,000
140,000
$250,000

$25,000
55,000
60,000
125,000
$265,000

$40,000
120,000
90,000
$250,000

$40,000

Both companies use the parent company theory. Push-down accounting is used for the acquisition.
Required:
1. Prepare the journal entry on January 1, 2011 on Sank Corporation's books.
2. Prepare a balance sheet for Sank Corporation immediately after the acquisition on January 1, 2011.
Answer:
Requirement 1
Cost of a 70% interest in Sank
$225,000
Fair value acquired ($225,000 70%)
157,500
Goodwill
$67,500
Entry:
Accounts receivable
7,000
Inventories
14,000
Goodwill
67,500
Retained earnings
90,000
Plant, property, and equipment
10,500
Push-down capital
168,000

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Requirement 2

Sank Corporation
Balance Sheet
January 1, 2011
(After Push-Down)

Assets
Cash
Accounts receivable
Inventories
Plant, property and equipment
Goodwill
Total assets

$25,000
52,000
54,000
129,500
67,500
$328,000

Liabilities & Equity

Accounts payable
Common stock
Push-down capital
Total liabilities & equity

$40,000
120,000
168,000
$328,000

Objective: LO1, 2
Difficulty: Moderate

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9) Johnsen Corporation paid $225,000 for a 70% interest in Jonas Corporation on January 1, 2011. On that
date, Jonas's balance sheet accounts, at book value and fair value, were as follows:

Assets
Cash
Accounts receivable-net
Inventories
Plant, property and equipment-net
Total assets
Equities
Accounts payable
Common stock
Retained earnings
Total liab. & equity

Book Value

Fair Value

$25,000
45,000
40,000
140,000
$250,000

$25,000
55,000
60,000
125,000
$265,000

$40,000
120,000
90,000
$250,000

$40,000

Required:
1. Prepare the journal entry necessary on January 1, 2011 on Jonas Corporation's books. Both companies
use push-down accounting and the entity theory.
2. Prepare the balance sheet for Jonas Corporation immediately after the acquisition on January 1, 2011.
Answer:
Requirement 1
Implied fair value ($225,000/0.70)
$321,429
Fair value of net assets
225,000
Goodwill
$96,429
Entry:
Accounts receivable
Inventories
Goodwill
Retained earnings
Plant, property, and equipment
Push-down capital

10,000
20,000
96,429
90,000

15,000
201,429

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Requirement 2

Jonas Corporation
Balance Sheet
January 1, 2011
(After Push-Down)

Assets
Cash
Accounts receivable
Inventories
Plant, property and equipment
Goodwill
Total assets

$25,000
55,000
60,000
125,000
96,429
$361,429

Liabilities & Equity

Accounts payable
Common stock
Push-down capital
Total liabilities & equity

$40,000
120,000
201,429
$361,429

Objective: LO1, 2
Difficulty: Moderate

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10) Patch Corporation has a 50% undivided interest in Saric Corporation, a joint venture. Patch accounts
for its interest in Saric by the equity method and also prepares consolidated financial statements for
external reporting purposes. Patch follows specialized industry practices and uses proportionate
consolidation for its interest in Saric. Separate financial statements for Patch and Saric are as follows:

Cash
Accounts receivable
Inventories
Investment in Saric
Land
Plant, property, equipment
Total assets

Patch
$30,000
70,000
80,000
140,000
116,000
200,000
$636,000

Saric
$18,000
42,000
72,000
40,000
128,000
$300,000

Accounts payable
Common stock
Retained earnings
Venture capital
Total liab. & equity

$24,000
340,000
272,000
________
$636,000

$20,000
0
________
280,000
$300,000

Consolidation
________
________
________
________
________
________
________
________
________
________
________

Required:
Prepare the consolidated balance sheet for Patch Corporation and its undivided interest in Saric
Corporation.
Answer:
Patch Corporation
Balance Sheet
Assets
Cash
$39,000
Accounts receivable
91,000
Inventories
116,000
Land
136,000
Plant, property & equipment
264,000
Total assets
$646,000
Liabilities & Equity
Accounts payable
Common stock
Retained earnings
Total liab. & equity
Objective: LO3
Difficulty: Moderate

$34,000
340,000
272,000
________
$646,000

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11) On January 1, 2011, Penny Company acquired a 90% interest in Lampire Company for $180,000 cash.
On January 1, 2011, Lampire Company had the following assets and liabilities:
Book Value
$10,000
30,000
40,000
60,000
$140,000

Cash
Accounts Receivable
Inventory
Plant Assets
Total Assets
Liabilities
Capital Stock
Retained Earnings
Total Liabilities &
Stockholders' Equity

Fair Value
$10,000
35,000
50,000
80,000
$175,000

$25,000
100,000
15,000

$25,000

$140,000

Push-down accounting is used for the acquisition.

