Download 1 AC411 Solution E8-9 Preliminary computations of fair value

AC411
Solution E8-9
Preliminary computations of fair value — book value differentials:
April 1, 2009 acquisition
Cost of 4,000 shares (20% interest)
$ 64,000
Implied total fair value of Sum ($64,000 / 20%)
$320,000
Book value of Sum on april 1 acquisition date:
Beginning stockholders’ equity
$280,000
20,000
Add: Income for 3 months ($80,000 × ¼ year)
Stockholders’ equity April 1
300,000
Goodwill
$ 20,000
July 1, 2010 acquisition
Cost of 8,000 shares (40% interest)
Implied total fair value of Sum ($164,000 / 40%)
Book value on July 1 acquisition date:
Beginning stockholders’ equity
Add: Income for 6 months ($80,000 × 1/2 year)
Less: Dividends May 1
Stockholders’ equity July 1
Goodwill (amount is unchanged by this transaction)
1
2
3
4
$164,000
$410,000
$360,000
40,000
(10,000)
390,000
$ 20,000
Income from Sum
2009
Income from Sum for 2009 ($80,000 × 20% × 3/4 year)
$ 12,000
2010 Income from Sum for 2010
20% share of reported income ($80,000 × 20%)
40% share of reported income ($80,000 × 40% × 1/2 year)
Income from Sum
$ 16,000
16,000
$ 32,000
Noncontrolling interest December 31, 2010
(($420,000 book value + $20,000 goodwill)× 40%)
$176,000
Preacquisition income (does not appear in come statement)
Sum income
Time before acquisition
Percent acquired in 2010
Preacquisition income ($80,000 × .5 × .4)
$ 80,000
1/2
40%
$ 16,000
Investment balance at December 31, 2010
Cost of 20% investment
Income from Sum for 2009
Cost of 40% investment
Income from Sum for 2010
Less: Dividends ($2,000 + $6,000)
Investment in Sum
$ 64,000
12,000
164,000
32,000
(8,000)
$264,000
Check:
Share of Sum’s December 31, 2010 equity ($420,000 × 60%)
Add: 60% of $20,000 Goodwill
Investment in Sum
$252,000
12,000
$264,000
1
Solution E8-10
Preliminary computations
Investment cost July 1, 2010
$675,000
Implied total fair value of Sandridge ($675,000 /
90%)
Less: Book value of Sandridge at acquisition:
Equity of Sandridge Mines December 31, 2009
Add: Income for 1/2 year
Equity of Sandridge Mines July 1, 2010
Excess (book value = underlying equity)
$750,000
1
$700,000
50,000
750,000
0
Investment income from Sandridge Mines
Income from Sandridge — 2010 ($100,000 × 1/2 year × 90%)
Income from Sandridge — 2011:
January 1 to July 1 ($80,000 × 1/2 year × 90%)
July 1 to December 31 ($80,000 × 1/2 year × 80%)
$ 45,000
$ 36,000
32,000
$ 68,000
Investment in Sandridge Mines
Cost July 1, 2010
Add: Income from Sandridge — 2010
Less: Dividends paid in December ($50,000 × 90%)
$675,000
45,000
(45,000)
Investment balance December 31, 2010
675,000
Less: Book value of 1/9 interest sold on July 1, 2011a
Add: Income from Sandridge — 2011
Less: Dividends paid in December ($30,000 × 80%)
a
(79,000)
68,000
(24,000)
Investment balance December 31, 2011
$640,000
Sale of 10% interest July 1, 2011:
Equity of Sandridge Mines December 31, 2009
Add: Income less dividends — 2010
Add: Income for 1/2 year — 2011
Equity of Sandridge Mines July 1, 2011
Interest sold
$700,000
50,000
40,000
790,000
10%
Underlying equity of interest sold
$ 79,000
Gain on sale of 1/9 interest ($85,000 proceeds - $79,000)
$
Since Piccolo maintains a controlling interest, the gain is not
recorded, but shown as an adjustment to additional paid-in
capital.
