CHAPTER 03 – CONSOLIDATIONS:

SUBSEQUENT TO THE DAY OF ACQUISITION

PROBLEMS 3-20, 3-21, 3-28, 3-29A

1
 2

3 Methods to Account For the Investment

The passage of time creates complexities for internal record keeping and the balance
of the investment account varies due to the accounting method used.
 A worksheet and consolidation entries are used to eliminate the investment account
and record the subsidiary’s assets and liabilities to create a single set of financial
statements for the combined business entity.
For each subsidiary owned, there is an asset, the investment account, and an income
account to record the earnings on the investment.
 The acquiring company selects one of these three methods to account for its
investment:
 Equity Method
 Initial Value Method
 Partial Equity Method
 3

Comparison of Methods – Journal Entries

Equity Method Partial Equity Method Initial Value Method
Investment x x   x
Acquisition Cash x   x x
Proportionate Share of
Investment x x   NO ENTRY
Net Income Equity Income x   x
Cash x x   x
Dividend Investment x   x x
Equity Income x NO ENTRY NO ENTRY
Amortization Investment x    

Initial Value Method – Dividends: “Dividend Income” is used

instead of “Investment”
Cash X
Dividend Income X
 4

Comparison of Methods – T-accounts

Investment-equity Investment-partial Investment-initial

Acquisition Acquisition Acquisition
Proportionate Proportionate
Share of Net Share of Net
Income Income  
  Dividend   Dividend  
  Amortization        
Ending
Balance Ending Balance   Ending Balance
 5

Consolidation Worksheet Entries SAIDE

 For the first year, the parent prepares five entries on the workpapers to consolidate
the two companies.
 Entry S - Eliminates the subsidiary’s Stockholders’ equity account beginning
balances and the book value component within the parent’s investment account.
 Entry A - Recognizes the unamortized Allocations as of the beginning of the
current year associated with the adjustments to fair value.
 Entry I - Eliminates the subsidiary Income accrued by the parent.
 Entry D - Eliminates the subsidiary Dividends.
 Entry E - Recognizes excess amortization Expenses for the current period on the
allocations from the original adjustments to fair value.
 6

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.
 7

P3-20 – Find the Excess FV over BV

FV of consideration transferred 490,000
- Subsidiary BV of Net Assets 400,000
Excess of FV > BV 90,000
- Total excess assigned to specific accounts ?
Goodwill ?

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.
 8

P3-20 – Amortization Schedule & Goodwill (if any)

FV of consideration transferred 490,000
- Subsidiary BV of Net Assets 400,000
Excess of FV > BV 90,000
- Total excess assigned to specific accounts 30,000 For consolidation
Goodwill 60,000 worksheet entry

FV BV FV-BV Useful Life Depreciation

Land 90,000 80,000 10,000
Buildings 160,000 120,000 40,000 4 10,000
Equipment 180,000 200,000 (20,000) 5 (4,000)
Totals 30,000 6,000
• Book Values --- given in Chart 3-20
• Fair Values --- given: “As of January 1, 2014, Abernethy's
land had a fair value of $90,000, its buildings were valued at Total excess assigned to For consolidated
$160,000, and its equipment was appraised at $180,000. specific accounts worksheet entries
 9

P3-20 – 2014 Journal Entries – equity method

12/31/14
Acquisition Investment 490,000
Cash 490,000
Proportionate Share Investment 80,000
of Income Equity Income 80,000
Dividend Cash 10,000
Investment 10,000
Amortization Equity Income 6,000
Investment 6,000

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)
 10

P3-20 – 2014 Journal Entries & T-accounts – equity method

12/31/14
Acquisition Investment 490,000
Cash 490,000
Proportionate Share Investment 80,000
of Income Equity Income 80,000
Dividend Cash 10,000
Investment 10,000
Amortization Equity Income 6,000
Investment 6,000

Investment-equity Equity Income

490,000 80,000
80,000  6,000
10,000
  6,000 74,000 To be used for
554,000 consolidation
worksheet entry
 11

P3-20 – 2014 Entry S

 Values for Entry S is given in Chart 3-20 from the problem. The chart is replicated here for convenience:

Chart 3-20

Entry S Common Stock 250,000

Additional paid-in capital 50,000
Retained Earnings 100,000
Investment 400,000
 12

P3-20 – 2014 Entry A

 Values for Entry A were taken from the amortization schedule calculated previously (FV – BV) . After
allocating to specific accounts, the goodwill was calculated to be $60,000. The amortization schedule is
replicated here for convenience:

FV BV FV-BV Useful Life Depreciation

Land 90,000 80,000 10,000
Buildings 160,000 120,000 40,000 4 10,000
Equipment 180,000 200,000 (20,000) 5 (4,000)
Totals 30,000 6,000

Entry A Land 10,000

Buildings 40,000
Goodwill 60,000
Equipment 20,000
Investment 90,000
 13

P3-20 – 2014 Entry I

 Recall that we calculated the Equity Income previously.

Equity Income
80,000
 6,000

74,000

Entry I Equity Income 74,000

Investment 74,000
 14

P3-20 – 2014 Entry D

 Recall that in 2014, this entry was made to recognize the dividend:

Dividend Cash 10,000

Investment 10,000

 Now we have to eliminate the subsidiary dividend via:

Entry D Investment 10,000

Dividend Declared 10,000
 15

P3-20 – 2014 Entry E

 Values for Entry E were taken from the amortization schedule. The schedule is replicated here for
convenience:

FV BV FV-BV Useful Life Depreciation

Land 90,000 80,000 10,000
Buildings 160,000 120,000 40,000 4 10,000
Equipment 180,000 200,000 (20,000) 5 (4,000)
Totals 30,000 6,000

Entry E Depreciation Expense 10,000

Building 10,000
Equipment 4,000
Depreciation Expense 4,000
 16

P3-20 – 2014 Consolidation Worksheet Entries Summary

12/31/2014
Entry S Common Stock 250,000
Additional paid-in capital 50,000
Retained Earnings 100,000
Investment 400,000
Entry A Land 10,000
Buildings 40,000
Goodwill 60,000
Equipment 20,000
Investment 90,000
Entry I Equity Income 74,000
Investment 74,000
Entry D Investment 10,000
Dividend Declared 10,000
Entry E Depreciation Expense 10,000
Building 10,000
Equipment 4,000
Depreciation Expense 4,000
 17

P3-20 – 2015 Journal Entries – equity method

12/31/2015 Equity Income
Income Accrual Investment 110,000 110,000
Equity Income 110,000  6,000
Dividend Cash 30,000
Investment 30,000 104,000
Amortization Equity Income 6,000
Investment 6,000
To be used for
consolidation
worksheet entry

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)
 18

P3-20 – 2015 Entry S

Entry S Common Stock 250,000
(2014) Additional paid-in capital 50,000
Retained Earnings 100,000
Investment 400,000

Because the parent now owns the subsidiary, Retained Earnings

they have no reason to issue more stock so 100,000 BB
Common Stock and Additional paid-in capital is DIV 2014 10,000 80,000 NI 2014
always the same. Retained earnings, however… 170,000

Entry S Common Stock 250,000

(2015) Additional paid-in capital 50,000
Retained Earnings 170,000
Investment 470,000
 19

P3-20 – 2015 Entry A

Entry A Land 10,000
(2014) Buildings 40,000
Goodwill 60,000
Equipment 20,000
Investment 90,000

 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

Entry A Land 10,000

(2015) Buildings 30,000
Goodwill 60,000
Equipment 16,000
Investment 84,000
 20

P3-20 – 2015 Entry I

 Recall that we calculated the Equity Income previously.

Equity Income
110,000
 6,000

104,000

Entry I Equity Income 104,000

Investment 104,000
 21

P3-20 – 2015 Entry D

 Recall that in 2015, this entry was made to recognize the dividend:

Dividend Cash 30,000

Investment 30,000

 Now we have to eliminate it via:

Entry D Investment 30,000

Dividend Declared 30,000
 22

P3-20 – 2015 Entry E

Entry E Depreciation Expense 10,000
(2014) Building 10,000
Equipment 4,000
Depreciation Expense 4,000