Required:
1. Assume both companies use the entity theory. Record the push-down adjustment on Lampire's
separate books on January 1, 2011.
2. Assume both companies use the parent company theory. Record the push-down adjustment on
Lampire's separate books on January 1, 2011.
Answer:
Requirement 1
Accounts receivable
5,000
Inventory
10,000
Plant assets
20,000
Goodwill [($180,000/0.90) - $150,000]
50,000
Retained earnings
15,000
Push-down capital
100,000
Requirement 2
Accounts receivable
Inventory
Plant assets
Goodwill [$180,000 - ($150,000 90%)]
Retained earnings
Push-down capital

4,500
9,000
18,000
45,000
15,000

Objective: LO1, 2
Difficulty: Moderate

91,500

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12) On January 1, 2011, Jeff Company acquired a 90% interest in Margaret Company for $198,000 cash. On
January 1, 2011, Margaret Company had the following assets and liabilities:

Cash
Accounts Receivable
Inventory
Plant Assets
Total Assets
Liabilities
Capital Stock
Retained Earnings
Total Liabilities &
Stockholders' Equity

Book Value
$5,000
30,000
40,000
60,000
$135,000

Fair Value
$5,000
35,000
50,000
80,000
$170,000

$25,000
100,000
10,000

$25,000

$135,000

Push-down accounting is used for the acquisition.

Required:
1. Assume both companies use the entity theory.
a. Record the journal entry on Margaret's separate books on January 1, 2011.
b. Record the journal entry on Jeff's separate books on January 1, 2011.
2. Assume both companies use the parent company theory.
a. Record the journal entry on Margaret's separate books on January 1, 2011.
b. Record the journal entry on Jeff's separate books on January 1, 2011.
Answer:
Requirement 1
Margaret Books
Accounts receivable
5,000
Inventory
10,000
Plant assets
20,000
Goodwill
75,000
Retained earnings
10,000
Push-down capital
120,000
Jeff Books
Investment in Margaret
Cash

198,000

198,000

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Requirement 2
Margaret Books
Accounts receivable ($5,000 90%)
Inventory ($10,000 90%)
Plant assets ($20,000 90%)
Goodwill
Retained earnings
Push-down capital
Jeff Books
Investment in Margaret
Cash

4,500
9,000
18,000
67,500
10,000

198,000

Objective: LO1, 2
Difficulty: Moderate

109,000

198,000

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13) On January 1, 2011, Jeff Company acquired a 90% interest in Marian Company for $198,000 cash. On
January 1, 2011, Marian Company had the following assets and liabilities:

Cash
Accounts Receivable
Inventory
Plant Assets
Total Assets
Liabilities
Capital Stock
Retained Earnings
Total Liabilities &
Stockholders' Equity

Book Value
$5,000
30,000
40,000
60,000
$135,000

Fair Value
$5,000
35,000
50,000
80,000
$170,000

$25,000
100,000
10,000

$25,000

$135,000

Push-down accounting is used for the acquisition.

Required:
1. Assume both companies use the entity theory. Prepare the elimination entry(ies) on consolidating work
papers on January 1, 2011.
2. Assume both companies use the parent company theory. Prepare the elimination entry(ies) on
consolidating work papers on January 1, 2011.
Answer:
Requirement 1
Capital stock
100,000
Push down capital
120,000
Investment in Marian Company
198,000
Noncontrolling interest ($220,000 10%)
22,000
Requirement 2
Capital stock
Push down capital
Investment in Marian Company
Noncontrolling interest ($110,000 10%)

100,000
109,000

Objective: LO1, 2
Difficulty: Moderate

198,000
11,000

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14) On January 1, 2011, Jennifer Company acquired a 90% interest in Jayda Company for $270,000 cash.
On January 1, 2011, Jayda Company had the following assets and liabilities:
Book Value
$10,000
50,000
50,000
100,000
$210,000

Cash
Accounts Receivable
Inventory
Plant Assets
Total Assets
Liabilities
Capital Stock
Retained Earnings
Total Liabilities &
Stockholders' Equity