6,000
2
2
Noncontrolling interest share
Noncontrolling interest share — 2010:
($100,000 income × 10% interest)
$ 10,000
Noncontrolling interest share — 2011:
($80,000 × 1/2 year × 10%) + ($80,000 × 1/2 year × 20%)
$ 12,000
Noncontrolling interest December 31, 2010
Equity of Sandridge Mines January 1
Add: Income less dividends for 2010
Equity of Sandridge Mines December 31
Noncontrolling interest percentage
$700,000
50,000
750,000
10%
Noncontrolling interest December 31
Noncontrolling interest December 31, 2011
Equity of Sandridge Mines January 1
Add: Income less dividends for 2011
Equity of Sandridge Mines December 31
Noncontrolling interest percentage
Noncontrolling interest December 31
$ 75,000
$750,000
50,000
800,000
20%
$160,000
Solution E8-11
Preliminary computations:
Investment cost January 1, 2010
Implied total fair value of Sanyo ($690,000 / 75%)
Book value of Sanyo
Excess fair value over book value = Goodwill
1
690,000
$
920,000
(800,000)
$ 120,000
Underlying book value December 31, 2010
$1,000,000 equity × 75%
2
$
$
750,000
$
690,000
Percentage ownership before purchase of additional shares
30,000 shares owned/40,000 shares outstanding = 75% interest
Percentage ownership after purchase of additional shares
40,000 shares owned/50,000 shares outstanding = 80% interest
3
Investment in Sanyo balance January 3, 2011
Investment cost January 1, 2009
Add: Share of Sanyo’s income less dividends
for 2009 ($200,000 × 75%)
Investment in Sanyo December 31, 2009
Add: Additional investment — January 3, 2011
(10,000 shares × $30)
Investment in Sanyo balance January 3, 2011
150,000
840,000
300,000
$1,140,000
3
4
Percentage ownership if shares sold to outside entities
30,000 shares owned/50,000 shares outstanding = 60% interest
5
Investment in Sanyo balance January 3, 2011
Investment in Sanyo December 31, 2009
(see 3 above)
Add: Increase in book value from change in
ownership interest:
Book value after additional 10,000 shares
were issued ($1,300,000 equity × 60%)
Book value before additional 10,000 shares
were issued ($1,000,000 equity × 75%)
Investment in Sanyo balance - January 3, 2011
$
840,000
$
30,000
870,000
$780,000
(750,000)
Solution E8-12
Preliminary computations:
Cost of additional investment (2,000 shares × $80)
$160,000
Implied total fair value of Saton
$160,000 / (2,000/12,000)
Less: Book value of Saton after issuance
Excess fair value over book value
$960,000
710,000
$250,000
January 2, 2010
Investment in Saton
160,000
Cash
160,000
To record purchase of additional 2,000 shares of Saton.
December 2010
Cash
50,000
Investment in Saton
50,000
To record receipt of dividends ($60,000 × 10,000/12,000
shares).
December 31, 2010
Investment in Saton
75,000
Income from Saton
To record income from Saton($90,000 × 10,000/12,000).
75,000
Solution P8-4
Entries on Panama’s books to reflect the change in ownership interest:
Option 1 Panama sells 30,000 shares of Shenandoah
Cash
1,500
Investment in Shenandoah
870
Additional paid-in capital
630
To record sale of 30,000 shares at $50 per share. No gain or loss is
recognized since parent maintains a controlling interest.
Option 2 Shenandoah issues and sells 40,000 shares to the public
Investment in Shenandoah
Additional paid-in capital
630
630
To record adjustment in ownership computed as follows:
4
Book value after sale of 40,000 shares
($12,440 × 75%)
Book value before sale of 40,000 shares
($10,440 × 5/6)
Increase in book value of investment from sale
$9,330
(8,700)
$ 630
Option 3 Shenandoah reissues 40,000 shares of treasury stock
Investment in Shenandoah
630
Additional paid-in capital
630
To record adjustment in ownership computed the same as 2 above.