 2015 Entry E is the same as 2014’s.

Entry E Depreciation Expense 10,000

(2015) Building 10,000
Equipment 4,000
Depreciation Expense 4,000
 23

P3-20 – 2015 Consolidation Worksheet Entries Summary

12/31/2015
Entry S Common Stock 250,000
Additional paid-in capital 50,000
Retained Earnings 170,000
Investment 470,000
Entry A Land 10,000
Buildings 30,000
Goodwill 60,000
Equipment 16,000
Investment 84,000
Entry I Equity Income 104,000
Investment 104,000
Entry D Investment 30,000
Dividend Declared 30,000
Entry E Depreciation Expense 10,000
Building 10,000
Equipment 4,000
Depreciation Expense 4,000
 24

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.
 25

P3-21 – Find the Excess FV over BV

FV of consideration transferred 500,000
- Subsidiary BV of Net Assets 400,000
Excess of FV > BV 100,000
- Total excess assigned to specific accounts ?
Goodwill ?

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.
 26

P3-21 – Amortization Schedule & Goodwill (if any)

FV of consideration transferred 500,000
- Subsidiary BV of Net Assets 400,000
Excess of FV > BV 100,000
- Total excess assigned to specific accounts 50,000 To be used for
Goodwill 50,000 consolidation
worksheet entry

FV BV FV - BV Useful Life Depr or Int

Equipment 220,000 200,000 20,000 5 4,000
Long-term liabilities (120,000) (150,000) 30,000 4 7,500
50,000 Total 11,500

• Book Values taken from Chart 3-21 (given in problem).

• Fair Values taken from: “equipment and long-term Total excess assigned For consolidated
liabilities had fair values of $220,000 and $120,000, to specific accounts worksheet entries
respectively, on the acquisition date.”
 27

P3-21 – 2014 Journal Entries – initial value & 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

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)
 28

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
 29

P3-21 – 2014 Entry S

 Values for Entry S were taken from Chart 3-21 given in the problem. The chart is replicated here for
convenience:
Chart 3-21

Entry S Common Stock 250,000

Additional paid-in capital 50,000
Retained Earnings 100,000
Investment 400,000
 30

P3-21 – 2014 Entry A

 Values for Entry A were taken from the amortization schedule calculated previously
(FV – BV) . After allocating to specific accounts, the goodwill was calculated to be
$50,000. The amortization schedule is replicated here for convenience:

FV BV FV - BV Useful Life Depr or Int

Equipment 220,000 200,000 20,000 5 4,000
Long-term liabilities (120,000) (150,000) 30,000 4 7,500
50,000 Total 11,500

Entry A Equipment 20,000

Goodwill 50,000
Long-term liabilities 30,000
Investment 100,000
 31

P3-21 – 2014 Entries I & D

 In the initial value method, we use the dividend income balance for Entry I and there would be no
entry for Entry D.
Initial Value Cash 10,000
Method Dividend Income 10,000

Entry I Dividend Income 10,000

Dividend Paid 10,000

Entry D NO ENTRY
 32

P3-21 – 2014 Entry E

Values for Entry E were taken from the amortization schedule. The schedule is replicated here for
convenience:
FV BV FV - BV Useful Life Depr or Int
Equipment 220,000 200,000 20,000 5 4,000
Long-term liabilities (120,000) (150,000) 30,000 4 7,500
50,000 Total 11,500

Entry E Depreciation Expense 4,000

Equipment 4,000
Interest Expense 7,500
Long-term Liabilities 7,500
 33

P3-21 – 2014 Consolidation Worksheet Entries Summary

2014 Worksheet Entries
Entry S Common Stock 250,000
Additional paid-in capital 50,000
Retained Earnings 100,000
Investment 400,000
Entry A Equipment 20,000
Goodwill 50,000
Long-term liabilities 30,000
Investment 100,000
Entry I Dividend Income 10,000
Dividend Paid 10,000
Entry D NO ENTRY

Entry E Depreciation Expense 4,000

Equipment 4,000
Interest Expense 7,500
Long-term Liabilities 7,500
 34

P3-21 – 2015 Journal Entries

“During 2015, Abernethy reported net income of $110,000 while declaring and paying dividends of
$30,000.”
12/31/2015 Initial Value Method Equity Method
NO ENTRY Investment 110,000
Equity Income 80,000
Cash 30,000 Cash 30,000
Dividend Income 30,000 Investment 30,000
NO ENTRY Equity Income 11,500
Investment 11,500

 Note: For Problem 3-21, the 2015 journal entries for the equity method is not necessary.
 35

P3-21 – 2015 Entry C

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 entry C is to adjust the books back to the equity method.