Fair Value
$10,000
70,000
80,000
200,000
$360,000

$100,000
100,000
10,000

$120,000

$210,000

Push-down accounting is used for the acquisition. Both companies use the entity theory.
Required:
1. What is the goodwill associated with Jayda Company on January 1, 2011?
2. Prepare the journal entry(ies) on Jayda's books on January 1, 2011.
3. Prepare the journal entry(ies) on Jennifer's books on January 1, 2011.
4. Prepare the elimination entry(ies) on the consolidating working papers on January 1, 2011.
Answer:
Requirement 1
Implied fair value ($270,000/0.90)
$300,000
Less: Fair value of net assets
240,000
Goodwill
$60,000
Requirement 2
Accounts receivable
Inventory
Plant assets
Goodwill
Retained earnings
Push down capital
Liabilities
Requirement 3
Investment in Jayda Company
Cash

20,000
30,000
100,000
60,000
10,000

270,000

200,000
20,000

270,000

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Requirement 4
Capital stock
Push down capital
Investment in Jayda Company
Noncontrolling interest ($300,000 10%)

100,000
200,000

Objective: LO1, 2
Difficulty: Moderate

270,000
30,000

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15) On January 1, 2011, Brody Company acquired an 80% interest in Kristin Company for $240,000 cash.
On January 1, 2011, Kristin Company had the following assets and liabilities:

Cash
Accounts Receivable
Inventory
Plant Assets
Total Assets
Liabilities
Capital Stock
Retained Earnings
Total Liabilities &
Stockholders' Equity

Book Value
$10,000
50,000
50,000
100,000
$210,000

Fair Value
$10,000
50,000
70,000
100,000
$230,000

$100,000
100,000
10,000

$120,000

$210,000

Push-down accounting is used for the acquisition. Both companies use the entity theory.
Required:
1. What is the goodwill associated with Kristin Company on January 1, 2011?
2. Prepare the journal entry(ies) on Kristin's books on January 1, 2011.
3. Prepare the journal entry(ies) on Brody's books on January 1, 2011.
4. Prepare the elimination entry(ies) on the consolidating working papers on January 1, 2011.
Answer:
Requirement 1
Implied fair value ($240,000/0.80)
$300,000
Less: Fair value of net assets
110,000
Goodwill
$190,000
Requirement 2
Inventory
Goodwill
Retained earnings
Push down capital
Liabilities
Requirement 3
Investment in Kristin Company
Cash
Requirement 4
Capital stock
Push down capital
Investment in Kristin Company
Noncontrolling interest ($300,000 20%)

20,000
190,000
10,000

240,000

100,000
200,000

Objective: LO1, 2
Difficulty: Moderate

200,000
20,000

240,000

240,000
60,000

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31
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

16) On January 1, 2011, Gregory Company acquired a 90% interest in Subway Company for $200,000 cash.
On January 1, 2011, Subway Company had the following assets and liabilities:

Cash
Accounts Receivable
Inventory
Other Current Assets
Plant Assets
Total Assets
Liabilities
Common Stock
Retained Earnings
Total Liabilities &
Stockholders' Equity

Book Value
$5,000
30,000
40,000
10,000
60,000
$145,000

Fair Value
$5,000
35,000
50,000
10,000
80,000
$180,000

$25,000
100,000
20,000

$25,000

$145,000

The plant assets have 20 years of useful life remaining. Straight-line depreciation is used. The excess fair
value over book value associated with Accounts Receivable and Inventory is realized in 2011.
In 2011, Subway reported net income of $35,000 and declared and paid common dividends of $10,000.
Gregory reported Income from Subway in 2011 of $17,100.
Required:
Assume both companies use the entity theory. Prepare the elimination entry(ies) on consolidating work
papers for the year ending December 31, 2011.

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Answer:
Common stock
Retained earnings
Cost of goods sold
Operating expenses (accounts receivable)
Plant assets
Goodwill [($200,000/0.90) - $155,000]
Investment in Subway Company
Noncontrolling interest ($222,222 10%)

100,000
20,000
10,000
5,000
20,000
67,222

Depreciation expense ($20,000/20)

Plant assets
Noncontrolling interest share
Noncontrolling interest
Dividends ($10,000 10%)
($35,000 - $16,000) 10% = $1,900
Cost of goods sold
$10,000
Operating expenses
5,000
Depr. Expense
1,000
Total
$16,000

1,000
1,900

Income from Subway

Dividends ($10,000 90%)
Investment in Subway

17,100

Objective: LO1, 2
Difficulty: Moderate

200,000
22,222

1,000
900
1,000

9,000
8,100

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