Chapter 03 Without Narration
Chapter 03 Without Narration
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Problem 3-20
Chapman Company obtains 100 percent of Abernethy Company's stock on January 1, 2014. As of that date,
Abernethy has the following trial balance:
Chart 3-20
During 2014, Abernethy reported net income of $80,000 while declaring and paying dividends of $10,000. During
2015, Abernethy reported net income of $110,000 while declaring and paying dividends of $30,000.
Assume that Chapman Company acquired Abernethy's common stock for $490,000 in cash. As of January 1, 2014,
Abernethy's land had a fair value of $90,000, its buildings were valued at $160,000, and its equipment was
appraised at $180,000. Chapman uses the equity method for this investment. Prepare consolidation worksheet
entries for December 31, 2014, and December 31, 2015.
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Explanation:
FV of consideration transferred = $490,000
“Assume that Chapman Company acquired Abernethy's common stock for $490,000 in cash.”
Subsidiary Book Value of Net Assets = $400,000
Assets – Liabilities = (40,000 + 120,000 + 60,000 + 200,000 + 90,000 + 80,000 + 10,000) – (50,000 +
150,000) = 400,000
Or just add up Stockholder’s Equity = 50,000 + 250,000 +100,000 = 400,000
All values were given in Chart 3-20 from the problem.
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Explanation:
Acquisition = $490,000
“Assume that Chapman Company acquired Abernethy's common stock for $490,000 in cash.”
Proportionate Share of Income $80,000 & Dividends of $10,000
“During 2014, Abernethy reported net income of $80,000 while declaring and paying dividends of $10,000.”
No calculations because: “Chapman Company obtains 100 percent of Abernethy Company's stock…”
Amortization = $6,000 (from amortization schedule calculated previously)
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Chart 3-20
Equity Income
80,000
6,000
74,000
Explanation:
Proportionate Share of Income $110,000 & Dividends of $30,000
“During 2015, Abernethy reported net income of $110,000 while declaring and paying dividends of
$30,000.”
No calculations because: “Chapman Company obtains 100 percent of Abernethy Company's stock…”
Amortization = $6,000 (from amortization schedule calculated previously)
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Recall that consolidation worksheet entries only go on the worksheet, not on the books. Hence, we have to
make Entry A again, but only for the unamortized amounts.
The second year (2015) would have balances that take last year’s depreciation into account.
Buildings = 40,000 – 10,000 (from amortization schedule) = 30,000
Equipment = 20,000 – 4,000 (from amortization schedule) = 16,000
Equity Income
110,000
6,000
104,000
Problem 3-21
Chapman Company obtains 100 percent of Abernethy Company's stock on January 1, 2014. As of that date,
Abernethy has the following trial balance:
Chart 3-21
During 2014, Abernethy reported net income of $80,000 while declaring and paying dividends of $10,000. During
2015, Abernethy reported net income of $110,000 while declaring and paying dividends of $30,000.
Assume that Chapman Company acquired Abernethy's common stock for $500,000 in cash. Assume that the
equipment and long-term liabilities had fair values of $220,000 and $120,000, respectively, on the acquisition date.
Chapman uses the initial value method to account for its investment. Prepare consolidation worksheet entries for
December 31, 2014, and December 31, 2015.
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Explanation:
FV of consideration transferred = $500,000
“Assume that Chapman Company acquired Abernethy's common stock for $500,000 in cash.”
Subsidiary Book Value of Net Assets = $400,000
Assets – Liabilities = (40,000 + 120,000 + 60,000 + 200,000 + 90,000 + 80,000 + 10,000) – (50,000 +
150,000) = 400,000
Or just add up Stockholder’s Equity = 50,000 + 250,000 +100,000 = 400,000
All values were given in Chart 3-21 from the problem.
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Explanation:
Acquisition = $500,000
“Assume that Chapman Company acquired Abernethy's common stock for $500,000 in cash.”
Proportionate Share of Income $80,000 & Dividends of $10,000
“During 2014, Abernethy reported net income of $80,000 while declaring and paying dividends of $10,000.”
No calculations because: “Chapman Company obtains 100 percent of Abernethy Company's stock…”
Amortization = $11,500 (from amortization schedule calculated previously)
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P3-21 – Why do we have to make the journal entries based on equity method?
Consolidation numbers are based on the equity method. The difference in the Investment balance (as
a result of using the initial value method) will be recorded in Consolidation Worksheet Entry C in
2015. The purpose of worksheet entry C is to adjust the books back to the equity method.
12/31/2014 Initial Value Method Equity Method
Investment 500,000 Investment 500,000
Cash 500,000 Cash 500,000
NO ENTRY Investment 80,000
Equity Income 80,000
Cash 10,000 Cash 10,000
Dividend Income 10,000 Investment 10,000
NO ENTRY Equity Income 11,500
Investment 11,500
Investment-initial Investment-equity
500,000 500,000
80,000
10,000
11,500
500,000 558,500
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Entry D NO ENTRY
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Note: For Problem 3-21, the 2015 journal entries for the equity method is not necessary.