Investment-initial Investment-equity
500,000 500,000
80,000
10,000
  11,500
500,000 558,500

558,500 – 500,000 = 58,500

Entry C Investment 58,500

Retained Earnings 58,500
 36

P3-21 – 2015 Entry S

Entry S Common Stock 250,000
(2014) Additional paid-in capital 50,000
Retained Earnings 100,000
Investment 400,000

Because the parent now owns the subsidiary, Retained Earnings

they have no reason to issue more stock so 100,000 BB
Common Stock and Additional paid-in capital is DIV 2014 10,000 80,000 NI 2014
always the same. Retained earnings, however… 170,000

Entry S Common Stock 250,000

(2015) Additional paid-in capital 50,000
Retained Earnings 170,000
Investment 470,000
 37

P3-21 – 2015 Entry A

Entry A Equipment 20,000
(2014) Goodwill 50,000
Long-term liabilities 30,000
Investment 100,000

 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 A Equipment 16,000

(2015) Goodwill 50,000
Long-term liabilities 22,500
Investment 88,500
 38

P3-21 – 2015 Entries I & D

 In the equity method, the value would have been the equity income balance, but in the initial value
method, we use the dividend income balance for Journal Entry I and there would be no entry for
Journal Entry D.
Initial Value Cash 30,000
Method Dividend Income 30,000

Entry I Dividend Income 30,000

Dividend Paid 30,000

Entry D NO ENTRY
 39

P3-21 – 2015 Entry E

 Values for Journal Entry E were taken from the amortization schedule. The schedule is
replicated here for convenience:
FV BV FV - BV Useful Life Depr or Int
Equipment 220,000 200,000 20,000 5 4,000
Long-term liabilities (120,000) (150,000) 30,000 4 7,500
50,000 Total 11,500

Entry E Depreciation Expense 4,000

Equipment 4,000
Interest Expense 7,500
Long-term Liabilities 7,500

Notice 2015 Entry E it is the same entry as 2014’s Entry E.

 40

P3-21 – 2015 Consolidation Worksheet Entries Summary

2015 Worksheet Entries
Entry C Investment 58,500
Retained Earnings 58,500
Entry S Common Stock 250,000
Additional paid-in capital 50,000
Retained Earnings 170,000
Investment 470,000
Entry A Equipment 16,000
Goodwill 50,000
Long-term liabilities 22,500
Investment 88,500
Entry I Dividend Income 30,000
Dividend Paid 30,000
Entry D NO ENTRY

Entry E Depreciation Expense 4,000

Equipment 4,000
Interest Expense 7,500
Long-term Liabilities 7,500
 41

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.
 42

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
 43

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
 44

Problem 3-28
 Prepare a consolidation worksheet for Patrick and O’Brien for the year ending December 31.
 45

P3-28 – Find the FV in excess of BV

 Given: “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.”

FV of consideration transferred 550,000

- Subsidiary BV of Net Assets 350,000
FV in excess of BV 200,000
- Total excess assigned to specific amounts ?
Goodwill ?
 46

P3-28 – Amortization Schedule & Goodwill (if any)

Book Value Fair Value FV-BV Useful Life Amortization
Trademarks (indefinite life) 60,000 160,000 100,000
Customer relationships (5-year remaining life) 0 75,000 75,000 5 15,000
Equipment (10-year remaining life) 342,000 312,000 (30,000) 10 (3,000)
Total 145,000 Total 12,000

FV of consideration transferred 550,000 For journal entries and

- Subsidiary BV of Net Assets 350,000 worksheet entries
FV in excess of BV 200,000
- Total assigned to specific amounts 145,000 To be used for
Goodwill 55,000 consolidation
worksheet entry
 47

