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CHAPTER 5 INCLASS PROBLEMS

PROBLEM 1

On January 1, 2009, Harrison, Inc. acquired 90 percent of Staff Company in


exchange for $1,125,000 fair-value consideration. The total fair value of
Staff Company was assessed at $1,200,000. The book value of Staff on
1/1/09 is 640,000 and there is an unrecognized trademark with a fair value of
80,000 and 10 year useful life. The subsidiary reported earnings of $70,000
in 2009 and $90,000 in 2010 with dividend payments of $30,000 each year.
Apart from its investment in Starr, Harrison had income of $220,000 in 2009
and $260,000 in 2010 and paid dividends of $70,000 each year.
Purchase 1125000
FV of NCI 75000

FV 1200000
BV 640000
560000
TM -80000
480000 GW

a.
What is the consolidated net income in each of these two years
2009: 70000+220000-(8000) = 282000
2010: 90000+260000-(8000) = 342000
b.

What is the balance of Noncontrolling Interest in Net Income for


2009 and 2010?
2009: 70000 8000 = 62000 * .1 = 6200.. Equity in NI = 55800
2010: 90000 8000 = 82000 * .1 = 8200.. Equity in NI = 73800
c.
What is the ending Noncontrolling Interest balance as of
December 31, 2010?
75000 + (70000*.1) + (90000*.1) (8000*.1*2) (30000*.1*2)
= 83400

d.

Prepare elimination entry R for the 2009 and 2010 consolidated


worksheets

SE 640000
Inv in sub (.9*640000) = 576000
NCI (.1*640000) = 64000
Beginning write-ups/write-downs/goodwill
TM 80000
GW 480000
Inv in sub 549000
NCI
11000

TM 80000
GW 480000

Ps
72000
477000
549000

NCI
8000
3000
11000

NCI in NI 6200
Dividends PD (.1*30000) = 3000
NCI
3200
NCI account = 64000 + 11000 + 3200 = 78200
Exp

8000
TM

8000

Equity in NI 55800
Div to P .9 * 30000 =27000
Inv in sub
28800
2010:
Ps
NCI
TM 72000
64800
7200
GW 480000 477000
3000
541800
10200
TM 72000
GW 480000
Inv in sub 541800
NCI 10200

NI 2009: 220000+55820 = 275820


NI 2010: 260000+73800 = 343800
2009: 282000 6200 = 275800
2010: 342000 8200 = 333800

Problem 2
Miller Company acquired an 80 percent interest in Taylor Company on
January 1, 2009. Miller paid $664,000 cash to the owners of Taylor to
acquire these shares. In addition, the remaining 20 percent of Taylor shares
continued to trade at a total value of $166,000 both before and after Millers
acquisition.
On January 1, 2009, Taylor reported a book value of $600,000 (Common
stock = $300,000, Additional paid in capital - $90,000, Retained earnings $210,000). Several of Taylors buildings that had a remaining life of 20
years were undervalued by a total of $80,000.
During the next three years, Taylor reported the following figures:
Year
2009
2010
2011

Net Income
$ 70,000
90,000
100,000

Dividends Paid
$ 10,000
15,000
20,000

Determine the appropriate answers for each of the following questions:


a.
What amount of excess depreciation expense would be recognized in
the consolidated financial statements for the initial years following this
acquisition?
b.
If a consolidated balance sheet is prepared as of January 1, 2009, what
amount of goodwill would be recognized?
c.
If a consolidated worksheet is prepared as of January 1, 2009, what
amount of goodwill would be recognized using the preferred IFRS method?

d. Assume that the parent company has been applying the equity method
to this investment. On December 31, 2011, the separate financial
statements of the two companies present the following information:
Miller
Company
Common stock $500,000
Additional paid in capital 280,000
Retained earnings 620,000

Taylor
Company
$300,000
90,000
425,000

Prepare the consolidated Stockholders Equity section for Miller and sub on
December 31, 2011.
e. Calculate the balance of Investment in Taylor on Millers books on
December 31, 2011 (Miller uses the equity method).

PROBLEM 3
Adams Corporation acquired 90 percent of the outstanding voting shares of
Barstow, Inc., on December 31, 2009. Adams paid a total of $603,000 in
cash for these shares. The 10 percent noncontrolling interest shares traded
on a daily basis at fair value of $67,000 both before and after Adams
acquisition.
Barstow account values on
12/31/09
Fair
Book
Market
Value
Value
$
$
Current assets
160,000 160,000
Land

120,000

150,000

Buildings (10-year life)

220,000

200,000

Equipment (5-year life)

160,000

200,000

Patents (10-year life)

50,000

Liabilities (5-year life)

(200,000) (180,000)

Common stock
Retained earnings,
12/31/09

(180,000)
(280,000)

Barstow,
Adams
Inc.
Corporation Corporation
12/31/2011 12/31/2011
Debits
Current assets

$
610,000

$
250,000

Land

380,000

150,000

Buildings

490,000

250,000

Equipment
Investment in Barstow,
Inc.

873,000

150,000

Cost of goods sold

480,000

90,000

Depreciation expense

100,000

55,000

Interest expense

40,000

15,000

Dividends paid

110,000

70,000

Total debits

$3,758,000

$1,030,000

Notes Payable

860,000

230,000

Common stock
Retained earnings,
1/1/11

510,000

180,000

1,353,500

340,000

Revenues

940,000

280,000

Investment income

94,500

Total credits

$3,758,000

675,000

Credits

$1,030,000

a.
Prepare schedules for acquisition-date fair-value allocations and
amortizations for Adams investment in Barstow.
b.

Show how Adams calculated the equity method accounts for 2011.

c.
Prepare a consolidation worksheet for Adams Corporation and
Barstow, Inc., as of December 31, 2011.