Consolidated Stockholders’ Equity
at January 1, 2010
Common stock
Additional paid-in capital
Retained earnings
Noncontrolling interesta
Total stockholders’ equity
a
Option 1
Option 2
Option 3
$10,000
3,630
7,000
2,610
$23,240
$10,000
3,630
7,000
3,110
$23,740
$10,000
3,630
7,000
3,110
$23,740
Noncontrolling interest under option 1: $10,440 × 25%
Noncontrolling interest under options 2 and 3: $12,440 × 25%
P8-7
>>(Solution P8-6)]
1
Investment in Stake December 31, 2010
Investment in Stake January 2, 2009
$ 98,000
Increase for 2009 ($30,000 retained earnings increase × 70%) 21,000
Purchase of additional 20% interest June 30, 2010
37,000
Increase 2010:
24,000
($30,000 × 1/2 year × 70%) + ($30,000 × 1/2 year × 90%)
(9,000)
Dividends 2010: ($10,000 × 90%)
Investment in Stake December 31, 2010
$171,000
2
Goodwill December 31, 2010
January 2, 2009 purchase:
Cost of 70% interest
Implied fair value of Stake ($98,000 / 70%)
Less: Book value of Stake
Goodwill
June 30, 2010 purchase:
Cost of 20% interest
Implied fair value of Stake ($37,000 / 20%)
Less: Book value of Stake
Goodwill - December 31, 2010
3
Consolidated net income
Sales
Cost of sales
Expenses
Consolidated net income
Noncontrolling interest share *
Controlling share of net income
$ 98,000
$140,000
120,000
$ 20,000
$ 37,000
$185,000
165,000
$ 20,000
$600,000
(400,000)
(70,000)
130,000
6,000
$124,000
5
*
4
5
Noncontrolling share is 10% for full year plus
20% for ½ year.
Alternative:
Post’s reported income = Controlling share of net income
Consolidated retained earnings December 31, 2010
Beginning retained earnings
Add: Controlling share of Consolidated net income — 2010
Less: Dividends
Consolidated retained earnings — ending
Alternative solution:
Post’s reported ending retained earnings = Consolidated
retained earnings — ending
$124,000
$200,000
124,000
(64,000)
$260,000
$260,000
Noncontrolling interest December 31, 2010
Equity of Stake December 31, 2010
Goodwill
Fair value of Stake
Noncontrolling interest percentage
Noncontrolling interest December 31, 2010
$170,000
20,000
$190,000
10%
$ 19,000
Solution P9-1
Pida Corporation and Subsidiaries
Schedule to Compute Consolidated Net Income and Noncontrolling Interest
Share
for the year 2009
Separate income (loss)
Pida
$500,000
Staley
$300,000
Less: Unrealized profit
Separate realized income (loss)
Allocate Bean’s loss
70% to Staley
Bean
$(20,000)
(20,000)
500,000
300,000
130,000
(14,000)
Allocate Axel’s income
60% to Staley
Patent
Allocate Staley’s income
90% to Pida
Patent
Axel
$150,000
78,000
(12,000)
352,000
316,800
(40,000)
(20,000)
14,000
(78,000)
(316,800)
Controlling share of net income $776,800
Noncontrolling interest income
$ 35,200
$ 52,000
$ (6,000)
Check:
Income allocated: $776,800 consolidated net income + $35,200 noncontrolling
interest share in Staley + $52,000 noncontrolling interest share in Axel $6,000 noncontrolling interest share (loss) in Bean = $858,000
Income to allocate: $500,000 Pida income + $300,000 Staley income +
$130,000 realized income of Axel - $20,000 loss of Bean - $52,000 patent =
$858,000
Controlling share of consolidated net income: $500,000 - $40,000 +
90%($300,000 - $12,000) + (90% × 60% × $130,000) - (90% × 70% × $20,000) =
$776,800
6
P9-3
Working paper entries
a
Income from Skill
27,000
Dividend income
10,000
Dividends
28,000
Investment in Skill
9,000
To eliminate income from Skill, dividend income, and 90% of
Skill’s dividends, and return the investment in Skill account
to the beginning-of-the-period balance under the equity basis.