P3-28 – Make the Journal Entries

Equity Method
Investment Cost Investment 550,000 Given
Cash 550,000
Income Accrual Investment 222,000 Given
Equity Income 222,000 (Chart 3-28A)
Dividend Cash 80,000 Given
Investment 80,000 (Chart 3-28A)
Amortization Equity Income 12,000 Amortization
Investment 12,000 Schedule

Investment-equity Equity Income (income from O'Brien)

550,000   222,000
222,000   12,000  
80,000
  12,000
680,000   210,000
For consolidation
worksheet entry
 48

P3-28 – Consolidation Worksheet Entries

Entry S Common Stock 100,000 Given Chart 3-28B
Retained Earnings 250,000 Given Chart 3-28A
Investment 350,000
Entry A Trademarks 100,000 Amortization Schedule
Customer Relationships 75,000 Amortization Schedule
Goodwill 55,000 Amortization Schedule
Equipment 30,000 Amortization Schedule
Investment 200,000
Entry I Equity Income 210,000 Calculated previously
Investment 210,000
Entry D Investment 80,000 Calculated previously
Dividends Declared 80,000
Entry E Amortization Expense 15,000 Amortization Schedule
Customer Relationships 15,000
Equipment 3,000 Amortization Schedule
Depreciation Expense 3,000
PROBLEM 3-28
PATRICK COMPANY
AND
CONSOLIDATED
SUBSIDIARY
O'BRIEN
Consolidation
Worksheet
For Year Ending
December 31
 50

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
 51

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
 52

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.
 53

P3-29 – Acquisition Entry

1/1/2011
Investment of Aaron 470,000
Common Stock 20,000
Additional paid-in capital 450,000

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
 54

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.”
 55

P3-29 – Amortization Schedule & Goodwill (if any)

“On the date of acquisition … 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. “

FV - BV (given) Remaining Life Amortization

Royalty agreements 60,000 6 10,000
Trademark 50,000 10 5,000
Total assigned: 110,000 Total: 15,000

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
 56

P3-29 – Initial Value Method

 When we recorded the investment in 2011, it was for $470,000.
 In 2015, the investment account balance is still at $470,000, so the company is using initial value
method.
Chart 3-29B
 57

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.

Entry C Investment 200,000

Retained Earnings 200,000
 58

P3-29 – 2015 Entry S

 Common Stock and Additional paid-in capital values are from Chart 3-29B
 Retained Earnings is from Chart 3-29A

Entry S Common Stock 100,000

Additional paid-in capital 30,000
Retained Earnings 490,000
Investment 620,000
 59

P3-29 – 2015 Entry A

 Values based off of Amortization Schedule (calculated previously)

FV - BV (given) Remaining Life Amortization

Royalty agreements 60,000 6 10,000
Trademark 50,000 10 5,000
Total assigned: 110,000 Total: 15,000

 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

Entry A Royalty Agreement 20,000

Trademark 30,000
Investment 50,000
 60

P3-29 – 2015 Entry I & D

 The $5,000 dividend is given in Chart 3-29A
 There is no Entry D for the initial value method.

Entry I Dividend Income 5,000

Dividend Declared 5,000
Entry D NO ENTRY
 61

P3-29 – 2015 Entry E

 Values based off of Amortization Schedule (calculated previously, schedule is replicated here):

FV - BV (given) Remaining Life Amortization

Royalty agreements 60,000 6 10,000
Trademark 50,000 10 5,000
Total assigned: 110,000 Total: 15,000

Entry E Amortization Expense 15,000

Royalty Agreement 10,000
Trademark 5,000
 62

P3-29 – 2015 Worksheet Entries Summary

2015 Consolidation Worksheet Entries
Entry C Investment 200,000
Retained Earnings 200,000
Entry S Common Stock 100,000
Additional paid-in capital 30,000
Retained Earnings 490,000
Investment 620,000
Entry A Royalty Agreement 20,000
Trademark 30,000
Investment 50,000
Entry I Dividend Income 5,000
Dividend Declared 5,000
Entry D NO ENTRY

Entry E Amortization Expense 15,000

Royalty Agreement 10,000
Trademark 5,000
PROBLEM 3-29
MICHAEL
COMPANY AND
CONSOLIDATED
SUBSIDIARY
Consolidation
Worksheet
For Year Ending
December 31,
2015