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Investment-initial Investment-equity
500,000 500,000
80,000
10,000
11,500
500,000 558,500
Recall that consolidation worksheet entries only go on the worksheet, not on the books. Hence, we have to
make entry A again, but only for the unamortized amounts.
The second year (2015) would have balances that take last year’s depreciation into account.
Equipment = 20,000 – 4,000 (from amortization schedule) = 16,000
Long-term liabilities = 30,000 – 7,500 (from amortization schedule) = 22,500
Entry D NO ENTRY
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Problem 3-28
Patrick Corporation acquired 100 percent of O'Brien Company's outstanding common stock on
January 1, for $550,000 in cash. O'Brien reported net assets with a carrying amount of $350,000 at
that time. Some of O'Brien's assets either were unrecorded (having been internally developed) or had
fair values that differed from book values as follows:
Book Value Fair Value
Trademarks (indefinite life) 60,000 160,000
Customer relationships (5-year remaining life) 0 75,000
Equipment (10-year remaining life) 342,000 312,000
Any goodwill is considered to have an indefinite life with no impairment charges during the year.
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Problem 3-28
Following are financial statements at the end of the first year for these two companies prepared from
their separately maintained accounting systems. O'Brien declared and paid dividends in the same
period. Credit balances are indicated by parentheses.
Chart 3-28A
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Problem 3-28
Following are financial statements at the end of the first year for these two companies prepared from
their separately maintained accounting systems. Credit balances are indicated by parentheses.
Chart 3-28B
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Problem 3-28
Prepare a consolidation worksheet for Patrick and O’Brien for the year ending December 31.
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Problem 3-29
Following are separate financial statements of Michael Company and Aaron Company as of December
31, 2015 (credit balances indicated by parentheses). Michael acquired all of Aaron's outstanding
voting stock on January 1, 2011, by issuing 20,000 shares of its own $1 par common stock. On the
acquisition date, Michael Company's stock actively traded at $23.50 per share.
Chart 3-29A
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Problem 3-29
Following are separate financial statements of Michael Company and Aaron Company as of December
31, 2015 (credit balances indicated by parentheses).
Chart 3-29B
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Problem 3-29
On the date of acquisition, Aaron reported retained earnings of $230,000 and a total book value of
$360,000. At that time, its royalty agreements were undervalued by $60,000. This intangible was
assumed to have a 6-year remaining life with no residual value. Additionally, Aaron owned a
trademark with a fair value of $50,000 and a 10-year remaining life that was not reflected on its
books. Aaron declared and paid dividends in the same period.
Using the preceding information, prepare a consolidation worksheet for these two companies as of
December 31, 2015.
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Explanation:
“Michael acquired all of Aaron's outstanding voting stock on January 1, 2011, by issuing 20,000 shares
of its own $1 par common stock. On the acquisition date, Michael Company's stock actively traded at
$23.50 per share.”
Common Stock = 20,000 shares x $1 par = $20,000
Additional paid-in capital = 20,000 shares x $23.50 price per share = $450,000
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P3-29 – FV in excess of BV
FV of consideration transferred 470,000
- Subsidiary BV of Net Assets 360,000
FV in excess of BV 110,000
- Total excess assigned to specific amounts ?
Goodwill ?
Explanation:
FV of consideration transferred = stock exchanged at FV
= Common Stock + Additional paid-in capital
= $20,000 + $450,000 = $470,000
Subsidiary BV of Net Assets = 360,000
“On the date of acquisition, Aaron reported retained earnings of $230,000 and a total book value
of $360,000.”
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For consolidated
FV of consideration transferred 470,000 worksheet entries
- Subsidiary BV of Net Assets 360,000
FV in excess of BV 110,000
Total excess assigned to specific amounts 110,000
Goodwill 0
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P3-29 – Entry C
The parent company is apparently applying the initial value method: only dividend income is
recognized during the current year and the investment account retains its original $470,000 balance.
Therefore, both the subsidiary's change in retained earnings during 2011–2014 as well as the
amortization for that period must be brought into the consolidation.
The values boxed in green would have been the values used for Entry A in 2011.
Now it is the year 2015, so the unamortized amount in 2015 would be:
Royalty Agreements 60,000 – (10,000 amortization expense x 4 years) = $20,000
Trademark 50,000 – (5,000 amortization expense x 4 years) = $30,000