b
200,000
Capital stock — Skill
200,000
Retained earnings — Skill
Goodwill
50,000
Investment in Skill
405,000
45,000
Noncontrolling interest — beginning
To eliminate reciprocal investment and equity accounts, and
enter beginning-of-the-period patent and noncontrolling
interest.
c
Treasury stock
80,000
Investment in Prill
To reclassify investment in Prill to treasury stock.
d
80,000
Noncontrolling Interest Share
3,000
Dividends
2,000
Noncontrolling Interest
1,000
To record noncontrolling interest share of subsidiary income
and dividends.
Treasury Stock approach
Prill Company and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2011
Prill
Income Statement
Sales
Income from Skill
Dividend income
Cost of sales
Expenses
$
400,000
27,000
$
177,000
Retained Earnings
Retained earnings — Prill
$
300,000
100,000
10,000
50,000*
30,000*
177,000
Dividends
100,000*
$
30,000
$
200,000
Consolidated
Statements
$
a
a
500,000
27,000
10,000
250,000*
80,000*
170,000
d
Retained earnings — Skill
Net income (Controlling
share in Consol. Column)
Retained earnings
December 31
$
200,000*
50,000*
Consolidated NI
Noncontrolling share
Controlling share of NI
Adjustments and
Eliminations
Skill 90%
3,000
3,000*
$
167,000
$
300,000
b 200,000
30,000
167,000
$
377,000
20,000*
$
210,000
a
d
28,000
2,000
90,000*
$
377,000
7
Balance Sheet
Other assets
Investment in Skill 90%
$
486,000
414,000
$
Investment in Prill 10%
Goodwill
Liabilities
Capital stock
Retained earnings
420,000
$
906,000
50,000
956,000
a
9,000
b 405,000
c 80,000
80,000
b
50,000
$
900,000
$
500,000
$
$
123,000
400,000
$
90,000
200,000
$
$
377,000
900,000 $
b 200,000
210,000
500,000
Noncontrolling interest January 1
Noncontrolling interest December 31
Treasury stock
c
b
45,000
d
1,000
46,000
80,000
$
*
213,000
400,000
377,000
80,000*
956,000
Deduct
Solution P9-4
1
Affiliation diagram
80%
Swift
2
Parish
20%
50%
Tolbert
10%
Income allocation
Definitions
P = Parish’s income on a consolidated basis
S = Swift’s income on a consolidated basis
T = Tolbert’s income on a consolidated basis
Equations
P = $200,000 + .8S + .5T
S = $100,000 + .2T
T = $50,000 + .1S
Solve for S
S = $100,000 + .2($50,000 + .1S)
S = $110,000 + .02S
.98S = $110,000
S = $112,244.90 or $112,245
Compute T
T = $50,000 + .1($112,244.90)
T = $50,000 + $11,224.49
T = $61,224.49 or $61,224
Compute P
P = $200,000 + .8($112,244.90) + .5($61,224.49)
P = $320,408.16 or $320,408
Income allocation
Consolidated net income = P =
Noncontrolling interest share in Swift ($112,245 × .1)
Noncontrolling interest share in Tolbert ($61,224 × .3)
$320,408
11,225
18,367
$350,000
8
3
P, S, and T are as defined in part 2.
Equation
P = ($200,000 - $20,000) + .8S + .5T
S = $100,000 + .2T
T = ($50,000 - $10,000) + .1S
Solve for S
S = $100,000 + .2($40,000 + .1S)
S = $108,000 + .02S
S = $110,204.08
Compute T
T = $40,000 + .1($110,204.08)
T = $51,020.41
Compute P
P = $180,000 + .8($110,204) + .5($51,020.41)
P = $293,673.48
Income allocation
Consolidated net income = P =
$293,673.48
11,020.40
Noncontrolling interest share in Swift ($110,204.08 × 10%)
15,306.12
Noncontrolling interest share in Tolbert ($51,020.41 × 30%)
$320,000.00
Solution P10-1
1
2
3
4
[Preferred stock] (amounts in thousands)
Undervaluation of the building from Parrella’s investment in Stanley
Cost of 180,000 shares of common stock
$3,600
Implied total fair value ($3,600 / 90%)
Less: Book value
Stockholders equity
$4,150
1,150
Less: Preferred equity (10,000 × $115)*
Common equity
Excess fair value = Goodwill
* Preferred equity at liq. Pref. (!0,000 × $105)
+ Div. in arrears ($100,000)
$4,000
Income from Stanley
Stanley’s reported income
Less: Preferred dividend for 2009
Stanley’s adjusted income to common
90% of Stanley’s adjusted income
Noncontrolling interest share for 2009
Income allocable to preferred
Stanley’s adjusted income
Noncontrol. common interest share (10%)
Noncontrolling interest share
$
(
$
3,000
$1,000
500
100)
400
$
360
$
100
$
$
40
140
$400
Noncontrolling interest December 31, 2009
Total stockholders’ equity ($4,150,000
+ $500,000 net income $400,000 dividends)
$4,250
Less: Preferred equity (No div. in
1,050 × 100%
arrears)
Common equity – book value
$3,200
$1,050
9
Plus Unamortized fair value at 12/31
Common equity at fair value
Noncontrolling interest December 31
5
1,000
$4,200 × 10%
Investment in Stanley December 31, 2009
Investment cost
Add: Income from Stanley
Less: Dividends ($400,000 - $100,000 preferred dividends
in arrears - $100,000 current preferred dividends) × 90%
Investment in Stanley December 31
Check:
Equity of common ($3,200,000 × 90%)
Undepreciated excess ($1,000,000 × 90%)
Investment in Stanley December 31
Solution P10-2
420
$1,470
$3,600
360
(180)
$3,780
$2,880
900
$3,780
[Preferred stock]
Preliminary computations
Stockholders’ equity July 1, 2009
$900,000 - ($46,000 income × 1/2 year)
Less: Preferred equity July 1, 2009
Par value with call premium
Dividend arrearage — 2008 ($200,000 × 9%)
Dividend arrearage — 2009 ($200,000 × 9% ×
1/2 year)
Common equity July 1, 2009
$877,000
$210,000
18,000
9,000
237,000
$640,000
Cost of 90% interest in Starky’s common stock
$630,000
Implied total fair value ($630,000 / 90%)
Book value of common equity
Goodwill
$700,000
(640,000)
$ 60,000
Cost of 80% interest in Starky’s preferred stock
Book value acquired ($237,000 × 80%)
Book value over cost of preferred
$175,000
(189,600)
$(14,600)
1
2
Investment account balances at December 31, 2009
Common
Investment cost
$630,000
Adjust preferred to book value and recognize
a constructive retirement
Income to preferred ($18,000 × 1/2 year × 80%)
12,600
Income to common ($28,000 × 1/2 year × 90%)
Investment balances December 31
$642,600
Preferred
$175,000
14,600
7,200
$196,800
Consolidated balance sheet working paper entries
9% preferred stock, $100 par
200,000
46,000
Retained earnings — Starky
196,800
Investment in Starky — preferred
49,200
Noncontrolling interest — preferred
To eliminate reciprocal preferred equity and investment
balances and enter noncontrolling interest. The preferred
stockholders’ claim on Starky’s retained earnings consists of
$18 per share preferred dividends in arrears plus a $5 per
share call premium. Computations: Investment in Starky
10
preferred = $123 × 1,600 shares. Noncontrolling interest —
preferred = $123 × 400 shares.
Capital stock, $10 par — Starky
Paid-in capital in excess of par — Starky
Retained earnings — Starky
Goodwill
Investment in Starky — common
Noncontrolling interest — common
500,000
40,000
114,000
60,000
642,600
71,400
To eliminate reciprocal common equity and investment amounts
and enter goodwill and noncontrolling interest in common.
NOTE: Noncontrolling interest includes 10% of Goodwill.
11